Dynamics
 
The assets and debt associated with the company’s Global Financing business are a significant part of IBM’s financial condition. Accordingly, although the financial position amounts appearing below and in “Year in Review — Financial Position” are the company’s consolidated amounts including Global Financing, to the extent the Global Financing business is a major driver of the consolidated financial position, reference in the narrative section will be made to the separate Global Financing section “Global Financing — Description of Business”. The amounts appearing in the separate Global Financing section are supplementary data presented to facilitate an understanding of the company’s Global Financing business.

Working Capital
 

Current assets increased $3,276 million due primarily to an increase of $1,672 million in Cash and cash equivalents and Marketable securities. See the Cash Flow analysis below. In addition, short-term receivables increased $1,565 million due to currency impacts.

Current liabilities increased $3,680 million due primarily to a $1,546 million increase in Deferred income primarily from the impact of foreign currencies, an $830 million increase in Accounts payable driven primarily by the impact of foreign currencies and the company’s outsourcing of some of its manufacturing, which changed the timing and amount of related accounts payable, a $615 million increase in Short-term debt (primarily associated with the Global Financing business, see “Global Financing — Financial Condition”), as well as a $743 million increase in Other accrued expenses and liabilities driven by increases in short-term derivatives that are in a liability position.

Cash Flow
 
The company’s cash flow from operating, investing and financing activities, as reflected in the Consolidated Statement of Cash Flows, are summarized in the table below. These amounts include the cash flows associated with the company’s Global Financing business.

Net cash provided by operating activities for the year ended December 31, 2003 increased as compared to 2002. This increase was driven primarily by lower pension contributions of approximately $1.6 billion and improved cash results from operations represented by the combined effect of improved profitability and accounts payable management. These increases were partially offset by lower cash generated by the Global Financing business in 2003 and lower cash received from the monetization of interest rate swaps in 2003 as compared to 2002. The monetization of interest rate swaps did not affect net income.

The decrease in cash flows in investing activities during 2003 was primarily attributable to fewer acquisitions in 2003 (primarily a $1,042 million net cash payment for Rational and a $397 million true-up for the 2002 acquisition of PwCC) than in 2002 (primarily a $2,852 million net cash payment for PwCC) and a decrease in capital expenditures as the company completes its 300 millimeter semiconductor facility. These increases were offset by the reduction in cash received from divestitures ($97 million in 2003 versus $1,233 million primarily for the HDD divestiture in 2002). The increase in cash used in financing activities in 2003 compared to 2002 was primarily the result of a reduction of debt, increased stock repurchases and dividends during 2003.

Non-Current Assets and Liabilities
 

The increase in Non-current assets during 2003 was primarily due to the $2,423 million increase in Prepaid pension assets associated with net periodic pension income (see note W, “Retirement-Related Benefits”) as well as a $1,015 million impact due to foreign currencies and a $2,806 million increase in Goodwill, which was primarily driven by the acquisition of Rational, as discussed in note C, “Acquisitions/Divestitures.” These increases were partially offset by the decrease of $699 million in Long-term financing receivables (see Global Financing — “Description of Business”) due to lower originations in sales type leases and lower amounts outstanding of syndicated loans.

Long-term debt decreased $3,000 million primarily driven by the decrease in non-Global Financing debt (see below).

Other non-current liabilities increased $2,211 million primarily due to a $1,036 million increase in Retirement and nonpension postretirement benefit obligations, a $384 million increase in non-current deferred taxes and a $433 million increase in non-current Deferred income. The increase in Retirement and nonpension postretirement benefit obligations was primarily attributable to the required accounting for the unfunded status of the non-U.S. pension plans as discussed in note W, “Retirement-Related Benefits,” as well as accrued pension costs and foreign exchange impact. The increase in both non-current deferred taxes and non-current Deferred income was primarily attributable to the impact of foreign currencies.

Debt
 
The company’s funding requirements are continually monitored and strategies are executed to manage the company’s overall asset and liability profile. Additionally, the company maintains sufficient flexibility to access global funding sources as needed.

During the fourth quarter of 2002, the company increased its non-Global Financing debt to position itself for potential year-end pension funding levels and the possible acquisition of Rational, especially given the cash paid for PwCC during the 2002 fourth quarter. Based upon the strong cash flows from operations in 2003, the company reduced non-Global Financing debt.

Equity
 

The company’s total consolidated Stockholders’ equity increased $5,082 million during 2003 primarily due to an increase in the company’s retained earnings partially offset by the company’s ongoing stock repurchase program and higher dividend payments.

Off-Balance Sheet Arrangements
 
The company, in the ordinary course of business, entered into off-balance sheet arrangements as defined by the SEC Final Rule 67 (FR-67), “Disclosure in Management’s Discussion and Analysis about Off-Balance Sheet Arrangements and Aggregate Contractual Obligations,” including: certain guarantees, indemnifications and retained interests in assets transferred to an unconsolidated entity for securitization purposes.

None of these off-balance sheet arrangements either has, or is reasonably likely to have, a material current or future effect on financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. See Looking Forward — “Liquidity and Capital Resources” for the company’s contractual obligations.

See note O, “Contingencies and Commitments,” for detailed information about the company’s guarantees on certain loans and financial commitments, indemnification arrangements and loans receivable securitization program.