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Notes to consolidated financial statements (audited)
International Business Machines Corporation and Subsidiary Companies
R. 2005 actions (audited)
In May 2005, management announced its plans to implement a series of restructuring actions designed to improve the company’s efficiencies, strengthen its client-facing operations and capture opportunities in high-growth markets. The company’s actions primarily included voluntary and involuntary workforce reductions, with the majority impacting the Global Services segment, primarily in Europe, as well as costs incurred in connection with the vacating of leased facilities. These actions were in addition to the company’s ongoing workforce reduction and rebalancing activities that occur each quarter. The total charges expected to be incurred in connection with all second-quarter 2005 initiatives is approximately $1,799 million ($1,776 million of which has been recorded cumulatively through December 31, 2005) and these initiatives are expected to be completed within one year. Approximately $1,625 million of the total charges require cash payments, of which approximately $1,066 million have been made as of December 31, 2005 and $391 million are expected to be made over the next 12 months.
Total pre-tax restructuring activity was as follows:
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| (Dollars in millions) |
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Pre-Tax Charges Recorded In Second Qtr. 2005 |
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Asset Impairments |
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Liability Recorded In The Second Qtr. 2005 |
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Payments |
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Other** |
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Liability As Of Dec. 31, 2005 |
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| Workforce reductions |
$ |
1,574 |
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$ |
— |
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$ |
1,574 |
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$ |
(1,013 |
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$ |
(107 |
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$ |
454 |
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| Vacant space |
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141 |
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— |
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141 |
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(53 |
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(5 |
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83 |
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| Asset impairments |
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95 |
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95 |
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— |
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— |
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— |
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— |
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| Total restructuring charges for second quarter 2005 actions |
$ |
1,810 |
* |
$ |
95 |
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$ |
1,715 |
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$ |
(1,066 |
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$ |
(112 |
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$ |
537 |
+ |
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Charges incurred for the workforce reductions consist of severance/termination benefits for approximately 16,000 employees (14,500 of which were for the incremental second-quarter 2005 actions). As of December 31, 2005 approximately 15,600 separations have been completed. The non-current portion of the liability associated with the workforce reductions relates to terminated employees who were granted annual payments to supplement their income in certain countries. Depending on individual country legal requirements, these required payments will continue until the former employee begins receiving pension benefits or is deceased. Cash payments made through December 31, 2005 associated with the workforce reductions were $1,013 million.
The vacant space accruals are primarily for ongoing obligations to pay rent for vacant space, offset by estimated sublease income, over the respective lease term of the company’s lease agreements. The length of these obligations varies by lease with the longest extending through 2019.
In connection with the company’s restructuring activities initiated in the second quarter of 2005, the company recorded pre-tax impairment charges for certain real estate assets of approximately $95 million dollars during the year ended December 31, 2005. The principal component of such impairment charges resulted from the sale of a facility in Yasu-City, Japan, which closed during the third quarter of 2005. In connection with this sale, the company recorded an impairment charge to write the asset down to its fair value in the second quarter.
These restructuring activities had the following effect on the company’s reportable segments:
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| At December 31: |
Total Pre-Tax Charges Expected To Be Incurred |
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Cumulative Pre-Tax Charges Recorded For 2nd Qtr. 2005 Initiatives |
* |
| Global Services |
$ |
1,191 |
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$ |
1,177 |
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| Systems and Technology Group |
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136 |
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133 |
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| Software |
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93 |
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92 |
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| Global Financing |
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16 |
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16 |
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| Enterprise Investments |
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6 |
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6 |
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| Total reportable segments |
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1,442 |
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1,424 |
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| Unallocated corporate amounts |
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357 |
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352 |
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| Total |
$ |
1,799 |
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$ |
1,776 |
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