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Management discussion
International Business Machines Corporation and Subsidiary Companies

Management discussion snapshot

($ and shares in millions except per share amounts)
For the year ended December 31: 2007 2006 Yr.-to-Yr.

* 4.2 percent adjusted for currency.
** At December 31.
NM—Not meaningful

Revenue $ 98,786 $ 91,424 8.1%*
Gross profit margin 42.2% 41.9% 0.4 pts.
Total expense and other income $ 27,240 $ 24,978 9.1%
Total expense and other income-to-revenue ratio 27.6% 27.3% 0.3 pts.
Income from continuing operations before income taxes $ 14,489 $ 13,317 8.8%
Provision for income taxes $ 4,071 $ 3,901 4.4%
Income from continuing operations $ 10,418 $ 9,416 10.6%
Net income $ 10,418 $ 9,492 9.7%
Net income margin 10.5% 10.4% 0.2 pts.
Earnings per share of common stock:
Assuming dilution:
Continuing operations $ 7.18 $ 6.06 18.5%
Discontinued operations (0.00) 0.05 NM
Total $ 7.18 $ 6.11 17.5%
Weighted-average shares outstanding:
Diluted 1,450.6 1,553.5 (6.6)%
Assets** $ 120,431 $ 103,234 16.7%
Liabilities** $ 91,962 $ 74,728 23.1%
Equity** $ 28,470 $ 28,506 (0.1)%

Continuing operations

The company’s performance in 2007 reflected the strength of its global model. Revenue increased in all geographies, with strong growth in emerging markets worldwide. The company capitalized on the opportunities in the global economies, generating 63 percent of its revenue outside the United States, in delivering full-year growth of 8.1 percent (4 percent adjusted for currency).

Gross profit margins improved reflecting a shift to higher value offerings and continued benefits from productivity initiatives and the transformation to a globally integrated enterprise. Pre-tax income from continuing operations grew 8.8 percent and Net income from continuing operations increased 10.6 percent versus 2006. Diluted earnings per share improved 18.5 percent, reflecting the strong growth in Net income and the benefits of the common stock repurchase program. In 2007, the company repurchased approximately $18.8 billion of its common stock, including a $12.5 billion ASR in the second quarter.

The increase in 2007 revenue, as compared to 2006, was primarily due to:

  • Strong performance from Global Technology Services and Global Business Services with growth in all business lines;
  • Continued strong demand in the Software business, driven by Key Branded Middleware products, with positive contributions from strategic acquisitions; and
  • Continued growth in emerging countries (Brazil, Russia, India and China: up 26 percent) and solid performance in all geographies, led by Asia Pacific.

The increase in Income from continuing operations before income taxes in 2007 was primarily due to:

  • Revenue growth as discussed above; and
  • Gross profit margin improvements in the Global Services and Systems and Technology segments.

The consolidated gross profit margin increased 0.4 points versus 2006 to 42.2 percent. An improvement in the Systems and Technology margin (2.0 points) contributed 0.5 points to the overall margin improvement. This increase was primarily driven by higher margins in System z, System p and System x servers. The Software margin was flat at 85.2 percent, but contributed 0.2 points to the overall margin improvement due to the mix of revenue by segment. The Global Technology Services and Global Business Services margins increased 0.1 points and 0.4 points to 29.9 percent and 23.5 percent, respectively, versus the prior year. Although gross profit margins improved for Global Services, the increased Global Services revenue content contributed to a 0.2 point decline in the consolidated gross margin due to the mix impact. The Global Financing margin declined 3.5 points versus 2006 to 46.7 percent, causing a 0.1 point decline in the overall company margin.

Total expense and other income increased 9.1 percent (5 percent adjusted for currency) in 2007 versus 2006. The increase was primarily due to increases in Selling, general and administrative (SG&A) expense and Interest expense. SG&A expense increased $1,801 million primarily due to acquisition related spending, as well as increased investments in emerging countries and the software and services businesses. Interest expense increased $333 million primarily due to higher debt associated with the financing of the ASR. In addition, Other (income) and expense declined $140 million in income year-to-year primarily due to higher losses on derivative instruments.

The effective tax rate for 2007 was 28.1 percent, compared with 29.3 percent in 2006.

Total assets increased $17,197 million ($12,957 million adjusted for currency) primarily due to increases in Cash and cash equivalents ($6,969 million), Prepaid pension assets ($6,788 million), total financing receivables ($2,729 million) and Goodwill ($1,431 million). These increases were partially offset by decreases in long-term deferred tax assets ($2,367 million) and short-term marketable securities ($1,479 million).

Total liabilities increased $17,234 million ($13,642 million adjusted for currency) driven primarily by increases in total debt ($12,592 million), tax liabilities ($1,492 million) and total deferred income ($1,773 million).

Stockholders’ equity of $28,470 million was essentially flat versus 2006. Increased Treasury stock ($17,649 million) from share repurchases, which included the ASR, was largely offset by increased Retained earnings ($8,208 million) driven by Net income, increased Common stock ($3,917 million) related to stock options and a decline in Accumulated gains and (losses) not affecting retained earnings ($5,487 million) primarily due to the effects of pension remeasurements.

The company generated $16,094 million in cash flow provided by operating activities, an increase of $1,075 million compared to 2006, primarily driven by increased Net income. Net cash used in investing activities of $4,675 million was $6,874 million lower than 2006 driven primarily by proceeds from disposition of short-term marketable securities and a reduction in cash used for acquisitions. Net cash used in financing activities of $4,740 million decreased $3,464 million versus 2006 driven by increased net proceeds from total debt ($12,233 million), partially offset by increased share repurchases ($10,744 million).

Global Services signings were $50 billion in 2007 as compared to $49 billion in 2006. The Global Services backlog is estimated to be $118 billion at December 31, 2007, versus $116 billion at December 31, 2006.

For additional information and details, see Year in Review.

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