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Management discussion
International Business Machines Corporation and Subsidiary Companies

Prior year in review

($ and shares in millions except per share amounts)
For the year ended December 31: 2006 2005 Yr.-To-Yr.
Percent/ Margin Change

* Flat adjusted for currency.

** Reflects implementation of FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations.” See note B, “Accounting Changes,” for additional information.

+ At December 31.

NM—Not meaningful
Revenue $ 91,424 $ 91,134 0.3%*
Gross profit margin 41.9% 40.1% 1.8 pts.
Total expense and other income $ 24,978 $ 24,306 2.8%
Total expense and other income-to-revenue ratio 27.3% 26.7% 0.7 pts.
Income from continuing operations before income taxes $ 13,317 $ 12,226 8.9%
Provision for income taxes $ 3,901 $ 4,232 (7.8)%
Income from continuing operations $ 9,416 $ 7,994 17.8%
Income/(loss) from discontinued operations $ 76 $ (24) NM
Income before cumulative effect of change in accounting principle $ 9,492 $ 7,970 19.1%
Cumulative effect of change in accounting principle, net of tax** $ — $ (36) NM
Net income $ 9,492 $ 7,934 19.6%
Net income margin 10.4% 8.7% 1.7 pts.
Earnings per share of common stock:
Assuming dilution:
Continuing operations $ 6.06 $ 4.91 23.4%
Discontinued operations 0.05 (0.01) NM
Cumulative effect of change in accounting principle** (0.02) NM
Total $ 6.11 $ 4.87 25.5%
Weighted-average shares outstanding:
Assuming dilution 1,553.5 1,627.6 (4.6)%
Assets + $ 103,234 $ 105,748 (2.4)%
Liabilities + $ 74,728 $ 72,650 2.9%
Equity + $ 28,506 $ 33,098 (13.9)%
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