UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

QUARTERLY REPORT

PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For The Quarter Ended March 31, 2007

1-2360

(Commission file number)

INTERNATIONAL BUSINESS MACHINES CORPORATION

(Exact name of registrant as specified in its charter)

 

914-499-1900

(Registrant’s telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.         Yes x        No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x

Accelerated filer o

Non-accelerated filer o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o   No x

The registrant has 1,484,827,275 shares of common stock outstanding at March 31, 2007.

Index

 

	Page
Part I — Financial Information:	1
Item 1. Consolidated Financial Statements	1
Consolidated Statement of Earnings for the three months ended March 31, 2007 and 2006	1
Consolidated Statement of Financial Position at March 31, 2007 and December 31, 2006	3
Consolidated Statement of Cash Flows for the three months ended March 31, 2007 and 2006	5
Notes to Consolidated Financial Statements	6
Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition	17
Item 4. Controls and Procedures	39
Part II — Other Information	39
Item 1. Legal Proceedings	39
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds and Issuer Repurchases of Equity Securities	39
Item 6. Exhibits	40

 

Part I - Financial Information

ITEM 1. Consolidated Financial Statements

INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF EARNINGS
(UNAUDITED)

(Dollars in millions except		Three Months Ended March 31,
per share amounts)		2007			2006*
Revenue:*
Services		$	12,423		$	11,590
Sales		8,985			8,486
Financing		621			583
Total revenue		22,029			20,659
Cost:*
Services		9,050			8,521
Sales		3,809			3,776
Financing		304			275
Total cost		13,163			12,571
Gross profit		8,866			8,088
Expense and other income:
Selling, general and administrative		5,089			4,602
Research, development and engineering		1,509			1,456
Intellectual property and custom development income		(205		)	(229		)
Other (income) and expense		(180		)	(246		)
Interest expense		73			66
Total expense and other income		6,287			5,648
Income from continuing operations before income taxes		2,579			2,440
Provision for income taxes		735			732
Income from continuing operations		1,844			1,708

* Reclassified to conform with 2007 presentation; see Note 1 on page 6 for additional information.

(Amounts may not add due to rounding.)

(The accompanying notes are an integral part of the financial statements.)

1

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INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF EARNINGS — (CONTINUED)
(UNAUDITED)

(Dollars in millions except		Three Months Ended March 31,
per share amounts)		2007			2006
Discontinued operations
Loss from discontinued operations, net of tax		—			—
Net income		$	1,844		$	1,708
Earnings per share of common stock:
Assuming dilution
Continuing operations		$	1.21		$	1.08
Discontinued operations		0.00			0.00
Total		$	1.21		$	1.08
Basic
Continuing operations		$	1.23		$	1.09
Discontinued operations		0.00			0.00
Total		$	1.23		$	1.09
Weighted-average number of common shares outstanding: (millions)
Assuming dilution		1,522.8			1,587.2
Basic		1,499.5			1,564.5
Cash dividends per common share		$	0.30		$	0.20

(Amounts may not add due to rounding.)

(The accompanying notes are an integral part of the financial statements.)

 

2

INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(UNAUDITED)

ASSETS

		At March 31,			At December 31,
(Dollars in millions)		2007			2006
Assets
Current assets:
Cash and cash equivalents		$	6,953		$	8,022
Marketable securities		3,829			2,634
Notes and accounts receivable — trade (net of allowances of $221 in 2007 and $221 in 2006)		10,178			10,789
Short-term financing receivables (net of allowances of $282 in 2007 and $307 in 2006)		12,947			15,095
Other accounts receivable (net of allowances of $12 in 2007 and $15 in 2006)		892			964
Inventories, at lower of average cost or market:
Finished goods		762			506
Work in process and raw materials		2,150			2,304
Total inventories		2,912			2,810
Deferred taxes		1,751			1,806
Prepaid expenses and other current assets		2,985			2,539
Total current assets		42,446			44,660
Plant, rental machines and other property		36,722			36,521
Less: Accumulated depreciation		22,308			22,082
Plant, rental machines and other property — net		14,414			14,440
Long-term financing receivables		10,123			10,068
Prepaid pension assets		10,994			10,629
Intangible assets — net		2,157			2,202
Goodwill		13,103			12,854
Investments and sundry assets		8,383			8,381
Total assets		$	101,619		$	103,234

 

(Amounts may not add due to rounding.)

(The accompanying notes are an integral part of the financial statements.)

3

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INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF FINANCIAL POSITION — (CONTINUED)
(UNAUDITED)

LIABILITIES AND STOCKHOLDERS’ EQUITY

(Dollars in millions)				At March 31, 2007			At December 31, 2006*
Liabilities and Stockholders’ Equity
Current liabilities:
Taxes				$	2,096		$	4,670
Short-term debt				9,661			8,902
Accounts payable				6,859			7,964
Compensation and benefits				3,615			4,595
Deferred income				9,380			8,587
Other accrued expenses and liabilities				5,152			5,372
Total current liabilities				36,763			40,091
Long-term debt				14,285			13,780
Retirement and nonpension postretirement benefit obligations				13,151			13,553
Other liabilities				9,613			7,304
Total liabilities				73,811			74,728
Stockholders’ equity:
Common stock, par value $0.20 per share, and additional paid-in capital				32,264			31,271
Shares authorized: 4,687,500,000
Shares issued:		2007 — 2,022,374,103
		2006 — 2,008,470,383
Retained earnings				53,878			52,432
Treasury stock — at cost				(49,726		)	(46,296		)
Shares:	2007 — 537,546,828
	2006 — 501,987,771
Accumulated gains and (losses) not affecting retained earnings				(8,607		)	(8,901		)
Total stockholders’ equity				27,809			28,506
Total liabilities and stockholders’ equity				$	101,619		$	103,234

* Reclassified to conform with 2007 presentation.

(Amounts may not add due to rounding.)

(The accompanying notes are an integral part of the financial statements.)

4

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INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, (UNAUDITED)

(Dollars in millions)		2007			2006
Cash flow from operating activities from continuing operations:
Net income		$	1,844		$	1,708
Loss from discontinued operations		—			—
Adjustments to reconcile income from continuing operations to cash provided from operating activities:
Depreciation		949			943
Amortization of intangibles		291			265
Stock-based compensation		178			200
Net gain on asset sales and other		(88		)	(9		)
Changes in operating assets and liabilities, net of acquisitions/divestitures		(157		)	4
Net cash provided by operating activities from continuing operations		3,016			3,110
Cash flow from investing activities from continuing operations:
Payments for plant, rental machines and other property, net of proceeds from dispositions		(917		)	(782		)
Investment in software		(215		)	(194		)
Acquisition of businesses, net of cash acquired		(205		)	(748		)
Purchases of marketable securities and other investments		(8,443		)	(6,807		)
Proceeds from sale of marketable securities and other investments		7,362			4,523
Net cash used in investing activities from continuing operations		(2,418		)	(4,008		)
Cash flow from financing activities from continuing operations:
Proceeds from new debt		900			101
Payments to settle debt		(104		)	(297		)
Short-term borrowings less than 90 days — net		436			100
Common stock transactions — net		(2,498		)	(2,144		)
Cash dividends paid		(452		)	(313		)
Net cash used in financing activities from continuing operations		(1,717		)	(2,553		)
Effect of exchange rate changes on cash and cash equivalents		52			22
Net cash used in discontinued operations — operating activities		(3		)	(4		)
Net change in cash and cash equivalents		(1,070		)	(3,433		)
Cash and cash equivalents at January 1		8,022			12,568
Cash and cash equivalents at March 31		$	6,953		$	9,135

(Amounts may not add due to rounding.)

(The accompanying notes are an integral part of the financial statements.)

5

Notes to Consolidated Financial Statements

1.       The accompanying consolidated financial statements and footnotes thereto are unaudited.  In the opinion of the management of International Business Machines Corporation (the company), these statements include all adjustments, which are of a normal recurring nature, necessary to present a fair statement of the company’s results of operations, financial position and cash flows.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions that affect the amounts of assets, liabilities, revenue, costs, expenses and gains and losses not affecting retained earnings that are reported in the Consolidated Financial Statements and accompanying disclosures.  Actual results may be different.  See the company’s 2006 Annual Report for a discussion of the company’s critical accounting estimates.

Interim results are not necessarily indicative of results for a full year.  The information included in this Form 10-Q should be read in conjunction with the company’s 2006 Annual Report.

In the first quarter of 2007, the company changed the presentation of revenue and cost in the Consolidated Statement of Earnings to reflect the categories of Services, Sales, and Financing. Previously, the presentation included Global Services, Hardware, Software, Global Financing, and an Other category. In the past, these categories were aligned with the company’s reportable segment presentation of external revenue and cost. However, as the company moves toward delivering solutions which bring integrated software and services capabilities to its clients, the alignment between segments and categories will diverge. Therefore, there are situations where the Services segments could include software revenue, and conversely, the Software segment may have services revenue. The change was made to avoid possible confusion between the segment revenue and cost presentation and the required category presentation in the Consolidated Statement of Earnings.

The change only impacts the format for the presentation of the company’s revenue and cost in the Consolidated Statement of Earnings and does not reflect any change in the company’s reportable segment results or in the company’s organizational structure.  The periods presented in this Form 10-Q are reported on a comparable basis.  The management discussion and analysis of revenue and gross profit from continuing operations will focus on the segment view, as this is how the business is managed and is the best reflection of the company’s operating results and strategy.

Within the financial tables in this Form 10-Q, certain columns and rows may not add due to the use of rounded numbers for disclosure purposes. Percentages presented are calculated from the underlying whole-dollar amounts.

2.       The following table summarizes Net income plus gains and (losses) not affecting retained earnings (net of tax).

		Three Months Ended March 31,
(Dollars in millions)		2007			2006
Net income		$	1,844		$	1,708
Gains and (losses) not affecting retained earnings: (net of tax)
Foreign currency translation adjustments		90			138
Prior service costs, net gains/(losses) and transition assets/ (obligations)*		208			—
Minimum pension liability adjustments*		—			296
Net unrealized losses on marketable securities		(19		)	(26		)
Net unrealized gains/(losses) on cash flow hedge derivatives		14			(151		)
Total net gains/(losses) not affecting retained earnings		294			258
Net income plus gains and (losses) not affecting retained earnings		$	2,138		$	1,966

*                    For additional information, see Note V on page 101 in the 2006 IBM Annual Report.

6

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3.       Stock-based compensation cost is measured at the grant date, based on the fair value of the award and is recognized over the employee requisite service period. The following table presents total stock-based compensation cost included in the Consolidated Statement of Earnings:

		Three Months Ended March 31,
(Dollars in millions)		2007			2006
Cost		$	46		$	56
Selling, general and administrative		112			122
Research, development and engineering		20			21
Pre-tax stock-based compensation cost		178			200
Income tax benefits		(66		)	(73		)
Total stock-based compensation cost		$	111		$	127

 

The reduction in pre-tax stock-based compensation cost for the three-month period ended March 31, 2007, as compared to the corresponding period in the prior year, was principally the result of a reduction in the level and fair value of stock option grants ($8 million) and a reduction related to performance-based stock units ($14 million).

As of March 31, 2007, the balance of $1,038 million of total unrecognized compensation costs related to non-vested awards is expected to be recognized over a weighted-average period of approximately two years.

There were no significant capitalized stock-based compensation costs at March 31, 2007 and 2006.

4.       In February 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, Including an Amendment of FASB Statement No. 115,” which will become effective in 2008. SFAS No. 159 permits entities to measure eligible financial assets, financial liabilities and firm commitments at fair value, on an instrument-by-instrument basis, that are otherwise not permitted to be accounted for at fair value under other generally accepted accounting principles. The fair value measurement election is irrevocable and subsequent changes in fair value must be recorded in earnings.  The company will adopt this Statement in fiscal year 2008 and is currently evaluating if it will elect the fair value option for any of its eligible financial instruments and other items.

In September 2006, the FASB finalized SFAS No. 157, “Fair Value Measurements” which will become effective in 2008. This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements; however, it does not require any new fair value measurements. The provisions of SFAS No. 157 will be applied prospectively to fair value measurements and disclosures beginning in the first quarter of 2008 and is not expected to have a material effect on the company’s Consolidated Financial Statements.

In the first quarter of 2007, the company adopted SFAS No. 156, “Accounting for Servicing of Financial Assets—an amendment of FASB Statement No. 140,” that provides guidance on accounting for separately recognized servicing assets and servicing liabilities. In accordance with the provisions of SFAS No. 156, separately recognized servicing assets and servicing liabilities must be initially measured at fair value, if practicable. Subsequent to initial recognition, the company may use either the amortization method or the fair value measurement method to account for servicing assets and servicing liabilities within the scope of this Statement. The adoption of this Statement did not have a material effect on the company’s Consolidated Financial Statements.

In the first quarter of 2007, the company adopted SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133 and 140,” which permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation in accordance with the provisions of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.”  The adoption of this Statement did not have a material effect on the company’s Consolidated Financial Statements.

7

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The company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109” (FIN 48) on January 1, 2007. FIN 48 clarifies the accounting and reporting for uncertainties in income tax law. This Interpretation prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. See Note 5 below for additional information, including the effects of adoption on the company’s Consolidated Statement of Financial Position.

5.       As highlighted in Note 4 above, the company adopted the provisions of FIN 48 on January 1, 2007.

The cumulative effect of adopting FIN 48 was a decrease in tax reserves and an increase of $117 million to the January 1, 2007 Retained earnings balance.  Upon adoption, the liability for income taxes associated with uncertain tax positions at January 1, 2007 was $2,414 million.  This liability can be reduced by $458 million of offsetting tax benefits associated with the correlative effects of potential transfer pricing adjustments, state income taxes and timing adjustments.  The net amount of $1,956 million, if recognized, would favorably affect the company’s effective tax rate.  In addition, consistent with the provisions of FIN 48, the company reclassified $1,971 million of income tax liabilities from current to non-current liabilities because payment of cash is not anticipated within one year of the balance sheet date. These non-current income tax liabilities are recorded in Other Liabilities in the Consolidated Statement of Financial Position.

Interest and penalties related to income tax liabilities are included in income tax expense. The balance of accrued interest and penalties recorded in the Consolidated Statement of Financial Position at January 1, 2007 was $126 million; of this amount, $95 million was also reclassified from current to non-current liabilities upon adoption of FIN 48.

With limited exception, the company is no longer subject to U.S. federal, state and local or non-U.S. income tax audits by taxing authorities for years through 2000. During the quarter, the U.S. Internal Revenue Service commenced its audit of the company’s U.S. income tax returns for 2004 and 2005. The company anticipates that this audit will be completed by the end of 2008.  The company does not anticipate a significant change to the total amount of unrecognized tax benefits within the next 12 months.

6.       The company offers defined benefit pension plans, defined contribution pension plans, as well as nonpension postretirement plans primarily consisting of retiree medical benefits. The following table provides the total retirement-related benefit plans’ impact on income from continuing operations before income taxes.

								Yr. to Yr.
								Percent
(Dollars in millions)		2007			2006			Change
For the three months ended March 31:
Retirement-related plans — cost:
Defined benefit and contribution pension plans — cost		$	540		$	523		3.3	%
Nonpension postretirement plans — cost		103			100			3.0
Total		$	643		$	623		3.2	%

 

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The following table provides the components of the cost/(income) for the company’s pension plans.

Cost/(Income) of Pension Plans

		U.S. Plans						Non-U.S. Plans
(Dollars in millions)		2007			2006			2007			2006
For the three months ended March 31:
Service cost		$	188		$	182		$	120		$	154
Interest cost		646			616			374			379
Expected return on plan assets		(926		)	(901		)	(604		)	(558		)
Amortization of transition assets		—			—			(1		)	(1		)
Amortization of prior service cost		15			15			(31		)	(3		)
Recognized actuarial losses		169			203			209			186
Net periodic pension cost—U.S. Plan and material non-U.S. Plans		92		*	115		*	67		**	157		**
Cost of other defined benefit plans		30			28			124			37
Total net periodic pension cost for all defined benefit plans		122			143			191			194
Cost of defined contribution plans		116			98			111			88
Total pension plan cost recognized in the Consolidated Statement of Earnings		$	238		$	241		$	302		$	282

*                    Represents the qualified portion of the IBM Personal Pension Plan.

**             Represents the qualified and non-qualified portion of material non-U.S. plans.

In 2007, the company expects to contribute to its non-U.S. defined benefit plans approximately $620 million, which is the legally mandated minimum contribution for the company’s non-U.S. plans. In the first quarter of 2007, the company contributed approximately $153 million to its non-U.S. plans.

The following table provides the components of the cost for the company’s nonpension postretirement plans.

Cost of Nonpension Postretirement Plans

		Three Months Ended March 31,
(Dollars in millions)		2007			2006
Service cost		$	17		$	16
Interest cost		79			79
Amortization of prior service cost		(15		)	(16		)
Recognized actuarial losses		8			8
Net periodic postretirement plan cost - U.S. Plan		89			87
Cost of non-U.S. Plans		14			13
Total nonpension postretirement plan cost recognized in the Consolidated Statement of Earnings		$	103		$	100

 

The company received a $9.5 million subsidy in the first quarter of 2007 in connection with the Medicare Prescription Drug Improvement and Modernization Act of 2003. A portion of this amount is used by the company to reduce its obligation and expense related to the plan, and the remainder is contributed to the plan to reduce contributions required by the participants.  For further information related to the Medicare Prescription Drug Act, see page 110 in the company’s 2006 Annual Report.

In addition, the company made a $500 million voluntary cash contribution to the U.S. nonpension postretirement benefit plan in March of 2007. This advance funding is in addition to ongoing contributions of approximately $400 million that will be made in 2007 which will be utilized to pay current year benefits. The $500 million contribution will be used to fund benefit payments in future years.

9

 

7.       During the three months ended March 31, 2007, the company completed four acquisitions at an aggregate cost of $251 million.

The Software segment completed two acquisitions: Consul Risk Management International BV., a privately held company, and Vallent Corporation, a privately held company. Each acquisition further complemented and enhanced the company’s portfolio of product offerings.

Global Technology Services (GTS) completed two acquisitions: Softek Storage Solutions Corporation, a privately held company and DM Information Systems, Ltd., a privately held company. Softek augments the company’s unified data mobility offerings and worldwide delivery expertise for managing data in storage array, host and virtualized IT environments. DMIS will enhance and complement the company’s Technology Service offerings.

Purchase price consideration was paid all in cash. These acquisitions are reported in the Consolidated Statement of Cash Flows net of acquired cash and cash equivalents.

The table below reflects the purchase price related to these acquisitions and the resulting purchase price allocations as of March 31, 2007.

		Amortization
(Dollars in millions)		Life (yrs.)		Acquisitions
Current assets				$	90
Fixed assets/non-current				6
Intangible assets:
Goodwill		N/A		239
Completed technology		3		11
Client relationships		3—5		13
Other		2—4		6
In-process research and development				—
Total assets acquired				365
Current liabilities				(85		)
Non-current liabilities				(30		)
Total liabilities assumed				(115		)
Total purchase price				$	251

 

The acquisitions were accounted for as purchase transactions, and accordingly, the assets and liabilities of the acquired entities were recorded at their estimated fair values at the date of acquisition. The primary items that generated the goodwill are the value of the synergies between the acquired companies and IBM and the acquired assembled workforce, neither of which qualify as an amortizable intangible asset. None of the goodwill is deductible for tax purposes. The overall weighted-average life of the identified amortizable intangible assets acquired is 3.6 years. With the exception of goodwill, these identified intangible assets will be amortized on a straight-line basis over their useful lives. Goodwill of $239 million has been assigned to the Software ($175 million) and Global Technology Services ($64 million) segments.

8.       The changes in the goodwill balances by reportable segment, for the quarter ended March 31, 2007, are as follows:

														Foreign
														Currency
								Purchase						Translation
(Dollars in millions)		Balance			Goodwill			Price						and Other			Balance
Segment		12/31/06			Additions			Adjustments			Divestitures			Adjustments			3/31/07
Global Technology Services		$	2,700		$	64		$	—		—			$	(55	)	$	2,709
Global Business Services		3,811			—			(5		)	—			89			3,895
Systems and Technology		214			—			—			—			—			214
Software		6,129			175			(20		)	—			—			6,284
Global Financing		—			—			—			—			—			—
Total		$	12,854		$	239		$	(25	)	$	—		$	34		$	13,103

 

There were no goodwill impairment losses recorded during the quarter.

10

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The following schedule details the company’s intangible asset balances by major asset class:

		At March 31, 2007
(Dollars in millions)		Gross Carrying			Accumulated			Net Carrying
Intangible asset class		Amount			Amortization			Amount
Capitalized software		$	1,878		$	(827	)	$	1,052
Client-related		1,051			(464		)	587
Completed technology		512			(161		)	351
Strategic alliances		104			(94		)	10
Patents/Trademarks		114			(37		)	77
Other(a)		263			(183		)	79
Total		$	3,922		$	(1,765	)	$	2,157

 

		At December 31, 2006
(Dollars in millions)		Gross Carrying			Accumulated			Net Carrying
Intangible asset class		Amount			Amortization			Amount
Capitalized software		$	1,871		$	(837	)	$	1,034
Client-related		1,038			(424		)	614
Completed technology		500			(128		)	372
Strategic alliances		104			(89		)	15
Patents/Trademarks		112			(29		)	83
Other(a)		264			(179		)	84
Total		$	3,888		$	(1,686	)	$	2,202

 

(a)       Other intangibles are primarily acquired proprietary and non-proprietary business processes, methodologies and systems and impacts from currency translation.

The net carrying amount of intangible assets decreased $45 million during the first quarter of 2007, primarily due to the amortization of existing intangible asset balances, partially offset by capitalized software additions and acquired intangible assets. The aggregate intangible amortization expense was $291 million and $265 million for the quarters ended March 31, 2007 and 2006, respectively. In addition, in the first quarter, the company retired $209 million of fully amortized intangible assets, impacting both the gross carrying amount and accumulated amortization by this amount.

The amortization expense for each of the five succeeding years relating to intangible assets currently recorded in the Consolidated Statement of Financial Position is estimated to be the following at March 31, 2007:

2007 (for Q2-Q4)		$	797 million
2008		$	700 million
2009		$	337 million
2010		$	154 million
2011		$	100 million

 

9.       The table on page 43 of this Form 10-Q reflect the results of the company’s reportable segments consistent with the management system used by the company’s chief operating decision maker. These results are not necessarily a depiction that is in conformity with GAAP. For example, employee retirement plan costs are developed using actuarial assumptions on a country-by-country basis and allocated to the segments based on headcount.  Different results could occur if actuarial assumptions that are unique to the segments were used. Performance measurement is based on income before income taxes (pre-tax income). These results are used, in part, by management, both in evaluating the performance of, and in allocating resources to, each of the segments.

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10.     The following table provides a rollforward of the current and non-current liability balances for actions taken in the following periods: (1) the second-quarter of 2005; (2) the fourth-quarter 2002 actions associated with the acquisition of the PricewaterhouseCoopers consulting business; (3) the second-quarter of 2002 associated with the Microelectronics Division and the rebalancing of both the company’s workforce and leased space resources; (4) the 2002 actions associated with the hard disk drive (HDD) business for reductions in workforce, manufacturing capacity and space; (5) actions taken in 1999; and (6) actions that took place prior to 1994. See the company’s 2006 Annual Report, Note R on page 93 for additional information on the actions taken in 2005.

		Liability									Liability
		as of									as of
(Dollars in millions)		12/31/2006			Payments			Other Adj.*			3/31/2007
Current:
Workforce		$	163		$	(43	)	$	16		$	135
Space		88			(16		)	9			81
Other		6			—			—			7
Total Current		$	257		$	(59	)	$	25		$	222
Non-current:
Workforce		$	531		$	—		$	—		$	531
Space		109			—			(8		)	101
Total Non-current		$	640		$	—		$	(7	)	$	632

*                    The other adjustments column in the table above principally includes the reclassification of non-current to current and foreign currency translation adjustments. In addition, during the quarter ended March 31, 2007, net adjustments to increase previously recorded liabilities for actions taken prior to 1994 ($2.6 million) were recorded: $2.3 million was included in Selling, General and Administrative expense and $0.3 million was recorded in Other (income) and expense.  In addition, interest expense (accretion) of $7.3 million was recorded in Selling, general and administrative expense and $1 million was recorded in Other (income) and expense.

11.     The company is involved in a variety of claims, suits, investigations and proceedings that arise from time to time in the ordinary course of its business, including actions with respect to contracts, intellectual property, product liability, employment, benefits, securities and environmental matters. These actions may be commenced by a number of different constituents, including competitors, partners, clients, current or former employees, government and regulatory agencies, stockholders and representatives of the locations in which the company does business. The following is a discussion of some of the more significant legal matters involving the company.

The company is a defendant in an action filed on March 6, 2003 in state court in Salt Lake City, Utah by The SCO Group. The company removed the case to Federal Court in Utah. Plaintiff is an alleged successor in interest to some of AT&T’s Unix IP rights, and alleges copyright infringement, unfair competition, interference with contract and breach of contract with regard to the company’s distribution of AIX and Dynix and contribution of code to Linux. The company has asserted counterclaims, including breach of contract, violation of the Lanham Act, unfair competition, intentional torts, unfair and deceptive trade practices, breach of the General Public License that governs open source distributions, promissory estoppel and copyright infringement. In October 2005, the company withdrew its patent counterclaims in an effort to simplify and focus the issues in the case and to expedite their resolution. Motions for summary judgment were heard in March 2007, and the court has not yet issued its decision. A trial date has not been set.

In May 2005, the Louisiana Supreme Court denied the company’s motion to review and reverse a Louisiana state court’s certification of a nationwide class in a case filed against the company in 1995. The class consists of certain former employees who left the company in 1992, and their spouses. They claim damages based on the company’s termination of an education assistance program. On April 4, 2006, the trial court denied the company’s motion for summary judgment. On October 27, 2006, the Louisiana Supreme Court denied IBM’s writ seeking an appeal of the trial court’s decision to deny summary judgment. At present, trial briefs are due in June 2007.  No date has been set for trial.

On June 2, 2003, the company announced that it received notice of a formal, nonpublic investigation by the Securities and Exchange Commission (SEC). The SEC sought information relating to revenue recognition in 2000 and 2001 primarily concerning certain types of client transactions. The company believes that the investigation arises from a separate investigation by the SEC of Dollar General Corporation, a client of the company’s Retail Stores Solutions unit, which markets and sells point-of-sale products.

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On January 8, 2004, the company announced that it received a “Wells Notice” from the staff of the SEC in connection with the staff’s investigation of Dollar General Corporation, which as noted above, is a client of the company’s Retail Stores Solutions unit. It is the company’s understanding that an employee in the company’s Sales & Distribution unit also received a Wells Notice from the SEC in connection with this matter. The Wells Notice notifies the company that the SEC staff is considering recommending that the SEC bring a civil action against the company for possible violations of the U.S. securities laws relating to Dollar General’s accounting for a specific transaction, by participating in and aiding and abetting Dollar General’s misstatement of its 2000 results. In that transaction, the company paid Dollar General $11 million for certain used equipment as part of a sale of IBM replacement equipment in Dollar General’s 2000 fourth fiscal quarter. Under the SEC’s procedures, the company responded to the SEC staff regarding whether any action should be brought against the company by the SEC. The separate SEC investigation noted above, relating to the recognition of revenue by the company in 2000 and 2001 primarily concerning certain types of client transactions, is not the subject of this Wells Notice.

On June 27, 2005, the company announced that it had received a request to voluntarily comply with an informal investigation by the staff of the SEC concerning the company’s disclosures relating to the company’s first-quarter 2005 earnings and expensing of equity compensation. On January 12, 2006, the company announced that it received notice of a formal, nonpublic investigation by the SEC of this matter. The company has been cooperating with the SEC, and will continue to do so. The SEC has informed the company that the investigation should not be construed as an indication that any violations of law have occurred.

In July 2005, two lawsuits were filed in the United States District Court for the Southern District of New York related to the company’s disclosures concerning first-quarter 2005 earnings and the expensing of equity compensation. Pursuant to an Order from the Court dated March 28, 2006, the two lawsuits were consolidated into a single action captioned “In re International Business Machines Corp. Securities Litigation.”  Plaintiffs filed a corrected consolidated amended complaint dated May 19, 2006, in which they named the company and IBM’s Senior Vice President and Chief Financial Officer as defendants and alleged that defendants made certain misrepresentations and omissions in violation of Section 10(b), and Rule 10b-5 thereunder, and Section 20(a) of the Securities Exchange Act of 1934.  On September 20, 2006, the Court denied a Motion to Dismiss that was filed by IBM.  On March 12, 2007, the plaintiffs’ class was certified.

In January 2004, the Seoul District Prosecutors Office in South Korea announced it had brought criminal bid-rigging charges against several companies, including IBM Korea and LG IBM (a joint venture between IBM Korea and LG Electronics, which has since been dissolved, effective January, 2005) and had also charged employees of some of those entities with, among other things, bribery of certain officials of government-controlled entities in Korea and bid rigging. IBM Korea and LG IBM cooperated fully with authorities in these matters. A number of individuals, including former IBM Korea and LG IBM employees, were subsequently found guilty and sentenced. IBM Korea and LG IBM were also required to pay fines. Debarment orders were imposed at different times, covering a period of no more than a year from the date of issuance, which barred IBM Korea from doing business directly with certain government-controlled entities in Korea. All debarment orders have since expired and when they were in force did not prohibit IBM Korea from selling products and services to business partners who sold to government-controlled entities in Korea. In addition, the U.S. Department of Justice and the SEC have both contacted the company in connection with this matter.

On January 24, 2006, a putative class action lawsuit was filed against IBM in federal court in San Francisco on behalf of technical support workers whose primary responsibilities are or were to install and maintain computer software and hardware. The complaint was subsequently amended on March 13, 2006. The First Amended Complaint, among other things, adds four additional named plaintiffs and modifies the definition of the workers purportedly included in the class. The suit, Rosenburg, et. al., v. IBM, alleges the company failed to pay overtime wages pursuant to the Fair Labor Standards Act and state law, and asserts violations of various state wage requirements, including recordkeeping and meal-break provisions. The suit also asserts certain violations of ERISA. Relief sought includes back wages, corresponding 401(k) and pension plan credits, interest and attorneys’ fees. On January 11, 2007, the District Court granted preliminary approval to a class-wide settlement whereby IBM will place into a fund $65 million, plus certain interest accruing between December 1, 2006 until such time as the fund is transferred to the claims administrator, to pay claims asserted by class members, Plaintiffs’ attorneys’ fees and administrative costs. Individual payments will be based on factors, including the class member’s state of employment, time worked in the relevant job position and base salary. The District Court is scheduled to have a hearing to finally approve the settlement in July 2007. The charge associated with this settlement was consistent with a provision previously established by the company.

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On October 23, 2006, the company filed two lawsuits against Amazon.com, Inc. (Amazon), in the United States District Court for the Eastern District of Texas, one in the Lufkin Division and one in the Tyler Division. The Lufkin suit alleges that Amazon has unlawfully infringed three IBM patents. The Tyler suit alleges that Amazon has unlawfully infringed two IBM patents. The Lufkin Division patents cover methods for storing data, presenting applications and presenting advertising on a computer network. The Tyler Division patents cover an electronic catalog requisition system and related information retrieval and ordering methods and a computer-implemented hypertext system and method for operating a computer-implemented object-oriented hypertext system. Each suit seeks, among other things, compensatory damages and injunctive relief. On December 14, 2006, Amazon answered, counterclaimed in each suit and sought to transfer the Lufkin suit to consolidate it with Tyler suit. IBM filed its opposition to the transfer motion on January 2, 2007 and answered the counterclaims in both suits on January 8. On January 16, 2007, the Lufkin court denied Amazon’s transfer motion. The courts have issued scheduling orders in both suits. The Lufkin action is set for trial on May 6,  2008 and the Tyler action on October 13, 2008.

On November 29, 2006, the company filed a lawsuit against Platform Solutions, Inc. (PSI) in the United States District Court for the Southern District of New York. IBM asserted claims for patent infringement and breach of contract in connection with PSI’s development and marketing of a computer system that PSI says is compatible with IBM’s S/390 and System z architectures. IBM also sought a declaratory judgment that its refusal to license its patents to PSI and certain of its software for use on PSI systems does not violate the antitrust laws. IBM seeks damages and injunctive relief. On January 19, 2007, PSI answered the complaint and asserted counterclaims against IBM for alleged monopolization and attempted monopolization, tying, violations of New York and California statutes proscribing unfair competition, tortious interference with the acquisition of PSI by a third party and promissory estoppel. PSI also sought declaratory judgments of noninfringement of IBM’s patents and patent invalidity. The court has not yet set a trial date.

In October 2003, a purported collective action lawsuit was filed against IBM in the United States District Court for the Northern District of California by ten former IBM employees alleging, on behalf of themselves and allegedly similarly situated former employees, that the company engaged in a pattern and practice of discriminating against employees on the basis of age when it terminated employees in connection with reductions in force. Initially, the District Court dismissed the lawsuit on the basis of release agreements signed by all the plaintiffs. On appeal, the Ninth Circuit reversed the trial court’s finding that the release barred these claims, and in January 2007 after denial of IBM’s petition for rehearing, the matter was returned to the trial court for further proceedings.

The company is party to, or otherwise involved in, proceedings brought by U.S. federal or state environmental agencies under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), known as “Superfund,” or laws similar to CERCLA. Such statutes require potentially responsible parties to participate in remediation activities regardless of fault or ownership of sites. The company is also conducting environmental investigations, assessments or remediations at or in the vicinity of several current or former operating sites globally pursuant to permits, administrative orders or agreements with country, state or local environmental agencies, and is involved in lawsuits and claims concerning certain current or former operating sites.

The company is also subject to ongoing tax examinations and governmental assessments in various jurisdictions. Similar to many other U.S. companies doing business in Brazil, the company is involved in various challenges with Brazilian authorities regarding non-income tax assessments and non-income tax litigation matters. These matters principally relate to claims for taxes on the importation of computer software. The total amounts related to these matters are approximately $1.7 billion, including amounts currently in litigation and other amounts. The company believes it will prevail on these matters and that these amounts are not meaningful indicators of liability.

In accordance with SFAS No. 5, “Accounting for Contingencies,” (SFAS No. 5), the company records a provision with respect to a claim, suit, investigation or proceeding when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Any provisions are reviewed at least quarterly and are adjusted to reflect the impact and status of settlements, rulings, advice of counsel and other information pertinent to a particular matter. Any recorded liabilities for the above items, including any changes to such liabilities for the quarter ended March 31, 2007, were not material to the Consolidated Financial Statements. Based on its experience, the company believes that the damage amounts claimed in the matters referred to above are not a meaningful indicator of the potential liability. Claims, suits, investigations and proceedings are inherently uncertain and it is not possible to predict the ultimate outcome of the matters previously discussed. While the company will continue to defend itself vigorously in all such matters, it is possible that the company’s business, financial condition, results of operations or cash flows could be affected in any particular period by the resolution of one or more of these matters.

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Whether any losses, damages or remedies finally determined in any such claim, suit, investigation or proceeding could reasonably have a material effect on the company’s business, financial condition, results of operations or cash flows will depend on a number of variables, including the timing and amount of such losses or damages; the structure and type of any such remedies; the significance of the impact any such losses, damages or remedies may have on the company’s Consolidated Financial Statements; and the unique facts and circumstances of the particular matter which may give rise to additional factors.

12.     The company’s extended lines of credit to third-party entities include unused amounts of $3,670 million and $2,895 million at March 31, 2007 and December 31, 2006, respectively. A portion of these amounts was available to the company’s business partners to support their working capital needs. In addition, the company has committed to provide future financing to its clients in connection with client purchase agreements for approximately $2,796 million and $2,496 million at March 31, 2007 and December 31, 2006, respectively.

The company has applied the disclosure provisions of FIN 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” to its agreements that contain guarantee or indemnification clauses. These disclosure provisions expand those required by SFAS No. 5, by requiring a guarantor to disclose certain types of guarantees, even if the likelihood of requiring the guarantor’s performance is remote. The following is a description of arrangements in which the company is the guarantor.

The company is a party to a variety of agreements pursuant to which it may be obligated to indemnify the other party with respect to certain matters. Typically, these obligations arise in the context of contracts entered into by the company, under which the company customarily agrees to hold the party harmless against losses arising from a breach of representations and covenants related to such matters as title to the assets sold, certain intellectual property (IP) rights, specified environmental matters, third-party performance of non-financial contractual obligations and certain income taxes. In each of these circumstances, payment by the company is conditioned on the other party making a claim pursuant to the procedures specified in the particular contract, which procedures typically allow the company to challenge the other party’s claims. Further, the company’s obligations under these agreements may be limited in terms of time and/or amount, and in some instances, the company may have recourse against third parties for certain payments made by the company.

It is not possible to predict the maximum potential amount of future payments under these or similar agreements, due to the conditional nature of the company’s obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made by the company under these agreements have not had a material effect on the company’s business, financial condition or results of operations.

In addition, the company guarantees certain loans and financial commitments. The maximum potential future payment under these financial guarantees was $30 million and $32 million at March 31, 2007 and December 31, 2006, respectively. The fair value of the guarantees recognized in the Consolidated Statement of Financial Position is not material.

Changes in the company’s warranty liability balance are presented in the following table:

(Dollars in millions)		2007			2006
Balance at January 1		$	582		$	754
Current period accruals		105			105
Accrual adjustments to reflect actual experience		(16		)	56
Charges incurred		(167		)	(198		)
Balance at March 31		$	504		$	718

 

The decrease in the balance was primarily driven by a reduction in estimated future cost as a result of the divestiture of the company’s Personal Computing business to Lenovo Group Limited (Lenovo) in April 2005.

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13.     Subsequent Events:  On April 24, 2007, the company announced that the Board of Directors approved a quarterly dividend of $0.40 per common share.  The dividend is payable June 9, 2007 to shareholders of record on May 10, 2007. The dividend declaration represents an increase of $0.10, or 33 percent more than the prior quarterly dividend of $0.30 per common share. In the last two years the company has doubled its quarterly dividend.

On  April 24, 2007, the company announced that the Board of Directors authorized $15 billion in additional funds for use in the company’s common stock repurchase program. This amount is in addition to approximately $1.4 billion for common stock repurchase remaining from a prior Board authorization. With this new approval, the company has approximately $16.4 billion available for its stock repurchase program. The company may repurchase shares on the open market or in private transactions, including structured or accelerated transactions, depending on market conditions. The company intends to borrow a large portion of the funds for this repurchase, and maintain increased financial leverage. At this time, the company does not anticipate requesting Board approval for additional funds for stock repurchases within the next 12 months.

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FOR THE THREE MONTHS ENDED MARCH 31, 2007*

Snapshot

								Yr. To Yr.
								Percent/
(Dollars in millions except per share amounts)								Margin
Three months ended March 31:		2007			2006			Change
Revenue		$	22,029		$	20,659		6.6	%**
Gross profit margin		40.2		%	39.1		%	1.1	pts.
Total expense and other income		$	6,287		$	5,648		11.3	%
Total expense and other income to revenue ratio		28.5		%	27.3		%	1.2	pts.
Provision for income taxes		$	735		$	732		0.4	%
Income from continuing operations		$	1,844		$	1,708		8.0	%
Earnings per share from continuing operations:
Assuming dilution		$	1.21		$	1.08		12.0	%
Basic		$	1.23		$	1.09		12.8	%
Weighted-average shares outstanding:
Assuming dilution		1,522.8			1,587.2			(4.1	)%
Basic		1,499.5			1,564.5			(4.2	)%
		3/31/07			12/31/06
Assets		$	101,619		$	103,234		(1.6	)%
Liabilities		$	73,811		$	74,728		(1.2	)%
Equity		$	27,809		$	28,506		(2.4	)%

*                    The following Results of Continuing Operations discussion does not include the hard disk drive (HDD) business that the company sold to Hitachi, Ltd. on December 31, 2002. The HDD business was accounted for as a discontinued operation under generally accepted accounting principles. There were no losses for the three-month period ended March 31, 2007 and 2006.

**             3.6 percent adjusted for currency

Within the Management Discussion, selected references to “adjusted for currency” or “at constant currency” are made so that the company’s financial results can be viewed without the impact of fluctuations in foreign currency exchange rates, thereby facilitating period-to-period comparisons of the company’s business performance.

Total revenue increased 6.6 percent as reported, 3.6 percent adjusted for currency versus the first quarter of 2006. Pre-tax income from continuing operations was $2,579 million, up 5.7 percent versus the first quarter of 2006. Diluted earnings per share from continuing operations was $1.21 versus $1.08, a 12.0 percent improvement year-to-year.

The company’s financial performance in the quarter demonstrated the value of its global integration. The company has been making investments for sometime to build global capabilities, transform its operations and extend its global reach. This quarter, the company’s strong performance in Asia Pacific, combined with improved performance in Europe, more than offset weakness in the United States. In addition, the company continued to benefit from strong growth in its emerging country markets where revenue grew 24.1 percent (21 percent adjusted for currency).

The increase in revenue was driven by an 8.8 percent increase in Software, reflecting double-digit growth in key branded middleware, a 7.0 percent increase in Global Technology Services led by Integrated Technology Services and an increase of 8.7 percent in Global Business Services with improved revenue growth in all three geographies.  In addition, Systems and Technology revenue increased 2.3 percent primarily driven by strong growth in System p and System z products, partially offset by an anticipated decline in Microelectronics and weaker performance in System Storage. Global Financing revenue increased 5.6 percent reflecting an improvement in financing revenue due to an increase in used equipment sales and financing assets.

The gross profit margin was 40.2 percent, an increase of 1.1 points versus the prior year driven by improvements in Systems and Technology and Global Business Services. This is the 11th consecutive quarter that the gross profit margin

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has increased, driven by an improving business mix and productivity initiatives.

Total expense and other income increased 11.3 percent versus the first quarter of 2006 driven by the company’s continuing investments in higher value capabilities.

The company’s effective tax rate for the first three months of 2007 was 28.5 percent versus 30.0 percent in the first quarter of 2006.

Total Assets declined $1.6 billion from December 31, 2006 primarily due to lower accounts receivable ($2.8 billion), partially offset by increases in Goodwill ($0.2 billion) and pension assets ($0.4 billion).

Global Services signings were $11.1 billion for the quarter, down 2 percent compared to the first quarter of 2006. The estimated Global Services backlog ended at $115 billion, versus $116 billion at December 31, 2006.

Quarter in Review

Results of Continuing Operations

Segment Details

The following table presents each reportable segment’s external revenue as a percentage of total external segment revenue.

For the period ended March 31:		2007		2006
Global Technology Services		37.8	%	37.7	%
Global Business Services		19.2		18.8
Total Global Services		57.0		56.5
Systems and Technology		20.7		21.6
Global Financing		2.8		2.8
Total Systems and Technology/Financing		23.5		24.4
Software		19.5		19.1
Total		100.0	%	100.0	%

 

The following is an analysis of the first quarter 2007 versus first quarter 2006 reportable segment external revenue and gross margin results.

 

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Global Services

								Yr. to Yr.
(Dollars in millions)								Percent
For the period ended March 31:		2007			2006			Change
Global Services revenue:		$	12,441		$	11,567		7.6	%
Global Technology Services		$	8,258		$	7,719		7.0	%
Strategic Outsourcing		4,335			4,098			5.8
Business Transformation Outsourcing		489			490			(0.1	)
Integrated Technology Services		1,899			1,689			12.5
Maintenance		1,534			1,443			6.3
Global Business Services		$	4,183		$	3,848		8.7	%

 

The company’s two services segments, Global Technology Services and Global Business Services, together had revenue of $12.4 billion, an increase of 7.6 percent (4 percent adjusted for currency) in the first quarter of 2007 when compared to the first quarter of 2006. Global Business Services delivered strong results for both revenue and profit growth in the quarter.

Global Technology Services (GTS) revenue increased 7.0 percent (4 percent adjusted for currency) in the first quarter versus the first quarter of 2006, led by strong growth in Integrated Technology Services. Total signings in GTS decreased 6 percent in the first quarter of 2007, with longer term signings decreasing 9 percent partially offset by increased shorter term signings of 5 percent.

Strategic Outsourcing revenue was up 5.8 percent (3 percent adjusted for currency) in the quarter driven by growth in Asia Pacific and EMEA, partially offset by weakness in the Americas. Total SO signings in the first quarter were down 11 percent when compared with first quarter of 2006.

Business Transformation Outsourcing (BTO) revenue decreased 0.1 percent (3 percent adjusted for currency) in the first quarter of 2007 when compared to the first quarter of 2006. Double-digit growth in Asia Pacific and EMEA was offset by decreased revenue in the Americas driven by the impact from a large contract renegotiation in 2006.  BTO signings increased 7 percent year to year.

Integrated Technology Services (ITS) revenue increased 12.5 percent (9 percent adjusted for currency) in the first quarter versus the comparable period of 2006. The company continues to see progress from the changes implemented to improve the ITS business, particularly in Asia Pacific and parts of Europe. In addition, the acquisition of Internet Security Systems, which added to the company’s capabilities in security and intrusion protection, contributed to the growth this quarter. ITS signings were up 5 percent year to year.

Maintenance revenue increased 6.3 percent (3 percent adjusted for currency) in the quarter, driven primarily by increased availability services on non-IBM IT equipment.

Global Business Services (GBS) revenue increased 8.7 percent (6 percent adjusted for currency) in the first quarter of 2007 versus the year ago period, reflecting improved revenue growth rates  in all three geographies with the strongest growth in Asia Pacific. From an offering perspective, the strongest growth was in the areas of supply chain, business strategy and change and in Service-Oriented Architecture (SOA) driven offerings, where the company continues to extend its leadership by helping clients to build strategic new solutions in partnership with the company’s Software business and Research Division.  Total signings in GBS increased 3 percent in the first quarter of 2007. Shorter term signings increased  13 percent year to year and were up in all geographies, led by the Americas and Asia Pacific. This was the third consecutive quarter of double-digit short term signings growth. Longer term signings were down 22 percent, as growth in signings for Application Management Services was offset by declines in the company’s U.S. Federal business.

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								Yr. to Yr.
								Percent/
(Dollars in millions)								Margin
For the period ended March 31:		2007			2006			Change
Global Services gross profit:
Global Technology Services		$	2,407		$	2,253		6.8	%
Gross profit margin		29.2		%	29.2		%	0.0	pts.
Global Business Services		997			823			21.2	%
Gross Profit margin		23.8		%	21.4		%	2.5	pts.

 

Global Technology Services gross profit margin was 29.2 percent, flat year to year, and the segment pre-tax margin was 7.8 percent in the first quarter, a decline of 2.5 points versus the first quarter of 2006.  The pre-tax margin decline was driven by increased investments in sales and delivery, as well as the impact of recently completed acquisitions.  The company continues to increase its investments in technology, tools and processes to improve service delivery and client satisfaction in outsourced accounts.  Gross margins improved in Asia Pacific, but cost issues in strategic outsourcing impacted margins in the U.S. The company is implementing actions to improve the profitability of the GTS business, with a specific focus on the U.S. cost base.

Global Business Services gross profit margin was 23.8 percent in the quarter, an improvement of 2.5 points versus the prior year.  The GBS segment pre-tax margin was 10.5 percent, an increase of 2.0 points year to year with pre-tax income growing 32 percent versus the prior year. This profit expansion was driven by higher revenue growth and utilization, improved pricing and strong contract management.

Global Services Signings

In first-quarter of 2007, total Global Services signings decreased 2 percent year to year to $11,084 million. Shorter term signings, driven by demand for both ITS and Consulting and Systems Integration offerings, were $5,255 million, up 10 percent. This was the third consecutive quarter of signings growth in these short term businesses. Longer term signings were $5,829 million, down 11 percent year to year when compared to first-quarter 2006.  GTS signings were $6,845 million and GBS signings were $4,239 million in the first quarter of 2007.  In the first quarter, the company signed 9 deals greater than $100 million and the total Global Services backlog was estimated at $115 billion, an increase of $4.9 billion versus March 31, 2006 and down $0.2 billion from December 31, 2006.

Global Technology Services Signings

(Dollars in millions)
For the period ended March 31:		2007			2006
Longer term		$	4,924		$	5,416
Shorter term		1,921			1,829
Total		$	6,845		$	7,245

 

Global Business Services Signings

(Dollars in millions)
For the period ended March 31:		2007			2006
Longer term		$	905		$	1,156
Shorter term		3,334			2,952
Total		$	4,239		$	4,109

 

Global Services signings are management’s initial estimate of the value of a client’s commitment under a Global Services contract. Signings are used by management to assess period performance of Global Services management. There are no third-party standards or requirements governing the calculation of signings. The calculation used by management is an approximation of constant currency, and involves estimates and judgments to gauge the extent of a client’s commitment, including the type and duration of the agreement, and the presence of termination charges or wind-down costs. For example, for longer term contracts that require significant upfront investment by the company, the portions of these contracts that are a signing are those periods in which there is a significant economic impact on the client if the commitment is not achieved, usually through a termination charge or the client incurring significant wind-down costs as a result of the termination. For

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