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, 2011
1-2360
(Commission file number)
INTERNATIONAL BUSINESS MACHINES CORPORATION
(Exact name of registrant as specified in its charter)
New York |
|
13-0871985 |
(State of incorporation) |
|
(IRS employer identification number) |
|
|
|
Armonk, New York |
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10504 |
(Address of principal executive offices) |
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(Zip Code) |
914-499-1900
(Registrants 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of accelerated filer, large accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x |
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Accelerated filer o |
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|
|
Non-accelerated filer o |
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Smaller reporting company o |
(Do not check if a smaller reporting company) |
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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 1,211,200,200 shares of common stock outstanding at March 31, 2011.
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 |
| ||||
per share amounts) |
|
2011 |
|
2010 |
| ||
Revenue: |
|
|
|
|
| ||
Services |
|
$ |
14,696 |
|
$ |
13,805 |
|
Sales |
|
9,387 |
|
8,508 |
| ||
Financing |
|
524 |
|
545 |
| ||
Total revenue |
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24,607 |
|
22,857 |
| ||
|
|
|
|
|
| ||
Cost: |
|
|
|
|
| ||
Services |
|
10,116 |
|
9,384 |
| ||
Sales |
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3,390 |
|
3,224 |
| ||
Financing |
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243 |
|
273 |
| ||
Total cost |
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13,749 |
|
12,880 |
| ||
|
|
|
|
|
| ||
Gross profit |
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10,858 |
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9,976 |
| ||
|
|
|
|
|
| ||
Expense and other income: |
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|
|
|
| ||
Selling, general and administrative |
|
5,826 |
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5,677 |
| ||
Research, development and engineering |
|
1,587 |
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1,509 |
| ||
Intellectual property and custom development income |
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(262 |
) |
(261 |
) | ||
Other (income) and expense |
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(202 |
) |
(545 |
) | ||
Interest expense |
|
93 |
|
82 |
| ||
Total expense and other income |
|
7,041 |
|
6,462 |
| ||
|
|
|
|
|
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Income before income taxes |
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3,817 |
|
3,515 |
| ||
Provision for income taxes |
|
954 |
|
914 |
| ||
Net income |
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$ |
2,863 |
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$ |
2,601 |
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|
|
|
|
|
| ||
Earnings per share of common stock: |
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|
|
|
| ||
Assuming dilution |
|
$ |
2.31 |
|
$ |
1.97 |
|
Basic |
|
$ |
2.34 |
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$ |
2.00 |
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|
|
|
|
|
| ||
Weighted-average number of common shares outstanding: (millions) |
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|
|
|
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Assuming dilution |
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1,240.0 |
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1,321.6 |
| ||
Basic |
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1,222.2 |
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1,301.2 |
| ||
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|
|
|
|
| ||
Cash dividend per common share |
|
$ |
0.65 |
|
$ |
0.55 |
|
(Amounts may not add due to rounding.)
(The accompanying notes are an integral part of the financial statements.)
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(UNAUDITED)
ASSETS
|
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At March 31, |
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At December 31, |
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(Dollars in millions) |
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2011 |
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2010 |
| ||
|
|
|
|
|
| ||
Assets: |
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|
|
|
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Current assets: |
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|
|
|
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Cash and cash equivalents |
|
$ |
12,763 |
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$ |
10,661 |
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Marketable securities |
|
482 |
|
990 |
| ||
Notes and accounts receivable trade (net of allowances of $328 in 2011 and $324 in 2010) |
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10,148 |
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10,834 |
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Short-term financing receivables (net of allowances of $318 in 2011 and $342 in 2010) |
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14,365 |
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16,257 |
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Other accounts receivable (net of allowances of $12 in 2011 and $10 in 2010) |
|
1,145 |
|
1,134 |
| ||
Inventories, at lower of average cost or market: |
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|
|
|
| ||
Finished goods |
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548 |
|
432 |
| ||
Work in process and raw materials |
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2,001 |
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2,018 |
| ||
Total inventories |
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2,549 |
|
2,450 |
| ||
Deferred taxes |
|
1,695 |
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1,564 |
| ||
Prepaid expenses and other current assets |
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4,376 |
|
4,226 |
| ||
Total current assets |
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47,524 |
|
48,116 |
| ||
|
|
|
|
|
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Plant, rental machines and other property |
|
40,765 |
|
40,289 |
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Less: Accumulated depreciation |
|
26,557 |
|
26,193 |
| ||
Plant, rental machines and other property net |
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14,208 |
|
14,096 |
| ||
Long-term financing receivables (net of allowances of $39 in 2011 and $58 in 2010) |
|
10,254 |
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10,548 |
| ||
Prepaid pension assets |
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3,788 |
|
3,068 |
| ||
Deferred taxes |
|
3,076 |
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3,220 |
| ||
Goodwill |
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25,408 |
|
25,136 |
| ||
Intangible assets net |
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3,324 |
|
3,488 |
| ||
Investments and sundry assets |
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5,380 |
|
5,778 |
| ||
Total assets |
|
$ |
112,960 |
|
$ |
113,452 |
|
(Amounts may not add due to rounding.)
(The accompanying notes are an integral part of the financial statements.)
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION (CONTINUED)
(UNAUDITED)
LIABILITIES AND EQUITY
(Dollars in millions) |
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At March 31, |
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At December 31, |
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|
|
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Liabilities and equity: |
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|
|
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Current liabilities: |
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|
|
|
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Taxes |
|
$ |
2,531 |
|
$ |
4,216 |
|
Short-term debt |
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8,508 |
|
6,778 |
| ||
Accounts payable |
|
6,747 |
|
7,804 |
| ||
Compensation and benefits |
|
4,446 |
|
5,028 |
| ||
Deferred income |
|
12,820 |
|
11,580 |
| ||
Other accrued expenses and liabilities |
|
5,336 |
|
5,156 |
| ||
Total current liabilities |
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40,387 |
|
40,562 |
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Long-term debt |
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21,749 |
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21,846 |
| ||
Retirement and nonpension postretirement benefit obligations |
|
15,995 |
|
15,978 |
| ||
Deferred income |
|
3,724 |
|
3,666 |
| ||
Other liabilities |
|
8,330 |
|
8,226 |
| ||
Total liabilities |
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90,185 |
|
90,279 |
| ||
|
|
|
|
|
| ||
Equity: |
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|
|
|
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IBM stockholders equity: |
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|
|
|
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Common stock, par value $0.20 per share, and additional paid-in capital |
|
46,278 |
|
45,418 |
| ||
Shares authorized: 4,687,500,000 |
|
|
|
|
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Shares issued: 2011 - 2,169,188,522 |
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|
|
|
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2010 - 2,161,800,054 |
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|
|
|
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Retained earnings |
|
94,590 |
|
92,532 |
| ||
Treasury stock - at cost |
|
(100,078 |
) |
(96,161 |
) | ||
Shares: 2011 - 957,988,323 |
|
|
|
|
| ||
2010 - 933,806,510 |
|
|
|
|
| ||
Accumulated other comprehensive income/(loss) |
|
(18,119 |
) |
(18,743 |
) | ||
Total IBM stockholders equity |
|
22,671 |
|
23,046 |
| ||
Noncontrolling interests |
|
104 |
|
126 |
| ||
Total equity |
|
22,776 |
|
23,172 |
| ||
Total liabilities and equity |
|
$ |
112,960 |
|
$ |
113,452 |
|
(Amounts may not add due to rounding.)
(The accompanying notes are an integral part of the financial statements.)
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, (UNAUDITED)
(Dollars in millions) |
|
2011 |
|
2010 |
| ||
|
|
|
|
|
| ||
Cash flow from operating activities: |
|
|
|
|
| ||
Net income |
|
$ |
2,863 |
|
$ |
2,601 |
|
Adjustments to reconcile net income to cash provided by operating activities: |
|
|
|
|
| ||
Depreciation |
|
918 |
|
924 |
| ||
Amortization of intangibles |
|
310 |
|
286 |
| ||
Stock-based compensation |
|
170 |
|
169 |
| ||
Net (gain)/loss on asset sales and other |
|
(320 |
) |
(578 |
) | ||
Changes in operating assets and liabilities, net of acquisitions/divestitures |
|
(147 |
) |
1,033 |
| ||
Net cash provided by operating activities |
|
3,792 |
|
4,437 |
| ||
|
|
|
|
|
| ||
Cash flow from investing activities: |
|
|
|
|
| ||
Payments for plant, rental machines and other property, net of proceeds from dispositions |
|
(915 |
) |
(758 |
) | ||
Investment in software |
|
(143 |
) |
(146 |
) | ||
Acquisition of businesses, net of cash acquired |
|
(51 |
) |
(824 |
) | ||
Non-operating finance receivables net |
|
541 |
|
457 |
| ||
Purchases of marketable securities and other investments |
|
(415 |
) |
(1,747 |
) | ||
Proceeds from disposition of marketable securities and other investments |
|
1,481 |
|
2,319 |
| ||
Net cash provided by/(used in) investing activities |
|
498 |
|
(699 |
) | ||
|
|
|
|
|
| ||
Cash flow from financing activities: |
|
|
|
|
| ||
Proceeds from new debt |
|
1,054 |
|
1,190 |
| ||
Payments to settle debt |
|
(1,539 |
) |
(2,382 |
) | ||
Short-term borrowings/(repayments) less than 90 days net |
|
2,135 |
|
1,673 |
| ||
Common stock repurchases |
|
(4,045 |
) |
(4,017 |
) | ||
Common stock transactions other |
|
877 |
|
885 |
| ||
Cash dividends paid |
|
(795 |
) |
(718 |
) | ||
Net cash used in financing activities |
|
(2,314 |
) |
(3,368 |
) | ||
|
|
|
|
|
| ||
Effect of exchange rate changes on cash and cash equivalents |
|
126 |
|
(81 |
) | ||
Net change in cash and cash equivalents |
|
2,102 |
|
289 |
| ||
|
|
|
|
|
| ||
Cash and cash equivalents at January 1 |
|
10,661 |
|
12,183 |
| ||
Cash and cash equivalents at March 31 |
|
$ |
12,763 |
|
$ |
12,472 |
|
(Amounts may not add due to rounding.)
(The accompanying notes are an integral part of the financial statements.)
Notes to Consolidated Financial Statements:
1. Basis of Presentation: The accompanying Consolidated Financial Statements and footnotes of the International Business Machines Corporation (IBM or the company) have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The financial statements and footnotes are unaudited. In the opinion of the companys management, these statements include all adjustments, which are of a normal recurring nature, necessary to present a fair statement of the companys results of operations, financial position and cash flows.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the assets, liabilities, revenue, costs, expenses and accumulated other comprehensive income/(loss) that are reported in the Consolidated Financial Statements and accompanying disclosures. Actual results may be different. See the companys 2010 Annual Report on pages 50 to 53 for a discussion of the companys critical accounting estimates.
Interim results are not necessarily indicative of financial results for a full year. The information included in this Form 10-Q should be read in conjunction with the companys 2010 Annual Report.
Noncontrolling interest amounts in income of $2.6 million and $1.8 million, net of tax, for the three months ended March 31, 2011 and March 31, 2010, respectively, are not presented separately in the Consolidated Statement of Earnings due to immateriality, but are reflected within the other (income) and expense line item. Additionally, changes to noncontrolling interests which are presented in Note 9, Equity Activity, on page 25 were $(22) million and $(2) million at March 31, 2011 and 2010, respectively.
Within the financial statements and tables presented, 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. Certain prior year amounts have been reclassified to conform to the current year presentation. This is annotated where applicable.
2. Accounting Changes: In December 2010, the Financial Accounting Standards Board (FASB) issued amended guidance to clarify the acquisition date that should be used for reporting pro-forma financial information for business combinations. If comparative financial statements are presented, the pro-forma revenue and earnings of the combined entity for the comparable prior reporting period should be reported as though the acquisition date for all business combinations that occurred during the current year had been completed as of the beginning of the comparable prior annual reporting period. The amendments in this guidance became effective prospectively for business combinations for which the acquisition date is on or after January 1, 2011. There was no impact in the consolidated financial results as the amendments relate only to additional disclosures.
In December 2010, the FASB issued amendments to the guidance on goodwill impairment testing. The amendments modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In making that determination, an entity should consider whether there are any adverse qualitative factors indicating that impairment may exist. The amendments were effective January 1, 2011 and did not have a material impact in the Consolidated Financial Statements.
In January 2011, the FASB temporarily deferred the disclosures regarding troubled debt restructurings which were included in the disclosure requirements about the credit quality of financing receivables and the allowance for credit losses which was issued in July 2010. In April 2011, the FASB issued additional guidance and clarifications to help creditors in determining whether a creditor has granted a concession, and whether a debtor is experiencing financial difficulties for purposes of determining whether a restructuring constitutes a troubled debt restructuring. The new guidance and the previously deferred disclosures are effective July 1, 2011 applied retrospectively to January 1, 2011. Prospective application is required for any new impairments identified as a result of this guidance. These changes are not expected to have a material impact in the Consolidated Financial Statements. For further information on the disclosures regarding the credit quality of financing receivables, see Note 5 on pages 13 to 17.
In January 2010, the FASB issued additional disclosure requirements for fair value measurements which the company included in its interim and annual financial statements in 2010. Certain disclosure requirements relating to fair value measurements using significant unobservable inputs (Level 3) were deferred until January 1, 2011. These new requirements did not have an impact in the consolidated financial results as they relate only to additional disclosures.
Notes to Consolidated Financial Statements (continued)
3. Fair Value: Exit prices are used to measure assets and liabilities that fall within the scope of the fair value measurements guidance. Under this guidance, the company is required to classify certain assets and liabilities based on the following fair value hierarchy:
· Level 1Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;
· Level 2Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly; and
· Level 3Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
The guidance requires the use of observable market data if such data is available without undue cost and effort.
When available, the company uses unadjusted quoted market prices to measure the fair value and classifies such items within Level 1. If quoted market prices are not available, fair value is based upon internally developed models that use current market-based or independently sourced market parameters such as interest rates and currency rates. Items valued using internally generated models are classified according to the lowest level input or value driver that is significant to the valuation.
The determination of fair value considers various factors including interest rate yield curves and time value underlying the financial instruments. For derivatives and debt securities, the company uses a discounted cash flow analysis using discount rates commensurate with the duration of the instrument.
In determining the fair value of financial instruments, the company considers certain market valuation adjustments to the base valuations calculated using the methodologies described below for several parameters that market participants would consider in determining fair value:
· Counterparty credit risk adjustments are applied to financial instruments, taking into account the actual credit risk of a counterparty as observed in the credit default swap market to determine the true fair value of such an instrument.
· Credit risk adjustments are applied to reflect the companys own credit risk when valuing all liabilities measured at fair value. The methodology is consistent with that applied in developing counterparty credit risk adjustments, but incorporates the companys own credit risk as observed in the credit default swap market.
As an example, the fair value of derivatives is derived utilizing a discounted cash flow model that uses observable market inputs such as known notional value amounts, yield curves, spot and forward exchange rates as well as discount rates. These inputs relate to liquid, heavily traded currencies with active markets which are available for the full term of the derivative.
Certain financial assets are measured at fair value on a nonrecurring basis. These assets include equity method investments that are recognized at fair value at the end of the period to the extent that they are deemed to be other-than-temporarily impaired. Certain assets that are measured at fair value on a recurring basis can be subject to nonrecurring fair value measurements. These assets include public cost method investments that are deemed to be other-than-temporarily impaired. In the event of an other-than-temporary impairment of a financial investment, fair value is measured using a model described above.
Non-financial assets such as property, plant and equipment, land, goodwill and intangible assets are also subject to nonrecurring fair value measurements if they are deemed to be impaired. The impairment models used for nonfinancial assets depend on the type of asset. See Note A, Significant Accounting Policies, on pages 68 to 79 in the 2010 Annual Report for further information. There were no material impairments of non-financial assets for the three months ended March 31, 2011 and 2010, respectively.
Accounting guidance permits the measurement of 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 accounting standards. This election is irrevocable. The company does not apply the fair value option to any eligible assets or liabilities.
Notes to Consolidated Financial Statements (continued)
The following tables present the companys financial assets and financial liabilities that are measured at fair value on a recurring basis at March 31, 2011 and December 31, 2010.
(Dollars in millions) |
|
|
|
|
|
|
|
|
| ||||
At March 31, 2011 |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
| ||||
Assets: |
|
|
|
|
|
|
|
|
| ||||
Cash and cash equivalents(1) |
|
|
|
|
|
|
|
|
| ||||
Time deposits and certificates of deposit |
|
$ |
|
|
$ |
4,874 |
|
$ |
|
|
$ |
4,874 |
|
Commercial paper |
|
|
|
2,269 |
|
|
|
2,269 |
| ||||
Money market funds |
|
2,708 |
|
|
|
|
|
2,708 |
| ||||
Other securities |
|
|
|
10 |
|
|
|
10 |
| ||||
Total |
|
2,708 |
|
7,153 |
|
|
|
9,861 |
| ||||
Debt securities current(2) |
|
|
|
|
|
|
|
|
| ||||
Commercial paper |
|
|
|
282 |
|
|
|
282 |
| ||||
U.S. government securities |
|
|
|
200 |
|
|
|
200 |
| ||||
Total |
|
|
|
482 |
|
|
|
482 |
| ||||
Debt securities noncurrent(3) |
|
1 |
|
6 |
|
|
|
7 |
| ||||
Non-equity method alliance investments(3) |
|
121 |
|
21 |
|
|
|
142 |
| ||||
Derivative assets(4) |
|
|
|
|
|
|
|
|
| ||||
Interest rate contracts |
|
|
|
548 |
|
|
|
548 |
| ||||
Foreign exchange contracts |
|
|
|
279 |
|
|
|
279 |
| ||||
Equity contracts |
|
|
|
21 |
|
|
|
21 |
| ||||
Total |
|
|
|
848 |
|
|
|
848 |
(6) | ||||
Total assets |
|
$ |
2,830 |
|
$ |
8,511 |
|
$ |
|
|
$ |
11,340 |
(6) |
|
|
|
|
|
|
|
|
|
| ||||
Liabilities: |
|
|
|
|
|
|
|
|
| ||||
Derivative liabilities(5) |
|
|
|
|
|
|
|
|
| ||||
Foreign exchange contracts |
|
$ |
|
|
$ |
967 |
|
$ |
|
|
$ |
967 |
|
Equity contracts |
|
|
|
4 |
|
|
|
4 |
| ||||
Total liabilities |
|
$ |
|
|
$ |
971 |
|
$ |
|
|
$ |
971 |
(6) |
(1) Included within cash and cash equivalents in the Consolidated Statement of Financial Position.
(2) Reported as marketable securities in the Consolidated Statement of Financial Position.
(3) Included within investments and sundry assets in the Consolidated Statement of Financial Position.
(4) The gross balances of derivative assets contained within prepaid expenses and other current assets, and investments and sundry assets in the Consolidated Statement of Financial Position at March 31, 2011 are $292 million and $556 million, respectively.
(5) The gross balances of derivative liabilities contained within other accrued expenses and liabilities, and other liabilities in the Consolidated Statement of Financial Position at March 31, 2011 are $894 million and $77 million, respectively.
(6) If derivative exposures covered by a qualifying master netting agreement had been netted in the Consolidated Statement of Financial Position, the total derivative asset and liability positions would have been reduced by $396 million each.
Notes to Consolidated Financial Statements (continued)
(Dollars in millions) |
|
|
|
|
|
|
|
|
| ||||
At December 31, 2010 |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
| ||||
Assets: |
|
|
|
|
|
|
|
|
| ||||
Cash and cash equivalents(1) |
|
|
|
|
|
|
|
|
| ||||
Time deposits and certificates of deposit |
|
$ |
|
|
$ |
2,473 |
|
$ |
|
|
$ |
2,473 |
|
Commercial paper |
|
|
|
2,673 |
|
|
|
2,673 |
| ||||
Money market funds |
|
1,532 |
|
|
|
|
|
1,532 |
| ||||
Foreign government securities |
|
|
|
1,054 |
|
|
|
1,054 |
| ||||
U.S. government securities |
|
|
|
44 |
|
|
|
44 |
| ||||
U.S. government agency securities |
|
|
|
22 |
|
|
|
22 |
| ||||
Other securities |
|
|
|
3 |
|
|
|
3 |
| ||||
Total |
|
1,532 |
|
6,269 |
|
|
|
7,801 |
| ||||
Debt securities current(2) |
|
|
|
|
|
|
|
|
| ||||
Commercial paper |
|
|
|
490 |
|
|
|
490 |
| ||||
U.S. government securities |
|
|
|
500 |
|
|
|
500 |
| ||||
Other securities |
|
|
|
1 |
|
|
|
1 |
| ||||
Total |
|
|
|
990 |
|
|
|
990 |
| ||||
Debt securities noncurrent(3) |
|
1 |
|
6 |
|
|
|
7 |
| ||||
Non-equity method alliance investments(3) |
|
445 |
|
13 |
|
|
|
458 |
| ||||
Derivative assets(4) |
|
|
|
|
|
|
|
|
| ||||
Interest rate contracts |
|
|
|
548 |
|
|
|
548 |
| ||||
Foreign exchange contracts |
|
|
|
539 |
|
|
|
539 |
| ||||
Equity contracts |
|
|
|
12 |
|
|
|
12 |
| ||||
Total |
|
|
|
1,099 |
|
|
|
1,099 |
(6) | ||||
Total assets |
|
$ |
1,978 |
|
$ |
8,377 |
|
$ |
|
|
$ |
10,355 |
(6) |
|
|
|
|
|
|
|
|
|
| ||||
Liabilities: |
|
|
|
|
|
|
|
|
| ||||
Derivative liabilities(5) |
|
|
|
|
|
|
|
|
| ||||
Foreign exchange contracts |
|
$ |
|
|
$ |
1,003 |
|
$ |
|
|
$ |
1,003 |
|
Equity contracts |
|
|
|
3 |
|
|
|
3 |
| ||||
Total liabilities |
|
$ |
|
|
$ |
1,006 |
|
$ |
|
|
$ |
1,006 |
(6) |
(1) Included within cash and cash equivalents in the Consolidated Statement of Financial Position.
(2) Reported as marketable securities in the Consolidated Statement of Financial Position.
(3) Included within investments and sundry assets in the Consolidated Statement of Financial Position.
(4) The gross balances of derivative assets contained within prepaid expenses and other current assets, and investments and sundry assets in the Consolidated Statement of Financial Position at December 31, 2010 are $511 million and $588 million, respectively.
(5) The gross balances of derivative liabilities contained within other accrued expenses and liabilities, and other liabilities in the Consolidated Statement of Financial Position at December 31, 2010 are $871 million and $135 million, respectively.
(6) If derivative exposures covered by a qualifying master netting agreement had been netted in the Consolidated Statement of Financial Position, the total derivative asset and liability positions would have been reduced by $475 million each.
There were no significant transfers between Levels 1 and 2 for the quarter ended March 31, 2011 and for the year ended December 31, 2010.
Notes to Consolidated Financial Statements (continued)
4. Financial Instruments (excluding derivatives): Cash and cash equivalents, debt and marketable equity securities are recognized and measured at fair value in the companys Consolidated Financial Statements. Notes and other accounts receivable and other investments are financial assets with carrying values that approximate fair value. Accounts payable, other accrued expenses and short-term debt are financial liabilities with carrying values that approximate fair value. In the absence of quoted prices in active markets, considerable judgment is required in developing estimates of fair value. Estimates are not necessarily indicative of the amounts the company could realize in a current market transaction. The following methods and assumptions are used to estimate fair values:
Loans and Long-term Receivables
Fair values are based on discounted future cash flows using current interest rates offered for similar loans to clients with similar credit ratings for the same remaining maturities.
Long-term Debt
Fair value of publicly-traded long-term debt is based on quoted market prices for the identical liability when traded as an asset in an active market. For other long-term debt for which a quoted market price is not available, an expected present value technique that uses rates currently available to the company for debt with similar terms and remaining maturities is used to estimate fair value. The carrying amount of long-term debt is $21,749 million and $21,846 million and the estimated fair value is $23,668 million and $24,006 million at March 31, 2011 and December 31, 2010, respectively.
Debt and Marketable Equity Securities
The following tables summarize the companys debt and marketable equity securities all of which are considered available-for-sale and recorded at fair value in the Consolidated Statement of Financial Position.
|
|
|
|
Gross |
|
Gross |
|
|
| ||||
(Dollars in millions) |
|
Adjusted |
|
Unrealized |
|
Unrealized |
|
Fair |
| ||||
At March 31, 2011 |
|
Cost |
|
Gains |
|
Losses |
|
Value |
| ||||
Cash and cash equivalents(1) |
|
|
|
|
|
|
|
|
| ||||
Time deposits and certificates of deposit |
|
$ |
4,874 |
|
$ |
|
|
$ |
(0 |
) |
$ |
4,874 |
|
Commercial paper |
|
2,269 |
|
|
|
(0 |
) |
2,269 |
| ||||
Money market funds |
|
2,708 |
|
|
|
|
|
2,708 |
| ||||
Other securities |
|
10 |
|
|
|
|
|
10 |
| ||||
Total |
|
$ |
9,861 |
|
$ |
|
|
$ |
(0 |
) |
$ |
9,861 |
|
Debt securities current(2) |
|
|
|
|
|
|
|
|
| ||||
Commercial paper |
|
$ |
282 |
|
$ |
0 |
|
$ |
|
|
$ |
282 |
|
U.S. government securities |
|
200 |
|
0 |
|
|
|
200 |
| ||||
Other securities |
|
2 |
|
|
|
(2 |
) |
0 |
| ||||
Total |
|
$ |
484 |
|
$ |
0 |
|
$ |
(2 |
) |
$ |
482 |
|
Debt securities noncurrent(3) |
|
|
|
|
|
|
|
|
| ||||
Other securities |
|
$ |
7 |
|
$ |
0 |
|
$ |
|
|
$ |
7 |
|
Total |
|
$ |
7 |
|
$ |
0 |
|
$ |
|
|
$ |
7 |
|
Non-equity method alliance investments(3) |
|
$ |
80 |
|
$ |
63 |
|
$ |
(0 |
) |
$ |
142 |
|
(1) Included within cash and cash equivalents in the Consolidated Statement of Financial Position.
(2) Reported as marketable securities within the Consolidated Statement of Financial Position.
(3) Included within investments and sundry assets in the Consolidated Statement of Financial Position.
Notes to Consolidated Financial Statements (continued)
|
|
|
|
Gross |
|
Gross |
|
|
| ||||
(Dollars in millions) |
|
Adjusted |
|
Unrealized |
|
Unrealized |
|
Fair |
| ||||
At December 31, 2010 |
|
Cost |
|
Gains |
|
Losses |
|
Value |
| ||||
Cash and cash equivalents(1) |
|
|
|
|
|
|
|
|
| ||||
Time deposits and certificates of deposit |
|
$ |
2,473 |
|
$ |
|
|
$ |
(0 |
) |
$ |
2,473 |
|
Commercial paper |
|
2,673 |
|
|
|
(0 |
) |
2,673 |
| ||||
Money market funds |
|
1,532 |
|
|
|
|
|
1,532 |
| ||||
Foreign government securities |
|
1,054 |
|
|
|
|
|
1,054 |
| ||||
U.S. government securities |
|
44 |
|
0 |
|
(0 |
) |
44 |
| ||||
U.S. government agency securities |
|
22 |
|
0 |
|
(0 |
) |
22 |
| ||||
Other securities |
|
3 |
|
|
|
|
|
3 |
| ||||
Total |
|
$ |
7,801 |
|
$ |
0 |
|
$ |
(0 |
) |
$ |
7,801 |
|
Debt securities current(2) |
|
|
|
|
|
|
|
|
| ||||
Commercial paper |
|
$ |
490 |
|
$ |
|
|
$ |
(0 |
) |
$ |
490 |
|
U.S. government securities |
|
500 |
|
|
|
(0 |
) |
500 |
| ||||
Other securities |
|
1 |
|
|
|
(0 |
) |
1 |
| ||||
Total |
|
$ |
990 |
|
$ |
|
|
$ |
(0 |
) |
$ |
990 |
|
Debt securities noncurrent(3) |
|
|
|
|
|
|
|
|
| ||||
Other securities |
|
$ |
6 |
|
$ |
1 |
|
$ |
(0 |
) |
$ |
7 |
|
Total |
|
$ |
6 |
|
$ |
1 |
|
$ |
(0 |
) |
$ |
7 |
|
Non-equity method alliance investments(3) |
|
$ |
194 |
|
$ |
264 |
|
$ |
(0 |
) |
$ |
458 |
|
(1) Included within cash and cash equivalents in the Consolidated Statement of Financial Position.
(2) Reported as marketable securities within the Consolidated Statement of Financial Position.
(3) Included within investments and sundry assets in the Consolidated Statement of Financial Position.
Based on an evaluation of available evidence as of March 31, 2011, the company believes that unrealized losses on debt and marketable equity securities are temporary and do not represent a need for an other-than-temporary impairment.
Proceeds from sales of debt securities and marketable equity securities were approximately $315 million and $9 million for the three months ended March 31, 2011 and 2010, respectively. The gross realized gains (before taxes) on these sales totaled $203 million for the three months ended March 31, 2011. The gross realized losses (before taxes) on these sales totaled less than $1 million for the three months ended March 31, 2011. The gross realized gains (before taxes) on these sales totaled $4 million for the three months ended March 31, 2010. The company determines the cost of the securities sold based on the specific identification method.
The after tax net unrealized holding gains/(losses) on available-for-sale debt and marketable equity securities that have been included in accumulated other comprehensive income/(loss) and the after tax net gains/(losses) reclassified from accumulated other comprehensive income/(loss) into net income were as follows:
(Dollars in millions) |
|
|
|
|
| ||
For the three months ended March 31: |
|
2011 |
|
2010 |
| ||
Net unrealized gains/(losses) arising during the period |
|
$ |
1 |
|
$ |
41 |
|
Less: Net (losses)/gains included in net income for the period* |
|
124 |
|
(1 |
) | ||
Net unrealized gains/(losses) on marketable securities |
|
$ |
(123 |
) |
$ |
42 |
|
* Includes writedowns of $3.1 million for the three months ended March 31, 2010.
The contractual maturities of substantially all available-for-sale debt securities are less than one year at March 31, 2011.
Notes to Consolidated Financial Statements (continued)
5. Financing Receivables: The following table presents financing receivables, net of allowances for credit losses, including residual values.
|
|
At March 31, |
|
At December 31, |
| ||
(Dollars in millions) |
|
2011 |
|
2010 |
| ||
|
|
|
|
|
| ||
Current: |
|
|
|
|
| ||
Net investment in sales-type and direct financing leases |
|
$ |
4,063 |
|
$ |
3,945 |
|
Commercial financing receivables |
|
4,873 |
|
6,777 |
| ||
Client loan receivables |
|
4,651 |
|
4,718 |
| ||
Installment payment receivables |
|
777 |
|
816 |
| ||
Total |
|
$ |
14,365 |
|
$ |
16,257 |
|
Noncurrent: |
|
|
|
|
| ||
Net investment in sales-type and direct financing leases |
|
$ |
5,290 |
|
$ |
5,384 |
|
Commercial financing receivables |
|
42 |
|
43 |
| ||
Client loan receivables |
|
4,612 |
|
4,734 |
| ||
Installment payment receivables |
|
310 |
|
388 |
| ||
Total |
|
$ |
10,254 |
|
$ |
10,548 |
|
Net investment in sales-type and direct financing leases relates principally to the companys systems products and are for terms ranging generally from two to six years. Net investment in sales-type and direct financing leases includes unguaranteed residual values of $814 million and $871 million at March 31, 2011 and December 31, 2010, respectively, and is reflected net of unearned income of $808 million and $816 million and net of the allowance for credit losses of $116 million and $126 million at those dates, respectively.
Commercial financing receivables relate primarily to inventory and accounts receivable financing for dealers and remarketers of IBM and non-IBM products. Payment terms for inventory and accounts receivable financing generally range from 30 to 90 days.
Client loan receivables are loans that are provided by Global Financing primarily to clients to finance the purchase of software and services. Separate contractual relationships on these financing arrangements are for terms ranging generally from two to seven years. Each financing contract is priced independently at competitive market rates. The company has a history of enforcing the terms of these separate financing agreements.
The company utilizes certain of its financing receivables as collateral for non-recourse borrowings. Financing receivables pledged as collateral for borrowings were $263 million and $302 million at March 31, 2011 and December 31, 2010, respectively.
The company did not have any financing receivables held for sale as of March 31, 2011 and December 31, 2010.
Financing Receivables by Portfolio Segment
The following tables present financing receivables on a gross basis excluding the allowance for credit losses and residual value, by portfolio segment and by class, excluding current commercial financing receivables and other miscellaneous current financing receivables at March 31, 2011 and December 31, 2010. The company determines its allowance for credit losses based on two portfolio segments: lease receivables and loan receivables, and further segments the portfolio via two classes: major markets and growth markets. For additional information on the companys accounting policies for the allowance for credit losses, see the companys 2010 Annual Report beginning on page 77.
Notes to Consolidated Financial Statements (continued)
(Dollars in millions) |
|
Major |
|
Growth |
|
Total |
| |||
Financing receivables: |
|
|
|
|
|
|
| |||
Lease receivables |
|
$ |
6,542 |
|
$ |
2,055 |
|
$ |
8,597 |
|
Loan receivables |
|
8,597 |
|
2,013 |
|
10,610 |
| |||
Ending balance |
|
$ |
15,139 |
|
$ |
4,068 |
|
$ |
19,207 |
|
Collectively evaluated for impairment |
|
$ |
14,774 |
|
$ |
3,878 |
|
$ |
18,651 |
|
Individually evaluated for impairment |
|
$ |
365 |
|
$ |
190 |
|
$ |
556 |
|
|
|
|
|
|
|
|
| |||
Allowance for credit losses: |
|
|
|
|
|
|
| |||
Lease receivables* |
|
$ |
84 |
|
$ |
42 |
|
$ |
126 |
|
Loan receivables* |
|
150 |
|
76 |
|
226 |
| |||
Beginning balance at January 1, 2011 |
|
$ |
234 |
|
$ |
119 |
|
$ |
353 |
|
Charge-offs |
|
(29 |
) |
(1 |
) |
(30 |
) | |||
Provision |
|
(11 |
) |
2 |
|
(9 |
) | |||
Other |
|
6 |
|
1 |
|
7 |
| |||
Lease receivables |
|
71 |
|
45 |
|
116 |
| |||
Loan receivables |
|
129 |
|
75 |
|
204 |
| |||
Ending balance at March 31, 2011 |
|
$ |
201 |
|
$ |
120 |
|
321 |
| |
Collectively evaluated for impairment |
|
$ |
45 |
|
$ |
9 |
|
$ |
54 |
|
Individually evaluated for impairment |
|
$ |
156 |
|
$ |
111 |
|
$ |
267 |
|
(Dollars in millions) |
|
Major |
|
Growth |
|
Total |
| |||
Financing receivables: |
|
|
|
|
|
|
| |||
Lease receivables |
|
$ |
6,562 |
|
$ |
1,983 |
|
$ |
8,545 |
|
Loan receivables |
|
9,087 |
|
1,993 |
|
11,080 |
| |||
Ending balance |
|
$ |
15,650 |
|
$ |
3,975 |
|
$ |
19,625 |
|
Collectively evaluated for impairment |
|
$ |
15,199 |
|
$ |
3,794 |
|
$ |
18,993 |
|
Individually evaluated for impairment |
|
$ |
451 |
|
$ |
181 |
|
$ |
632 |
|
|
|
|
|
|
|
|
| |||
Allowance for credit losses: |
|
|
|
|
|
|
| |||
Lease receivables* |
|
$ |
84 |
|
$ |
42 |
|
$ |
126 |
|
Loan receivables* |
|
150 |
|
76 |
|
226 |
| |||
Ending balance at December 31, 2010 |
|
$ |
234 |
|
$ |
119 |
|
$ |
353 |
|
Collectively evaluated for impairment |
|
$ |
60 |
|
$ |
11 |
|
$ |
71 |
|
Individually evaluated for impairment |
|
$ |
174 |
|
$ |
108 |
|
$ |
282 |
|
* Reclassified to conform with 2011 presentation.
When calculating the allowances, financing receivables are evaluated either on an individual or a collective basis. For individually evaluated receivables, the company determines the expected cash flow for the receivable and calculates an estimate of the potential loss and the probability of loss. For those accounts in which the loss is probable, the company records a specific reserve. In addition, the company records an unallocated reserve that is calculated by applying a reserve rate to its different portfolios, excluding accounts that have been specifically reserved. This reserve rate is based upon credit rating, probability of default, term, characteristics (lease/loan) and loss history.
Financing Receivables on Non-Accrual Status
Certain receivables for which the company has recorded a specific reserve may also be placed on non-accrual status. Non-accrual assets are those receivables with specific reserves and other accounts for which it is likely that the company will be unable to collect all amounts due according to original terms of the lease or loan agreement. Income recognition is discontinued on these receivables.
Notes to Consolidated Financial Statements (continued)
The following table presents the recorded investment in financing receivables which were on non-accrual status at March 31, 2011 and December 31, 2010.
(Dollars in millions) |
|
At March 31, |
|
At December 31, |
| ||
Major markets |
|
$ |
69 |
|
$ |
69 |
|
Growth markets |
|
39 |
|
33 |
| ||
Total lease receivables |
|
$ |
108 |
|
$ |
101 |
|
|
|
|
|
|
| ||
Major markets |
|
$ |
109 |
|
$ |
141 |
|
Growth markets |
|
98 |
|
123 |
| ||
Total loan receivables |
|
$ |
207 |
|
$ |
264 |
|
|
|
|
|
|
| ||
Total receivables |
|
$ |
315 |
|
$ |
366 |
|
Impaired Loans
The company considers any loan with an individually evaluated reserve as an impaired loan. Depending on the level of impairment, loans will also be placed on non-accrual status (see section Financing Receivables on Non-Accrual Status).
The following tables present impaired client loan receivables at March 31, 2011 and December 31, 2010.
(Dollars in millions) |
|
Recorded |
|
Related |
|
Average |
|
Interest |
|
Interest |
| |||||
Major markets |
|
$ |
155 |
|
$ |
98 |
|
$ |
176 |
|
$ |
0 |
|
$ |
0 |
|
Growth markets |
|
136 |
|
70 |
|
134 |
|
0 |
|
0 |
| |||||
Total |
|
$ |
292 |
|
$ |
168 |
|
$ |
310 |
|
$ |
1 |
|
$ |
0 |
|
* Impaired loans are placed on non-accrual status, depending on the level of impairment.
(Dollars in millions) |
|
Recorded |
|
Related |
| ||
At December 31, 2010: |
|
Investment |
|
Allowance |
| ||
Major markets |
|
$ |
196 |
|
$ |
119 |
|
Growth markets |
|
132 |
|
68 |
| ||
Total |
|
$ |
328 |
|
$ |
187 |
|
Credit Quality Indicators
The companys credit quality indicators are based on rating agency data, publicly available information and information provided by the companies, and are reviewed periodically based on the relative level of risk. The resulting indicators are a numerical rating system that maps to Moodys Investors Service credit ratings as shown below. Moodys has not provided to the company a credit rating on its clients.
The tables on page 16 present the gross recorded investment for each class of receivables, by credit quality indicator, at March 31, 2011 and December 31, 2010. Receivables with a credit quality indicator ranging from Aaa to Baa3 are considered investment grade. All others are considered non-investment grade.
Notes to Consolidated Financial Statements (continued)
|
|
Lease Receivables |
|
Loan Receivables |
| ||||||||
(Dollars in millions) |
|
Major |
|
Growth |
|
Major |
|
Growth |
| ||||
Credit Rating: |
|
|
|
|
|
|
|
|
| ||||
Aaa Aa3 |
|
$ |
916 |
|
$ |
162 |
|
$ |
1,204 |
|
$ |
159 |
|
A1 A3 |
|
1,367 |
|
210 |
|
1,797 |
|
205 |
| ||||
Baal Baa3 |
|
2,414 |
|
849 |
|
3,172 |
|
831 |
| ||||
Bal Ba2 |
|
929 |
|
454 |
|
1,221 |
|
445 |
| ||||
Ba3 B1 |
|
530 |
|
236 |
|
696 |
|
231 |
| ||||
B2 B3 |
|
249 |
|
90 |
|
327 |
|
89 |
| ||||
Caa D |
|
137 |
|
53 |
|
181 |
|
52 |
| ||||
Total |
|
$ |
6,542 |
|
$ |
2,055 |
|
$ |
8,597 |
|
$ |
2,013 |
|
At March 31, 2011, the industries which made up Global Financings receivables portfolio consist of: Financial (37 percent), Government (16 percent), Manufacturing (14 percent), Retail (9 percent), Services (8 percent), Communications (5 percent) and Other (12 percent).
|
|
Lease Receivables* |
|
Loan Receivables* |
| ||||||||
(Dollars in millions) |
|
Major |
|
Growth |
|
Major |
|
Growth |
| ||||
Credit Rating: |
|
|
|
|
|
|
|
|
| ||||
Aaa Aa3 |
|
$ |
794 |
|
$ |
173 |
|
$ |
1,100 |
|
$ |
173 |
|
A1 A3 |
|
1,463 |
|
182 |
|
2,026 |
|
183 |
| ||||
Baal Baa3 |
|
2,494 |
|
837 |
|
3,453 |
|
841 |
| ||||
Bal Ba2 |
|
899 |
|
403 |
|
1,245 |
|
405 |
| ||||
Ba3 B1 |
|
518 |
|
242 |
|
718 |
|
243 |
| ||||
B2 B3 |
|
230 |
|
93 |
|
318 |
|
94 |
| ||||
Caa D |
|
164 |
|
54 |
|
227 |
|
54 |
| ||||
Total |
|
$ |
6,562 |
|
$ |
1,983 |
|
$ |
9,087 |
|
$ |
1,993 |
|
* Reclassified to conform with 2011 presentation.
At December 31, 2010, the industries which make up Global Financings receivables portfolio consist of: Financial (36 percent), Government (16 percent), Manufacturing (14 percent), Retail (9 percent), Services (8 percent), Communications (5 percent) and Other (12 percent).
Past Due Financing Receivables
The company views receivables as past due when payment has not been received after 90 days, measured from billing date.
(Dollars in millions) |
|
Total |
|
Current |
|
Total |
|
Recorded |
| ||||
Major markets |
|
$ |
16 |
|
$ |
6,526 |
|
$ |
6,542 |
|
$ |
7 |
|
Growth markets |
|
19 |
|
2,036 |
|
2,055 |
|
7 |
| ||||
Total lease receivables |
|
$ |
34 |
|
$ |
8,563 |
|
$ |
8,597 |
|
$ |
14 |
|
|
|
|
|
|
|
|
|
|
| ||||
Major markets |
|
$ |
17 |
|
$ |
8,580 |
|
$ |
8,597 |
|
$ |
7 |
|
Growth markets |
|
33 |
|
1,980 |
|
2,013 |
|
13 |
| ||||
Total loan receivables |
|
$ |
50 |
|
$ |
10,560 |
|
$ |
10,610 |
|
$ |
20 |
|
|
|
|
|
|
|
|
|
|
| ||||
Total |
|
$ |
84 |
|
$ |
19,123 |
|
$ |
19,207 |
|
$ |
34 |
|
* Does not include accounts that are fully reserved.
Notes to Consolidated Financial Statements (continued)
(Dollars in millions) |
|
Total |
|
Current |
|
Total |
|
Recorded |
| ||||
Major markets |
|
$ |
10 |
|
$ |
6,552 |
|
$ |
6,562 |
|
$ |
5 |
|
Growth markets |
|
13 |
|
1,970 |
|
1,983 |
|
5 |
| ||||
Total lease receivables |
|
$ |
22 |
|
$ |
8,523 |
|
$ |
8,545 |
|
$ |
10 |
|
|
|
|
|
|
|
|
|
|
| ||||
Major markets |
|
$ |
11 |
|
$ |
9,076 |
|
$ |
9,087 |
|
$ |
4 |
|
Growth markets |
|
32 |
|
1,961 |
|
1,993 |
|
17 |
| ||||
Total loan receivables |
|
$ |
43 |
|
$ |
11,037 |
|
$ |
11,080 |
|
$ |
21 |
|
|
|
|
|
|
|
|
|
|
| ||||
Total |
|
$ |
65 |
|
$ |
19,560 |
|
$ |
19,625 |
|
$ |
31 |
|
* Does not include accounts that are fully reserved.
6. Derivative Financial Instruments: The company operates in multiple functional currencies and is a significant lender and borrower in the global markets. In the normal course of business, the company is exposed to the impact of interest rate changes and foreign currency fluctuations, and to a lesser extent equity and commodity price changes and client credit risk. The company limits these risks by following established risk management policies and procedures, including the use of derivatives, and, where cost effective, financing with debt in the currencies in which assets are denominated. For interest rate exposures, derivatives are used to better align rate movements between the interest rates associated with the companys lease and other financial assets and the interest rates associated with its financing debt. Derivatives are also used to manage the related cost of debt. For foreign currency exposures, derivatives are used to better manage the cash flow volatility arising from foreign exchange rate fluctuations.
As a result of the use of derivative instruments, the company is exposed to the risk that counterparties to derivative contracts will fail to meet their contractual obligations. To mitigate the counterparty credit risk, the company has a policy of only entering into contracts with carefully selected major financial institutions based upon their credit ratings and other factors. The companys established policies and procedures for mitigating credit risk on principal transactions include reviewing and establishing limits for credit exposure and continually assessing the creditworthiness of counterparties. The right of set-off that exists under certain of these arrangements enables the legal entities of the company subject to the arrangement to net amounts due to and from the counterparty reducing the maximum loss from credit risk in the event of counterparty default.
The company is also a party to collateral security arrangements with most of its major counterparties. These arrangements require the company to hold or post collateral (cash or U.S. Treasury securities) when the derivative fair values exceed contractually established thresholds. Posting thresholds can be fixed or can vary based on credit default swap pricing or credit ratings received from the major credit agencies. The aggregate fair value of all derivative instruments under these collateralized arrangements that were in a liability position at March 31, 2011 and December 31, 2010 was $420 million and $363 million, respectively, for which the company posted collateral of $1 million and $9 million, respectively. Full collateralization of these agreements would be required in the event that the companys credit rating falls below investment grade or if its credit default swap spread exceeds 250 basis points, as applicable, pursuant to the terms of the collateral security arrangements. The aggregate fair value of derivative instruments in net asset positions as of March 31, 2011 and December 31, 2010 was $848 million and $1,099 million, respectively. This amount represents the maximum exposure to loss at the reporting date as a result of the counterparties failing to perform as contracted. This exposure was reduced by $396 million and $475 million at March 31, 2011 and December 31, 2010, respectively, of liabilities included in master netting arrangements with those counterparties. Additionally, at March 31, 2011 and December 31, 2010, this exposure was reduced by $34 million and $88 million of collateral, respectively, received by the company.
Notes to Consolidated Financial Statements (continued)
The company does not offset derivative assets against liabilities in master netting arrangements nor does it offset receivables or payables recognized upon payment or receipt of cash collateral against the fair values of the related derivative instruments. At March 31, 2011 and December 31, 2010, respectively, $1 million and $9 million was recognized in other receivables for the right to reclaim cash collateral. The amount recognized in accounts payable for the obligation to return cash collateral totaled $34 million and $88 million at March 31, 2011 and December 31, 2010, respectively. The company restricts the use of cash collateral received to rehypothecation, and therefore reports it in prepaid expenses and other current assets in the Consolidated Statement of Financial Position. At March 31, 2011 and December 31, 2010, respectively, $1 million and $9 million was rehypothecated.
The company may employ derivative instruments to hedge the volatility in stockholders equity resulting from changes in currency exchange rates of significant foreign subsidiaries of the company with respect to the U.S. dollar. These instruments, designated as net investment hedges, expose the company to liquidity risk as the derivatives have an immediate cash flow impact upon maturity which is not offset by a cash flow from the translation of the underlying hedged equity. The company monitors this cash loss potential on an ongoing basis and may discontinue some of these hedging relationships by de-designating or terminating the derivative instrument in order to manage the liquidity risk. Although not designated as accounting hedges, the company may utilize derivatives to offset the changes in the fair value of the de-designated instruments from the date of de-designation until maturity.
In its hedging programs, the company uses forward contracts, futures contracts, interest-rate swaps and cross-currency swaps, depending upon the underlying exposure. The company is not a party to leveraged derivative instruments.
A brief description of the major hedging programs, categorized by underlying risk, follows.
Interest Rate Risk
Fixed and Variable Rate Borrowings
The company issues debt in the global capital markets, principally to fund its financing lease and loan portfolio. Access to cost-effective financing can result in interest rate mismatches with the underlying assets. To manage these mismatches and to reduce overall interest cost, the company uses interest-rate swaps to convert specific fixed-rate debt issuances into variable-rate debt (i.e., fair value hedges) and to convert specific variable-rate debt issuances into fixed-rate debt (i.e., cash flow hedges). At March 31, 2011 and December 31, 2010, the total notional amount of the companys interest rate swaps was $7.1 billion and $7.1 billion, respectively. The weighted-average remaining maturity of these instruments at March 31, 2011 and December 31, 2010 was approximately 5.2 years and 5.7 years, respectively.
Forecasted Debt Issuance
The company is exposed to interest rate volatility on future debt issuances. To manage this risk, the company may use forward starting interest-rate swaps to lock in the rate on the interest payments related to the forecasted debt issuance. These swaps are accounted for as cash flow hedges. The company did not have any derivative instruments relating to this program outstanding at March 31, 2011 and December 31, 2010.
At March 31, 2011 and December 31, 2010, net losses of approximately $11 million and $13 million (before taxes), respectively, were recorded in accumulated other comprehensive income/(loss) in connection with cash flow hedges of the companys borrowings. For both periods, $8 million of losses are expected to be reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying transactions.
Notes to Consolidated Financial Statements (continued)
Foreign Exchange Risk
Long-Term Investments in Foreign Subsidiaries (Net Investment)
A large portion of the companys foreign currency denominated debt portfolio is designated as a hedge of net investment in foreign subsidiaries to reduce the volatility in stockholders equity caused by changes in foreign currency exchange rates in the functional currency of major foreign subsidiaries with respect to the U.S. dollar. The company also uses cross-currency swaps and foreign exchange forward contracts for this risk management purpose. At March 31, 2011 and December 31, 2010, the total notional amount of derivative instruments designated as net investment hedges was $2.1 billion and $1.9 billion, respectively. The weighted-average remaining maturity of these instruments at March 31, 2011 and December 31, 2010 was approximately 0.3 years and 0.4 years, respectively.
In addition, at March 31, 2011 and December 31, 2010, the company had liabilities of $106 million and $221 million, respectively, representing the fair value of derivative instruments that were previously designated in qualifying net investment hedging relationships, but were de-designated prior to March 31, 2011 and December 31, 2010, respectively; of these amounts $106 million and $221 million are expected to mature over the next 12 months, respectively. The notional amount of these instruments at March 31, 2011 and December 31, 2010 was $0.8 billion and $1.6 billion, respectively, including original and offsetting transactions.
Anticipated Royalties and Cost Transactions
The companys operations generate significant nonfunctional currency, third-party vendor payments and intercompany payments for royalties and goods and services among the companys non-U.S. subsidiaries and with the parent company. In anticipation of these foreign currency cash flows and in view of the volatility of the currency markets, the company selectively employs foreign exchange forward contracts to manage its currency risk. These forward contracts are accounted for as cash flow hedges. The maximum length of time over which the company is hedging its exposure to the variability in future cash flows is 3.9 years. At March 31, 2011 and December 31, 2010, the total notional amount of forward contracts designated as cash flow hedges of forecasted royalty and cost transactions was $11.2 billion and $11.3 billion, respectively, with a weighted-average remaining maturity of 0.7 years and 0.8 years, respectively.
At March 31, 2011 and December 31, 2010, in connection with cash flow hedges of anticipated royalties and cost transactions, the company recorded net losses of $287 million and of $147 million (before taxes), respectively, in accumulated other comprehensive income/(loss). Within these amounts $396 million and $249 million of losses, respectively, are expected to be reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying anticipated transactions.
Foreign Currency Denominated Borrowings
The company is exposed to exchange rate volatility on foreign currency denominated debt. To manage this risk, the company employs cross-currency swaps to convert fixed-rate foreign currency denominated debt to fixed-rate debt denominated in the functional currency of the borrowing entity. These swaps are accounted for as cash flow hedges. The maximum length of time over which the company is hedging its exposure to the variability in future cash flows is 2.8 years. At March 31, 2011 and December 31, 2010, the total notional amount of cross-currency swaps designated as cash flow hedges of foreign currency denominated debt was $0.1 billion and $0.2 billion, respectively.
At March 31, 2011 and December 31, 2010, net losses of approximately $0 million and $1 million (before taxes), respectively, were recorded in accumulated other comprehensive income/(loss) in connection with cash flow hedges of the companys borrowings. Within these amounts $2 million and approximately $1 million of losses, respectively, are expected to be reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying transactions.
Notes to Consolidated Financial Statements (continued)
Subsidiary Cash and Foreign Currency Asset/Liability Management
The company uses its Global Treasury Centers to manage the cash of its subsidiaries. These centers principally use currency swaps to convert cash flows in a cost-effective manner. In addition, the company uses foreign exchange forward contracts to economically hedge, on a net basis, the foreign currency exposure of a portion of the companys nonfunctional currency assets and liabilities. The terms of these forward and swap contracts are generally less than two years. The changes in the fair values of these contracts and of the underlying hedged exposures are generally offsetting and are recorded in other (income) and expense in the Consolidated Statement of Earnings. At March 31, 2011 and December 31, 2010, the total notional amount of derivative instruments in economic hedges of foreign currency exposure was $9.2 billion and $13.0 billion, respectively.
Equity Risk Management
The company is exposed to market price changes in certain broad market indices and in the companys own stock primarily related to certain obligations to employees. Changes in the overall value of these employee compensation obligations are recorded in selling, general and administrative (SG&A) expense in the Consolidated Statement of Earnings. Although not designated as accounting hedges, the company utilizes derivatives, including equity swaps and futures, to economically hedge the exposures related to its employee compensation obligations. The derivatives are linked to the total return on certain broad market indices or the total return on the companys common stock. They are recorded at fair value with gains or losses also reported in SG&A expense in the Consolidated Statement of Earnings. At March 31, 2011 and December 31, 2010, the total notional amount of derivative instruments in economic hedges of these compensation obligations was $1.0 billion and $1.0 billion, respectively.
Other Risks
The company may hold warrants to purchase shares of common stock in connection with various investments that are deemed derivatives because they contain net share or net cash settlement provisions. The company records the changes in the fair value of these warrants in other (income) and expense in the Consolidated Statement of Earnings. The company did not have any warrants qualifying as derivatives outstanding at March 31, 2011 and December 31, 2010.
The company is exposed to a potential loss if a client fails to pay amounts due under contractual terms. The company utilizes credit default swaps to economically hedge its credit exposures. These derivatives have terms of one year or less. The swaps are recorded at fair value with gains and losses reported in other (income) and expense in the Consolidated Statement of Earnings. The company did not have any derivative instruments relating to this program outstanding at March 31, 2011 and December 31, 2010.
The following tables provide a quantitative summary of the derivative and non-derivative instrument related risk management activity as of March 31, 2011 and December 31, 2010 as well as for the three months ended March 31, 2011 and 2010, respectively:
Notes to Consolidated Financial Statements (continued)
Fair Values of Derivative Instruments in the Consolidated Statement of Financial Position
As of March 31, 2011 and December 31, 2010
|
|
Fair Value of Derivative Assets |
|
Fair Value of Derivative Liabilities |
| ||||||||||||
|
|
Balance Sheet |
|
|
|
|
|
Balance Sheet |
|
|
|
|
| ||||
(Dollars in millions) |
|
Classification |
|
3/31/2011 |
|
12/31/2010 |
|
Classification |
|
3/31/2011 |
|
12/31/2010 |
| ||||
Designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest rate contracts: |
|
Prepaid expenses and other current assets |
|
$ |
34 |
|
$ |
33 |
|
Other accrued expenses and liabilities |
|
$ |
|
|
$ |
|
|
|
|
Investments and sundry assets |
|
514 |
|
514 |
|
Other liabilities |
|
|
|
|
| ||||
Foreign exchange contracts: |
|
Prepaid expenses and other current assets |
|
132 |
|
224 |
|
Other accrued expenses and liabilities |
|
673 |
|
498 |
| ||||
|
|
Investments and sundry assets |
|
17 |
|
22 |
|
Other liabilities |
|
77 |
|
135 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Fair value of derivative assets |
|
|
|
$ |
697 |
|
$ |
794 |
|
Fair value of derivative liabilities |
|
$ |
750 |
|
$ |
633 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Not designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Foreign exchange contracts: |
|
Prepaid expenses and other current assets |
|
$ |
105 |
|
$ |
242 |
|
Other accrued expenses and liabilities |
|
$ |
217 |
|
$ |
370 |
|
|
|
Investments and sundry assets |
|
25 |
|
51 |
|
Other liabilities |
|
|
|
|
| ||||
Equity contracts: |
|
Prepaid expenses and other current assets |
|
21 |
|
12 |
|
Other accrued expenses and liabilities |
|
4 |
|
3 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Fair value of derivative assets |
|
|
|
$ |
151 |
|
$ |
305 |
|
Fair value of derivative liabilities |
|
$ |
221 |
|
$ |
373 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total debt designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Short-term debt |
|
|
|
N/A |
|
N/A |
|
|
|
$ |
864 |
|
$ |
823 |
| ||
Long-term debt |
|
|
|
N/A |
|
N/A |
|
|
|
1,908 |
|
1,746 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total |
|
|
|
$ |
848 |
|
$ |
1,099 |
|
|
|
$ |
3,743 |
|
$ |
3,576 |
|
N/Anot applicable
Notes to Consolidated Financial Statements (continued)
The Effect of Derivative Instruments in the Consolidated Statement of Earnings
For the three months ended March 31, 2011 and 2010
|
|
Gain (Loss) Recognized in Earnings |
| ||||||||||||
|
|
Consolidated |
|
Recognized on |
|
Attributable to Risk |
| ||||||||
(Dollars in millions) |
|
Statement of |
|
Derivatives(1) |
|
Being Hedged(2) |
| ||||||||
For the three months ended March 31: |
|
Earnings Line Item |
|
2011 |
|
2010 |
|
2011 |
|
2010 |
| ||||
Derivative instruments in fair value hedges: |
|
|
|
|
|
|
|
|
|
|
| ||||
Interest rate contracts |
|
Cost of financing |
|
$ |
(9 |
) |
$ |
72 |
|
$ |
52 |
|
$ |
(24 |
) |
|
|
Interest expense |
|
(6 |
) |
40 |
|
34 |
|
(14 |
) | ||||
Derivative instruments not designated as hedging instruments:(1) |
|
|
|
|
|
|
|
|
|
|
| ||||
Foreign exchange contracts |
|
Other (income) and expense |
|
87 |
|
(128 |
) |
N/A |
|
N/A |
| ||||
Equity contracts |
|
SG&A expense |
|
59 |
|
21 |
|
N/A |
|
N/A |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total |
|
|
|
$ |
131 |
|
$ |
5 |
|
$ |
86 |
|
$ |
(38 |
) |
|
|
Gain (Loss) Recognized in Earnings and Other Comprehensive Income |
| ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
(Ineffectiveness) and |
| ||||||||||
|
|
Effective Portion |
|
Consolidated |
|
Effective Portion Reclassified |
|
Amounts Excluded from |
| ||||||||||||
|
|
Recognized in AOCI |
|
Statement of |
|
from AOCI to Earnings |
|
Effectiveness Testing(3) |
| ||||||||||||
For the three months ended March 31: |
|
2011 |
|
2010 |
|
Earnings Line Item |
|
2011 |
|
2010 |
|
2011 |
|
2010 |
| ||||||
Derivative instruments in cash flow hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Interest rate contracts |
|
$ |
|
|
$ |
(0 |
) |
Interest expense |
|
$ |
(2 |
) |
$ |
(2 |
) |
$ |
|
|
$ |
|
|
Foreign exchange contracts |
|
(237 |
) |
631 |
|
Other (income) and expense |
|
(47 |
) |
(53 |
) |
0 |
|
(6 |
) | ||||||
|
|
|
|
|
|
Cost of sales |
|
(34 |
) |
(88 |
) |
|
|
|
| ||||||
|
|
|
|
|
|
SG&A expense |
|
(17 |
) |
(51 |
) |
|
|
|
| ||||||
Instruments in net investment hedges(4): |
|
|
|
|
|
|
|
&nbs |