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, 2013
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 |
|
|
|
10504 |
|
(Address of principal executive offices) |
|
(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 l3 or l5(d) of the Securities Exchange Act of 1934 during the preceding l2 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 the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer x |
|
Accelerated filer o |
|
|
|
Non-accelerated filer o |
|
Smaller reporting company o |
(Do not check if a smaller reporting company) |
|
|
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 1,108,794,396 shares of common stock outstanding at March 31, 2013.
PART I - Financial Information
Item 1. Consolidated Financial Statements:
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF EARNINGS
(UNAUDITED)
|
|
Three Months Ended March 31, |
| ||||
(Dollars in millions except per share amounts) |
|
2013 |
|
2012 |
| ||
Revenue: |
|
|
|
|
| ||
Services |
|
$ |
14,274 |
|
$ |
14,820 |
|
Sales |
|
8,629 |
|
9,356 |
| ||
Financing |
|
505 |
|
497 |
| ||
Total revenue |
|
23,408 |
|
24,673 |
| ||
Cost: |
|
|
|
|
| ||
Services |
|
9,526 |
|
9,985 |
| ||
Sales |
|
2,931 |
|
3,325 |
| ||
Financing |
|
273 |
|
244 |
| ||
Total cost |
|
12,730 |
|
13,555 |
| ||
Gross profit |
|
10,678 |
|
11,118 |
| ||
Expense and other income: |
|
|
|
|
| ||
Selling, general and administrative |
|
5,577 |
|
5,886 |
| ||
Research, development and engineering |
|
1,644 |
|
1,601 |
| ||
Intellectual property and custom development income |
|
(183 |
) |
(255 |
) | ||
Other (income) and expense |
|
(60 |
) |
(58 |
) | ||
Interest expense |
|
94 |
|
110 |
| ||
Total expense and other income |
|
7,072 |
|
7,283 |
| ||
Income before income taxes |
|
3,606 |
|
3,836 |
| ||
Provision for income taxes |
|
574 |
|
769 |
| ||
Net income |
|
$ |
3,032 |
|
$ |
3,066 |
|
|
|
|
|
|
| ||
Earnings per share of common stock: |
|
|
|
|
| ||
Assuming dilution |
|
$ |
2.70 |
|
$ |
2.61 |
|
Basic |
|
$ |
2.72 |
|
$ |
2.65 |
|
Weighted-average number of common shares outstanding: (millions) |
|
|
|
|
| ||
Assuming dilution |
|
1,124.0 |
|
1,174.2 |
| ||
Basic |
|
1,113.7 |
|
1,159.1 |
| ||
|
|
|
|
|
| ||
Cash dividend per common share |
|
$ |
0.85 |
|
$ |
0.75 |
|
(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 COMPREHENSIVE INCOME
(UNAUDITED)
|
|
Three Months Ended March 31, |
| ||||
(Dollars in millions) |
|
2013 |
|
2012 |
| ||
Net income |
|
$ |
3,032 |
|
$ |
3,066 |
|
Other comprehensive income/(loss), before tax: |
|
|
|
|
| ||
Foreign currency translation adjustments |
|
(405 |
) |
387 |
| ||
Net changes related to available-for-sale securities: |
|
|
|
|
| ||
Unrealized gains/(losses) arising during the period |
|
(3 |
) |
6 |
| ||
Reclassification of (gains)/losses to net income |
|
1 |
|
(14 |
) | ||
Subsequent changes in previously impaired securities arising during the period |
|
1 |
|
18 |
| ||
Total net changes related to available-for-sale securities |
|
(1 |
) |
10 |
| ||
Unrealized gains/(losses) on cash flow hedges: |
|
|
|
|
| ||
Unrealized gains/(losses) arising during the period |
|
360 |
|
51 |
| ||
Reclassification of (gains)/losses to net income |
|
(56 |
) |
(24 |
) | ||
Total unrealized gains/(losses) on cash flow hedges |
|
305 |
|
27 |
| ||
Retirement-related benefit plans: |
|
|
|
|
| ||
Prior service costs/(credits) |
|
33 |
|
0 |
| ||
Net (losses)/gains arising during the period |
|
(15 |
) |
(6 |
) | ||
Amortization of prior service (credits)/cost |
|
(30 |
) |
(37 |
) | ||
Amortization of net (gains)/losses |
|
886 |
|
619 |
| ||
Total retirement-related benefit plans |
|
875 |
|
576 |
| ||
Other comprehensive income/(loss), before tax |
|
773 |
|
1,000 |
| ||
Income tax (expense)/benefit related to items of other comprehensive income |
|
(480 |
) |
(229 |
) | ||
Other comprehensive income/(loss) |
|
293 |
|
770 |
| ||
Total comprehensive income/(loss) |
|
$ |
3,325 |
|
$ |
3,837 |
|
(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
|
|
At March 31, |
|
At December 31, |
| ||
(Dollars in millions) |
|
2013 |
|
2012 |
| ||
Assets: |
|
|
|
|
| ||
Current assets: |
|
|
|
|
| ||
Cash and cash equivalents |
|
$ |
10,585 |
|
$ |
10,412 |
|
Marketable securities |
|
1,407 |
|
717 |
| ||
Notes and accounts receivable trade (net of allowances of $263 in 2013 and $255 in 2012) |
|
10,084 |
|
10,667 |
| ||
Short-term financing receivables (net of allowances of $273 in 2013 and $288 in 2012) |
|
16,141 |
|
18,038 |
| ||
Other accounts receivable (net of allowances of $20 in 2013 and $17 in 2012) |
|
1,971 |
|
1,873 |
| ||
Inventories, at lower of average cost or market: |
|
|
|
|
| ||
Finished goods |
|
519 |
|
475 |
| ||
Work in process and raw materials |
|
1,902 |
|
1,812 |
| ||
Total inventories |
|
2,421 |
|
2,287 |
| ||
Deferred taxes |
|
1,592 |
|
1,415 |
| ||
Prepaid expenses and other current assets |
|
4,747 |
|
4,024 |
| ||
Total current assets |
|
48,949 |
|
49,433 |
| ||
|
|
|
|
|
| ||
Property, plant and equipment |
|
40,056 |
|
40,501 |
| ||
Less: Accumulated depreciation |
|
26,459 |
|
26,505 |
| ||
Property, plant and equipment net |
|
13,597 |
|
13,996 |
| ||
Long-term financing receivables (net of allowances of $64 in 2013 and $66 in 2012) |
|
11,946 |
|
12,812 |
| ||
Prepaid pension assets |
|
903 |
|
945 |
| ||
Deferred taxes |
|
4,227 |
|
3,973 |
| ||
Goodwill |
|
29,025 |
|
29,247 |
| ||
Intangible assets net |
|
3,601 |
|
3,787 |
| ||
Investments and sundry assets |
|
5,011 |
|
5,021 |
| ||
Total assets |
|
$ |
117,258 |
|
$ |
119,213 |
|
(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
|
|
At March 31, |
|
At December 31, |
| ||
(Dollars in millions) |
|
2013 |
|
2012 |
| ||
Liabilities: |
|
|
|
|
| ||
Current liabilities: |
|
|
|
|
| ||
Taxes |
|
$ |
4,678 |
|
$ |
4,948 |
|
Short-term debt |
|
8,725 |
|
9,181 |
| ||
Accounts payable |
|
7,203 |
|
7,952 |
| ||
Compensation and benefits |
|
3,964 |
|
4,745 |
| ||
Deferred income |
|
12,971 |
|
11,952 |
| ||
Other accrued expenses and liabilities |
|
4,583 |
|
4,847 |
| ||
Total current liabilities |
|
42,122 |
|
43,625 |
| ||
Long-term debt |
|
24,672 |
|
24,088 |
| ||
Retirement and nonpension postretirement benefit obligations |
|
19,069 |
|
20,418 |
| ||
Deferred income |
|
4,409 |
|
4,491 |
| ||
Other liabilities |
|
7,771 |
|
7,607 |
| ||
Total liabilities |
|
98,044 |
|
100,229 |
| ||
Equity: |
|
|
|
|
| ||
IBM stockholders equity: |
|
|
|
|
| ||
Common stock, par value $0.20 per share, and additional paid-in capital |
|
50,522 |
|
50,110 |
| ||
Shares authorized: 4,687,500,000 |
|
|
|
|
| ||
Shares issued: 2013 - 2,201,287,322 |
|
|
|
|
| ||
2012 - 2,197,561,159 |
|
|
|
|
| ||
Retained earnings |
|
119,713 |
|
117,641 |
| ||
Treasury stock - at cost |
|
(125,677 |
) |
(123,131 |
) | ||
Shares: 2013 - 1,092,492,926 |
|
|
|
|
| ||
2012 - 1,080,193,483 |
|
|
|
|
| ||
Accumulated other comprehensive income/(loss) |
|
(25,466 |
) |
(25,759 |
) | ||
Total IBM stockholders equity |
|
19,092 |
|
18,860 |
| ||
Noncontrolling interests |
|
122 |
|
124 |
| ||
Total equity |
|
19,214 |
|
18,984 |
| ||
Total liabilities and equity |
|
$ |
117,258 |
|
$ |
119,213 |
|
(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
(UNAUDITED)
|
|
Three Months Ended March 31, |
| ||||
(Dollars in millions) |
|
2013 |
|
2012 |
| ||
Cash flows from operating activities: |
|
|
|
|
| ||
Net income |
|
$ |
3,032 |
|
$ |
3,066 |
|
Adjustments to reconcile net income to cash provided by operating activities |
|
|
|
|
| ||
Depreciation |
|
822 |
|
847 |
| ||
Amortization of intangibles |
|
331 |
|
310 |
| ||
Stock-based compensation |
|
144 |
|
168 |
| ||
Net (gain)/loss on asset sales and other |
|
(62 |
) |
(143 |
) | ||
Changes in operating assets and liabilities, net of acquisitions/divestitures |
|
(244 |
) |
43 |
| ||
Net cash provided by operating activities |
|
4,023 |
|
4,291 |
| ||
|
|
|
|
|
| ||
Cash flows from investing activities: |
|
|
|
|
| ||
Payments for property, plant and equipment |
|
(714 |
) |
(937 |
) | ||
Proceeds from disposition of property, plant and equipment |
|
123 |
|
95 |
| ||
Investment in software |
|
(139 |
) |
(160 |
) | ||
Acquisition of businesses, net of cash acquired |
|
(58 |
) |
(1,319 |
) | ||
Divestitures of businesses, net of cash transferred |
|
10 |
|
|
| ||
Non-operating finance receivables net |
|
732 |
|
636 |
| ||
Purchases of marketable securities and other investments |
|
(2,136 |
) |
(1,227 |
) | ||
Proceeds from disposition of marketable securities and other investments |
|
1,169 |
|
681 |
| ||
Net cash used in investing activities |
|
(1,012 |
) |
(2,230 |
) | ||
|
|
|
|
|
| ||
Cash flows from financing activities: |
|
|
|
|
| ||
Proceeds from new debt |
|
2,685 |
|
3,906 |
| ||
Payments to settle debt |
|
(857 |
) |
(848 |
) | ||
Short-term borrowings/(repayments) less than 90 days net |
|
(1,359 |
) |
(2,107 |
) | ||
Common stock repurchases |
|
(2,593 |
) |
(3,015 |
) | ||
Common stock transactions other |
|
356 |
|
619 |
| ||
Cash dividends paid |
|
(948 |
) |
(870 |
) | ||
Net cash used in financing activities |
|
(2,716 |
) |
(2,316 |
) | ||
|
|
|
|
|
| ||
Effect of exchange rate changes on cash and cash equivalents |
|
(121 |
) |
167 |
| ||
Net change in cash and cash equivalents |
|
173 |
|
(87 |
) | ||
|
|
|
|
|
| ||
Cash and cash equivalents at January 1 |
|
10,412 |
|
11,922 |
| ||
Cash and cash equivalents at March 31 |
|
$ |
10,585 |
|
$ |
11,835 |
|
(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 CHANGES IN EQUITY
(UNAUDITED)
|
|
Common |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
|
|
Stock and |
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
| |||||||
|
|
Additional |
|
|
|
|
|
Other |
|
Total IBM |
|
Non- |
|
|
| |||||||
|
|
Paid-in |
|
Retained |
|
Treasury |
|
Comprehensive |
|
Stockholders |
|
Controlling |
|
Total |
| |||||||
(Dollars in millions) |
|
Capital |
|
Earnings |
|
Stock |
|
Income/(Loss) |
|
Equity |
|
Interests |
|
Equity |
| |||||||
Equity - January 1, 2013 |
|
$ |
50,110 |
|
$ |
117,641 |
|
$ |
(123,131 |
) |
$ |
(25,759 |
) |
$ |
18,860 |
|
$ |
124 |
|
$ |
18,984 |
|
Net income plus other comprehensive income/(loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Net income |
|
|
|
3,032 |
|
|
|
|
|
3,032 |
|
|
|
3,032 |
| |||||||
Other comprehensive income/(loss) |
|
|
|
|
|
|
|
293 |
|
293 |
|
|
|
293 |
| |||||||
Total comprehensive income/(loss) |
|
|
|
|
|
|
|
|
|
$ |
3,325 |
|
|
|
$ |
3,325 |
| |||||
Cash dividends declared common stock |
|
|
|
(948 |
) |
|
|
|
|
(948 |
) |
|
|
(948 |
) | |||||||
Common stock issued under employee plans (3,726,163 shares) |
|
361 |
|
|
|
|
|
|
|
361 |
|
|
|
361 |
| |||||||
Purchases (629,550 shares) and sales (648,990 shares) of treasury stock under employee plans net |
|
|
|
(12 |
) |
(53 |
) |
|
|
(65 |
) |
|
|
(65 |
) | |||||||
Other treasury shares purchased, not retired (12,318,883 shares) |
|
|
|
|
|
(2,493 |
) |
|
|
(2,493 |
) |
|
|
(2,493 |
) | |||||||
Changes in other equity |
|
52 |
|
|
|
|
|
|
|
52 |
|
|
|
52 |
| |||||||
Changes in noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
(1 |
) | |||||||
Equity - March 31, 2013 |
|
$ |
50,522 |
|
$ |
119,713 |
|
$ |
(125,677 |
) |
$ |
(25,466 |
) |
$ |
19,092 |
|
$ |
122 |
|
$ |
19,214 |
|
|
|
Common |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
|
|
Stock and |
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
| |||||||
|
|
Additional |
|
|
|
|
|
Other |
|
Total IBM |
|
Non- |
|
|
| |||||||
|
|
Paid-in |
|
Retained |
|
Treasury |
|
Comprehensive |
|
Stockholders |
|
Controlling |
|
Total |
| |||||||
(Dollars in millions) |
|
Capital |
|
Earnings |
|
Stock |
|
Income/(Loss) |
|
Equity |
|
Interests |
|
Equity |
| |||||||
Equity - January 1, 2012 |
|
$ |
48,129 |
|
$ |
104,857 |
|
$ |
(110,963 |
) |
$ |
(21,885 |
) |
$ |
20,138 |
|
$ |
97 |
|
$ |
20,236 |
|
Net income plus other comprehensive income/(loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Net income |
|
|
|
3,066 |
|
|
|
|
|
3,066 |
|
|
|
3,066 |
| |||||||
Other comprehensive income/(loss) |
|
|
|
|
|
|
|
770 |
|
770 |
|
|
|
770 |
| |||||||
Total comprehensive income/(loss) |
|
|
|
|
|
|
|
|
|
$ |
3,837 |
|
|
|
$ |
3,837 |
| |||||
Cash dividends declared common stock |
|
|
|
(870 |
) |
|
|
|
|
(870 |
) |
|
|
(870 |
) | |||||||
Common stock issued under employee plans (5,688,794 shares) |
|
495 |
|
|
|
|
|
|
|
495 |
|
|
|
495 |
| |||||||
Purchases (864,073 shares) and sales (1,021,123 shares) of treasury stock under employee plans net |
|
|
|
(18 |
) |
(54 |
) |
|
|
(72 |
) |
|
|
(72 |
) | |||||||
Other treasury shares purchased, not retired (15,544,014 shares) |
|
|
|
|
|
(3,003 |
) |
|
|
(3,003 |
) |
|
|
(3,003 |
) | |||||||
Changes in other equity |
|
176 |
|
|
|
|
|
|
|
176 |
|
|
|
176 |
| |||||||
Changes in noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
(15 |
) |
(15 |
) | |||||||
Equity - March 31, 2012 |
|
$ |
48,800 |
|
$ |
107,036 |
|
$ |
(114,020 |
) |
$ |
(21,115 |
) |
$ |
20,701 |
|
$ |
82 |
|
$ |
20,783 |
|
(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 only 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. These estimates are based on managements best knowledge of current events, historical experience, actions that the company may undertake in the future and on various other assumptions that are believed to be reasonable under the circumstances. As a result, actual results may be different from these estimates. See the companys 2012 Annual Report on pages 59 to 61 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 2012 Annual Report.
Noncontrolling interest amounts in income of $1.4 million and $3.6 million, net of tax, for the three months ended March 31, 2013 and 2012, respectively, are included in the Consolidated Statement of Earnings within the other (income) and expense line item.
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 March 2013, Financial Accounting Standards Board (FASB) issued guidance on when foreign currency translation adjustments should be released to net income. When a parent entity ceases to have a controlling financial interest in a subsidiary or group of assets that is a business within a foreign entity, the parent is required to release any related cumulative translation adjustment into net income. Accordingly, the cumulative translation adjustment should be released into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. The guidance is effective prospectively beginning January 1, 2014. It is not expected to have a material impact in the consolidated financial results.
In February 2013, the FASB issued guidance for the recognition, measurement and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of the guidance is fixed at the reporting date. Examples include debt arrangements, other contractual obligations and settled litigation. The guidance requires an entity to measure such obligations as the sum of the amount that the reporting entity agreed to pay on the basis of its arrangement among its co-obligors plus additional amounts the reporting entity expects to pay on behalf of its co-obligors. The guidance is effective January 1, 2014 and is not expected to have a material impact in the consolidated financial results.
3. Financial Instruments:
Fair Value Measurements
Accounting guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Under this guidance, the company is required to classify certain assets and liabilities based on the following fair value hierarchy:
· Level 1Quoted prices (unadjusted) in active markets for identical assets or liabilities that can be accessed at the measurement date;
· Level 2Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and
· Level 3Unobservable inputs for the asset or liability.
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 in active markets 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
Notes to Consolidated Financial Statements (continued)
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 measurement date 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 available-for-sale equity 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 76 to 86 in the companys 2012 Annual Report for further information. There were no material impairments of non-financial assets for the three months ended March 31, 2013 and 2012, 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.
The following tables present the companys financial assets and financial liabilities that are measured at fair value on a recurring basis at March 31, 2013 and December 31, 2012.
Notes to Consolidated Financial Statements (continued)
(Dollars in millions) |
|
|
|
|
|
|
|
|
| ||||
At March 31, 2013 |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
| ||||
Assets: |
|
|
|
|
|
|
|
|
| ||||
Cash equivalents(1) |
|
|
|
|
|
|
|
|
| ||||
Time deposits and certificates of deposit |
|
$ |
|
|
$ |
4,232 |
|
$ |
|
|
$ |
4,232 |
|
Commercial paper |
|
|
|
3,038 |
|
|
|
3,038 |
| ||||
Money market funds |
|
996 |
|
|
|
|
|
996 |
| ||||
U.S. government securities |
|
|
|
150 |
|
|
|
150 |
| ||||
Other securities |
|
|
|
33 |
|
|
|
33 |
| ||||
Total |
|
996 |
|
7,453 |
|
|
|
8,448 |
(6) | ||||
Debt securities - current (2) |
|
|
|
1,407 |
|
|
|
1,407 |
(6) | ||||
Debt securities - noncurrent (3) |
|
2 |
|
7 |
|
|
|
10 |
| ||||
Available-for-sale equity investments(3) |
|
14 |
|
0 |
|
|
|
14 |
| ||||
Derivative assets (4) |
|
|
|
|
|
|
|
|
| ||||
Interest rate contracts |
|
|
|
584 |
|
|
|
584 |
| ||||
Foreign exchange contracts |
|
|
|
451 |
|
|
|
451 |
| ||||
Equity contracts |
|
|
|
26 |
|
|
|
26 |
| ||||
Total |
|
|
|
1,061 |
|
|
|
1,061 |
(7) | ||||
Total assets |
|
$ |
1,012 |
|
$ |
9,928 |
|
$ |
|
|
$ |
10,940 |
(7) |
Liabilities: |
|
|
|
|
|
|
|
|
| ||||
Derivative liabilities (5) |
|
|
|
|
|
|
|
|
| ||||
Foreign exchange contracts |
|
$ |
|
|
$ |
293 |
|
$ |
|
|
$ |
293 |
|
Equity contracts |
|
|
|
3 |
|
|
|
3 |
| ||||
Total liabilities |
|
$ |
|
|
$ |
296 |
|
$ |
|
|
$ |
296 |
(7) |
(1) Included within cash and cash equivalents in the Consolidated Statement of Financial Position.
(2) Commercial paper and certificates of deposit 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, 2013 are $519 million and $542 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, 2013 were $237 million and $58 million, respectively.
(6) Available-for-sale securities with carrying values that approximate fair value.
(7) 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 $220 million each.
Notes to Consolidated Financial Statements (continued)
(Dollars in millions) |
|
|
|
|
|
|
|
|
| ||||
At December 31, 2012 |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
| ||||
Assets: |
|
|
|
|
|
|
|
|
| ||||
Cash equivalents(1) |
|
|
|
|
|
|
|
|
| ||||
Time deposits and certificates of deposit |
|
$ |
|
|
$ |
3,694 |
|
$ |
|
|
$ |
3,694 |
|
Commercial paper |
|
|
|
2,098 |
|
|
|
2,098 |
| ||||
Money market funds |
|
1,923 |
|
|
|
|
|
1,923 |
| ||||
Other securities |
|
|
|
30 |
|
|
|
30 |
| ||||
Total |
|
1,923 |
|
5,823 |
|
|
|
7,746 |
(6) | ||||
Debt securities - current (2) |
|
|
|
717 |
|
|
|
717 |
(6) | ||||
Debt securities - noncurrent (3) |
|
2 |
|
8 |
|
|
|
10 |
| ||||
Available-for-sale equity investments(3) |
|
34 |
|
|
|
|
|
34 |
| ||||
Derivative assets (4) |
|
|
|
|
|
|
|
|
| ||||
Interest rate contracts |
|
|
|
604 |
|
|
|
604 |
| ||||
Foreign exchange contracts |
|
|
|
305 |
|
|
|
305 |
| ||||
Equity contracts |
|
|
|
9 |
|
|
|
9 |
| ||||
Total |
|
|
|
918 |
|
|
|
918 |
(7) | ||||
Total assets |
|
$ |
1,959 |
|
$ |
7,466 |
|
$ |
|
|
$ |
9,424 |
(7) |
Liabilities: |
|
|
|
|
|
|
|
|
| ||||
Derivative liabilities (5) |
|
|
|
|
|
|
|
|
| ||||
Foreign exchange contracts |
|
$ |
|
|
$ |
496 |
|
$ |
|
|
$ |
496 |
|
Equity contracts |
|
|
|
7 |
|
|
|
7 |
| ||||
Total liabilities |
|
$ |
|
|
$ |
503 |
|
$ |
|
|
$ |
503 |
(7) |
(1) Included within cash and cash equivalents in the Consolidated Statement of Financial Position.
(2) Commercial paper and certificates of deposit 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, 2012 are $333 million and $585 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, 2012 were $426 million and $78 million, respectively.
(6) Available-for-sale securities with carrying values that approximate fair value.
(7) 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 $262 million each.
There were no transfers between Levels 1 and 2 for the three months ended March 31, 2013 and the year ended December 31, 2012.
Financial Assets and Liabilities Not Measured at Fair Value
Short-Term Receivables and Payables
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 (excluding the current portion of long-term debt) are financial liabilities with carrying values that approximate fair value. If measured at fair value in the financial statements, these financial instruments would be classified as Level 3 in the fair value hierarchy.
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. At March 31, 2013 and December 31, 2012, the difference between the carrying amount and estimated fair value for loans and long-term receivables was immaterial. If measured at fair value in the financial statements, these financial instruments would be classified as Level 3 in the fair value hierarchy.
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
Notes to Consolidated Financial Statements (continued)
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 $24,672 million and $24,088 million and the estimated fair value is $27,449 million and $27,119 million at March 31, 2013 and December 31, 2012, respectively. If measured at fair value in the financial statements, long-term debt (including the current portion) would be classified as Level 2 in the fair value hierarchy.
Debt and Marketable Equity Securities
The companys cash equivalents and current debt securities are considered available-for-sale and recorded at fair value, which is not materially different from carrying value, in the Consolidated Statement of Financial Position. The following tables summarize the companys noncurrent debt and marketable equity securities which are also 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, 2013: |
|
Cost |
|
Gains |
|
Losses |
|
Value |
| ||||
Debt securities noncurrent(1) |
|
$ |
7 |
|
$ |
3 |
|
$ |
|
|
$ |
10 |
|
Available-for-sale equity investments(1) |
|
$ |
10 |
|
$ |
4 |
|
$ |
|
|
$ |
14 |
|
(1) Included within investments and sundry assets in the Consolidated Statement of Financial Position.
|
|
|
|
Gross |
|
Gross |
|
|
| ||||
(Dollars in millions) |
|
Adjusted |
|
Unrealized |
|
Unrealized |
|
Fair |
| ||||
At December 31, 2012: |
|
Cost |
|
Gains |
|
Losses |
|
Value |
| ||||
Debt securities noncurrent(1) |
|
$ |
8 |
|
$ |
2 |
|
$ |
|
|
$ |
10 |
|
Available-for-sale equity investments(1) |
|
$ |
31 |
|
$ |
4 |
|
$ |
(1 |
) |
$ |
34 |
|
(1) Included within investments and sundry assets in the Consolidated Statement of Financial Position.
Based on an evaluation of available evidence as of December 31, 2012, the company believed that unrealized losses on debt and available-for-sale equity investments were temporary and did not represent a need for an other-than-temporary impairment.
Sales of debt and available-for-sale equity investments during the period were as follows:
(Dollars in millions) |
|
|
|
|
| ||
For the three months ended March 31: |
|
2013 |
|
2012 |
| ||
Proceeds |
|
$ |
18 |
|
$ |
45 |
|
Gross realized gains (before taxes) |
|
3 |
|
14 |
| ||
Gross realized losses (before taxes) |
|
(4 |
) |
(0 |
) | ||
The after-tax net unrealized holding gains/(losses) on available-for-sale debt and marketable equity securities that have been included in other comprehensive income/(loss) for the period and the after-tax net (gains)/losses reclassified from accumulated other comprehensive income/(loss) to net income were as follows:
(Dollars in millions) |
|
|
|
|
| ||
For the three months ended March 31: |
|
2013 |
|
2012 |
| ||
Net unrealized gains/(losses) arising during the period |
|
$ |
(1 |
) |
$ |
15 |
|
Net unrealized (gains)/losses reclassified to net income* |
|
0 |
|
(8 |
) | ||
* There were no significant writedowns for the three months ended March 31, 2013 and 2012.
The contractual maturities of substantially all available-for-sale debt securities are less than one year at March 31, 2013.
Notes to Consolidated Financial Statements (continued)
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 profile. 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 derivative 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, 2013 and December 31, 2012 was $16 million and $94 million, respectively, for which no collateral was posted at March 31, 2013 and December 31, 2012. 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, 2013 and December 31, 2012 was $1,061 million and $918 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 $220 million and $262 million at March 31, 2013 and December 31, 2012, respectively, of liabilities included in master netting arrangements with those counterparties. Additionally, at March 31, 2013 and December 31, 2012, this exposure was reduced by $151 million and $69 million of cash collateral, respectively, received by the company. At March 31, 2013 and December 31, 2012 the net exposure related to derivative assets recorded in the Statement of Financial Position was $690 million and $587 million respectively. At March 31, 2013 and December 31, 2012 the net amount related to derivative liabilities recorded in the Statement of Financial Position was $76 million and $242 million, respectively. Additionally, the companys exposure is further reduced by non-cash collateral held at March 31, 2013 and December 31, 2012 of $21 million and $31 million, in U.S. Treasury securities, respectively. Per accounting guidance, non-cash collateral is not recorded on the Statement of Financial Position.
In the Statement of Financial Position, 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. No amount was recognized in other receivables at March 31, 2013 or December 31, 2012 for the right to reclaim cash collateral. The amount recognized in accounts payable for the obligation to return cash collateral totaled $151 million and $69 million at March 31, 2013 and December 31, 2012, 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. No amount was rehypothecated at March 31, 2013 or at December 31, 2012.
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.
Notes to Consolidated Financial Statements (continued)
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, 2013 and December 31, 2012, the total notional amount of the companys interest rate swaps was $4.2 billion and $4.3 billion, respectively. The weighted-average remaining maturity of these instruments at March 31, 2013 and December 31, 2012 was approximately 4.8 years and 5.1 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, 2013 and December 31, 2012.
At March 31, 2013 and December 31, 2012, net gains of approximately $1 million, respectively, were recorded in accumulated other comprehensive income/(loss) in connection with cash flow hedges of the companys borrowings. Within these amounts, gains of less than $1 million, respectively, are expected to be reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying transactions.
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, 2013 and December 31, 2012, the total notional amount of derivative instruments designated as net investment hedges was $3.5 billion and $3.3 billion, respectively. The weighted-average remaining maturity of these instruments at March 31, 2013 and December 31, 2012 was approximately 0.2 years and 0.4 years, respectively.
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 four years. At March 31, 2013 and December 31, 2012, the total notional amount of forward contracts designated as cash flow hedges of forecasted royalty and cost transactions was $10.8 billion and $10.7 billion, respectively, with a weighted-average remaining maturity of 0.7 years and 0.7 years, respectively.
At March 31, 2013 and December 31, 2012, in connection with cash flow hedges of anticipated royalties and cost transactions, the company recorded net gains of $166 million and net losses of $138 million (before taxes), respectively, in accumulated other comprehensive income/(loss). Within these amounts $200 million of gains and $79 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.
Notes to Consolidated Financial Statements (continued)
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. At March 31, 2013 and December 31, 2012, no instruments relating to this program were outstanding.
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 one year. 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, 2013 and December 31, 2012, the total notional amount of derivative instruments in economic hedges of foreign currency exposure was $15.4 billion and $12.9 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, 2013 and December 31, 2012, the total notional amount of derivative instruments in economic hedges of these compensation obligations was $1.2 billion and $1.2 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, 2013 and December 31, 2012.
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. 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, 2013 and December 31, 2012.
The following tables provide a quantitative summary of the derivative and non-derivative instrument related risk management activity as of March 31, 2013 and December 31, 2012 as well as for the three months ended March 31, 2013 and 2012, respectively:
Notes to Consolidated Financial Statements (continued)
Fair Values of Derivative Instruments in the Consolidated Statement of Financial Position
As of March 31, 2013 and December 31, 2012
|
|
Fair Value of Derivative Assets |
|
Fair Value of Derivative Liabilities |
| ||||||||||||
|
|
Balance Sheet |
|
|
|
|
|
Balance Sheet |
|
|
|
|
| ||||
(Dollars in millions) |
|
Classification |
|
3/31/2013 |
|
12/31/2012 |
|
Classification |
|
3/31/2013 |
|
12/31/2012 |
| ||||
Designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest rate contracts: |
|
Prepaid expenses and other current assets |
|
$ |
66 |
|
$ |
47 |
|
Other accrued expenses and liabilities |
|
$ |
|
|
$ |
|
|
|
|
Investments and sundry assets |
|
518 |
|
557 |
|
Other liabilities |
|
|
|
|
| ||||
Foreign exchange contracts: |
|
Prepaid expenses and other current assets |
|
317 |
|
135 |
|
Other accrued expenses and liabilities |
|
132 |
|
267 |
| ||||
|
|
Investments and sundry assets |
|
7 |
|
5 |
|
Other liabilities |
|
58 |
|
78 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Fair value of derivative assets |
|
|
|
$ |
908 |
|
$ |
744 |
|
Fair value of derivative liabilities |
|
$ |
190 |
|
$ |
345 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Not designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Foreign exchange contracts: |
|
Prepaid expenses and other current assets |
|
$ |
110 |
|
$ |
142 |
|
Other accrued expenses and liabilities |
|
$ |
103 |
|
$ |
152 |
|
|
|
Investments and sundry assets |
|
17 |
|
23 |
|
Other liabilities |
|
|
|
|
| ||||
Equity contracts: |
|
Prepaid expenses and other current assets |
|
26 |
|
9 |
|
Other accrued expenses and liabilities |
|
3 |
|
7 |
| ||||
Fair value of derivative assets |
|
|
|
$ |
153 |
|
$ |
174 |
|
Fair value of derivative liabilities |
|
$ |
106 |
|
$ |
159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total debt designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
Short-term debt |
|
N/A |
|
N/A |
|
|
|
$ |
1,703 |
|
$ |
578 |
| ||
|
|
Long-term debt |
|
N/A |
|
N/A |
|
|
|
1,768 |
|
3,035 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total |
|
|
|
$ |
1,061 |
|
$ |
918 |
|
|
|
$ |
3,767 |
|
$ |
4,116 |
|
N/A not 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, 2013 and 2012
|
|
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 |
|
2013 |
|
2012 |
|
2013 |
|
2012 |
| ||||
Derivative instruments in fair value hedges: |
|
|
|
|
|
|
|
|
|
|
| ||||
Interest rate contracts |
|
Cost of financing |
|
$ |
(20 |
) |
$ |
(24 |
) |
$ |
46 |
|
$ |
57 |
|
|
|
Interest expense |
|
(13 |
) |
(19 |
) |
30 |
|
45 |
| ||||
Derivative instruments not designated as hedging instruments(1): |
|
|
|
|
|
|
|
|
|
|
| ||||
Foreign exchange contracts |
|
Other (income) and expense |
|
(439 |
) |
(81 |
) |
N/A |
|
N/A |
| ||||
Equity contracts |
|
SG&A expense |
|
85 |
|
98 |
|
N/A |
|
N/A |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total |
|
|
|
$ |
(387 |
) |
$ |
(26 |
) |
$ |
76 |
|
$ |
102 |
|
|
|
Gain (Loss) Recognized in Earnings and Other Comprehensive Income |
| ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(Ineffectiveness) and |
| ||||||||
|
|
Effective Portion |
|
Consolidated |
|
Effective Portion Reclassified |
|
Amounts Excluded from |
| ||||||||||||
For the three months |
|
Recognized in OCI |
|
Statement of |
|
from AOCI |
|
Effectiveness Testing(3) |
| ||||||||||||
ended March 31: |
|
2013 |
|
2012 |
|
Earnings Line Item |
|
2013 |
|
2012 |
|
2013 |
|
2012 |
| ||||||
Derivative instruments in cash flow hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Interest rate contracts |
|
$ |
|
|
$ |
|
|
Interest expense |
|
$ |
|
|
$ |
(2 |
) |
$ |
|
|
$ |
|
|
Foreign exchange contracts |
|
360 |
|
51 |
|
Other (income) and expense |
|
37 |
|
20 |
|
1 |
|
1 |
| ||||||
|
|
|
|
|
|
Cost of sales |
|
9 |
|
5 |
|
|
|
|
| ||||||
|
|
|
|
|
|
SG&A expense |
|
10 |
|
2 |
|
|
|
|
| ||||||
Instruments in net investment hedges(4): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Foreign exchange contracts |
|
219 |
|
(37 |
) |
Interest expense |
|
|
|
|
|
(1 |
) |
2 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total |
|
$ |
579 |
|
$ |
12 |
|
|
|
$ |
56 |
|
$ |
24 |
|
$ |
0 |
|
$ |
3 |
|
N/A-not applicable
Note: AOCI represents Accumulated other comprehensive income/(loss) in the Consolidated Statement of Changes in Equity.
(1) The amount includes changes in clean fair values of the derivative instruments in fair value hedging relationships and the periodic accrual for coupon payments required under these derivative contracts.
(2) The amount includes basis adjustments to the carrying value of the hedged item recorded during the period and amortization of basis adjustments recorded on de-designated hedging relationships during the period.
(3) The amount of gain (loss) recognized in income represents ineffectiveness on hedge relationships.
(4) Instruments in net investment hedges include derivative and non-derivative instruments.
For the three months ending March 31, 2013, and 2012, there were no significant gains or losses recognized in earnings representing hedge ineffectiveness or excluded from the assessment of hedge effectiveness (for fair value hedges), or associated with an underlying exposure that did not or was not expected to occur (for cash flow hedges); nor are there any anticipated in the normal course of business.
Notes to Consolidated Financial Statements (continued)
Refer to the companys 2012 Annual Report, Note A, Significant Accounting Policies, on page 83 for additional information on the companys use of derivative financial instruments.
4. 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) |
|
2013 |
|
2012 |
| ||
Current: |
|
|
|
|
| ||
Net investment in sales-type and direct financing leases |
|
$ |
3,960 |
|
$ |
3,862 |
|
Commercial financing receivables |
|
6,025 |
|
7,750 |
| ||
Client loan receivables |
|
5,113 |
|
5,395 |
| ||
Installment payment receivables |
|
1,044 |
|
1,031 |
| ||
Total |
|
$ |
16,141 |
|
$ |
18,038 |
|
Noncurrent: |
|
|
|
|
| ||
Net investment in sales-type and direct financing leases |
|
$ |
5,732 |
|
$ |
6,107 |
|
Commercial financing receivables |
|
1 |
|
5 |
| ||
Client loan receivables |
|
5,582 |
|
5,966 |
| ||
Installment payment receivables |
|
631 |
|
733 |
| ||
Total |
|
$ |
11,946 |
|
$ |
12,812 |
|
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 $750 million and $794 million at March 31, 2013 and December 31, 2012, respectively, and is reflected net of unearned income of $738 million and $728 million, and net of the allowance for credit losses of $112 million and $114 million at those dates, respectively.
Commercial financing receivables, net of allowance for credit losses of $31 million and $46 million at March 31, 2013 and December 31, 2012, respectively, 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, net of allowance for credit losses of $158 million and $155 million at March 31, 2013 and December 31, 2012, respectively, are loans that are provided primarily to clients to finance the purchase of software and services. Separate contractual relationships on these financing arrangements are for terms ranging generally from one to seven years.
Installment payment receivables, net of allowance for credit losses of $35 million and $39 million at March 31, 2013 and December 31, 2012, respectively, are loans that are provided primarily to clients to finance hardware, software and services ranging generally from one to three years.
Client loan receivables and installment payment receivables financing contracts are 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 $550 million and $650 million at March 31, 2013 and December 31, 2012, respectively.
The company did not have any financing receivables held for sale as of March 31, 2013 and December 31, 2012.
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, 2013 and December 31, 2012. The company determines its allowance for credit losses based on two portfolio segments: lease receivables and loan receivables, and further segments the portfolio into two classes: major markets and growth markets. For additional information on the companys accounting policies for the allowance for credit losses, see the companys 2012 Annual Report beginning on page 85.
Notes to Consolidated Financial Statements (continued)
(Dollars in millions) |
|
Major |
|
Growth |
|
|
| |||
At March 31, 2013 |
|
Markets |
|
Markets |
|
Total |
| |||
Financing receivables: |
|
|
|
|
|
|
| |||
Lease receivables |
|
$ |
6,823 |
|
$ |
2,135 |
|
$ |
8,958 |
|
Loan receivables |
|
8,688 |
|
3,878 |
|
12,566 |
| |||
Ending balance |
|
$ |
15,511 |
|
$ |
6,013 |
|
$ |
21,524 |
|
Collectively evaluated for impairment |
|
$ |
15,397 |
|
$ |
5,862 |
|
$ |
21,259 |
|
Individually evaluated for impairment |
|
$ |
114 |
|
$ |
151 |
|
$ |
265 |
|
Allowance for credit losses: |
|
|
|
|
|
|
| |||
Beginning balance at January 1, 2013 |
|
|
|
|
|
|
| |||
Lease receivables |
|
$ |
59 |
|
$ |
55 |
|
$ |
114 |
|
Loan receivables |
|
121 |
|
84 |
|
204 |
| |||
Total |
|
$ |
180 |
|
$ |
138 |
|
$ |
318 |
|
Write-offs |
|
(16 |
) |
(2 |
) |
(18 |
) | |||
Provision |
|
(13 |
) |
21 |
|
9 |
| |||
Other |
|
(4 |
) |
(0 |
) |
(4 |
) | |||
Ending balance at March 31, 2013 |
|
$ |
148 |
|
$ |
157 |
|
$ |
306 |
|
Lease receivables |
|
$ |
52 |
|
$ |
60 |
|
$ |
112 |
|
Loan receivables |
|
$ |
96 |
|
$ |
98 |
|
$ |
193 |
|
|
|
|
|
|
|
|
| |||
Collectively evaluated for impairment |
|
$ |
56 |
|
$ |
29 |
|
$ |
85 |
|
Individually evaluated for impairment |
|
$ |
92 |
|
$ |
129 |
|
$ |
220 |
|
(Dollars in millions) |
|
Major |
|
Growth |
|
|
| |||
At December 31, 2012 |
|
Markets |
|
Markets |
|
Total |
| |||
Financing receivables: |
|
|
|
|
|
|
| |||
Lease receivables |
|
$ |
7,036 |
|
$ |
2,138 |
|
$ |
9,174 |
|
Loan receivables |
|
9,666 |
|
3,670 |
|
13,336 |
| |||
Ending balance |
|
$ |
16,701 |
|
$ |
5,808 |
|
$ |
22,510 |
|
Collectively evaluated for impairment |
|
$ |
16,570 |
|
$ |
5,684 |
|
$ |
22,254 |
|
Individually evaluated for impairment |
|
$ |
131 |
|
$ |
125 |
|
$ |
256 |
|
Allowance for credit losses: |
|
|
|
|
|
|
| |||
Beginning balance at January 1, 2012 |
|
|
|
|
|
|
| |||
Lease receivables |
|
$ |
79 |
|
$ |
40 |
|
$ |
118 |
|
Loan receivables |
|
125 |
|
64 |
|
189 |
| |||
Total |
|
$ |
203 |
|
$ |
104 |
|
$ |
307 |
|
Write-offs |
|
(14 |
) |
(1 |
) |
(15 |
) | |||
Provision |
|
(9 |
) |
38 |
|
28 |
| |||
Other |
|
0 |
|
(2 |
) |
(2 |
) | |||
Ending balance at December 31, 2012 |
|
$ |
180 |
|
$ |
138 |
|
$ |
318 |
|
Lease receivables |
|
$ |
59 |
|
$ |
55 |
|
$ |
114 |
|
Loan receivables |
|
$ |
121 |
|
$ |
84 |
|
$ |
204 |
|
|
|
|
|
|
|
|
| |||
Collectively evaluated for impairment |
|
$ |
69 |
|
$ |
29 |
|
$ |
98 |
|
Individually evaluated for impairment |
|
$ |
111 |
|
$ |
109 |
|
$ |
220 |
|
When determining 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 determined 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.
Notes to Consolidated Financial Statements (continued)
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.
The following table presents the recorded investment in financing receivables which are on non-accrual status at March 31, 2013 and December 31, 2012.
|
|
At March 31, |
|
At December 31, |
| ||
(Dollars in millions) |
|
2013 |
|
2012 |
| ||
Major markets |
|
$ |
26 |
|
$ |
27 |
|
Growth markets |
|
20 |
|
21 |
| ||
Total lease receivables |
|
$ |
46 |
|
$ |
47 |
|
|
|
|
|
|
| ||
Major markets |
|
$ |
41 |
|
$ |
67 |
|
Growth markets |
|
59 |
|
25 |
| ||
Total loan receivables |
|
$ |
100 |
|
$ |
92 |
|
|
|
|
|
|
| ||
Total receivables |
|
$ |
146 |
|
$ |
139 |
|
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.
The following tables present impaired client loan receivables.
|
|
At March 31, 2013 |
|
At December 31, 2012 |
| ||||||||
|
|
Recorded |
|
Related |
|
Recorded |
|
Related |
| ||||
(Dollars in millions) |
|
Investment |
|
Allowance |
|
Investment |
|
Allowance |
| ||||
Major markets |
|
$ |
70 |
|
$ |
64 |
|
$ |
88 |
|
$ |
77 |
|
Growth markets |
|
86 |
|
78 |
|
72 |
|
65 |
| ||||
Total |
|
$ |
155 |
|
$ |
142 |
|
$ |
160 |
|
$ |
143 |
|
|
|
|
|
|
|
Interest |
| |||
|
|
Average |
|
Interest |
|
Income |
| |||
(Dollars in millions) |
|
Recorded |
|
Income |
|
Recognized on |
| |||
For the three months ended March 31, 2013: |
|
Investment |
|
Recognized* |
|
Cash Basis |
| |||
Major markets |
|
$ |
79 |
|
$ |
0 |
|
$ |
0 |
|
Growth markets |
|
79 |
|
0 |
|
0 |
| |||
Total |
|
$ |