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 SEPTEMBER 30, 2015
1-2360
(Commission file number)
INTERNATIONAL BUSINESS MACHINES CORPORATION
(Exact name of registrant as specified in its charter)
New York |
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13-0871985 |
(State of incorporation) |
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(IRS employer identification number) |
Armonk , New York |
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10504 |
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(Address of principal executive offices) |
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(Zip Code) |
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914-499-1900
(Registrant’s telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section l3 or l5(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 ý No ☐
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 ý No ☐
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 ý |
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Non-accelerated filer ☐ |
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(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 ☐ No ý
The registrant had 970,110,126 shares of common stock outstanding at September 30, 2015.
Index
2
Part I - Financial Information
Item 1. Consolidated Financial Statements:
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
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Three Months Ended September 30, |
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Nine Months Ended September 30, |
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(Dollars in millions except per share amounts) |
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2015 |
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2014 |
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2015 |
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2014 |
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Revenue: |
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Services |
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$ |
12,327 |
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$ |
13,869 |
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$ |
37,290 |
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$ |
41,979 |
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Sales |
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6,501 |
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8,034 |
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20,990 |
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25,180 |
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Financing |
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452 |
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494 |
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1,403 |
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1,521 |
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Total revenue |
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19,280 |
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22,397 |
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59,682 |
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68,680 |
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Cost: |
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Services |
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8,067 |
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8,868 |
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24,776 |
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27,100 |
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Sales |
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1,544 |
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2,398 |
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4,895 |
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7,269 |
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Financing |
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233 |
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257 |
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733 |
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765 |
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Total cost |
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9,844 |
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11,523 |
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30,405 |
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35,135 |
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Gross profit |
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9,436 |
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10,874 |
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29,278 |
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33,545 |
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Expense and other (income): |
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Selling, general and administrative |
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4,731 |
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5,281 |
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15,273 |
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17,146 |
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Research, development and engineering |
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1,287 |
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1,354 |
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3,885 |
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4,117 |
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Intellectual property and custom |
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development income |
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(188) |
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(145) |
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(489) |
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(543) |
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Other (income) and expense |
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(133) |
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(103) |
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(578) |
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(433) |
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Interest expense |
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117 |
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126 |
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340 |
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367 |
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Total expense and other (income) |
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5,815 |
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6,513 |
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18,431 |
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20,654 |
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Income from continuing operations before |
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income taxes |
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3,621 |
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4,361 |
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10,846 |
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12,891 |
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Provision for income taxes |
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659 |
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906 |
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1,943 |
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2,655 |
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Income from continuing operations |
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$ |
2,962 |
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$ |
3,455 |
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$ |
8,904 |
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$ |
10,237 |
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Loss from discontinued operations, net of tax |
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(12) |
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(3,437) |
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(176) |
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(3,698) |
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Net income |
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$ |
2,950 |
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$ |
18 |
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$ |
8,727 |
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$ |
6,539 |
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Earnings/(loss) per share of common stock: |
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Assuming dilution: |
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Continuing operations |
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$ |
3.02 |
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$ |
3.46 |
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$ |
9.03 |
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$ |
10.09 |
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Discontinued operations |
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(0.01) |
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(3.44) |
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(0.18) |
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(3.65) |
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Total |
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$ |
3.01 |
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$ |
0.02 |
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$ |
8.85 |
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$ |
6.44 |
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Basic: |
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Continuing operations |
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$ |
3.04 |
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$ |
3.48 |
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$ |
9.07 |
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$ |
10.15 |
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Discontinued operations |
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(0.01) |
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(3.46) |
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(0.18) |
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(3.67) |
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Total |
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$ |
3.03 |
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$ |
0.02 |
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$ |
8.89 |
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$ |
6.48 |
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Weighted-average number of common |
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shares outstanding: (millions) |
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Assuming dilution |
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979.0 |
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997.7 |
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986.0 |
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1,014.9 |
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Basic |
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975.1 |
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991.8 |
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981.8 |
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1,008.9 |
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Cash dividend per common share |
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$ |
1.30 |
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$ |
1.10 |
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$ |
3.70 |
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$ |
3.15 |
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(Amounts may not add due to rounding.) |
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(The accompanying notes are an integral part of the financial statements.) |
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3
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
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Three Months Ended September 30, |
Nine Months Ended September 30, |
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(Dollars in millions) |
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2015 |
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2014 |
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2015 |
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2014 |
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Net income |
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$ |
2,950 |
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$ |
18 |
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$ |
8,727 |
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$ |
6,539 |
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Other comprehensive income/(loss), before tax: |
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Foreign currency translation adjustments |
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(1,015) |
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(1,126) |
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(1,365) |
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(848) |
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Net changes related to available-for-sale securities: |
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Unrealized gains/(losses) arising during the period |
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(102) |
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0 |
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(85) |
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1 |
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Reclassification of (gains)/losses to net income |
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0 |
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0 |
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0 |
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5 |
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Total net changes related to available-for-sale securities |
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(101) |
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0 |
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(85) |
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6 |
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Unrealized gains/(losses) on cash flow hedges: |
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Unrealized gains/(losses) arising during the period |
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36 |
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524 |
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467 |
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596 |
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Reclassification of (gains)/losses to net income |
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(273) |
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58 |
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(843) |
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91 |
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Total unrealized gains/(losses) on cash flow hedges |
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(237) |
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582 |
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(376) |
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687 |
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Retirement-related benefit plans: |
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Prior service costs/(credits) |
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0 |
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0 |
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6 |
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1 |
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Net (losses)/gains arising during the period |
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(2) |
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1 |
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14 |
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48 |
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Curtailments and settlements |
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11 |
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7 |
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19 |
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20 |
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Amortization of prior service (credits)/costs |
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(25) |
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(29) |
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(76) |
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(88) |
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Amortization of net (gains)/losses |
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823 |
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635 |
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2,479 |
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1,923 |
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Total retirement-related benefit plans |
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807 |
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615 |
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2,441 |
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1,905 |
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Other comprehensive income/(loss), before tax |
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(547) |
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71 |
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616 |
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1,749 |
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Income tax (expense)/benefit related to items of |
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other comprehensive income |
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(176) |
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(680) |
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(895) |
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(1,126) |
Other comprehensive income/(loss) |
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(724) |
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(609) |
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(280) |
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623 |
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Total comprehensive income/(loss) |
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$ |
2,227 |
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$ |
(591) |
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$ |
8,448 |
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$ |
7,162 |
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(Amounts may not add due to rounding.) |
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(The accompanying notes are an integral part of the financial statements.) |
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4
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF
FINANCIAL POSITION
(UNAUDITED)
ASSETS
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At September 30, |
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At December 31, |
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(Dollars in millions) |
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2015 |
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2014 |
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Assets: |
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Current assets: |
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Cash and cash equivalents |
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$ |
9,480 |
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$ |
8,476 |
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Marketable securities |
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88 |
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0 |
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Notes and accounts receivable - trade (net of allowances of $362 |
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in 2015 and $336 in 2014) |
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7,987 |
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9,090 |
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Short-term financing receivables (net of allowances of $488 in 2015 |
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and $452 in 2014) |
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16,195 |
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19,835 |
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Other accounts receivable (net of allowances of $53 in 2015 and |
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$40 in 2014) |
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931 |
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2,906 |
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Inventories, at lower of average cost or market: |
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Finished goods |
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388 |
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430 |
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Work in process and raw materials |
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1,224 |
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1,674 |
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Total inventories |
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1,613 |
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2,103 |
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Deferred taxes |
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1,660 |
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|
2,044 |
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Prepaid expenses and other current assets |
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4,158 |
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4,967 |
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Total current assets |
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42,112 |
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49,422 |
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Property, plant and equipment |
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29,229 |
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39,034 |
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Less: Accumulated depreciation |
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18,568 |
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28,263 |
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Property, plant and equipment — net |
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10,661 |
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10,771 |
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Long-term financing receivables (net of allowances of $121 in 2015 |
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and $126 in 2014) |
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9,517 |
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|
11,109 |
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Prepaid pension assets |
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4,033 |
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|
2,160 |
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Deferred taxes |
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|
3,690 |
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4,808 |
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Goodwill |
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30,275 |
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30,556 |
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Intangible assets — net |
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2,775 |
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|
3,104 |
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Investments and sundry assets |
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5,586 |
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|
5,603 |
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Total assets |
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$ |
108,649 |
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$ |
117,532 |
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(Amounts may not add due to rounding.) |
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(The accompanying notes are an integral part of the financial statements.) |
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5
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 September 30, |
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At December 31, |
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2015 |
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2014 |
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Liabilities: |
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Current liabilities: |
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Taxes |
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$ |
2,883 |
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$ |
5,084 |
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Short-term debt |
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|
7,538 |
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5,731 |
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Accounts payable |
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|
5,166 |
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6,864 |
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Compensation and benefits |
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|
3,785 |
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|
4,031 |
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Deferred income |
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|
10,458 |
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|
11,877 |
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Other accrued expenses and liabilities |
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|
3,902 |
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|
6,013 |
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Total current liabilities |
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33,732 |
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|
39,600 |
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Long-term debt |
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|
32,122 |
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|
35,073 |
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Retirement and nonpension postretirement benefit obligations |
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|
17,012 |
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|
18,261 |
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Deferred income |
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|
3,593 |
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|
3,691 |
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Other liabilities |
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|
8,739 |
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|
8,892 |
|||
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Total liabilities |
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|
95,198 |
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|
105,518 |
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Equity: |
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IBM stockholders’ equity: |
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|
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||||
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Common stock, par value $0.20 per share, and additional paid-in capital |
|
|
53,220 |
|
|
52,666 |
|||
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Shares authorized: 4,687,500,000 |
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Shares issued: |
2015 - 2,219,559,126 |
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2014 - 2,215,209,574 |
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|
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Retained earnings |
|
|
142,898 |
|
|
137,793 |
|||
|
Treasury stock - at cost |
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|
(154,669) |
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|
(150,715) |
|||
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Shares: |
2015 - 1,249,449,000 |
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|
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2014 - 1,224,685,815 |
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|
|
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Accumulated other comprehensive income/(loss) |
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|
(28,155) |
|
|
(27,875) |
|||
|
Total IBM stockholders’ equity |
|
|
13,294 |
|
|
11,868 |
|||
Noncontrolling interests |
|
|
157 |
|
|
146 |
||||
Total equity |
|
|
13,450 |
|
|
12,014 |
||||
Total liabilities and equity |
|
$ |
108,649 |
|
$ |
117,532 |
||||
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|
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|
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|
|
|
|
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|
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(Amounts may not add due to rounding.) |
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||||
(The accompanying notes are an integral part of the financial statements.) |
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6
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CASH
FLOWS
(UNAUDITED)
|
|
|
Nine Months Ended September 30, |
||||
(Dollars in millions) |
|
|
2015 |
|
|
2014 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
Net income |
|
$ |
8,727 |
|
$ |
6,539 |
|
Adjustments to reconcile net income to cash provided by operating activities |
|
|
|
|
|
|
|
|
Depreciation |
|
|
1,981 |
|
|
2,428 |
|
Amortization of intangibles |
|
|
884 |
|
|
1,018 |
|
Stock-based compensation |
|
|
369 |
|
|
416 |
|
Net (gain)/loss on asset sales and other |
|
|
584 |
|
|
(262) |
|
Loss on Microelectronics business disposal |
|
|
48 |
|
|
3,346 |
|
Changes in operating assets and liabilities, net of acquisitions/divestitures |
|
|
(864) |
|
|
(2,675) |
Net cash provided by operating activities |
|
|
11,729 |
|
|
10,809 |
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Payments for property, plant and equipment |
|
|
(2,670) |
|
|
(2,793) |
|
Proceeds from disposition of property, plant and equipment |
|
|
314 |
|
|
325 |
|
Investment in software |
|
|
(407) |
|
|
(336) |
|
Acquisition of businesses, net of cash acquired |
|
|
(821) |
|
|
(650) |
|
Divestitures of businesses, net of cash transferred |
|
|
(488) |
|
|
489 |
|
Non-operating finance receivables — net |
|
|
1,334 |
|
|
948 |
|
Purchases of marketable securities and other investments |
|
|
(2,101) |
|
|
(1,513) |
|
Proceeds from disposition of marketable securities and other investments |
|
|
2,125 |
|
|
1,765 |
Net cash used in investing activities |
|
|
(2,714) |
|
|
(1,765) |
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from new debt |
|
|
3,701 |
|
|
5,642 |
|
Payments to settle debt |
|
|
(5,389) |
|
|
(3,108) |
|
Short-term borrowings/(repayments) less than 90 days — net |
|
|
1,080 |
|
|
3,888 |
|
Common stock repurchases |
|
|
(3,846) |
|
|
(13,547) |
|
Common stock transactions — other |
|
|
271 |
|
|
549 |
|
Cash dividends paid |
|
|
(3,636) |
|
|
(3,176) |
Net cash used in financing activities |
|
|
(7,818) |
|
|
(9,753) |
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
(194) |
|
|
(447) |
|
Net change in cash and cash equivalents |
|
|
1,004 |
|
|
(1,155) |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at January 1 |
|
|
8,476 |
|
|
10,716 |
|
Cash and cash equivalents at September 30 |
|
$ |
9,480 |
|
$ |
9,561 |
|
|
|
|
|
|
|
|
|
(Amounts may not add due to rounding.) |
|
|
|
|
|
|
|
(The accompanying notes are an integral part of the financial statements.) |
|
|
|
|
|
|
7
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, 2015 |
|
$ |
52,666 |
|
$ |
137,793 |
|
$ |
(150,715) |
|
$ |
(27,875) |
|
$ |
11,868 |
|
$ |
146 |
|
$ |
12,014 |
Net income plus other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
comprehensive income/(loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
8,727 |
|
|
|
|
|
|
|
|
8,727 |
|
|
|
|
|
8,727 |
Other comprehensive income/(loss) |
|
|
|
|
|
|
|
|
|
|
|
(280) |
|
|
(280) |
|
|
|
|
|
(280) |
Total comprehensive income/(loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
8,448 |
|
|
|
|
$ |
8,448 |
Cash dividends paid – |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common stock |
|
|
|
|
|
(3,636) |
|
|
|
|
|
|
|
|
(3,636) |
|
|
|
|
|
(3,636) |
Common stock issued under |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
employee plans (4,349,552 shares) |
|
|
556 |
|
|
|
|
|
|
|
|
|
|
|
556 |
|
|
|
|
|
556 |
Purchases (954,158 shares) and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
sales (484,817 shares) of treasury |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock under employee plans – net |
|
|
|
|
|
14 |
|
|
(93) |
|
|
|
|
|
(79) |
|
|
|
|
|
(79) |
Other treasury shares purchased, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
not retired (24,293,844 shares) |
|
|
|
|
|
|
|
|
(3,861) |
|
|
|
|
|
(3,861) |
|
|
|
|
|
(3,861) |
Changes in other equity |
|
|
(2) |
|
|
|
|
|
|
|
|
|
|
|
(2) |
|
|
|
|
|
(2) |
Changes in noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11 |
|
|
11 |
Equity - September 30, 2015 |
|
$ |
53,220 |
|
$ |
142,898 |
|
$ |
(154,669) |
|
$ |
(28,155) |
|
$ |
13,294 |
|
$ |
157 |
|
$ |
13,450 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2014 |
|
$ |
51,594 |
|
$ |
130,042 |
|
$ |
(137,242) |
|
$ |
(21,602) |
|
$ |
22,792 |
|
$ |
137 |
|
$ |
22,929 |
Net income plus other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
comprehensive income/(loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
6,539 |
|
|
|
|
|
|
|
|
6,539 |
|
|
|
|
|
6,539 |
Other comprehensive income/(loss) |
|
|
|
|
|
|
|
|
|
|
|
623 |
|
|
623 |
|
|
|
|
|
623 |
Total comprehensive income/(loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
7,162 |
|
|
|
|
$ |
7,162 |
Cash dividends paid – |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common stock |
|
|
|
|
|
(3,176) |
|
|
|
|
|
|
|
|
(3,176) |
|
|
|
|
|
(3,176) |
Common stock issued under |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
employee plans (6,354,088 shares) |
|
|
792 |
|
|
|
|
|
|
|
|
|
|
|
792 |
|
|
|
|
|
792 |
Purchases (1,124,077 shares) and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
sales (894,291 shares) of treasury |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock under employee plans – net |
|
|
|
|
|
(1) |
|
|
(95) |
|
|
|
|
|
(96) |
|
|
|
|
|
(96) |
Other treasury shares purchased, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
not retired (70,854,767 shares) |
|
|
|
|
|
|
|
|
(13,280) |
|
|
|
|
|
(13,280) |
|
|
|
|
|
(13,280) |
Changes in other equity |
|
|
60 |
|
|
|
|
|
|
|
|
|
|
|
60 |
|
|
|
|
|
60 |
Changes in noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
3 |
Equity - September 30, 2014 |
|
$ |
52,446 |
|
$ |
133,403 |
|
$ |
(150,616) |
|
$ |
(20,978) |
|
$ |
14,255 |
|
$ |
140 |
|
$ |
14,395 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts may not add due to rounding.) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
(The accompanying notes are an integral part of the financial statements.) |
|
|
|
|
|
|
|
|
|
|
|
|
8
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 company's management, these statements include all adjustments, which are only of a normal recurring nature, necessary to present a fair statement of the company's results of operations, financial position and cash flows.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amount of assets, liabilities, revenue, costs, expenses and other comprehensive income/(loss) that are reported in the Consolidated Financial Statements and accompanying disclosures. These estimates are based on management’s 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. Refer to the company's 2014 Annual Report on pages 68 to 71 for a discussion of the company's critical accounting estimates.
On October 20, 2014, the company announced a definitive agreement to divest its Microelectronics business and manufacturing operations to GLOBALFOUNDRIES. The assets and liabilities of the Microelectronics business were reported as held for sale at December 31, 2014, and the operating results of the Microelectronics business have been reported as discontinued operations. The transaction closed on July 1, 2015. Refer to Note 9, Acquisitions/Divestitures,” for additional information on the transaction. In addition, in the first quarter of 2015, the company renamed its Systems & Technology segment to Systems Hardware and its System z brand to z Systems.
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 company's 2014 Annual Report.
Noncontrolling interest amounts of $2.4 million and $2.4 million, net of tax, for the three months ended September 30, 2015 and 2014, respectively, and $5.9 million and $4.2 million, net of tax, for the nine months ended September 30, 2015 and 2014, 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 September 2015, the Financial Accounting Standards Board
(FASB) issued guidance eliminating the requirement that an acquirer in a
business combination account for a measurement-period adjustment
retrospectively. Instead, an acquirer will recognize a measurement-period
adjustment during the period in which the amount of the adjustment is
determined. In addition, the portion of the amount recorded in current-period
earnings by line item that would have been recorded in previous reporting
periods if the adjustment to the provisional amounts had been recognized as of
the acquisition date should be presented separately on the face of the income
statement or disclosed in the notes. The guidance is effective January 1, 2016
with early adoption permitted. The guidance is not expected to have a material
impact in the consolidated financial results.
In July 2015, the FASB issued guidance which requires all inventories, except those using the last-in, first-out or retail methods, to be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonable predictable cost of completion, disposal and transportation. The guidance is effective January 1, 2017 with early adoption permitted. The guidance is not expected to have a material impact in the consolidated financial results.
In May 2015, the FASB issued guidance which removed the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The amendments also removed the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. Rather, those disclosures are limited to investments for which the entity has elected to measure the fair value using that practical expedient. The guidance is effective January 1, 2016 with early adoption permitted. The guidance is a change in disclosure only and will not have a material impact in the consolidated financial results.
In April 2015, the FASB issued guidance which requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The guidance is effective January 1, 2016 with early adoption permitted. The guidance is a change in financial
9
Notes to Consolidated Financial Statements – (continued)
statement presentation only and will not have a material impact in the consolidated financial results. At September 30, 2015, the company had approximately $74 million in debt issuance costs included in investments and sundry assets in the Consolidated Statement of Financial Position.
In April 2015, the FASB issued guidance about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a services contract. All software licenses recognized under this guidance will be accounted for consistent with other licenses of intangible assets. The guidance is effective January 1, 2016 with early adoption permitted. The guidance is not expected to have a material impact in the consolidated financial results.
In May 2014, the FASB issued guidance on the recognition of revenue from contracts with customers. Revenue recognition will depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented, or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application. The guidance was initially effective January 1, 2017 and early adoption was not permitted. In August 2015, the FASB issued guidance which provides for a one-year deferral of the effective date to January 1, 2018, with an option of applying the standard on the original effective date. The company is currently evaluating the impact of the new guidance, the effective date and the method of adoption.
In April 2014, the FASB issued guidance that changed the criteria for reporting a discontinued operation. Only disposals of a component that represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results is a discontinued operation. The guidance also requires expanded disclosures about discontinued operations and disposals of a significant part of an entity that does not qualify for discontinued operations reporting. The guidance was effective January 1, 2015. The impact to the company will be dependent on any transaction that is within the scope of the new guidance.
In July 2013, the FASB issued guidance regarding the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. Under certain circumstances, unrecognized tax benefits should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. The guidance was effective January 1, 2014. The guidance was a change in financial statement presentation only and did not have a material impact in the consolidated financial results.
In March 2013, the 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 was effective January 1, 2014 and did not 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 matters. 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 was effective January 1, 2014 and did not have a material impact in the consolidated financial results.
10
Notes to Consolidated Financial Statements – (continued)
3. Financial Instruments:
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 1—Quoted prices (unadjusted) in active markets for identical assets or liabilities that can be accessed at the measurement date;
· Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and
· Level 3—Unobservable 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 as 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 company’s 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 company’s 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. In the third quarter of 2014, the company recorded an impairment on certain assets that were initially reported as held for sale at September 30, 2014. See note 9, “Acquisitions/Divestitures,” for additional information. There were no material impairments of non-financial assets for the nine months ended September 30, 2015.
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 has not applied the fair value option to any eligible assets or liabilities.
The following tables present the company’s financial assets and financial liabilities that are measured at fair value on a recurring basis at September 30, 2015 and December 31, 2014.
11
Notes to Consolidated Financial Statements – (continued)
(Dollars in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
||
At September 30, 2015 |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
||||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Cash equivalents (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits and certificates of deposit |
|
$ |
— |
|
$ |
4,626 |
|
$ |
— |
|
$ |
4,626 |
|
|
|
Commercial paper |
|
|
— |
|
|
275 |
|
|
— |
|
|
275 |
|
|
|
Money market funds |
|
|
2,155 |
|
|
— |
|
|
— |
|
|
2,155 |
|
|
|
U.S. government securities |
|
|
— |
|
|
0 |
|
|
— |
|
|
0 |
|
|
|
Canadian government securities |
|
|
— |
|
|
186 |
|
|
— |
|
|
186 |
|
|
|
Other securities |
|
|
— |
|
|
7 |
|
|
— |
|
|
7 |
|
|
Total |
|
|
2,155 |
|
|
5,094 |
|
|
— |
|
|
7,250 |
(6) |
|
|
Debt securities - current (2) |
|
|
— |
|
|
88 |
|
|
— |
|
|
88 |
(6) |
|
|
Debt securities - noncurrent (3) |
|
|
1 |
|
|
8 |
|
|
— |
|
|
9 |
|
|
|
Trading security investments (3) |
|
|
54 |
|
|
— |
|
|
— |
|
|
54 |
|
|
|
Available-for-sale equity investments (3) |
|
|
160 |
|
|
— |
|
|
— |
|
|
160 |
|
|
|
Derivative assets (4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts |
|
|
— |
|
|
739 |
|
|
— |
|
|
739 |
|
|
|
Foreign exchange contracts |
|
|
— |
|
|
542 |
|
|
— |
|
|
542 |
|
|
|
Equity contracts |
|
|
— |
|
|
2 |
|
|
— |
|
|
2 |
|
|
Total |
|
|
— |
|
|
1,283 |
|
|
— |
|
|
1,283 |
(7) |
|
Total assets |
|
$ |
2,371 |
|
$ |
6,473 |
|
$ |
— |
|
$ |
8,844 |
(7) |
||
Liabilities: |
|
|
|
|
|
|
|
|
|