IBM AnnualIBM Annual ReportReport

Chris LaSalleChris LaSalleSection 004Section 004

IBM: Executive SummaryIBM: Executive Summary

Recognizing the shift in the field of information Recognizing the shift in the field of information technology, IBM’s Management team identified technology, IBM’s Management team identified the weaknesses and sought after solutions that the weaknesses and sought after solutions that would keep them competitive. The result? Profit would keep them competitive. The result? Profit margins up and losses down. IBM was once a margins up and losses down. IBM was once a leader in the technological world and is working leader in the technological world and is working hard to ensure they stay in the forefront of their hard to ensure they stay in the forefront of their field. field.

Executive Summary (con’t)Executive Summary (con’t)

IBM: IntroductionIBM: Introduction Who:Who: Samuel J. Palmisano Samuel J. Palmisano

Where:Where: New Orchard RoadNew Orchard RoadArmonk, New York 10504Armonk, New York 10504914-499-1900 914-499-1900

Worldwide with a major Worldwide with a major focus in North America focus in North America Europe and Asia Europe and Asia

When:When: December 31, 2005December 31, 2005

IBM: FocusIBM: Focus

Principal products and services:Principal products and services:• Systems and Financing:Systems and Financing:

Storage , servers, personal systems, printing Storage , servers, personal systems, printing systems, and retail store solutionssystems, and retail store solutions

• Software:Software: Specializing in connecting operating Specializing in connecting operating

systems, business processes, and systems, business processes, and applications seamlesslyapplications seamlessly

• Services:Services: Including a comprehensive IT services Including a comprehensive IT services

integrated with business insight to reduce integrated with business insight to reduce costs, improve productivity, and assert costs, improve productivity, and assert competitive advantagecompetitive advantage

IBM: The Audit ReportIBM: The Audit Report

PricewaterhouseCoopers LLPPricewaterhouseCoopers LLPNew York, New YorkNew York, New York

PricewaterhouseCoopers LLP stated that to PricewaterhouseCoopers LLP stated that to the best of their knowledge, IBM’s financial the best of their knowledge, IBM’s financial report was an accurate representation of report was an accurate representation of the current financial situation. They the current financial situation. They audited all of the units, minus one, and audited all of the units, minus one, and upheld the report from another firm upheld the report from another firm regarding that one unit.regarding that one unit.

IBM: Stock Market InformationIBM: Stock Market Information

As of 10/6/06 @ 16:00 pm:As of 10/6/06 @ 16:00 pm: CurrentCurrent: : $83.14 $83.14 12 Month Range12 Month Range: 72.73 89.94: 72.73 89.94 Dividend amount: $5.37/shareDividend amount: $5.37/share RecommendationRecommendation: This stock has a : This stock has a

continued growth rate and a solid continued growth rate and a solid future: HOLD/BUYfuture: HOLD/BUY

IBM: Industry SituationIBM: Industry SituationThe information technology field is currently The information technology field is currently a central component in all industries. In the a central component in all industries. In the year 2006, few business can survive without year 2006, few business can survive without the services offered by companies such as the services offered by companies such as IBM. All businesses will benefit from better IBM. All businesses will benefit from better

research and development in this field. research and development in this field.

IBM: Company PlansIBM: Company Plans

Using the IBM investor guide and Using the IBM investor guide and the IBM Annual Report, IBM plans the IBM Annual Report, IBM plans to capitalize on their strengths to capitalize on their strengths and focus on the three main areas and focus on the three main areas of their business. In addition, a of their business. In addition, a pledge to greater organizational pledge to greater organizational efficiency through reduced costs, efficiency through reduced costs, decreased inventory, and speedier decreased inventory, and speedier procurement. procurement.

IBM: Income StatementIBM: Income StatementFormat: single-step Format: single-step

20042004 20052005

Gross Gross ProfitProfit

35,56835,568 36,53236,532

Operating Operating IncomeIncome

7,9947,994 7,4977,497

Net Net IncomeIncome

7,9347,934 7,4797,479

Numbers shown in millions

IBM: Income Statement (con’t)IBM: Income Statement (con’t)

Although IBM reported a loss in Although IBM reported a loss in operating and net incomes just shy operating and net incomes just shy of 1,000,000; the gross profit has of 1,000,000; the gross profit has increased by 964,000. These loses increased by 964,000. These loses may be due to restructuring and/or may be due to restructuring and/or taxes and in future years could taxes and in future years could possibly pave the way for the possibly pave the way for the company to show a more rotund company to show a more rotund profit.profit.

IBM: Balance SheetIBM: Balance Sheet

Assets=Liabilities + Stockholders’ Equity Assets=Liabilities + Stockholders’ Equity

20042004 111.003 =111.003 = 79,315 +79,315 + 31,68831,688

20052005 105,748 =105,748 = 72,650 +72,650 + 33,09833,098

IBM: Balance SheetIBM: Balance Sheet

While assets and liabilities While assets and liabilities decreased, stockholders equity decreased, stockholders equity increased. A possible explanation for increased. A possible explanation for the increase in stockholder equity the increase in stockholder equity could be due to the divesting of a could be due to the divesting of a less profitable portion of the less profitable portion of the company.company.

IBM: Statement of Cash IBM: Statement of Cash FlowsFlows

The net cash flows from operations for 2005 The net cash flows from operations for 2005 were more than 2003 but less than 2004.were more than 2003 but less than 2004.The companies growth has come from their The companies growth has come from their attention and specialization of products and attention and specialization of products and services in their industry. They have recently services in their industry. They have recently consolidated by divesting a significant part of consolidated by divesting a significant part of the company. the company. The company’s primary source of financing is The company’s primary source of financing is currently stock sales.currently stock sales.Cash has both increased and decreased over Cash has both increased and decreased over the past two years.the past two years.

IBM: Accounting PoliciesIBM: Accounting PoliciesTopics of the notes to the financial Topics of the notes to the financial

statementstatement Significant Accounting PoliciesSignificant Accounting Policies Accounting changesAccounting changes Acquisitions/DivestituresAcquisitions/Divestitures Financial InstrumentsFinancial Instruments InventoriesInventories Financial ReceivablesFinancial Receivables Plant, rental machines, and other property.Plant, rental machines, and other property. Investments and Sundry AssetsInvestments and Sundry Assets Intangible Assets Including Good WillIntangible Assets Including Good Will Securitization of ReceivablesSecuritization of Receivables BorrowingsBorrowings

IBM: Accounting PoliciesIBM: Accounting PoliciesTopics of the notes to the financial Topics of the notes to the financial

statement con’tstatement con’t Derivations and Hedging TransactionsDerivations and Hedging Transactions Other LiabilitiesOther Liabilities Stockholders’ Equity ActivityStockholders’ Equity Activity Contingencies and CommitmentsContingencies and Commitments TaxesTaxes Research, Development and EngineeringResearch, Development and Engineering 2005 Actions2005 Actions Earnings Per Share of Common Stock Earnings Per Share of Common Stock Rental Expense and Lease CommitmentsRental Expense and Lease Commitments Stock-Based CompensationStock-Based Compensation Retirement-Related BenefitsRetirement-Related Benefits Segment InformationSegment Information Subsequent EventsSubsequent Events

IBM: Financial AnalysisIBM: Financial AnalysisLiquidity RatiosLiquidity Ratios

20052005 Working Capital: $7,858,000Working Capital: $7,858,000 Current Ratio: 2.66Current Ratio: 2.66 Receivable turnover: 3.7Receivable turnover: 3.7 Average days’ sales uncollected: 98.6Average days’ sales uncollected: 98.6 Inventory turnover: 19.2Inventory turnover: 19.2 Average days’ inventory on hand: 19.01 Average days’ inventory on hand: 19.01

IBM: Financial AnalysisIBM: Financial AnalysisLiquidity Ratios con’tLiquidity Ratios con’t

20042004 Working Capital: $5,235,000Working Capital: $5,235,000 Current Ratio: 2.13Current Ratio: 2.13 Receivable turnover: 2.46Receivable turnover: 2.46 Average days’ sales uncollected: 148.4Average days’ sales uncollected: 148.4 Inventory turnover: 18.3Inventory turnover: 18.3 Average days’ inventory on hand: 19.94 Average days’ inventory on hand: 19.94

IBM: Financial AnalysisIBM: Financial AnalysisLiquidity Ratios con’tLiquidity Ratios con’t

When comparing the liquidity ratios from When comparing the liquidity ratios from 2004 to 2005 the following results were 2004 to 2005 the following results were found:found:

Working Capitol increased considerably.Working Capitol increased considerably. Current Ratio shows added strength and Current Ratio shows added strength and

an increased ability to pay debt.an increased ability to pay debt. Receivable Turnover increased indicating Receivable Turnover increased indicating

a more effective credit policy.a more effective credit policy.

IBM: Financial AnalysisIBM: Financial AnalysisLiquidity Ratios con’tLiquidity Ratios con’t

Average Day’s Sales Uncollected has Average Day’s Sales Uncollected has shown a significant decrease indicating a shown a significant decrease indicating a smaller number of day’s till collection of smaller number of day’s till collection of receivables.receivables.

Inventory turnover has increased equating Inventory turnover has increased equating to a larger relative size of the companies to a larger relative size of the companies inventory.inventory.

Average days inventory on hand has Average days inventory on hand has decreased indicating a lower number of decreased indicating a lower number of days taken to sell inventory.days taken to sell inventory.

IBM: Financial AnalysisIBM: Financial AnalysisProfitability RatiosProfitability Ratios

Profit margin: 2005= 8.7%, 2004= Profit margin: 2005= 8.7%, 2004= 7.7%7.7%

Asset turnover:2005= .86, 2004= .87Asset turnover:2005= .86, 2004= .87 Return on assets:2005= 7.5%, 2004= Return on assets:2005= 7.5%, 2004=

6.7%6.7% Return on equity:2005= 23.9%, 2004= Return on equity:2005= 23.9%, 2004=

23.6%23.6%

IBM: Financial AnalysisIBM: Financial AnalysisProfitability Ratios con’t.Profitability Ratios con’t.

The increase in Profit Margin is indicative The increase in Profit Margin is indicative of an increase in efficiency with respect to of an increase in efficiency with respect to each dollar spent.each dollar spent.

Asset turnover has remained relatively Asset turnover has remained relatively unchanged.unchanged.

An increase in the Return on Assets shows An increase in the Return on Assets shows the companies solid profitability.the companies solid profitability.

A slight increase in the Return on Equity A slight increase in the Return on Equity shows the gain in profitability of shows the gain in profitability of stockholders investments.stockholders investments.

IBM: Financial AnalysisIBM: Financial AnalysisSolvency RatioSolvency Ratio

Debt to equity: 2005= 3.19, 2004= 3.5Debt to equity: 2005= 3.19, 2004= 3.5 Although IBM’s stockholders own more Although IBM’s stockholders own more

of the company than in the past, the of the company than in the past, the creditors still own a majority.creditors still own a majority.

IBM: Financial AnalysisIBM: Financial AnalysisMarket Strength RatiosMarket Strength Ratios

Price/earnings per share: 2005= Price/earnings per share: 2005= 15.48, 2004= 16.4. Investor 15.48, 2004= 16.4. Investor confidence has declined.confidence has declined.

Dividend yield: 2005= .07, 2004= 1. Dividend yield: 2005= .07, 2004= 1. This stocks current return to an This stocks current return to an investor has declined.investor has declined.