# To the Stockholders

IBM's worldwide business health is strong despite a difficult year for the computer industry.

An uncertain North American economy, currency fluctuations, sluggish capital spending by our customers, and an early 1985 pause in high-end processor installations had an adverse impact on IBM's performance for the full-year 1985. However, our quarterly results improved each quarter during 1985.

Worldwide net earnings for the year ended December 31, 1985, were $6,555 million, down 0.4 percent from 1984's earnings of $6,582 million. Net earnings were $10.67 per share in 1985, compared with $10.77 per share for the same period in 1984. The after-tax margin was 13.1 percent in 1985, compared with 14.3 percent in 1984. Average shares outstanding were 614.1 million in 1985 and 611.4 million in 1984.

Earnings before income taxes were $11,619 million in 1985 and $11,623 million in 1984. Before-tax margins were 23.2 percent in 1985 and 25.3 percent in 1984.

Worldwide gross income was $50,056 million in 1985, up 9.0 percent from the prior year's $45,937 million. Even though currency rates had a favorable effect in the second half of 1985, the full-year impact was still negative compared with 1984. It is estimated that if currency rates had remained the same as in 1984, gross income would have been $400 million higher in 1985, yielding a revenue growth rate of 9.8 percent, while net earnings would have been $40 million higher, yielding an increase of 0.2 percent.

Gross income from non-U.S. operations in 1985, included in consolidated results, was $21,545 million, up 16.0 percent from $18,566 million in 1984. Non-U.S. net earnings of $3,078 million in 1985 showed an increase of 19.0 percent over 1984's earnings of $2,587 million.

As IBM anticipated, the quarter ended December 31, 1985, was particularly strong with net earnings of $2,681 million, up 23.4 percent over 1984's fourth-quarter earnings of $2,172 million. Per share earnings were $4.36, compared with $3.55 for the 1984 period. Gross income for the fourth quarter of 1985 was $17,155 million, compared with $14,496 million for the fourth quarter of 1984, an increase of 18.4 percent.

Total orders for 1985 showed good growth over the prior year. Worldwide shipments for the full year were higher than in 1984, with substantially all of the growth continuing to be in the non-U.S. portions of the business. Fourth-quarter shipment growth was due mostly to the strength of the 390 processors and high-end storage devices, along with growth in typewriters, printers and personal computers.

There is an absence of convincing evidence the North American economy is showing sustained improvement, and we are approaching 1986 with caution. We are managing our costs, expenses and other resources carefully. Product costs and expenses in 1985 reflect increases in productivity over the prior year, and we expect this direction to continue throughout 1986.

We remain optimistic about the future of IBM and the overall computer industry. Our continuing investments in research, development and facilities have positioned us for future growth.

**Resilient Performance**

IBM's results gained strength steadily during the course of 1985, reaching a peak in the fourth quarter. In a trying year for our industry, as well

Paul J. Rizzo, vice chairman, John R. Opel, chairman of the board, and John F. Akers, president and chief executive officer