2020
Annual Report
Dear IBM Investor:
Today your
company is
positioned to lead
as we enter the era
of hybrid cloud
and AI. As I write
to you, the world is
still experiencing
disruption as a
result of the global
pandemic.
What we have witnessed over the past year is an acceleration
of digital transformation. Every company in every industry
wants to build a much stronger digital foundation to
fundamentally change the way its business works. There is
no going back. In the next two to three years, we expect to see
digital transformation at a rate that, before 2020, we thought
would take 5 to 10 years.
Perhaps the most profound and exciting change our clients
are experiencing is the adoption of new business models
based on digital technologies that IBM is building. This is
evident whether you look at the use of AI-powered assistants
to offset the massive increase of requests fl ooding call
centers, the meteoric rise of telemedicine, or the use of hybrid
cloud to build rich, personalized and secure experiences in
areas like digital banking.
As I will describe to you in this letter, we have made decisive
moves to help our clients thrive by tapping into the immense
power of hybrid cloud and AI. My confi dence in our ability
to exit this turbulent period stronger is grounded in the
strength of our strategy, the progress of our transformation,
and the talent and resilience of IBMers around the world.
2020 performance
For the year, we generated $73.6 billion of revenue,
a decline of 4 percent excluding the impact of currency and
divestitures. Much of this refl ects the broader uncertainty
of the macro environment, which also affects our clients.
The urgency for digital transformation continues to fuel
momentum for our business. Our cloud-related revenue grew
20 percent to $25.1 billion excluding the impact of currency
and divestitures, and now represents over one-third of our
total revenue.
Red Hat was a key driver with normalized revenue growth
of 18 percent in 2020 and a backlog topping $5 billion
for the fi rst time at year end. Red Hat, together with our
modernized Cloud Pak solutions, delivered overall software
revenue growth for the year. Global Business Services (GBS)
cloud revenue grew at a double-digit rate as we focused
on modernizing clients’ applications and reimagining their
workfl ows with AI. Global Technology Services helped
clients navigate the unprecedented volatility in their own
business volumes, ending the year with strong contract
renewals and new client additions. With IBM Systems,
as always, performance refl ects product cycles. Even with
a very successful new product introduction in the second
half of 2019, IBM Z revenue grew in 2020, with the z15 now
shipping the largest capacity in the platform’s history.
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IBM 2020 Annual Report
The fundamentals across our business continue to be
strong. Our operating gross profi t margin expanded 130 basis
points to over 49 percent, an indication of the value our
clients derive from our offerings. Operating net income was
$7.8 billion, even after a signifi cant charge for structural
actions to improve our go-forward position.
Everywhere you look today, businesses have an acute need for
speed to market, fl exibility and nimbleness, and continuous
innovation. On these, hybrid cloud delivers. In fact, clients
fi nd that choosing a hybrid cloud approach is 2.5 times more
valuable than relying on public cloud alone.
In this environment we also took actions to enhance our
balance sheet and liquidity, resulting in a stronger fi nancial
position. Free cash fl ow is the fuel for our growth, and for
the year we generated a solid $18.2 billion of net cash from
operations and free cash fl ow of $10.8 billion. We focused
our captive fi nancing business on our hybrid cloud and
AI strategy, reducing our external fi nancing needs. We
continued to return capital to our shareholders in the form
of $5.8 billion in dividends. We raised the dividend for the
25th consecutive year in an uninterrupted 105 years of
paying a dividend, while continuing to invest in technologies,
skills, and ecosystems to expand our capabilities and
accelerate future growth.
The right strategy for digital transformation
Hybrid cloud and AI are the two next great shifts in the
technology landscape, and IBM is positioning itself to play
a key role in this swift and massive transformation. We see
the hybrid cloud opportunity at $1 trillion. Most of it is still
ahead of us, as less than 25 percent of workloads have moved
to public clouds thus far. Meanwhile, the current enterprise
deployment rate of AI is only in the single digits.
To seize the immense opportunity that this represents,
our approach is platform-centric. Linux, Containers and
Kubernetes are the foundation of our hybrid cloud platform
with Red Hat OpenShift as our core product, delivering
all of these attributes and more. We have a vast software
portfolio modernized to run cloud-native anywhere. Our GBS
expertise is a key factor in driving consumption and is
currently helping hundreds of major clients on their hybrid
cloud journeys. All of these capabilities are supported by our
systems and cloud infrastructure, which allows us to build
industry-specifi c clouds.
Based on this foundation, we are successfully leveraging
Red Hat as a unique platform to address what our global,
complex and highly regulated clients need: a hybrid cloud
platform that is open, fl exible and secure. Our hybrid
cloud approach lets clients connect their back offi ce to their
front offi ce, modernize mission-critical workloads, build
cloud-native apps, and securely deploy and manage data
and applications across various IT environments.
Gaining momentum
One of the best indicators of progress is to look at the pace
of client consumption. On that front, we are making good
headway. We now have more than 2,800 clients using our
hybrid cloud platform, up 40 percent over the past year,
as they leverage it to accelerate their own digital
transformation journeys.
Energy industry services, software and equipment leader
Schlumberger is expanding customer access to its AI-
powered exploration and production solutions and making
its data platform hybrid cloud-friendly, exclusively through
OpenShift. This engagement is also driving business for
Cloud Paks, IBM Cloud and GBS. Delta Air Lines is using
OpenShift, Cloud Paks and GBS expertise to modernize its
digital customer experience.
IBM has built two industry clouds designed to tackle the
specifi c needs of mission-critical and highly regulated
industries. Our Cloud for Financial Services added key
partners in 2020, such as Adobe, Infosys Finacle, Persistent
Systems and many others. Some of the world’s largest banks
signed on, including Bank of America, BNP Paribas and
MUFG Bank.
In 2020, we launched our Cloud for Telecommunications.
So far, more than 35 partners have joined. As a strategic
partner, Samsung is working with IBM and Red Hat to develop
next-generation 5G and mobile edge device solutions for
private networks. Separately, we are helping companies like
Vodafone Idea, Verizon and Bharti Airtel transform their IT
and telecom network operations.
Clients are moving to deploy AI at scale. More than 40,000
clients have turned to IBM to unlock value from their data.
IBM’s AI platform is differentiated by automation, natural
language processing and trust. It is the only AI platform that
can run anywhere—on premise, private cloud and public
cloud. Clients across industries are using it to infuse AI into
their core business processes, such as hiring, supply chains
and customer service.
Putting Watson Assistant, natural language processing and
enterprise AI search capabilities to work as multilingual
virtual agents, IBM helped Children’s Healthcare of Atlanta
create the “COVID-19 Pediatric Assessment Tool” for parents.
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Using the OpenPages with Watson platform, we are helping
clients to manage risk more effectively and effi ciently across
their global operations by consolidating audit, risk, and
control processes and procedures.
Trust is table stakes for the expansion of data and AI in
daily business processes. IBM clients’ data is their data, and
their insights are their insights. That commitment and our
industry-leading encryption technology differentiate our
AI in the marketplace.
Decisive moves for future growth
Over the past year, we have made a series of decisive moves
to support our hybrid cloud and AI strategy.
We announced the separation of our managed infrastructure
services business in October 2020. In a business where
scale matters, “NewCo” will be the biggest in its fi eld, with
more than 4,600 clients at the start, including 75 percent of
the Fortune 100. Our two companies will continue to share
a strong bond as NewCo will remain IBM’s preferred partner
for infrastructure management.
In 2020, we closed seven strategic acquisitions. All are
designed to strengthen our hybrid cloud and AI portfolio.
They enhance our software, expand our GBS capabilities
in implementation and consulting, augment our security
offerings, and support our go-to-market to drive hybrid
cloud consumption.
To accelerate consumption of our hybrid cloud platform, we
have elevated the role of partners and also rapidly expanded
our ecosystem by adding hundreds of new partnerships
with global system integrators, independent software vendors
and major third-party software partners. We are investing
$1 billion in our ecosystem so that our partners can play a
much bigger role in fulfi lling the many needs of our clients.
Partners are helping broaden the reach of our software
portfolio. For example, we collaborated with Salesforce to build
our Digital Health Pass, which incorporates data such as
temperature checks, COVID-19 test results and vaccine status
to help organizations safely reopen. The Digital Health Pass is
combined with the power of Salesforce’s customer relationship
management solutions and IBM’s technologies, such as hybrid
cloud, AI and Blockchain. Together we are also building a new
vaccine management platform for Ireland’s Health Service
Executive. Our partnership with ServiceNow on Watson AIOps
supports our continued leadership in transformative AI by
helping clients automate IT operations and reduce risk.
Arvind Krishna
Chairman and
Chief Executive Offi cer
Thank you to former Executive Chairman
Ginni Rometty. Under her leadership
we laid the foundation for the hybrid cloud
and AI strategy that will drive the engine
of our clients’ success.
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IBM 2020 Annual Report
In addition, we are aligning our go-to-market model with
our hybrid cloud and AI approach, implementing a simplifi ed
client segmentation, putting IBM Garage at the center of our
experiential sales process and working more closely with
ecosystem partners so they can deliver more value to clients.
Trust is our license to operate, and for more than a century
IBM has earned the trust of our clients and society. We
continue to earn it through projects such as our work with the
Vatican to develop principles for ethical AI, and our leadership
role in data privacy reinforced by the IBM Policy Lab.
Responsible stewardship
Being a responsible steward of technology is core to
IBM culture and has never been more important than
it was in 2020.
Emerging stronger
I am proud of the work IBMers have done to bring us to this
point, and I am grateful to you, our shareholders, for your
support on our journey.
We saw how our commitment to Good Tech can make a
difference during a global emergency. We organized the
High-Performance Computing Consortium to put our fastest
computers at the disposal of scientists around the world
working to understand and combat COVID-19. IBM’s Watson
Assistant for Citizens helped dozens of governments at all
levels disseminate information about COVID-19 testing and
best practices.
As I look back, for me as for so many other IBMers, 2020
has put the spotlight on IBM’s essential role for our clients.
IBM is the backbone of some of the most critical systems
that keep the world running. Our technologies and services
help banks process credit card transactions, businesses
run supply chains, telcos connect customers, healthcare
providers improve patient care, and companies and cities
tackle cyber threats.
As protesters took to the streets to condemn systemic
racism, we sent a letter to Congress explaining our decision
to abandon facial recognition software, prompting other tech
companies to follow suit. Internally we launched several
social justice initiatives including Emb(race), a program
highlighting the experiences of Black IBMers, and a program
increasing our partnerships with historically Black colleges
and universities (HBCUs). We created the position of SVP of
Transformation and Culture, strengthening our transparency
around and commitment to fostering the culture of diversity
and inclusion that is the foundation of IBM’s success.
The climate crisis is one of the most urgent issues of our
time. IBM has been a leader in corporate sustainability for
half a century. Our fi rst corporate environmental policy
statement dates back to 1971. Since 1990, we have shared
our progress in managing waste, conserving energy, using
renewable electricity and reducing carbon dioxide emissions.
We are taking other steps to advance our environmental
leadership. We are setting a new goal to reach net zero
greenhouse gas emissions by 2030 to help address
the climate crisis. As a founding member of the Climate
Leadership Council, we also support a carbon tax that
will reduce carbon emissions globally through market-
based incentives.
IBM’s essential and transformative role in the world is a
reminder that few companies have the trust, talent and
ingenuity to help clients solve their greatest challenges
the way that your company can. IBM is reshaping its future
as a hybrid cloud and AI platform company. I am excited
about our ability to emerge stronger as the world recovers
from the effects of the global public health crisis, and the
possibilities ahead as our clients accelerate their digital
transformation journeys.
Arvind Krishna
Chairman and Chief Executive Offi cer
In an effort to provide additional and useful information regarding the company’s
fi nancial results and other fi nancial information, as determined by generally accepted
accounting principles (GAAP), these materials contain non-GAAP fi nancial measures
on a continuing operations basis, including revenue adjusted for divested businesses
and constant currency, free cash flow, and other “operating” fi nancial measures
including operating gross profi t margin, operating earnings, operating earnings per
share and operating net income. The rationale for management’s use of this non-GAAP
information is included on pages 18, 19, and 57 of the company’s 2020 Annual Report,
which is Exhibit 13 to the Form 10-K submitted with the SEC on February 23, 2021.
For reconciliation of these non-GAAP fi nancial measures to GAAP and other
information, please refer to pages 21, 45, and 58 of the company’s 2020 Annual Report.
These materials also contain year-to-year change in revenue for Red Hat, normalized
for historical comparability. The rationale for management’s use of this non-GAAP
fi nancial measure and its reconciliation to GAAP are respectively included as
Exhibits 99.2 and 99.1 to the company’s Form 8-K submitted with the SEC on
January 21, 2021.
Hybrid cloud and AI
are IBM’s clear path
to growth
At the beginning of 2020, less than 25 percent
of mission-critical workloads had moved to
the cloud. As companies sought to equip their
employees to work remotely during the pandemic,
many sped up the pace of their technological
changes. They’ve realized the sooner they can
make the jump to cloud and cloud-enabled AI,
the better. This trend will continue until the
75 percent of workloads that were left behind
migrate to hybrid cloud.
IBM is doubling down on its investment in hybrid
cloud and AI because we see it as the best way to
help our customers on this journey. They want the
speed, effi ciency and innovation that comes with
moving to the cloud, without having to reinvent
their entire IT infrastructure. That’s what hybrid
cloud is all about.
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“Over the last decade, IBM has
transformed itself to meet the
mission-critical needs of our
clients. Today, IBM is laser-
focused on open hybrid cloud—
a $1 trillion market opportunity.
Our hybrid cloud platform
provides a full stack of
capabilities to clients including
our AI-enabled software
portfolio, cloud transformation
services, systems, security
and the IBM public cloud.”
Jim Whitehurst
President, IBM
IBM is uniquely qualifi ed to deliver what our
clients need and want. In Red Hat OpenShift
we have the leading open source hybrid cloud
platform. Add our Cloud Paks, and we can
transform complex legacy architecture into a
completely secure integrated platform. Our
clients benefi t from the seamless automation,
data mining and analysis, development of cloud-
native applications and multicloud management
our platform provides. Our services team brings
the expertise to make migration to the hybrid
cloud easy and a custom fi t for each client.
Our combined offerings are the recipe for our
clients’ success and IBM’s growth. Our industry-
leading security makes the hybrid cloud safe
and compliant for heavily regulated enterprises
like banks, telcos and energy companies.
Our automation frees up people for business
transformation. Our cloud-native AI integrates
data from across the IT infrastructure, generating
new insights into processes and outcomes that
create real business value. IBM’s services team
has the industry and technological expertise to
help our clients reinvent themselves using our
platform and the applications that run on it, from
banking to telecoms to retail to energy to just
about anything.
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IBM 2020 Annual Report
IBM and Red Hat—
leading in hybrid
cloud
IBM’s acquisition of Red Hat has been a game changer for
enterprise computing. Red Hat’s software underpins the most
flexible, secure and cost-effective platform for running mission-
critical workloads—the hybrid cloud.
Red Hat OpenShift is the leading enterprise Kubernetes
platform —used across industries as the foundation for cloud-
native applications. With OpenShift, customers can choose the
right environment for workloads and run applications seamlessly
across any kind of architecture, whether on-premise, public
cloud, private cloud or at the edge.
OpenShift is also the platform for IBM Cloud Paks, offering
clients containerized solutions for data, integration, automation,
multicloud management and security. Our focus is on helping
large enterprises succeed and on removing complexity and risk
from their digital journeys.
In the fi nancial services sector, our hybrid cloud platform is
helping banks around the world roll out new digital services while
providing built-in security that satisfi es data protection regulations.
Technology from IBM Cloud and Red Hat is enabling Banco
Sabadell’s 100 percent digital model in Mexico. CaixaBank, Spain’s
leading fi nancial group in terms of retail and digital banking, is
building a hybrid cloud infrastructure using Red Hat OpenShift.
As 5G becomes more prevalent, telecommunications providers
need to scale quickly to support growing volumes of data,
voice and multimedia services. Indian telco Vodafone Idea
is transforming its network into an open hybrid cloud platform
using IBM’s Watson AI and Red Hat Ansible Automation
Platform to improve the cost and quality of its core network
delivery. Bharti Airtel is leveraging IBM and Red Hat to build
a more effi cient, flexible network cloud for core operations
and new digital services.
Red Hat ecosystem partners are helping our clients get more
out of our platform. In 2020, IBM and Red Hat introduced
Red Hat Marketplace, the fi rst enterprise software and service
marketplace designed for hybrid cloud computing. Red Hat
Marketplace has one of the largest curated collections of tools
and services developers need to build cloud-native applications.
“A hybrid cloud foundation
built on open source offers
the fl exibility, acceleration
and innovation that digital
transformation requires.
For most corporations, hybrid
cloud is the only practical way
to the cloud.”
Paul Cormier
President and
Chief Executive Offi cer,
Red Hat
Unlocking the power
of client data
Throughout 2020, IBM helped organizations unlock the power
of their data to drive measurable results at scale. Clients deployed
our hybrid cloud software to modernize their IT landscapes, use
data to predict and shape future outcomes, automate workflows,
enhance customer service and secure their organizations
against cyber threats.
AI for business requires mastery of automation, natural
language processing and trust. New Watson Natural Language
Understanding capabilities from Project Debater will help
businesses analyze linguistic nuances, while new AI FactSheets
for Watson Studio in Cloud Pak for Data will increase the
transparency and explainability of AI models. Trust is critical
to AI adoption. We help our clients understand how AI models
make decisions, provide transparency into how AI technology
is built, and govern and champion the responsible use of AI.
Additionally, the introduction of Watson AIOps and the
acquisitions of WDG Automation and Instana expanded our
AI-powered automation capabilities. Partnerships with Box,
Cloudera, MongoDB and ServiceNow grew our AI ecosystem.
We have more than 40,000 Watson client engagements across
20 industries, where market leaders are using IBM Watson to
work smarter. EY is using IBM Watson Discovery to transform
M&A due diligence with a custom natural language processing
model that delivers insights into competitive deal processes.
Deutsche Lufthansa AG is using IBM Watson Studio,
IBM Watson Machine Learning and IBM Cloud Pak for Data
to achieve operational excellence and enhance customer and
employee experiences. And with our business partner EquBot,
we helped HSBC develop the AI-powered US equity index AiPEX,
a fi rst-of-its-kind tool that analyzes vast amounts of publicly
available data—from company announcements to satellite
images of store parking lots—to identify potential growth stocks.
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Navigating the pandemic
with Watson Assistant
Organizations turned to Watson Assistant, IBM’s AI-powered
virtual agent for business, to fi eld COVID-related questions
from customers, employees and the general public. Use of
Watson Assistant surged 64 percent between February and
November 2020.
Burger King Brazil customized Watson Assistant to connect
16,000 employees across 800 restaurants to information
on HR with speed, reliability and security. Using Watson
Assistant and Watson Discovery, GlaxoSmithKline launched
16 virtual assistants that answered 83,000 questions in a
single three-month span. GM Financial used Watson Assistant
to manage 50 to 60 percent of live chat requests when the
pandemic hit.
IBM trained Watson Assistant to answer COVID-related
questions, and offered it free of charge to hospitals, governments
and other organizations for 90 days. The Royal Marsden,
a leading London-based cancer center, used its virtual agent
to give employees consistent information about the virus and
related workplace guidance. The Government of Colombia
created a virtual agent that facilitated over 11,000 queries
per month on travel guidance and virus prevention. And ahead
of the November elections, the Idaho Secretary of State
used Watson Assistant to answer logistical questions from
its 900,000-plus voters.
“We want to help clients
transform their businesses—
leveraging our hybrid cloud and
AI software to modernize their
applications, improve customer
service and dramatically cut
costs. We’ll continue working
across our ecosystem to increase
adoption of our platform, and
help our clients fi nd innovative
ways to fuel their digital
transformations.”
Rob Thomas
Senior Vice President,
IBM Cloud and Data Platform
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IBM 2020 Annual Report
Creating intelligent
workflows
IBM Global Business Services (GBS) helps organizations reinvent
the way they work. With intelligent workflows, businesses can
reshape core functions across their organizations—from supply
chains to recruitment and bill processing. Running on the hybrid
cloud and powered by IBM’s leading AI automation software
and analytics, intelligent workflows connect data from disparate
systems, streamline processes and generate actionable insights.
For example, 12 of Europe’s largest banks worked with IBM
consultants to co-create a blockchain-based trade fi nance
platform called we.trade. Small- and medium-sized businesses
benefi t from being able to collaborate and trade across a
transparent and secure environment. Transaction information
is authorized and shared only with the appropriate parties across
the platform via smart contracts. Along with reduced risk and
increased regulatory compliance for all users, we.trade has
reported up to 80 percent savings in transaction processing.
In just fi ve days, IBM helped TSB Bank in the United Kingdom
launch its web-based TSB Smart Agent to allow immediate
customer access to applications for repayment deferrals on
mortgages and loans during the pandemic. The AI-driven
TSB Smart Agent complemented employee actions to respond
to more than 40,000 customer requests during the fi rst several
weeks of operation.
Rising to strategic needs and multiple challenges caused
by brushfi res and COVID-19, leading telecommunications
company Telstra and IBM co-created a cognitive supply chain
control tower, an integrated supply chain platform and agile
work protocols to serve its operations reliably.
Mikhel Ruia, Managing Director
of Glenmuir, a British golf clothing
manufacturer and member of
we.trade via its bank, HSBC.
“An open, fl exible, hybrid approach
to cloud gives businesses the
freedom to choose from multiple
providers to best meet their
business and IT needs. As we
help clients shift to hybrid cloud,
we see tremendous benefi ts from
open innovation. Build once, run
anywhere. Innovate anywhere
with anyone’s technology.
That’s the beauty of a hybrid
cloud platform.”
John Granger
Senior Vice President,
Hybrid Cloud Services and
Chief Operating Offi cer,
IBM Global Business Services
“2020 was one of the most
challenging periods in history
for businesses, with 6 out of
10 organizations accelerating
their digital transformations.
Recognizing that future
disruptions are inevitable and
unpredictable, now is the time
to create intelligent workfl ows
that streamline processes
and help people manage these
tectonic shifts.”
Mark Foster
Senior Vice President,
IBM Services
“NewCo”: a trusted partner to
the world’s global enterprises
To clarify our approach to the $1 trillion market opportunity for
hybrid cloud growth, IBM announced the spin-off of our market-
leading managed infrastructure services unit, “NewCo” (to be
named later).
The spin-off will create two market-leading companies focused
on what they do best. For IBM that means concentrating on its
hybrid cloud platform, AI capabilities and consulting services to
help clients on their digital transformation journeys. NewCo will
pursue a $500 billion market opportunity in managed
infrastructure services.
NewCo—with more than 4,600 technology-intensive, highly
regulated clients in 115 countries, a backlog of $60 billion and
more than twice the scale of its nearest competitor—will have
greater agility to design, run and modernize the infrastructures
of the world’s most important organizations.
Both companies will be on an improved growth trajectory
with greater abilities to partner and capture new opportunities—
creating value for clients and shareholders. Operating
independently, IBM and NewCo will capitalize on their
respective strengths.
“The spin-off of NewCo is an
opportunity that presents
exciting potential. We are already
the number one managed
infrastructure services provider
in the world. Our unmatched
talent, the breadth of our
services, our ecosystem of
partners and our deep global
client relationships should
position us well for the future.”
Martin Schroeter
CEO, NewCo
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Driving innovation
and resilience
Maintaining business continuity, enabling remote workforces and
strengthening virtual customer engagement were all critical in
2020. In response, IBM Global Technology Services (GTS) rallied
for go-to-market coverage—taking client service to the next level
to keep businesses up and running while facilitating their
migrations to hybrid cloud.
As GTS focused its service offerings to support hybrid cloud
and AI, industry analysts took notice. NelsonHall gave IBM top
marks for addressing both immediate and future client needs.
Everest joined all analysts in naming IBM “a leader in delivery
automation through intelligent automation.” And Forrester
ranked IBM as a leader in disaster recovery as a service.* For
example, National Telecom Public Co., Ltd. is using IBM
open-source software support services to help hotels control
virus spread as Thailand reopens its borders.
But outstanding client services is what really defi ned GTS in
2020. Hybrid cloud technology allows manufacturers, logistics
companies, governments, retailers and service providers, to work
together across a multitude of different computing environments.
As a result, GTS saw signifi cant demand for a hybrid cloud
approach to reinventing supply chains in 2020. For example,
IBM signed a multi-year agreement with Coca-Cola European
Partners, to use the power of the open hybrid cloud, combined
with the expertise of IBM Services, to transform its soft drink
supply chain.
Adopting a hybrid cloud strategy, South Korean credit card issuer
Lotte Card turned to GTS to migrate and manage its mission-
critical enterprise systems. Using cloud-native technology from
IBM and Red Hat OpenShift, Lotte Card accelerated customer
workload processing by 300 percent. As the speed of digital
transformation increases, the flexibility of cloud technologies
over traditional IT infrastructures will allow Lotte Card to
respond with greater agility to rapidly changing market
conditions, and to better serve its customers in near real time.
* The Forrester Wave™: Disaster Recovery-As-A-Service Providers, Q2 2019
by Naveen Chhabra with Glenn O’Donnell, Amanda Lipson and Bill Nagel. April 2019.
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IBM 2020 Annual Report
As the need for digital transformation accelerated in 2020,
it became clear that businesses benefi ted the most when they
were supported by an ecosystem of partners that continually
provided the best technologies and industry expertise.
That’s why IBM has committed to a $1 billion investment
in its hybrid cloud ecosystem over the next three years. This
investment has already begun supporting a coalition of best-
of-breed global system integrators and independent software
vendors that are helping clients migrate their mission-critical
workloads to IBM’s hybrid cloud platform.
More than 85 new partners from a wide range of technology
and industry backgrounds joined the ecosystem in 2020—
reflecting IBM’s ability to leverage long-standing relationships in
the technology community. A key part of this ecosystem, Red Hat
Marketplace provides clients with greater scale, resources
and capabilities, reinforcing the value of the OpenShift hybrid
cloud platform.
Enhancing the client
experience through
ecosystems
“We’re dedicated to fostering
a culture of openness and
collaboration among our
ecosystem partners while
ensuring that their data is
not compromised. By investing
in our partners and working
together, we will drive success
for our clients, for our partners
and for IBM.”
Bob Lord
Senior Vice President,
Worldwide Ecosystems
and Blockchain
Uniting the developer
ecosystem to solve global
problems
Since its inception in 2018, the annual Call for Code competition
to create open source technology to help tackle the world’s
biggest challenges has scaled to engage more than 400,000
developers and problem solvers across 179 nations.
The 2020 challenge focused on managing the effects of
climate change and fi ghting COVID-19. The winning application
from Agrolly is built on IBM Cloud Object Storage, IBM Watson
Studio and IBM Watson Assistant. It connects small farmers
to personalized, real-time data from The Weather Company
(an IBM business) to help them cope with climate change. The
competition also yielded promising COVID-19 solutions, some
of which may be going to market.
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Adobe, a leader in multimedia and creative software, is
partnering with Red Hat and IBM to focus on instilling trust
through the customer experience for businesses in regulated
industries. The IBM iX digital and design consultancy will extend
its offerings across Adobe’s core enterprise applications.
The global leader in customer relationship management (CRM)
platforms, Salesforce is working with IBM to help organizations
safely reopen and provide individuals with a verifi able way to
manage and share their vaccination and health status.
IBM advanced its long-standing partnership with enterprise
application software innovator SAP by contributing an industry
cloud solution focused on industrial manufacturing. The aim is
to help companies rewire their organizations to create effi cient,
automated business processes that increase productivity and
customer satisfaction.
A pacesetter in digital workflow software, ServiceNow is
collaborating with IBM to use Watson AIOps and ServiceNow’s
intelligent workflow capabilities to help companies reduce
operational risk and lower costs through automation.
Leading systems integrator Wipro expanded its partnership
with IBM to help businesses securely migrate and manage
mission-critical workloads and cloud-native applications on
IBM’s hybrid cloud platform.
Driving growth for our clients,
our partners and IBM
In 2020, IBM adopted a single, consistent client engagement
model across hybrid cloud, software, services and systems—
giving clients greater access to Red Hat and acting as one team
with a singular focus on client success. Clients want to consume
our technology more easily, with greater access to our unmatched
technical and industry expertise and business value creation
earlier in the process. In response, we have intensifi ed our focus
on experiential selling—both digitally and through IBM Garage,
where we co-create, co-execute and co-operate with clients to
give them clear visibility into our capabilities and their projected
business results.
We also increased investment in our ecosystem of system
integrators and software vendors so they can play a much bigger
role in client fulfi llment in ways that drive mutual success
for customers, partners and IBM. We’re giving our partners the
access they need to experience our hybrid cloud platform and
develop solutions that speak directly to client needs.
“IBM’s streamlined engagement
model simplifi es the way clients
interact with us, experience our
differentiated technology and
service offerings, leverage our
unmatched industry expertise,
and realize tangible business
value. By following these
principles, IBM will open new
market opportunities as we give
more clients the confi dence to
use their data for competitive
advantage.”
Bridget van Kralingen
Senior Vice President,
Global Markets
12
IBM 2020 Annual Report
The industry
standard for cloud
and enterprise IT
As governments and regulated industries migrate their mission-
critical workloads to hybrid cloud, they must be confi dent in the
safety, security and reliability of the IT infrastructures they rely
on, and know that their systems are built to adapt to client
needs—not vice versa. IBM’s industry-optimized clouds enable
clients to focus on their business processes instead of on IT
and applications.
These are highly focused clouds designed with a deep
understanding of particular regulatory environments. Industry-
specifi c features and controls including identity management,
access management and confi guration management are built in
so that any solutions clients develop or deploy on these clouds
automatically comply with industry regulations.
In 2020, we brought some of the world’s largest banks onto
IBM Cloud for Financial Services, including BNP Paribas and
MUFG Bank, and expanded our fi nancial services ecosystem.
We unveiled the IBM Cloud for Telecommunications and added
35 partners to our telecommunications ecosystem. We also
broadened our strategic partnership with Samsung on 5G
technology. Using IBM Cloud Satellite, which runs on Red Hat
OpenShift, IBM is also collaborating with AT&T to help
businesses deploy applications to any environment where
their data resides—including the network edge.
IBM’s Systems portfolio delivers critical value to our enterprise
client base, in support of our hybrid cloud strategy. IBM’s z15
saw record-setting volumes on Linux as clients leveraged
Red Hat OpenShift, Ansible and our cloud-native offerings in
response to the pandemic. Our high-value, secure and scalable
platform was more relevant than ever. In fi nancial services,
for example, z15 helped our clients scale capacity quickly and
remotely, enabling them to navigate unprecedented market
volatility. 2020 also marked the 20th anniversary of Linux on
IBM Z, a milestone of innovation for a platform that is attracting
a new generation of developers to help our clients anticipate
and overcome future challenges.
“With Red Hat OpenShift on
IBM Z and LinuxONE servers,
clients can modernize their
applications for the hybrid cloud
and determine their own IT
strategies to optimize the value of
their existing IT infrastructure.
They can maintain security and
scalability in the public cloud,
and enjoy ‘write once/run
anywhere’ application portability
in an environment that protects
sensitive data.”
Tom Rosamilia
Senior Vice President,
IBM Systems and Chairman,
North America
“IBM is making digital
transformation increasingly
accessible by creating industry-
specifi c clouds, which unleash
enormous value, especially
for regulated industries like
banking, government and telco.
By building this capacity, we
open our clients to digital
transformation that can change
how they serve their customers
and think about their business,
while reducing risk to the
fi nancial system as a whole.”
Howard Boville
Senior Vice President,
IBM Hybrid Cloud
13
Applying science and
technology to serve client
needs in 2020
New milestones
for IBM Research
For the 28th straight year, IBM led the industry in US patents—
the majority of them in AI, cloud and hybrid cloud, quantum
computing, and security. IBM Research continues to build
on our natural language processing and encryption innovations
to deliver real-world commercial results.
In 2020, IBM Research doubled down on transformative
innovations. Chief among these is quantum computing, which
uses quantum physics principles to solve problems far faster
than binary computing. Complementing classical computing,
quantum could help tackle some of our toughest challenges.
An AI model from IBM and Pfi zer uses written text samples to
help predict the eventual onset of Alzheimer’s disease. The
model uses IBM’s hybrid cloud platform, which enables the
automated collection and analysis of global data.
IBM led the global Urgency of Science (#urgencyofscience)
campaign, joined by numerous private and public sector
partners.
IBM and AMD entered a Confi dential Computing Collaboration
agreement to foster security in hybrid cloud and high-
performance computing environments.
IBM released RoboRXN, a free, cloud-disseminated tool that
uses AI, neural translation and machine automation to help
scientists more accurately predict chemical reactions.
IBM leads in quantum computing, with nearly 300,000 registered
users and more than 140 organizations in our network. Among
them, Anthem, Inc. is studying how quantum may further
improve diagnostic accuracy for personalized healthcare
treatments; Delta Air Lines is exploring quantum’s potential to
transform customer experiences; at Keio University’s Network
Hub (Japan), Mitsubishi Chemical and JSR are researching
ways to reduce quantum computation errors to help manufacture
more effi cient OLED devices; and the University of Tokyo and
Fraunhofer-Gesellschaft (Germany) will operate the fi rst
non-US installations of IBM Quantum System One computers.
By 2023, IBM will produce a quantum processor with more
than 1,000 qubits—giving us a potential advantage in solving
problems faster than even today’s fastest supercomputers. We
have also developed quantum-safe security software for hybrid
cloud, and have partnered with historically Black colleges and
universities (HBCUs) to help prepare quantum’s next generation.
“With quantum, we’re witnessing
the most exciting development in
computing in 60 years. It will be
a revolution in the way science is
practiced, the rate of accelerated
discovery and a whole new class
of intelligent mission-critical
applications.”
Darío Gil
Senior Vice President and
Director of IBM Research
“Research is a critical component
of IBM’s commitment to
delighting our clients with the
solutions and industry expertise
they need to compete and grow.
We are optimally positioned
for growth with our hybrid
cloud, AI and services offerings.
Emerging technologies like
quantum—along with our
ongoing innovations in security
and energy effi ciency—will
supercharge the next phase of our
clients’ digital transformations
as they derive even greater
business value from their data.”
Jim Whitehurst
President, IBM
14
IBM 2020 Annual Report
Transformation
and culture
Having the right culture gives meaning to IBM’s mission,
fosters growth and innovation, and contributes directly to our
delivery of differentiated value to our clients. While dedicating
themselves to client service in 2020, IBMers also shared their
thoughts—through company-wide conversations, via our annual
engagement survey and directly with our CEO—about evolving
our culture in four key areas:
Growth—obsessing over our clients’ growth; winning in the
marketplace to drive growth for IBM; providing development
opportunities to help IBMers succeed in their careers
Inclusion—building and developing empathetic
relationships; fostering meaningful collaborations;
embracing flexibility; listening
IBM’s commitment to
purpose and values in 2020
In 2020 IBM reaffi rmed its commitment to our purpose and
values through a number of key initiatives:
Innovation—shedding the status quo to encourage
entrepreneurialism; being creative and adaptable; being curious,
bold and nimble; learning from our mistakes
– CEO letter to the US Congress outlining policy proposals
to advance racial equality and announcing that IBM has
sunset its general-purpose facial recognition and analysis
software products.
Feedback—embracing candor and transparency; creating
avenues for ongoing dialogs; being respectful, but honest
and willing to grow
Leading with purpose and culture yields powerful and
sustainable outcomes. It’s what motivates us to do our best
work and enables us to bring our whole selves to work. As
IBM pursues the disruptive processes of growth and change for
our clients and for our company, we also proceed with purpose—
committed to our values and focused on what matters.
“Companies focused on culture
as a tenet for growth will thrive
in the digital era as it becomes
the underlying force driving
the inclusion, innovation and
trust that leads to sustainable
solutions to yield powerful
outcomes and meaningful
societal progress.”
Obed Louissaint
Senior Vice President,
Transformation and Culture
– Sponsorship of OneTen, a startup that will focus on training
Black candidates to fi ll 1 million professional corporate roles
over the next 10 years.
– Call for Code for Racial Justice—an activation of IBM’s
ecosystem of partners, advocates and employees to develop
open source projects focusing on Police & Judicial Reform
and Accountability, Diverse Representation and Policy &
Legislation Reform.
– Launch of Open P-TECH—a free digital education platform
for workplace and digital skills including AI, cloud computing,
cybersecurity and design thinking—and committed to 1,000
paid IBM internships for US P-TECH students.
– IBM Quantum Computing education partnership with HBCUs
as part of a $100 million investment in developing a diverse
and inclusive quantum workforce.
– IBM Policy Lab calls for a risk-based approach to AI
regulation, resulting in the Vatican’s nomination of IBM as
one of two primary signatories to the Rome Call for AI Ethics
advocating a human-centered approach to AI.
Reinventing the
world of work
Managing workforce
crises in 2020
IBM focused on workforce resilience during 2020.
15
Events of the most diffi cult year in recent memory tested—
and then affi rmed—IBM’s pioneering commitment to reinventing
the world of work. Our tradition of applying intelligence, reason
and science to all challenges for our employees and our clients
became more relevant than ever during a period of global
pandemic, social unrest and political uncertainty that taxed
all of our resolve. To manage these crises, we relied upon the full
force of IBM values, technologies and humanistic approaches
to protect, support and inspire our workforce.
The COVID-19 pandemic laid bare the inadequacies of
19th century industrial work structures, such as: the 9-to-5
workday predicated on a handful of time zones in a world with
more than two dozen; agricultural-era assumptions about
family structure and care obligations; noninclusive defi nitions
of personal identities; and stigmas surrounding mental health
issues. The current crises underscore the need to focus on what
matters—leadership and effi ciency, but also empathy and
acceptance—all supported by a foundation of trust.
“Thanks to our hybrid cloud-
enabled digital workplace, IBM
adapted nearly overnight to
95 percent remote work in 2020.
With the right collaboration tools
in place, we focused on employee
health, well-being and resiliency—
offering new benefi ts and
training 30,000 managers in
empathetic leadership. Employee
engagement actually increased
in 2020. And we are strongly
positioned to defi ne the future
of work for a post-COVID world.”
Nickle LaMoreaux
Senior Vice President and
Chief Human Resources Offi cer
IBM CEO Arvind Krishna endorsed
the IBM Work From Home Pledge,
created by IBMers.
In January, we mobilized IBM’s Corporate Crisis Management
Team (CCMT) at the earliest signs of a potential pandemic,
relying on IBM’s established response plans for Ebola and SARS.
In early March, we transitioned 95 percent of IBM’s global
workforce to remote work in a matter of days, leveraging
the IBM hybrid cloud platform to provide key workforce
collaboration tools to more than 345,000 employees across
more than 175 countries.
Throughout 2020 we provided key tools, wellness and mental
health guidance, and management support to help employees
stay safe and sane, circulating real-time global and local updates
on the pandemic, and establishing a 24/7 “Ask Health & Safety”
team to address questions and concerns.
As we prepare for a safe post-COVID workplace, we must adjust
our people management approach to the new normal. Mastering
ongoing challenges will require maintaining a growth mindset,
adapting to change and learning from our mistakes. IBM will
apply design thinking to how employees use hybrid offi ce space
in purpose-driven ways. We must keep current with skills
retraining and recruiting as accelerated digital transformation
drives a tighter tech skills job market. Automation will create
new jobs. We will make every effort to address employee
demands for empathy, transparency and social responsibility
in a new era of activism.
IBM Work From Home Pledge
I pledge to be Family First.
I pledge to support Flexibility for Personal Needs.
I pledge to support “Not Camera Ready” times.
I pledge to Be Kind.
I pledge to Set Boundaries and Prevent Video Fatigue.
I pledge to Take Care of Myself.
I pledge to Frequently Check In on people.
I pledge to Be Connected.
16
Financial Highlights
International Business Machines Corporation and Subsidiary Companies
($ in millions except per share amounts)
For the year ended December 31:
Revenue
Net Income
Income from continuing operations
Operating (non-GAAP) earnings**
Earnings per share of common stock—continuing operations
Assuming dilution
Basic
Diluted operating (non-GAAP)**
Net cash provided by operating activities
Capital expenditures, net
Share repurchases
Cash dividends paid on common stock
Per share of common stock
At December 31:
Cash, cash equivalents, restricted cash and marketable securities
Total assets
Working capital
Total debt
Total equity
Common shares outstanding (in millions)
Stock price per common share
2020
2019
$ 73,620
$ 77,147
$ 5,590*
$ 9,431
$ 5,501*
$ 9,435
$ 7,774*
$ 11,436
$ 6.13*
$ 10.57
$ 6.18*
$ 10.63
$ 8.67*
$ 12.81
$ 18,197
$ 14,770
$ 3,042
$ 2,370
$
—
$ 1,361
$ 5,797
$ 5,707
$ 6.51
$ 6.43
2020
2019
$ 14,275
$ 9,009
$155,971
$152,186
$ (705)
$ 718
$ 61,538
$ 62,899
$ 20,727
$ 20,985
893
887
$ 125.88
$ 134.04
* Includes a $2.0 billion pre-tax charge for structural actions in the fourth quarter resulting in an impact of ($1.84) to diluted earnings per share from
continuing operations and diluted operating (non-GAAP) earnings per share. The impact to basic earnings per share was ($1.85).
** See page 45 for a reconciliation of net income to operating earnings.
Report of Financials
International Business Machines Corporation and Subsidiary Companies
17
MANAGEMENT DISCUSSION
Overview
Forward-Looking and Cautionary Statements
Management Discussion Snapshot
Description of Business
Year in Review
Prior Year in Review
Other Information
Looking Forward
Liquidity and Capital Resources
Critical Accounting Estimates
Currency Rate Fluctuations
Market Risk
Cybersecurity
Report of Management
Report of Independent Registered
Public Accounting Firm
CONSOLIDATED FINANCIAL STATEMENTS
Income Statement
Comprehensive Income
Balance Sheet
Cash Flows
Equity
18
19
19
23
30
53
55
55
56
59
62
63
64
65
66
68
69
70
71
72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Basis & Policies
A Significant Accounting Policies
B Accounting Changes
Performance & Operations
C Revenue Recognition
D Segments
E Acquisitions & Divestitures
F Research, Development & Engineering
G Taxes
H Earnings Per Share
Balance Sheet & Liquidity
I Financial Assets & Liabilities
J
Inventory
K Financing Receivables
L Property, Plant & Equipment
M Leases
N Intangible Assets Including Goodwill
O Investments & Sundry Assets
P Borrowings
Q Other Liabilities
R Commitments & Contingencies
S Equity Activity
Risk Management, Compensation/Benefits & Other
T Derivative Financial Instruments
U Stock-Based Compensation
V Retirement-Related Benefits
W Subsequent Events
Performance Graph
Stockholder Information
Board of Directors and Senior Leadership
74
87
90
91
96
100
100
104
105
106
106
110
110
112
114
114
117
118
120
123
126
128
140
141
142
143
18
Management Discussion
International Business Machines Corporation and Subsidiary Companies
OVERVIEW
The financial section of the International Business Machines Corporation (IBM or the company) 2020 Annual Report includes the
Management Discussion, the Consolidated Financial Statements and the Notes to Consolidated Financial Statements. This Overview is
designed to provide the reader with some perspective regarding the information contained in the financial section.
Organization of Information
• The Management Discussion is designed to provide readers with an overview of the business and a narrative on our financial
results and certain factors that may affect our future prospects from the perspective of management. The “Management
Discussion Snapshot” presents an overview of the key performance drivers in 2020.
• Beginning with the “Year in Review,” the Management Discussion contains the results of operations for each reportable segment
of the business and a discussion of our financial position and cash flows. Other key sections within the Management Discussion
include: “Looking Forward” and “Liquidity and Capital Resources,” which includes a description of management’s definition and
use of free cash flow.
• The Consolidated Financial Statements provide an overview of income and cash flow performance and financial position.
• The Notes follow the Consolidated Financial Statements. Among other items, the Notes contain our accounting policies, revenue
information, acquisitions and divestitures, certain commitments and contingencies and retirement-related plans information.
• On October 8, 2020, we announced our plan to separate the managed infrastructure services unit of our Global Technology
Services (GTS) segment into a new public company (currently referred to as NewCo and to be named later). The separation is
expected to be achieved through a U.S. federal tax-free spin-off to IBM shareholders and completed by the end of 2021. It will be
subject to customary market, regulatory and other closing conditions, including final IBM Board of Directors’ approval. The
announcement did not have any classification impact to our Consolidated Financial Statements or segment reporting. We will
report the managed infrastructure services unit as discontinued operations after its separation.
•
In the first quarter of 2020, we realigned offerings and the related management system to reflect divestitures completed in the
second half of 2019 and tighter integration of certain industry-specific consulting services. These changes impacted Cloud &
Cognitive Software and Global Business Services (GBS) but did not impact the Consolidated Financial Statements. Total recast
revenue for full-year 2019 and 2018 was approximately $0.3 billion and $0.4 billion, respectively. The periods presented in this
Annual Report are reported on a comparable basis.
• On July 9, 2019, IBM acquired 100 percent of the outstanding shares of Red Hat, Inc. (Red Hat). Red Hat is reported within the
Cloud & Cognitive Software segment, in Cloud & Data Platforms. Refer to note E, “Acquisitions & Divestitures,” for additional
information.
• The references to “adjusted for currency” or “at constant currency” in the Management Discussion do not include operational
impacts that could result from fluctuations in foreign currency rates. When we refer to growth rates at constant currency or adjust
such growth rates for currency, it is done so that certain financial results can be viewed without the impact of fluctuations in
foreign currency exchange rates, thereby facilitating period-to-period comparisons of business performance. Financial results
adjusted for currency are calculated by translating current period activity in local currency using the comparable prior-year
period’s currency conversion rate. This approach is used for countries where the functional currency is the local currency.
Generally, when the dollar either strengthens or weakens against other currencies, the growth at constant currency rates or
adjusting for currency will be higher or lower than growth reported at actual exchange rates. See “Currency Rate Fluctuations” for
additional information.
• To provide better transparency on the recurring performance of the ongoing business, the company provides total revenue,
geographic revenue and cloud revenue growth rates excluding divested businesses and at constant currency. These divested
businesses are included in the category “Other—divested businesses.”
• Within the financial statements and tables in this Annual Report, certain columns and rows may not add due to the use of rounded
numbers for disclosure purposes. Percentages reported are calculated from the underlying whole-dollar numbers.
Operating (non-GAAP) Earnings
In an effort to provide better transparency into the operational results of the business, supplementally, management separates
business results into operating and non-operating categories. Operating earnings from continuing operations is a non-GAAP measure
that excludes the effects of certain acquisition-related charges, intangible asset amortization, expense resulting from basis differences
on equity method investments, retirement-related costs, discontinued operations and certain managed infrastructure services spin-
off charges and their related tax impacts. Management characterizes direct and incremental charges incurred to accomplish the
managed infrastructure services spin-off as non-operating given their unique and non-recurring nature. These charges primarily relate
to transaction and third-party support costs, business separation and applicable employee retention fees, pension settlement charges
and related tax charges. All other spending for the managed infrastructure services business operations is included in both earnings
from continuing operations and in operating (non-GAAP) earnings. Due to the unique, non-recurring nature of the enactment of the U.S.
Management Discussion
International Business Machines Corporation and Subsidiary Companies
19
Tax Cuts and Jobs Act (U.S. tax reform), management characterizes the one-time provisional charge recorded in the fourth quarter of
2017 and adjustments to that charge as non-operating. Adjustments include true-ups, accounting elections and any changes to
regulations, laws, audit adjustments, etc. that affect the recorded one-time charge. For acquisitions, operating (non-GAAP) earnings
exclude the amortization of purchased intangible assets and acquisition-related charges such as in-process research and development,
transaction costs, applicable retention, restructuring and related expenses, tax charges related to acquisition integration and pre-
closing charges, such as financing costs. These charges are excluded as they may be inconsistent in amount and timing from period to
period and are significantly impacted by the size, type and frequency of the company’s acquisitions. All other spending for acquired
companies is included in both earnings from continuing operations and in operating (non-GAAP) earnings. Throughout the Management
Discussion, the impact of acquisitions over the prior 12-month period may be a driver of higher expense year to year. For retirement-
related costs, management characterizes certain items as operating and others as non-operating, consistent with GAAP. We include
defined benefit plan and nonpension postretirement benefit plan service costs, multi-employer plan costs and the cost of defined
contribution plans in operating earnings. Non-operating retirement-related costs include defined benefit plan and nonpension
postretirement benefit plan amortization of prior service costs, interest cost, expected return on plan assets, amortized actuarial
gains/losses, the impacts of any plan curtailments/settlements and pension insolvency costs and other costs. Non-operating
retirement-related costs are primarily related to changes in pension plan assets and liabilities which are tied to financial market
performance, and the company considers these costs to be outside of the operational performance of the business.
Overall, management believes that supplementally providing investors with a view of operating earnings as described above provides
increased transparency and clarity into both the operational results of the business and the performance of the company’s pension
plans; improves visibility to management decisions and their impacts on operational performance; enables better comparison to peer
companies; and allows the company to provide a long-term strategic view of the business going forward. Our reportable segment
financial results reflect pre-tax operating earnings from continuing operations, consistent with our management and measurement
system. In addition, these non-GAAP measures provide a perspective consistent with areas of interest we routinely receive from
investors and analysts.
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
Certain statements contained in this Annual Report may constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Any forward-looking statement in this Annual Report speaks only as of the date on which
it is made; IBM assumes no obligation to update or revise any such statements except as required by law. Forward-looking
statements are based on IBM’s current assumptions regarding future business and financial performance; these statements, by
their nature, address matters that are uncertain to different degrees. Forward-looking statements involve a number of risks,
uncertainties and other factors that could cause actual results to be materially different, as discussed more fully elsewhere in this
Annual Report and in the company’s filings with the Securities and Exchange Commission (SEC), including IBM’s 2020 Form 10-K
filed on February 23, 2021.
MANAGEMENT DISCUSSION SNAPSHOT
($ and shares in millions except per share amounts)
For year ended December 31:
Revenue
Gross profit margin
Total expense and other (income)
Income from continuing operations before income taxes
Provision for/(benefit from) income taxes from continuing operations
Income from continuing operations
Income from continuing operations margin
Income/(loss) from discontinued operations, net of tax
Net income
Earnings per share from continuing operations–assuming dilution
Weighted-average shares outstanding–assuming dilution
Assets
Liabilities
Equity
2020
2019
$ 73,620
$ 77,147
48.3 %
47.3 %
$ 30,937 **
$ 4,637 **
$
$ 5,501 **
(864)
7.5 %
89
$
$ 5,590 **
6.13 **
$
896.6
$ 155,971
$ 135,244
$ 20,727
$ 26,322
$ 10,166
$
731
$ 9,435
12.2 %
$
(4)
$ 9,431
$ 10.57
892.8
$ 152,186
$ 131,202
$ 20,985
Yr.-to-Yr.
Percent/Margin
Change
(4.6)%*
1.0 pts.
17.5 %
(54.4)%
NM
(41.7)%
(4.8)pts.
NM
(40.7)%
(42.0)%
0.4 %
2.5 %
3.1 %
(1.2)%
*
(4.7) percent adjusted for currency; (3.5) percent excluding divested businesses and adjusted for currency.
** Includes a $2.0 billion pre-tax charge for structural actions in the fourth quarter resulting in an impact to diluted earnings per share from continuing
operations of ($1.84).
Relates to discontinued operations of Microelectronics, divested in 2015.
At December 31
NM–Not meaningful
20
Management Discussion
International Business Machines Corporation and Subsidiary Companies
The following table provides the company’s operating (non-GAAP) earnings for 2020 and 2019. See page 45 for additional information.
($ in millions except per share amounts)
For year ended December 31:
Net income as reported
Income/(loss) from discontinued operations, net of tax**
Income from continuing operations
Non-operating adjustments (net of tax)
Acquisition-related charges
Non-operating retirement-related costs/(income)
U.S. tax reform impacts
Spin-off-related charges
Operating (non-GAAP) earnings
Diluted operating (non-GAAP) earnings per share
2020
$5,590 *
89
$5,501 *
1,454
908
(110)
21
$7,774 *
$ 8.67 *
2019
$ 9,431
(4)
$ 9,435
1,343
512
146
—
$11,436
$ 12.81
Yr.-to-Yr.
Percent Change
(40.7)%
NM
(41.7)%
8.3
77.2
NM
NM
(32.0)%
(32.3)%
* Includes a $2.0 billion pre-tax charge for structural actions in the fourth quarter resulting in an impact to diluted operating (non-GAAP) earnings per
share of ($1.84).
** Relates to discontinued operations of Microelectronics, divested in 2015.
NM–Not meaningful
Strategic Announcement
IBM is redefining its future as a hybrid cloud platform and AI company. The October 8, 2020 announcement of our plan to separate
the managed infrastructure services unit of our GTS segment into a new public company will create two industry-leading
companies, each with strategic focus and flexibility to capitalize on their respective missions and drive client and shareholder
value. Client buying needs for application and infrastructure services are diverging, while adoption of our hybrid cloud platform is
accelerating. This change in clients’ needs makes it the right time to create two market-leading companies focused on what they
do best. IBM will focus on its open hybrid cloud platform and AI capabilities to accelerate clients’ digital transformations. Upon
separation, NewCo will immediately be the world's leading managed infrastructure services provider and will have greater agility
to design, run and modernize the infrastructure of the world’s most important organizations. Both IBM and NewCo will have greater
ability to focus on their operating and financial models, have more freedom to partner with others and both will align their
investments and capital structure to their strategic focus areas. We are on track to complete the separation by the end of 2021.
Environmental Dynamics
On March 11, 2020, the World Health Organization (WHO) declared the novel coronavirus (COVID-19) a global pandemic. This
resulted in significant governmental measures being initiated around the globe, including travel bans and border closings, shelter-
in-place orders, closures of non-essential businesses and social distancing requirements in efforts to slow down and control the
spread of the virus.
Throughout 2020, the health of IBM employees, our clients, business partners and community continued to be our primary focus.
We are actively engaged to ensure our plans and response activities continue to be aligned with recommendations of the WHO, the
U.S. Centers for Disease Control and Prevention, and governmental regulations.
IBM continues to be well positioned to support our clients through this crisis. The pandemic has driven companies to accelerate
their digital transformations, resulting in the removal of traditional barriers to progress. The reliance on technology, particularly
hybrid cloud and AI technologies that give clients the scalability and flexibility needed to adjust to the rapid market changes, has
become more acute. We are helping to advise, build, move and manage our clients’ journey to the cloud. We are also working with
our clients to apply AI, automation and other technologies to make their workflows more intelligent and responsive. As our clients
are intensifying their focus on their most important asset, their people, we are partnering with clients to help them enhance
employee engagement and productivity, reskill the workforce faster and reimagine ways of working.
The COVID-19 pandemic and broader macroeconomic uncertainty has placed every company in uncharted waters. In this
environment, the underlying fundamentals of our business continue to remain sound:
• Our diversification and mix by industry, geography and client segment provides some stability during these times;
•
IBM has always focused on the enterprise space, and within that our business is more concentrated in large enterprises, which in
total have been relatively more stable throughout the pandemic;
• From an industry perspective, the majority of our revenue comes from clients in financial services, telecom, and the public sector
– industries that run the world’s most critical processes;
• From a geographic perspective, we are continuing to see markets experience different impacts from the pandemic over time. Our
global footprint provides some natural hedge;
Management Discussion
International Business Machines Corporation and Subsidiary Companies
21
• Approximately 60 percent of our annual revenue is in recurring revenue streams;
• Our balance sheet remains strong with ample liquidity and access to capital.
All of this provides some level of stability, not only in our revenue, but also in profit and cash, as we continue to manage through
these challenging times. However, in this macroeconomic environment, clients balanced near-term needs and opportunities for
transformation. Their near-term priorities were focused on operational stability, flexibility and cash preservation, and as such, in
2020, we experienced some disruptions in transactional performance, shorter duration software transactions and delays in some
services projects.
At the same time, this environment has only reinforced the need for clients to modernize their businesses to succeed in this new
normal, with hybrid cloud and AI at the core of their digital transformations. While the current environment poses certain short-
term challenges, it also presents long-term opportunities that IBM will seize as our open hybrid platform and AI-driven model
delivers greater innovation, higher productivity and more strategic optionality to our clients.
Financial Performance Summary
In 2020, we reported $73.6 billion in revenue and income from continuing operations of $5.5 billion, which included a $2.0 billion
pre-tax charge for structural actions (primarily workforce rebalancing) in the fourth quarter to simplify and optimize our operating
model. Operating (non-GAAP) earnings in 2020 were $7.8 billion, which also included the charge for workforce rebalancing. Diluted
earnings per share from continuing operations was $6.13 as reported and $8.67 on an operating (non-GAAP) basis. We also
generated $18.2 billion in cash from operations, $10.8 billion in free cash flow and delivered shareholder returns of $5.8 billion in
dividends. With the unprecedented COVID-19 pandemic and macroeconomic uncertainty beginning in March 2020, client priorities
shifted to maintaining operational stability, flexibility and preservation of cash. While there was continued demand for offerings
that support their digital transformation, clients moved to shorter term duration engagements and prioritized operational
expenditures over capital expenditures, which impacted the company’s performance in 2020. However, our results reflect strong
performance in hybrid cloud led by Red Hat, gross margin expansion and solid cash generation. We also continued to strengthen
our position as a hybrid cloud platform and AI company through strategic organic investments and acquisitions.
Total consolidated revenue decreased 4.6 percent as reported and 4.7 percent adjusted for currency compared to the prior year.
Excluding divested businesses and adjusted for currency, revenue decreased 3.5 percent. Cloud & Cognitive Software increased
2.1 percent as reported and 2 percent adjusted for currency, with strong performance from Red Hat, offset by declines in
transactional performance in other areas of the portfolio. Within Cloud & Cognitive Software, Cloud & Data Platforms, which
includes Red Hat, grew 20.9 percent as reported (20 percent adjusted for currency), while Cognitive Applications decreased
3.0 percent as reported (3 percent adjusted for currency), and Transaction Processing Platforms declined 16.8 percent as reported
(17 percent adjusted for currency) reflecting the impacts of the macroeconomic uncertainty, with purchase deferrals and clients
opting for shorter duration contracts. Global Business Services decreased 3.8 percent as reported and 4 percent adjusted for
currency with declines across all lines of business due to project delays and less discretionary spending by clients. Global
Technology Services decreased 5.7 percent as reported and 5 percent adjusted for currency with declines in Infrastructure & Cloud
Services and Technology Support Services driven by lower business volumes primarily with clients in industries more impacted by the
macroeconomic environment. Systems decreased 8.2 percent year to year as reported and 9 percent adjusted for currency due to
product cycle dynamics. Across the segments, total IBM cloud revenue of $25.1 billion in 2020 grew 19 percent as reported (18
percent adjusted for currency) and 20 percent excluding divested businesses and adjusted for currency.
From a geographic perspective, Americas revenue declined 6.0 percent year to year as reported (4 percent excluding divested
businesses and adjusted for currency). Europe/Middle East/Africa (EMEA) decreased 3.3 percent (4 percent excluding divested
businesses and adjusted for currency). Asia Pacific declined 3.5 percent (4 percent excluding divested businesses and adjusted for
currency).
The consolidated gross margin of 48.3 percent increased 1.0 points year to year, and the operating (non-GAAP) gross margin of
49.3 percent increased 1.3 points versus the prior year, reflecting portfolio mix with strong software contribution and our focus on
productivity.
Total expense and other (income) increased 17.5 percent in 2020 compared to the prior year. The year-to-year performance was driven
by higher charges for workforce rebalancing, a full year of Red Hat operational spending in 2020 compared to six months in 2019, lower
gains from divestitures and higher non-operating retirement-related costs, partially offset by lower spending including reductions in
travel and other expenses associated with COVID-19 restrictions. Total operating (non-GAAP) expense and other (income) increased
16.8 percent year to year, driven primarily by the same factors excluding the non-operating retirement-related costs.
Pre-tax income from continuing operations of $4.6 billion decreased 54.4 percent and the pre-tax margin was 6.3 percent, a decrease
of 6.9 points versus 2019, primarily due to higher workforce rebalancing charges in 2020, lower gains from divestitures and higher
retirement-related costs in the current year. The continuing operations effective tax rate for 2020 was (18.6) percent compared to 7.2
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Management Discussion
International Business Machines Corporation and Subsidiary Companies
percent in 2019. The benefit from income taxes in 2020 was primarily due to the tax impacts of an intra-entity sale of certain of the
company’s intellectual property and related impacts in the first quarter, which resulted in a net tax benefit of $0.9 billion. Net income
from continuing operations of $5.5 billion decreased 41.7 percent and the net income from continuing operations margin was 7.5
percent, down 4.8 points year to year, primarily due to the fourth-quarter workforce rebalancing charge. Operating (non-GAAP) pre-
tax income from continuing operations of $7.7 billion decreased 38.7 percent year to year and the operating (non-GAAP) pre-tax
margin from continuing operations decreased 5.8 points to 10.4 percent, reflecting the higher workforce rebalancing charges and lower
gains from divestitures in the current year. The operating (non-GAAP) effective tax rate for 2020 was (1.5) percent compared to 8.5
percent in 2019. The current year operating (non-GAAP) benefit from income taxes was primarily driven by the net tax benefit from an
intra-entity IP sale in the first quarter. Operating (non-GAAP) income from continuing operations of $7.8 billion decreased 32.0 percent
and the operating (non-GAAP) income margin from continuing operations of 10.6 percent was down 4.3 points year to year.
Diluted earnings per share from continuing operations of $6.13 in 2020 decreased 42.0 percent and operating (non-GAAP) diluted
earnings per share of $8.67 decreased 32.3 percent versus 2019, both including a ($1.84) impact from the fourth-quarter 2020
structural actions.
During 2020, we continued to take actions to further enhance our balance sheet and liquidity position. At December 31, 2020, the
balance sheet remained strong with flexibility to support and invest in the business, with a strong cash position and ample credit
available during these uncertain times. Cash and cash equivalents, restricted cash and marketable securities at year end were $14.3
billion, an increase of $5.3 billion from December 31, 2019. Throughout 2020, we took mitigation actions to preserve liquidity as well
as strategic actions to optimize our capital structure, for example, we re-focused our Global Financing portfolio reducing our external
debt needs. We have reduced total debt by $1.4 billion from prior year end and $11.5 billion since the second quarter of 2019
(immediately preceding the Red Hat transaction).
Total assets increased $3.8 billion (increased $0.9 billion adjusted for currency) from December 31, 2019 primarily driven by:
• An increase of $5.3 billion in cash and cash equivalents, restricted cash and marketable securities;
• An increase in deferred taxes of $4.1 billion primarily due to the intra-entity sale of IP in the first quarter; and
• An increase in prepaid pension assets of $0.7 billion driven by higher returns on plan assets and plan remeasurements; partially
offset by
• A decline in receivables of $6.5 billion mainly due to sales of financing receivables, continued focus on collections, including
collection of divestiture-related receivables and a decline in revenue.
Total liabilities increased $4.0 billion (increased $0.1 billion adjusted for currency) from December 31, 2019 driven by:
• An increase in other accrued expenses and liabilities of $2.5 billion primarily due to the workforce rebalancing charge in the fourth
quarter of 2020;
• An increase in deferred income of $1.3 billion; and
• An increase in retirement and nonpension postretirement benefit obligations of $1.1 billion mainly driven by plan
remeasurements; partially offset by
• A decrease in total debt of $1.4 billion.
Total equity of $20.7 billion decreased $0.3 billion from December 31, 2019 as a result of:
• Dividends paid of $5.8 billion; partially offset by
• Net income of $5.6 billion.
Cash provided by operating activities was $18.2 billion in 2020, an increase of $3.4 billion compared to 2019, driven primarily by an
increase in cash provided by receivables ($4.8 billion); partially offset by performance-related declines within net income.
Net cash used in investing activities of $3.0 billion decreased $23.9 billion compared to the prior year, primarily driven by a decrease
in net cash used for acquisitions ($32.3 billion) due to the acquisition of Red Hat in the prior year, partially offset by a decrease in cash
provided by net non-operating finance receivables ($6.2 billion), primarily driven by the wind down of the OEM IT commercial financing
operations.
Financing activities were a net use of cash of $9.7 billion in 2020 compared to a net source of cash of $9.0 billion in 2019. The year-
to-year change of $18.8 billion was driven by a decrease in net cash provided from debt transactions ($20.0 billion) primarily driven by
a higher level of net additions in the prior year to fund the Red Hat acquisition and a decrease in cash used for gross common stock
repurchases ($1.4 billion).
Management Discussion
International Business Machines Corporation and Subsidiary Companies
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DESCRIPTION OF BUSINESS
Please refer to IBM’s Annual Report on Form 10-K filed with the SEC on February 23, 2021, for Item 1A. entitled “Risk Factors.”
We create value for clients by providing integrated solutions and products that leverage: data, information technology, deep expertise
in industries and business processes, with trust and security and a broad ecosystem of partners and alliances. Our hybrid cloud
platform and AI technology and services capabilities support clients’ digital transformations and help them engage with their
customers and employees in new ways. These solutions draw from an industry-leading portfolio of consulting and IT implementation
services, cloud, digital and cognitive offerings, and enterprise systems and software which are all bolstered by one of the world’s
leading research organizations.
IBM Strategy
As technology has increasingly become a key engine of business success, enterprises around the world are prioritizing digital
transformation. The pressing need to adapt to evolving market requirements and adopt new business models that improve customer
experience and streamline business performance has accelerated the urgency of this transformation.
To date, only 25 percent of enterprise workloads have made it onto a public cloud–mostly limited to greenfield cloud applications or
ones that are easy to “lift and shift.” The remaining 75 percent have not moved, as enterprises wrestle with how to handle the mission-
critical workloads and data that require heightened security, particularly for highly regulated industries with complex, often cross-
border, compliance needs.
Hybrid cloud and AI are the only way to deliver the digital transformation businesses are looking for across all their processes,
applications and data. Together, they have a multiplier effect on the speed and breadth of transformation. Only a fraction of enterprise
data is being leveraged for business insights, in part because it is spread across public clouds, datacenters and increasingly, edge
computing. The emergence of edge computing across many industries will only expand the kinds of hybrid environments our clients
use.
A hybrid cloud approach bridges the silos within this existing enterprise infrastructure, maintaining security for mission-critical
workloads while enabling the data collection and analysis that accelerates development and deployment of AI at scale. AI unlocks the
value of enterprise data, using it to reinvent processes, predict outcomes and transform businesses.
The pressing need to pivot to remote work and reinvent their business models during the pandemic accelerated the urgency of this
transformation for many enterprises. Companies are focused more than ever on moving workloads to the cloud.
IBM’s Commitment to Hybrid Cloud and AI
That makes hybrid cloud and AI an enormous opportunity for IBM. Hybrid cloud alone represents a $1 trillion market.
We are targeting this market because we recognize the value it brings to our clients. Through deep engagement with a wide breadth of
clients, we know that a hybrid cloud approach on average creates 2.5 times more value for enterprises than a public cloud-alone
strategy, and IBM leads in delivering better return on investment (ROI) through hybrid cloud. This higher ROI comes from enhanced
business acceleration, developer productivity, infrastructure cost efficiency and regulatory compliance and security.
We have built a hybrid cloud platform, based on open technologies, that allows clients to realize their digital and AI transformations
across the applications, data and environments in which they operate. Watson is IBM’s industry leading AI for business, a portfolio of
enterprise-ready pre-built applications and tools designed to reduce the costs and hurdles of AI adoption through industry-leading
natural language processing, automation and trust in our responsible use of AI. Building on our hybrid cloud platform, our software
collects and analyzes data from across our clients’ enterprises, training our AI to provide insights into their business processes. These
insights enable intelligent workflows, reinventing the way businesses operate and driving improved business outcomes that accelerate
our clients’ adoption of AI.
Trust is a key differentiator for IBM’s AI, and of paramount importance to our clients. In a recent survey, 76 percent of AI professionals
said being able to trust their AI’s output is fair, safe and reliable is “critically” or “very” important to their business. That is why we
believe that AI must be transparent and explainable, and that data and insights belong to the creator. In keeping with this belief, we
have designed hybrid cloud and AI solutions that give our clients sole control of their encryption keys. Our homomorphic encryption
takes data privacy and security one step further, allowing data to be processed without decryption.
We have pivoted all of IBM to deliver on this hybrid cloud and AI value for our clients. We believe we have the portfolio that will support
IBM’s success as well our clients’ and ecosystem partners’ success. It includes the services capabilities that drive consumption of our
technology and enable digital transformation, our software portfolio that can achieve transformational business outcomes through AI
and automation, and our systems and infrastructure that can run this platform for mission-critical applications.
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IBM’s Technology Stack and Platform Approach
IBM offers clients a full technology stack that meets them wherever they are on their journey, from their existing IT infrastructure to
our hybrid cloud platform to our cloud-native software to our services professionals who can advise on custom solutions that create
the most value for our clients. Our ecosystem partners enhance the client experience and innovation that can be derived from IBM
technology.
Our hybrid cloud approach is platform-centric, with Linux, containers and Kubernetes as the architectural foundation. Platforms provide
compelling economics: every $1 of platform spend on average drives $3 to $5 of software revenue, $6 to $8 of services and $1 to $2
of enterprise infrastructure. The multiplier effect of our technology stack creates more value for IBM and our growing ecosystem of
partners.
IBM Hybrid Cloud and AI Solutions
IBM Hybrid Cloud and AI Solutions
Business Transformation
and Hybrid Cloud Services
Business Transformation
and Hybrid Cloud Services
IBM Services
IBM Services
Digital Transformation •
Digital Transformation •
Application Modernization •
Application Modernization •
Intelligent Workflows
Intelligent Workflows
System Integrator
Partners
System Integrator
Partners
Hybrid Cloud Software
Hybrid Cloud Software
IBM Software
IBM Software
IBM Cloud Paks
IBM Cloud Paks
Automation • Data and AI •
Automation • Data and AI •
Integration • Networking • Security •
Integration • Networking • Security •
Industry Capabilities
Industry Capabilities
Software and
SaaS Partners
Software and
SaaS Partners
Hybrid Cloud Platform
Hybrid Cloud Platform
Red Hat
Red Hat
Hybrid Cloud Platform
Hybrid Cloud Platform
Development, Security and Operational Services
Development, Security and Operational Services
Infrastructure
Infrastructure
IBM Cloud
IBM Cloud
Public Clouds
Public Clouds
AWS•Azure•Other
AWS•Azure•Other
IBM Systems
IBM Systems
Enterprise
Enterprise
Infrastructure
Infrastructure
Edge
Edge
Hybrid cloud platforms and software comprise a $450 billion market opportunity and are the key to any hybrid cloud architecture.
Red Hat OpenShift is the leading hybrid cloud software platform, and the only one that is fully integrated and open source, with built-
in development, security and operations features. It takes advantage of an ecosystem of millions of developers to accelerate
innovation. Leveraging the power of Kubernetes and containers, OpenShift creates the foundation that allows our clients to manage
siloed, multi-cloud, edge and legacy infrastructure as a single platform. These capabilities are a clear differentiator, enabling our clients
to “write once, deploy anywhere” for their hybrid architecture. We are seeing strong momentum, with more than 2,800 clients using
our hybrid cloud platform at the end of 2020.
Cloud Paks are IBM’s containerized, modernized software built to extend the value of OpenShift. They are key to realizing value through
digital transformation in four important ways. They help our clients to modernize applications to take advantage of the hybrid platform,
automate processes for speed and efficiency, use the power of AI for data driven decision-making and prediction, and secure the entire
platform from the data center to the edge. Cloud Paks provide a powerful addition to IBM’s traditional middleware. Our traditional
middleware is an industry standard that creates tremendous value for our clients through connectivity on all kinds of systems and gives
IBM a leadership position in the market.
IBM’s software enables solutions that can transform businesses. It is the software that solves industry or business-specific problems
such as supply chain or asset management and uses our breakthrough natural language processing and automation capabilities as well
as other technologies including analytics, encryption, blockchain and machine learning. IBM Research continues to advance these
technologies, for example integrating neural and symbolic techniques to build AI that can perform more complex tasks by
understanding and reasoning more like humans.
Business transformation and hybrid cloud services provide a $300 billion market opportunity. Key to how our technology is delivered,
IBM Global Business Services (GBS) is a leading design, consulting and systems integration organization, with more OpenShift certified
experts than any of the competition. They are the leaders in helping enterprises move workloads onto OpenShift – the top hybrid cloud
platform – and have built or migrated hybrid cloud applications for more than 500 clients.
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Our consultants have the trust of clients around the world, many having worked in the same industries as the clients they serve. Our
services professionals bring that deep knowledge to helping clients develop their hybrid cloud infrastructure, applying the full range of
IBM’s and its partners’ capabilities to build intelligent workflows enabled by our technology stack. GBS works with our ecosystem
partners and IBM developers to create the custom solutions that realize digital transformation for our clients in any country and any
industry.
Infrastructure, a $230 billion market, is at the base of our stack, incorporating the public and private cloud technology that integrates
with our hybrid cloud approach.
Our clients are using a combination of public and private cloud infrastructure to keep their mission-critical data and workloads secure.
IBM provides both in a way that can easily be slotted into our hybrid cloud platform and AI. IBM public cloud is the technology behind
our clouds for highly regulated industries, such as IBM Cloud for Financial Services and IBM Cloud for Telecommunications, with
industry-specific security and compliance features. To help clients integrate their private clouds into a hybrid cloud strategy using IBM
IT infrastructure, we have made investments in our IBM Z, LinuxONE, Power and Storage offerings to support our hybrid cloud platform
and software.
Investing in the Future
Investment in future technologies is an important part of our strategy. Hybrid cloud and AI are the technologies of today, but IBM’s
investment in quantum computing positions us to win in the next era of computing. We were the first technology company to publish
plans to produce a quantum processor with more than 1,000 qubits by 2023 giving us a significant first mover advantage.
We already have more than 285,000 registered users in our market-leading quantum network. The 130+ members of the IBM Q
Network – including universities, banks, auto companies, telcos and a wide array of companies from other industries – have run over
500 billion quantum circuits.
IBM Research continues to develop new technologies and improve on our existing ones, ensuring that IBM stays in the vanguard of
technological innovation that helps enterprises achieve their digital transformations.
Aligning Structure to Strategy
As we focus our strategy on hybrid cloud and AI, IBM is making it easier for our clients to consume our technology and gain better
access to our deep technical expertise.
We are adjusting our portfolio to align to our strategy. The announced spin-off of our managed infrastructure services business will
better align IBM to our hybrid cloud platform and AI strategy and create clearer focus for both companies. With over 4,600 technology-
intensive, highly regulated clients in 115 countries and more than twice the scale of its nearest competitor, NewCo will pursue a $500
billion market opportunity in managed infrastructure services.
At the same time, we continue to invest organically and inorganically. The acquisitions we announced in 2020 extend our hybrid cloud
and AI technology and services capabilities to provide value for our clients.
We are changing the way we go to market to simplify our client segmentation and better align IBM’s salesforce with our clients so that
we more consistently deliver the value of our platform. We will demonstrate the value of our hybrid cloud and AI approach through
technical and experiential selling. IBM Garage, a market-leading immersive experience for co-creating solutions, helps our clients and
partners grasp the value of the platform by seeing it in practice.
We are expanding our ecosystem by adding hundreds of new global systems integrators, independent software vendors and major
third-party software partners. We are investing $1 billion in our ecosystem to ensure that our partners have the resources they need to
develop software and build their businesses on our platform expanding IBM’s go-to-market reach.
When our partners succeed, our clients succeed, and that translates to success for IBM. Our hybrid cloud and AI strategy is designed
for our mutual success. It is the engine to propel growth across our entire business, enhanced by a revised sales strategy, ecosystem
priority and go-to-market approach. The focus of 2021 will be to accelerate that engine.
Business Segments and Capabilities
Our hybrid cloud and AI strategy is realized through our operations and consist of five business segments: Cloud & Cognitive Software,
Global Business Services, Global Technology Services, Systems and Global Financing.
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Cloud & Cognitive Software
Cloud & Cognitive Software brings together IBM’s software platforms and solutions, enabling us to help clients predict, automate,
secure and modernize, on a secure hybrid cloud. It includes all software, except operating system software reported in the Systems
segment.
Cloud & Cognitive Software comprises three business areas–Cognitive Applications, Cloud & Data Platforms and Transaction
Processing Platforms, which have the following capabilities:
Cognitive Applications: includes software that address vertical and domain-specific solutions, increasingly infused with AI, enabled by
IBM’s Watson technology. Application areas such as health, financial services, supply chain, asset management, weather and security
software and services are among the offerings.
Cloud & Data Platforms: includes the company’s distributed middleware and data platform software, including Red Hat, which enables
the operation of clients’ hybrid cloud environments, whether on-premise or in public and private clouds. Included are IBM Cloud Paks,
which are pre-integrated enterprise grade solutions built on Red Hat OpenShift and a combination of containerized IBM and Red Hat
software and services. It also includes product areas such as WebSphere distributed, analytics platform software such as DB2
distributed, information integration, and enterprise content management, as well as blockchain and AI/Watson platforms.
As clients increasingly move more of their mission-critical workloads to the cloud, their multi-cloud environments will be based on a
foundation of Linux, with Kubernetes open source software to deploy, manage and scale container-based applications. Red Hat, which
provides the leading Linux operating system–Red Hat Enterprise Linux (RHEL)–and the leading hybrid cloud platform–Red Hat
OpenShift–is at the center of this transformational shift among clients.
Transaction Processing Platforms: the software that supports client mission-critical on-premise workloads in industries such as
banking, airlines and retail. This includes transaction processing software such as Customer Information Control System and storage
software, as well as the analytics and integration software running on IBM operating systems (e.g., DB2 and WebSphere running on
z/OS).
Global Business Services
Global Business Services provides clients with consulting, business process and application management services, focused on
implementing AI-enabled intelligent workflows and modernizing application suites, optimized for hybrid cloud environments. These
professional services deliver value and innovation to clients through solutions which leverage industry, technology and business
strategy and process expertise. GBS is the digital reinvention partner for IBM clients, combining industry knowledge, functional
expertise, and applications with the power of business design and cognitive and cloud technologies. The full portfolio of GBS services
is backed by its globally integrated delivery network and integration with technologies, solutions and services across IBM.
GBS assists clients in their digital transformations, helping them build business platform strategies and experiences, transform
processes to intelligent workflows using AI and other exponential technologies, and build hybrid, open cloud infrastructures.
Global Business Services comprises three business areas–Consulting, Application Management and Global Process Services, which
have the following capabilities:
Consulting: provides business consulting services focused on bringing to market solutions that help clients shape their digital blueprints
and customer experiences, modernize their applications, define their cognitive operating models, unlock the potential in all data to
improve decision-making, set their next-generation talent strategies and create new technology architectures in a cloud-centric world.
Application Management: delivers system integration, application management, maintenance and support services for packaged
software, as well as custom and traditional applications. Value is delivered through advanced capabilities in areas such as security and
privacy, application testing and modernization, cloud application migration and automation.
Global Process Services (GPS): delivers finance, procurement, talent and engagement, and industry-specific business process
outsourcing services. These services deliver improved business results to clients through a consult-to-operate model which includes
the strategic change and/or operation of the client’s processes, applications and infrastructure. GBS is redefining process services for
both growth and efficiency through the application of the power of cognitive technologies like Watson, as well as the IoT, blockchain
and deep analytics.
Global Technology Services
Global Technology Services provides comprehensive IT infrastructure and platform services that create business value for clients.
Clients gain access to leading-edge capabilities and realize high-quality performance, greater flexibility and economic value. GTS
delivers these outcomes through insights drawn from IBM’s decades of experience across thousands of engagements, the skills of
practitioners, advanced technologies, applied innovation from IBM Research and global scale.
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Global Technology Services comprises two business areas–Infrastructure & Cloud Services and Technology Support Services, which
have the following capabilities:
Infrastructure & Cloud Services: delivers a portfolio of project, managed, outsourcing and cloud-delivered services focused on clients’
enterprise IT infrastructure environments with improved quality, flexibility and economic value. The portfolio consists of Infrastructure
Services and IBM Cloud.
Infrastructure Services modernizes and manages IT environments to accelerate clients’ digital transformations. It provides a
comprehensive set of services and solutions that include resiliency, security, and network capabilities. These solutions embed unique
insights drawn from depth of expertise and scale to enable high performance of mission-critical systems and services. The portfolio is
built leveraging platforms, such as the MultiCloud Management Platform and the IBM Services Platform with Watson, which augment
human intelligence with cognitive technologies to address complex client environments. This portfolio is delivered by skilled and
experienced practitioners to ensure secure, resilient and reliable client environments. On October 8, 2020, IBM announced our plan to
separate the managed infrastructure services unit into a new public company. We are on track to complete the separation by the end
of 2021.
The IBM Cloud infrastructure layer is built on an open architecture and specifically designed for clients to run mission-critical workloads
with leading edge security capabilities including confidential computing and keep your own keys to ensure our clients data is their data.
It also includes industry-specific public clouds with built-in controls for highly regulated industries such as financial services,
telecommunications, government and healthcare. IBM Cloud powered by deep AI capabilities across the hybrid cloud platform helps
our clients extract insights from their data from multiple sources, all within a secure and open architecture. Built on enterprise grade
hardware, it also provides storage, network functionality, and a full range of compute options such as virtual machines, containers,
bare metal, and serverless, as well as virtualization for enterprise deployments.
Technology Support Services: delivers comprehensive support services to maintain and improve the availability of clients’ IT
infrastructures. These offerings include maintenance for IBM products and other technology platforms, as well as open source and
cross-vendor software and solution support, drawing on innovative technologies and leveraging IBM Services Platform with Watson
capabilities.
Systems
Systems provides clients with innovative infrastructure platforms to help meet the new requirements of hybrid multi-cloud and
enterprise AI workloads. IBM Systems also designs advanced semiconductor and systems technology in collaboration with IBM
Research, primarily for use in our systems.
Systems comprises Systems Hardware and Systems Operating Software, which have the following capabilities:
Systems Hardware: includes IBM’s servers and Storage Systems.
Servers: a range of high-performance systems designed to address computing capacity, security and performance needs of
businesses, hyperscale cloud service providers and scientific computing organizations. The portfolio includes IBM Z and LinuxONE,
trusted enterprise platforms for integrating data, transactions and insight; and Power Systems, a system designed from the ground up
for big data and enterprise AI, optimized for hybrid cloud and Linux.
Storage Systems: data storage products and solutions that allow clients to retain and manage rapidly growing, complex volumes of
digital information and to fuel data-centric cognitive applications. These solutions address critical client requirements for information
retention and archiving, security, compliance and storage optimization, including data deduplication, availability and virtualization. The
portfolio consists of a broad range of flash storage, disk and tape storage solutions.
Operating Systems Software: IBM Z operating system environments include z/OS, a security-rich, high-performance enterprise
operating system, as well as Linux. Power Systems offers a choice of AIX, IBM i or Linux operating systems that leverage POWER
architecture to deliver secure, reliable and high performing enterprise-class workloads across a breadth of server offerings.
Global Financing
Global Financing encompasses two primary businesses: financing, primarily conducted through IBM Credit LLC (IBM Credit), and
remanufacturing and remarketing. IBM Credit, a wholly owned subsidiary of IBM, facilitates IBM clients’ acquisition of information
technology systems, software and services through its financing solutions. The financing arrangements are predominantly for products
or services that are critical to the end users’ business operations and support IBM’s hybrid cloud platform and AI strategy. Global
Financing conducts a comprehensive credit evaluation of its clients prior to extending financing. As a captive financier, Global Financing
has the benefit of both deep knowledge of its client base and a clear insight into the products and services financed. These factors
allow the business to effectively manage two of the major risks associated with financing, credit and residual value, while generating
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strong returns on equity. Global Financing also maintains a long-term partnership with IBM’s clients through various stages of the IT
asset life cycle–from initial purchase and technology upgrades to asset disposition decisions.
Global Financing comprises the following business areas:
Client Financing: lease, installment payment plan and loan financing to end users and internal clients for terms up to seven years.
Assets financed are primarily new and used IT hardware, software and services where we have expertise. Internal financing is
predominantly in support of Global Technology Services’ long-term client service contracts. All internal financing arrangements are at
arm’s-length rates and are based upon market conditions.
Commercial Financing: short-term working capital financing to suppliers, distributors and resellers primarily of IBM products. In 2019,
we wound down the Original Equipment Manufacturer (OEM) IT portion of our commercial financing operations. In the fourth-quarter
2020, Global Financing expanded its financial flexibility by entering into an agreement with a third-party investor to sell up to $3 billion
of its IBM commercial financing receivables, at any one time, on a revolving basis over the agreement’s three-year term.
Remanufacturing and Remarketing: assets include used equipment returned from lease transactions, or used and surplus equipment
acquired internally or externally. These assets may be refurbished or upgraded, and sold or leased to new or existing clients both
externally and internally. Externally remarketed equipment revenue represents sales or leases to clients and resellers. Internally
remarketed equipment revenue primarily represents used equipment that is sold internally to Global Technology Services. Systems
may also sell the equipment that it purchases from Global Financing to external clients.
IBM Worldwide Organizations
The following worldwide organizations play key roles in IBM’s delivery of value to its clients:
• Global Markets
• Research, Development and Intellectual Property
Global Markets
IBM operates in more than 175 countries with a broad distribution of revenue. To manage this global footprint, Global Markets leads
our dedicated country-based IBM operations in order to serve clients, develop markets, and ultimately, ensure IBM is led through a
client lens.
These teams serve our clients locally, complemented by digital capabilities, global talent and resources, and an extensive partner
ecosystem. These country teams have client leaders, IBM consultants, solution specialists, delivery professionals and business
partners all working on behalf of clients. Their mission is to provide insights and innovation and co-create with clients to help them
address their most pressing business challenges and opportunities.
In this way, we serve as a trusted partner to clients, establishing and maintaining relationships that deliver long-term value based on
industry expertise, innovative technologies and an ability to deliver mission critical capabilities to an enterprise at scale.
Research, Development and Intellectual Property
Our research and development (R&D) operations differentiate us from our competitors. In 2020, we invested approximately 9 percent
of total revenue for R&D, focusing on high-growth, high-value opportunities. IBM Research works with clients and our business units
through global labs on near-and mid-term innovations. It delivers many new technologies to our portfolio every year and helps clients
address their most difficult challenges. IBM Research scientists are conducting pioneering work in hybrid cloud, AI, quantum
computing, security, systems and more–applying these technologies across industries including financial services, healthcare,
automotive, pharmaceuticals and energy.
We actively continue to seek IP protection for our innovations. Some of our technological breakthroughs are used exclusively in IBM
products, while others are licensed and may be used in IBM products and/or the products of the licensee. As part of our business
model, we license certain of our IP assets, which constitute high-value technology, but may be applicable in more mature markets.
While our various proprietary IP rights are important to our success, we believe our business as a whole is not materially dependent on
any particular patent or license, or any particular group of patents or licenses. In addition, IBM owns or is licensed under a number of
third-party patents, which vary in duration, relating to its products.
Management Discussion
International Business Machines Corporation and Subsidiary Companies
29
Human Capital
Employees and Related Workforce
(In thousands)
For the year ended December 31:
IBM/wholly owned subsidiaries
Less-than-wholly owned subsidiaries
Complementary*
2020
345.9
10.5
18.9
* The complementary workforce is an approximation of equivalent full-time employees hired under temporary, part-time and limited-term employment
arrangements to meet specific business needs in a flexible and cost-effective manner.
As a globally integrated enterprise, IBM operates in more than 175 countries and is continuing to shift our business to the higher value
segments of enterprise IT. Our global workforce is highly skilled, reflective of the work we do for our clients’ digital transformations
and in support of their mission-critical operations. Our global workforce includes developers, consultants, client delivery and services
specialists, research scientists and others. Our employees are among the world’s leading experts in cloud, AI, quantum computing,
cybersecurity and industry-specific solutions.
Talent and Culture
IBM attracts, develops, engages and retains talent in a dynamic and competitive environment. IBM offers a compelling employee value
proposition: we develop and deliver innovative technologies including hybrid cloud, AI, and quantum, for clients whose businesses the
world relies on. IBM is continuously transforming and developing its talent, both through learning and hiring. In 2020, more than 30,000
people from 75 countries joined IBM. Employees are encouraged and enabled to learn and grow their careers, with employees
completing more than 80 hours of learning on average in 2020. Our digital learning platform, Your Learning, uses Watson AI to generate
personalized recommendations and includes peer-to-peer collaboration and internal social sharing. Hundreds of thousands of
employees globally participate in our annual engagement survey, which measures elements such as workplace experience, inclusion,
pride and propensity to recommend IBM as an employer. Our industry-leading talent practices enabled IBM to improve employee
engagement by more than 2 points year to year and retain employees above historical levels. Every manager and leader in IBM has
access to their team and organization engagement levels along with actionable data-driven insights.
Diversity and Inclusion
IBM has a long, proud history as a pioneer in diversity and inclusion. A diverse and inclusive workplace leads to greater innovation,
agility, performance and engagement, enabling both business growth and societal impact. We ensure employees from diverse
backgrounds are engaged, can be their authentic selves, build skills and achieve their greatest potential. With the full support of our
Board of Directors, beginning in April 2021 we will disclose annually an overview of our diversity, pay equity and inclusion efforts and
programs, including diversity representation data. We are proud of our inclusive culture, with nine out of ten employees responding
that they can be their authentic selves at work. Our focus on creating a diverse and inclusive workplace led to increased engagement
levels for women, Black and Hispanic employees. We are also focused on meeting or exceeding the diversity of skilled talent in the
labor market, for every underrepresented group, and at every level of our company. Women now make up more than 33 percent of our
workforce, and we increased representation of women, Black and Hispanic employees in 2020 compared to the prior year. While we
have taken significant actions and made progress, we have ongoing work to do. IBM believes in pay equity: we have had an equal pay
policy since 1935 and a long-standing practice of maintaining pay equity. To this end, we conduct statistical pay equity analysis that
includes all countries with IBM employees. We also empower employees to understand their pay by providing comprehensive
education and transparent access to pay statements including a comparison to market pay ranges.
Health, Safety and Well-Being
We have a long-standing commitment to the health, safety and well-being of our employees. Never has this been more important than
in 2020 as we faced the COVID-19 pandemic. From early in the course of the outbreak, we supported the health, safety and well-being
of our employees by restricting travel, cancelling in-person meetings and events and transitioning nearly 95 percent of our workforce
to work from home. We have a robust case management system to manage COVID-19 exposures and a comprehensive playbook on
workplace health and safety measures that allow our offices to reopen when conditions improve. Employees are supported with 24/7
access to IBM’s world-class Health and Safety team, education, timely updates and forums to ask questions and raise concerns.
Additionally, from the outset of the COVID-19 pandemic, IBM has focused on mental health and supporting our employees for the long
run with programs shaped by frequent survey polls and employee input sessions. Such programs include: four weeks additional paid
time off for working parents and caregivers facing disruption, robust case management through our Employee Assistance Program to
manage COVID-19 exposures and develop comprehensive guidance, training for employees on resilience and for managers on how to
identify and address mental health issues and financial counseling offerings tailored to pandemic-related matters.
30
Management Discussion
International Business Machines Corporation and Subsidiary Companies
YEAR IN REVIEW
Results of Continuing Operations
Segment Details
The following is an analysis of the 2020 versus 2019 reportable segment results. The table below presents each reportable segment’s
external revenue and gross margin results. Segment pre-tax income includes transactions between segments that are intended to
reflect an arm’s-length transfer price and excludes certain unallocated corporate items.
($ in millions)
For the year ended December 31:
Revenue
Cloud & Cognitive Software
Gross margin
Global Business Services
Gross margin
Global Technology Services
Gross margin
Systems
Gross margin
Global Financing
Gross margin
Other
Gross margin
Total consolidated revenue
Total consolidated gross profit
Total consolidated gross margin
Non-operating adjustments
Amortization of acquired intangible assets
Acquisition-related charges
Spin-off-related charges
Operating (non-GAAP) gross profit
Operating (non-GAAP) gross margin
* Recast to reflect segment changes.
** (3.5) percent excluding divested businesses and adjusted for currency.
NM–Not meaningful
Cloud & Cognitive Software
($ in millions)
For the year ended December 31:
Cloud & Cognitive Software external revenue
Cloud & Data Platforms
Cognitive Applications
Transaction Processing Platforms
* Recast to reflect segment changes.
2020
2019
$ 23,376
$ 22,891 *
77.5 %
77.1 %*
16,162
16,798 *
29.7 %
27.7 %*
25,812
27,361
34.8 %
34.8 %
6,978
7,604
55.9 %
1,123
37.7 %
169
NM
$ 73,620
$ 35,575
48.3 %
732
—
1
$ 36,308
53.1 %
1,400
35.6 %
1,092 *
12.5 %*
$ 77,147
$ 36,488
47.3 %
534
13
—
$ 37,035
49.3 %
48.0 %
Yr.-to-Yr.
Percent/
Margin
Change
Yr.-to-Yr.
Percent Change
Adjusted for
Currency
1.9 %
(4.1)%
(5.4)%
(8.7)%
(19.2)%
(84.4)%
(4.7)%
2.1 %
0.4 pts.
(3.8)%
2.0 pts.
(5.7)%
0.0 pts.
(8.2)%
2.8 pts.
(19.8)%
2.1 pts.
(84.5)%
NM
(4.6)%**
(2.5)%
1.0 pts.
37.1 %
(100.0)%
NM
(2.0)%
1.3 pts.
2020
$ 23,376
$ 11,481 **
5,290
6,606
2019
$ 22,891 *
$ 9,499
5,456 *
7,936
Yr.-to-Yr.
Percent
Change
2.1 %
20.9 %
(3.0)
(16.8)
Yr.-to-Yr.
Percent Change
Adjusted for
Currency
1.9 %
20.5 %
(3.2)
(17.0)
** Red Hat was acquired on July 9, 2019. Results in 2020 include a full year of Red Hat revenue.
Cloud & Cognitive Software revenue of $23,376 million increased 2.1 percent as reported (2 percent adjusted for currency) in 2020
compared to the prior year. There was strong growth in Cloud & Data Platforms, as reported and at constant currency, driven primarily
by Red Hat, as our hybrid cloud and AI solutions are resonating with clients. Both Cognitive Applications and Transaction Processing
Platforms revenue decreased year to year as reported and adjusted for currency, driven by declines in transactional software
performance as clients delayed longer term commitments in the current environment.
Cloud & Data Platforms revenue of $11,481 million increased 20.9 percent as reported (20 percent adjusted for currency) compared
to the prior year, driven by a full year of Red Hat revenue contribution and Red Hat’s strong performance in infrastructure and
application development and emerging technologies. Red Hat OpenShift, the leading open source hybrid cloud platform, helped clients
modernize mission-critical workloads, build cloud native applications, and deploy and manage data and applications across various
clouds within an environment that is open, flexible and secure. We now have more than 2,800 clients using our hybrid cloud platform,
which is an increase of more than 1,000 new enterprise clients since the acquisition of Red Hat in July 2019.
Management Discussion
International Business Machines Corporation and Subsidiary Companies
31
Cognitive Applications revenue of $5,290 million decreased 3.0 percent as reported (3 percent adjusted for currency) compared to the
prior year. We had good client adoption in security solutions such as Cloud Pak for Security and growth in security services as clients
focused on their secure digital transformations. This growth was offset by declines in solutions used by some of the more impacted
industries in the current macroeconomic environment where clients deferred transformational investments to focus on their core
operations.
Transaction Processing Platforms revenue of $6,606 million decreased 16.8 percent as reported (17 percent adjusted for currency) in
2020 compared to the prior year. With the macroeconomic environment due to the COVID-19 pandemic, clients focused on near-term
priorities resulting in purchase deferrals, which impacted our transactional software performance in 2020. However, our subscription
and support revenue grew in 2020 compared to the prior year.
Within Cloud & Cognitive Software, cloud revenue of $7.0 billion grew 67 percent as reported and adjusted for currency year to year.
($ in millions)
For the year ended December 31:
Cloud & Cognitive Software
External gross profit
External gross profit margin
Pre-tax income
Pre-tax margin
* Recast to reflect segment changes.
2020
2019 *
Yr.-to-Yr.
Percent/
Margin
Change
$ 18,118
$17,650
77.5 %
77.1 %
$ 6,362
$ 7,811
24.0 %
30.4 %
2.7 %
0.4 pts.
(18.5)%
(6.4)pts.
The Cloud & Cognitive Software gross profit margin increased 0.4 points to 77.5 percent in 2020 compared to the prior year. The gross
profit margin expansion was driven primarily by the full-year contribution from Red Hat and year-to-year improvement in services
margins as we continued to focus on shifting to higher value services, such as Software-as-a-Service and security services, and driving
AI-powered automation across the portfolio. Pre-tax income of $6,362 million decreased 18.5 percent compared to the prior year with
a pre-tax margin decline of 6.4 points to 24.0 percent. The decline in pre-tax income and margin was driven primarily by the revenue
decline in Transaction Processing Platforms, our continued investment in our strategic areas of cloud and AI, and the impact of higher
workforce rebalancing charges year to year which had 2.6 points of impact on the pre-tax margin.
Global Business Services
($ in millions)
For the year ended December 31:
Global Business Services external revenue
Consulting
Application Management
Global Process Services
* Recast to reflect segment changes.
2020
$16,162
$ 8,083
7,133
945
2019
$16,798 *
$ 8,157 *
7,646
995
Yr.-to-Yr.
Percent
Change
Yr.-to-Yr.
Percent Change
Adjusted for
Currency
(3.8)%
(0.9)%
(6.7)
(5.0)
(4.1)%
(1.3)%
(6.9)
(4.7)
GBS revenue of $16,162 million decreased 3.8 percent as reported (4 percent adjusted for currency) in 2020 compared to the
prior year. As the global pandemic intensified through the year, we aligned our offerings to help clients focus on engaging customers
virtually, modernizing and migrating applications to the cloud, empowering a remote workforce, and focusing on cybersecurity and IT
resiliency. In 2020, GBS accelerated the number of engagements using Red Hat technology and continued to drive client adoption of
Red Hat OpenShift and IBM Cloud Paks.
Consulting revenue of $8,083 million decreased 0.9 percent as reported (1 percent adjusted for currency) compared to the prior year.
Given the macroeconomic environment during 2020, clients shifted priorities, which led to project delays and less demand for more
discretionary offerings. As we pivoted our offerings and capabilities to help address clients’ priorities around application modernization,
our GBS Consulting total signings grew for the year at a mid-single digit rate compared to 2019.
Application Management revenue of $7,133 million decreased 6.7 percent as reported (7 percent adjusted for currency) driven
primarily by the decline in our more traditional on-premise application management services, partially offset by growth in higher value
offerings to develop, modernize and manage cloud applications. Our incumbency in Application Management creates the opportunity
and trust to be the partner of choice for our clients’ digital journeys, and helps drive adoption of our hybrid cloud platform.
Global Process Services revenue of $945 million decreased 5.0 percent as reported (5 percent adjusted for currency), reflecting the
impact of the ongoing macroeconomic environment on volume-based services. GPS returned to growth in the fourth quarter of 2020,
32
Management Discussion
International Business Machines Corporation and Subsidiary Companies
as we continued to deliver efficiency and flexibility to our clients’ processes by infusing innovative technology and redesigning
intelligent workflows.
Within GBS, cloud revenue of $5.8 billion grew 11 percent as reported and adjusted for currency. GBS continued to drive the adoption
of our hybrid cloud platform to help our clients accelerate their digital reinventions by modernizing their application infrastructures and
leveraging business transformation services built on hybrid cloud.
($ in millions)
For the year ended December 31:
Global Business Services
External gross profit
External gross profit margin
Pre-tax income
Pre-tax margin
* Recast to reflect segment changes.
2020
2019 *
Yr.-to-Yr.
Percent/
Margin
Change
$ 4,795
29.7 %
$ 1,351
8.3 %
$ 4,655
27.7 %
$ 1,623
9.5 %
3.0 %
2.0 pts.
(16.8)%
(1.2)pts.
The GBS gross profit margin increased 2.0 points to 29.7 percent compared to the prior year, driven by margin improvements across
all three areas of the business. The gross margin expansion reflects our shift to higher-value offerings, improved productivity and
operational efficiency created by our investments in innovative delivery capabilities and our ability to leverage our variable and global
delivery resource model. Pre-tax income of $1,351 million decreased 16.8 percent compared to the prior year and the pre-tax margin
declined 1.2 points to 8.3 percent. The year-to-year declines in pre-tax income and margin were driven by the higher workforce
rebalancing charges year to year, which had 2.6 points of impact to pre-tax margin, partially offset by the gross margin expansion.
Global Technology Services
($ in millions)
For the year ended December 31:
Global Technology Services external revenue
Infrastructure & Cloud Services
Technology Support Services
2020
2019
$25,812
$19,669
6,144
$27,361
$20,736
6,625
Yr.-to-Yr.
Percent
Change
Yr.-to-Yr.
Percent Change
Adjusted for
Currency
(5.7)%
(5.1)%
(7.3)
(5.4)%
(5.2)%
(6.0)
GTS revenue of $25,812 million decreased 5.7 percent as reported (5 percent adjusted for currency) in 2020 compared to the
prior year. The revenue decline was driven by lower client business volumes primarily with clients in industries more impacted by the
macroeconomic environment. However, cloud revenue grew as reported and adjusted for currency in 2020 compared to the prior year.
We had strong contract renewals and added a number of new clients in the fourth quarter.
Infrastructure & Cloud Services revenue of $19,669 million decreased 5.1 percent as reported (5 percent adjusted for currency)
compared to the prior year. Revenue was impacted by lower client-based business volumes year to year in the more economically
sensitive industries. Clients took a longer-term view, with a focus on modernizing their core infrastructure to create operational
efficiency and move their mission-critical workloads to a hybrid cloud platform. These clients turn to GTS’s managed infrastructure
services with its deep expertise in managing clients’ mission-critical infrastructures and next generation service delivery capabilities
infused with AI and automation. As we prepare to separate our managed infrastructure services business in 2021, we are deeply
engaged with our clients to ensure a smooth transition to NewCo, the world’s leading provider of infrastructure services.
Technology Support Services (TSS) revenue of $6,144 million decreased 7.3 percent as reported (6 percent adjusted for currency) in
2020, driven primarily by the Systems hardware product cycles and a shift away from lower value services.
Within GTS, cloud revenue of $9.4 billion grew 10 percent as reported and adjusted for currency.
Management Discussion
International Business Machines Corporation and Subsidiary Companies
33
($ in millions)
For the year ended December 31:
Global Technology Services
External total gross profit
External total gross profit margin
Pre-tax income
Pre-tax margin
2020
2019
Yr.-to-Yr.
Percent/
Margin
Change
$ 8,975
34.8 %
$ 117
0.4 %
$ 9,515
34.8 %
$ 1,645
5.8 %
(5.7) %
0.0 pts.
(92.9) %
(5.3) pts.
The GTS gross profit margin of 34.8 percent was flat compared to the prior year. We had margin improvement across the portfolio from
the benefits of workforce rebalancing actions taken earlier in the year and from the shift to higher-value business, partially offset by
revenue declines in TSS. Pre-tax income of $117 million decreased 92.9 percent and pre-tax margin decreased 5.3 points year to year
to 0.4 percent, reflecting the higher level of workforce rebalancing charges in the current year, which had 4.2 points of impact on the
pre-tax margin. A significant portion of the structural actions in the fourth quarter of 2020 impacted GTS in order to further improve
margins and the overall financial profile of the business.
Services Backlog and Signings
($ in billions)
At December 31:
Total backlog
2020
$110.8
2019
$112.4
Yr.-to-Yr.
Percent
Change
Yr.-to-Yr.
Percent Change
Adjusted for
Currency
(1.5)%
(4.5) %
The estimated total services backlog at December 31, 2020 was $111 billion, a decrease of 1.5 percent as reported (4 percent adjusted
for currency).
Total services backlog includes Infrastructure & Cloud Services, Security Services, Consulting, Global Process Services, Application
Management and TSS. Total backlog is intended to be a statement of overall work under contract which is either noncancellable, or
which historically has very low likelihood of termination, given the criticality of certain services to the company’s clients. Total backlog
does not include as-a-Service arrangements that allow for termination under contractual commitment terms. Backlog estimates are
subject to change and are affected by several factors, including terminations, changes in the scope of contracts, periodic revalidations,
adjustments for revenue not materialized and adjustments for currency.
($ in millions)
For the year ended December 31:
Total signings
2020
$38,770
2019
$40,741
Yr.-to-Yr.
Percent
Change
Yr.-to-Yr.
Percent Change
Adjusted for
Currency
(4.8)%
(5.1)%
Services signings are management’s initial estimate of the value of a client’s commitment under a services contract. There are no third-
party standards or requirements governing the calculation of signings. The calculation used by management involves estimates and
judgments to gauge the extent of a client’s commitment, including the type and duration of the agreement, and the presence of
termination charges or wind-down costs.
Signings include Infrastructure & Cloud Services, Security Services, Consulting, Global Process Services and Application Management
contracts. Contract extensions and increases in scope are treated as signings only to the extent of the incremental new value. Total
services signings can vary over time due to a variety of factors including, but not limited to, the timing of signing a small number of
larger contracts, such as in Infrastructure & Cloud Services or Global Process Services. TSS is generally not included in signings as the
maintenance contracts tend to be more steady state, where revenues equal renewals. Certain longer-term TSS contracts that have
characteristics similar to outsourcing contracts are included in signings.
Contract portfolios purchased in an acquisition are treated as positive backlog adjustments provided those contracts meet the
company’s requirements for initial signings. A new signing will be recognized if a new services agreement is signed incidental or
coincidental to an acquisition or divestiture.
Management believes that the estimated values of services backlog and signings disclosed herein provide insight into our potential
future revenue, which is used by management as a tool to monitor the performance of the business and viewed as useful decision-
making information for investors. The conversion of signings and backlog into revenue may vary based on the types of services and
34
Management Discussion
International Business Machines Corporation and Subsidiary Companies
solutions, customer decisions, and as well as other factors, which may include, but are not limited to, macroeconomic environment or
external events.
Systems
($ in millions)
For the year ended December 31:
Systems external revenue
Systems Hardware
IBM Z
Power Systems
Storage Systems
2020
$6,978
$5,481
2019
$7,604
$5,918
Operating Systems Software
1,497
1,686
Yr.-to-Yr.
Percent
Change
Yr.-to-Yr.
Percent Change
Adjusted for
Currency
(8.2)%
(7.4)%
1.9
(22.4)
(6.1)
(11.2)
(8.7) %
(8.0) %
1.2
(22.9)
(6.7)
(11.2)
Systems revenue of $6,978 million decreased 8.2 percent year to year as reported (9 percent adjusted for currency). Our Systems
portfolio continues to deliver critical and lasting value to enterprise clients in support of our hybrid cloud strategy. Systems Hardware
revenue of $5,481 million declined 7.4 percent as reported (8 percent adjusted for currency), driven primarily by declines in Power
Systems and Storage Systems, partially offset by year-to-year growth in IBM Z. Operating Systems Software revenue of $1,497 million
declined 11.2 percent as reported (11 percent adjusted for currency) compared to the prior year.
Within Systems Hardware, IBM Z revenue increased 1.9 percent as reported (1 percent adjusted for currency) despite an elongated
z15 adoption cycle as a result of the challenging environment. The full-year growth in IBM Z reflects the importance of this high-value,
secure and scalable platform with cloud native development capabilities. Our installed base of MIPS is more than 3.5 times the level
of a decade ago, with 60 percent of our install base in new workload areas such as Linux.
Power Systems revenue decreased 22.4 percent as reported (23 percent adjusted for currency) year to year, reflecting the product
cycles across the Power Systems portfolio.
Storage Systems revenue decreased 6.1 percent as reported (7 percent adjusted for currency) year to year, driven primarily by declines
in high-end storage which is a reflection of the IBM Z cycle.
Within Systems, cloud revenue of $2.9 billion declined 3 percent as reported and adjusted for currency.
($ in millions)
For the year ended December 31:
Systems
External Systems Hardware gross profit
External Systems Hardware gross profit margin
External Operating Systems Software gross profit
External Operating Systems Software gross profit margin
External total gross profit
External total gross profit margin
Pre-tax income
Pre-tax margin
2020
2019
$ 2,668
48.7 %
$ 1,232
82.3 %
$ 3,899
55.9 %
$ 449
5.8 %
$ 2,622
44.3 %
$ 1,412
83.8 %
$ 4,034
53.1 %
$ 701
8.4 %
Yr.-to-Yr.
Percent/
Margin
Change
1.8 %
4.4 pts.
(12.8)%
(1.5)pts.
(3.3)%
2.8 pts.
(36.0)%
(2.7)pts.
The Systems gross profit margin increased 2.8 points to 55.9 percent in 2020 compared to the prior year, driven primarily by margin
improvements in IBM Z and Power Systems, and a mix to IBM Z hardware. Pre-tax income of $449 million declined 36.0 percent and
pre-tax margin decreased 2.7 points year to year to 5.8 percent, driven primarily by the higher level of workforce rebalancing charges
in the current year, which had 2.5 points of impact on the pre-tax margin.
Management Discussion
International Business Machines Corporation and Subsidiary Companies
35
Global Financing
($ in millions)
For the year ended December 31:
External revenue
Internal revenue
Total revenue
Pre-tax income
2020
2019
$1,123
894
$2,017
$ 761
$1,400
1,232
$2,632
$1,055
Yr.-to-Yr.
Percent
Change
(19.8)%
(27.5)
(23.4)%
(27.8)%
In 2019, we began the wind down of our OEM Commercial Financing business to refocus our Global Financing business on IBM’s
products and services. In 2020, we entered into arrangements to sell certain financing receivables to third parties. While the strategic
actions we have taken are the primary driver of the decline in external revenue and pre-tax income on a year-to-year basis, our
repositioning of the Global Financing business has strengthened our liquidity position, improved the quality of our portfolio and lowered
our debt needs.
Global Financing total revenue decreased 23.4 percent compared to the prior year. This was due to a decrease in internal revenue of
27.5 percent, driven by decreases in internal used equipment sales (down 22.3 percent to $670 million) and internal financing (down
39.5 percent to $224 million). The decrease in internal financing was due to lower average asset balances and yields. External revenue
declined 19.8 percent due to decreases in external financing (down 25.5 percent to $834 million), reflecting the wind down of the OEM
IT commercial financing operations and a decline in client financing revenue.
Sales of used equipment represented 47.5 percent and 43.4 percent of Global Financing’s revenue for the years ended December 31,
2020 and 2019, respectively, which reflects lower financing revenue compared to 2019. The gross profit margin on used sales was
50.7 percent and 52.2 percent for the years ended December 31, 2020 and 2019, respectively.
Global Financing pre-tax income decreased 27.8 percent year to year primarily driven by a decline in gross profit ($339 million) due to
lower revenue, partially offset by a decrease in expense ($46 million), which was in line with the segment’s performance.
Geographic Revenue
In addition to the revenue presentation by reportable segment, we also measure revenue performance on a geographic basis.
($ in millions)
For the year ended December 31:
Total revenue
Americas
Europe/Middle East/Africa
Asia Pacific
2020
2019
$73,620
$34,114
23,644
15,863
$ 77,147
$ 36,274
24,443
16,430
Yr.-to-Yr.
Percent
Change
(4.6)%
(6.0)%
(3.3)
(3.5)
Yr.-to-Yr.
Percent Change
Adjusted for
Currency
(4.7)%
(4.8)%
(4.7)
(4.3)
Yr.-to-Yr.
Percent Change
Excluding Divested
Businesses And
Adjusted for
Currency
(3.5)%
(3.5)%
(3.6)
(3.5)
Total revenue of $73,620 million in 2020 decreased 4.6 percent year to year as reported (5 percent adjusted for currency and 4 percent
excluding divested businesses and adjusted for currency).
Americas revenue decreased 6.0 percent as reported (5 percent adjusted for currency and 4 percent excluding divested businesses
and adjusted for currency). Within North America, the U.S. decreased 4.9 percent and Canada decreased 6.0 percent as reported (5
percent adjusted for currency). Latin America declined 12.9 percent as reported (3 percent adjusted for currency). Within Latin America,
Brazil declined 17.9 percent as reported (3 percent adjusted for currency).
EMEA revenue decreased 3.3 percent as reported (5 percent adjusted for currency and 4 percent excluding divested businesses and
adjusted for currency). As reported, the UK, Germany, France and Italy decreased 9.5 percent, 6.3 percent, 3.4 percent and 1.0 percent,
respectively, and declined 10 percent, 9 percent, 5 percent and 3 percent, respectively, adjusted for currency.
Asia Pacific revenue decreased 3.5 percent as reported (4 percent adjusted for currency and excluding divested businesses and
adjusted for currency). Japan was flat as reported and decreased 2 percent adjusted for currency. As reported, China, Australia and
India decreased 13.0 percent, 5.8 percent and 6.7 percent, respectively, and declined 13 percent, 5 percent and 2 percent,
respectively, adjusted for currency.
36
Management Discussion
International Business Machines Corporation and Subsidiary Companies
Total Expense and Other (Income)
($ in millions)
For the year ended December 31:
Total consolidated expense and other (income)
Non-operating adjustments
Amortization of acquired intangible assets
Acquisition-related charges
Non-operating retirement-related (costs)/income
Spin-off-related charges
Operating (non-GAAP) expense and other (income)
Total consolidated expense-to-revenue ratio
Operating (non-GAAP) expense-to-revenue ratio
2020
$ 30,937 *
2019
$ 26,322
(1,126)
(13)
(1,123)
(28)
$ 28,648 *
42.0 %
38.9 %
(764)
(409)
(615)
—
$ 24,533
34.1 %
31.8 %
Yr.-to-Yr.
Percent/
Margin
Change
17.5 %
47.3
(96.8)
82.5
NM
16.8 %
7.9 pts.
7.1 pts.
* Includes a $2.0 billion pre-tax charge for structural actions in the fourth quarter.
NM–Not meaningful
Total expense and other (income) year-to-year results for the year ended December 31, 2020 were impacted by the Red Hat acquisition
which closed in July 2019. As a result, in the current year, there was a full year of expenses for Red Hat operational spending and
amortization of acquired intangible assets associated with the transaction. The current year also included a fourth-quarter $2.0 billion
pre-tax charge for structural actions (primarily workforce rebalancing) to simplify and optimize our operating model.
Total expense and other (income) increased 17.5 percent in 2020 versus the prior year primarily driven by the fourth-quarter
charge for workforce rebalancing, higher Red Hat operational spending, lower gains from divestitures and higher non-operating
retirement-related costs, partially offset by lower spending including reductions in travel and other expenses associated with
COVID-19 restrictions. Total operating (non-GAAP) expense and other (income) increased 16.8 percent year to year, driven
primarily by the factors above excluding the higher non-operating retirement-related costs.
For additional information regarding total expense and other (income) for both expense presentations, see the following analyses
by category.
Selling, General and Administrative Expense
($ in millions)
For the year ended December 31:
Selling, general and administrative expense
Selling, general and administrative–other
Advertising and promotional expense
Workforce rebalancing charges
Amortization of acquired intangible assets
Stock-based compensation
Provision for/(benefit from) expected credit loss expense
Total consolidated selling, general and administrative expense
Non-operating adjustments
Amortization of acquired intangible assets
Acquisition-related charges
Spin-off-related charges
Operating (non-GAAP) selling, general and administrative expense
* Includes a $2.0 billion pre-tax charge for structural actions in the fourth quarter.
NM–Not meaningful
2020
2019
$ 16,800
1,542
2,922 *
1,123
586
109
$ 23,082 *
(1,123)
(13)
(28)
$ 21,917 *
$17,099
1,647
555
762
453
89
$20,604
(762)
(282)
—
$19,560
Yr.-to-Yr.
Percent
Change
(1.8)%
(6.3)
426.3
47.5
29.5
22.4
12.0 %
47.5
(95.3)
NM
12.1 %
Total selling, general and administrative (SG&A) expense increased 12.0 percent in 2020 versus 2019, driven primarily by the
following factors:
• Fourth-quarter workforce rebalancing charge (10 points);
• Higher spending (2 points) driven by a full year of Red Hat operational expense in 2020 compared to six months in 2019
(5 points), partially offset by spending reductions associated with COVID-19 restrictions;
• Higher amortization of acquired intangible assets associated with the Red Hat transaction (1 point); partially offset by
• Lower acquisition-related charges associated with the Red Hat transaction (2 points).
Management Discussion
International Business Machines Corporation and Subsidiary Companies
37
Operating (non-GAAP) expense increased 12.1 percent year to year primarily driven by the same factors excluding the
acquisition-related charges and amortization of acquired intangible assets associated with the Red Hat transaction.
Provisions for expected credit loss expense increased $19.8 million in 2020 compared to 2019. The receivables provision coverage
was 2.4 percent at December 31, 2020, an increase of 70 basis points from December 31, 2019. The higher coverage rate at December
31, 2020 also reflects the adoption of the new guidance for current expected credit losses.
Research, Development and Engineering Expense
($ in millions)
For the year ended December 31:
Total consolidated research, development and engineering
Non-operating adjustment
Acquisition-related charges
Operating (non-GAAP) research, development and engineering
2020
$ 6,333
2019
$ 5,989
Yr.-to-Yr.
Percent
Change
5.7 %
—
$ 6,333
(53)
$ 5,936
(100.0)
6.7 %
Research, development and engineering (RD&E) expense was 8.6 percent of revenue in 2020 and 7.8 percent of revenue in 2019.
RD&E expense increased 5.7 percent in 2020 versus 2019 primarily driven by:
• Higher spending (7 points) driven by a full year of Red Hat spending in 2020 compared to six months in 2019 (8 points); partially
offset by
• Lower acquisition-related charges associated with the Red Hat transaction (1 point).
Operating (non-GAAP) expense increased 6.7 percent year to year primarily driven by Red Hat spending.
Intellectual Property and Custom Development Income
($ in millions)
For the year ended December 31:
Licensing of intellectual property including royalty-based fees
Custom development income
Sales/other transfers of intellectual property
Total
2020
$ 309
275
42
$ 626
2019
$ 367
246
34
$ 648
Yr.-to-Yr.
Percent
Change
(15.8)%
11.7
22.4
(3.3)%
Licensing of intellectual property including royalty-based fees decreased 3.3 percent in 2020 compared to 2019. This was primarily
due to a decline in licensing of intellectual property including royalty-based fees compared to the prior year. The timing and amount of
licensing, sales or other transfers of IP may vary significantly from period to period depending upon the timing of licensing agreements,
economic conditions, industry consolidation and the timing of new patents and know-how development.
Other (Income) and Expense
($ in millions)
For the year ended December 31:
Other (income) and expense
Foreign currency transaction losses/(gains)
(Gains)/losses on derivative instruments
Interest income
Net (gains)/losses from securities and investment assets
Retirement-related costs/(income)
Other
Total consolidated other (income) and expense
Non-operating adjustments
Amortization of acquired intangible assets
Acquisition-related charges
Non-operating retirement-related costs/(income)
Operating (non-GAAP) other (income) and expense
NM–Not meaningful
2020
2019
$ 114
(101)
(105)
(22)
1,123
(149)
$ 861
(2)
—
(1,123)
$ (265)
$ (279)
15
(349)
(32)
615
(937)
$ (968)
(2)
154
(615)
$ (1,431)
Yr.-to-Yr.
Percent
Change
NM
NM
(70.0)%
(31.8)
82.5
(84.2)
NM
—
(100.0)
82.5
(81.5)%
38
Management Discussion
International Business Machines Corporation and Subsidiary Companies
Total consolidated other (income) and expense was expense of $861 million in 2020 compared to income of $968 million in 2019.
The year-to-year change was primarily driven by:
• Lower gains from divestitures ($733 million) reflected in Other;
• Higher non-operating retirement-related costs ($508 million). Refer to “Retirement-Related Plans” for additional information.
• Net exchange losses (including derivative instruments) in the current year versus net exchange gains (including derivative
instruments) in the prior year ($277 million); and
• Lower interest income ($244 million) driven by lower interest rates and a lower average cash balance in the current year.
Operating (non-GAAP) other (income) and expense was $265 million of income in 2020 and decreased $1,167 million compared to
the prior-year period. The year-to-year change was primarily driven by the lower gains from divestitures, effects of currency and lower
interest income described above.
Interest Expense
($ in millions)
For the year ended December 31:
Total consolidated interest expense
Non-operating adjustment
Acquisition-related charges
Operating (non-GAAP) interest expense
2020
$1,288
2019
$1,344
Yr.-to-Yr.
Percent
Change
(4.2) %
—
$1,288
(228)
$1,116
(100.0)
15.4 %
Interest expense decreased $56 million compared to 2019. Interest expense is presented in cost of financing in the Consolidated
Income Statement only if the related external borrowings are to support the Global Financing external business. Overall interest
expense (excluding capitalized interest) in 2020 was $1,738 million, a decrease of $214 million year to year primarily driven by lower
average interest rates.
Operating (non-GAAP) interest expense increased $172 million compared to the prior-year period. The prior year excluded Red Hat
pre-closing debt financing costs and the current year included a full year of interest expense associated with the higher level of debt.
Stock-Based Compensation
Pre-tax stock-based compensation cost of $937 million increased $258 million compared to 2019. This was primarily due to
increases related to a full year of compensation expense associated with the issuances and conversions of stock-based
compensation for Red Hat ($167 million) compared to six months in 2019, and issuances of restricted stock units ($91 million).
Stock-based compensation cost, and the year-to-year change, was reflected in the following categories: Cost: $153 million, up
$53 million; SG&A expense: $586 million, up $134 million; and RD&E expense: $198 million, up $72 million.
Retirement-Related Plans
The following table provides the total pre-tax cost for all retirement-related plans. Total operating costs/(income) are included in the
Consolidated Income Statement within the caption (e.g., Cost, SG&A, RD&E) relating to the job function of the plan participants.
($ in millions)
For the year ended December 31:
Retirement-related plans–cost
Service cost
Multi-employer plans
Cost of defined contribution plans
Total operating costs/(income)
Interest cost
Expected return on plan assets
Recognized actuarial losses
Amortization of prior service costs/(credits)
Curtailments/settlements
Other costs
Total non-operating costs/(income)
Total retirement-related plans–cost
NM–Not meaningful
2020
2019
$ 406
29
1,058
$ 1,494
$ 2,203
(3,448)
2,285
13
52
18
$ 1,123
$ 2,617
$ 385
32
1,040
$ 1,457
$ 2,929
(4,192)
1,819
(9)
41
28
$ 615
$ 2,072
Yr.-to-Yr.
Percent
Change
5.5 %
(7.9)
1.8
2.5 %
(24.8)%
(17.8)
25.7
NM
28.4
(37.9)
82.5 %
26.3 %
Total pre-tax retirement-related plan cost increased by $545 million compared to 2019, primarily driven by lower expected returns on
plan assets ($744 million) and an increase in recognized actuarial losses ($467 million), partially offset by lower interest costs ($726
million).
Management Discussion
International Business Machines Corporation and Subsidiary Companies
39
As discussed in the “Operating (non-GAAP) Earnings” section, we characterize certain retirement-related costs as operating and others
as non-operating. Utilizing this characterization, operating retirement-related costs in 2020 were $1,494 million, an increase of $37
million compared to 2019. Non-operating costs of $1,123 million in 2020 increased $508 million year to year, driven primarily by the
same factors as above.
Income Taxes
The continuing operations effective tax rate for 2020 was (18.6) percent compared to 7.2 percent in 2019. The decrease in the effective
tax rate was primarily driven by a net tax benefit of $0.9 billion related to an intra-entity sale of certain of the company’s intellectual
property and related impacts in the first quarter of 2020, and a benefit of $0.2 billion related to a foreign tax law change. The operating
(non-GAAP) effective tax rate for 2020 was (1.5) percent compared to 8.5 percent in 2019. The current year operating (non-GAAP)
benefit from income taxes was primarily driven by the net tax benefit from the intra-entity IP sale. For more information, see note G,
“Taxes.”
Earnings Per Share
Basic earnings per share is computed on the basis of the weighted-average number of shares of common stock outstanding during the
period. Diluted earnings per share is computed on the basis of the weighted-average number of shares of common stock outstanding
plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential
common shares include outstanding stock options and stock awards.
For the year ended December 31:
Earnings per share of common stock from continuing operations
Assuming dilution
Basic
Diluted operating (non-GAAP)
Weighted-average shares outstanding (in millions)
Assuming dilution
Basic
2020
2019
$6.13 *
$6.18 *
$8.67 *
896.6
890.3
$ 10.57
$ 10.63
$ 12.81
892.8
887.2
Yr.-to-Yr.
Percent
Change
(42.0)%
(41.9)%
(32.3)%
0.4 %
0.4 %
* The $2.0 billion pre-tax charge for structural actions in the fourth quarter resulted in an impact of ($1.84) to diluted earnings per share from continuing
operations and diluted operating (non-GAAP) earnings per share. The impact to basic earnings per share was ($1.85).
Actual shares outstanding at December 31, 2020 and 2019 were 892.7 million and 887.1 million, respectively. The year-to-year
increase was primarily the result of the common stock issued under employee plans. The average number of common shares
outstanding assuming dilution was 3.8 million shares higher in 2020 versus 2019.
Financial Position
Dynamics
At December 31, 2020, our balance sheet remained strong with flexibility to support the business. We continue to manage the
investment portfolio to meet our capital preservation and liquidity objectives. In this unprecedented environment as a result of the
COVID-19 pandemic, while we are supporting our clients and improving the flexibility and competitive position of our operations, we
took actions to enhance our balance sheet strength and liquidity position.
Cash, restricted cash and marketable securities at December 31, 2020 were $14,275 million, an increase of $5,265 million compared
to prior year end. Through strategic mitigation actions and re-focus of our Global Financing portfolio, financing receivables declined
$4,925 million to $17,979 million as of December 31, 2020. Total debt of $61,538 million decreased $1,361 million from prior year-
end. During 2020, we completed bond issuances totaling $8,117 million, with terms ranging from 7 to 30 years, and interest rates
ranging from 0.325 to 2.95 percent depending on maturity. We have reduced total debt $11,501 million since the end of the second
quarter of 2019 (immediately preceding the Red Hat acquisition). We have consistently generated strong cash flow from operations
and continue to have access to additional sources of liquidity through the capital markets and our credit facilities.
During 2020, we generated $18,197 million in cash from operating activities, an increase of $3,426 million compared to 2019. The
year-to-year increase was primarily driven by the reduction of financing receivables due to sales of receivables. Our free cash flow for
2020 was $10,805 million, a decrease of $1,104 million compared to the prior year. See pages 57 and 58 for additional information on
free cash flow. We returned $5,797 million to shareholders through dividends in 2020. We suspended our share repurchase program
at the time of the Red Hat closing to focus on debt repayment. At 2020 year end, we had $2.0 billion remaining in share repurchase
authorization. Our cash generation permits us to invest and deploy capital to areas with the most attractive long-term opportunities.
Consistent with accounting standards, the company remeasured the funded status of our retirement and postretirement plans at
December 31. At December 31, 2020, the overall net underfunded position was $11,506 million, an increase of $416 million from
December 31, 2019, driven by lower discount rates partially offset by strong asset returns. At year end, our qualified defined benefit
40
Management Discussion
International Business Machines Corporation and Subsidiary Companies
plans were well funded and the required contributions related to these plans and multi-employer plans are expected to be
approximately $300 million in both 2021 and 2022. In 2020, the return on the U.S. Personal Pension Plan assets was 12.2 percent and
the plan was 108 percent funded at December 31, 2020. Overall, global asset returns were 9.6 percent and the qualified defined
benefit plans worldwide were 102 percent funded at December 31, 2020.
Global Financing Financial Position Key Metrics
($ in millions)
At December 31:
Cash and cash equivalents
Net investment in sales-type and direct financing leases (1)
Equipment under operating leases–external clients (2)
Client loans
Total client financing assets
Commercial financing receivables
Intercompany financing receivables (3) (4)
Total assets
Debt
Total equity
2020
$ 1,862
4,092
104
11,498
15,694
2,411
3,959
$ 25,075
21,167
$ 2,352
2019
$ 1,697
6,224
238
12,884
19,346
3,820
3,870
$ 29,568
24,727
$ 2,749
(1) Includes deferred initial direct costs which are expensed in IBM’s consolidated results.
(2) Includes intercompany mark-up, priced on an arm’s-length basis, on products purchased from the company’s product divisions which is eliminated in
IBM’s consolidated results.
(3) Entire amount eliminated for purposes of IBM’s consolidated results and therefore does not appear in the Consolidated Balance Sheet.
(4) These assets, along with all other financing assets in this table, are leveraged at the value in the table using Global Financing debt.
At December 31, 2020, approximately 61 percent of the total external portfolio was with investment-grade clients with no direct
exposure to consumers, a decrease of 4 points year to year and an increase of 4 points compared to September 30, 2020. The reduction
in investment grade year to year was driven primarily by credit rating changes within the existing portfolio of clients, partially offset by
the wind down of OEM IT commercial financing operations. We continue to apply our rigorous credit policies, particularly in industries
and countries disrupted by COVID-19, as it relates to the origination of new business. This investment grade percentage is based on
the credit ratings of the companies in the portfolio and reflects mitigating credit enhancement actions taken by the client to reduce the
risk to IBM.
We have a long-standing practice of taking mitigation actions, in certain circumstances, to transfer credit risk to third parties, with
enhanced focus in this unprecedented environment of the COVID-19 pandemic. These actions may include credit insurance, financial
guarantees, nonrecourse borrowings, transfers of receivables recorded as true sales in accordance with accounting guidance or sales
of equipment under operating lease. Sales of receivables arrangements are also utilized in the normal course of business as part of the
company’s cash and liquidity management.
During the year ended December 31, 2020, the company sold $2,562 million of client financing receivables, consisting of loan and
lease receivables of $1,410 million and $1,152 million, respectively.
On December 24, 2020, the company entered into an agreement with a third-party investor to sell up to $3,000 million of IBM short-
term commercial financing receivables, at any one time, on a revolving basis. The company sold $515 million of commercial financing
receivables under the agreement in the fourth quarter of 2020. In addition, the company included $383 million of commercial financing
receivables classified as held for sale at December 31, 2020 in short-term financing receivables in the Consolidated Balance Sheet.
The reduction of financing receivables due to these sales resulted in a benefit to cash flows from operating activities, however had no
impact to free cash flow. The impact to the Consolidated Income Statement, including fees and net gain or loss associated with the
transfer of these receivables for the year ended December 31, 2020, was not material. For additional information relating to the sales
of financing receivables refer to note K, “Financing Receivables.”
IBM Working Capital
($ in millions)
At December 31:
Current assets
Current liabilities
Working capital
Current ratio
2020
$ 39,165
39,869
$
(705)
0.98:1
2019
$ 38,420
37,701
$
718
1.02:1
Management Discussion
International Business Machines Corporation and Subsidiary Companies
41
Working capital decreased $1,423 million from the year-end 2019 position. The key changes are described below:
Current assets increased $745 million ($40 million adjusted for currency) due to:
• An increase of $5,265 million ($5,064 million adjusted for currency) in cash and cash equivalents, restricted cash and marketable
securities; and
• An increase of $536 million ($446 million adjusted for currency) in total inventory, deferred costs and prepaid expenses and other
current assets; partially offset by
• A decline in receivables of $5,057 million ($5,469 million adjusted for currency) mainly due to sales of financing receivables,
continued focus on collections, including collection of divestiture-related receivables and a decline in revenue.
Current liabilities increased $2,168 million ($1,121 million adjusted for currency) as a result of:
• An increase in other accrued expenses and liabilities of $2,491 million ($1,922 million adjusted for currency) primarily due to the
fourth-quarter workforce rebalancing charge; and
• An increase in deferred income of $807 million ($488 million adjusted for currency); and
• An increase in taxes payable of $462 million ($448 million adjusted for currency); partially offset by
• A decrease in short-term debt of $1,615 million ($1,552 million adjusted for currency) due to maturities of $9,165 million;
partially offset by reclassifications of $7,998 million from long-term debt to reflect upcoming maturities.
Receivables and Allowances
Roll Forward of Total IBM Receivables Allowance for Credit Losses
($ in millions)
January 1, 2020 *
December 31, 2020
$ 612
$ 644
* Opening balance does not equal the allowance at December 31, 2019 due to the adoption of the guidance on current expected credit losses. Refer to
Write-offs
$ (85)
Other
$ 10
Additions/
(Releases) **
$108
note B, “Accounting Changes,” for additional information.
** Additions/(Releases) for Allowance for Credit Losses are recorded in expense.
Refer to note A, “Significant Accounting Policies,” for additional information regarding Allowance for Credit Losses write-offs.
Primarily represents translation adjustments.
The total IBM receivables provision coverage was 2.4 percent at December 31, 2020, an increase of 60 basis points compared to
January 1, 2020. The increase was primarily driven by the overall decline in total receivables and an increase in customer specific
provisions. The majority of the write-offs during the year related to receivables which had been previously reserved.
Global Financing Receivables and Allowances
The following table presents external Global Financing receivables excluding immaterial miscellaneous receivables.
($ in millions)
At December 31:
Amortized cost/Recorded investment(1)(2)
Specific allowance for credit losses
Unallocated allowance for credit losses
Total allowance for credit losses
Net financing receivables
Allowance for credit losses coverage
2020
$ 18,264
184
79
263
$ 18,001
2019
$ 22,446
177
45
221
$ 22,224
1.4 %
1.0 %
(1) Prior to the January 1, 2020 adoption of the guidance on current expected credit losses, the presentation was recorded investment, subsequent to adoption
the presentation is amortized cost. Both presentations include deferred initial direct costs which are expensed in IBM’s consolidated results.
(2) The amortized cost basis of a financial asset represents the original amount of the financing receivable (including residual value) adjusted for unearned
income, deferred initial direct costs, cash collected, write-offs and any foreign exchange adjustment. Recorded investment excluded residual value.
Upon the adoption of the guidance on current expected credit losses, the percentage of financing receivables reserved increased from
1.0 percent at December 31, 2019, to 1.1 percent January 1, 2020, primarily driven by a 74.2 percent increase in unallocated reserves.
42
Management Discussion
International Business Machines Corporation and Subsidiary Companies
The percentage of financing receivables reserved increased from 1.1 percent at January 1, 2020, to 1.4 percent at December 31, 2020,
which reflects essentially flat unallocated and specific reserves and an overall decline in financing receivables.
Roll Forward of Global Financing Receivables Allowance for Credit Losses (included in Total IBM)
($ in millions)
January 1, 2020 *
December 31, 2020
$ 262
$263
* Opening balance does not equal the allowance at December 31, 2019 due to the adoption of the guidance on current expected credit losses. Refer to
Write-offs
$(36)
Other
$4
Additions/
(Releases) **
$32
note B, “Accounting Changes,” for additional information.
** Additions/(Releases) for Allowance for Credit Losses are recorded in expense.
Refer to note A, “Significant Accounting Policies,” for additional information regarding Allowance for Credit Loss write-offs.
Primarily represents recoveries of amounts previously written off and translation adjustments.
Global Financing’s provision for expected credit losses (including impacts from off-balance sheet commitments which are recorded in
other liabilities) was an addition of $34 million in 2020, compared to a release of $7 million in 2019. The increase was primarily driven
by higher unallocated and specific reserves in Americas.
Noncurrent Assets and Liabilities
($ in millions)
At December 31:
Noncurrent assets
Long-term debt
Noncurrent liabilities (excluding debt)
2020
$ 116,806
$ 54,355
$ 41,020
2019
$ 113,767
$ 54,102
$ 39,398
The increase in noncurrent assets of $3,039 million ($829 million adjusted for currency) was driven by:
• An increase in deferred taxes of $4,060 million ($3,915 million adjusted for currency) primarily due to the intra-entity sale of IP in
the first quarter; and
• An increase in prepaid pension assets of $745 million ($526 million adjusted for currency) driven by higher returns on plan assets
and plan remeasurements; partially offset by
• A decrease in long-term financing receivables of $1,626 million ($1,811 million adjusted for currency) as a result of sales of
receivables and product cycle dynamics; and
• A decrease in net intangible assets and goodwill of $44 million ($1,283 million adjusted for currency) resulting from intangibles
amortization, partially offset by an increase from new acquisitions.
Long-term debt increased $253 million (decreased $1,307 million adjusted for currency) primarily driven by:
•
Issuances of $8,727 million; partially offset by
• Reclassifications to short-term debt of $7,998 million to reflect upcoming maturities; and
• Redemption of $2,102 million of certain outstanding bonds.
Noncurrent liabilities (excluding debt) increased $1,621 million ($251 million adjusted for currency) primarily driven by:
• An increase in retirement and nonpension postretirement benefit obligations of $1,106 million ($297 million adjusted for
currency) mainly driven by plan remeasurements; and
• An increase in deferred income of $450 million ($364 million adjusted for currency); partially offset by
• A decrease in operating lease liabilities of $306 million ($424 million adjusted for currency).
Debt
Our funding requirements are continually monitored and we execute our strategies to manage the overall asset and liability
profile. Additionally, we maintain sufficient flexibility to access global funding sources as needed.
($ in millions)
At December 31:
Total company debt
Total Global Financing segment debt
Debt to support external clients
Debt to support internal clients
Non-Global Financing debt
2020
$ 61,538
$ 21,167
17,819
3,348
$ 40,371
2019
$ 62,899
$ 24,727
21,487
3,239
$ 38,173
Management Discussion
International Business Machines Corporation and Subsidiary Companies
43
Total debt of $61,538 million decreased $1,361 million ($2,859 million adjusted for currency) from December 31, 2019, primarily
driven by early retirements and debt maturities of $11,267 million; partially offset by issuances of $8,982 million. Total debt decreased
$11,501 million since the end of the second quarter 2019 (immediately preceding the Red Hat acquisition).
Non-Global Financing debt of $40,371 million increased $2,199 million ($1,046 million adjusting for currency) from December 31,
2019, but has decreased $7,685 million since June 30, 2019.
Global Financing debt of $21,167 million decreased $3,560 million from December 31, 2019 ($3,905 million adjusting for currency),
primarily due to lower funding requirements as a result of the decline in financing assets, consistent with the company’s portfolio
management strategy.
Global Financing provides financing predominantly for IBM’s external client assets, as well as for assets under contract by other IBM
units. These assets, primarily for GTS, generate long-term, stable revenue streams similar to the Global Financing asset portfolio. Based
on their attributes, these GTS assets are leveraged with the balance of the Global Financing asset base.
The debt used to fund Global Financing assets is composed of intercompany loans and external debt. Total debt changes generally
correspond with the level of client and commercial financing receivables, the level of cash and cash equivalents, the change in
intercompany and external payables and the change in intercompany investment from IBM. The terms of the intercompany loans are
set by the company to substantially match the term, currency and interest rate variability underlying the financing receivable and are
based on arm’s-length pricing. The Global Financing debt-to-equity ratio remained at 9 to 1 at December 31, 2020.
We measure Global Financing as a stand-alone entity, and accordingly, interest expense relating to debt supporting Global Financing’s
external client and internal business is included in the “Global Financing Results of Operations” and in note D, “Segments.” In the
Consolidated Income Statement, the external debt-related interest expense supporting Global Financing’s internal financing to IBM is
reclassified from cost of financing to interest expense.
Equity
Total equity decreased by $258 million from December 31, 2019, primarily due to dividends paid of $5,797 million and a decline in
accumulated other comprehensive income of $740 million mainly due to foreign currency translation adjustments; partially offset by
increases from net income of $5,590 million and common stock of $661 million.
Cash Flow
Our cash flows from operating, investing and financing activities, as reflected in the Consolidated Statement of Cash Flows on page 71
are summarized in the table below. These amounts include the cash flows associated with the Global Financing business.
($ in millions)
For the year ended December 31:
Net cash provided by/(used in) continuing operations
Operating activities
Investing activities
Financing activities
Effect of exchange rate changes on cash, cash equivalents and restricted cash
Net change in cash, cash equivalents and restricted cash
2020
2019
$ 18,197
(3,028)
(9,721)
(87)
$ 5,361
$ 14,770
(26,936)
9,042
(167)
$ (3,290)
Net cash provided by operating activities increased $3,426 million in 2020 driven by the following key factors:
• An increase of cash provided by receivables of $4,795 million primarily driven by sales of receivables, including sales of financing
receivables of $3,076 million; and
• Payroll tax and value-added tax payment deferrals and exemptions of approximately $600 million due to tax relief provided under
the U.S. CARES Act and other non-U.S. government assistance programs related to COVID-19; partially offset by
• An increase in workforce rebalancing payments of $293 million;
• A net increase in cash payments for income taxes of $162 million primarily driven by withholding tax on intercompany dividends
in the second quarter; and
• Performance-related declines within net income.
Net cash used in investing activities decreased $23,908 million driven by:
• A decrease in net cash used for acquisitions of $32,294 million due to the Red Hat acquisition in the prior year; partially offset by
• A decrease of $6,245 million in cash provided by net non-operating finance receivables primarily driven by the wind down of the
OEM IT commercial financing operations;
• An increase in cash used for net purchases of marketable securities and other investments of $896 million;
44
Management Discussion
International Business Machines Corporation and Subsidiary Companies
• An increase in cash used for net capital expenditures of $672 million; and
• A decrease in cash provided from divestitures of $573 million.
Financing activities were a net use of cash of $9,721 million in 2020 compared to a net source of cash of $9,042 million in 2019.
The year-to-year change of $18,763 million was driven by:
• A decrease in net cash provided by debt transactions of $19,998 million driven primarily by a higher level of net additions in the
prior year to fund the Red Hat acquisition; partially offset by
• A decrease in cash used for gross common share repurchases of $1,361 million.
Global Financing Return on Equity Calculation
($ in millions)
At December 31:
Numerator
Global Financing after-tax income (1) *
Denominator
Average Global Financing equity (2) **
Global Financing return on equity (1)/(2)
2020
2019
$ 635
$ 765
$ 2,465
25.8 %
$2,968
25.8 %
* Calculated based upon an estimated tax rate principally based on Global Financing’s geographic mix of earnings as IBM’s provision for income taxes is
determined on a consolidated basis.
** Average of the ending equity for Global Financing for the last five quarters.
Management Discussion
International Business Machines Corporation and Subsidiary Companies
45
GAAP Reconciliation
The tables below provide a reconciliation of our income statement results as reported under GAAP to our operating earnings
presentation which is a non-GAAP measure. Management’s calculation of operating (non-GAAP) earnings, as presented, may differ
from similarly titled measures reported by other companies. Please refer to the “Operating (non-GAAP) Earnings” section for
management’s rationale for presenting operating earnings information.
($ in millions except per share amounts)
For the year ended December 31, 2020:
Gross profit
Gross profit margin
SG&A
RD&E
Other (income) and expense
Interest expense
Total expense and other (income)
Pre-tax income from continuing operations
Pre-tax margin from continuing operations
Provision for/(benefit from) income taxes**
Effective tax rate
Income from continuing operations
Income margin from continuing operations
Diluted earnings per share from continuing
operations
Acquisition-
Retirement-
GAAP
$ 35,575
48.3 %
$ 23,082 *
6,333
861
1,288
30,937 *
4,637 *
Related
Adjustments
732
1.0 pts.
$
$(1,137)
—
(2)
—
(1,139)
1,871
$
$
Related
Adjustments
—
— pts.
—
—
(1,123)
—
(1,123)
1,123
$
6.3 %
(864)
(18.6)%
$
2.5 pts.
418
10.0 pts.
$ 5,501 *
$ 1,454
7.5 %
2.0 pts.
$
$
1.5 pts.
215
5.5 pts.
908
1.2 pts.
$
U.S. Tax
Reform
Impacts
—
$
— pts.
—
—
—
—
—
—
— pts.
$ 110
1.4 pts.
Spin-off-
Related
Charges
1
0.0 pts.
$
$ (28)
—
—
—
(28)
28
0.0 pts.
7
0.2 pts.
$
$ (110)
$ 21
(0.1)pts.
0.0 pts.
Operating
(non-GAAP)
$36,308
49.3 %
$21,917 *
6,333
(265)
1,288
28,648 *
7,660 *
10.4 %
$ (114)
(1.5)%
$ 7,774 *
10.6 %
$ 6.13 *
$ 1.63
$ 1.01
$(0.12)
$0.02
$
8.67 *
* Includes a $2.0 billion pre-tax charge for structural actions in the fourth quarter resulting in an impact of ($1.84) to diluted earnings per share from
continuing operations and diluted operating (non-GAAP) earnings per share.
** The tax impact on operating (non-GAAP) pre-tax income is calculated under the same accounting principles applied to the GAAP pre-tax income which
employs an annual effective tax rate method to the results.
($ in millions except per share amounts)
For the year ended December 31, 2019:
Gross profit
Gross profit margin
SG&A
RD&E
Other (income) and expense
Interest expense
Total expense and other (income)
Pre-tax income from continuing operations
Pre-tax margin from continuing operations
Provision for income taxes*
Effective tax rate
Income from continuing operations
Income margin from continuing operations
Diluted earnings per share from continuing
operations
GAAP
$ 36,488
47.3 %
$ 20,604
5,989
(968)
1,344
26,322
10,166
Acquisition-
Related
Adjustments
547
0.7 pts.
$
$(1,044)
(53)
152
(228)
(1,173)
1,721
$
13.2 %
731
7.2 %
$
2.2 pts.
378
2.0 pts.
$
Retirement-
Related
Adjustments
—
$
— pts.
—
—
(615)
—
(615)
615
0.8 pts.
U.S. Tax
Reform
Impacts
$ —
Spin-off-
Related
Charges
$ —
Operating
(non-GAAP)
$37,035
— pts.
— pts.
48.0 %
$ —
—
—
—
—
—
— pts.
$ —
—
—
—
—
—
— pts.
$19,560
5,936
(1,431)
1,116
24,533
12,503
16.2 %
$ 103
$(146)
$ —
$ 1,067
0.5 pts.
(1.2)pts.
— pts.
8.5 %
$ 9,435
$ 1,343
$ 512
$ 146
$ —
$11,436
12.2 %
1.7 pts.
0.7 pts.
0.2 pts.
— pts.
14.8 %
$ 10.57
$ 1.50
$ 0.58
$0.16
$ —
$ 12.81
* The tax impact on operating (non-GAAP) pre-tax income is calculated under the same accounting principles applied to the GAAP pre-tax income which
employs an annual effective tax rate method to the results.
46
Management Discussion
International Business Machines Corporation and Subsidiary Companies
Consolidated Fourth-Quarter Results
($ and shares in millions except per share amounts)
For the fourth quarter:
Revenue
Gross profit margin
Total expense and other (income)
Income from continuing operations before income taxes
Provision for income taxes from continuing operations
Income from continuing operations
Income from continuing operations margin
Income from discontinued operations, net of tax
Net income
Earnings per share from continuing operations–assuming dilution
Weighted-average shares outstanding–assuming dilution
2020
$20,367
25
51.7 %
$ 9,234 **
$ 1,289 **
$
$ 1,264 **
6.2 %
92
$
$ 1,356 **
$
1.41 **
899.0
2019
$ 21,777
51.0 %
$ 7,107
$ 3,993
$
324
$ 3,669
16.8 %
$
0
$ 3,670
$ 4.11
893.7
Yr.-to-Yr.
Percent/
Margin
Change
(6.5)%*
0.7 pts.
29.9 %
(67.7)%
(92.3)%
(65.5)%
(10.6)pts.
NM
(63.0)%
(65.7)%
0.6 %
* (8.6) percent adjusted for currency; (8.4) percent excluding divested businesses and adjusted for currency.
** Includes a $2.0 billion pre-tax charge for structural actions resulting in an impact to diluted earnings per share from continuing operations of ($1.84).
Relates to discontinued operations of Microelectronics, divested in 2015.
NM–Not meaningful
The following table provides operating (non-GAAP) earnings for the fourth quarter of 2020 and 2019. See page 52 for additional
information.
($ in millions except per share amounts)
For the fourth quarter:
Net income as reported
Income from discontinued operations, net of tax**
Income from continuing operations
Non-operating adjustments (net of tax)
Acquisition-related charges
Non-operating retirement-related costs/(income)
U.S. tax reform impacts
Spin-off-related charges
Operating (non-GAAP) earnings
Diluted operating (non-GAAP) earnings per share
2020
$ 1,356 *
92
$ 1,264 *
359
198
18
21
$ 1,861 *
$ 2.07 *
2019
$ 3,670
0
$ 3,669
376
175
(14)
—
$ 4,206
$ 4.71
Yr.-to-Yr.
Percent
Change
(63.0) %
NM
(65.5) %
(4.4)
13.4
NM
NM
(55.8) %
(56.1) %
* Includes a $2.0 billion pre-tax charge for structural actions resulting in an impact to diluted operating (non-GAAP) earnings per share of ($1.84).
** Relates to discontinued operations of Microelectronics, divested in 2015.
NM–Not meaningful
Snapshot
In the fourth quarter of 2020, we reported $20.4 billion in revenue and income from continuing operations of $1.3 billion, which
included a $2.0 billion pre-tax charge for structural actions (primarily workforce rebalancing) to simplify and optimize our operating
model. Fourth quarter operating (non-GAAP) earnings were $1.9 billion, which also included the charge for workforce rebalancing.
Diluted earnings per share from continuing operations was $1.41 as reported and $2.07 on an operating (non-GAAP) basis. We
generated $5.9 billion in cash from operations, $6.1 billion in free cash flow and delivered shareholder returns of $1.5 billion in
dividends. While challenges related to macroeconomic uncertainty and product cycle dynamics continued, our fourth-quarter results
reflect strong performance in hybrid cloud led by Red Hat, gross margin expansion and solid cash generation.
Total consolidated revenue decreased 6.5 percent as reported and 9 percent adjusted for currency compared to the prior year.
Excluding divested businesses, revenue was down 6.2 percent as reported and 8 percent adjusted for currency. Cloud & Cognitive
Software decreased 4.5 percent as reported and 7 percent adjusted for currency. Within this segment, Cloud & Data Platforms grew
8.8 percent (6 percent adjusted for currency) with Red Hat delivering double-digit growth across infrastructure software and
application development and emerging technologies. Cognitive Applications increased 0.2 percent as reported but decreased
2 percent adjusted for currency and Transaction Processing Platforms decreased 23.8 percent (26 percent adjusted for currency). GBS
decreased 2.7 percent as reported and 5 percent adjusted for currency but improved sequentially from the third quarter. Cloud revenue
within GBS grew at a double-digit rate and GPS revenue returned to growth in the fourth quarter. GTS decreased 5.5 percent as reported
and 8 percent adjusted for currency, with declines in Infrastructure & Cloud Services and Technology Support Services. Systems
decreased 17.8 percent as reported and 19 percent adjusted for currency primarily driven by product cycle dynamics. Across the
Management Discussion
International Business Machines Corporation and Subsidiary Companies
47
segments, total IBM cloud revenue of $7.5 billion in the fourth quarter of 2020 grew 10 percent as reported (7 percent adjusted for
currency) and 8 percent excluding divested businesses and adjusted for currency.
From a geographic perspective, Americas revenue decreased 10.5 percent year to year as reported (10 percent excluding divested
businesses and adjusted for currency). EMEA decreased 3.1 percent (8 percent excluding divested businesses and adjusted for
currency). Asia Pacific declined 2.0 percent year to year as reported (5 percent excluding divested businesses and adjusted for
currency).
The consolidated gross margin of 51.7 percent increased 0.7 points year to year and the operating (non-GAAP) gross margin of
52.5 percent increased 0.7 points with margin expansion across software, services and systems.
Total expense and other (income) increased 29.9 percent in the fourth quarter of 2020 versus the prior-year period primarily driven by
the workforce rebalancing charge, lower gains from divestitures and the impact of currency. These increases were partially offset by
lower spending including reduced travel and other expenses associated with COVID-19 restrictions. Total operating (non-GAAP)
expense and other (income) increased 30.8 percent year to year, driven primarily by the same factors.
Pre-tax income from continuing operations of $1.3 billion decreased 67.7 percent and the pre-tax margin was 6.3 percent, a decrease
of 12.0 points versus the prior-year period, primarily due to the workforce rebalancing charge. The continuing operations effective tax
rate for the fourth quarter of 2020 was 1.9 percent compared to an effective tax rate of 8.1 percent in the fourth quarter of 2019. Net
income from continuing operations was $1.3 billion, a decrease of 65.5 percent year to year. The net income margin from continuing
operations was 6.2 percent, a decrease of 10.6 points from the prior-year period.
Operating (non-GAAP) pre-tax income from continuing operations of $2.1 billion decreased 55.8 percent year to year and the operating
(non-GAAP) pre-tax margin from continuing operations decreased 11.4 points to 10.2 percent, primarily due to the workforce
rebalancing charge. The operating (non-GAAP) effective tax rate from continuing operations in the fourth quarter of 2020 was 10.4
percent versus 10.5 percent in the prior year. Operating (non-GAAP) income from continuing operations of $1.9 billion decreased 55.8
percent with an operating (non-GAAP) income margin from continuing operations of 9.1 percent, down 10.2 points year to year.
Diluted earnings per share from continuing operations of $1.41 in the fourth quarter of 2020 decreased 65.7 percent and operating
(non-GAAP) diluted earnings per share of $2.07 decreased 56.1 percent versus the fourth quarter of 2019.
48
Management Discussion
International Business Machines Corporation and Subsidiary Companies
Segment Details
The following is an analysis of the fourth quarter of 2020 versus the fourth quarter of 2019 reportable segment external revenue and
gross margin results. Segment pre-tax income includes transactions between the segments that are intended to reflect an arm’s-length
transfer price and excludes certain unallocated corporate items.
($ in millions)
For the fourth quarter:
Revenue
Cloud & Cognitive Software
Gross margin
Global Business Services
Gross margin
Global Technology Services
Gross margin
Systems
Gross margin
Global Financing
Gross margin
Other
Gross margin
Total consolidated revenue
Total consolidated gross profit
Total consolidated gross margin
Non-operating adjustments
Amortization of acquired intangible assets
Spin-off-related charges
Operating (non-GAAP) gross profit
Operating (non-GAAP) gross margin
* Recast to reflect segment changes.
** (8.4) percent excluding divested businesses and adjusted for currency.
NM–Not meaningful
Cloud & Cognitive Software
2020
2019
$ 6,837
$ 7,160 *
79.8 %
79.5 %*
4,170
4,285 *
30.1 %
27.6 %*
6,568
6,949
35.9 %
35.2 %
Yr.-to-Yr.
Percent/
Margin
Change
Yr.-to-Yr.
Percent Change
Adjusted for
Currency
(4.5)%
0.2 pts.
(2.7)%
2.6 pts.
(5.5)%
0.7 pts.
(6.6)%
(5.2)%
(7.8)%
2,501
3,042
(17.8)%
(19.4)%
59.9 %
286
33.8 %
6
NM
56.0 %
301
35.6 %
40 *
(84.2)%*
$ 20,367
$ 10,523
$ 21,777
$ 11,100
51.7 %
51.0 %
177
1
189
—
$ 10,700
$ 11,289
3.8 pts.
(4.8)%
(1.8)pts.
(6.0)%
(84.8)%
(84.1)%
(8.6)%
NM
(6.5)%**
(5.2)%
0.7 pts.
(6.5)%
NM
(5.2)%
52.5 %
51.8 %
0.7 pts.
Cloud & Cognitive Software revenue of $6,837 million decreased 4.5 percent as reported (7 percent adjusted for currency) in the fourth
quarter of 2020 compared to the prior year. The year-to-year decline in our software performance reflects the continued challenging
transactional environment due to the macroeconomic environment in the fourth quarter of 2020. Since the fourth quarter is seasonally
our largest transactional quarter, this was more impactful than in other quarters in 2020. Additionally, we had strong software
performance in the fourth quarter of 2019, the peak in our enterprise license agreement (ELA) cycle, where clients renew, on average,
about every three years. With the uncertainty our clients are facing in the current environment, many clients opted for shorter duration
ELAs. This dynamic, in combination with the large seasonal volume of ELAs in the fourth quarter, impacted our software revenue
performance. We had strong year-to-year renewal rates for subscription and support in the fourth-quarter 2020, reflecting our clients’
commitment to our critical software solutions. We had solid growth in Cloud & Data Platforms led by Red Hat’s continued strong
performance. Cognitive Applications grew slightly as reported, but declined adjusted for currency. Transaction Processing Platforms
declined as reported and adjusted for currency. We had double-digit growth in total cloud revenue within the segment as reported and
adjusted for currency.
In the fourth quarter, Cloud & Data Platforms revenue of $3,373 million increased 8.8 percent as reported (6 percent adjusted for
currency) compared to the prior year, reflecting clients’ adoption of our hybrid cloud and AI solutions, including Red Hat and Cloud
Paks. Red Hat continued its strong performance with double-digit revenue growth in the fourth quarter, driven by subscription growth.
Red Hat’s strong growth was driven by offerings in infrastructure software and application development and emerging technologies.
We are expanding our integration offerings, bringing AI-powered automation across the portfolio through key partnerships and new
innovation. We continued to enhance Cloud Pak for Automation, which grew at a strong double-digit rate in the fourth quarter of 2020.
Cognitive Applications revenue of $1,545 million grew 0.2 percent year to year as reported, but declined 2 percent adjusted for
currency, with growth in security. The growth in security reflects clients’ interest in our modernized Cloud Pak for Security and services.
We had declining performance in solutions concentrated in industries impacted more severely by the current environment, such as
TRIRIGA, which is focused on commercial real estate.
Management Discussion
International Business Machines Corporation and Subsidiary Companies
49
Transaction Processing Platforms revenue of $1,919 million decreased 23.8 percent as reported (26 percent adjusted for currency)
reflecting our clients’ prioritization of operating expenditures over capital expenditures, which was amplified this quarter, given our
strong seasonal mix toward transactional revenue and the ELA dynamics in the fourth-quarter 2020 compared to the prior-year period.
Within Cloud & Cognitive Software, total cloud revenue of $2.2 billion grew 39 percent as reported (36 percent adjusted for currency),
which reflects our clients’ demand for our hybrid cloud and AI solutions.
Cloud & Cognitive Software gross profit margin of 79.8 percent increased 0.2 points during the fourth quarter of 2020 compared to the
prior year. Pre-tax income of $1,887 million decreased 30.8 percent compared to the prior year and pre-tax margin decreased 9.8
points to 24.9 percent, driven primarily by the workforce rebalancing charge taken in the fourth-quarter 2020, which had 8.2 points of
impact on the pre-tax margin.
Global Business Services
GBS revenue of $4,170 million decreased 2.7 percent as reported (5 percent adjusted for currency) in the fourth quarter of 2020
compared to the prior year, but reflects a sequential year-to-year improvement versus the third-quarter 2020. Total cloud revenue
within the segment grew at a double-digit rate year to year, and Global Process Services revenue returned to growth in the fourth-
quarter 2020. This growth was offset by declines in Application Management and Consulting. While there remains some market
uncertainty, especially in industries more severely impacted by the current environment, our clients are focused on accelerating their
digital reinventions by leveraging business transformation services built on hybrid cloud. Our offerings are aligned to this high-value
opportunity with a clear focus on reimagining workflows using AI and modernizing the underlying application infrastructures through
hybrid cloud.
Consulting revenue of $2,110 million decreased 0.4 percent as reported (3 percent adjusted for currency). We had continued growth
in Cloud Application Development, DevOps and Cloud services such as SAP S/4HANA implementations, offset by declines in on-
premise engagements. Consulting signings grew 11 percent as reported (8 percent adjusted for currency) driven by advisory work for
application modernization and enabled by our unique and experiential Garage methodology.
Application Management revenue of $1,801 million decreased 6.3 percent as reported (9 percent adjusted for currency), reflecting a
continued shift away from traditional on-premise application management services to building and managing our clients’ cloud
applications. Our incumbency in Application Management creates an opportunity, and trust, with our clients to be the partner of choice
for their digital journey. This incumbency also drives adoption of Red Hat’s hybrid cloud platform. In 2020, our GBS Red Hat
engagements accelerated through the year, with 75 new engagements in the fourth quarter. We are continuing this momentum by
investing in ecosystems, resources, offerings and skills, and through the acquisitions announced in the fourth-quarter 2020 which will
add to our offerings in areas such as cloud development, cloud migration, platform engineering and digital transformation.
Global Process Services (GPS) revenue of $258 million increased 6.2 percent as reported (4 percent adjusted for currency). GPS
returned to revenue growth in the fourth-quarter 2020, as we delivered efficiency and flexibility to our clients’ processes through
innovative technology and redesign of workflows.
Within GBS, cloud revenue of $1.7 billion grew 16 percent as reported (14 percent adjusted for currency) year to year.
GBS fourth-quarter gross profit margin of 30.1 percent increased 2.6 points year to year. Pre-tax income of $148 million decreased
68.5 percent year to year and the pre-tax margin decreased 7.3 points to 3.5 percent. The gross profit margin expansion was driven
primarily by improved delivery quality resulting from our investment in innovative delivery capabilities. The decline in pre-tax income
and margin reflects the workforce rebalancing charge taken in the fourth quarter of 2020, which had 8.8 points of impact on the pre-
tax margin.
Global Technology Services
GTS revenue of $6,568 million decreased 5.5 percent as reported (8 percent adjusted for currency). In the fourth quarter,
Infrastructure & Cloud Services revenue declined as reported and adjusted for currency. We had strong growth in cloud revenue, which
was offset by a decline in client business volumes. Technology Support Services revenue declined as reported and adjusted for currency
due to Systems’ product cycle dynamics.
Infrastructure & Cloud Services revenue of $5,006 million decreased 5.2 percent as reported (8 percent adjusted for currency). We
continued to prioritize high-value opportunities and rescope contracts with our clients to provide long-term value. While these actions
impacted our revenue performance this quarter, they contributed to improved gross margin. We had strong contract renewals in the
fourth quarter and signed eleven new logo deals. This was one of the strongest new logo signings periods in the last two years and
more than doubled the number signed in the fourth quarter of 2019. However, with our announcement in October 2020 of the spin-off
of our managed infrastructure services business, some client negotiations were extended, resulting in the delay of some transactions
in the fourth quarter. We are working with our clients to ensure a smooth transition to NewCo after the separation and the positive
50
Management Discussion
International Business Machines Corporation and Subsidiary Companies
response we have received from our client outreach demonstrates the confidence our clients have in NewCo’s long-term value
proposition to manage and modernize their mission-critical infrastructures.
Technology Support Services revenue of $1,562 million declined 6.3 percent as reported (7 percent adjusted for currency), driven
primarily by lower services due to Systems product cycles and lower volumes due to hardware consolidation and shift to cloud.
Within GTS, cloud revenue of $2.5 billion grew 4 percent year to year as reported (1 percent adjusted for currency).
GTS gross profit margin of 35.9 percent improved 0.7 points in the fourth quarter of 2020 compared to the prior-year period. This
improvement was driven by the restructuring of certain existing contracts and reduced activity in lower value offerings. GTS reported
a pre-tax loss of $353 million in the fourth quarter of 2020 compared to pre-tax income of $645 million in the prior-year period. The
pre-tax margin decreased 14.1 points year to year to (5.1) percent. The pre-tax loss and decline in pre-tax margin reflect the workforce
rebalancing charge taken in the fourth quarter of 2020, which had 12.5 points of impact on the pre-tax margin. Through these workforce
rebalancing actions, we are optimizing the NewCo business to have a leaner and more efficient operating model.
Systems
Systems revenue of $2,501 million decreased 17.8 percent as reported (19 percent adjusted for currency) in the fourth quarter of 2020
compared to the same period in 2019. Systems Hardware revenue of $2,077 million decreased 18.8 percent as reported (20 percent
adjusted for currency), driven by product cycle dynamics in IBM Z, Power Systems and Storage Systems.
Within Systems Hardware, IBM Z revenue decreased 22.9 percent year to year as reported (24 percent adjusted for currency),
compared to the fourth quarter of 2019, which was the first full quarter of shipments of the z15 mainframe. Clients in sectors such as
banking and financial markets made purchases early in the cycle to manage through robust market volatility. However, clients in some
other industries, focused on cash preservation due to the current macroeconomic environment, delayed their purchases elongating the
z15 adoption cycle. Our fourth-quarter 2020 performance reflected improved adoption of z15 in some of these industries.
Power Systems revenue declined 14.5 percent as reported (16 percent adjusted for currency) in the fourth-quarter 2020 compared to
the prior-year period, driven primarily by declines in low-end and high-end systems reflecting the product cycles.
Storage Systems revenue decreased 14.9 percent as reported (17 percent adjusted for currency), driven primarily by declines in high-
end storage systems, partially offset by growth in SAN. In the fourth-quarter 2019, we launched the DS8900 high-end system that is
tightly integrated with the z15 mainframe, which drove strong performance in the prior-year period.
In the fourth quarter, Operating Systems Software revenue of $423 million decreased 12.1 percent as reported (14 percent adjusted
for currency) driven primarily by the IBM Z and Power Systems product cycles.
Within Systems, cloud revenue of $1.1 billion decreased 18 percent as reported (19 percent adjusted for currency) in the fourth quarter
of 2020 compared to the same period in 2019.
The Systems gross profit margin increased 3.8 points to 59.9 percent in the fourth-quarter 2020 compared to the prior year. Pre-tax
income of $455 million decreased 43.2 percent and the pre-tax margin decreased 7.9 points year to year to 16.9 percent. The gross
profit margin expansion was driven primarily by improvements in IBM Z and Power Systems margins, partially offset by a mix within
the hardware portfolio. The decline in pre-tax income and margin reflects the workforce rebalancing charge taken in the fourth-quarter
2020, which had 6.0 points of impact on the pre-tax margin.
Global Financing
Global Financing revenue of $286 million decreased 4.8 percent year to year, primarily driven by declines in financing revenue partially
offset by an increase in used equipment sales. Global Financing fourth-quarter pre-tax income decreased 22.6 percent to $195 million
and the pre-tax margin of 37.6 percent decreased 1.3 points year to year. The decrease in pre-tax income was driven by a decrease in
gross profit.
Geographic Revenue
Total revenue of $20,367 million decreased 6.5 percent as reported (9 percent adjusted for currency and 8 percent excluding divested
businesses and adjusted for currency) in the fourth quarter compared to the prior-year period.
Americas revenue of $9,358 million decreased 10.5 percent as reported (10 percent adjusted for currency and excluding divested
businesses and adjusted for currency). Within North America, revenue in the U.S. decreased 10.0 percent and Canada decreased
9.8 percent as reported (11 percent adjusted for currency). Latin America decreased 14.7 percent as reported (8 percent adjusted for
currency). Within Latin America, Brazil decreased 24.1 percent as reported (13 percent adjusted for currency).
Management Discussion
International Business Machines Corporation and Subsidiary Companies
51
EMEA revenue of $6,869 million decreased 3.1 percent as reported (9 percent adjusted for currency and 8 percent excluding divested
businesses and adjusted for currency). As reported, France, Italy and Germany decreased 10.2 percent, 3.6 percent and 2.7 percent,
respectively, and declined 17 percent, 11 percent and 10 percent, respectively, adjusted for currency. In the UK, revenue was flat as
reported, but declined 2 percent adjusted for currency.
Asia Pacific revenue of $4,140 million decreased 2.0 percent as reported (6 percent adjusted for currency and 5 percent excluding
divested businesses and adjusted for currency). Japan increased 0.5 percent as reported, but declined 3 percent adjusted for currency.
As reported, India and China decreased 18.0 percent and 9.2 percent, respectively, and declined 15 percent and 13 percent,
respectively, adjusted for currency. Australia increased 8.4 percent as reported (1 percent adjusted for currency).
Total Expense and Other (Income)
($ in millions)
For the fourth quarter:
Total consolidated expense and other (income)
Non-operating adjustments
Amortization of acquired intangible assets
Acquisition-related charges
Non-operating retirement-related (costs)/income
Spin-off-related charges
Operating (non-GAAP) expense and other (income)
Total consolidated expense-to-revenue ratio
Operating (non-GAAP) expense-to-revenue ratio
* Includes a $2.0 billion pre-tax charge for structural actions.
NM–Not meaningful
2020
$ 9,234 *
2019
$ 7,107
(278)
(10)
(295)
(28)
$ 8,623 *
45.3 %
42.3 %
(294)
(27)
(196)
—
$ 6,591
32.6 %
30.3 %
Yr.-to-Yr.
Percent/
Margin
Change
29.9 %
(5.4)
(61.6)
50.4
NM
30.8 %
12.7 pts.
12.1 pts.
Total expense and other (income) increased 29.9 percent in the fourth quarter with an expense-to-revenue ratio of 45.3 percent
compared to 32.6 percent in the fourth quarter of 2019. The year-to-year increase was primarily driven by the fourth-quarter charge
for workforce rebalancing (28 points), lower gains from divestitures (3 points) and the impact of currency (3 points), partially offset by
lower spending (4 points) including reduced travel and other expenses associated with COVID-19 restrictions.
Total operating (non-GAAP) expense and other income increased 30.8 percent year to year primarily driven by the same factors
described above.
Cash Flow
We generated $5.9 billion in cash flow from operating activities in the fourth quarter of 2020, an increase of $2.4 billion compared to
the fourth quarter of 2019, primarily driven by sales of financing receivables of $1.5 billion. Net cash used in investing activities of $0.6
billion was $0.7 billion higher than the prior year, primarily driven by an increase in cash used in acquisitions ($0.3 billion) and lower
cash provided by divestitures ($0.2 billion). Net cash used in financing activities of $6.3 billion increased $0.6 billion compared to the
prior year, primarily due to higher net reductions in debt.
52
Management Discussion
International Business Machines Corporation and Subsidiary Companies
GAAP Reconciliation
The tables below provide a reconciliation of our income statement results as reported under GAAP to our operating earnings
presentation which is a non-GAAP measure. Management’s calculation of operating (non-GAAP) earnings, as presented, may differ
from similarly titled measures reported by other companies. Refer to the “Operating (non-GAAP) Earnings” section for management’s
rationale for presenting operating earnings information.
($ in millions except per share amounts)
For the fourth quarter 2020:
Gross profit
Gross profit margin
SG&A
RD&E
Other (income) and expense
Interest expense
Total expense and other (income)
Pre-tax income from continuing operations
Pre-tax margin from continuing operations
Provision for income taxes**
Effective tax rate
Income from continuing operations
Income margin from continuing operations
Diluted earnings per share from continuing
Acquisition- Retirement-
Related
GAAP Adjustments
$ 177
$ 10,523
Related
Adjustments
$ —
U.S. Tax
Reform
Impacts
$ —
51.7 %
$ 7,232 *
1,611
247
317
9,234 *
1,289 *
$
6.3 %
25
1.9 %
0.9 pts.
$ (287)
—
(1)
—
(288)
465
2.3 pts.
$ 105
— pts.
— pts.
$ —
—
(295)
—
(295)
295
1.4 pts.
$ —
—
—
—
—
—
— pts.
$ 96
$ (18)
4.6 pts.
4.4 pts.
(0.9)pts.
$ 1,264 *
$ 359
$ 198
$ 18
Spin-off-
Related
Charges
1
0.0 pts.
$
$ (28)
—
—
—
(28)
28
0.1 pts.
7
0.3 pts.
$
$ 21
6.2 %
1.8 pts.
1.0 pts.
0.1 pts.
0.1 pts.
Operating
(non-GAAP)
$10,700
52.5 %
$ 6,917 *
1,611
(48)
317
8,623 *
2,077 *
10.2 %
216
10.4 %
$ 1,861 *
9.1 %
$
operations
$ 1.41 *
$ 0.40
$0.22
$ 0.02
$0.02
$
2.07 *
* Includes a $2.0 billion pre-tax charge for structural actions resulting in an impact of ($1.84) to diluted earnings per share from continuing operations and
diluted operating (non-GAAP) earnings per share.
** The tax impact on operating (non-GAAP) pre-tax income from continuing operations is calculated under the same accounting principles applied to the
GAAP pre-tax income which employs an annual effective tax rate method to the results.
($ in millions except per share amounts)
For the fourth quarter 2019:
Gross profit
Gross profit margin
SG&A
RD&E
Other (income) and expense
Interest expense
Total expense and other (income)
Pre-tax income from continuing operations
Pre-tax margin from continuing operations
Provision for income taxes*
Effective tax rate
Income from continuing operations
Income margin from continuing operations
Diluted earnings per share from continuing
Acquisition- Retirement-
Related
GAAP Adjustments
$ 189
$ 11,100
Related
Adjustments
$ —
51.0 %
$ 5,433
1,596
(117)
354
7,107
3,993
$
18.3 %
324
8.1 %
0.9 pts.
$(320)
0
(1)
—
(320)
509
2.3 pts.
$ 133
— pts.
$ —
—
(196)
—
(196)
196
0.9 pts.
$ 21
2.0 pts.
0.1 pts.
$
U.S. Tax
Reform
Impacts
—
$
— pts.
—
—
—
—
—
—
— pts.
14
0.3 pts.
$
$ 3,669
$ 376
$ 175
$ (14)
Spin-off-
Related
Charges
$ —
Operating
(non-GAAP)
$11,289
51.8 %
$ 5,113
1,596
(314)
354
6,591
4,698
$
21.6 %
492
10.5 %
$ 4,206
— pts.
$ —
—
—
—
—
—
— pts.
$ —
— pts.
$ —
16.8 %
1.7 pts.
0.8 pts.
(0.1)pts.
— pts.
19.3 %
operations
$ 4.11
$0.42
$ 0.20
$(0.02)
$ —
$
4.71
* The tax impact on operating (non-GAAP) pre-tax income from continuing operations is calculated under the same accounting principles applied to the
GAAP pre-tax income which employs an annual effective tax rate method to the results.
Management Discussion
International Business Machines Corporation and Subsidiary Companies
53
PRIOR YEAR IN REVIEW
This section provides a summary of our segment results and year-to-year comparisons between 2019 and 2018. These results have
been recast to conform to our segment changes effective first-quarter 2020 which impacted the Cloud & Cognitive Software segment,
Global Business Services segment and the Other—divested businesses category. The recast results of those segments impacted are
presented below. There was no change to Global Technology Services, Systems or Global Financing segments, and there was no change
to our consolidated results. Refer to “Year in Review” pages 34 to 46 of the “Management Discussion” section of our 2019 Annual
Report for all other details of our financial performance in 2019 compared to 2018.
Segment Details
The table below presents each reportable segment’s external revenue and gross margin results. Segment pre-tax income includes
transactions between segments that are intended to reflect an arm’s-length transfer price and excludes certain unallocated corporate
items.
($ in millions)
For the year ended December 31:
Revenue
Cloud & Cognitive Software
Gross margin
Global Business Services
Gross margin
Global Technology Services
Gross margin
Systems
Gross margin
Global Financing
Gross margin
Other
Gross margin
Total consolidated revenue
Total consolidated gross profit
Total consolidated gross margin
Non-operating adjustments
Amortization of acquired intangible assets
Acquisition-related charges
Operating (non-GAAP) gross profit
Operating (non-GAAP) gross margin
* Recast to reflect segment changes.
2019
2018
$ 22,891 *
$ 21,857 *
77.1 %*
78.1 %*
16,798 *
16,795 *
27.7 %*
26.9 %*
27,361
29,146
34.8 %
34.4 %
7,604
8,034
53.1 %
49.8 %
1,400
1,590
35.6 %
29.1 %
1,092 *
2,169 *
12.5 %*
39.1 %*
$ 77,147
$ 36,488
$ 79,591
$ 36,936
47.3 %
46.4 %
534
13
$ 37,035
372
—
$ 37,307
48.0 %
46.9 %
Yr.-to-Yr.
Percent/
Margin
Change
Yr.-to-Yr.
Percent Change
Adjusted for
Currency
6.5 %
2.2 %
(3.7) %
(4.1) %
(10.0) %
(48.3) %
(1.0) %
4.7 %**
(1.0)pts.**
0.0 %
0.8 pts.
(6.1)%
0.3 pts.
(5.3)%
3.2 pts.
(11.9)%
6.4 pts.
(49.6)%
(26.6)pts.
(3.1)%
(1.2)%
0.9 pts.
43.8 %
NM
(0.7)%
1.1 pts.
** 2019 results were impacted by Red Hat purchase accounting and acquisition-related activity.
0.2 percent excluding divested businesses and currency.
NM–Not meaningful
Cloud & Cognitive Software
($ in millions)
For the year ended December 31:
Cloud & Cognitive Software external revenue
Cloud & Data Platforms
Cognitive Applications
Transaction Processing Platforms
* Recast to reflect segment changes.
** 2019 results were impacted by Red Hat purchase accounting.
2019
$ 22,891 *
$ 9,499
5,456 *
7,936
2018
$ 21,857 *
$ 8,603
5,280 *
7,974
Yr.-to-Yr.
Percent
Change **
4.7 %
10.4 %
3.3
(0.5)
Yr.-to-Yr.
Percent Change
Adjusted for
Currency **
6.5 %
12.3 %
4.8
1.4
Cloud & Cognitive Software revenue increased in 2019 compared to the prior year with strong results from the contribution of Red Hat
beginning in the third quarter. Cloud & Data Platforms, which includes Red Hat, had strong double-digit growth as reported and adjusted
for currency driven by the addition of RHEL and OpenShift and the continued execution of the combined Red Hat and IBM hybrid cloud
strategy. Within Cognitive Applications, the increase was driven by growth in Security and industry verticals such as IoT. Transaction
Processing Platforms declined year to year as reported, but grew adjusted for currency with performance reflecting the ongoing
investment in IBM platforms and the timing of larger transactions that were tied to client business volumes and buying cycles. Within
54
Management Discussion
International Business Machines Corporation and Subsidiary Companies
Cloud & Cognitive Software, cloud revenue of $4.2 billion grew 40 percent as reported and 42 percent adjusted for currency compared
to the prior year.
($ in millions)
For the year ended December 31:
Cloud & Cognitive Software
External gross profit
External gross profit margin
Pre-tax income
Pre-tax margin
* Recast to reflect segment changes.
2019 *
2018 *
Yr.-to-Yr.
Percent/
Margin
Change **
$ 17,650
$ 17,068
77.1 %
78.1 %
$ 7,811
$ 8,914
30.4 %
35.6 %
3.4 %
(1.0)pts.
(12.4)%
(5.2)pts.
** 2019 results were impacted by Red Hat purchase accounting and acquisition-related activity.
The Cloud & Cognitive Software gross profit margin decline was driven by the purchase price accounting impacts from the Red Hat
acquisition. The decline in pre-tax income reflected the acquisition of Red Hat, ongoing investments in key strategic areas and lower
income from IP partnership agreements.
Global Business Services
($ in millions)
For the year ended December 31:
Global Business Services external revenue
Consulting
Application Management
Global Process Services
* Recast to reflect segment changes.
2019
$ 16,798 *
$ 8,157 *
7,646
995
2018
$ 16,795 *
$
7,906 *
7,852
1,037
Yr.-to-Yr.
Percent
Change
Yr.-to-Yr.
Percent Change
Adjusted for
Currency
0.0 %
3.2 %
(2.6)
(4.1)
2.2 %
5.1 %
(0.3)
(1.3)
GBS revenue was flat as reported, but grew adjusted for currency in 2019 compared to the prior year. This performance was driven by
strong growth in Consulting led by offerings that enabled each phase of our clients’ digital journey. These offerings included cognitive
technology and data platform services, application modernization and next-generation enterprise applications and offerings that use
AI to help clients unlock new opportunities and realize productivity improvements. Application Management declined as reported, but
was flat adjusted for currency. We had growth in offerings that help clients develop and manage cloud applications and modernize and
automate their application portfolio, offset by continued decline in the more traditional application management engagements. GPS
revenue decreased year to year as demand shifted away from traditional Business Process Outsourcing (BPO) offerings to new business
platforms around intelligent workflows. Within GBS, cloud revenue of $5.2 billion grew 10 percent as reported and 13 percent adjusted
for currency compared to the prior year.
($ in millions)
For the year ended December 31:
Global Business Services
External gross profit
External gross profit margin
Pre-tax income
Pre-tax margin
* Recast to reflect segment changes.
2019 *
2018 *
$ 4,655
27.7 %
$ 1,623
9.5 %
$ 4,519
26.9 %
$ 1,602
9.4 %
Yr.-to-Yr.
Percent/
Margin
Change
3.0 %
0.8 pts.
1.3 %
0.1 pts.
The year-to-year improvements in margins and pre-tax income in GBS were driven by the continued mix shift to higher-value offerings,
the yield from delivery productivity improvements and a currency benefit from leveraging the global delivery resource model. We
continued to invest in our services offerings and skills necessary to assist our clients on their cloud journey.
GAAP Reconciliation
The following table provides a reconciliation of our consolidated gross profit and gross margin as reported under GAAP to our operating
earnings presentation which is a non-GAAP measure. Management’s calculation of operating (non-GAAP) earnings, as presented, may
Management Discussion
International Business Machines Corporation and Subsidiary Companies
55
differ from similarly titled measures reported by other companies. Refer to the “Operating (non-GAAP) Earnings” section for
management’s rationale for presenting operating earnings information.
($ in millions)
For the year ended December 31:
2019
Gross profit
Gross profit margin
2018
Gross profit
Gross profit margin
OTHER INFORMATION
Looking Forward
Acquisition-
Related
GAAP
Adjustments
Operating
(non-GAAP)
$ 36,488
$547
$37,035
47.3 %
0.7 pts.
48.0 %
$ 36,936
$372
$37,307
46.4 %
0.5 pts.
46.9 %
IBM is redefining our future as a hybrid cloud platform and AI company. To accelerate our strategy, we have taken a number of actions
that span our portfolio, our operating model and our capital structure.
On October 8, 2020, we announced our plan to separate the managed infrastructure services unit of our GTS segment into a new public
company, currently referred to as NewCo. The separation is expected to be achieved through a U.S. federal tax-free spin-off to IBM
shareholders and be completed by the end of 2021. This creates two industry-leading companies, each with strategic focus and
flexibility to capitalize on their respective missions and drive client and shareholder value. Client buying needs for application and
infrastructure services are diverging, while adoption of our hybrid cloud platform is accelerating. This change in clients’ needs makes
it the right time to create two market-leading companies focused on what they do best. IBM will accelerate our open hybrid cloud
platform growth strategy and AI capabilities to drive clients’ digital transformations. NewCo will design, run and modernize the
infrastructure of the world’s most important organizations. Both IBM and NewCo will have greater agility to focus on their operating
and financial models, have more freedom to partner with others and both will align their investments and capital structure to their
strategic focus areas. We remain on track to complete the separation by the end of 2021.
IBM’s focus will be on our open hybrid cloud platform, which represents a $1 trillion market opportunity. We are unlocking the full
value of the cloud for clients, further accelerating their digital transformations and adoption of the platform. This platform facilitates
the deployment of powerful AI capabilities to enable the power of data, application modernization services and systems. These are all
underpinned by the security, unmatched expertise in industry verticals, and deep commitment to open source innovation that clients
expect from us. Our approach is platform-centric and differentiated by Red Hat OpenShift, our market-leading open platform, along
with a vast software portfolio modernized to run cloud-native and our GBS expertise that drives platform adoption. This platform allows
clients to “write-once/run-anywhere,” and enables a hybrid cloud approach that drives up to 2.5 times more value for clients than a
public cloud-only solution. Our unique full-stack capabilities and the large ecosystem of partners and global coalition of best of breed
independent software vendors we have brought together should accelerate adoption of our platform. Our software portfolio, focused
on data and AI, automation, and security, enables the widest access to innovation through open source. Our business, strategy and
technology consultants help clients transform by modernizing their existing applications, and by building new AI-infused data analysis
capabilities on the leading open hybrid cloud platform. The secure, mission-critical IBM public cloud is designed to provide all required
regulatory controls, and offers clients a foundation of open source software, security leadership, and enterprise-grade infrastructure.
Our Systems business, integrated with the hybrid cloud platform, allows cloud-native developers to capitalize on the unique capabilities
of our hardware. Leveraging our long-term relationships with clients, we will continue to drive the innovation in hardware that
enterprises rely on for their most mission-critical computing needs.
NewCo will immediately be the world’s leading managed infrastructure services provider, focused on managing and modernizing client
IT environments, a $500 billion market opportunity. It will leverage its unrivaled expertise to offer services and solutions that include
resiliency, security and network capabilities to enable high performance of mission-critical systems and services to help clients in their
transformation journeys. NewCo will extend its leadership through increased investment in the next generation of transformational
managed infrastructure services and be able to partner fully across all cloud vendors, opening new avenues for growth. At the same
time, NewCo will maintain a strong strategic partnership with IBM and continue to serve existing and new clients.
We are increasing our investment, both organic and inorganic, in innovation, expertise and ecosystems to drive value through greater
focus on our portfolio, our operating model and the needs of our clients. We are investing in platform capabilities, including security
and industry-specific clouds. We are continuing to make investments in data and AI, and in technologies like quantum to create future
market opportunities, while adding GBS skills and expertise to bring these innovations to market. We announced a new go-to-market
model in January 2021 to engage our clients in a more technical and experiential way and we are investing $1 billion to expand our
ecosystem to broaden our reach and accelerate our platform adoption.
56
Management Discussion
International Business Machines Corporation and Subsidiary Companies
We have also taken actions to enhance our balance sheet strength and liquidity. At December 31, 2020, we had over $14 billion of
cash, restricted cash and cash equivalents. We have focused our Global Financing business on IBM’s hybrid cloud and AI offerings. We
wound down our OEM Commercial Financing business and entered into an agreement to sell our IBM commercial financing receivables
beginning in December 2020. Consistent with our refocused Global Financing strategy and expected capital needs, IBM Credit will no
longer require direct access to the public capital markets. As part of IBM’s overall 2021 debt pay down strategy, in the first half of the
year IBM Credit will redeem $1.75 billion of outstanding debt and deregister with the SEC.
Looking forward, there is tremendous opportunity for us to help our clients become digital businesses. We continue to take prudent
actions to improve our operating model and accelerate our strategic priorities. We are managing for the long-term and are confident in
the direction and focus of our business. We expect to continue our progress as a leading hybrid cloud and AI company with an improving
financial profile while maintaining our solid and modestly growing dividend policy.
Our pension plans are well funded. Contributions for all retirement-related plans are expected to be approximately $2.3 billion in 2021,
an increase of approximately $100 million compared to 2020, of which $0.3 billion generally relates to legally required contributions
to non-U.S. defined benefit and multi-employer plans. We expect 2021 pre-tax retirement-related plan cost to be approximately $2.9
billion, an increase of approximately $300 million compared to 2020. This estimate reflects current pension plan assumptions at
December 31, 2020. Within total retirement-related plan cost, operating retirement-related plan cost is expected to be approximately
$1.5 billion, approximately flat versus 2020. Non-operating retirement-related plan cost is expected to be approximately $1.4 billion,
an increase of approximately $300 million compared to 2020, primarily driven by lower income from expected return on assets.
Liquidity and Capital Resources
The company has consistently generated strong cash flow from operations, providing a source of funds ranging between $14.8 billion
and $18.2 billion per year over the past three years. The company provides for additional liquidity through several sources: maintaining
an adequate cash balance, access to global funding sources, committed global credit facilities and other committed and uncommitted
lines of credit worldwide. The following table provides a summary of the major sources of liquidity for the years ended December 31,
2018 through 2020.
Cash Flow and Liquidity Trends
($ in billions)
Net cash from operating activities
Cash and cash equivalents, restricted cash and short-term marketable securities
Committed global credit facilities
$ 18.2
$ 14.3
$ 15.3
$ 14.8
$ 9.0
$ 15.3
2020
2019
2018
$ 15.2
$ 12.2
$ 15.3
On July 9, 2019, we closed the acquisition of Red Hat for cash consideration of $34.8 billion. The transaction was funded through a
combination of cash on hand and proceeds from debt issuances. In order to reduce this debt and return to target leverage ratios within
a couple of years, we suspended our share repurchase program at the time of the Red Hat acquisition closing. Refer to note P,
“Borrowings,” for additional details of financing this transaction.
The indenture governing our debt securities and our various credit facilities each contain significant covenants which obligate the
company to promptly pay principal and interest, limit the aggregate amount of secured indebtedness and sale and leaseback
transactions to 10 percent of IBM’s consolidated net tangible assets, and restrict our ability to merge or consolidate unless certain
conditions are met. The credit facilities also include a covenant on our consolidated net interest expense ratio, which cannot be less
than 2.20 to 1.0, as well as a cross default provision with respect to other defaulted indebtedness of at least $500 million.
We are in compliance with all of our significant debt covenants and provide periodic certification to our lenders. The failure to comply
with debt covenants could constitute an event of default with respect to our debt to which such provisions apply. If certain events of
default were to occur, the principal and interest on the debt to which such event of default applied would become immediately due and
payable.
We do not have “ratings trigger” provisions in our debt covenants or documentation, which would allow the holders to declare an event
of default and seek to accelerate payments thereunder in the event of a change in credit rating. Our contractual agreements governing
derivative instruments contain standard market clauses which can trigger the termination of the agreement if IBM’s credit rating were
to fall below investment grade. At December 31, 2020, the fair value of those instruments that were in a liability position was
$627 million, before any applicable netting, and this position is subject to fluctuations in fair value period to period based on the level
of the company’s outstanding instruments and market conditions. We have no other contractual arrangements that, in the event of a
change in credit rating, would result in a material adverse effect on our financial position or liquidity.
Management Discussion
International Business Machines Corporation and Subsidiary Companies
57
The major ratings agencies ratings on our debt securities at December 31, 2020 were as follows:
IBM and IBM Credit LLC Ratings
Senior long-term debt
Commercial paper
Standard
and Poor’s
Moody’s
Investors
Service
A2
Prime-1
A
A-1
IBM has ample financial flexibility, supported by our strong liquidity position and cash flows, to operate at a single A credit rating. Debt
levels have decreased $11.5 billion from our peak levels at June 30, 2019 (immediately preceding the Red Hat acquisition) and we will
continue to deleverage throughout 2021 utilizing our debt maturities schedule.
In July 2017, the UK’s Financial Conduct Authority, which regulates the London Interbank Offered Rate (LIBOR), announced that it
intends to phase out LIBOR by the end of 2021. Various central bank committees and working groups continue to discuss replacement
of benchmark rates, the process for amending existing LIBOR-based contracts, and the potential economic impacts of different
alternatives. The Alternative Reference Rates Committee has identified the Secured Overnight Financing Rate (SOFR) as its preferred
alternative rate for USD LIBOR. SOFR is a measure of the cost of borrowing cash overnight, collateralized by U.S. Treasury securities,
and is based on directly observable U.S. Treasury-backed repurchase transactions. We are continuing to evaluate the potential impact
of the replacement of the LIBOR benchmark interest rate, including risk management, internal operational readiness and monitoring
the FASB standard-setting process to address financial reporting issues that might arise in connection with transition from LIBOR to a
new benchmark rate. However, it is not expected to have a material impact in the consolidated financial results.
We prepare our Consolidated Statement of Cash Flows in accordance with applicable accounting standards for cash flow presentation
on page 71 and highlight causes and events underlying sources and uses of cash in that format on pages 43 to 44. For the purpose of
running its business, IBM manages, monitors and analyzes cash flows in a different format.
Management uses free cash flow as a measure to evaluate its operating results, plan share repurchase levels, strategic investments
and assess its ability and need to incur and service debt. The entire free cash flow amount is not necessarily available for discretionary
expenditures. We define free cash flow as net cash from operating activities less the change in Global Financing receivables and net
capital expenditures, including the investment in software. A key objective of the Global Financing business is to generate strong
returns on equity, and our Global Financing receivables are the basis for that growth. Accordingly, management considers Global
Financing receivables as a profit-generating investment, not as working capital that should be minimized for efficiency. Therefore,
management includes presentations of both free cash flow and net cash from operating activities that exclude the effect of Global
Financing receivables. Free cash flow guidance is derived using an estimate of profit, working capital and operational cash flows. Since
we view Global Financing receivables as a profit-generating investment, which we seek to maximize, it is not considered when
formulating guidance for free cash flow. As a result, we do not estimate a GAAP Net Cash from Operations expectation metric.
From the perspective of how management views cash flow, in 2020, after investing $3.0 billion in capital investments, primarily to
scale our cloud infrastructure, we generated free cash flow of $10.8 billion which was down $1.1 billion compared to 2019. Year
to year, there were higher capital expenditures and workforce rebalancing payments from previous actions, offset by improvements in
sales cycle working capital and contribution from Red Hat, net of related interest. In 2020, we continued to return value to shareholders
including $5.8 billion in dividends.
IBM’s Board of Directors considers the dividend payment on a quarterly basis. In the second quarter of 2020, the Board of Directors
increased the company’s quarterly common stock dividend from $1.62 to $1.63 per share.
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The table below represents the way in which management reviews cash flow as previously described.
($ in billions)
For the year ended December 31:
Net cash from operating activities per GAAP
Less: the change in Global Financing receivables
Net cash from operating activities, excluding Global Financing receivables
Capital expenditures, net
Free cash flow (FCF)
Acquisitions
Divestitures
Share repurchase
Common stock repurchases for tax withholdings
Dividends
Non-Global Financing debt
Other (includes Global Financing receivables and Global Financing debt)
Change in cash, cash equivalents, restricted cash and short-term
2020
2019
$ 18.2
4.3
13.8
(3.0)
10.8
(0.3)
0.5
—
(0.3)
(5.8)
0.2
0.2
$ 14.8
0.5
14.3
(2.4)
11.9
(32.6)
1.1
(1.4)
(0.3)
(5.7)
22.8
1.0
2018
$ 15.2
(0.3)
15.6
(3.7)
11.9
(0.1)
—
(4.4)
(0.2)
(5.7)
(0.5)
(1.6)
marketable securities
FCF as percent of Income from Continuing Operations
$ 5.3
196 %*
$ (3.2)
126 %
$ (0.6)
136 %**
* 143% in 2020 excluding a $2.0 billion pre-tax charge in the fourth quarter for structural actions.
** 111% in 2018 excluding charge of $2.0 billion associated with the enactment of U.S. tax reform.
Events that could temporarily change the historical cash flow dynamics discussed previously include significant changes in operating
results, material changes in geographic sources of cash, unexpected adverse impacts from litigation, future pension funding
requirements during periods of severe downturn in the capital markets or the timing of tax payments. Whether any litigation has such
an adverse impact will depend on a number of variables, which are more completely described in note R, “Commitments &
Contingencies.” With respect to pension funding, in 2020, we contributed $211 million to our non-U.S. defined benefit plans compared
to $274 million in 2019. As highlighted in the Contractual Obligations table, we expect to make legally mandated pension plan
contributions to certain non-U.S. plans of approximately $1.5 billion in the next five years. The 2021 contributions are currently
expected to be approximately $300 million. Contributions related to all retirement-related plans are expected to be approximately
$2.3 billion in 2021, an increase of approximately $100 million compared to 2020. Financial market performance could increase the
legally mandated minimum contributions in certain non-U.S. countries that require more frequent remeasurement of the funded status.
We are not quantifying any further impact from pension funding because it is not possible to predict future movements in the capital
markets or pension plan funding regulations.
In 2021, we are not legally required to make any contributions to the U.S. defined benefit pension plans.
Our cash flows are sufficient to fund our current operations and obligations, including investing and financing activities such as
dividends and debt service. When additional requirements arise, we have several liquidity options available. These options may include
the ability to borrow additional funds at reasonable interest rates and utilizing our committed global credit facilities. With our share
repurchase program suspended since the close of the Red Hat acquisition, our overall shareholder payout remains at a comfortable
level and we remain fully committed to our long-standing dividend policy.
Management Discussion
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59
Contractual Obligations
($ in millions)
Long-term debt obligations
Interest on long-term debt obligations
Finance lease obligations*
Operating lease obligations*
Purchase obligations
Other long-term liabilities:
Minimum defined benefit plan pension funding
(mandated)**
Excess 401(k) Plus Plan
Long-term termination benefits
Tax reserves
Other
Total
Total Contractual
Payment Stream
$ 61,718
16,538
296
5,265
7,315
Payments Due In
2021
$ 6,956
1,526
97
1,468
1,846
2022–23
$ 13,015
2,691
137
2,070
3,502
2024–25
$ 10,751
2,125
37
1,089
1,885
After 2025
$30,995
10,196
24
638
82
1,500
1,833
3,157
4,913
754
$103,290
300
198
2,185
368
224
$ 15,168
600
423
300
600
460
133
752
539
159
$ 22,898
109
$ 17,189
263
$43,490
* Finance lease obligations are presented on a discounted cash flow basis, whereas operating lease obligations are presented on an undiscounted cash
flow basis.
** As funded status on plans will vary, obligations for mandated minimum pension payments after 2025 could not be reasonably estimated.
Includes benefits related to a $2.0 billion charge for structural actions in the fourth quarter of 2020, most of which is expected to be paid in 2021.
These amounts represent the liability for unrecognized tax benefits. We estimate that approximately $368 million of the liability is expected to be settled
within the next 12 months. The settlement period for the noncurrent portion of the income tax liability cannot be reasonably estimated as the timing of
the payments will depend on the progress of tax examinations with the various tax authorities; however, it is not expected to be due within the next
12 months.
Certain contractual obligations reported in the previous table exclude the effects of time value and therefore, may not equal the
amounts reported in the Consolidated Balance Sheet. Certain noncurrent liabilities are excluded from the previous table as their future
cash outflows are uncertain. This includes deferred taxes, derivatives, deferred income, disability benefits and other sundry items.
Certain obligations related to our divestitures are included.
Purchase obligations include all commitments to purchase goods or services of either a fixed or minimum quantity that meet any of the
following criteria: (1) they are noncancelable, (2) we would incur a penalty if the agreement was canceled, or (3) we must make
specified minimum payments even if we do not take delivery of the contracted products or services (take-or-pay). If the obligation to
purchase goods or services is noncancelable, the entire value of the contract is included in the previous table. If the obligation is
cancelable, but we would incur a penalty if canceled, the dollar amount of the penalty is included as a purchase obligation. Contracted
minimum amounts specified in take-or-pay contracts are also included in the table as they represent the portion of each contract that
is a firm commitment.
In the ordinary course of business, we enter into contracts that specify that we will purchase all or a portion of our requirements of a
specific product, commodity or service from a supplier or vendor. These contracts are generally entered into in order to secure pricing
or other negotiated terms. They do not specify fixed or minimum quantities to be purchased and, therefore, we do not consider them
to be purchase obligations.
Interest on floating-rate debt obligations is calculated using the effective interest rate at December 31, 2020, plus the interest rate
spread associated with that debt, if any.
Off-Balance Sheet Arrangements
From time to time, we may enter into off-balance sheet arrangements as defined by SEC Financial Reporting Release 67 (FRR-67),
“Disclosure in Management’s Discussion and Analysis about Off-Balance Sheet Arrangements and Aggregate Contractual Obligations.”
At December 31, 2020, we had no such off-balance sheet arrangements that have, or are reasonably likely to have, a material current
or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources. See the table above for our contractual obligations, and note R, “Commitments & Contingencies,”
for detailed information about our guarantees, financial commitments and indemnification arrangements. We do not have retained
interests in assets transferred to unconsolidated entities or other material off-balance sheet interests or instruments.
Critical Accounting Estimates
The application of GAAP requires IBM to make estimates and assumptions about certain items and future events that directly affect its
reported financial condition. The accounting estimates and assumptions discussed in this section are those that we consider to be the
most critical to our financial statements. An accounting estimate is considered critical if both (a) the nature of the estimate or
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assumption is material due to the levels of subjectivity and judgment involved, and (b) the impact within a reasonable range of
outcomes of the estimate and assumption is material to IBM’s financial condition. Senior management has discussed the development,
selection and disclosure of these estimates with the Audit Committee of IBM’s Board of Directors. Our significant accounting policies
are described in note A, “Significant Accounting Policies.”
The inputs into certain of our critical accounting estimates considered the macroeconomic impacts of the COVID-19 pandemic. These
estimates included, but were not limited to, the allowances for credit losses, the carrying values of goodwill and intangible assets and
other long-lived assets, our net investments in sales-type or direct financing leases, valuation allowances for tax assets and revenue
recognition. The macroeconomic impacts of the COVID-19 pandemic did not have a material impact on our critical accounting
estimates reflected in our 2020 results. Given the inherent uncertainty of the magnitude of future impacts from and/or the duration of
the pandemic, our estimates may change materially in future periods.
A quantitative sensitivity analysis is provided where that information is reasonably available, can be reliably estimated and provides
material information to investors. The amounts used to assess sensitivity (e.g., 1 percent, 10 percent, etc.) are included to allow users
of the Annual Report to understand a general direction cause and effect of changes in the estimates and do not represent
management’s predictions of variability. For all of these estimates, it should be noted that future events rarely develop exactly as
forecasted, and estimates require regular review and adjustment.
Pension Assumptions
For our defined benefit pension plans, the measurement of the benefit obligation to plan participants and net periodic pension
(income)/cost requires the use of certain assumptions, including, among others, estimates of discount rates and expected return on
plan assets.
Changes in the discount rate assumptions would impact the (gain)/loss amortization and interest cost components of the net periodic
pension (income)/cost calculation and the projected benefit obligation (PBO). The discount rate assumption for the IBM Personal
Pension Plan (PPP), a U.S.-based defined benefit plan, decreased by 90 basis points to 2.20 percent on December 31, 2020. This
change will increase pre-tax income recognized in 2021 by an estimated $48 million. If the discount rate assumption for the PPP had
increased by 90 basis points on December 31, 2020, pre-tax income recognized in 2021 would decrease by an estimated $29 million.
Further changes in the discount rate assumptions would impact the PBO which, in turn, may impact our funding decisions if the PBO
exceeds plan assets. A 25 basis point increase or decrease in the discount rate would cause a corresponding decrease or increase,
respectively, in the PPP’s PBO of an estimated $1.3 billion based upon December 31, 2020 data.
The expected long-term return on plan assets assumption is used in calculating the net periodic pension (income)/cost. Expected
returns on plan assets are calculated based on the market-related value of plan assets, which recognizes changes in the fair value of
plan assets systematically over a five-year period in the expected return on plan assets line in net periodic pension (income)/cost. The
differences between the actual return on plan assets and the expected long-term return on plan assets are recognized over five years
in the expected return on plan assets line in net periodic pension (income)/cost and also as a component of actuarial (gains)/losses,
which are recognized over the service lives or life expectancy of the participants, depending on the plan, provided such amounts exceed
thresholds which are based upon the benefit obligation or the value of plan assets, as provided by accounting standards.
To the extent the outlook for long-term returns changes such that management changes its expected long-term return on plan assets
assumption, each 50 basis point increase or decrease in the expected long-term return on PPP plan assets assumption would have an
estimated decrease or increase, respectively, of $240 million on the following year’s pre-tax net periodic pension (income)/cost (based
upon the PPP’s plan assets at December 31, 2020 and assuming no contributions are made in 2021).
We may voluntarily make contributions or be required, by law, to make contributions to our pension plans. Actual results that differ
from the estimates may result in more or less future IBM funding into the pension plans than is planned by management. Impacts of
these types of changes on our pension plans in other countries worldwide would vary depending upon the status of each respective
plan.
In addition to the above, we evaluate other pension assumptions involving demographic factors, such as retirement age and mortality,
and update these assumptions to reflect experience and expectations for the future. Actual results in any given year can differ from
actuarial assumptions because of economic and other factors.
For additional information on our pension plans and the development of these assumptions, see note V, “Retirement-Related Benefits.”
Revenue Recognition
Application of GAAP related to the measurement and recognition of revenue requires us to make judgments and estimates. Specifically,
complex arrangements with nonstandard terms and conditions may require significant contract interpretation to determine the
appropriate accounting, including whether promised goods and services specified in an arrangement are distinct performance
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61
obligations. Other significant judgments include determining whether IBM or a reseller is acting as the principal in a transaction and
whether separate contracts should be combined and considered part of one arrangement.
Revenue recognition is also impacted by our ability to determine when a contract is probable of collection and to estimate variable
consideration, including, for example, rebates, volume discounts, service-level penalties and performance bonuses. We consider
various factors when making these judgments, including a review of specific transactions, historical experience and market and
economic conditions. Evaluations are conducted each quarter to assess the adequacy of the estimates. If the estimates were changed
by 10 percent in 2020, the impact on net income would have been immaterial.
Costs to Complete Service Contracts
We enter into numerous service contracts through our services businesses. During the contractual period, revenue, cost and profits
may be impacted by estimates of the ultimate profitability of each contract, especially contracts for which we use cost-to-cost
measures of progress. If at any time these estimates indicate the contract will be unprofitable, the entire estimated loss for the
remainder of the contract is recorded immediately in cost. We perform ongoing profitability analyses of these services contracts in
order to determine whether the latest estimates require updating. Key factors reviewed to estimate the future costs to complete each
contract are future labor costs and product costs and expected productivity efficiencies. Contract loss provisions recorded as a
component of other accrued expenses and liabilities were immaterial at December 31, 2020 and 2019.
Income Taxes
We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Significant judgments are required in determining the
consolidated provision for income taxes.
During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is
uncertain. As a result, we recognize tax liabilities based on estimates of whether additional taxes and interest will be due. These tax
liabilities are recognized when, despite our belief that our tax return positions are supportable, we believe that certain positions may
not be fully sustained upon review by tax authorities. We believe that our accruals for tax liabilities are adequate for all open audit years
based on our assessment of many factors, including past experience and interpretations of tax law. This assessment relies on estimates
and assumptions and may involve a series of complex judgments about future events. To the extent that new information becomes
available which causes us to change our judgment regarding the adequacy of existing tax liabilities, such changes to tax liabilities will
impact income tax expense in the period in which such determination is made.
Significant judgment is also required in determining any valuation allowance recorded against deferred tax assets. In assessing the
need for a valuation allowance, management considers all available evidence for each jurisdiction including past operating results,
estimates of future taxable income and the feasibility of ongoing tax planning strategies/actions. In the event that we change our
determination as to the amount of deferred tax assets that can be realized, we will adjust the valuation allowance with a corresponding
impact to income tax expense in the period in which such determination is made.
The consolidated provision for income taxes will change period to period based on nonrecurring events, such as the settlement of
income tax audits and changes in tax laws, as well as recurring factors including the geographic mix of income before taxes, state and
local taxes and the effects of various global income tax strategies.
To the extent that the provision for income taxes increases/decreases by 1 percent of income from continuing operations before income
taxes, consolidated net income would have decreased/improved by $46 million in 2020.
Valuation of Assets
The application of business combination and impairment accounting requires the use of significant estimates and assumptions. The
acquisition method of accounting for business combinations requires us to estimate the fair value of assets acquired including
separately identifiable intangible assets, liabilities assumed, and any noncontrolling interest in the acquiree to properly allocate
purchase price consideration. Impairment testing for assets, other than goodwill, requires the allocation of cash flows to those assets
or group of assets and if required, an estimate of fair value for the assets or group of assets. Our estimates are based upon assumptions
believed to be reasonable, but which are inherently uncertain and unpredictable. These valuations require the use of management’s
assumptions, which would not reflect unanticipated events and circumstances that may occur.
Valuation of Goodwill
We review goodwill for impairment annually and whenever events or changes in circumstances indicate the carrying value of goodwill
may not be recoverable. In 2020, we assessed the qualitative risk factors to determine whether it is more likely than not that the fair
value of a reporting unit is less than its carrying amount.
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We assess qualitative factors in each of our reporting units that carry goodwill including relevant events and circumstances that affect
the fair value of reporting units. Examples include, but are not limited to, macroeconomic, industry and market conditions, as well as
other individual factors such as:
• A loss of key personnel;
• A significant adverse shift in the operating environment of the reporting unit such as unanticipated competition;
• A significant pending litigation;
• A more likely than not expectation that a reporting unit or a significant portion of a reporting unit will be sold or otherwise
disposed of; and
• An adverse action or assessment by a regulator.
We assess these qualitative factors to determine whether it is necessary to perform the quantitative goodwill impairment test. This
quantitative test is required only if we conclude that it is more likely than not that a reporting unit’s fair value is less than its carrying
amount. After performing the annual goodwill impairment qualitative analysis during the fourth quarter of 2020, the company
determined it was not necessary to perform the quantitative goodwill impairment test.
Loss Contingencies
We are currently involved in various claims and legal proceedings. At least quarterly, we review the status of each significant matter
and assess our potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the
amount can be reasonably estimated, we accrue a liability for the estimated loss. Significant judgment is required in both the
determination of probability and the determination as to whether an exposure is reasonably estimable. Because of uncertainties related
to these matters, accruals are based only on the best information available at the time. As additional information becomes available,
we reassess the potential liability related to our pending claims and litigation, and may revise our estimates. These revisions in the
estimates of the potential liabilities could have a material impact on our results of operations and financial position.
Global Financing Receivables Allowance for Credit Losses
The Global Financing business reviews its financing receivables portfolio on a regular basis in order to assess collectibility and records
adjustments to the allowance for credit losses at least quarterly. A description of the methods used by management to estimate the
amount of uncollectible receivables is included in note A, “Significant Accounting Policies.” Factors that could result in actual receivable
losses that are materially different from the estimated reserve include significant changes in the economy, or a sudden change in the
economic health of a significant client that represents a concentration in Global Financing’s receivables portfolio.
To the extent that actual collectibility differs from management’s estimates currently provided for by 10 percent, Global Financing’s
segment pre-tax income and our income from continuing operations before income taxes would be higher or lower by an estimated
$26 million depending upon whether the actual collectibility was better or worse, respectively, than the estimates.
Residual Value
Residual value represents the estimated fair value of equipment under lease as of the end of the lease. Residual value estimates can
impact the determination of whether a lease is classified as operating, sales-type or direct financing. Global Financing estimates the
future fair value of leased equipment by using historical models, analyzing the current market for new and used equipment, and
obtaining forward-looking product information such as marketing plans and technological innovations. Residual value estimates are
periodically reviewed and “other than temporary” declines in estimated future residual values are recognized upon identification.
Anticipated increases in future residual values are not recognized until the equipment is remarketed.
Factors that could cause actual results to materially differ from the estimates include significant changes in the used-equipment market
brought on by unforeseen changes in technology innovations and any resulting changes in the useful lives of used equipment.
To the extent that actual residual value recovery is lower than management’s estimates by 10 percent, Global Financing’s segment
pre-tax income and our income from continuing operations before income taxes for 2020 would have been lower by an estimated $52
million. If the actual residual value recovery is higher than management’s estimates, the increase in income will be realized at the end
of lease when the equipment is remarketed.
Currency Rate Fluctuations
Changes in the relative values of non-U.S. currencies to the U.S. dollar affect our financial results and financial position. At
December 31, 2020, currency changes resulted in assets and liabilities denominated in local currencies being translated into more
dollars than at year-end 2019. We use financial hedging instruments to limit specific currency risks related to financing transactions
and other foreign currency-based transactions.
During periods of sustained movements in currency, the marketplace and competition adjust to the changing rates. For example, when
pricing offerings in the marketplace, we may use some of the advantage from a weakening U.S. dollar to improve our position
competitively, and price more aggressively to win the business, essentially passing on a portion of the currency advantage to our
customers. Competition will frequently take the same action. Consequently, we believe that some of the currency-based changes in
Management Discussion
International Business Machines Corporation and Subsidiary Companies
63
cost impact the prices charged to clients. We also maintain currency hedging programs for cash management purposes which may
temporarily mitigate, but not eliminate, the volatility of currency impacts on our financial results.
We translate revenue, cost and expense in our non-U.S. operations at current exchange rates in the reported period. References to
“adjusted for currency” or “constant currency” reflect adjustments based upon a simple mathematical formula. However, this constant
currency methodology that we utilize to disclose this information does not incorporate any operational actions that management could
take to mitigate fluctuating currency rates. Currency movements impacted our year-to-year revenue and earnings per share growth in
2020. Based on the currency rate movements in 2020, total revenue decreased 4.6 percent as reported and 4.7 percent at constant
currency versus 2019. On an income from continuing operations before income taxes basis, these translation impacts offset by the net
impact of hedging activities resulted in a theoretical maximum (assuming no pricing or sourcing actions) increase of approximately
$280 million in 2020 on an as-reported basis and an increase of approximately $290 million on an operating (non-GAAP) basis. The
same mathematical exercise resulted in an increase of approximately $300 million in 2019 on an as-reported basis and an increase of
$260 million on an operating (non-GAAP) basis. We view these amounts as a theoretical maximum impact to our as-reported financial
results. Considering the operational responses mentioned above, movements of exchange rates, and the nature and timing of hedging
instruments, it is difficult to predict future currency impacts on any particular period, but we believe it could be substantially less than
the theoretical maximum given the competitive pressure in the marketplace.
For non-U.S. subsidiaries and branches that operate in U.S. dollars or whose economic environment is highly inflationary, translation
adjustments are reflected in results of operations. Generally, we manage currency risk in these entities by linking prices and contracts
to U.S. dollars.
During 2018, the three-year cumulative inflation rates in Argentina, using a combination of monthly indices, exceeded the 100 percent
threshold for hyperinflation. As a result, effective July 1, 2018, the company changed the functional currency from local currency to
U.S. dollar functional for Argentina with no material impact. In 2019 and 2020, the Argentinean economy continued to experience high
inflation. The ongoing impact is not material given the size of the company’s operations in the country (less than 1 percent of total 2020
and 2019 revenue, respectively).
Market Risk
In the normal course of business, our financial position is routinely subject to a variety of risks. In addition to the market risk associated
with interest rate and currency movements on outstanding debt and non-U.S. dollar denominated assets and liabilities, other examples
of risk include collectibility of accounts receivable and recoverability of residual values on leased assets.
We regularly assess these risks and have established policies and business practices to protect against the adverse effects of these
and other potential exposures. As a result, we do not anticipate any material losses from these risks.
Our debt, in support of the Global Financing business and the geographic breadth of our operations, contains an element of market risk
from changes in interest and currency rates. We manage this risk, in part, through the use of a variety of financial instruments including
derivatives, as described in note T, “Derivative Financial Instruments.”
To meet disclosure requirements, we perform a sensitivity analysis to determine the effects that market risk exposures may have on
the fair values of our debt and other financial instruments.
The financial instruments that are included in the sensitivity analysis are comprised of our cash and cash equivalents, marketable
securities, short-term and long-term loans, commercial financing and installment payment receivables, investments, long-term and
short-term debt and derivative financial instruments. Our derivative financial instruments generally include interest rate swaps, foreign
currency swaps and forward contracts.
To perform the sensitivity analysis, we assess the risk of loss in fair values from the effect of hypothetical changes in interest rates and
foreign currency exchange rates on market-sensitive instruments. The market values for interest and foreign currency exchange risk
are computed based on the present value of future cash flows as affected by the changes in rates that are attributable to the market
risk being measured. The discount rates used for the present value computations were selected based on market interest and foreign
currency exchange rates in effect at December 31, 2020 and 2019. The differences in this comparison are the hypothetical losses
associated with each type of risk.
Information provided by the sensitivity analysis does not necessarily represent the actual changes in fair value that we would incur
under normal market conditions because, due to practical limitations, all variables other than the specific market risk factor are held
constant. In addition, the results of the model are constrained by the fact that certain items are specifically excluded from the analysis,
while the financial instruments relating to the financing or hedging of those items are included by definition. Excluded items include
short-term and long-term receivables from sales-type and direct financing leases, forecasted foreign currency cash flows and the
company’s net investment in foreign operations. As a consequence, reported changes in the values of some of the financial instruments
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impacting the results of the sensitivity analysis are not matched with the offsetting changes in the values of the items that those
instruments are designed to finance or hedge.
The results of the sensitivity analysis at December 31, 2020 and 2019, are as follows:
Interest Rate Risk
A hypothetical 10 percent adverse change in the levels of interest rates, with all other variables held constant, would result in a decrease
in the fair value of our financial instruments of approximately $0.4 billion and $0.6 billion at December 31, 2020 and 2019, respectively.
Changes in the relative sensitivity of the fair value of our financial instrument portfolio for these theoretical changes in the level of
interest rates are primarily driven by changes in debt maturities, interest rate profile and amount.
Foreign Currency Exchange Rate Risk
A hypothetical 10 percent adverse change in the levels of foreign currency exchange rates relative to the U.S. dollar, with all other
variables held constant, would result in a decrease in the fair value of our financial instruments of approximately $1.8 billion and $0.6
billion at December 31, 2020 and 2019, respectively. The increase in the sensitivity of these theoretical changes from the prior year is
primarily driven by an increase in Euro denominated long-term debt and a decrease in derivatives used for purchases of foreign
currencies.
Financing Risks
See the “Description of Business” on pages 27 to 28 for a discussion of the financing risks associated with the Global Financing
business and management’s actions to mitigate such risks.
Cybersecurity
While cybersecurity risk can never be completely eliminated, our approach draws on the depth and breadth of our global capabilities,
both in terms of our offerings to clients and our internal approaches to risk management. We offer commercial security solutions that
deliver capabilities in areas such as identity and access management, data security, application security, network security and endpoint
security. These solutions include pervasive encryption, threat intelligence, analytics, cognitive and artificial intelligence, and forensic
capabilities that analyze client security events, yielding insights about attacks, threats, and vulnerabilities facing the client. We also
offer professional consulting and technical services solutions for security from assessment and incident response to deployment and
resource augmentation. In addition, we offer managed and outsourced security solutions from multiple security operations centers
around the world. Finally, security is embedded in a multitude of our products and offerings through secure engineering and operations,
and by critical functions (e.g., encryption, access control) in servers, storage, software, services, and other solutions.
From an enterprise perspective, we implement a multi-faceted risk-management approach based on the National Institute of
Standards and Technology Cybersecurity Framework to identify and address cybersecurity risks. In addition, we have established
policies and procedures that provide the foundation upon which IBM’s infrastructure and data are managed. We regularly assess and
adjust our technical controls and methods to identify and mitigate emerging cybersecurity risks. We use a layered approach with
overlapping controls to defend against cybersecurity attacks and threats on networks, end-user devices, servers, applications, data
and cloud solutions. We draw heavily on our own commercial security solutions and services to mitigate cybersecurity risks. We also
have threat intelligence and security monitoring programs, as well as a global incident response process to respond to cybersecurity
threats and attacks. In addition, we utilize a combination of online training, educational tools, videos and other awareness initiatives
to foster a culture of security awareness and responsibility among our workforce.
Report of Management
International Business Machines Corporation and Subsidiary Companies
65
Management Responsibility for Financial Information
Responsibility for the integrity and objectivity of the financial information presented in this Annual Report rests with IBM management.
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United
States of America, applying certain estimates and judgments as required.
IBM maintains an effective internal control structure. It consists, in part, of organizational arrangements with clearly defined lines of
responsibility and delegation of authority, and comprehensive systems and control procedures. An important element of the control
environment is an ongoing internal audit program. Our system also contains self-monitoring mechanisms, and actions are taken to
correct deficiencies as they are identified.
To assure the effective administration of internal controls, we carefully select and train our employees, develop and disseminate
written policies and procedures, provide appropriate communication channels and foster an environment conducive to the effective
functioning of controls. We believe that it is essential for the company to conduct its business affairs in accordance with the highest
ethical standards, as set forth in the IBM Business Conduct Guidelines. These guidelines, translated into numerous languages, are
distributed to employees throughout the world, and reemphasized through internal programs to assure that they are understood and
followed.
The Audit Committee of the Board of Directors is composed solely of independent, non-management directors, and is responsible for
recommending to the Board the independent registered public accounting firm to be retained for the coming year, subject to
stockholder ratification. The Audit Committee meets regularly and privately with the independent registered public accounting firm,
with the company’s internal auditors, as well as with IBM management, to review accounting, auditing, internal control structure and
financial reporting matters.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting of the company. Internal
control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the
United States of America.
The company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets
that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management conducted an evaluation of the effectiveness of internal control over financial reporting based on the criteria established
in Internal Control–Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Based on this evaluation, management concluded that the company’s internal control over financial reporting was effective as
of December 31, 2020.
PricewaterhouseCoopers LLP, an independent registered public accounting firm, is retained to audit IBM’s Consolidated Financial
Statements and the effectiveness of the internal control over financial reporting. Its accompanying report is based on audits conducted
in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Arvind Krishna
Chairman and Chief Executive Officer
February 23, 2021
James J. Kavanaugh
Senior Vice President and Chief Financial Officer
February 23, 2021
66
Report of Independent Registered Public Accounting Firm
International Business Machines Corporation and Subsidiary Companies
To the Board of Directors and Stockholders of International Business Machines Corporation
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of International Business Machines Corporation and its subsidiaries
(the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of income, of comprehensive income,
of equity and of cash flows for each of the three years in the period ended December 31, 2020, including the related notes (collectively
referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting
as of December 31, 2020, based on criteria established in Internal Control–Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of
the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the
period ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of America. Also in
our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31,
2020, based on criteria established in Internal Control–Integrated Framework (2013) issued by the COSO.
Change in Accounting Principle
As discussed in Note B to the consolidated financial statements, the Company changed the manner in which it accounts for leases in
2019.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying
Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express opinions on the Company’s
consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public
accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations
of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due
to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of
the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included
performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable
basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements
in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only
in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect
on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Report of Independent Registered Public Accounting Firm
International Business Machines Corporation and Subsidiary Companies
67
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements
that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are
material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The
communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a
whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on
the accounts or disclosures to which it relates.
Income Taxes–Uncertain Tax Positions
As described in Notes A and G to the consolidated financial statements, the Company is subject to income taxes in the United States and
numerous foreign jurisdictions. As disclosed by management, during the ordinary course of business there are many transactions and
calculations for which the ultimate tax determination is uncertain. As a result, management recognizes tax liabilities based on estimates of
whether additional taxes and interest will be due. As further described by management, these tax liabilities are recognized when, despite
management’s belief that the tax return positions are supportable, management believes that certain positions may not be fully sustained
upon review by tax authorities. Management bases its assessment of the accruals for tax liabilities on many factors, including past
experience and interpretations of tax law. This assessment relies on estimates and assumptions and may involve a series of complex
judgments about future events. As of December 31, 2020, unrecognized tax benefits were $8.6 billion.
The principal considerations for our determination that performing procedures relating to uncertain tax positions is a critical audit matter
are the significant judgment by management when estimating the uncertain tax positions, including applying complex tax laws, and a high
degree of estimation uncertainty based on potential for significant adjustments as a result of audits by tax authorities or other forms of tax
settlement. This in turn led to a high degree of auditor judgment, effort, and subjectivity in performing procedures to evaluate management’s
timely identification and measurement of uncertain tax positions. Also, the evaluation of audit evidence available to support the uncertain
tax positions is complex and required significant auditor judgment as the nature of the evidence is often inherently subjective, and the audit
effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion
on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the identification
and recognition of the uncertain tax positions, and controls addressing completeness of the uncertain tax positions, as well as controls
over measurement of the amount recorded. These procedures also included, among others (i) testing the information used in the
calculation of the uncertain tax positions, including intercompany agreements, international, federal, and state filing positions, and the
related final tax returns; (ii) testing the calculation of the uncertain tax positions by jurisdiction, including management’s assessment
of the technical merits of tax positions and estimates of the amount of tax benefit expected to be sustained; (iii) testing the
completeness of management’s assessment of both the identification of uncertain tax positions and possible outcomes of each
uncertain tax position; and (iv) evaluating the status and results of income tax audits pending in various tax jurisdictions. Professionals
with specialized skill and knowledge were used to assist in the evaluation of the completeness and measurement of the Company’s
uncertain tax positions, including evaluating the reasonableness of management’s assessment of whether tax positions are more-
likely-than-not of being sustained and the amount of potential benefit to be realized.
PricewaterhouseCoopers LLP
New York, New York
February 23, 2021
We, or firms that we have ultimately acquired, have served as the Company’s auditor since 1923. For the period from 1923 to 1958,
the Company was audited by firms that a predecessor firm to PricewaterhouseCoopers LLP ultimately acquired.
68
Consolidated Income Statement
International Business Machines Corporation and Subsidiary Companies
($ in millions except per share amounts)
For the year ended December 31:
Revenue
Services
Sales
Financing
Total revenue
Cost
Services
Sales
Financing
Total cost
Gross profit
Expense and other (income)
Selling, general and administrative
Research, development and engineering
Intellectual property and custom development income
Other (income) and expense
Interest expense
Total expense and other (income)
Income from continuing operations before income taxes
Provision for/(benefit from) income taxes
Income from continuing operations
Income/(loss) from discontinued operations, net of tax
Net income
Earnings/(loss) per share of common stock
Assuming dilution
Continuing operations
Discontinued operations
Total
Basic
Continuing operations
Discontinued operations
Total
Weighted-average number of common shares outstanding
Assuming dilution
Basic
Amounts may not add due to rounding.
The accompanying notes are an integral part of the financial statements.
Notes
2020
2019
2018
$45,004
27,484
1,133
73,620
30,404
6,934
708
38,046
35,575
23,082
6,333
(626)
861
1,288
30,937
4,637
(864)
5,501
89
$ 5,590
$
$
$
$
6.13
0.10
6.23
6.18
0.10
6.28
C
F
P&T
G
H
H
H
H
H
H
$47,493
28,252
1,402
77,147
32,491
7,263
904
40,659
36,488
20,604
5,989
(648)
(968)
1,344
26,322
10,166
731
9,435
(4)
$ 9,431
$ 10.57
(0.01)
$ 10.56
$ 10.63
0.00
$ 10.63
$49,257
28,735
1,599
79,591
33,687
7,835
1,132
42,655
36,936
19,366
5,379
(1,026)
1,152
723
25,594
11,342
2,619
8,723
5
$ 8,728
$
$
$
$
9.51
0.01
9.52
9.56
0.01
9.57
896,563,971
890,348,679
892,813,376
887,235,105
916,315,714
912,048,072
Consolidated Statement of Comprehensive Income
International Business Machines Corporation and Subsidiary Companies
69
($ in millions)
For the year ended December 31:
Net income
Other comprehensive income/(loss), before tax
Foreign currency translation adjustments
Net changes related to available-for-sale securities
Unrealized gains/(losses) arising during the period
Reclassification of (gains)/losses to net income
Total net changes related to available-for-sale securities
Unrealized gains/(losses) on cash flow hedges
Unrealized gains/(losses) arising during the period
Reclassification of (gains)/losses to net income
Total unrealized gains/(losses) on cash flow hedges
Retirement-related benefit plans
Prior service costs/(credits)
Net (losses)/gains arising during the period
Curtailments and settlements
Amortization of prior service (credits)/costs
Amortization of net (gains)/losses
Total retirement-related benefit plans
Other comprehensive income/(loss), before tax
Income tax (expense)/benefit related to items of other comprehensive
income
Other comprehensive income/(loss)
Total comprehensive income
Amounts may not add due to rounding.
The accompanying notes are an integral part of the financial statements.
Notes
2020
2019
2018
$ 5,590
$ 9,431
$ 8,728
S
S
S
S
S
S
S
(1,500)
(39)
(730)
(1)
—
(1)
(349)
(21)
(370)
(37)
(1,678)
52
13
2,314
664
(1,206)
466
(740)
$ 4,850
1
—
1
(689)
75
(614)
(73)
(120)
41
(9)
1,843
1,681
1,029
(136)
893
$ 10,324
(2)
—
(2)
(136)
449
313
(182)
(2,517)
11
(73)
2,966
204
(215)
(262)
(476)
$ 8,252
70
Consolidated Balance Sheet
International Business Machines Corporation and Subsidiary Companies
($ in millions except per share amounts)
At December 31:
Assets
Current assets
Notes
2020
2019
Cash and cash equivalents
Restricted cash
Marketable securities
Notes and accounts receivable—trade (net of allowances of $351 in 2020 and $299 in 2019)
Short-term financing receivables (net of allowances of $218 in 2020 and $188 in 2019)
Other accounts receivable (net of allowances of $28 in 2020 and $33 in 2019)
Inventory
Deferred costs
Prepaid expenses and other current assets
Total current assets
Property, plant and equipment
Less: Accumulated depreciation
Property, plant and equipment—net
Operating right-of-use assets—net
Long-term financing receivables (net of allowances of $45 in 2020 and $33 in 2019)
Prepaid pension assets
Deferred costs
Deferred taxes
Goodwill
Intangible assets—net
Investments and sundry assets
Total assets
Liabilities and equity
Current liabilities
$ 13,212
463
600
7,132
10,892
714
1,839
2,107
2,206
39,165
33,176
23,136
10,040
4,686
7,086
7,610
2,449
9,241
59,617
13,796
2,282
$ 155,971
I
K
J
C
L
L
L
M
K
V
C
G
N
N
O
Taxes
Short-term debt
Accounts payable
Compensation and benefits
Deferred income
Operating lease liabilities
Other accrued expenses and liabilities
Total current liabilities
Long-term debt
Retirement and nonpension postretirement benefit obligations
Deferred income
Operating lease liabilities
Other liabilities
Total liabilities
Commitments and Contingencies
Equity
IBM stockholders' equity
Common stock, par value $.20 per share, and additional paid-in capital
Shares authorized: 4,687,500,000
Shares issued (2020—2,242,969,004; 2019—2,237,996,975)
Retained earnings
Treasury stock, at cost (shares: 2020—1,350,315,580; 2019—1,350,886,521)
Accumulated other comprehensive income/(loss)
Total IBM stockholders' equity
Noncontrolling interests
Total equity
Total liabilities and equity
Amounts may not add due to rounding.
The accompanying notes are an integral part of the financial statements.
$
8,172
141
696
7,870
14,192
1,733
1,619
1,896
2,101
38,420
32,028
22,018
10,010
4,996
8,712
6,865
2,472
5,182
58,222
15,235
2,074
$ 152,186
$
2,839
8,797
4,896
3,406
12,026
1,380
4,357
37,701
54,102
17,142
3,851
3,879
14,526
131,202
$
G
I&P
M
I&P
V
3,301
7,183
4,908
3,440
12,833
1,357
6,847
39,869
54,355
18,248
4,301
3,574
14,897
135,244
M
Q
R
S
A
56,556
55,895
162,717
(169,339)
(29,337)
20,597
129
20,727
$ 155,971
162,954
(169,413)
(28,597)
20,841
144
20,985
$ 152,186
Consolidated Statement of Cash Flows
International Business Machines Corporation and Subsidiary Companies
71
($ in millions)
For the year ended December 31:
Cash flows from operating activities
Net income
Adjustments to reconcile net income to cash provided by operating activities
2020
2019
2018
$ 5,590
$ 9,431
$ 8,728
Depreciation
Amortization of intangibles
Stock-based compensation
Deferred taxes
Net (gain)/loss on asset sales and other
Change in operating assets and liabilities, net of acquisitions/divestitures
Receivables (including financing receivables)
Retirement related
Inventory
Other assets/other liabilities
Accounts payable
Net cash provided by operating activities
Cash flows from investing activities
Payments for property, plant and equipment
Proceeds from disposition of property, plant and equipment
Investment in software
Purchases of marketable securities and other investments
Proceeds from disposition of marketable securities and other investments
Non-operating finance receivables—net
Acquisition of businesses, net of cash acquired
Divestiture of businesses, net of cash transferred
Net cash provided by/(used in) investing activities
Cash flows from financing activities
Proceeds from new debt
Payments to settle debt
Short-term borrowings/(repayments) less than 90 days—net
Common stock repurchases
Common stock repurchases for tax withholdings
Financing—other
Cash dividends paid
Net cash provided by/(used in) financing activities
Effect of exchange rate changes on cash, cash equivalents and restricted cash
Net change in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at January 1
Cash, cash equivalents and restricted cash at December 31
Supplemental data
Income taxes paid—net of refunds received
Interest paid on debt
Amounts may not add due to rounding.
The accompanying notes are an integral part of the financial statements.
4,227
2,468
937
(3,203)
(70)
5,297
936
(209)
2,087
138
18,197
(2,618)
188
(612)
(6,246)
5,618
475
(336)
503
(3,028)
10,504
(13,365)
(853)
—
(302)
92
(5,797)
(9,721)
(87)
5,361
8,314
$ 13,675
4,209
1,850
679
(1,527)
(1,096)
502
301
67
858
(503)
14,770
(2,286)
537
(621)
(3,693)
3,961
6,720
(32,630)
1,076
(26,936)
31,825
(12,944)
(2,597)
(1,361)
(272)
99
(5,707)
9,042
(167)
(3,290)
11,604
$ 8,314
3,127
1,353
510
853
123
1,006
1,368
(127)
(1,819)
126
15,247
(3,395)
248
(569)
(7,041)
6,487
(503)
(139)
—
(4,913)
6,891
(8,533)
1,341
(4,443)
(171)
111
(5,666)
(10,469)
(495)
(630)
12,234
$ 11,604
$ 2,253
$ 1,830
$ 2,091
$ 1,685
$ 1,745
$ 1,423
72
Consolidated Statement of Equity
International Business Machines Corporation and Subsidiary Companies
($ in millions except per share amounts)
2018
Equity, January 1, 2018
Cumulative effect of change in
accounting principle
Common
Stock and
Additional
Paid-in
Capital
Accumulated
Other
Treasury Comprehensive
Income/(Loss)
Stock
Retained
Earnings
Total IBM
Non-
Stockholders’ Controlling
Interests
Equity
Total
Equity
$ 54,566 $ 153,126 $ (163,507)
$ (26,592)
$17,594
$ 131 $ 17,725
580
2,422
8,728
(2,422)
580
580
(476)
8,728
(476)
$ 8,252
8,728
(476)
$ 8,252
(5,666)
(5,666)
(5,666)
Revenue*
Stranded tax effects/other*
Net income plus other comprehensive
income/(loss)
Net income
Other comprehensive income/(loss)
Total comprehensive income/(loss)
Cash dividends paid—common stock
($6.21 per share)
Common stock issued under employee
plans (3,998,245 shares)
585
Purchases (1,173,416 shares) and sales
(424,589 shares) of treasury stock
under employee plans—net
Other treasury shares purchased, not
retired (32,949,233 shares)
Changes in other equity
Changes in noncontrolling interests
Equity, December 31, 2018
15
(117)
(4,447)
0
0
585
(103)
(4,447)
0
585
(103)
(4,447)
0
3
$ 134 $ 16,929
3
$ 55,151 $ 159,206 $ (168,071)
$ (29,490)
$16,796
* Reflects the adoption of FASB guidance. Refer to note B, “Accounting Changes.”
Amounts may not add due to rounding.
The accompanying notes are an integral part of the financial statements.
($ in millions except per share amounts)
Common
Stock and
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Non-
Treasury Comprehensive Stockholders’ Controlling
Interests
Income/(Loss)
Total IBM
Equity
Stock
Total
Equity
2019
Equity, January 1, 2019
Net income plus other comprehensive
income/(loss)
Net income
Other comprehensive income/(loss)
Total comprehensive income/(loss)
Cash dividends paid—common stock
($6.43 per share)
Common stock issued under employee
$55,151 $ 159,206 $ (168,071)
$(29,490)
$16,796
$ 134 $ 16,929
9,431
893
9,431
893
$10,324
9,431
893
$ 10,324
(5,707)
(5,707)
(5,707)
plans (4,569,917 shares)
745
Purchases (2,000,704 shares) and sales
(2,041,347 shares) of treasury stock
under employee plans—net
Other treasury shares purchased, not
retired (9,979,516 shares)
Changes in other equity
Changes in noncontrolling interests
Equity, December 31, 2019
Amounts may not add due to rounding.
30
(11)
(1,331)
(5)
745
19
(1,331)
(5)
745
19
(1,331)
(5)
10
$ 144 $ 20,985
10
$55,895 $ 162,954 $ (169,413)
$(28,597)
$20,841
The accompanying notes are an integral part of the financial statements.
Consolidated Statement of Equity
International Business Machines Corporation and Subsidiary Companies
73
($ in millions except per share amounts)
2020
Equity, January 1, 2020
Cumulative effect of change in accounting
principle*
Net income plus other comprehensive
income/(loss)
Net income
Other comprehensive income/(loss)
Total comprehensive income/(loss)
Cash dividends paid—common stock
($6.51 per share)
Common stock issued under employee
Common
Stock and
Additional
Paid-in
Retained
Capital Earnings
Accumulated
Other
Non-
Treasury Comprehensive Stockholders’ Controlling
Total IBM
Stock Income/(Loss)
Equity
Interests
Total
Equity
$55,895 $162,954 $(169,413)
$(28,597)
$20,841
$144 $ 20,985
(66)
5,590
(66)
(66)
(740)
5,590
(740)
$ 4,850
5,590
(740)
$ 4,850
(5,797)
(5,797)
(5,797)
plans (4,972,028 shares)
661
Purchases (2,363,966 shares) and sales
(2,934,907 shares) of treasury stock
under employee plans—net
Changes in noncontrolling interests
Equity, December 31, 2020
36
74
661
110
661
110
(15)
$129 $ 20,727
(15)
$56,556 $162,717 $(169,339)
$(29,337)
$20,597
* Reflects the adoption of the FASB guidance on current expected credit losses. Refer to note B, “Accounting Changes.”
Amounts may not add due to rounding.
The accompanying notes are an integral part of the financial statements.
74
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
NOTE A. SIGNIFICANT ACCOUNTING POLICIES
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).
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.
On October 8, 2020, the company announced that it will separate the managed infrastructure services unit of its Global Technology
Services (GTS) segment into a new public company (NewCo). The managed infrastructure services unit is comprised of outsourcing and
other infrastructure modernization and management services. The separation is expected to be achieved through a U.S. federal tax-
free spin-off to IBM shareholders and completed by the end of 2021. It will be subject to customary market, regulatory and other
closing conditions, including final IBM Board of Directors’ approval. The announcement did not have any classification impact to the
company’s Consolidated Financial Statements or segment reporting. The company will report the managed infrastructure services unit
as discontinued operations after separation.
In the first quarter of 2020, the company realigned offerings and the related management system to reflect divestitures completed in
the second half of 2019 and tighter integration of certain industry-related consulting services. These changes impacted two of the
company’s reportable segments, but did not impact the Consolidated Financial Statements. Refer to note D, “Segments,” for additional
information on the company’s reportable segments. The periods presented in this Annual Report are reported on a comparable basis.
On July 9, 2019, the company completed the acquisition of all the outstanding shares of Red Hat, Inc. (Red Hat). Refer to note E,
“Acquisitions & Divestitures,” and note N, “Intangible Assets Including Goodwill,” for additional information.
The benefit from income taxes for the year ended December 31, 2020 includes the tax impacts of an intra-entity sale of certain of the
company’s intellectual property, which resulted in a net benefit of $0.9 billion in the first quarter of 2020. The impact of the enactment
of the Tax Cuts and Jobs Act (U.S. tax reform) resulted in a charge to income taxes of $0.1 billion and $2.0 billion, for the years ended
December 31, 2019 and 2018, respectively. In 2020, there was no impact from the enactment of U.S. tax reform. Refer to note G,
“Taxes,” for additional information.
Noncontrolling interest amounts of $22 million, $25 million and $17 million, net of tax, for the years ended December 31, 2020, 2019
and 2018, respectively, are included as a reduction within other (income) and expense in the Consolidated Income Statement.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of IBM and its controlled subsidiaries, which are primarily majority owned.
Any noncontrolling interest in the equity of a subsidiary is reported as a component of total equity in the Consolidated Balance Sheet.
Net income and losses attributable to the noncontrolling interest is reported as described above in the Consolidated Income Statement.
The accounts of variable interest entities (VIEs) are included in the Consolidated Financial Statements, if required. Investments in
business entities in which the company does not have control but has the ability to exercise significant influence over operating and
financial policies, are accounted for using the equity method and the company’s proportionate share of income or loss is recorded in
other (income) and expense. The accounting policy for other investments in equity securities is described within the “Marketable
Securities” section of this note. Equity investments in non-publicly traded entities lacking controlling financial interest or significant
influence are primarily measured at cost, absent other indicators of fair value, net of impairment, if any. All intercompany transactions
and accounts have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
amounts that are reported in the Consolidated Financial Statements and accompanying disclosures. Estimates are made for the
following, among others: revenue, costs to complete service contracts, income taxes, pension assumptions, valuation of assets
including goodwill and intangible assets, loss contingencies, allowance for credit losses and other matters. 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, including in 2020, the macroeconomic
impacts of the COVID-19 pandemic. Actual results may be different from these estimates.
Revenue
The company accounts for a contract with a client when it has written approval, the contract is committed, the rights of the parties,
including payment terms, are identified, the contract has commercial substance and consideration is probable of collection.
Revenue is recognized when, or as, control of a promised product or service transfers to a client, in an amount that reflects the
consideration to which the company expects to be entitled in exchange for transferring those products or services. If the consideration
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
75
promised in a contract includes a variable amount, the company estimates the amount to which it expects to be entitled using either
the expected value or most likely amount method. The company’s contracts may include terms that could cause variability in the
transaction price, including, for example, rebates, volume discounts, service-level penalties, and performance bonuses or other forms
of contingent revenue.
The company only includes estimated amounts in the transaction price to the extent it is probable that a significant reversal of
cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. The company
may not be able to reliably estimate contingent revenue in certain long-term arrangements due to uncertainties that are not expected
to be resolved for a long period of time or when the company’s experience with similar types of contracts is limited. The company’s
arrangements infrequently include contingent revenue. Changes in estimates of variable consideration are included in note C, “Revenue
Recognition.”
The company’s standard billing terms are that payment is due upon receipt of invoice, payable within 30 days. Invoices are generally
issued as control transfers and/or as services are rendered. Additionally, in determining the transaction price, the company adjusts the
promised amount of consideration for the effects of the time value of money if the billing terms are not standard and the timing of
payments agreed to by the parties to the contract provide the client or the company with a significant benefit of financing, in which
case the contract contains a significant financing component. As a practical expedient, the company does not account for significant
financing components if the period between when the company transfers the promised product or service to the client and when the
client pays for that product or service will be one year or less. Most arrangements that contain a financing component are financed
through the company’s Global Financing business and include explicit financing terms.
The company may include subcontractor services or third-party vendor equipment or software in certain integrated services
arrangements. In these types of arrangements, revenue from sales of third-party vendor products or services is recorded net of costs
when the company is acting as an agent between the client and the vendor, and gross when the company is the principal for the
transaction. To determine whether the company is an agent or principal, the company considers whether it obtains control of the
products or services before they are transferred to the customer. In making this evaluation, several factors are considered, most
notably whether the company has primary responsibility for fulfillment to the client, as well as inventory risk and pricing discretion.
The company recognizes revenue on sales to solution providers, resellers and distributors (herein referred to as resellers) when the
reseller has economic substance apart from the company and the reseller is considered the principal for the transaction with the end-
user client.
The company reports revenue net of any revenue-based taxes assessed by governmental authorities that are imposed on and
concurrent with specific revenue-producing transactions.
In addition to the aforementioned general policies, the following are the specific revenue recognition policies for arrangements with
multiple performance obligations and for each major category of revenue.
Arrangements with Multiple Performance Obligations
The company’s global capabilities as a hybrid cloud platform and AI company include services, software, hardware and related
financing. The company enters into revenue arrangements that may consist of any combination of these products and services based
on the needs of its clients.
The company continues to develop new products and offerings and continuously reinvents its platforms and delivery methods,
including the use of cloud and as-a-Service models. These are not separate businesses; they are offerings across the segments that
address market opportunities in analytics, data, cloud and security. Revenue from these offerings follows the specific revenue
recognition policies for arrangements with multiple performance obligations and for each major category of revenue, depending on the
type of offering, which are comprised of services, hardware and/or software.
To the extent that a product or service in multiple performance obligation arrangements is subject to other specific accounting
guidance, such as leasing guidance, that product or service is accounted for in accordance with such specific guidance. For all other
products or services in these arrangements, the company determines if the products or services are distinct and allocates the
consideration to each distinct performance obligation on a relative standalone selling price basis.
When products and services are not distinct, the company determines an appropriate measure of progress based on the nature of its
overall promise for the single performance obligation.
The revenue policies in the Services, Hardware and/or Software sections below are applied to each performance obligation, as
applicable.
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Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
Services
The company’s primary services offerings include cloud and infrastructure services, including outsourcing, and other managed
services; application management services; global process services (GPS); maintenance and support; and consulting, including the
design and development of complex IT systems to a client’s specifications (e.g., design and build). Many of these services can be
delivered entirely or partially through cloud or as-a-Service delivery models. The company’s services are provided on a time-and-
material basis, as a fixed-price contract or as a fixed-price per measure of output contract and the contract terms range from less than
one year to over 10 years.
In services arrangements, the company typically satisfies the performance obligation and recognizes revenue over time. In design and
build arrangements, the performance obligation is satisfied over time either because the client controls the asset as it is created (e.g.,
when the asset is built at the customer site) or because the company’s performance does not create an asset with an alternative use
and the company has an enforceable right to payment plus a reasonable profit for performance completed to date. In most other
services arrangements, the performance obligation is satisfied over time because the client simultaneously receives and consumes the
benefits provided as the company performs the services.
In outsourcing, other managed services, application management, GPS and other cloud-based services arrangements, the company
determines whether the services performed during the initial phases of the arrangement, such as setup activities, are distinct. In most
cases, the arrangement is a single performance obligation comprised of a series of distinct services that are substantially the same and
that have the same pattern of transfer (i.e., distinct days of service). The company applies a measure of progress (typically time-based)
to any fixed consideration and allocates variable consideration to the distinct periods of service based on usage. As a result, revenue
is generally recognized over the period the services are provided on a usage basis. This results in revenue recognition that corresponds
with the value to the client of the services transferred to date relative to the remaining services promised.
Revenue from time-and-material contracts is recognized on an output basis as labor hours are delivered and/or direct expenses are
incurred. Revenue from as-a-Service type contracts, such as Infrastructure-as-a-Service, is recognized either on a straight-line basis
or on a usage basis, depending on the terms of the arrangement (such as whether the company is standing ready to perform or whether
the contract has usage-based metrics). If an as-a-Service contract includes setup activities, those promises in the arrangement are
evaluated to determine if they are distinct.
Revenue related to maintenance and support services and extended warranty is recognized on a straight-line basis over the period of
performance because the company is standing ready to provide services.
In design and build contracts, revenue is recognized based on progress toward completion of the performance obligation using a cost-
to-cost measure of progress. Revenue is recognized based on the labor costs incurred to date as a percentage of the total estimated
labor costs to fulfill the contract. Due to the nature of the work performed in these arrangements, the estimation of cost at completion
is complex, subject to many variables and requires significant judgment. Key factors reviewed by the company to estimate costs to
complete each contract are future labor and product costs and expected productivity efficiencies. Changes in original estimates are
reflected in revenue on a cumulative catch-up basis in the period in which the circumstances that gave rise to the revision become
known by the company. Refer to note C, “Revenue Recognition,” for the amount of revenue recognized in the reporting period on a
cumulative catch-up basis (i.e., from performance obligations satisfied, or partially satisfied, in previous periods).
The company performs ongoing profitability analyses of its design and build services contracts accounted for using a cost-to-cost
measure of progress in order to determine whether the latest estimates of revenues, costs and profits require updating. If at any time
these estimates indicate that the contract will be unprofitable, the entire estimated loss for the remainder of the contract is recorded
immediately. For other types of services contracts, any losses are recorded as incurred.
In some services contracts, the company bills the client prior to recognizing revenue from performing the services. Deferred income of
$4,994 million and $5,106 million at December 31, 2020 and 2019, respectively, is included in the Consolidated Balance Sheet. In
other services contracts, the company performs the services prior to billing the client. When the company performs services prior to
billing the client in design and build contracts, the right to consideration is typically subject to milestone completion or client
acceptance and the unbilled accounts receivable is classified as a contract asset. At December 31, 2020 and 2019, contract assets for
services contracts of $448 million and $424 million, respectively, are included in prepaid expenses and other current assets in the
Consolidated Balance Sheet. The remaining amount of unbilled accounts receivable of $1,008 million and $1,071 million at
December 31, 2020 and 2019, respectively, is included in notes and accounts receivable–trade in the Consolidated Balance Sheet.
Billings usually occur in the month after the company performs the services or in accordance with specific contractual provisions.
Hardware
The company’s hardware offerings include the sale or lease of system servers and storage solutions. The capabilities of these products
can also be delivered through as-a-Service or cloud delivery models, such as Storage-as-a-Service. The company also offers installation
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
77
services for its more complex hardware products. Hardware offerings are often sold with distinct maintenance services, described in
the Services section above.
Revenue from hardware sales is recognized when control has transferred to the customer which typically occurs when the hardware
has been shipped to the client, risk of loss has transferred to the client and the company has a present right to payment for the
hardware. In limited circumstances when a hardware sale includes client acceptance provisions, revenue is recognized either when
client acceptance has been obtained, client acceptance provisions have lapsed, or the company has objective evidence that the criteria
specified in the client acceptance provisions have been satisfied. Revenue from hardware sales-type leases is recognized at the
beginning of the lease term. Revenue from rentals and operating leases is recognized on a straight-line basis over the term of the rental
or lease.
Revenue from as-a-Service arrangements is recognized either on a straight-line basis or on a usage basis as described in the Services
section above. Installation services are accounted for as distinct performance obligations with revenue recognized as the services are
performed. Shipping and handling activities that occur after the client has obtained control of a product are accounted for as an activity
to fulfill the promise to transfer the product rather than as an additional promised service and, therefore, no revenue is deferred and
recognized over the shipping period.
Software
The company’s software offerings include cognitive applications, which contain many of the company’s strategic areas including
analytics, data and security; cloud and data platforms, which contain the company’s distributed middleware and data platform
software, including Red Hat; transaction processing platforms, which primarily supports mission-critical systems for clients; and,
operating systems software, which provides operating systems for IBM Z and Power Systems hardware. These offerings include
proprietary software and open source software, and many can be delivered entirely or partially through as-a-Service or cloud delivery
models, while others are delivered as on-premise software licenses.
Revenue from proprietary perpetual (one-time charge) license software is recognized at a point in time at the inception of the
arrangement when control transfers to the client, if the software license is distinct from the post-contract support (PCS) offered by the
company. In limited circumstances, when the software requires continuous updates to provide the intended functionality, the software
license and PCS are not distinct and revenue for the single performance obligation is recognized over time as the PCS is provided. This
is only applicable to certain security software perpetual licenses offered by the company.
Revenue from proprietary term license software is recognized at a point in time for the committed term of the contract (which is typically
one month due to client termination rights), unless consideration depends on client usage, in which case revenue is recognized when
the usage occurs. Clients may contract to convert their existing IBM term license software into perpetual license software plus PCS.
When proprietary term license software is converted to perpetual license software, the consideration becomes fixed with no
cancellability and, therefore, revenue for the perpetual license is recognized upon conversion, consistent with the accounting for other
perpetual licenses, as described above. PCS revenue is recognized as described below.
The company also has open source software offerings. Since open source software is offered under an open source licensing model
and therefore, the license is available for free, the standalone selling price is zero. As such, when the license is sold with PCS or other
products and services, no consideration is allocated to the license when it is a distinct performance obligation and therefore no revenue
is recognized when control of the license transfers to the client. Revenue is recognized over the PCS period. In certain cases, open
source software is bundled with proprietary software and, if the open source software is not considered distinct, the software bundle
(e.g., Cloud Pak) is accounted for under a proprietary software model.
Revenue from PCS is recognized over the contract term on a straight-line basis because the company is providing a service of standing
ready to provide support, when-and-if needed, and is providing unspecified software upgrades on a when-and-if available basis over
the contract term.
Revenue from software hosting or Software-as-a-Service arrangements is recognized either on a straight-line basis or on a usage basis
as described in the Services section above. In software hosting arrangements, the rights provided to the client (e.g., ownership of a
license, contract termination provisions and the feasibility of the client to operate the software) are considered in determining whether
the arrangement includes a license. In arrangements that include a software license, the associated revenue is recognized in
accordance with the software license recognition policy above rather than over time as a service.
Financing
Financing income attributable to sales-type leases, direct financing leases and loans is recognized on the accrual basis using the
effective interest method. Operating lease income is recognized on a straight-line basis over the term of the lease.
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Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
Standalone Selling Price
The company allocates the transaction price to each performance obligation on a relative standalone selling price basis. The standalone
selling price (SSP) is the price at which the company would sell a promised product or service separately to a client. In most cases, the
company is able to establish SSP based on the observable prices of products or services sold separately in comparable circumstances
to similar clients. The company typically establishes SSP ranges for its products and services which are reassessed on a periodic basis
or when facts and circumstances change.
In certain instances, the company may not be able to establish a SSP range based on observable prices and the company estimates
SSP. The company estimates SSP by considering multiple factors including, but not limited to, overall market conditions, including
geographic or regional specific factors, competitive positioning, competitor actions, internal costs, profit objectives and pricing
practices. Additionally, in certain circumstances, the company may estimate SSP for a product or service by applying the residual
approach. This approach is most commonly used when certain perpetual software licenses are only sold bundled with one year of PCS
and a price has not been established for the software. Estimating SSP is a formal process that includes review and approval by the
company’s management.
Services Costs
Recurring operating costs for services contracts are recognized as incurred. For fixed-price design and build contracts, the costs of
external hardware and software accounted for under the cost-to-cost measure of progress are deferred and recognized based on the
labor costs incurred to date (i.e., the measure of progress), as a percentage of the total estimated labor costs to fulfill the contract as
control transfers over time for these performance obligations. Certain eligible, nonrecurring costs (i.e., setup costs) incurred in the
initial phases of outsourcing contracts and other cloud-based services contracts, including Software-as-a-Service arrangements, are
capitalized when the costs relate directly to the contract, the costs generate or enhance resources of the company that will be used in
satisfying the performance obligation in the future, and the costs are expected to be recovered. These costs consist of transition and
setup costs related to the installation of systems and processes and other deferred fulfillment costs, including, for example, prepaid
assets used in services contracts (i.e., prepaid software or prepaid maintenance). Capitalized costs are amortized on a straight-line
basis over the expected period of benefit, which includes anticipated contract renewals or extensions, consistent with the transfer to
the client of the services to which the asset relates. Additionally, fixed assets associated with these contracts are capitalized and
depreciated on a straight-line basis over the expected useful life of the asset. If an asset is contract specific, then the depreciation
period is the shorter of the useful life of the asset or the contract term. Amounts paid to clients in excess of the fair value of acquired
assets used in outsourcing arrangements are deferred and amortized on a straight-line basis as a reduction of revenue over the
expected period of benefit. The company performs periodic reviews to assess the recoverability of deferred contract transition and
setup costs. If the carrying amount is deemed not recoverable, an impairment loss is recognized. Refer to note C, “Revenue
Recognition,” for the amount of deferred costs to fulfill a contract at December 31, 2020 and 2019.
In situations in which an outsourcing contract is terminated, the terms of the contract may require the client to reimburse the company
for the recovery of unbilled accounts receivable, unamortized deferred contract costs and additional costs incurred by the company to
transition the services.
Software Costs
Costs that are related to the conceptual formulation and design of licensed software programs are expensed as incurred to research,
development and engineering expense; costs that are incurred to produce the finished product after technological feasibility has been
established are capitalized as an intangible asset. Capitalized amounts are amortized on a straight-line basis over periods ranging up
to three years and are recorded in software cost within cost of sales. The company performs periodic reviews to ensure that
unamortized program costs remain recoverable from future revenue. Costs to support or service licensed programs are charged to
software cost within cost of sales as incurred.
The company capitalizes certain costs that are incurred to purchase or develop internal-use software. Internal-use software programs
also include software used by the company to deliver Software-as-a-Service when the client does not receive a license to the software
and the company has no substantive plans to market the software externally. Capitalized costs are amortized on a straight-line basis
over periods ranging up to three years and are recorded in selling, general and administrative expense or cost of sales, depending on
whether the software is used by the company in revenue generating transactions. Additionally, the company may capitalize certain
types of implementation costs and amortize them over the term of the arrangement when the company is a customer in a cloud-
computing arrangement.
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
79
Incremental Costs of Obtaining a Contract
Incremental costs of obtaining a contract (e.g., sales commissions) are capitalized and amortized on a straight-line basis over the
expected customer relationship period if the company expects to recover those costs. The expected customer relationship period is
determined based on the average customer relationship period, including expected renewals, for each offering type and ranges from
three to six years. Expected renewal periods are only included in the expected customer relationship period if commission amounts
paid upon renewal are not commensurate with amounts paid on the initial contract. Incremental costs of obtaining a contract include
only those costs the company incurs to obtain a contract that it would not have incurred if the contract had not been obtained. The
company has determined that certain commissions programs meet the requirements to be capitalized. Some commission programs
are not subject to capitalization as the commission expense is paid and recognized as the related revenue is recognized. Additionally,
as a practical expedient, the company expenses costs to obtain a contract as incurred if the amortization period would have been a year
or less. These costs are included in selling, general and administrative expenses.
Product Warranties
The company offers warranties for its hardware products that generally range up to three years, with the majority being either one or
three years. Any cost of standard warranties is accrued when the corresponding revenue is recognized. The company estimates its
standard warranty costs for products based on historical warranty claim experience and estimates of future spending and applies this
estimate to the revenue stream for products under warranty. Estimated future costs for warranties applicable to revenue recognized
in the current period are charged to cost of sales. The warranty liability is reviewed quarterly to verify that it properly reflects the
remaining obligation based on the anticipated expenditures over the balance of the obligation period. Adjustments are made when
actual warranty claim experience differs from estimates. Costs from fixed-price support or maintenance contracts, including extended
warranty contracts, are recognized as incurred.
Revenue from extended warranty contracts is initially recorded as deferred income and subsequently recognized on a straight-line
basis over the delivery period because the company is providing a service of standing ready to provide services over such term.
Refer to note R, “Commitments & Contingencies,” for additional information.
Shipping and Handling
Costs related to shipping and handling are recognized as incurred and included in cost in the Consolidated Income Statement.
Expense and Other Income
Selling, General and Administrative
Selling, general and administrative (SG&A) expense is charged to income as incurred, except for certain sales commissions, which are
capitalized and amortized. For further information regarding capitalizing sales commissions, see “Incremental Costs of Obtaining a
Contract” above. Expenses of promoting and selling products and services are classified as selling expense and, in addition to sales
commissions, include such items as compensation, advertising and travel. General and administrative expense includes such items as
compensation, legal costs, office supplies, non-income taxes, insurance and office rental. In addition, general and administrative
expense includes other operating items such as an allowance for credit losses, workforce rebalancing charges for contractually
obligated payments to employees terminated in the ongoing course of business, acquisition costs related to business combinations,
amortization of certain intangible assets and environmental remediation costs.
Advertising and Promotional Expense
The company expenses advertising and promotional costs as incurred. Cooperative advertising reimbursements from vendors are
recorded net of advertising and promotional expense in the period in which the related advertising and promotional expense is incurred.
Advertising and promotional expense, which includes media, agency and promotional expense, was $1,542 million, $1,647 million and
$1,466 million in 2020, 2019 and 2018, respectively, and is recorded in SG&A expense in the Consolidated Income Statement.
Research, Development and Engineering
Research, development and engineering (RD&E) costs are expensed as incurred. Software costs that are incurred to produce the
finished product after technological feasibility has been established are capitalized as an intangible asset.
80
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
Intellectual Property and Custom Development Income
The company licenses and sells the rights to certain of its intellectual property (IP) including internally developed patents, trade secrets
and technological know-how. Certain IP transactions to third parties are licensing/royalty-based and others are transaction-based
sales/other transfers. Income from licensing arrangements is recognized at the inception of the license term if the nature of the
company’s promise is to provide a right to use the company’s intellectual property as it exists at that point in time (i.e., the license is
functional intellectual property) and control has transferred to the client. Income is recognized over time if the nature of the company’s
promise is to provide a right to access the company’s intellectual property throughout the license period (i.e., the license is symbolic
intellectual property), such as a trademark license. Licensing arrangements include IP partnerships whereby a business partner
licenses source code from the company and becomes responsible for developing, maintaining and enhancing the product. The company
retains its customers and go-to-market capability and any royalty due to the partner is recognized in cost of sales. The IP partner has
the rights to market the product and its derivative works under its own brand and remits royalty to the company on those sales, which
are recorded as royalty-based fees. Depending on the nature of the transaction, an IP partnership would be accounted for as a
divestiture if the company concludes the transaction meets the definition of a business. Income from royalty-based fee arrangements
is recognized at the later of when the subsequent sale or usage occurs or the performance obligation to which some or all of the royalty
has been allocated has been satisfied (or partially satisfied). The company also enters into cross-licensing arrangements of patents,
and income from these arrangements is recognized when control transfers to the customer. In addition, the company earns income
from certain custom development projects with strategic technology partners and specific clients. The company records the income
from these projects over time as the company satisfies the performance obligation if the fee is nonrefundable and is not dependent
upon the ultimate success of the project.
Other (Income) and Expense
Other (income) and expense includes interest income (other than from Global Financing external transactions), gains and losses on
certain derivative instruments, gains and losses from securities and other investments, gains and losses from certain real estate
transactions, foreign currency transaction gains and losses, gains and losses from the sale of financial assets, gains and losses from
the sale of businesses, other than reported as discontinued operations, and amounts related to accretion of asset retirement
obligations. Other (income) and expense also includes certain components of retirement-related costs, including interest costs,
expected return on plan assets, amortization of prior service costs/(credits), curtailments and settlements and other net periodic
pension/post-retirement benefit costs.
Business Combinations and Intangible Assets Including Goodwill
The company accounts for business combinations using the acquisition method and accordingly, the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree are recorded at their acquisition date fair values. Goodwill
represents the excess of the purchase price over the fair value of net assets, including the amount assigned to identifiable intangible
assets. The primary drivers that generate goodwill are the value of synergies between the acquired entities and the company and the
acquired assembled workforce, neither of which qualifies as a separately identifiable intangible asset. Goodwill recorded in an
acquisition is assigned to applicable reporting units based on expected revenues or expected cash flows. Identifiable intangible assets
with finite lives are amortized over their useful lives. Amortization of completed technology is recorded in cost, and amortization of all
other intangible assets is recorded in SG&A expense. Acquisition-related costs, including advisory, legal, accounting, valuation and
pre-close and other costs, are typically expensed in the periods in which the costs are incurred and are recorded in SG&A expense. The
results of operations of acquired businesses are included in the Consolidated Financial Statements from the acquisition date.
Impairment
Long-lived assets, other than goodwill, are tested for impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. The impairment test is based on undiscounted cash flows and, if impaired, the asset is written
down to fair value based on either discounted cash flows or appraised values. Goodwill is tested for impairment at least annually, in
the fourth quarter and whenever changes in circumstances indicate an impairment may exist. The goodwill impairment test is
performed at the reporting unit level, which is generally at the level of or one level below an operating segment.
Depreciation and Amortization
Property, plant and equipment are carried at cost and depreciated over their estimated useful lives using the straight-line method. The
estimated useful lives of certain depreciable assets are as follows: buildings, 30 to 50 years; building equipment, 10 to 20 years; land
improvements, 20 years; production, engineering, office and other equipment, 2 to 20 years; and information technology equipment,
1.5 to 5 years. Leasehold improvements are amortized over the shorter of their estimated useful lives or the related lease term, rarely
exceeding 25 years.
As noted within the “Software Costs” section of this note, capitalized software costs are amortized on a straight-line basis over periods
ranging up to 3 years. Other intangible assets are amortized over periods between 1 and 20 years.
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
81
Environmental
The cost of internal environmental protection programs that are preventative in nature are expensed as incurred. When a cleanup
program becomes likely, and it is probable that the company will incur cleanup costs and those costs can be reasonably estimated, the
company accrues remediation costs for known environmental liabilities.
Asset Retirement Obligations
Asset retirement obligations (ARO) are legal obligations associated with the retirement of long-lived assets and the liability is initially
recorded at fair value. The related asset retirement costs are capitalized by increasing the carrying amount of the related assets by the
same amount as the liability. Asset retirement costs are subsequently depreciated over the useful lives of the related assets.
Subsequent to initial recognition, the company records period-to-period changes in the ARO liability resulting from the passage of time
in interest expense and revisions to either the timing or the amount of the original expected cash flows to the related assets.
Defined Benefit Pension and Nonpension Postretirement Benefit Plans
The funded status of the company’s defined benefit pension plans and nonpension postretirement benefit plans (retirement-related
benefit plans) is recognized in the Consolidated Balance Sheet. The funded status is measured as the difference between the fair value
of plan assets and the benefit obligation at December 31, the measurement date. For defined benefit pension plans, the benefit
obligation is the projected benefit obligation (PBO), which represents the actuarial present value of benefits expected to be paid upon
retirement based on employee services already rendered and estimated future compensation levels. For the nonpension
postretirement benefit plans, the benefit obligation is the accumulated postretirement benefit obligation (APBO), which represents the
actuarial present value of postretirement benefits attributed to employee services already rendered. The fair value of plan assets
represents the current market value of assets held in an irrevocable trust fund, held for the sole benefit of participants, which are
invested by the trust fund. Overfunded plans, with the fair value of plan assets exceeding the benefit obligation, are aggregated and
recorded as a prepaid pension asset equal to this excess. Underfunded plans, with the benefit obligation exceeding the fair value of
plan assets, are aggregated and recorded as a retirement and nonpension postretirement benefit obligation equal to this excess.
The current portion of the retirement and nonpension post-retirement benefit obligations represents the actuarial present value of
benefits payable in the next 12 months exceeding the fair value of plan assets, measured on a plan-by-plan basis. This obligation is
recorded in compensation and benefits in the Consolidated Balance Sheet.
Net periodic pension and nonpension postretirement benefit cost/(income) is recorded in the Consolidated Income Statement and
includes service cost, interest cost, expected return on plan assets, amortization of prior service costs/(credits) and (gains)/losses
previously recognized as a component of other comprehensive income/(loss) (OCI) and amortization of the net transition asset
remaining in accumulated other comprehensive income/(loss) (AOCI). The service cost component of net benefit cost is recorded in
Cost, SG&A and RD&E in the Consolidated Income Statement (unless eligible for capitalization) based on the employees’ respective
functions. The other components of net benefit cost are presented separately from service cost within other (income) and expense in
the Consolidated Income Statement.
(Gains)/losses and prior service costs/(credits) are recognized as a component of OCI in the Consolidated Statement of Comprehensive
Income as they arise. Those (gains)/losses and prior service costs/(credits) are subsequently recognized as a component of net periodic
cost/(income) pursuant to the recognition and amortization provisions of applicable accounting guidance. (Gains)/losses arise as a
result of differences between actual experience and assumptions or as a result of changes in actuarial assumptions. Prior service
costs/(credits) represent the cost of benefit changes attributable to prior service granted in plan amendments.
The measurement of benefit obligations and net periodic cost/(income) is based on estimates and assumptions approved by the
company’s management. These valuations reflect the terms of the plans and use participant-specific information such as
compensation, age and years of service, as well as certain assumptions, including estimates of discount rates, expected return on plan
assets, rate of compensation increases, interest crediting rates and mortality rates.
Defined Contribution Plans
The company’s contribution for defined contribution plans is recorded when the employee renders service to the company. The charge
is recorded in Cost, SG&A and RD&E in the Consolidated Income Statement based on the employees’ respective functions.
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Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
Stock-Based Compensation
Stock-based compensation represents the cost related to stock-based awards granted to employees. The company measures stock-
based compensation cost at the grant date, based on the estimated fair value of the award and recognizes the cost on a straight-line
basis (net of estimated forfeitures) over the employee requisite service period. The company grants its employees Restricted Stock
Units (RSUs), including Retention Restricted Stock Units (RRSUs); Performance Share Units (PSUs); and periodically grants stock
options. RSUs are stock awards granted to employees that entitle the holder to shares of common stock as the award vests, typically
over a one- to five-year period. PSUs are stock awards where the number of shares ultimately received by the employee depends on
the company’s performance against specified targets and typically vest over a three-year period. Over the performance period, the
number of shares that will be issued is adjusted based upon the probability of achievement of performance targets. The ultimate
number of shares issued and the related compensation cost recognized as expense will be based on a comparison of the final
performance metrics to the specified targets. Dividend equivalents are not paid on the stock awards described above. The fair value of
the awards is determined and fixed on the grant date based on the company’s stock price, adjusted for the exclusion of dividend
equivalents where applicable and for PSUs assumes that performance targets will be achieved. The company estimates the fair value
of stock options using a Black-Scholes valuation model. Stock-based compensation cost is recorded in Cost, SG&A, and RD&E in the
Consolidated Income Statement based on the employees’ respective functions.
The company records deferred tax assets for awards that result in deductions on the company’s income tax returns, based on the
amount of compensation cost recognized and the relevant statutory tax rates. The differences between the deferred tax assets
recognized for financial reporting purposes and the actual tax deduction reported on the income tax return are recorded as a benefit
or expense to the provision for income taxes in the Consolidated Income Statement.
Income Taxes
Income tax expense is based on reported income before income taxes. Deferred income taxes reflect the tax effect of temporary
differences between asset and liability amounts that are recognized for financial reporting purposes and the amounts that are
recognized for income tax purposes. These deferred taxes are measured by applying currently enacted tax laws. U.S. tax reform
introduced Global Intangible Low-Taxed Income (GILTI), which subjects a U.S. shareholder to current tax on income earned by certain
foreign subsidiaries. Beginning in 2018, the company elected to include GILTI in measuring deferred taxes. Valuation allowances are
recognized to reduce deferred tax assets to the amount that will more likely than not be realized. In assessing the need for a valuation
allowance, management considers all available evidence for each jurisdiction including past operating results, estimates of future
taxable income and the feasibility of ongoing tax planning strategies/actions. When the company changes its determination as to the
amount of deferred tax assets that can be realized, the valuation allowance is adjusted with a corresponding impact to income tax
expense in the period in which such determination is made.
The company recognizes additional tax liabilities when the company believes that certain positions may not be fully sustained upon
review by tax authorities. Benefits from tax positions are measured at the largest amount of benefit that is greater than 50 percent
likely of being realized upon settlement. The noncurrent portion of tax liabilities is included in other liabilities in the Consolidated
Balance Sheet. To the extent that new information becomes available which causes the company to change its judgment regarding the
adequacy of existing tax liabilities, such changes to tax liabilities will impact income tax expense in the period in which such
determination is made. Interest and penalties, if any, related to accrued liabilities for potential tax assessments are included in income
tax expense.
Translation of Non-U.S. Currency Amounts
Assets and liabilities of non-U.S. subsidiaries that have a local functional currency are translated to U.S. dollars at year-end exchange
rates. Translation adjustments are recorded in OCI. Income and expense items are translated at weighted-average rates of exchange
prevailing during the year.
Inventory, property, plant and equipment—net and other non-monetary assets and liabilities of non-U.S. subsidiaries and branches
that operate in U.S. dollars are translated at the approximate exchange rates prevailing when the company acquired the assets or
liabilities. All other assets and liabilities denominated in a currency other than U.S. dollars are translated at year-end exchange rates
with the transaction gain or loss recognized in other (income) and expense. Income and expense items are translated at the weighted-
average rates of exchange prevailing during the year. These translation gains and losses are included in net income for the period in
which exchange rates change.
Derivative Financial Instruments
The company uses derivative financial instruments primarily to manage foreign currency and interest rate risk, and to a lesser extent,
equity and credit risk. The company does not use derivative financial instruments for trading or speculative purposes. Derivatives that
qualify for hedge accounting can be designated as either cash flow hedges, net investment hedges, or fair value hedges. The company
may enter into derivative contracts that economically hedge certain of its risks, even when hedge accounting does not apply, or the
company elects not to apply hedge accounting.
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
83
Derivatives are recognized in the Consolidated Balance Sheet at fair value on a gross basis as either assets or liabilities and classified
as current or noncurrent based upon whether the maturity of the instrument is less than or greater than 12 months.
Changes in the fair value of derivatives designated as a cash flow hedge are recorded, net of applicable taxes, in OCI and subsequently
reclassified into the same income statement line as the hedged exposure when the underlying hedged item is recognized in earnings.
Effectiveness for net investment hedging derivatives is measured on a spot-to-spot basis. Changes in the fair value of highly effective
net investment hedging derivatives and other non-derivative financial instruments designated as net investment hedges are recorded
as foreign currency translation adjustments in AOCI. Changes in the fair value of the portion of a net investment hedging derivative
excluded from the assessment of effectiveness are recorded in interest expense and cost of financing. Changes in the fair value of
interest rate derivatives designated as a fair value hedge and the offsetting changes in the fair value of the underlying hedged exposure
are recorded in interest expense and cost of financing. Changes in the fair value of derivatives not designated as hedges are reported
in earnings primarily in other (income) and expense. See note T, “Derivative Financial Instruments,” for further information.
The cash flows associated with derivatives designated as fair value and cash flow hedges are reported in cash flows from operating
activities in the Consolidated Statement of Cash Flows. Cash flows from derivatives designated as net investment hedges and
derivatives not designated as hedges are reported in cash flows from investing activities in the Consolidated Statement of Cash Flows.
Cash flows from derivatives designated as hedges of foreign currency denominated debt directly associated with the settlement of the
principal are reported in payments to settle debt in cash flows from financing activities in the Consolidated Statement of Cash Flows.
Financial Instruments
In determining the fair value of its financial instruments, the company uses a variety of methods and assumptions that are based on
market conditions and risks existing at each balance sheet date. See note I, “Financial Assets & Liabilities,” for further information. All
methods of assessing fair value result in a general approximation of value, and such value may never actually be realized.
Fair Value Measurement
Fair value is defined 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. The company classifies 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.
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.
The company holds investments primarily in time deposits, certificates of deposit, and U.S. government debt that are designated as
available-for-sale. The primary objective of the company’s cash and debt investment portfolio is to maintain principal by investing in
very liquid and highly rated investment grade securities.
Available-for-sale securities are measured for impairment on a recurring basis by comparing the security’s fair value with its amortized
cost basis. Effective January 1, 2020 with the adoption of the new standard on credit losses, if the fair value of the security falls below
its amortized cost basis, the change in fair value is recognized in the period the impairment is identified when the loss is due to credit
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Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
factors. The change in fair value due to non-credit factors is recorded in other comprehensive income when the company does not
intend to sell and has the ability to hold the investment. The company’s standard practice is to hold all of its debt security investments
classified as available-for-sale until maturity. There were no impairments for credit losses and no material non-credit impairments
recognized for the year ended December 31, 2020. Prior to the adoption of the new standard, available-for-sale securities were
measured for impairment using an other-than-temporary impairment model. No impairment was recorded for the years ended
December 31, 2019 and 2018.
Certain nonfinancial assets such as property, plant and equipment, land, goodwill and intangible assets are 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. There were no material impairments of nonfinancial assets for the years ended December 31, 2020, 2019 and 2018.
Cash Equivalents
All highly liquid investments with maturities of three months or less at the date of purchase are considered to be cash equivalents.
Marketable Securities
The company measures equity investments at fair value with changes recognized in net income.
Debt securities included in current assets represent securities that are expected to be realized in cash within one year of the balance
sheet date. Long-term debt securities and alliance equity securities are included in investments and sundry assets. Debt securities are
considered available-for-sale and are reported at fair value with unrealized gains and losses, net of applicable taxes, in OCI. The
realized gains and losses on available-for-sale debt securities are included in other (income) and expense in the Consolidated Income
Statement. Realized gains and losses are calculated based on the specific identification method.
Inventory
Raw materials, work in process and finished goods are stated at the lower of average cost or net realizable value.
Notes and Accounts Receivable—Trade and Contract Assets
The company classifies the right to consideration in exchange for products or services transferred to a client as either a receivable or a
contract asset. A receivable is a right to consideration that is unconditional as compared to a contract asset which is a right to
consideration that is conditional upon factors other than the passage of time. The majority of the company’s contract assets represent
unbilled amounts related to design and build services contracts when the cost-to-cost method of revenue recognition is utilized,
revenue recognized exceeds the amount billed to the client, and the right to consideration is subject to milestone completion or client
acceptance. Contract assets are generally classified as current and are recorded on a net basis with deferred income (i.e., contract
liabilities) at the contract level.
Financing Receivables
Financing receivables primarily consist of client loan and installment payment receivables (loans) and investment in sales-type and
direct financing leases (collectively referred to as client financing receivables) and commercial financing receivables. Leases are
accounted for in accordance with lease accounting standards. Loans, which are generally unsecured, are primarily for software and
services. Commercial financing receivables are primarily for working capital financing to suppliers, distributors and resellers of IBM
products and services. Loans and commercial financing receivables are recorded at amortized cost, which approximates fair value.
Transfers of Financial Assets
The company enters into arrangements to sell certain financial assets (primarily notes and accounts receivable–trade and financing
receivables) to third-party financial institutions. For a transfer of financial assets to be considered a sale, the asset must be legally
isolated from the company and the purchaser must have control of the asset. Determining whether all the requirements have been met
includes an evaluation of legal considerations, the extent of the company’s continuing involvement with the assets transferred and any
other relevant consideration. When the true sale criteria are met, the company derecognizes the carrying value of the financial asset
transferred and recognizes a net gain or loss on the sale. The proceeds from these arrangements are reflected as cash provided by
operating activities in the Consolidated Statement of Cash Flows. If the true sale criteria are not met, the transfer is considered a
secured borrowing and the financial asset remains on the Consolidated Balance Sheet with proceeds from the sale recognized as debt
and recorded as cash flows from financing activities in the Consolidated Statement of Cash Flows.
Arrangements to sell notes and accounts receivable–trade are used in the normal course of business as part of the company’s cash
and liquidity management. Facilities primarily in the U.S., Canada and several countries in Europe enable the company to sell certain
notes and accounts receivable–trade, without recourse, to third parties in order to manage credit, collection, concentration and
currency risk. The gross amounts sold (the gross proceeds) under these arrangements were $3.1 billion, $2.1 billion and $2.2 billion
for the years ended December 31, 2020, 2019 and 2018, respectively. Within the notes and accounts receivables–trade sold and
derecognized from the Consolidated Balance Sheet, $0.5 billion, $0.5 billion, and $0.9 billion remained uncollected from customers at
December 31, 2020, 2019 and 2018, respectively. The fees and the net gains and losses associated with the transfer of receivables
were not material for any of the periods presented. Refer to note K, “Financing Receivables,” for more information on transfers of
financing receivables.
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
85
Allowance for Credit Losses
Effective January 1, 2020, the company adopted the new accounting standard related to current expected credit losses. The standard
applies to financial assets measured at amortized cost, including loans, net investments in leases, trade accounts receivable and
certain off-balance sheet commitments. As of the effective date, the company estimates its allowance for current expected credit
losses based on an expected loss model, compared to prior periods which were estimated using an incurred loss model. The impact
related to adopting the new standard was not material. Certain changes resulting from the new standard impacted the company’s
description of its significant accounting policies compared to 2019. For further information regarding the adoption of the new standard,
see note B, “Accounting Changes.”
Receivables are recorded concurrent with billing and shipment of a product and/or delivery of a service to customers. An allowance for
uncollectible trade receivables and contract assets, if needed, is estimated based on specific customer situations, current and future
expected economic conditions, past experiences of losses, as well as an assessment of potential recoverability of the balance due.
The company estimates its allowances for expected credit losses for financing receivables by considering past events, including any
historical default, historical concessions and resulting troubled debt restructurings, current economic conditions, any non-freestanding
mitigating credit enhancements, and certain forward-looking information, including reasonable and supportable forecasts. As of
January 1, 2020, the methodologies that the company uses to calculate its financing receivables reserves, which are applied
consistently to its different portfolios, are as follows:
Individually Evaluated–The company reviews all financing receivables considered at risk quarterly, and performs an analysis based
upon current information available about the client, such as financial statements, news reports, published credit ratings, current
market-implied credit analysis, as well as collateral net of repossession cost, prior collection history and current and future expected
economic conditions. For loans that are collateral dependent, impairment is measured using the fair value of the collateral when
foreclosure is probable. Using this information, 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.
Collectively Evaluated–The company determines its allowances for credit losses for collectively evaluated financing receivables
(unallocated) based on two portfolio segments: client financing receivables and commercial financing receivables. The company further
segments the portfolio into three classes: Americas, Europe/Middle East/Africa (EMEA) and Asia Pacific.
For client financing receivables, the company uses a credit loss model to calculate allowances based on its internal loss experience
and current conditions and forecasts, by class of financing receivable. The company records an unallocated reserve that is calculated
by applying a reserve rate to its portfolio, excluding accounts that have been individually evaluated and specifically reserved. This
reserve rate is based upon credit rating, probability of default, term and loss history. The allowance is adjusted quarterly for expected
recoveries of amounts that were previously written off or are expected to be written off. Recoveries cannot exceed the aggregated
amount of the previous write-off or expected write-off.
The company considers forward-looking macroeconomic variables such as gross domestic product, unemployment rates, equity prices
and corporate profits when quantifying the impact of economic forecasts on its client financing receivables allowance for expected
credit losses. Macroeconomic variables may vary by class of financing receivables based on historical experiences, portfolio
composition and current environment. The company also considers the impact of current conditions and economic forecasts relating
to specific industries, geographical areas, and client credit ratings, in addition to performing a qualitative review of credit risk factors
across the portfolio. Under this approach, forecasts of these variables over two years are considered reasonable and supportable.
Beyond two years, the company reverts to long-term average loss experience. Forward-looking estimates require the use of judgment,
particularly in times of economic uncertainty.
The portfolio of commercial financing receivables is short term in nature and any allowance for these assets is estimated based on a
combination of write-off history and current economic conditions, excluding any individually evaluated accounts.
Other Credit-Related Policies
Past Due–The company views receivables as past due when payment has not been received after 90 days, measured from the original
billing date.
Non-Accrual–Non-accrual assets include those receivables (impaired loans or nonperforming leases) 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. Interest income recognition is discontinued on these receivables. Cash collections are first applied as a reduction to
principal outstanding. Any cash received in excess of principal payments outstanding is recognized as interest income. Receivables
may be removed from non-accrual status, if appropriate, based upon changes in client circumstances, such as a sustained history of
payments.
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Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
Write-Off–Receivable losses are charged against the allowance in the period in which the receivable is deemed uncollectible.
Subsequent recoveries, if any, are credited to the allowance. Write-offs of receivables and associated reserves occur to the extent that
the customer is no longer in operation and/or, there is no reasonable expectation of additional collections or repossession.
Leases
The company conducts business as both a lessee and a lessor. In its ordinary course of business, the company enters into leases as a
lessee for property, plant and equipment. The company is also the lessor of certain equipment, mainly through its Global Financing
segment.
When procuring goods or services, or upon entering into a contract with its clients, the company determines whether an arrangement
contains a lease at its inception. As part of that evaluation, the company considers whether there is an implicitly or explicitly identified
asset in the arrangement and whether the company, as the lessee, or the client, if the company is the lessor, has the right to control
the use of that asset.
Accounting for Leases as a Lessee
When the company is the lessee, all leases with a term of more than 12 months are recognized as right-of-use (ROU) assets and
associated lease liabilities in the Consolidated Balance Sheet. The lease liabilities are measured at the lease commencement date and
determined using the present value of the lease payments not yet paid and the company’s incremental borrowing rate, which
approximates the rate at which the company would borrow on a secured basis in the country where the lease was executed. The
interest rate implicit in the lease is generally not determinable in transactions where the company is the lessee. The ROU asset equals
the lease liability adjusted for any initial direct costs (IDCs), prepaid rent and lease incentives. The company’s variable lease payments
generally relate to payments tied to various indexes, non-lease components and payments above a contractual minimum fixed amount.
Operating leases are included in operating right-of-use assets–net, current operating lease liabilities and operating lease liabilities in
the Consolidated Balance Sheet. Finance leases are included in property, plant and equipment, short-term debt and long-term debt in
the Consolidated Balance Sheet. The lease term includes options to extend or terminate the lease when it is reasonably certain that
the company will exercise that option.
The company made a policy election to not recognize leases with a lease term of 12 months or less in the Consolidated Balance Sheet.
For all asset classes, the company has elected the lessee practical expedient to combine lease and non-lease components (e.g.,
maintenance services) and account for the combined unit as a single lease component. A significant portion of the company’s lease
portfolio is real estate, which are mainly accounted for as operating leases, and are primarily used for corporate offices and data
centers. The average term of the real estate leases is approximately five years. The company also has equipment leases, such as IT
equipment and vehicles, which have lease terms that range from two to five years. For certain of these operating and finance leases,
the company applies a portfolio approach to account for the lease assets and lease liabilities.
Accounting for Leases as a Lessor
The company typically enters into leases as an alternative means of realizing value from equipment that it would otherwise sell. Assets
under lease include new and used IBM equipment and certain OEM products. IBM equipment generally consists of IBM Z, Power
Systems and Storage Systems products.
Lease payments due to IBM are typically fixed and paid in equal installments over the lease term. The majority of the company’s leases
do not contain variable payments that are dependent on an index or a rate. Variable lease payments that do not depend on an index or
a rate (e.g., property taxes), that are paid directly by the company and are reimbursed by the client, are recorded as revenue, along
with the related cost, in the period in which collection of these payments is probable. Payments that are made directly by the client to
a third party, including certain property taxes and insurance, are not considered part of variable payments and therefore are not
recorded by the company. The company has made a policy election to exclude from consideration in contracts all collections from sales
and other similar taxes.
The company’s payment terms for leases are typically unconditional. Therefore, in an instance when the client requests to terminate
the lease prior to the end of the lease term, the client would typically be required to pay the remaining lease payments in full. At the
end of the lease term, the company allows the client to either return the equipment, purchase the equipment at the then-current fair
market value or at a pre-stated purchase price or renew the lease based on mutually agreed upon terms.
When lease arrangements include multiple performance obligations, the company allocates the consideration in the contract between
the lease components and the non-lease components on a relative standalone selling price basis.
Sales-Type and Direct Financing Leases
For a sales-type or direct financing lease, the carrying amount of the asset is derecognized from inventory and a net investment in the
lease is recorded. For a sales-type lease, the net investment in the lease is measured at commencement date as the sum of the lease
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
87
receivable and the estimated residual value of the equipment less unearned income and allowance for credit losses. Any selling profit
or loss arising from a sales-type lease is recorded at lease commencement. Selling profit or loss is presented on a gross basis when
the company enters into a lease to realize value from a product that it would otherwise sell in its ordinary course of business, whereas
in transactions where the company enters into a lease for the purpose of generating revenue by providing financing, the selling profit
or loss is presented on a net basis. Under a sales-type lease, initial direct costs are expensed at lease commencement. Over the term
of the lease, the company recognizes finance income on the net investment in the lease and any variable lease payments, which are
not included in the net investment in the lease.
For a direct financing lease, the net investment in the lease is measured similarly to a sales-type lease, however, the net investment in
the lease is reduced by any selling profit. In a direct financing lease, the selling profit and initial direct costs are deferred at
commencement and recognized over the lease term. The company rarely enters into direct financing leases.
The estimated residual value represents the estimated fair value of the equipment under lease at the end of the lease. Estimating
residual value is a risk unique to financing activities, and management of this risk is dependent upon the ability to accurately project
future equipment values. The company has insight into product plans and cycles for both the IBM and OEM IT products under lease.
The company estimates the future fair value of leased equipment by using historical models, analyzing the current market for new and
used equipment and obtaining forward-looking product information such as marketing plans and technology innovations.
The company optimizes the recovery of residual values by extending lease arrangements with, or selling leased equipment to existing
clients. The company has historically managed residual value risk both through insight into its own product cycles and monitoring of
OEM IT product announcements. The company periodically reassesses the realizable value of its lease residual values. Anticipated
decreases in specific future residual values that are considered to be other-than-temporary are recognized immediately upon
identification and are recorded as an adjustment to the residual value estimate. For sales-type and direct financing leases, this
reduction lowers the recorded net investment and is recognized as a loss charged to finance income in the period in which the estimate
is changed, as well as an adjustment to unearned income to reduce future-period financing income.
Operating Leases
Equipment provided to clients under an operating lease is carried at cost within property, plant and equipment in the Consolidated
Balance Sheet and depreciated over the lease term using the straight-line method, generally ranging from one to four years. The
depreciable basis is the original cost of the equipment less the estimated residual value of the equipment at the end of the lease term.
At commencement of an operating lease, IDCs are deferred. As lease payments are made, the company records sales revenue over
the lease term. IDCs are amortized over the lease term on the same basis as lease income is recorded.
Assets under operating leases are tested for impairment whenever events or changes in circumstances indicate that the carrying
amount may not be recoverable. The impairment test is based on undiscounted cash flows, and, if impaired, the asset is written down
to fair value based on either discounted cash flows or appraised values.
Common Stock
Common stock refers to the $.20 par value per share capital stock as designated in the company’s Certificate of Incorporation. Treasury
stock is accounted for using the cost method. When treasury stock is reissued, the value is computed and recorded using a weighted-
average basis.
Earnings Per Share of Common Stock
Earnings per share (EPS) is computed using the two-class method, which determines EPS for each class of common stock and
participating securities according to dividends and dividend equivalents and their respective participation rights in undistributed
earnings. Basic EPS of common stock is computed by dividing net income by the weighted-average number of common shares
outstanding for the period. Diluted EPS of common stock is computed on the basis of the weighted-average number of shares of
common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method.
Dilutive potential common shares include outstanding stock awards, convertible notes and stock options.
NOTE B. ACCOUNTING CHANGES
New Standards to be Implemented
Simplifying the Accounting for Income Taxes
Standard/Description–Issuance date: December 2019. This guidance simplifies various aspects of income tax accounting by removing
certain exceptions to the general principle of the guidance and clarifies and amends existing guidance to improve consistency in
application.
Effective Date and Adoption Considerations–The guidance was effective January 1, 2021 and early adoption was permitted. The
company adopted the guidance as of the effective date.
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Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
Effect on Financial Statements or Other Significant Matters–The guidance is not expected to have a material impact in the
consolidated financial results.
Standards Implemented
Reference Rate Reform
Standard/Description–Issuance date: March 2020, with amendments in 2021. This guidance provides optional expedients and
exceptions for applying GAAP to contract modifications, hedging relationships, and other transactions that reference London Interbank
Offered Rate (LIBOR) or another reference rate expected to be discontinued, subject to meeting certain criteria.
Effective Date and Adoption Considerations–The guidance is effective as of March 12, 2020 through December 31, 2022.
Effect on Financial Statements or Other Significant Matters–The company made a policy election in the first quarter of 2020 to adopt
the practical expedient which allows for the continuation of fair value hedge accounting for interest rate derivative contracts upon the
transition from LIBOR to Secured Overnight Financing Rate (SOFR) or another reference rate alternative, without any impact to the
Consolidated Income Statement. The company is continuing to evaluate the potential impact of the replacement of the LIBOR
benchmark on its interest rate risk management activities; however, it is not expected to have a material impact in the consolidated
financial results.
Simplifying the Test for Goodwill Impairment
Standard/Description–Issuance date: January 2017. This guidance simplifies the goodwill impairment test by removing Step 2. It also
requires disclosure of any reporting units that have zero or negative carrying amounts if they have goodwill allocated to them.
Effective Date and Adoption Considerations–The guidance was effective January 1, 2020 and early adoption was permitted. The
company adopted the guidance on a prospective basis as of the effective date.
Effect on Financial Statements or Other Significant Matters–The guidance did not have a material impact in the consolidated financial
results.
Financial Instruments–Credit Losses
Standard/Description–Issuance date: June 2016, with amendments in 2018, 2019, and 2020. This changes the guidance for credit
losses based on an expected loss model rather than an incurred loss model. It requires the consideration of all available relevant
information when estimating expected credit losses, including past events, current conditions and forecasts and their implications for
expected credit losses. It also expands the scope of financial instruments subject to impairment, including off-balance sheet
commitments and residual value.
Effective Date and Adoption Considerations–The guidance was effective January 1, 2020 with one-year early adoption permitted.
The company adopted the guidance as of the effective date, using the transition methodology whereby prior comparative periods were
not retrospectively presented in the Consolidated Financial Statements.
Effect on Financial Statements or Other Significant Matters–At January 1, 2020, an increase in the allowance for credit losses of $81
million was recorded for accounts receivable–trade and financing receivables (inclusive of its related off-balance sheet commitments).
Additionally, net deferred taxes were reduced by $14 million in the Consolidated Balance Sheet, resulting in a cumulative effect net
decrease to retained earnings of $66 million. Refer to note K, “Financing Receivables,” and note R, “Commitments & Contingencies,”
for additional information.
Leases
Standard/Description–Issuance date: February 2016, with amendments in 2018 and 2019. This guidance requires lessees to
recognize right-of-use (ROU) assets and lease liabilities for most leases in the Consolidated Balance Sheet. For lessors, it also
eliminated the use of third-party residual value guarantee insurance in the lease classification test, and overall aligns with revenue
recognition guidance. Due to changes in lease termination guidance, when equipment is returned to the company prior to the end of
the lease term, the carrying amounts of lease receivables are reclassified to loan receivables. The guidance also requires qualitative
and quantitative disclosures to assess the amount, timing and uncertainty of cash flows arising from leases.
Effective Date and Adoption Considerations–The company adopted the guidance on its effective date of January 1, 2019, using the
transition option whereby prior comparative periods were not retrospectively presented in the Consolidated Financial Statements. The
company elected the package of practical expedients not to reassess prior conclusions related to contracts containing leases, lease
classification and initial direct costs and the lessee practical expedient to combine lease and non-lease components for all asset
classes. The company made a policy election to not recognize ROU assets and lease liabilities for short-term leases for all asset classes.
Effect on Financial Statements or Other Significant Matters–The guidance had a material impact on the Consolidated Balance Sheet
as of the effective date. As a lessee, at adoption, the company recognized operating and financing ROU assets of $4.8 billion and $0.2
billion, respectively, and operating and financing lease liabilities of $5.1 billion and $0.2 billion, respectively. The transition adjustment
recognized in retained earnings on January 1, 2019 was not material. None of the other changes to the guidance had a material impact
in the company’s consolidated financial results at the effective date.
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
89
Reclassification of Certain Tax Effects from AOCI
Standard/Description–Issuance date: February 2018. In accordance with its accounting policy, the company releases income tax
effects from AOCI once the reason the tax effects were established cease to exist (e.g., when available-for-sale debt securities are sold
or if a pension plan is liquidated). This guidance allows for the reclassification of stranded tax effects as a result of the change in tax
rates from U.S. tax reform to be recorded upon adoption of the guidance rather than at the actual cessation date.
Effective Date and Adoption Considerations–The guidance was effective January 1, 2019 with early adoption permitted. The company
adopted the guidance effective January 1, 2018 and elected not to reclassify prior periods.
Effect on Financial Statements or Other Significant Matters–At adoption on January 1, 2018, $2.4 billion was reclassified from AOCI
to retained earnings, primarily comprised of amounts relating to retirement-related benefit plans.
Revenue Recognition–Contracts with Customers
Standard/Description–Issuance date: May 2014, with amendments in 2015 and 2016. Revenue recognition depicts 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 specific disclosures relating to revenue recognition.
Effective Date and Adoption Considerations–The company adopted the guidance on its effective date of January 1, 2018 using the
modified retrospective transition method.
Effect on Financial Statements or Other Significant Matters–At adoption, $557 million was reclassified from notes and accounts
receivable—trade and deferred income-current to prepaid expenses and other current assets to establish the opening balance for net
contract assets. In-scope sales commission costs previously recorded in the Consolidated Income Statement were capitalized in
deferred costs in the amount of $737 million. Deferred income of $29 million was recorded for certain software licenses that will be
recognized over time versus at point in time under previous guidance. Additionally, net deferred taxes were reduced by $184 million in
the Consolidated Balance Sheet, resulting in a cumulative effect net increase to retained earnings of $524 million. In the fourth quarter
of 2018, the company recognized an additional impact to net deferred taxes and retained earnings of $56 million, resulting in a total
net increase to retained earnings of $580 million. The decrease to net deferred taxes was the result of the company’s election to include
GILTI in measuring deferred taxes. The revenue guidance did not have a material impact in the company’s consolidated financial
results. Refer to note C, “Revenue Recognition,” for additional information.
For all other standards that the company adopted in the periods presented, there was no material impact in the consolidated financial
results.
90
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
NOTE C. REVENUE RECOGNITION
During 2020, in the unprecedented macroeconomic environment that resulted from the COVID-19 pandemic, clients focused on
operational stability, flexibility and cash preservation which impacted the company's revenue performance.
Disaggregation of Revenue
The following tables provide details of revenue by major products/service offerings and by geography.
Revenue by Major Products/Service Offerings
($ in millions)
For the year ended December 31:
Cloud & Data Platforms
Cognitive Applications
Transaction Processing Platforms
Total Cloud & Cognitive Software
Consulting
Application Management
Global Process Services
Total Global Business Services
Infrastructure & Cloud Services
Technology Support Services
Total Global Technology Services
Systems Hardware
Operating Systems Software
Total Systems
Global Financing
Other
Total Revenue
* Recast to conform to 2020 presentation.
2020
$ 11,481 **
5,290
6,606
$ 23,376
$ 8,083
7,133
945
$ 16,162
$ 19,669
6,144
$ 25,812
$ 5,481
1,497
$ 6,978
$ 1,123
$
169
$ 73,620
2019
$ 9,499
5,456 *
7,936
$ 22,891 *
$ 8,157 *
7,646
995
$ 16,798 *
$ 20,736
6,625
$ 27,361
$ 5,918
1,686
$ 7,604
$ 1,400
$ 1,092 *
$ 77,147
2018
$ 8,603
5,280 *
7,974
$ 21,857 *
$ 7,906 *
7,852
1,037
$ 16,795 *
$ 22,185
6,961
$ 29,146
$ 6,363
1,671
$ 8,034
$ 1,590
$ 2,169 *
$ 79,591
** Red Hat was acquired on July 9, 2019. Results in 2020 include a full year of Red Hat revenue.
Contains lease and loan/working capital financing arrangements which are not subject to the guidance on revenue from contracts with customers.
Revenue by Geography
($ in millions)
For the year ended December 31:
Americas
Europe/Middle East/Africa
Asia Pacific
Total
Remaining Performance Obligations
2020
$ 34,114
23,644
15,863
$ 73,620
2019
$ 36,274
24,443
16,430
$ 77,147
2018
$ 36,994
25,491
17,106
$ 79,591
The remaining performance obligation (RPO) disclosure provides the aggregate amount of the transaction price yet to be recognized
as of the end of the reporting period and an explanation as to when the company expects to recognize these amounts in revenue. It is
intended to be a statement of overall work under contract that has not yet been performed and does not include contracts in which the
customer is not committed, such as certain as-a-Service, governmental, term software license and services offerings. The customer is
not considered committed when they are able to terminate for convenience without payment of a substantive penalty. The disclosure
includes estimates of variable consideration, except when the variable consideration is a sales-based or usage-based royalty promised
in exchange for a license of intellectual property. Additionally, as a practical expedient, the company does not include contracts that
have an original duration of one year or less. RPO estimates are subject to change and are affected by several factors, including
terminations, changes in the scope of contracts, periodic revalidations, adjustment for revenue that has not materialized and
adjustments for currency.
At December 31, 2020, the aggregate amount of the transaction price allocated to RPO related to customer contracts that are
unsatisfied or partially unsatisfied was $124 billion. Approximately 60 percent of the amount is expected to be recognized as revenue
in the subsequent two years, approximately 35 percent in the subsequent three to five years and the balance (mostly Infrastructure &
Cloud Services) thereafter.
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
91
Revenue Recognized for Performance Obligations Satisfied (or Partially Satisfied) in Prior Periods
For the year ended December 31, 2020, revenue was reduced by $29 million for performance obligations satisfied (or partially
satisfied) in previous periods mainly due to changes in estimates on contracts with cost-to-cost measures of progress. Refer to note A,
“Significant Accounting Policies,” for additional information on these contracts and estimates of costs to complete.
Reconciliation of Contract Balances
The following table provides information about notes and accounts receivable—trade, contract assets and deferred income balances.
($ in millions)
At December 31:
Notes and accounts receivable—trade (net of allowances of $351 in 2020 and $299 in 2019)
Contract assets*
Deferred income (current)
Deferred income (noncurrent)
* Included within prepaid expenses and other current assets in the Consolidated Balance Sheet.
2020
$ 7,132
497
12,833
4,301
2019
$ 7,870
492
12,026
3,851
The amount of revenue recognized during the year ended December 31, 2020 that was included within the deferred income balance
at December 31, 2019 was $10.1 billion and primarily related to services and software.
The following table provides roll forwards of the notes and accounts receivable—trade allowance for expected credit losses for the
years ended December 31, 2020 and 2019.
($ in millions)
January 1, 2020 *
$ 316
January 1, 2019
$ 309
Additions/(Releases)
$ 76
Additions/(Releases)
$ 98
Write-offs
$ (46)
Write-offs
$(113)
Other **
$5
Other **
$5
December 31, 2020
$351
December 31, 2019
$299
* Opening balance does not equal the allowance at December 31, 2019 due to the adoption of the guidance for current expected credit losses. Refer to
note B, “Accounting Changes,” for additional information.
** Primarily represents translation adjustments.
The contract assets allowance for expected credit losses was not material in the years ended December 31, 2020 and 2019.
Deferred Costs
($ in millions)
At December 31:
Capitalized costs to obtain a contract
Deferred costs to fulfill a contract
Deferred setup costs
Other deferred fulfillment costs
Total deferred costs*
2020
$ 842
1,859
1,855
$ 4,556
2019
$ 609
1,939
1,820
$ 4,368
* Of the total deferred costs, $2,107 million was current and $2,449 million was noncurrent at December 31, 2020 and $1,896 million was current and
$2,472 million was noncurrent at December 31, 2019.
The amount of total deferred costs amortized during the year ended December 31, 2020 was $3,793 million and there were no material
impairment losses incurred. Refer to note A, “Significant Accounting Policies,” for additional information on deferred costs to fulfill a
contract and capitalized costs of obtaining a contract.
NOTE D. SEGMENTS
In the first quarter of 2020, the company realigned offerings and the related management system to reflect divestitures completed in
the second half of 2019 and tighter integration of certain industry-related consulting services. Accordingly, the company updated its
Cloud & Cognitive Software segment, Global Business Services segment and the Other–divested businesses category in the first quarter
of 2020 and recast the related historical information for consistency with the go-forward performance. Total recast revenue for full-
year 2019 and 2018 was approximately $0.3 billion and $0.4 billion, respectively. There was no change to the Global Technology
Services, Systems or Global Financing segments, and there was no impact to IBM’s consolidated results.
92
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
The following table displays the segment updates:
Management System Change
Divestitures of IBM's Risk Analytics and Regulatory Offerings
and Sales Performance Management Offerings
Resulting Segment Implications
- Cloud & Cognitive Software (Cognitive Applications)
+ Other—divested businesses
Realignment of certain industry-related consulting offerings to
the Global Business Services segment
- Cloud & Cognitive Software (Cognitive Applications)
+ Global Business Services (Consulting)
The segments represent components of the company for which separate financial information is available that is utilized on a regular
basis by the chief operating decision maker (the chief executive officer) in determining how to allocate resources and evaluate
performance. The segments are determined based on several factors, including client base, homogeneity of products, technology,
delivery channels and similar economic characteristics.
Segment revenue and pre-tax income include transactions between the segments that are intended to reflect an arm’s-length, market-
based transfer price. Systems that are used by Global Technology Services in outsourcing arrangements are primarily sourced internally
from the Systems segment, and software is primarily sourced internally through the Cloud & Cognitive Software and Systems segments.
For providing IT services that are used internally, Global Technology Services and Global Business Services recover cost, as well as a
reasonable fee, that is intended to reflect the arm’s-length value of providing the services. They enter into arm’s-length loans at prices
equivalent to market rates with Global Financing to facilitate the acquisition of equipment and software used in services engagements.
All internal transaction prices are reviewed annually, and reset if appropriate.
The company utilizes globally integrated support organizations to realize economies of scale and efficient use of resources. As a result,
a considerable amount of expense is shared by all of the segments. This shared expense includes sales coverage, certain marketing
functions and support functions such as Accounting, Treasury, Procurement, Legal, Human Resources and Billing and Collections.
Where practical, shared expenses are allocated based on measurable drivers of expense, e.g., headcount. When a clear and measurable
driver cannot be identified, shared expenses are allocated on a financial basis that is consistent with the company’s management
system, e.g., advertising expense is allocated based on the gross profits of the segments. A portion of the shared expenses, which are
recorded in net income, are not allocated to the segments. These expenses are associated with the elimination of internal transactions
and other miscellaneous items.
The following tables reflect the results of continuing operations of the company’s segments consistent with the management and
measurement system utilized within the company and have been recast for the prior-year periods due to the company’s January 2020
segment changes. Performance measurement is based on pre-tax income from continuing operations. These results are used, in part,
by the chief operating decision maker, both in evaluating the performance of, and in allocating resources to, each of the segments.
In the fourth quarter of 2020, the company recorded a charge of $2.0 billion in selling, general and administrative expense in the
Consolidated Income Statement for severance and employee related benefits in accordance with the accounting guidance for ongoing
benefit arrangements. The impact to pre-tax income from continuing operations by segment was as follows: Cloud & Cognitive Software
($0.6 billion), Global Business Services ($0.4 billion), Global Technology Services ($0.9 billion), Systems ($0.2 billion) and the impact
to Global Financing was not material.
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
93
Management System Segment View
($ in millions)
For the year ended December 31:
2020
External revenue
Internal revenue
Total revenue
Pre-tax income from continuing operations
Revenue year-to-year change
Pre-tax income year-to-year change
Pre-tax income margin
2019
External revenue
Internal revenue
Total revenue
Pre-tax income from continuing operations
Revenue year-to-year change
Pre-tax income year-to-year change
Pre-tax income margin
2018
External revenue
Internal revenue
Total revenue
Pre-tax income from continuing operations
Revenue year-to-year change
Pre-tax income year-to-year change
Pre-tax income margin
Cloud &
Cognitive
Software
Global
Business
Services
Global
Technology
Global
Services
Systems Financing
$ 23,376
3,169
$ 26,545
$ 6,362
$ 16,162
193
$ 16,355
$ 1,351
3.2 %
(18.5)%
24.0 %
(4.2)%
(16.8)%
8.3 %
$25,812
1,226
$27,039
117
$
(5.2)%
(92.9)%
0.4 %
$6,978
824
$7,802
$ 449
$1,123
894
$2,017
$ 761
(6.3)%
(36.0)%
5.8 %
(23.4)%
(27.8)%
37.7 %
(3.1)%
(29.6)%
11.3 %
Total
Segments
$ 73,451
6,306
$ 79,758
$ 9,040
$ 22,891 *
2,827
$ 25,718 *
$ 7,811 *
2.7 %*
(12.4)%*
30.4 %*
$ 21,857 *
3,190
$ 25,047 *
$ 8,914 *
2.0 %*
10.0 %*
35.6 %*
$ 16,798 *
278
$ 17,076 *
$ 1,623 *
(0.3)%*
1.3 %*
9.5 %*
$ 16,795 *
326
$ 17,121 *
$ 1,602 *
3.0 %*
26.2 %*
9.4 %*
$27,361
1,157
$28,518
$ 1,645
$7,604
726
$8,330
$ 701
$1,400
1,232
$2,632
$1,055
$ 76,054 *
6,220
$ 82,274 *
$ 12,835 *
(5.0)%
(7.6)%
5.8 %
(5.9)%
(22.4)%
8.4 %
(17.8)%
(22.5)%
40.1 %
(2.3)%*
(11.9)%*
15.6 %*
$29,146
872
$30,018
$ 1,781
$8,034
815
$8,848
$ 904
$1,590
1,610
$3,200
$1,361
$ 77,421 *
6,813
$ 84,235 *
$ 14,562 *
0.5 %
(32.0)%
5.9 %
(1.1)%
(19.9)%
10.2 %
1.0 %
6.5 %
42.5 %
1.3 %*
1.2 %*
17.3 %*
Includes the impact of a $2.0 billion pre-tax charge for structural actions in the fourth quarter of 2020.
* Recast to conform to 2020 presentation.
Reconciliations of IBM as Reported
($ in millions)
For the year ended December 31:
Revenue
Total reportable segments
Other—divested businesses
Other revenue
Elimination of internal transactions
Total IBM consolidated revenue
* Recast to conform to 2020 presentation.
($ in millions)
For the year ended December 31:
Pre-tax income from continuing operations
Total reportable segments
Amortization of acquired intangible assets
Acquisition-related charges
Non-operating retirement-related (costs)/income
Spin-off-related charges
Elimination of internal transactions
Other—divested businesses
Unallocated corporate amounts
Total pre-tax income from continuing operations
2020
2019
2018
$ 79,758
37
132
(6,306)
$ 73,620
$ 82,274 *
930 *
162
(6,220)
$ 77,147
$ 84,235 *
1,961 *
207
(6,813)
$ 79,591
2020
2019
2018
$ 9,040
(1,858)
(13)
(1,123)
(28)
(381)
(9)
(990)
$ 4,637
$ 12,835 *
(1,298)
(423)
(615)
—
(290)
574 *
(617)
$ 10,166
$ 14,562 *
(809)
(16)
(1,572)
—
(725)
287 *
(385)
$ 11,342
Includes the impact of a $2.0 billion pre-tax charge for structural actions in the fourth quarter of 2020.
* Recast to conform to 2020 presentation.
94
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
Immaterial Items
Investment in Equity Alliances and Equity Alliances Gains/(Losses)
The investments in equity alliances and the resulting gains and (losses) from these investments that are attributable to the segments
did not have a material effect on the financial position or the financial results of the segments.
Segment Assets and Other Items
Cloud & Cognitive Software assets are mainly goodwill, acquired intangible assets and accounts receivable. Global Business Services
assets are primarily goodwill and accounts receivable. Global Technology Services assets are primarily goodwill, plant, property and
equipment, including the assets associated with the outsourcing business, accounts receivable and acquired intangible assets.
Systems assets are primarily goodwill, manufacturing inventory, and plant, property and equipment. Global Financing assets are
primarily financing receivables, cash and marketable securities, and fixed assets under operating leases.
To ensure the efficient use of the company’s space and equipment, several segments may share leased or owned plant, property and
equipment assets. Where assets are shared, landlord ownership of the assets is assigned to one segment and is not allocated to each
user segment. This is consistent with the company’s management system and is reflected accordingly in the table below. In those
cases, there will not be a precise correlation between segment pre-tax income and segment assets.
Depreciation expense and capital expenditures that are reported by each segment also are consistent with the landlord ownership
basis of asset assignment.
Global Financing amounts for interest income and interest expense reflect the interest income and interest expense associated with
the Global Financing business, including the intercompany financing activities discussed on page 28, as well as the income from
investment in cash and marketable securities.
Management System Segment View
($ in millions)
For the year ended December 31:
2020
Assets
Depreciation/amortization of intangibles**
Capital expenditures/investments in intangibles
Interest income
Interest expense
Cloud &
Cognitive
Software
Global
Business
Services
Global
Technology
Services
Systems
Global
Financing
Total
Segments
$ 58,752
1,168
548
—
—
$ 10,290
180
28
—
—
$21,971
2,605
2,039
—
—
2019
Assets
Depreciation/amortization of intangibles**
Capital expenditures/investments in intangibles
Interest income
Interest expense
$ 58,342 * $ 10,136 *
167 *
47 *
—
—
1,089 *
517 *
—
—
$22,436
2,601
1,575
—
—
2018
Assets
Depreciation/amortization of intangibles**
Capital expenditures/investments in intangibles
Interest income
Interest expense
* Recast to conform to 2020 presentation.
$ 28,502 * $ 8,443 *
108 *
58 *
—
—
1,051 *
468 *
—
—
$17,624
2,359
2,569
—
—
** Segment pre-tax income from continuing operations does not include the amortization of intangible assets.
$4,620
343
249
—
—
$4,590
350
305
—
—
$4,030
315
241
—
—
$ 25,075
119
41
1,058
307
$ 120,708
4,415
2,906
1,058
307
$ 29,568
186
57
1,490
512
$ 125,072 *
4,392
2,501
1,490
512
$ 41,320
229
274
1,647
515
$ 99,920 *
4,063
3,610
1,647
515
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
95
Reconciliations of IBM as Reported
($ in millions)
At December 31:
Assets
Total reportable segments
Elimination of internal transactions
Other-divested businesses
Unallocated amounts
Cash and marketable securities
Notes and accounts receivable
Deferred tax assets
Plant, other property and equipment
Operating right-of-use assets**
Pension assets
Other
Total IBM consolidated assets
* Recast to conform to 2020 presentation.
2020
2019
2018
$ 120,708
(4,685)
218
12,486
1,589
9,012
2,206
3,409
7,610
3,417
$ 155,971
$ 125,072 *
(4,317)
1,906 *
7,308
1,488 *
4,995
2,262 *
3,530
6,865
3,077 *
$ 152,186
$ 99,920 *
(7,143)
2,702 *
10,393
1,597
5,089
2,463 *
—
4,666
3,695 *
$ 123,382
** Reflects the adoption of the FASB guidance on leases in 2019.
Major Clients
No single client represented 10 percent or more of the company’s total revenue in 2020, 2019 or 2018.
Geographic Information
The following provides information for those countries that are 10 percent or more of the specific category.
Revenue*
($ in millions)
For the year ended December 31:
United States
Japan
Other countries
Total IBM consolidated revenue
* Revenues are attributed to countries based on the location of the client.
Plant and Other Property–Net
($ in millions)
At December 31:
United States
Other countries
Total
Operating Right-of-Use Assets–Net*
($ in millions)
At December 31:
United States
Japan
Other countries
Total
* Reflects the adoption of the FASB guidance on leases in 2019.
2020
2019
$ 26,978
8,694
37,949
$ 73,620
$ 28,395
8,681
40,071
$ 77,147
2018
$ 29,078
8,489
42,024
$ 79,591
2020
2019
$ 4,410
5,533
$ 9,943
$4,485
5,294
$9,778
2018
$ 4,585
5,774
$ 10,359
2020
$1,243
606
2,836
$4,686
2019
$1,386
659
2,951
$4,996
2018
$ —
—
—
$ —
96
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
Revenue by Classes of Similar Products or Services
The following table presents external revenue for similar classes of products or services within the company’s reportable segments.
Client solutions often include IBM software and systems and other suppliers’ products if the client solution requires it. For each of the
segments that include services, Software-as-a-Service, consulting, education, training and other product-related services are included
as services. For each of these segments, software includes product license charges and ongoing subscriptions.
($ in millions)
For the year ended December 31:
Cloud & Cognitive Software
Software
Services
Systems
Global Business Services
Services
Software
Systems
Global Technology Services
Services
Maintenance
Systems
Software
Systems
Servers
Storage
Software
Services
Global Financing
Financing
Used equipment sales
* Recast to conform to 2020 presentation.
NOTE E. ACQUISITIONS & DIVESTITURES
Acquisitions
2020
2019
2018
$ 19,107
4,159
110
$ 15,896
180
86
$ 19,632
4,815
967
399
$ 3,466
1,801
1,359
351
$
834
289
$ 18,649 *
4,076 *
166
$ 16,527 *
156
115
$ 20,768
5,183
1,072
338
$ 3,746
1,920
1,528
410
$ 1,120
281
$ 17,906 *
3,795 *
156
$ 16,439 *
151
206
$ 22,222
5,484
1,069
371
$ 3,996
2,114
1,499
425
$ 1,223
366
The company accounts for business combinations using the acquisition method, and accordingly, the identifiable assets acquired, the
liabilities assumed and any noncontrolling interest in the acquiree are recorded at their acquisition date fair values. Significant
judgments and use of estimates are required when performing valuations. For example, the company uses judgments when estimating
the fair value of intangible assets using a discounted cash flow model, which involves the use of significant estimates and assumptions
with respect to revenue growth rates, the customer attrition rate and discount rates.
Purchase price consideration for all acquisitions was paid primarily in cash. All acquisitions, except otherwise stated, were for
100 percent of the acquired business and are reported in the Consolidated Statement of Cash Flows, net of acquired cash and cash
equivalents.
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
97
2020
In 2020, the company completed seven acquisitions at an aggregate cost of $723 million.
The following acquisitions closed in 2020. Each acquisition is expected to enhance the company’s portfolio of products and services
capabilities and further advance IBM’s hybrid cloud and AI strategy.
Acquisition
Segment
Description of Acquired Business
First Quarter
Stratoss Lifecycle Manager business
(Stratoss) from Accanto Systems Oy
Second Quarter
Automated Security Assurance
Platform business (ASAP) from
Spanugo Inc.
Third Quarter
WDG Soluções Em Sistemas E
Automação De Processos LTDA (WDG
Automation)
Fourth Quarter
Instana
Cloud & Cognitive Software
Cloud native business designed to deliver
web-scale levels of operational automation
for the cloud-based networking world
Cloud & Cognitive Software
Cloud cybersecurity platform, will integrate
into the IBM public cloud to further meet the
security demands of clients in highly
regulated industries
Cloud & Cognitive Software
Provider of robotic process automation
Cloud & Cognitive Software
TruQua Enterprises, LLC (TruQua)
Global Business Services
Expertus Technologies Inc. (Expertus)
Global Business Services
7Summits LLC (7Summits)
Global Business Services
Application performance monitoring and
observability company which helps
businesses better manage applications that
span the hybrid cloud landscape
IT services provider and SAP development
partner
Provider of cloud solutions for the financial
services industry
Leading Salesforce partner that delivers
transformative digital experiences across
industries
At December 31, 2020, the remaining cash to be remitted by the company related to certain fourth-quarter acquisitions was $323
million. This amount has been classified as restricted cash in the Consolidated Balance Sheet, most of which is expected to be paid in
the first quarter of 2021.
The following table reflects the purchase price related to these acquisitions and the resulting purchase price allocations as of December
31, 2020.
($ in millions)
Current assets
Property, plant and equipment/noncurrent assets
Intangible assets
Goodwill
Client relationships
Completed technology
Trademarks
Total assets acquired
Current liabilities
Noncurrent liabilities
Total liabilities assumed
Total purchase price
N/A—Not applicable
Amortization
Life (in Years)
Total
Acquisitions
$ 35
7
N/A
5—7
2—7
1—7
575
84
73
11
$784
19
41
$ 61
$723
98
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
The goodwill generated is primarily attributable to the assembled workforce of the acquired businesses and the increased synergies
expected to be achieved from the integration of the acquired businesses into the company’s various integrated solutions and services
neither of which qualifies as an amortizable intangible asset.
The overall weighted-average useful life of the identified amortizable intangible assets acquired was 6.8 years. These identified
intangible assets will be amortized on a straight-line basis over their useful lives, which approximates the pattern that the assets’
economic benefits are expected to be consumed over time. Goodwill of $362 million, $205 million and $8 million was assigned to the
Cloud & Cognitive Software segment, Global Business Services segment and Systems segment, respectively. It is expected that none
of the goodwill will be deductible for tax purposes.
The valuation of the assets acquired and liabilities assumed is subject to revision. If additional information becomes available, the
company may further revise the purchase price allocation as soon as practical, but no later than one year from the acquisition date;
however, material changes are not expected.
Transactions Closed in 2021–In February 2021, the company acquired Nordcloud, a consulting company providing services in cloud
implementation, application transformation and managed services; Taos Mountain, LLC (Taos), a leading cloud professional and
managed services provider; and Red Hat acquired StackRox, an innovator in container and Kubernetes-native security. Nordcloud and
Taos will be integrated into the Global Business Services segment and StackRox will be integrated into the Cloud & Cognitive Software
segment. At the date of issuance of the financial statements, the initial purchase accounting for the acquisitions of Nordcloud, Taos
and StackRox was not complete.
2019
In 2019, the company completed one acquisition at an aggregate cost of $35 billion.
Red Hat–On July 9, 2019, IBM completed the acquisition of all of the outstanding shares of Red Hat at an aggregate cost of $35 billion.
Red Hat’s portfolio of open source and cloud technologies combined with IBM’s innovative hybrid cloud technology and industry
expertise are accelerating the delivery of the hybrid cloud platform capabilities required to address the next chapter of cloud
implementations.
On the acquisition date, Red Hat shareholders received $190 per share in cash, representing a total equity value of approximately $34
billion. The company funded the transaction through a combination of cash on hand and proceeds from debt issuances.
The following table reflects the purchase price and the resulting purchase price allocation as of December 31, 2020. The net purchase
price adjustments recorded during 2020 were primarily related to noncurrent tax assets and liabilities.
($ in millions)
Current assets*
Property, plant and equipment/noncurrent assets
Intangible assets
Goodwill
Client relationships
Completed technology
Trademarks
Total assets acquired
Current liabilities**
Noncurrent liabilities
Total liabilities assumed
Total purchase price
Amortization
Life (in Years)
N/A
10
9
20
Allocated
Amount
$ 3,186
948
22,985
7,215
4,571
1,686
$ 40,592
1,395
4,117
$ 5,512
$ 35,080
* Includes $2.2 billion of cash and cash equivalents.
** Includes $485 million of short-term debt related to the convertible notes acquired from Red Hat that were recognized at their fair value on the
acquisition date, which was fully settled as of October 1, 2019.
N/A-Not applicable
The goodwill generated was primarily attributable to the assembled workforce of Red Hat and the increased synergies expected to be
achieved from the integration of Red Hat products into the company’s various integrated solutions neither of which qualify as an
amortizable intangible asset.
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
99
The overall weighted-average useful life of the identified amortizable intangible assets acquired was 10.9 years. These identified
intangible assets will be amortized on a straight-line basis over their useful lives, which approximates the pattern that the assets’
economic benefits are expected to be consumed over time. The following table presents the goodwill allocated to the segments as of
December 31, 2020.
($ in billions)
Segment
Cloud & Cognitive Software
Global Technology Services
Global Business Services
Systems
Total
Goodwill
Allocated *
$ 18.4
3.1
1.1
0.4
$ 23.0
* It is expected that approximately six percent of the goodwill will be deductible for tax purposes.
The following table presents the supplemental consolidated financial results of the company on an unaudited pro forma basis, as if the
acquisition had been consummated on January 1, 2018 through the periods shown below. The primary adjustments reflected in the
pro forma results relate to: (1) the debt used to fund the acquisition, (2) changes driven by acquisition accounting, including
amortization of intangible assets and the deferred revenue fair value adjustment, (3) employee retention plans, (4) elimination of
intercompany transactions between IBM and Red Hat, and (5) the presentation of acquisition-related costs.
The unaudited pro forma financial information presented below does not purport to represent the actual results of operations that IBM
and Red Hat would have achieved had the companies been combined during the periods presented, and was not intended to project
the future results of operations that the combined company could achieve after the acquisition. Historical fiscal periods are not aligned
under this presentation. The unaudited pro forma financial information did not reflect any potential cost savings, operating efficiencies,
long-term debt pay down estimates, suspension of IBM’s share repurchase program, financial synergies or other strategic benefits as
a result of the acquisition or any restructuring costs to achieve those benefits.
(Unaudited)
($ in millions)
For the year ended December 31:
Revenue
Net income
2018
2019
$ 79,628
$ 9,723
2018
$ 81,360
$ 5,702
In 2018, the company completed two acquisitions for an aggregate cost of $49 million. One acquisition was completed by the Cloud &
Cognitive Software segment and one acquisition by the Global Business Services segment. These acquisitions did not have a material
impact on the Consolidated Financial Statements.
Divestitures
2020
In the fourth quarter of 2020, the company entered into a definitive agreement to sell certain remaining OEM commercial financing
capabilities reported within the Global Financing segment. The financial terms related to this transaction are not material. The
transaction is expected to be completed in the second half of 2021.
2019
Select IBM Software Products–On June 30, 2019, HCL Technologies Limited (HCL) acquired select standalone Cloud & Cognitive
Software products from IBM for $1,775 million, inclusive of $150 million of contingent consideration. The transaction included
commercial software, intellectual property and services offerings in addition to transition services for IT and other services. The total
pre-tax gain recognized on this transaction as of December 31, 2020 was $669 million. The total gain on sale may change in the future
due to contingent consideration or changes in other transaction estimates, however, material changes are not expected.
The company received cash of $812 million at closing and $812 million in the second quarter of 2020. The company also received $90
million of contingent consideration as of December 31, 2020. Any earned outstanding contingent consideration is expected to be paid
to IBM within 27 months of the closing. In addition, IBM remits payment to HCL predominantly for servicing certain customer contracts
until such contracts are terminated or entitlements are assumed by HCL, related to deferred revenue that existed prior to closing. IBM
made cash payments to HCL of $288 million and $174 million during the years ended December 31, 2020 and December 31, 2019,
respectively, for such contracts.
Select IBM Marketing Platform and Commerce Offerings–On April 4, 2019, IBM and Centerbridge Partners, L.P. (Centerbridge)
announced a definitive agreement, in which Centerbridge would acquire select marketing platform and commerce offerings from IBM.
100
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
The transaction included commercial software and services offerings. In addition, IBM is providing Centerbridge with IT transition
services. All other contracted transition services concluded as of June 30, 2020. Upon closing, Centerbridge announced that this
business would be re-branded under the name Acoustic. The closing completed for the U.S. on June 30, 2019. The company received
a net cash payment of $240 million in 2019 and expects to receive an additional $150 million of cash within 36 months of the U.S.
closing.
A subsequent closing occurred in most other countries on March 31, 2020. The closing of all remaining countries occurred as of June
30, 2020. The pre-tax gain recognized on this transaction as of December 31, 2020 was $82 million. The pre-tax gain is subject to
adjustment in the future due to changes in transaction-related estimates which are not expected to be material.
IBM Risk Analytics and Regulatory Offerings–On September 24, 2019, IBM and SS&C Technologies Holdings, Inc. (SS&C) entered into
a definitive agreement in which SS&C would acquire certain Algorithmics and related assets from IBM. The transaction closed in the
fourth quarter of 2019. The company recognized an immaterial pre-tax gain on the sale for the year ended December 31, 2019.
Sales Performance Management Offerings–On November 20, 2019, IBM and Varicent Parent Holdings Corporation (Varicent) entered
into a definitive agreement in which Varicent would acquire certain sales performance management assets from IBM. The initial closing
of certain countries was completed on December 31, 2019. The company received a net cash payment of $230 million and recognized
a pre-tax gain on the sale of $136 million for the year ended December 31, 2019. A subsequent closing for the remaining countries
occurred on March 31, 2020 and the company recognized an immaterial pre-tax gain.
The above 2019 divested businesses are reported in Other–divested businesses as described in note D, "Segments."
In addition to the above, the company completed three divestitures reported in the Global Financing segment, the Global Business
Services segment and the Other–divested businesses in 2019. The financial terms related to each of these transactions were not
material.
The pre-tax gains recognized on the divestitures above were recorded in other (income) and expense in the Consolidated Income
Statement.
2018
The company had no divestitures in 2018.
NOTE F. RESEARCH, DEVELOPMENT & ENGINEERING
RD&E expense was $6,333 million in 2020, $5,989 million in 2019 and $5,379 million in 2018.
The company incurred total expense of $6,039 million, $5,657 million and $5,027 million in 2020, 2019 and 2018, respectively, for
scientific research and the application of scientific advances to the development of new and improved products and their uses, as well
as services and their application. Within these amounts, software-related expense was $3,732 million, $3,541 million and $3,050
million in 2020, 2019 and 2018, respectively.
Expense for product-related engineering was $295 million, $334 million and $352 million in 2020, 2019 and 2018, respectively.
NOTE G. TAXES
($ in millions)
For the year ended December 31:
Income/(loss) from continuing operations before income taxes
U.S. operations
Non-U.S. operations
Total income from continuing operations before income taxes
2020
2019
2018
$ (1,726)
6,363
$ 4,637
$
(315)
10,481
$ 10,166
$
627
10,715
$ 11,342
The income from continuing operations provision for/(benefit from) income taxes by geographic operations was as follows:
($ in millions)
For the year ended December 31:
U.S. operations
Non-U.S. operations
Total continuing operations provision for/(benefit from) income taxes
2020
2019
$ 2,004
(2,868)
$ (864)
$ (408)
1,139
$ 731
2018
$ 1,199
1,420
$ 2,619
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
101
The components of the income from continuing operations provision for/(benefit from) income taxes by taxing jurisdiction were as
follows:
($ in millions)
For the year ended December 31:
U.S. federal
Current
Deferred
U.S. state and local
Current
Deferred
Non-U.S.
Current
Deferred
Total continuing operations provision for/(benefit from) income taxes
Discontinued operations provision for/(benefit from) income taxes
Provision for social security, real estate, personal property and other taxes
Total taxes included in net income
2020
2019
2018
$ 315
1,177
$ 1,492
$ 316
(315)
1
$
$ 1,827
(4,184)
$ (2,357)
$ (864)
(13)
3,199
$ 2,322
$ 331
(839)
$ (508)
$
(85)
(82)
$ (167)
$ 1,829
(423)
$ 1,406
$ 731
(1)
3,304
$ 4,034
$ (342)
1,377
$ 1,035
$ 127
(292)
$ (165)
$ 2,135
(386)
$ 1,749
$ 2,619
2
3,322
$ 5,943
A reconciliation of the statutory U.S. federal tax rate to the company’s effective tax rate from continuing operations was as follows:
For the year ended December 31:
Statutory rate
Enactment of U.S. tax reform
Tax differential on foreign income
Intra-entity IP sale
Domestic incentives
State and local
Other
Effective rate
Percentages rounded for disclosure purposes.
2020
21 %
—
(15)
(20)
(4)
0
(1)
(19)%
2019
21 %
1
(11)
—
(2)
(1)
(1)
7 %
2018
21 %
18
(9)
—
(3)
(1)
(3)
23 %
The significant components reflected within the tax rate reconciliation labeled “Tax differential on foreign income” include the effects
of foreign subsidiaries’ earnings taxed at rates other than the U.S. statutory rate, foreign export incentives, U.S. taxes on foreign income
and any net impacts of intercompany transactions. These items also reflect audit settlements or changes in the amount of unrecognized
tax benefits associated with each of these items.
The continuing operations effective rate for 2020 was (18.6) percent compared to 7.2 percent in 2019. The decrease in the effective
tax rate was primarily driven by an intra-entity sale of certain of the company’s intellectual property which required the recognition of
a $3.4 billion deferred tax asset. The recognition of this non-U.S. deferred tax asset and its related GILTI impacts in the U.S. resulted
in a net tax benefit of $0.9 billion in the first quarter of 2020. In addition, a change in foreign tax law resulted in a $0.2 billion tax benefit
in the current year.
On December 22, 2017, the U.S. Tax Cuts and Jobs Act was enacted. U.S. tax reform introduced many changes, including lowering the
U.S. corporate tax rate to 21 percent, changes in incentives, provisions to prevent U.S. base erosion and significant changes in the
taxation of international income, including provisions which allow for the repatriation of foreign earnings without U.S. tax. The
enactment of U.S. tax reform resulted in charges to tax expense of $0.1 billion and $2.0 billion for the years ended December 31, 2019
and 2018, respectively. In 2020, there was no impact from the enactment of U.S. tax reform. In 2018, the charge was primarily
attributable to the company’s election to include GILTI in measuring deferred taxes, plus refinements to the one-time U.S. transition
tax and foreign tax costs on undistributed foreign earnings. The charge in 2019 was related to additional tax reform guidance issued
by the U.S. Treasury in January 2019.
The effect of tax law changes on deferred tax assets and liabilities did not have a material impact on the company’s 2020 effective tax
rate.
102
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
Deferred Tax Assets
($ in millions)
At December 31:
Retirement benefits
Leases
Share-based and other compensation
Domestic tax loss/credit carryforwards
Deferred income
Foreign tax loss/credit carryforwards
Bad debt, inventory and warranty reserves
Depreciation
Hedging losses
Restructuring charges
Accruals
Intangible assets
Capitalized research and development
Other
Gross deferred tax assets
Less: valuation allowance
Net deferred tax assets
*
Deferred Tax Liabilities
($ in millions)
At December 31:
Goodwill and intangible assets
GILTI deferred taxes
Leases and right-of-use assets
Depreciation
Retirement benefits
Software development costs
Deferred transition costs
Undistributed foreign earnings
Other
Gross deferred tax liabilities
2020
$ 3,946
1,525
616
1,746
712
818
361
308
576
302
483
3,540 *
1,387
1,441
17,761
850
$ 16,911
2019
$ 3,766
1,729
637
1,259
600
836
298
253
—
138 **
368
592
722
1,300
12,498
608
$ 11,890
2020
2019
$ 2,679
4,365 *
1,908
709
1,221
1,007
205
307
741
$ 13,142
$ 3,111
1,908
2,216
728
1,002
1,075
233
725
940
$ 11,938
* The increase in the balance was primarily due to an intra-entity sale of intellectual property in the first quarter of 2020.
** Previously included in Other.
For financial reporting purposes, the company had foreign and domestic loss carryforwards, the tax effect of which was $661 million,
including a tax only capital loss in a subsidiary, as well as foreign and domestic credit carryforwards of $1,903 million. Substantially all
of these carryforwards are available for at least two years and the majority are available for 10 years or more.
The valuation allowances as of December 31, 2020, 2019 and 2018 were $850 million, $608 million and $915 million, respectively.
The amounts principally apply to certain foreign and domestic loss carryforwards and credits. In the opinion of management, it is more
likely than not that these assets will not be realized. However, to the extent that tax benefits related to these carryforwards are realized
in the future, the reduction in the valuation allowance will reduce income tax expense.
The amount of unrecognized tax benefits at December 31, 2020 increased by $1,422 million in 2020 to $8,568 million. A reconciliation
of the beginning and ending amount of unrecognized tax benefits was as follows:
($ in millions)
Balance at January 1
Additions based on tax positions related to the current year
Additions for tax positions of prior years
Reductions for tax positions of prior years (including impacts due to a lapse of statute)
Settlements
Balance at December 31
2020
2019
$7,146
1,690
159
(408)
(19)
$8,568
$ 6,759
816
779
(922)
(286)
$ 7,146
2018
$ 7,031
394
1,201
(1,686)
(181)
$ 6,759
The additions to unrecognized tax benefits related to the current and prior years were primarily attributable to non-U.S. tax matters,
including transfer pricing, as well as U.S. federal and state tax matters, credits and incentives. The settlements and reductions to
unrecognized tax benefits for tax positions of prior years were primarily attributable to U.S. federal and state tax matters, non-U.S.
audits and impacts due to lapse of statute of limitations.
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
103
The unrecognized tax benefits at December 31, 2020 of $8,568 million can be reduced by $574 million associated with timing
adjustments, U.S. tax credits, potential transfer pricing adjustments and state income taxes. The net amount of $7,994 million, if
recognized, would favorably affect the company’s effective tax rate. The net amounts at December 31, 2019 and 2018 were $6,562
million and $6,041 million, respectively.
Interest and penalties related to income tax liabilities are included in income tax expense. During the year ended December 31, 2020,
the company recognized $117 million in interest expense and penalties; in 2019, the company recognized $13 million in interest
expense and penalties; and, in 2018, the company recognized a net benefit of $14 million in interest expense and penalties. The
company had $843 million for the payment of interest and penalties accrued at December 31, 2020, and had $819 million accrued at
December 31, 2019.
Within the next 12 months, the company believes it is reasonably possible that the total amount of unrecognized tax benefits
associated with certain positions may be reduced. The potential decrease in the amount of unrecognized tax benefits is associated
with the anticipated resolution of the company’s U.S. income tax audit for 2015 and 2016, as well as various non-U.S. audits. The
company estimates that the unrecognized tax benefits at December 31, 2020 could be reduced by $368 million.
During the fourth quarter of 2020, the U.S. Internal Revenue Service (IRS) concluded its examination of the company’s U.S. income tax
returns for 2013 and 2014, which had a specific focus on certain cross-border transactions that occurred in 2013 and issued a final
Revenue Agent’s Report (RAR). The IRS’ proposed adjustments relative to these cross-border transactions, if sustained, would result
in additional taxable income of approximately $4.5 billion. The company strongly disagrees with the IRS on these specific matters and
intends to protest the proposed adjustments through the IRS Appeals Office and U.S. courts, if necessary. The company believes it has
appropriately accounted for all of its uncertain tax positions. In the third quarter of 2018, the IRS commenced its audit of the company’s
U.S. tax returns for 2015 and 2016. The company anticipates that this audit will be completed in 2021. With respect to major U.S. state
and foreign taxing jurisdictions, the company is generally no longer subject to tax examinations for years prior to 2015. The company
is no longer subject to income tax examination of its U.S. federal tax return for years prior to 2013. The open years contain matters that
could be subject to differing interpretations of applicable tax laws and regulations as it relates to the amount and/or timing of income,
deductions and tax credits. Although the outcome of tax audits is always uncertain, the company believes that adequate amounts of
tax, interest and penalties have been provided for any adjustments that are expected to result for these years.
The company is involved in a number of income tax-related matters in India challenging tax assessments issued by the India Tax
Authorities. As of December 31, 2020, the company had recorded $742 million as prepaid income taxes in India. A significant portion
of this balance represents cash tax deposits paid over time to protect the company’s right to appeal various income tax assessments
made by the India Tax Authorities. Although the outcome of tax audits are always uncertain, the company believes that adequate
amounts of tax, interest and penalties have been provided for any adjustments that are expected to result for these years.
Within consolidated retained earnings at December 31, 2020 were undistributed after-tax earnings from certain non-U.S. subsidiaries
that were not indefinitely reinvested. At December 31, 2020, the company had a deferred tax liability of $307 million for the estimated
taxes associated with the repatriation of these earnings. Undistributed earnings of approximately $980 million and other outside basis
differences in foreign subsidiaries were indefinitely reinvested in foreign operations. Quantification of the deferred tax liability, if any,
associated with indefinitely reinvested earnings and outside basis differences was not practicable.
104
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
NOTE H. EARNINGS PER SHARE
The following table presents the computation of basic and diluted earnings per share of common stock.
($ in millions except per share amounts)
For the year ended December 31:
Weighted-average number of shares on which earnings per share
calculations are based
Basic
Add—incremental shares under stock-based compensation plans
Add—incremental shares associated with contingently issuable shares
Assuming dilution
Income from continuing operations
Income/(loss) from discontinued operations, net of tax*
Net income on which basic earnings per share is calculated
Income from continuing operations
Net income applicable to contingently issuable shares
Income from continuing operations on which diluted earnings per
2020
2019
2018
890,348,679
4,802,940
1,412,352
896,563,971
$5,501
89
$5,590
$5,501
(2)
887,235,105
4,199,440
1,378,831
892,813,376
$9,435
(4)
$9,431
$9,435
0
912,048,072
2,786,316
1,481,326
916,315,714
$8,723
5
$8,728
$8,723
(6)
share is calculated
$5,499
$9,435
$8,718
Income/(loss) from discontinued operations, net of tax, on which
basic and diluted earnings per share is calculated*
Net income on which diluted earnings per share is calculated
Earnings/(loss) per share of common stock
Assuming dilution
Continuing operations
Discontinued operations
Total
Basic
Continuing operations
Discontinued operations
Total
89
$5,588
(4)
$9,431
$ 6.13
0.10
$ 6.23
$ 6.18
0.10
$ 6.28
$10.57
(0.01)
$10.56
$10.63
0.00
$10.63
5
$8,722
$ 9.51
0.01
$ 9.52
$ 9.56
0.01
$ 9.57
* Related to discontinued operations of Microelectronics, divested in 2015.
Weighted-average stock options to purchase 1,417,665 common shares in 2020, 855,679 common shares in 2019 and 576,776
common shares in 2018 were outstanding, but were not included in the computation of diluted earnings per share because the exercise
price of the options was greater than the average market price of the common shares for the full year, and therefore, the effect would
have been antidilutive.
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
105
NOTE I. FINANCIAL ASSETS & LIABILITIES
Fair Value Measurements
Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents the company’s financial assets and financial liabilities that are measured at fair value on a recurring basis
at December 31, 2020 and 2019.
($ in millions)
At December 31:
Cash equivalents(1)
Fair Value
Hierarchy Level
2020
2019
Assets (7)
Liabilities (8)
Assets (7)
Liabilities (8)
Time deposits and certificates of deposit(2)
Money market funds
U.S. government securities(2)
Total cash equivalents
Equity investments(3)
Debt securities–current(2)(4)
Debt securities–noncurrent(2)(5)
Derivatives designated as hedging instruments
Interest rate contracts
Foreign exchange contracts
Derivatives not designated as hedging instruments
Foreign exchange contracts
Equity contracts(6)
Total
2
1
2
1
2
2
2
2
2
1,2
(1) Included within cash and cash equivalents in the Consolidated Balance Sheet.
(2) Available-for-sale debt securities with carrying values that approximate fair value.
(3) Included within investments and sundry assets in the Consolidated Balance Sheet.
$7,668
148
500
$8,316
2
600
7
100
111
13
12
$9,161
N/A
N/A
N/A
N/A
N/A
N/A
N/A
—
580
47
—
$627
$4,392
427
—
$4,819
0
696
65
56
175
10
1
$5,823
N/A
N/A
N/A
N/A
N/A
N/A
N/A
—
635
33
4
$673
(4) Primarily includes time deposits and U.S. treasury bills that are reported within marketable securities in the Consolidated Balance Sheet.
(5) Primarily includes government and corporate debt securities that are reported within investments and sundry assets in the Consolidated Balance Sheet.
(6) Level 1 includes immaterial amounts related to equity futures contracts.
(7) The gross balances of derivative assets contained within prepaid expenses and other current assets, and investments and sundry assets in the Consolidated
Balance Sheet at December 31, 2020 were $85 million and $151 million, respectively, and at December 31, 2019 were $149 million and $94 million,
respectively.
(8) The gross balances of derivative liabilities contained within other accrued expenses and liabilities, and other liabilities in the Consolidated Balance Sheet
at December 31, 2020 were $587 million and $40 million, respectively, and at December 31, 2019 were $167 million and $506 million, respectively.
N/A – Not applicable
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 and including short-
term finance lease liabilities) 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, except for short-term debt
which would be classified as Level 2.
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 December 31, 2020 and 2019, 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 (including long-term finance lease liabilities) for which a quoted market price is not available,
an expected present value technique that uses rates currently available to the company for debt with similar terms and remaining
maturities is used to estimate fair value. The carrying amount of long-term debt was $54,355 million and $54,102 million, and the
estimated fair value was $61,598 million and $58,431 million at December 31, 2020 and 2019, respectively. If measured at fair value
in the financial statements, long-term debt (including the current portion) would be classified as Level 2 in the fair value hierarchy.
106
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
NOTE J. INVENTORY
($ in millions)
At December 31:
Finished goods
Work in process and raw materials
Total
NOTE K. FINANCING RECEIVABLES
2020
$ 190
1,649
$ 1,839
2019
$ 220
1,399
$ 1,619
Financing receivables primarily consist of client loan and installment payment receivables (loans) and investment in sales-type and
direct financing leases (collectively referred to as client financing receivables) and commercial financing receivables. Loans are
provided primarily to clients to finance the purchase of hardware, software and services. Payment terms on these financing
arrangements are generally for terms up to seven years. Investment in sales-type and direct financing leases relate principally to the
company’s Systems products and are for terms ranging generally from two to six years. Commercial financing receivables relate
primarily to working capital financing for dealers and remarketers of IBM products. Payment terms for working capital financing
generally range from 30 to 90 days.
Effective January 1, 2020, the company adopted the new accounting standard related to current expected credit losses. Under this
new guidance, financing receivables are presented at amortized cost. Prior to the effective date, financing receivables were measured
at recorded investment, which does not include residual value. As a result, all prior periods are presented at recorded investment,
while current period information is presented at amortized cost. Additionally, current period information reflects updates to the
portfolio segments, and other presentation changes within the following tables, as a result of the adoption of this new guidance. Refer
to note A, “Significant Accounting Policies” and note B, “Accounting Changes” for additional information.
A summary of the components of the company’s financing receivables is presented as follows:
($ in millions)
Client Financing Receivables
At December 31, 2020:
Financing receivables, gross
Unearned income
Residual value*
Amortized cost
Allowance for credit losses
Total financing receivables, net
Current portion
Noncurrent portion
Client Loan and
Installment Payment
Receivables/
(Loans)
$12,159
(488)
—
$11,671
(173)
$11,498
$ 6,955
$ 4,542
Investment in
Sales-Type and
Direct Financing
Leases
$4,001
(335)
485
$4,151
(82)
$4,069
$1,525
$2,544
* Includes guaranteed and unguaranteed residual value.
($ in millions)
At December 31, 2019:
Financing receivables, gross
Unearned income
Recorded investment
Allowance for credit losses
Unguaranteed residual value
Guaranteed residual value
Total financing receivables, net
Current portion
Noncurrent portion
Client Financing Receivables
Client Loan and
Installment Payment
Receivables/
(Loans)
$13,592
(570)
$13,022
(138)
—
—
$12,884
$ 8,037
$ 4,847
Investment in
Sales-Type and
Direct Financing
Leases
$6,077
(509)
$5,567
(72)
652
53
$6,199
$2,334
$3,865
Commercial
Financing
Receivables
$2,419
0
—
$2,419
(8)
$2,411
$2,411
—
$
Commercial
Financing
Receivables
$3,836
(4)
$3,831
(11)
—
—
$3,820
$3,820
—
$
Total
$18,580
(823)
485
$18,242
(263)
$17,979
$10,892
$ 7,086
Total
$23,504
(1,083)
$22,421
(221)
652
53
$22,904
$14,192
$ 8,712
The company has a long-standing practice of taking mitigation actions, in certain circumstances, to transfer credit risk to third parties,
with enhanced focus in this unprecedented environment of the COVID-19 pandemic. These actions may include credit insurance,
financial guarantees, nonrecourse borrowings, transfers of receivables recorded as true sales in accordance with accounting guidance
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
107
or sales of equipment under operating lease. Sale of receivables arrangements are also utilized in the normal course of business as
part of the company’s cash and liquidity management.
Financing receivables pledged as collateral for borrowings were $482 million and $1,062 million at December 31, 2020 and 2019,
respectively. These borrowings are included in note P, “Borrowings.”
Transfer of Financial Assets
For the year ended December 31, 2020, the company sold $2,562 million of client financing receivables to third parties, consisting of
loan and lease receivables of $1,410 million and $1,152 million, respectively. More than half of the receivables sold were classified as
current assets at the time of sale.
On December 24, 2020, the company entered into an agreement with a third-party investor to sell up to $3,000 million of IBM short-
term commercial financing receivables, at any one time, on a revolving basis. The company sold $515 million of commercial financing
receivables under the agreement in the fourth quarter of 2020. In addition, the company included $383 million of commercial financing
receivables classified as held for sale at December 31, 2020 in short-term financing receivables in the Consolidated Balance Sheet.
The carrying value of the receivables classified as held for sale approximates fair value.
The transfers of these receivables qualified as true sales and therefore reduced financing receivables, resulting in a benefit to cash
flows from operating activities. The impact to the Consolidated Income Statement, including fees and net gain or loss associated with
the transfer of these receivables for the year ended December 31, 2020, was not material.
The company did not have any material sales of financing receivables or any financing receivables classified as held for sale for the
years ended December 31, 2019 and 2018.
Financing Receivables by Portfolio Segment
The following tables present the amortized cost basis or recorded investment for client financing receivables at December 31, 2020
and 2019, further segmented by three classes: Americas, Europe/Middle East/Africa (EMEA) and Asia Pacific. The commercial financing
receivables portfolio segment is excluded from the tables in the sections below as the receivables are short term in nature and the
current estimated risk of loss and resulting impact to the company’s financial results are not material.
($ in millions)
At December 31, 2020:
Amortized cost
Allowance for credit losses
Beginning balance at December 31, 2019
Adjustment for adoption of new standard
Beginning balance at January 1, 2020
Write-offs
Recoveries
Additions/(releases)
Other*
Ending balance at December 31, 2020
* Primarily represents translation adjustments.
Americas
$ 7,758
EMEA
$5,023
Asia Pacific
$3,042
Total
$15,822
$ 120
21
$ 142
(28)
0
33
(6)
$ 141
$
$
$
54
15
69
(3)
0
5
6
77
$
$
$
36
5
41
(3)
2
(4)
1
37
$
$
$
210
41
252
(34)
3
34
1
255
IBM continues to monitor the evolving global impacts from the COVID-19 pandemic as well as its impact on external economic models,
which have been revised with increased frequency throughout the year. The company’s allowance for credit losses at December 31,
2020 reflects the qualitative process which is described further in note A, “Significant Accounting Policies.” Any changes to economic
models that occurred after the balance sheet date will be reflected in future periods.
108
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
($ in millions)
At December 31, 2019:
Recorded investment
Lease receivables
Loan receivables
Ending balance
Recorded investment, collectively evaluated for impairment
Recorded investment, individually evaluated for impairment
Allowance for credit losses
Beginning balance at January 1, 2019
Lease receivables
Loan receivables
Total
Write-offs
Recoveries
Additions/(releases)
Other*
Ending balance at December 31, 2019
Lease receivables
Loan receivables
Related allowance, collectively evaluated for impairment
Related allowance, individually evaluated for impairment
* Primarily represents translation adjustments.
Americas
EMEA
Asia Pacific
Total
$ 3,419
6,726
$ 10,144
$ 10,032
112
$
$
$
$
$
$
$
$
53
105
158
(42)
1
5
(1)
120
33
88
25
96
$ 1,186
3,901
$ 5,087
$ 5,040
47
$
$
$
$
$
$
$
$
22
43
65
(3)
0
(7)
0
54
23
31
11
43
$ 963
2,395
$3,359
$3,326
32
$
$
$
$
$
$
$
$
24
32
56
(18)
1
(3)
(1)
36
16
20
4
32
$ 5,567
13,022
$ 18,590
$ 18,399
191
$
$
$
$
$
$
$
$
99
179
279
(63)
2
(5)
(2)
210
72
138
39
171
Write-offs of lease receivables and loan receivables were $16 million and $47 million, respectively, for the year ended December 31,
2019. Provisions for expected credit losses recorded for lease receivables and loan receivables were a release of $6 million and an
addition of $2 million, respectively, for the year ended December 31, 2019.
When determining the allowances, financing receivables are evaluated either on an individual or a collective basis. For the company’s
policy on determining allowances for credit losses, refer to note A, “Significant Accounting Policies.”
Past Due Financing Receivables
The company summarizes information about the amortized cost basis or recorded investment in client financing receivables, including
amortized cost or recorded investments aged over 90 days and still accruing, billed invoices aged over 90 days and still accruing, and
amortized cost or recorded investment not accruing.
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
109
($ in millions)
At December 31, 2020:
Americas
EMEA
Asia Pacific
Total client financing receivables
Total
Amortized
Cost
$ 7,758
5,023
3,042
$15,822
Amortized
Cost
> 90 Days (1)
$295
119
42
$456
Amortized
Cost
> 90 Days and
Accruing (1)
$200
28
12
$241
Billed
Invoices
> 90 Days and
Accruing
$12
5
4
$20
Amortized
Cost
Not
Accruing (2)
$ 96
95
32
$223
(1) At a contract level, which includes total billed and unbilled amounts for financing receivables aged greater than 90 days.
(2) Of the amortized cost not accruing, there was a related allowance of $178 million. Financing income recognized on these receivables was immaterial for the
year ended December 31, 2020.
($ in millions)
At December 31, 2019:
Americas
EMEA
Asia Pacific
Total lease receivables
Americas
EMEA
Asia Pacific
Total loan receivables
Total
Total
Recorded
Investment
$ 3,419
1,186
963
$ 5,567
$ 6,726
3,901
2,395
$13,022
$18,590
Recorded
Investment
> 90 Days (1)
$187
28
19
$234
$127
77
26
$231
$465
Recorded
Investment
> 90 Days and
Accruing (1)
$147
13
7
$168
$ 71
8
6
$ 85
$253
Billed
Invoices
> 90 Days and
Accruing
$11
2
1
$14
$11
3
2
$15
$29
Recorded
Investment
Not
Accruing (2)
$ 41
17
11
$ 69
$ 72
72
21
$166
$235
(1) At a contract level, which includes total billed and unbilled amounts for financing receivables aged greater than 90 days.
(2) Of the recorded investment not accruing, $191 million was individually evaluated for impairment with a related allowance of $171 million. Financing income
on these receivables was immaterial for the year ended December 31, 2019.
Credit Quality Indicators
The company’s credit quality indicators, which are based on rating agency data, publicly available information and information provided
by customers, are reviewed periodically based on the relative level of risk. The resulting indicators are a numerical rating system that
maps to Moody’s Investors Service credit ratings as shown below. The company uses information provided by Moody’s, where
available, as one of many inputs in its determination of customer credit ratings. The credit quality of the customer is evaluated based
on these indicators and is assigned the same risk rating whether the receivable is a lease or a loan.
The following tables present the amortized cost basis or recorded investment for client financing receivables by credit quality indicator,
at December 31, 2020 and 2019, respectively. Receivables with a credit quality indicator ranging from Aaa to Baa3 are considered
investment grade. All others are considered non-investment grade. Effective January 1, 2020, under the new guidance for current
expected credit losses, the company discloses its credit quality by year of origination. Additionally, under the new guidance, the
amortized cost is presented on a gross basis, whereas under the prior guidance, the company presented the recorded investment net
of the allowance for credit losses. At December 31, 2020, the credit quality indicators reflect mitigating credit enhancement actions
taken by customers which reduces the risk to IBM.
($ in millions)
At December 31, 2020:
Vintage year:
2020
2019
2018
2017
2016
2015 and prior
Total
Americas
EMEA
Asia Pacific
Aaa - Baa3
Ba1 - D
Aaa - Baa3
Ba1 - D
Aaa - Baa3
Ba1 - D
$2,818
988
829
285
90
28
$5,038
$ 1,449
623
360
154
52
81
$ 2,720
$1,513
668
329
70
33
22
$2,635
$1,427
519
245
128
46
22
$2,387
$ 958
564
419
205
114
38
$2,298
$351
123
167
52
33
18
$743
110
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
($ in millions)
At December 31, 2019:
Credit rating
Aaa—Aa3
A1—A3
Baa1—Baa3
Ba1—Ba2
Ba3—B1
B2—B3
Caa—D
Total
Lease Receivables
Loan Receivables
Americas
EMEA
Asia Pacific
Americas
EMEA
Asia Pacific
$ 465
750
955
746
215
242
13
$3,385
$
54
181
409
326
140
50
2
$1,162
$ 43
454
147
154
101
47
2
$947
$1,028
1,186
1,882
1,513
471
522
36
$6,638
$ 193
395
1,527
921
564
253
18
$ 3,871
$ 189
892
619
388
205
72
10
$2,376
Troubled Debt Restructurings
The company did not have any significant troubled debt restructurings for the years ended December 31, 2020 and 2019.
NOTE L. PROPERTY, PLANT & EQUIPMENT
($ in millions)
At December 31:
Land and land improvements
Buildings and building and leasehold improvements
Information technology equipment
Production, engineering, office and other equipment
Plant and other property—gross
Less: Accumulated depreciation
Plant and other property—net
Rental machines
Less: Accumulated depreciation
Rental machines—net
Total—net
NOTE M. LEASES
Accounting for Leases as a Lessee
The following tables presents the various components of lease costs:
($ in millions)
For the year ended December 31:
Finance lease cost
Operating lease cost
Short-term lease cost
Variable lease cost
Sublease income
Total lease cost
2020
$
381
9,416
19,419
3,695
32,911
22,968
9,943
265
168
97
$ 10,040
2019
$
365
9,364
18,054
3,721
31,504
21,726
9,778
523
292
232
$ 10,010
2020
$
91
1,581
38
480
(31)
$ 2,158
2019
$
30
1,645
38
534
(24)
$ 2,223
The company had no sale and leaseback transactions for the year ended December 31, 2020. The company recorded net gains on sale
and leaseback transactions of $41 million for the year ended December 31, 2019.
Rental expense, including amounts charged to inventory and fixed assets, and excluding amounts previously reserved, was $1,944
million for the year ended December 31, 2018.
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
111
The following table presents supplemental information relating to the cash flows arising from lease transactions. Cash payments
related to variable lease costs and short-term leases are not included in the measurement of operating and finance lease liabilities,
and, as such, are excluded from the amounts below.
($ in millions)
For the year ended December 31:
Cash paid for amounts included in the measurement of lease liabilities
Operating cash outflows from finance leases
Financing cash outflows from finance leases
Operating cash outflows from operating leases
ROU assets obtained in exchange for new finance lease liabilities
ROU assets obtained in exchange for new operating lease liabilities
2020
2019
$
10
85
1,566
176
1,130
$
8
22
1,541
209 *
6,481 *
* Includes opening balance additions as a result of the adoption of the new lease guidance effective January 1, 2019. The post adoption addition of leases
for the year ended December 31, 2019 was $1,679 million for operating leases and immaterial for finance leases.
The following table presents the weighted-average lease term and discount rate for finance and operating leases.
At December 31:
Finance leases
Weighted-average remaining lease term
Weighted-average discount rate
Operating leases
Weighted-average remaining lease term
Weighted-average discount rate
2020
2019
3.9 yrs.
1.28 %
4.8 yrs.
1.62 %
5.0 yrs.
3.06 %
5.4 yrs.
3.03 %
The following table presents a maturity analysis of expected undiscounted cash flows for operating and finance leases on an annual
basis for the next five years and thereafter.
($ in millions)
Finance leases
Operating leases
2021
$ 106
1,468
$
2022
90
1,186
2023
2024
$ 62
885
$ 33
683
2025
$ 16
405
Thereafter
$ 36
638
Imputed
Interest *
$ (47)
(334)
Total **
$ 296
4,930
* Imputed interest represents the difference between undiscounted cash flows and discounted cash flows.
** The company entered into lease agreements for certain facilities and equipment with payments totaling approximately $376 million that have not yet
commenced as of December 31, 2020, and therefore are not included in this table.
The following table presents the total amount of finance leases recognized in the Consolidated Balance Sheet:
($ in millions)
At December 31:
ROU Assets—Property, plant and equipment
Lease Liabilities
Short-term debt
Long-term debt
Accounting for Leases as a Lessor
The following table presents amounts included in the Consolidated Income Statement related to lessor activity:
2020
$ 282
97
199
2019
$ 187
52
151
($ in millions)
For the year ended December 31:
Lease income—sales-type and direct financing leases
Sales-type lease selling price
Less: Carrying value of underlying assets*
Gross profit
Interest income on lease receivables
Total sales-type and direct financing lease income
Lease income—operating leases
Variable lease income
Total lease income
* Excludes unguaranteed residual value.
2020
2019
$ 1,357
439
917
249
1,166
260
115
$ 1,541
$ 1,509
591
918
303
1,221
324
56
$ 1,601
112
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
Sales-Type and Direct Financing Leases
At December 31, 2020 and 2019, the unguaranteed residual values of sales-type and direct financing leases were $469 million and
$652 million, respectively. For further information on the company’s net investment in leases, including guaranteed and unguaranteed
residual values, refer to note K, “Financing Receivables.”
For the years ended December 31, 2020 and 2019, impairment of residual values was immaterial.
The following table presents a maturity analysis of the lease payments due to IBM on sales-type and direct financing leases over the
next five years and thereafter, as well as a reconciliation of the undiscounted cash flows to the financing receivables recognized in the
Consolidated Balance Sheet at December 31, 2020:
($ in millions)
2021
2022
2023
2024
2025
Thereafter
Total undiscounted cash flows
Present value of lease payments (recognized as financing receivables)
Difference between undiscounted cash flows and discounted cash flows
Total
$1,766
1,233
645
275
74
7
$4,001
3,666 *
$ 335
* The present value of the lease payments will not equal the financing receivables balances in the Consolidated Balance Sheet due to certain items,
including IDCs, allowance for credit losses and residual values, which are included in the financing receivable balance, but are not included in the future
lease payments.
Operating Leases
The following table presents a maturity analysis of the undiscounted lease payments due to IBM on operating leases over the next
five years and thereafter, at December 31, 2020:
($ in millions)
2021
2022
2023
2024
2025
Thereafter
Total undiscounted cash flows
Total
$50
15
2
0
—
—
$67
There were no material impairment losses incurred for equipment provided to clients under an operating lease for the years ended
December 31, 2020 and 2019.
At December 31, 2020 and 2019, the unguaranteed residual values of operating leases were $48 million and $81 million, respectively.
NOTE N. INTANGIBLE ASSETS INCLUDING GOODWILL
Intangible Assets
The following table presents the company’s intangible asset balances by major asset class:
($ in millions)
At December 31, 2020:
Intangible asset class
Capitalized software
Client relationships
Completed technology
Patents/trademarks
Other**
Total
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount *
$ 1,777
8,838
5,957
2,246
56
$18,874
$ (814)
(2,056)
(1,671)
(499)
(39)
$(5,079)
$
963
6,783
4,286
1,747
16
$13,796
* Includes an increase in net intangible asset balance of $279 million due to foreign currency translation.
** Other intangibles are primarily acquired proprietary and nonproprietary business processes, methodologies and systems.
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
113
($ in millions)
At December 31, 2019:
Intangible asset class
Capitalized software
Client relationships
Completed technology
Patents/trademarks
Other**
Total
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount *
$ 1,749
8,921
6,261
2,301
56
$ 19,287
$ (743)
(1,433)
(1,400)
(445)
(31)
$ (4,052)
$ 1,006
7,488
4,861
1,856
24
$ 15,235
* Includes a decrease in net intangible asset balance of $42 million due to foreign currency translation.
** Other intangibles are primarily acquired proprietary and nonproprietary business processes, methodologies and systems.
There was no impairment of intangible assets recorded in 2020 and 2019. The net carrying amount of intangible assets decreased
$1,439 million during the year ended December 31, 2020, primarily due to intangible asset amortization, partially offset by additions
of capitalized software. The aggregate intangible amortization expense was $2,468 million and $1,850 million for the years ended
December 31, 2020 and 2019, respectively. The increase in intangible amortization expense during 2020 was primarily due to an
increase in the gross carrying amount of intangible assets from the Red Hat acquisition which closed in the third quarter of 2019. In
addition, in 2020 and 2019, respectively, the company retired $1,483 million and $946 million of fully amortized intangible assets,
impacting both the gross carrying amount and accumulated amortization by this amount.
The future amortization expense relating to intangible assets currently recorded in the Consolidated Balance Sheet is estimated to be
the following at December 31, 2020:
($ in millions)
2021
2022
2023
2024
2025
Thereafter
Goodwill
Capitalized
Software
$544
305
114
0
—
—
Acquired
Intangibles
$1,809
1,746
1,432
1,382
1,364
5,099
Total
$ 2,353
2,051
1,546
1,383
1,364
5,099
The changes in the goodwill balances by reportable segment, for the years ended December 31, 2020 and 2019, are as follows:
($ in millions)
Segment
Cloud & Cognitive Software
Global Business Services
Global Technology Services
Systems
Total
($ in millions)
Segment
Cloud & Cognitive Software*
Global Business Services
Global Technology Services
Systems
Other—divested businesses*
Total
Balance at Goodwill
Purchase
Price
January 1, 2020 Additions Adjustments
$(139)
—
—
—
$(139)
$ 43,037
5,775
7,141
2,270
$ 58,222
$ 362
205
—
8
$ 575
Balance at Goodwill
Purchase
Price
January 1, 2019 Additions Adjustments
$ 133
1
—
(110)
—
$ 24
$24,463 $18,399
1,059
4,711
3,119
3,988
525
1,847
1,256
—
$36,265 $23,102
Foreign
Currency
Translation
and Other
Balance at
Divestitures Adjustments ** December 31, 2020
$ 43,934
$675
6,145
165
7,245
104
2,293
15
$ 59,617
$960
$ —
—
—
—
$ —
Foreign
Currency
Translation
and Other
Balance at
$
Divestitures Adjustments ** December 31, 2019
$ 43,037
5,775
7,141
2,270
—
$ 58,222
—
(1)
—
—
(1,256)
$(1,257)
$ 41
5
34
7
—
$ 87
* Recast to conform to 2020 presentation.
** Primarily driven by foreign currency translation.
There were no goodwill impairment losses recorded during 2020 or 2019 and the company has no accumulated impairment losses.
114
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
Purchase price adjustments recorded in 2020 and 2019 were related to acquisitions that were still subject to the measurement period
that ends at the earlier of 12 months from the acquisition date or when information becomes available. During 2020, net purchase
price adjustments recorded to noncurrent tax assets and liabilities were related to the Red Hat acquisition. Net purchase price
adjustments recorded in 2019 were not material.
NOTE O. INVESTMENTS & SUNDRY ASSETS
($ in millions)
At December 31:
Derivatives—noncurrent
Alliance investments
Equity method
Non-equity method
Long-term deposits
Other receivables
Employee benefit-related
Prepaid income taxes
Other assets
Total
NOTE P. BORROWINGS
Short-Term Debt
($ in millions)
At December 31:
Commercial paper
Short-term loans
Long-term debt—current maturities
Total
2020
$ 151
172
54
239
423
238
777
227
$ 2,282
2019
94
$
184
38
242
276
253
664
321
$ 2,074
2020
$
—
130
7,053
$ 7,183
2019
$ 304
971
7,522
$ 8,797
The weighted-average interest rate for commercial paper at December 31, 2019 was 1.6 percent. The weighted-average interest rate
for short-term loans was 5.7 percent and 6.1 percent at December 31, 2020 and 2019, respectively.
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
115
Long-Term Debt
Pre-Swap Borrowing
($ in millions)
At December 31:
U.S. dollar debt (weighted-average interest rate at December 31, 2020):*
2.3%
1.3%
2.6%
3.3%
3.3%
6.8%
3.3%
3.0%
6.5%
3.5%
2.0%
5.9%
8.0%
4.5%
2.9%
4.0%
7.0%
4.7%
4.3%
3.0%
7.1%
Maturities
2020
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2032
2038
2039
2040
2042
2045
2046
2049
2050
2096
$
5,499
6,233
2,395
5,029
631
4,370
2,219
313
3,250
1,350
600
83
2,745
650
1,107
27
650
3,000
750
316
— $ 4,326
8,498
6,289
2,388
5,045
636
4,350
969
313
3,250
—
600
83
2,745
—
1,107
27
650
3,000
—
316
$ 41,218 $44,594
Other currencies (weighted-average interest rate at December 31, 2020, in parentheses):*
Euro (1.1%)
Pound sterling (2.6%)
Japanese yen (0.3%)
Other (3.7%)
Finance lease obligations (1.5%)
Less: net unamortized discount
Less: net unamortized debt issuance costs
Add: fair value adjustment**
Less: current maturities
Total
2021-2040
2021-2022
2022-2026
2021-2024
2021-2030
296
411
1,409
324
$ 18,355 $14,306
1,390
1,339
375
$ 61,718 $62,003
204
$ 62,013 $62,207
881
142
440
$ 61,408 $61,624
7,053
7,522
$ 54,355 $54,102
875
156
426
* Includes notes, debentures, bank loans and secured borrowings.
** The portion of the company’s fixed-rate debt obligations that is hedged is reflected in the Consolidated Balance Sheet as an amount equal to the sum of
the debt’s carrying value and a fair value adjustment representing changes in the fair value of the hedged debt obligations attributable to movements in
benchmark interest rates.
The company’s indenture governing its debt securities and its various credit facilities each contain significant covenants which obligate
the company to promptly pay principal and interest, limit the aggregate amount of secured indebtedness and sale and leaseback
transactions to 10 percent of the company’s consolidated net tangible assets, and restrict the company’s ability to merge or consolidate
unless certain conditions are met. The credit facilities also include a covenant on the company’s consolidated net interest expense
ratio, which cannot be less than 2.20 to 1.0, as well as a cross default provision with respect to other defaulted indebtedness of at least
$500 million.
The company is in compliance with all of its debt covenants and provides periodic certifications to its lenders. The failure to comply
with its debt covenants could constitute an event of default with respect to the debt to which such provisions apply. If certain events
of default were to occur, the principal and interest on the debt to which such event of default applied would become immediately due
and payable.
In the first half of 2019, the company issued an aggregate of $20 billion of U.S. dollar fixed- and floating-rate notes and $5.7 billion of
Euro fixed-rate notes. The proceeds were primarily used for the acquisition of Red Hat. For additional information on this transaction,
refer to note E, “Acquisitions & Divestitures.” In the first half of 2020, the company issued an aggregate of $4.1 billion of Euro fixed-
rate notes and $4.0 billion of U.S. dollar fixed-rate notes. The proceeds from the Euro issuance were primarily used to early redeem
outstanding fixed-rate notes which were due in 2021 in the aggregate amount of $2.9 billion. The company incurred a loss of $49
116
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
million in the first quarter of 2020 upon redemption, which was recorded in other (income) and expense in the Consolidated Income
Statement.
Post-Swap Borrowing (Long-Term Debt, Including Current Portion)
($ in millions)
For the year ended December 31:
Fixed-rate debt
Floating-rate debt*
Total
2020
2019
Amount
Weighted-Average
Interest Rate
Amount
Weighted-Average
Interest Rate
$ 53,442
7,966
$ 61,408
2.7 %
1.1 %
$52,169
9,455
$61,624
2.9 %
2.2 %
* Includes $2,975 million in 2020 and 2019 of notional interest-rate swaps that effectively convert fixed-rate long-term debt into floating-rate debt. Refer
to note T, “Derivative Financial Instruments,” for additional information.
Pre-swap annual contractual obligations of long-term debt outstanding at December 31, 2020, are as follows:
($ in millions)
2021
2022
2023
2024
2025
Thereafter
Total
Interest on Debt
($ in millions)
For the year ended December 31:
Cost of financing
Interest expense
Interest capitalized
Total interest paid and accrued
Total
$ 7,053
7,345
5,807
6,506
4,282
31,020
$ 62,013
2020
$ 451
1,288
6
$ 1,745
2019
$ 608
1,344
5
$ 1,957
2018
$ 757
723
3
$ 1,482
Refer to the related discussion in note D, “Segments,” for total interest expense of the Global Financing segment. Refer to note T, “Derivative
Financial Instruments,” for a discussion of the use of foreign currency denominated debt designated as a hedge of net investment, as well
as a discussion of the use of currency and interest-rate swaps in the company’s debt risk management program.
Lines of Credit
On July 2, 2020, the company and IBM Credit LLC entered into a new $2.5 billion 364-day Credit Agreement to replace the existing $2.5
billion 364-day Credit Agreement, and also extended the maturity date of the existing $2.5 billion Three-Year Credit Agreement. The new
maturity dates for the 364-day and Three-Year Credit Agreements are July 1, 2021 and July 20, 2023, respectively. The company also
amended its $10.25 billion Five-Year Credit Agreement to include an option exercisable in 2021 to extend the current maturity date of July
20, 2024 by an additional two years. Each of the facility sizes remained unchanged. The total expense recorded by the company related to
the Five-Year Credit Agreement was $8 million in 2020, $7 million in 2019 and $7 million in 2018. The total expense recorded by the
company related to the 364-day and Three-Year Credit Agreements was $4 million in 2020, $2 million in 2019 and $2 million in 2018. The
Five-Year Credit Agreement permits the company and its subsidiary borrowers to borrow up to $10.25 billion on a revolving basis.
Borrowings of the subsidiary borrowers will be unconditionally backed by the company. The company may also, upon the agreement of
either existing lenders, or of additional banks not currently party to the Five-Year Credit Agreement, increase the commitments under the
Credit Agreement up to an additional $1.75 billion. The 364-day Credit Agreement and the Three-Year Credit Agreement allow the company
and IBM Credit (each a Borrower) to borrow up to an aggregate of $5 billion on a revolving basis. Neither Borrower is a guarantor or co-
obligor of the other Borrower under the 364-day and Three-Year Credit Agreements. Subject to certain conditions stated in the Five-Year,
364-day and Three-Year Credit Agreements (the Credit Agreements), the Borrowers may borrow, prepay and re-borrow amounts under
the Credit Agreements at any time during the term of such agreements. Funds borrowed may be used for the general corporate purposes
of the Borrowers.
Interest rates on borrowings under the Credit Agreements will be based on prevailing market interest rates, as further described in the
Credit Agreements. The Credit Agreements contain customary representations and warranties, covenants, events of default, and
indemnification provisions. The company believes that circumstances that might give rise to breach of these covenants or an event of
default, as specified in the Credit Agreements, are remote. The company also has other committed lines of credit in some of the geographies
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
117
which are not significant in the aggregate. Interest rates and other terms of borrowing under these lines of credit vary from country to
country, depending on local market conditions.
As of December 31, 2020, there were no borrowings by the company, or its subsidiaries, under these credit facilities.
NOTE Q. OTHER LIABILITIES
($ in millions)
At December 31:
Income tax reserves
Excess 401(k) Plus Plan
Disability benefits
Derivative liabilities
Workforce reductions
Deferred taxes
Other taxes payable
Environmental accruals
Warranty accruals
Asset retirement obligations
Acquisition related
Divestiture related
Other
Total
2020
$ 5,274
1,635
452
40
956
5,472
253
246
33
117
60
62
297
$ 14,897
2019
$ 5,118
1,521
478
506
725
5,230
42
254
45
94
9
65
439
$ 14,526
In response to changing business needs, the company periodically takes workforce reduction actions to improve productivity, cost
competitiveness and to rebalance skills. The noncurrent contractually obligated future payments associated with these activities are
reflected in the workforce reductions caption in the previous table. The noncurrent liabilities are workforce accruals primarily related
to terminated employees who are no longer working for the company who were granted annual payments to supplement their incomes
in certain countries. Depending on the individual country’s legal requirements, these required payments will continue until the former
employee begins receiving pension benefits or passes away. The total amounts accrued for workforce reductions, including amounts
classified as other accrued expenses and liabilities in the Consolidated Balance Sheet were $3,151 million and $950 million at
December 31, 2020 and 2019, respectively. The increase in the total amount accrued as of December 31, 2020 relates primarily to
the workforce reduction action in the fourth quarter of 2020 for which the company recorded a charge of $2,036 million in selling,
general and administrative expense in the Consolidated Income Statement for severance and employee related benefits in accordance
with the accounting guidance for ongoing benefit arrangements.
The company employs extensive internal environmental protection programs that primarily are preventive in nature. The company also
participates in environmental assessments and cleanups at a number of locations, including operating facilities, previously owned
facilities and Superfund sites. The company’s maximum exposure for all environmental liabilities cannot be estimated and no amounts
have been recorded for non-ARO environmental liabilities that are not probable or estimable. The total amounts accrued for non-ARO
environmental liabilities, including amounts classified as current in the Consolidated Balance Sheet, that do not reflect actual or
anticipated insurance recoveries, were $266 million and $270 million at December 31, 2020 and 2019, respectively. Estimated
environmental costs are not expected to materially affect the consolidated financial position or consolidated results of the company’s
operations in future periods. However, estimates of future costs are subject to change due to protracted cleanup periods and changing
environmental remediation regulations.
As of December 31, 2020, the company was unable to estimate the range of settlement dates and the related probabilities for certain
asbestos remediation AROs. These conditional AROs are primarily related to the encapsulated structural fireproofing that is not subject
to abatement unless the buildings are demolished and non-encapsulated asbestos that the company would remediate only if it
performed major renovations of certain existing buildings. Because these conditional obligations have indeterminate settlement dates,
the company could not develop a reasonable estimate of their fair values. The company will continue to assess its ability to estimate
fair values at each future reporting date. The related liability will be recognized once sufficient additional information becomes
available. The total amounts accrued for ARO liabilities, including amounts classified as current in the Consolidated Balance Sheet, were
$154 million and $150 million at December 31, 2020 and 2019, respectively.
118
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
NOTE R. COMMITMENTS & CONTINGENCIES
Commitments
The company’s extended lines of credit to third-party entities include unused amounts of $2.1 billion and $1.8 billion at December 31,
2020 and 2019, respectively. A portion of these amounts was available to the company’s business partners to support their working
capital needs. In addition, the company has committed to provide future financing to its clients in connection with client purchase
agreements for $5.2 billion and $6.3 billion at December 31, 2020 and 2019, respectively. Effective January 1, 2020, the company
adopted the new standard on current expected credit losses, which resulted in the recognition of a related allowance for non-
cancellable off-balance sheet commitments. Refer to note B, “Accounting Changes,” for additional information. The allowance for these
commitments is recorded in other liabilities in the Consolidated Balance Sheet and was not material at December 31, 2020. The
company collectively evaluates the allowance for these arrangements using a provision methodology consistent with the portfolio of
the commitments. Refer to note A, “Significant Accounting Policies,” for additional information.
The company has applied the guidance requiring a guarantor to disclose certain types of guarantees, even if the likelihood of requiring
the guarantor’s performance is remote. The following is a description of arrangements in which the company is the guarantor.
The company is a party to a variety of agreements pursuant to which it may be obligated to indemnify the other party with respect to
certain matters. Typically, these obligations arise in the context of contracts entered into by the company, under which the company
customarily agrees to hold the party harmless against losses arising from a breach of representations and covenants related to such
matters as title to the assets sold, certain intellectual property rights, specified environmental matters, third-party performance of
nonfinancial contractual obligations and certain income taxes. In each of these circumstances, payment by the company is conditioned
on the other party making a claim pursuant to the procedures specified in the particular contract, the procedures of which typically
allow the company to challenge the other party’s claims. While indemnification provisions typically do not include a contractual
maximum on the company’s payment, the company’s obligations under these agreements may be limited in terms of time and/or
nature of claim, and in some instances, the company may have recourse against third parties for certain payments made by the
company.
It is not possible to predict the maximum potential amount of future payments under these or similar agreements due to the conditional
nature of the company’s obligations and the unique facts and circumstances involved in each particular agreement. Historically,
payments made by the company under these agreements have not had a material effect on the company’s business, financial condition
or results of operations.
In addition, the company guarantees certain loans and financial commitments. The maximum potential future payment under these
financial guarantees and the fair value of these guarantees recognized in the Consolidated Balance Sheet at December 31, 2020 and
2019 was not material.
Changes in the company’s warranty liability for standard warranties, which are included in other accrued expenses and liabilities and
other liabilities in the Consolidated Balance Sheet, and for extended warranty contracts, which are included in deferred income in the
Consolidated Balance Sheet, are presented in the following tables.
Standard Warranty Liability
($ in millions)
Balance at January 1
Current period accruals
Accrual adjustments to reflect experience
Charges incurred
Balance at December 31
Extended Warranty Liability (Deferred Income)
($ in millions)
Balance at January 1
Revenue deferred for new extended warranty contracts
Amortization of deferred revenue
Other*
Balance at December 31
Current portion
Noncurrent portion
* Other consists primarily of foreign currency translation adjustments.
2020
$ 113
83
(16)
(96)
$ 83
2020
$ 477
166
(224)
6
$ 425
$ 204
$ 221
2019
$ 118
111
(1)
(115)
$ 113
2019
$ 533
198
(253)
(2)
$ 477
$ 227
$ 250
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
119
Contingencies
As a company with a substantial employee population and with clients in more than 175 countries, IBM is involved, either as plaintiff
or defendant, in a variety of ongoing claims, demands, suits, investigations, tax matters and proceedings that arise from time to time
in the ordinary course of its business. The company is a leader in the information technology industry and, as such, has been and will
continue to be subject to claims challenging its IP rights and associated products and offerings, including claims of copyright and patent
infringement and violations of trade secrets and other IP rights. In addition, the company enforces its own IP against infringement,
through license negotiations, lawsuits or otherwise. Further, given the rapidly evolving external landscape of cybersecurity, privacy and
data protection laws, regulations and threat actors, the company or its clients could become subject to actions or proceedings in various
jurisdictions. Also, as is typical for companies of IBM’s scope and scale, the company is party to actions and proceedings in various
jurisdictions involving a wide range of labor and employment issues (including matters related to contested employment decisions,
country-specific labor and employment laws, and the company’s pension, retirement and other benefit plans), as well as actions with
respect to contracts, product liability, securities, foreign operations, competition law and environmental matters. These actions may
be commenced by a number of different parties, including competitors, clients, current or former employees, government and
regulatory agencies, stockholders and representatives of the locations in which the company does business. Some of the actions to
which the company is party may involve particularly complex technical issues, and some actions may raise novel questions under the
laws of the various jurisdictions in which these matters arise.
The company records a provision with respect to a claim, suit, investigation or proceeding when it is probable that a liability has been
incurred and the amount of the loss can be reasonably estimated. Any recorded liabilities, including any changes to such liabilities for
the years ended December 31, 2020, 2019 and 2018 were not material to the Consolidated Financial Statements.
In accordance with the relevant accounting guidance, the company provides disclosures of matters for which the likelihood of material
loss is at least reasonably possible. In addition, the company also discloses matters based on its consideration of other matters and
qualitative factors, including the experience of other companies in the industry, and investor, customer and employee relations
considerations.
With respect to certain of the claims, suits, investigations and proceedings discussed herein, the company believes at this time that
the likelihood of any material loss is remote, given, for example, the procedural status, court rulings, and/or the strength of the
company’s defenses in those matters. With respect to the remaining claims, suits, investigations and proceedings discussed in this
note, except as specifically discussed herein, the company is unable to provide estimates of reasonably possible losses or range of
losses, including losses in excess of amounts accrued, if any, for the following reasons. Claims, suits, investigations and proceedings
are inherently uncertain, and it is not possible to predict the ultimate outcome of these matters. It is the company’s experience that
damage amounts claimed in litigation against it are unreliable and unrelated to possible outcomes, and as such are not meaningful
indicators of the company’s potential liability. Further, the company is unable to provide such an estimate due to a number of other
factors with respect to these claims, suits, investigations and proceedings, including considerations of the procedural status of the
matter in question, the presence of complex or novel legal theories, and/or the ongoing discovery and development of information
important to the matters. The company reviews claims, suits, investigations and proceedings at least quarterly, and decisions are made
with respect to recording or adjusting provisions and disclosing reasonably possible losses or range of losses (individually or in the
aggregate), to reflect the impact and status of settlement discussions, discovery, procedural and substantive rulings, reviews by
counsel and other information pertinent to a particular matter.
Whether any losses, damages or remedies finally determined in any claim, suit, investigation or proceeding could reasonably have a
material effect on the company’s business, financial condition, results of operations or cash flows will depend on a number of variables,
including: the timing and amount of such losses or damages; the structure and type of any such remedies; the significance of the impact
any such losses, damages or remedies may have in the Consolidated Financial Statements; and the unique facts and circumstances of
the particular matter that may give rise to additional factors. While the company will continue to defend itself vigorously, it is possible
that the company’s business, financial condition, results of operations or cash flows could be affected in any particular period by the
resolution of one or more of these matters.
The following is a summary of the more significant legal matters involving the company.
The company is a defendant in an action filed on March 6, 2003 in state court in Salt Lake City, Utah by the SCO Group (SCO v. IBM).
The company removed the case to Federal Court in Utah. Plaintiff is an alleged successor in interest to some of AT&T’s UNIX IP rights,
and alleges copyright infringement, unfair competition, interference with contract and breach of contract with regard to the company’s
distribution of AIX and Dynix and contribution of code to Linux and the company has asserted counterclaims. On September 14, 2007,
plaintiff filed for bankruptcy protection, and all proceedings in this case were stayed. The court in another suit, the SCO Group, Inc. v.
Novell, Inc., held a trial in March 2010. The jury found that Novell is the owner of UNIX and UnixWare copyrights; the judge
subsequently ruled that SCO is obligated to recognize Novell’s waiver of SCO’s claims against IBM and Sequent for breach of UNIX
license agreements. On August 30, 2011, the Tenth Circuit Court of Appeals affirmed the district court’s ruling and denied SCO’s appeal
of this matter. In June 2013, the Federal Court in Utah granted SCO’s motion to reopen the SCO v. IBM case. In February 2016, the
120
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
Federal Court ruled in favor of IBM on all of SCO’s remaining claims, and SCO appealed. On October 30, 2017, the Tenth Circuit Court
of Appeals affirmed the dismissal of all but one of SCO’s remaining claims, which was remanded to the Federal Court in Utah.
On March 9, 2017, the Commonwealth of Pennsylvania’s Department of Labor and Industry sued IBM in Pennsylvania state court
regarding a 2006 contract for the development of a custom software system to manage the Commonwealth’s unemployment insurance
benefits programs. The matter is pending in a Pennsylvania court.
In December 2017, CIS General Insurance Limited (CISGIL) sued IBM UK regarding a contract entered into by IBM UK and CISGIL in
2015 to implement and operate an IT insurance platform. The contract was terminated by IBM UK in July 2017 for non-payment by
CISGIL. CISGIL alleges wrongful termination, breach of contract and breach of warranty. The matter is pending in the London High
Court with trial beginning in January 2020.
In May 2015, a putative class action was commenced in the United States District Court for the Southern District of New York related
to the company’s October 2014 announcement that it was divesting its global commercial semiconductor technology business, alleging
violations of the Employee Retirement Income Security Act (ERISA). Management’s Retirement Plans Committee and three current or
former IBM executives are named as defendants. On September 29, 2017, the Court granted the defendants’ motion to dismiss the
first amended complaint. On December 10, 2018, the Second Circuit Court of Appeals reversed the District Court order. On January
14, 2020, the Supreme Court of the United States vacated the decision and remanded the case to the Second Circuit. On June 22,
2020, the Second Circuit reinstated its prior decision and remanded the case to the District Court. In February 2021, the parties
reached an agreement to settle the matter subject to court approval.
The company is party to, or otherwise involved in, proceedings brought by U.S. federal or state environmental agencies under the
Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), known as “Superfund,” or laws similar to CERCLA.
Such statutes require potentially responsible parties to participate in remediation activities regardless of fault or ownership of sites.
The company is also conducting environmental investigations, assessments or remediations at or in the vicinity of several current or
former operating sites globally pursuant to permits, administrative orders or agreements with country, state or local environmental
agencies, and is involved in lawsuits and claims concerning certain current or former operating sites.
The company is also subject to ongoing tax examinations and governmental assessments in various jurisdictions. Along with many
other U.S. companies doing business in Brazil, the company is involved in various challenges with Brazilian tax authorities regarding
non-income tax assessments and non-income tax litigation matters. The total potential amount related to all these matters for all
applicable years is approximately $750 million. The company believes it will prevail on these matters and that this amount is not a
meaningful indicator of liability.
NOTE S. EQUITY ACTIVITY
The authorized capital stock of IBM consists of 4,687,500,000 shares of common stock with a $.20 per share par value, of which
892,653,424 shares were outstanding at December 31, 2020, and 150,000,000 shares of preferred stock with a $.01 per share par
value, none of which were outstanding at December 31, 2020.
Stock Repurchases
The Board of Directors authorizes the company to repurchase IBM common stock. The company suspended its share repurchase
program effective with the close of the Red Hat acquisition on July 9, 2019 in order to focus on reducing debt related to the acquisition.
The company repurchased 9,979,516 common shares at a cost of $1,331 million, and 32,949,233 common shares at a cost of $4,447
million in 2019 and 2018, respectively. These amounts reflect transactions executed through December 31 of each year. Actual cash
disbursements for repurchased shares may differ due to varying settlement dates for these transactions. At December 31, 2020,
$2,008 million of Board common stock repurchase authorization was available.
Other Stock Transactions
The company issued the following shares of common stock as part of its stock-based compensation plans and employees stock
purchase plan: 4,972,028 shares in 2020, 4,569,917 shares in 2019, and 3,998,245 shares in 2018. The company issued 2,934,907
treasury shares in 2020, 2,041,347 treasury shares in 2019 and 424,589 treasury shares in 2018, as a result of restricted stock unit
releases and exercises of stock options by employees of certain acquired businesses and by non-U.S. employees. Also, as part of the
company’s stock-based compensation plans, 2,363,966 common shares at a cost of $302 million, 2,000,704 common shares at a cost
of $272 million, and 1,173,416 common shares at a cost of $171 million in 2020, 2019 and 2018, respectively, were remitted by
employees to the company in order to satisfy minimum statutory tax withholding requirements. These amounts are included in the
treasury stock balance in the Consolidated Balance Sheet and the Consolidated Statement of Equity.
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
121
Reclassifications and Taxes Related to Items of Other Comprehensive Income
($ in millions)
For the year ended December 31, 2020:
Other comprehensive income/(loss)
Foreign currency translation adjustments
Net changes related to available-for-sale securities
Unrealized gains/(losses) arising during the period
Reclassification of (gains)/losses to other (income) and expense
Total net changes related to available-for-sale securities
Unrealized gains/(losses) on cash flow hedges
Unrealized gains/(losses) arising during the period
Reclassification of (gains)/losses to:
Cost of services
Cost of sales
Cost of financing
SG&A expense
Other (income) and expense
Interest expense
Total unrealized gains/(losses) on cash flow hedges
Retirement-related benefit plans(1)
Prior service costs/(credits)
Net (losses)/gains arising during the period
Curtailments and settlements
Amortization of prior service (credits)/costs
Amortization of net (gains)/losses
Total retirement-related benefit plans
Other comprehensive income/(loss)
Before Tax
Tax (Expense)/
Amount
Benefit
Net of Tax
Amount
$(1,500)
$ 535
$ (965)
$
$
(1)
—
(1)
0
$
—
0
$
$
$
0
—
0
$ (349)
$ 89
$ (261)
(23)
(2)
27
0
(101)
78
$ (370)
$
(37)
(1,678)
52
13
2,314
$
664
$(1,206)
6
1
(7)
0
25
(20)
$ 94
$
7
295
(14)
(1)
(451)
$(163)
$ 466
(18)
(2)
20
0
(75)
58
$ (277)
$
(29)
(1,383)
38
12
1,863
$ 501
$ (740)
(1) These AOCI components are included in the computation of net periodic pension cost. Refer to note V, “Retirement-Related Benefits,” for additional
information.
($ in millions)
For the year ended December 31, 2019:
Other comprehensive income/(loss)
Foreign currency translation adjustments
Net changes related to available-for-sale securities
Unrealized gains/(losses) arising during the period
Reclassification of (gains)/losses to other (income) and expense
Total net changes related to available-for-sale securities
Unrealized gains/(losses) on cash flow hedges
Unrealized gains/(losses) arising during the period
Reclassification of (gains)/losses to:
Cost of services
Cost of sales
Cost of financing
SG&A expense
Other (income) and expense
Interest expense
Total unrealized gains/(losses) on cash flow hedges
Retirement-related benefit plans(1)
Prior service costs/(credits)
Net (losses)/gains arising during the period
Curtailments and settlements
Amortization of prior service (credits)/costs
Amortization of net (gains)/losses
Total retirement-related benefit plans
Other comprehensive income/(loss)
Before Tax
Tax (Expense)/
Amount
Benefit
Net of Tax
Amount
$ (39)
$ 29
$ (10)
$
$
1
—
1
$
$
0
—
0
$
$
1
—
1
$ (689)
$ 167
$ (522)
(68)
(51)
89
(53)
(39)
197
$ (614)
$ (73)
(120)
41
(9)
1,843
$1,681
$1,029
17
15
(22)
14
10
(50)
$ 151
$ 10
52
(12)
5
(371)
$(316)
$(136)
(50)
(37)
67
(39)
(29)
148
$ (463)
$ (63)
(68)
29
(4)
1,471
$1,365
$ 893
(1) These AOCI components are included in the computation of net periodic pension cost. Refer to note V, “Retirement-Related Benefits,” for additional
information.
122
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
($ in millions)
For the year ended December 31, 2018:
Other comprehensive income/(loss)
Foreign currency translation adjustments
Net changes related to available-for-sale securities
Unrealized gains/(losses) arising during the period
Reclassification of (gains)/losses to other (income) and expense
Total net changes related to available-for-sale securities
Unrealized gains/(losses) on cash flow hedges
Unrealized gains/(losses) arising during the period
Reclassification of (gains)/losses to:
Cost of services
Cost of sales
Cost of financing
SG&A expense
Other (income) and expense
Interest expense
Total unrealized gains/(losses) on cash flow hedges
Retirement-related benefit plans(1)
Prior service costs/(credits)
Net (losses)/gains arising during the period
Curtailments and settlements
Amortization of prior service (credits)/costs
Amortization of net (gains)/losses
Total retirement-related benefit plans
Other comprehensive income/(loss)
Before Tax
Tax (Expense)/
Amount
Benefit
Net of Tax
Amount
$ (730)
$(172)
$ (902)
$
$
(2)
—
(2)
$
$
1
—
1
$
$
(1)
—
(1)
$ (136)
$ 43
$
(93)
(30)
(8)
75
0
341
71
$ 313
$ (182)
(2,517)
11
(73)
2,966
$ 204
$ (215)
8
3
(19)
0
(86)
(18)
$ (69)
$ 31
576
(2)
5
(632)
$ (21)
$(262)
(22)
(5)
56
0
255
53
$ 244
$ (151)
(1,941)
9
(68)
2,334
$ 184
$ (476)
(1) These AOCI components are included in the computation of net periodic pension cost. Refer to note V, “Retirement-Related Benefits,” for additional
information.
Net Change Net Unrealized
Retirement- Gains/(Losses)
on Available-
Related
Benefit
Accumulated
Other
For-Sale Comprehensive
Securities Income/(Loss)
$(26,592)
(2,422)
(3,089)
$ 3
(2)
(1)
Accumulated Other Comprehensive Income/(Loss) (net of tax)
($ in millions)
Net Unrealized
Gains/(Losses)
on Cash Flow
Foreign
Currency
Translation
December 31, 2017
Cumulative effect of a change in accounting principle**
Other comprehensive income before reclassifications
Amount reclassified from accumulated other
comprehensive income
Total change for the period
December 31, 2018
Other comprehensive income before reclassifications
Amount reclassified from accumulated other
comprehensive income
Total change for the period
December 31, 2019
Other comprehensive income before reclassifications
Amount reclassified from accumulated other
comprehensive income
Total change for the period
December 31, 2020
Hedges Adjustments *
$ 35
5
(93)
$ (2,834)
46
(902)
Plans
$(23,796)
(2,471)
(2,092)
337
244
284
(522)
59
(463)
(179)
(261)
—
(902)
(3,690)
(10)
—
(10)
(3,700)
(965)
2,276
184
(26,083)
(131)
1,496
1,365
(24,718)
(1,412)
(16)
$(277)
$(456)
—
$ (965)
$ (4,665)
1,914
$
501
$(24,216)
* Foreign currency translation adjustments are presented gross except for any associated hedges which are presented net of tax.
** Reflects the adoption of FASB guidance. Refer to note B, “Accounting Changes.”
—
(1)
0
1
—
1
0
0
—
$ 0
$ 0
2,612
(476)
(29,490)
(663)
1,556
893
(28,597)
(2,638)
1,898
$
(740)
$(29,337)
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
123
NOTE T. 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 company’s 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.
In the Consolidated Balance Sheet, 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 for the right to reclaim or the obligation to return cash collateral at December 31,
2020 and $26 million was recognized in other accounts receivable for the right to reclaim cash collateral at December 31, 2019. The
company restricts the use of cash collateral received to rehypothecation, and therefore reports it in restricted cash in the Consolidated
Balance Sheet. No amount was rehypothecated at December 31, 2020 and 2019. Additionally, if derivative exposures covered by a
qualifying master netting agreement had been netted in the Consolidated Balance Sheet at December 31, 2020 and 2019, the total
derivative asset and liability positions each would have been reduced by $213 million and $194 million, respectively.
In its hedging programs, the company may use forward contracts, futures contracts, interest-rate swaps, cross-currency swaps, equity
swaps, and options 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 to fund its operations and financing business. 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 may use 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 December 31, 2020 and 2019, the
total notional amount of the company’s interest-rate swaps was $3.0 billion at both periods. The weighted-average remaining maturity
of these instruments at December 31, 2020 and 2019 was approximately 1.2 years and 2.2 years, respectively. These interest-rate
contracts were accounted for as fair value hedges. The company did not have any cash flow hedges relating to this program outstanding
at December 31, 2020 and 2019.
Forecasted Debt Issuance
The company is exposed to interest rate volatility on future debt issuances. To manage this risk, the company may use instruments
such as forward starting interest-rate swaps to lock in the rate on the interest payments related to the forecasted debt issuances. In
the second quarter of 2019, the company issued an aggregate of $20 billion of indebtedness (refer to note P, “Borrowings,” for
additional information). Following the receipt of the net proceeds from this debt offering, the company terminated $5.5 billion of
forward starting interest-rate swaps. There were no instruments outstanding at December 31, 2020 and 2019.
In connection with cash flow hedges of forecasted interest payments related to the company’s borrowings, the company recorded net
losses of $174 million and net losses of $192 million (before taxes) at December 31, 2020 and 2019, respectively, in AOCI. The
company estimates that $18 million (before taxes) of the deferred net losses on derivatives in AOCI at December 31, 2020 will be
reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying interest
payments.
Foreign Exchange Risk
Long-Term Investments in Foreign Subsidiaries (Net Investment)
A large portion of the company’s 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. At December 31, 2020 and 2019, the carrying value of debt
designated as hedging instruments was $16.4 billion and $7.3 billion, respectively. The $9.0 billion increase is part of the company’s
risk management strategy and is primarily the result of the designation of new issuances in the first quarter of 2020 and previously
hedged Euro-denominated debt. The company also uses cross-currency swaps and foreign exchange forward contracts for this risk
management purpose. At December 31, 2020 and 2019, the total notional amount of derivative instruments designated as net
investment hedges was $7.2 billion and $7.9 billion, respectively. At December 31, 2020 and 2019, the weighted-average remaining
maturity of these instruments was approximately 0.3 years and 0.1 years, respectively.
124
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
Anticipated Royalties and Cost Transactions
The company’s operations generate significant nonfunctional currency, third-party vendor payments and intercompany payments for
royalties and goods and services among the company’s non-U.S. subsidiaries and with the 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 remaining length
of time over which the company has hedged its exposure to the variability in future cash flows is approximately four years. At
December 31, 2020 and 2019, the total notional amount of forward contracts designated as cash flow hedges of forecasted royalty
and cost transactions was $8.0 billion and $9.7 billion, respectively. At December 31, 2020 and 2019, the weighted-average remaining
maturity of these instruments was approximately 0.7 years and 0.8 years, respectively.
At December 31, 2020 and 2019, in connection with cash flow hedges of anticipated royalties and cost transactions, the company
recorded net losses of $192 million and net gains of $145 million (before taxes), respectively, in AOCI. The company estimates that
$285 million (before taxes) of deferred net losses on derivatives in AOCI at December 31, 2020 will be reclassified to net income within
the next 12 months, providing an offsetting economic impact against the underlying anticipated transactions.
Foreign Currency Denominated Borrowings
The company is exposed to exchange rate volatility on foreign currency denominated debt. To manage this risk, the company employs
cross-currency swaps to convert fixed-rate foreign currency denominated debt to fixed-rate debt denominated in the functional
currency of the borrowing entity. These swaps are accounted for as cash flow hedges. At December 31, 2020, the maximum length of
time remaining over which the company has hedged its exposure was approximately seven years. At December 31, 2020 and 2019,
the total notional amount of cross-currency swaps designated as cash flow hedges of foreign currency denominated debt was $1.5
billion and $8.2 billion, respectively. The primary driver of the $6.7 billion decrease in cross-currency swaps is part of the company’s
risk management strategy to use the previously hedged foreign currency denominated debt as a hedge of net investment in foreign
subsidiaries.
At December 31, 2020 and 2019, in connection with cash flow hedges of foreign currency denominated borrowings, the company
recorded net losses of $236 million and net losses of $185 million (before taxes), respectively, in AOCI. The company estimates that
$23 million (before taxes) of deferred net losses on derivatives in AOCI at December 31, 2020 will be reclassified to net income within
the next 12 months, providing an offsetting economic impact against the underlying exposure.
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 company’s 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 Income
Statement. At December 31, 2020 and 2019, the total notional amount of derivative instruments in economic hedges of foreign
currency exposure was $6.8 billion and $7.1 billion, respectively.
Equity Risk Management
The company is exposed to market price changes in certain broad market indices and in the company’s own stock primarily related to
certain obligations to employees. Changes in the overall value of these employee compensation obligations are recorded in SG&A
expense in the Consolidated Income Statement. 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 company’s common stock, and are
recorded at fair value with gains or losses also reported in SG&A expense in the Consolidated Income Statement. At December 31,
2020 and 2019, the total notional amount of derivative instruments in economic hedges of these compensation obligations was $1.3
billion at both periods.
Cumulative Basis Adjustments for Fair Value Hedges
At December 31, 2020 and 2019, the following amounts were recorded in the Consolidated Balance Sheet related to cumulative basis
adjustments for fair value hedges:
($ in millions)
At December 31:
Short-term debt:
Carrying amount of the hedged item
Cumulative hedging adjustments included in the carrying amount—assets/(liabilities)
Long-term debt:
Carrying amount of the hedged item
Cumulative hedging adjustments included in the carrying amount—assets/(liabilities)*
2020
2019
$ (1,302)
(2)
$
—
—
(2,097)
(424)
(3,411)
(440)
* Includes ($353) million and ($404) million of hedging adjustments on discontinued hedging relationships at December 31, 2020 and 2019, respectively.
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
125
The Effect of Derivative Instruments in the Consolidated Income Statement
The total amounts of income and expense line items presented in the Consolidated Income Statement in which the effects of fair value
hedges, cash flow hedges, net investment hedges and derivatives not designated as hedging instruments are recorded and the total
effect of hedge activity on these income and expense line items are as follows:
2020
$ 30,404
6,934
708
23,082
861
1,288
Total
2019
$ 32,491
7,263
904
20,604
(968)
1,344
Gains/(Losses) of
Total Hedge Activity
2018
2020
2019
$ 33,687
7,835
1,132
19,366
1,152
723
$ 23
2
12
141
101
35
$ 68
51
(42)
267
(15)
(93)
2018
$ 30
8
(6)
(116)
(434)
(6)
Gain/(Loss) Recognized in Consolidated Income Statement
Consolidated
Income Statement
Recognized on
Derivatives
Attributable to Risk
Being Hedged (2)
Line Item 2020 2019 2018 2020 2019 2018
Cost of financing
Interest expense
$ 20 $ 44 $ (61)
(58)
98
58
$ 4 $ (32) $ 97
92
11
(71)
Other (income)
and expense
SG&A expense
(93)
(53)
1
(116)
214
142
$ 220 $ 302 $ (327)
N/A
N/A
N/A
N/A
N/A
N/A
$ 14 $ (103) $ 189
($ in millions)
For the year ended December 31:
Cost of services
Cost of sales
Cost of financing
SG&A expense
Other (income) and expense
Interest expense
($ in millions)
For the year ended December 31:
Derivative instruments in fair value hedges (1)
Interest rate contracts
Derivative instruments not designated as hedging
instruments
Foreign exchange contracts
Equity contracts
Total
($ in millions)
For the year ended
December 31:
Derivative instruments in cash
flow hedges
Interest rate contracts
Foreign exchange contracts
Gain/(Loss) Recognized in Consolidated Income Statement and Other Comprehensive Income
Recognized in OCI
2020 2019 2018
Consolidated
Income Statement
Reclassified
from AOCI
Amounts Excluded from
Effectiveness Testing (3)
Line Item 2020 2019 2018 2020
2019
2018
$
— $ (168) $ (35) Cost of financing $ (5) $
Interest expense
(349) (521) (101) Cost of services
Cost of sales
Cost of financing
SG&A expense
Other (income)
and expense
Interest expense
(13)
23
2
(23)
0
(3) $ —
—
(8)
30
68
8
51
(75)
(86)
0
53
$ —
—
—
—
—
—
$ —
—
—
—
—
—
$ —
—
—
—
—
—
101
(65) (190)
39 (341)
(71)
—
—
—
—
—
—
Instruments in net investment
hedges (4)
Foreign exchange contracts
(2,127)
Total
(1) The amount includes changes in clean fair values of the derivative instruments in fair value hedging relationships and the periodic accrual for coupon
$ (2,477) $ (784) $ 549
(95) 686 Cost of financing
Interest expense
—
—
—
—
$ 21 $ (75) $ (449)
—
—
16
45
$60
35
77
$ 112
33
31
$64
payments required under these derivative contracts.
(2) The amount includes basis adjustments to the carrying value of the hedged item recorded during the period and amortization of basis adjustments
recorded on de-designated hedging relationships during the period.
(3) The company’s policy is to recognize all fair value changes in amounts excluded from effectiveness testing in net income each period.
(4) Instruments in net investment hedges include derivative and non-derivative instruments with the amounts recognized in OCI providing an offset to the
translation of foreign subsidiaries.
N/A–Not applicable
For the years ending December 31, 2020, 2019 and 2018, there were no material gains or losses excluded from the assessment of
hedge effectiveness (for fair value or cash flow hedges), or associated with an underlying exposure that did not or was not expected to
occur (for cash flow hedges); nor are there any anticipated in the normal course of business.
126
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
NOTE U. STOCK-BASED COMPENSATION
The following table presents total stock-based compensation cost included in income from continuing operations.
($ in millions)
For the year ended December 31:
Cost
SG&A expense
RD&E expense
Pre-tax stock-based compensation cost
Income tax benefits
Net stock-based compensation cost
2020
2019
$ 153
586
198
937
(213)
$ 724
$ 100
453
126
679
(155)
$ 524
2018
$ 82
361
67
510
(116)
$ 393
Red Hat was acquired on July 9, 2019. The 2020 results include a full year of compensation expense for issuances and conversions of
stock-based compensation for Red Hat compared to six months in 2019.
The company’s total unrecognized compensation cost related to non-vested awards at December 31, 2020 was $1.4 billion and is
expected to be recognized over a weighted-average period of approximately 2.2 years.
Capitalized stock-based compensation cost was not material at December 31, 2020, 2019 and 2018.
Incentive Awards
Stock-based incentive awards are provided to employees under the terms of the company’s long-term performance plans (the Plans).
The Plans are administered by the Executive Compensation and Management Resources Committee of the Board of Directors. Awards
available under the Plans principally include restricted stock units, performance share units, stock options or any combination thereof.
There were 293 million shares originally authorized to be awarded under the company's existing Plans and 66 million shares granted
under previous plans that, if and when those awards were cancelled, could be reissued under the existing Plans. At December 31,
2020, 103 million unused shares were available to be granted.
Stock Awards
Stock awards are made in the form of Restricted Stock Units (RSUs), including Retention Restricted Stock Units (RRSUs), or
Performance Share Units (PSUs).
The following table summarizes RSU and PSU activity under the Plans during the years ended December 31, 2020, 2019 and 2018.
RSUs
PSUs
Weighted-Average
Weighted-Average
Grant Price Number of Units
Grant Price
Balance at January 1, 2018
Awards granted
Awards released
Awards canceled/forfeited/performance adjusted
Balance at December 31, 2018
Awards granted
Awards released
Awards canceled/forfeited/performance adjusted
Balance at December 31, 2019
Awards granted
Awards released
Awards canceled/forfeited/performance adjusted
Balance at December 31, 2020
$ 141
121
148
139
$ 130
119
136
128
$ 123
115
126
121
$ 117
8,555,263
4,806,790
(2,579,962)
(979,387)
9,802,704
5,650,861
(3,145,016)
(981,921)
11,326,628
10,651,955
(3,781,240)
(1,300,639)
16,896,704
$144
130
152
147
$136
117
140
131
$126
117
137
125
$120
Number of Units
2,649,313
909,140
(666,244)
(472,514) *
2,419,695 **
1,395,534
(846,672)
(112,107) *
2,856,450 **
1,582,666
(630,974)
(256,642) *
3,551,500 **
* Includes adjustments of (70,089), (8,544) and (328,120) PSUs for 2020, 2019 and 2018, respectively, because final performance metrics were above or
below specified targets.
** Represents the number of shares expected to be issued based on achievement of grant date performance targets. The actual number of shares issued
will depend on final performance against specified targets over the vesting period.
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
127
The total fair value of RSUs and PSUs granted and vested during the years ended December 31, 2020, 2019 and 2018 were as follows:
($ in millions)
For the year ended December 31:
RSUs
Granted
Vested
PSUs
Granted
Vested
2020
2019
2018
$ 1,220
478
$ 186
86
$ 674
428
$ 164
118
$ 583
381
$ 118
101
In connection with vesting and release of RSUs and PSUs, the tax benefits realized by the company for the years ended December 31,
2020, 2019 and 2018 were $139 million, $131 million and $117 million, respectively.
Stock Options
In 2016, the company made one grant of 1.5 million premium-priced stock options. As of December 31, 2020, these options were
vested with a weighted-average exercise price of $140 per share and had a remaining weighted-average contractual life of
approximately 5.1 years. The options are exercisable within a range of $129 to $154. These vested options had no intrinsic value as of
December 31, 2020.
The company has not granted options since 2016. No material stock options were exercised, forfeited or canceled during the years
ended December 31, 2020, 2019 and 2018.
The company settles employee stock option exercises primarily with newly issued common shares and, occasionally, with treasury
shares. Total treasury shares held at December 31, 2020 and 2019 were approximately 1,350 million and 1,351 million shares,
respectively.
Acquisitions
In connection with the acquisition of Red Hat in July 2019, the company issued and assumed 6.4 million stock awards with a fair value
of $845 million. A share conversion ratio of 1.35 was applied to convert Red Hat’s outstanding equity awards for Red Hat’s common
stock into IBM stock awards. At December 31, 2020, there were 2.1 million of these stock awards outstanding with a weighted-average
grant price of $140 per share.
In connection with various other acquisition transactions, there was an additional 0.1 million stock options outstanding at
December 31, 2020, as a result of the company’s conversion of stock-based awards previously granted by acquired entities. The
weighted-average exercise price of these awards was $44 per share.
IBM Employees Stock Purchase Plan
The company maintains a non-compensatory Employees Stock Purchase Plan (ESPP). The ESPP enables eligible participants to
purchase shares of IBM common stock at a 5 percent discount off the average market price on the day of purchase through payroll
deductions of up to 10 percent of eligible compensation. Eligible compensation includes any compensation received by the employee
during the year. The ESPP provides for semi-annual offering periods during which shares may be purchased and continues as long as
shares remain available under the ESPP, unless terminated earlier at the discretion of the Board of Directors. Individual ESPP
participants are restricted from purchasing more than $25,000 of common stock in one calendar year or 1,000 shares in an offering
period.
Employees purchased approximately one million shares under the ESPP during each year ended December 31, 2020, 2019 and 2018.
Cash dividends declared and paid by the company on its common stock also include cash dividends on the company stock purchased
through the ESPP. Dividends are paid on full and fractional shares and can be reinvested. The company stock purchased through the
ESPP is considered outstanding and is included in the weighted-average outstanding shares for purposes of computing basic and
diluted earnings per share.
Approximately 17.8 million shares were available for purchase under the ESPP at December 31, 2020.
128
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
NOTE V. RETIREMENT-RELATED BENEFITS
Description of Plans
IBM sponsors the following retirement-related plans/benefits:
Plan
Eligibility
Funding
Benefit Calculation
Other
U.S. Defined
Benefit (DB)
Pension Plans
Qualified
Personal
Pension Plan
(PPP)
U.S. regular, full-
time and part-time
employees hired
prior to January 1,
2005
Company contributes to
irrevocable trust fund,
held for sole benefit of
participants and
beneficiaries
Vary based on the participant:
Benefit accruals ceased
December 31, 2007
Five-year, final pay formula
based on salary, years of
service, mortality and other
participant-specific factors
Unfunded, provides
benefits in excess of IRS
limitations for qualified
plans
Cash balance formula based
on percentage of employees’
annual salary, as well as an
interest crediting rate
Excess Personal
Pension Plan
(PPP)
Supplemental
Executive
Retention Plan
(Retention Plan)
401(k) Plus
U.S. Defined
Contribution (DC)
Plans (1)
Eligible U.S.
executives
Unfunded
U.S. regular, full-
time and part-time
employees
All contributions are
made in cash and
invested in accordance
with participants’
investment elections
Based on average
earnings, years of service and
age at termination of
employment
Dollar-for-dollar match,
generally 5 or 6 percent of
eligible compensation and
automatic matching of 1, 2 or
4 percent of eligible
compensation, depending on
date of hire
Company match and automatic
contributions (at the same rate
under 401(k) Plus Plan) on
eligible compensation deferred
and on compensation earned
in excess of the IRC pay limit.
The percentage varies
depending on eligibility
and years of service
Employees generally
receive contributions after
one year of service
Employees generally
receive contributions after
one year of service.
Amounts deferred into the
Plan, including company
contributions, are
recorded as liabilities
Varies based on plan design
formulas and eligibility
requirements
Since January 1, 2004,
new hires are not eligible
for these benefits
Excess 401(k)
Plus
U.S. employees
whose eligible
compensation is
expected to exceed
IRS compensation
limit for qualified
plans
U.S. Nonpension
Postretirement
Benefit Plan
Nonpension
Postretirement
Plan
Non-U.S. Plans
DB or DC
Medical and dental
benefits for eligible
U.S. retirees and
eligible dependents,
as well as life
insurance for eligible
U.S. retirees
Eligible regular
employees in certain
non-U.S.
subsidiaries or
branches
Unfunded, non-qualified
amounts deferred are
record-keeping
(notional) accounts and
are not held in trust for
the participants, but may
be invested in
accordance with
participants’ investment
elections (under the
401(k) Plus Plan options)
Company contributes to
irrevocable trust fund,
held for the sole benefit
of participants and
beneficiaries
Company deposits funds
under various fiduciary-
type arrangements,
purchases annuities
under group contracts or
provides reserves for
these plans
Based either on years of
service and the employee’s
compensation (generally
during a fixed number of years
immediately before
retirement) or on annual
credits
In certain countries,
benefit accruals have
ceased and/or have been
closed to new hires as of
various dates
Nonpension
Postretirement
Plan
Medical and dental
benefits for eligible
non-U.S. retirees
and eligible
dependents, as well
as life insurance for
certain eligible non-
U.S. retirees
Primarily unfunded
except for a few select
countries where the
company contributes to
irrevocable trust funds
held for the sole benefit
of participants and
beneficiaries
Varies based on plan design
formulas and eligibility
requirements by country
Most non-U.S. retirees are
covered by local
government sponsored
and administered
programs
(1) Matching and automatic contributions are made once at the end of the year for employees that are employed as of December 15 of the plan year.
Contributions may be made for certain types of separations that occur prior to December 15.
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
129
Plan Financial Information
Summary of Financial Information
The following table presents a summary of the total retirement-related benefits net periodic (income)/cost recorded in the
Consolidated Income Statement.
($ in millions)
For the year ended December 31:
Defined benefit pension plans
Retention Plan
Total defined benefit pension plans
(income)/cost
IBM 401(k) Plus Plan and non-U.S. plans
Excess 401(k)
Total defined contribution plans cost
Nonpension postretirement benefit plans
U.S. Plans
2018
2020 2019
$167 $(153) $ 542 $1,178 $ 955 $ 1,284 $1,345 $ 803 $1,827
17
Non-U.S. Plans
2018
2018
2020
2019
2020
2019
Total
17
11
11
11
11
—
—
—
$178 $(142) $ 559 $1,178 $ 955 $ 1,284 $1,355 $ 813 $1,843
$585 $ 588 $ 588 $ 447 $ 427 $ 412 $1,032 $1,015 $1,000
24
$612 $ 613 $ 612 $ 447 $ 427 $ 412 $1,058 $1,040 $1,024
24
27
26
26
27
—
—
—
cost
$145 $ 154 $ 147 $
58 $
65 $
51 $ 203 $ 219 $ 198
Total retirement-related benefits net
periodic cost
$934 $ 624 $1,319 $1,683 $1,448 $ 1,747 $2,617 $2,072 $3,066
The following table presents a summary of the total PBO for defined benefit pension plans, APBO for nonpension postretirement benefit
plans, fair value of plan assets and the associated funded status recorded in the Consolidated Balance Sheet.
($ in millions)
At December 31:
U.S. Plans
Overfunded plans
Qualified PPP
Underfunded plans
Benefit Obligations
Fair Value of Plan Assets
2020
2019
2020
2019
Funded Status*
2020
2019
$50,375 $ 48,471
$54,386
$51,784 $ 4,011 $ 3,313
Excess PPP
Retention Plan
Nonpension postretirement benefit plan
Total underfunded U.S. plans
$ 1,556 $ 1,473
288
3,857
$ 5,653 $ 5,618
306
3,791
$
$
—
—
15
15
$
$
— $ (1,556) $ (1,473)
(288)
—
3
(3,854)
3 $ (5,638) $ (5,615)
(306)
(3,776)
Non-U.S. Plans
Overfunded plans
Qualified defined benefit pension plans**
Nonpension postretirement benefit plans
Total overfunded non-U.S. plans
Underfunded plans
Qualified defined benefit pension plans**
Nonqualified defined benefit pension plans
Nonpension postretirement benefit plans
Total underfunded non-U.S. plans
Total overfunded plans
Total underfunded plans
$20,649 $ 18,371
19
$20,670 $ 18,390
21
7,180
755
$25,160 $ 23,222
6,731
828
$33,095 $ 30,782
$71,044 $ 66,861
$38,747 $ 36,399
$24,246
22
$24,269
$19,586
—
31
$19,617
$78,654
$19,632
$21,921 $ 3,597 $ 3,550
2
$21,942 $ 3,599 $ 3,552
21
1
—
44
(7,180)
(723)
$18,398 $ (5,574) $ (4,824)
(6,731)
(785)
$18,442 $(13,478) $(12,340)
$73,726 $ 7,610 $ 6,865
$18,445 $(19,116) $(17,955)
* Funded status is recognized in the Consolidated Balance Statement as follows: Asset amounts as prepaid pension assets; (Liability) amounts as
compensation and benefits (current liability) and retirement and nonpension postretirement benefit obligations (noncurrent liability).
** Non-U.S. qualified plans represent plans funded outside of the U.S. Non-U.S. nonqualified plans are unfunded.
At December 31, 2020, the company’s qualified defined benefit pension plans worldwide were 102 percent funded compared to the
benefit obligations, with the U.S. Qualified PPP 108 percent funded. Overall, including nonqualified plans, the company’s defined
benefit pension plans worldwide were 93 percent funded.
Defined Benefit Pension and Nonpension Postretirement Benefit Plan Financial Information
The following tables through page 132 represent financial information for the company’s retirement-related benefit plans, excluding
defined contribution plans. The defined benefit pension plans under U.S. Plans consist of the Qualified PPP, the Excess PPP and the
Retention Plan. The defined benefit pension plans and the nonpension postretirement benefit plans under non-U.S. Plans consist of all
plans sponsored by the company’s subsidiaries. The nonpension postretirement benefit plan under U.S. Plan consists of only the U.S.
Nonpension Postretirement Benefit Plan.
130
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
The following tables present the components of net periodic (income)/cost of the retirement-related benefit plans recognized in the
Consolidated Income Statement, excluding defined contribution plans.
($ in millions)
For the year ended December 31:
Service cost
Interest cost(1)
Expected return on plan assets(1)
Amortization of transition assets(1)
Amortization of prior service costs/(credits)(1)
Recognized actuarial losses(1)
Curtailments and settlements(1)
Multi-employer plans
Other costs/(credits)
Total net periodic (income)/cost
($ in millions)
For the year ended December 31:
Service cost
Interest cost(1)
Expected return on plan assets(1)
Amortization of transition assets(1)
Amortization of prior service costs/(credits)(1)
Recognized actuarial losses(1)
Curtailments and settlements(1)
Other costs/(credits)
Total net periodic cost
U.S. Plans
2019
—
$
1,882
(2,599)
—
16
559
—
—
—
$ (142)
Defined Benefit Pension Plans
Non-U.S. Plans
2018
— $
$
1,719
(2,701)
—
16
1,525
—
—
—
2020
392
563
(1,275)
—
(8)
1,406
52
29
18
559 $ 1,178
$
$
2019
370
847
(1,588)
0
(23)
1,249
41
32
28
955
$
$
2020
—
1,501
(2,169)
—
16
829
—
—
—
178
$
Nonpension Postretirement Benefit Plans
2020
9
$
103
—
—
4
29
—
—
$145
U.S. Plan
2019
$ 10
145
—
—
(2)
1
—
—
$154
2018 2020
$ 13
132
0
—
(7)
10
—
—
$ 147
$ 5
36
(4)
0
0
21
0
0
$58
Non-U.S. Plans
2019
$ 5
55
(5)
—
0
10
0
—
$65
$
2018
413
830
(1,342)
0
(83)
1,401
11
38
16
$ 1,284
2018
$ 5
45
(6)
0
0
6
0
—
$51
(1) These components of net periodic pension costs are included in other (income) and expense in the Consolidated Income Statement.
For the U.S. Qualified PPP, beginning in 2019, substantially all participants are considered inactive. The amortization period of
unrecognized actuarial losses was changed to the average remaining life expectancy of inactive plan participants, which was 18 years
as of December 31, 2018. Beginning in 2019, there was a reduction to amortization expense of approximately $900 million annually.
There was no impact to the funded status, retiree benefit payments or funding requirements.
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
131
The following table presents the changes in benefit obligations and plan assets of the company’s retirement-related benefit plans,
excluding DC plans.
($ in millions)
Change in benefit obligation
Benefit obligation at January 1
Service cost
Interest cost
Plan participants' contributions
Acquisitions/divestitures, net
Actuarial losses/(gains)
Benefits paid from trust
Direct benefit payments
Foreign exchange impact
Amendments/curtailments/
settlements/other
Benefit obligation at December 31
Change in plan assets
Fair value of plan assets at January 1
Actual return on plan assets
Employer contributions
Acquisitions/divestitures, net
Plan participants' contributions
Benefits paid from trust
Foreign exchange impact
Amendments/curtailments/
settlements/other
Fair value of plan assets at December 31
Funded status at December 31
Accumulated benefit obligation*
Defined Benefit Pension Plans
Nonpension Postretirement Benefit Plans
U.S. Plans
Non-U.S. Plans
U.S. Plan
Non-U.S. Plans
2020
2019
2020
2019
2020
2019 2020 2019
$50,232 $47,812 $48,324 $ 45,770 $ 3,857 $ 3,912 $ 848 $ 705
370
5
55
847
—
23
0
(32)
141
3,467
(6)
(1,902)
(27)
(403)
(1)
134
—
1,501
—
1
4,071
(3,445)
(123)
—
392
563
23
50
2,766
(1,946)
(420)
3,283
—
1,882
—
—
4,040
(3,378)
(124)
—
9
103
56
—
135
(369)
0
—
10
145
57
—
148
(389)
(6)
—
5
36
—
0
(3)
(4)
(24)
(82)
(23)
$52,237 $50,232 $52,989 $ 48,324 $ 3,791 $ 3,857 $ 775 $ 848
(47)
(21)
50
(1)
—
—
0
$51,784 $48,213 $40,319 $ 36,758 $
6,046
—
1
—
(3,445)
—
6,949
—
—
—
(3,378)
—
2,571
182
97
23
(1,946)
2,599
4,896
243
(25)
23
(1,902)
333
3 $
0
325
—
56
(369)
—
29 $ 65 $ 65
7
4
—
—
—
—
—
—
(6)
(4)
(1)
(10)
1
304
—
57
(389)
—
—
—
—
0
0
$54,386 $51,784 $43,832 $ 40,319 $
3 $ 53 $ 65
$ 2,149 $ 1,551 $ (9,157) $ (8,005) $(3,776) $(3,854) $(722) $(783)
N/A
$52,237 $50,232 $52,513 $ 47,645
0
15 $
N/A
N/A
N/A
(13)
(7)
* Represents the benefit obligation assuming no future participant compensation increases.
N/A–Not applicable
The following table presents the net funded status recognized in the Consolidated Balance Sheet.
($ in millions)
Defined Benefit Pension Plans
Nonpension Postretirement Benefit Plans
U.S. Plans
Non-U.S. Plans
U.S. Plan
Non-U.S. Plans
At December 31:
Prepaid pension assets
Current liabilities—compensation and
2020
2019
2020
2019
2020
$ 4,011 $ 3,313 $ 3,597 $ 3,550 $
0 $
2019 2020 2019
2
0 $
1 $
benefits
(122)
(120)
(366)
(313)
(346)
(346)
(34)
(33)
Noncurrent liabilities—retirement and
nonpension postretirement benefit
obligations
Funded status—net
(1,740)
(752)
$ 2,149 $ 1,551 $ (9,157) $ (8,005) $ (3,776) $ (3,854) $ (722) $ (783)
(12,388)
(11,242)
(1,641)
(3,507)
(3,430)
(690)
132
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
The following table presents the pre-tax net loss, prior service costs/(credits) and transition (assets)/liabilities recognized in OCI
and the changes in the pre-tax net loss, prior service costs/(credits) and transition (assets)/liabilities recognized in AOCI for the
retirement-related benefit plans.
($ in millions)
Net loss at January 1
Current period loss/(gain)
Curtailments and settlements
Amortization of net loss included in net
periodic (income)/cost
Net loss at December 31
Prior service costs/(credits) at January 1
Current period prior service costs/(credits)
Curtailments, settlements and other
Amortization of prior service (costs)/credits
Defined Benefit Pension Plans
Nonpension Postretirement Benefit Plans
U.S. Plans
Non-U.S. Plans
U.S. Plan
Non-U.S. Plans
2020
2019
2020
2019 2020
$ 16,608 $ 17,476 $ 17,272 $ 18,452 $ 551
135
—
1,338
(52)
(309)
—
194
—
109
(41)
(559)
(829)
(1,406)
(29)
$ 15,972 $ 16,608 $ 17,151 $ 17,272 $ 656
172 $ 34
$
—
102
—
—
297 $
37
0
57 $
—
—
41 $
—
—
(1,249)
2019
$ 405
147
—
2020
$ 287
(2)
0
(1)
$ 551
$ 52
(21)
—
(21)
$ 264
$ (4)
—
—
2019
$ 172
125
0
(10)
$ 287
$ 4
(8)
—
included in net periodic (income)/cost
(16)
(16)
8
23
(4)
2
0
0
Prior service costs/(credits) at
December 31
Transition (assets)/liabilities at January 1
Amortization of transition assets/(liabilities)
$
$
24 $
— $
41 $
— $
342 $
0 $
297 $ 30
0 $ —
$ 34
$ —
$ (4)
$ 0
$ (4)
$ 0
included in net periodic (income)/cost
—
—
0
0
—
—
0
—
Transition (assets)/liabilities at
December 31
Total loss recognized in accumulated
other comprehensive income/(loss)*
$
— $
— $
0 $
0 $ —
$ —
$ 0
$ 0
$ 15,997 $ 16,648 $ 17,493 $ 17,569 $ 687
$ 585
$ 260
$ 283
* Refer to note S, “Equity Activity” for the total change in AOCI, and the Consolidated Statement of Comprehensive Income for the components of net
periodic (income)/cost, including the related tax effects, recognized in OCI for the retirement-related benefit plans.
On October 26, 2018, the High Court in London in the case of Lloyds Pension Group Trustees Limited v Lloyds Bank PLC, confirmed that
the UK defined benefit pension plans are required to equalize pension benefits to take into account unequal guaranteed minimum
pension benefits accrued during the period 1990-1997. As a result of this court decision, IBM recorded an increase of $125 million to
the PBO for the IBM UK defined benefit plan, which represents approximately 1 percent of the UK PBO. This amount was recorded as
prior service cost in OCI for the year ended December 31, 2018. In 2020, the High Court issued a follow-on judgment to the 2018 ruling
which did not have a material impact to the PBO as of December 31, 2020.
Assumptions Used to Determine Plan Financial Information
Underlying both the measurement of benefit obligations and net periodic (income)/cost are actuarial valuations. These valuations use
participant-specific information such as salary, age and years of service, as well as certain assumptions, the most significant of which
include estimates of discount rates, expected return on plan assets, rate of compensation increases, interest crediting rates and
mortality rates. The company evaluates these assumptions, at a minimum, annually, and makes changes as necessary.
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
133
The following tables present the assumptions used to measure the net periodic (income)/cost and the year-end benefit obligations for
retirement-related benefit plans.
Defined Benefit Pension Plans
U.S. Plans
Non-U.S. Plans
2020
2019
2018
2020
2019
2018
Weighted-average assumptions used to measure net periodic
(income)/cost for the year ended December 31
Discount rate
Expected long-term returns on plan assets
Rate of compensation increase
Interest crediting rate
3.10 %
4.50 %
N/A
2.70 %
4.10 %
5.25 %
N/A
3.60 %
3.40 %
5.25 %
N/A
2.30 %
1.19 %
3.37 %
2.60 %
0.28 %
1.85 %
4.38 %
2.18 %
0.30 %
1.76 %
3.62 %
2.41 %
0.30 %
Weighted-average assumptions used to measure benefit
obligations at December 31
Discount rate
Rate of compensation increase
Interest crediting rate
N/A–Not applicable
2.20 %
N/A
1.10 %
3.10 %
N/A
2.70 %
4.10 %
N/A
3.60 %
0.86 %
2.50 %
0.26 %
1.19 %
2.60 %
0.28 %
1.85 %
2.18 %
0.30 %
Nonpension Postretirement Benefit Plans
U.S. Plan
Non-U.S. Plans
2020
2019
2018
2020
2019
2018
Weighted-average assumptions used to measure net periodic
cost for the year ended December 31
Discount rate
Expected long-term returns on plan assets
Interest crediting rate
2.80 %
N/A
2.70 %
3.90 %
N/A
3.60 %
3.30 %
N/A
2.30 %
4.98 %
7.51 %
N/A
7.48 %
8.64 %
N/A
7.28 %
8.91 %
N/A
Weighted-average assumptions used to measure benefit
obligations at December 31
Discount rate
Interest crediting rate
N/A–Not applicable
1.80 %
1.10 %
2.80 %
2.70 %
3.90 %
3.60 %
4.46 %
N/A
4.98 %
N/A
7.48 %
N/A
134
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
Item
Description of Assumptions
Discount Rate
Changes in discount rate assumptions impact net periodic (income)/cost and the PBO.
For the U.S. and certain non-U.S. countries, a portfolio of high-quality corporate bonds is used to construct a
yield curve. Cash flows from the company’s expected benefit obligation payments are matched to the yield
curve to derive the discount rates.
In other non-U.S. countries where the markets for high-quality long-term bonds are not as well developed, a
portfolio of long-term government bonds is used as a base, and a credit spread is added to simulate corporate
bond yields at these maturities in the jurisdiction of each plan. This is the benchmark for developing the
respective discount rates.
Expected
Long-Term
Returns on
Plan Assets
Represents the expected long-term returns on plan assets based on the calculated market-related value of
plan assets and considers long-term expectations for future returns and the investment policies and strategies
discussed on pages 134 to 135. These rates of return are developed and tested for reasonableness against
historical returns by the company.
The use of expected returns may result in pension income that is greater or less than the actual return of those
plan assets in a given year. Over time, however, the expected long-term returns are designed to approximate
the actual long-term returns, and therefore result in a pattern of income or loss recognition that more closely
matches the pattern of the services provided by the employees.
The difference between actual and expected returns is recognized as a component of net loss or gain in AOCI,
which is amortized as a component of net periodic (income)/cost over the service lives or life expectancy of the
plan participants, depending on the plan, provided such amounts exceed certain thresholds provided by
accounting standards. The market-related value of plan assets recognizes changes in the fair value of plan
assets systematically over a five-year period in the expected return on plan assets line in net periodic
(income)/cost.
The projected long-term rate of return on plan assets for 2021 is 3.75 percent for U.S. and 2.86 percent for
non-U.S. DB Plans.
Compensation rate increases are determined based on the company’s long-term plans for such increases.
These rate increases are not applicable to the U.S. DB pension plans as benefit accruals ceased December 31,
2007.
Mortality assumptions are based on life expectancy and death rates for different types of participants and are
periodically updated based on actual experience.
Benefits for certain participants in the PPP are calculated using a cash balance formula. An assumption
underlying this formula is an interest crediting rate, which impacts both net periodic (income)/cost and the
PBO. This provides the basis for projecting the expected interest rate that plan participants will earn on the
benefits that they are expected to receive in the following year and is based on the average from August to
October of the one-year U.S. Treasury Constant Maturity yield plus one percent.
Rate of
Compensation
Increases and
Mortality
Assumptions
Interest
Crediting Rate
Healthcare
Cost Trend
Rate
For nonpension postretirement benefit plans, the company reviews external data and its own historical trends
for healthcare costs to determine the healthcare cost trend rates. The healthcare cost trend rate has an
insignificant effect on plan costs or the benefit obligation due to the terms of the plan which limit the
company’s obligation to the participants.
The company’s U.S. healthcare cost trend rate assumption for 2021 is 6.25 percent. The company assumes
that trend rate will decrease to 5.0 percent over the next six years.
Plan Assets
Retirement-related benefit plan assets are recognized and measured at fair value. Because of the inherent uncertainty of valuations,
these fair value measurements may not necessarily reflect the amounts the company could realize in current market transactions.
Investment Policies and Strategies
The investment objectives of the Qualified PPP portfolio are designed to generate returns that will enable the plan to meet its future
obligations. The precise amount for which these obligations will be settled depends on future events, including the retirement dates
and life expectancy of the plans’ participants. The obligations are estimated using actuarial assumptions, based on the current
economic environment and other pertinent factors described above. The Qualified PPP portfolio’s investment strategy balances the
requirement to generate returns, using potentially higher yielding assets such as equity securities, with the need to control risk in the
portfolio with less volatile assets, such as fixed-income securities. Risks include, among others, inflation, volatility in equity values and
changes in interest rates that could cause the plan to become underfunded, thereby increasing its dependence on contributions from
the company. To mitigate any potential concentration risk, careful consideration is given to balancing the portfolio among industry
sectors, companies and geographies, taking into account interest rate sensitivity, dependence on economic growth, currency and other
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
135
factors that affect investment returns. There were no significant changes to investment strategy made in 2020 and none are planned
for 2021. The Qualified PPP portfolio’s target allocation is 12 percent equity securities, 80 percent fixed-income securities, 3 percent
real estate and 5 percent other investments.
The assets are managed by professional investment firms and investment professionals who are employees of the company. They are
bound by investment mandates determined by the company’s management and are measured against specific benchmarks. Among
these managers, consideration is given, but not limited to, balancing security concentration, issuer concentration, investment style and
reliance on particular active and passive investment strategies.
Market liquidity risks are tightly controlled, with $3,870 million of the Qualified PPP portfolio as of December 31, 2020 invested in
private market assets consisting of private equities and private real estate investments, which are less liquid than publicly traded
securities. In addition, the Qualified PPP portfolio had $1,203 million in commitments for future investments in private markets to be
made over a number of years. These commitments are expected to be funded from plan assets.
Derivatives are used as an effective means to achieve investment objectives and/or as a component of the plan’s risk management
strategy. The primary reasons for the use of derivatives are fixed income management, including duration, interest rate management
and credit exposure, cash equitization and to manage currency strategies.
Outside the U.S., the investment objectives are similar to those described previously, subject to local regulations. The weighted-
average target allocation for the non-U.S. plans is 16 percent equity securities, 70 percent fixed-income securities, 3 percent real
estate and 11 percent other investments, which is consistent with the allocation decisions made by the company’s management. In
some countries, a higher percentage allocation to fixed income is required to manage solvency and funding risks. In others, the
responsibility for managing the investments typically lies with a board that may include up to 50 percent of members elected by
employees and retirees. This can result in slight differences compared with the strategies previously described. The percentage of non-
U.S. plans investment in assets that are less liquid is consistent with the U.S. plan. The use of derivatives is also consistent with the
U.S. plan and mainly for currency hedging, interest rate risk management, credit exposure and alternative investment strategies.
The company’s nonpension postretirement benefit plans are underfunded or unfunded. For some plans, the company maintains a
nominal, highly liquid trust fund balance to ensure timely benefit payments.
Defined Benefit Pension Plan Assets
The following table presents the company’s defined benefit pension plans’ asset classes and their associated fair value at
December 31, 2020. The U.S. Plan consists of the Qualified PPP and the non-U.S. Plans consist of all plans sponsored by the company’s
subsidiaries.
136
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
($ in millions)
Equity
Equity securities(1)
Equity mutual funds(2)
Fixed income
Level 1
Level 2
Level 3
Total Level 1
Level 2
Level 3
Total
U.S. Plan
Non-U.S. Plans
$ 2,714 $
105
0
—
$ — $ 2,714
105
—
$ 474 $
0
0
—
$ — $
—
474
0
—
—
—
470
—
76
—
(3)
—
3,363
21,375
18,217
612
—
—
1,001
—
18
—
41,222
—
542
—
—
—
—
—
—
—
542
21,375
18,759
612
470
—
1,077
—
15
—
45,128
—
—
—
—
—
352
—
69
29
923
9,760
3,725
3
—
6,675
651
—
521
—
21,335
2
—
—
—
—
—
298
—
—
300
9,762
3,725
3
—
6,675
1,002
298
590
29
22,559
Government and related(3)
Corporate bonds(4)
Mortgage and asset-backed securities
Fixed income mutual funds(5)
Insurance contracts(6)
Cash and short-term investments(7)
Real estate
Derivatives(8)
Other mutual funds(9)
Subtotal
Investments measured at net asset
value using the NAV practical
expedient(10)
Other(11)
Fair value of plan assets
—
—
—
—
$ 3,363 $41,222
—
—
9,579
(321)
$542 $ 54,386
—
—
—
—
$ 923 $ 21,335
—
—
21,313
(39)
$300 $ 43,832
(1) Represents U.S. and international securities. The U.S. Plan includes IBM common stock of $6 million, representing 0.010 percent of the U.S. Plan assets.
Non-U.S. Plans include IBM common stock of $1 million, representing 0.003 percent of the non-U.S. Plans assets.
(2) Invests in predominantly equity securities.
(3) Includes debt issued by national, state and local governments and agencies.
(4) Non-U.S. Plans include IBM corporate bonds of $5 million, representing 0.012 percent of the non-U.S. Plans assets.
(5) Invests predominantly in fixed-income securities.
(6) Primarily represents insurance policy contracts (Buy-In) in certain non-U.S. plans.
(7) Includes cash, cash equivalents and short-term marketable securities.
(8) Includes interest-rate derivatives, forwards, exchange-traded and other over-the-counter derivatives.
(9) Invests in both equity and fixed-income securities.
(10)Investments measured at fair value using the net asset value (NAV) per share (or its equivalent) as a practical expedient, including commingled funds,
hedge funds, private equity and real estate partnerships.
(11) Represents net unsettled transactions, relating primarily to purchases and sales of plan assets.
The U.S. nonpension postretirement benefit plan assets of $15 million were invested primarily in cash equivalents, categorized as Level
1 in the fair value hierarchy. The non-U.S. nonpension postretirement benefit plan assets of $53 million, primarily in Brazil, and, to a
lesser extent, in Mexico and South Africa, were invested primarily in government and related fixed-income securities and corporate
bonds, categorized as Level 2 in the fair value hierarchy.
The following table presents the company’s defined benefit pension plans’ asset classes and their associated fair value at
December 31, 2019. The U.S. Plan consists of the Qualified PPP and the non-U.S. Plans consist of all plans sponsored by the company’s
subsidiaries.
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
137
($ in millions)
Equity
Equity securities(1)
Equity mutual funds(2)
Fixed income
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
U.S. Plan
Non-U.S. Plans
$1,943 $
85
—
—
$ — $ 1,943 $ 2,209 $
85
—
—
0
—
$ — $ 2,209
—
—
Government and related(3)
Corporate bonds(4)
Mortgage and asset-backed securities
Fixed income mutual funds(5)
Insurance contracts
Cash and short-term investments(6)
Real estate
Derivatives(7)
Other mutual funds(8)
Subtotal
Investments measured at net asset
value using the NAV practical
expedient(9)
Other(10)
Fair value of plan assets
—
—
—
386
—
54
—
0
—
2,469
21,134
16,666
630
—
—
848
—
6
—
39,284
—
518
—
—
—
—
—
—
—
518
21,134
17,185
630
386
—
903
—
6
—
42,271
—
—
—
—
—
204
—
18
25
2,456
10,288
2,124
19
—
1,862
644
—
969
0
15,907
—
—
—
—
$2,469 $ 39,284
—
—
9,519
(6)
—
—
$518 $ 51,784 $ 2,456 $ 15,907
—
—
2
—
—
—
—
—
328
—
—
330
10,290
2,124
19
—
1,862
849
328
987
25
18,693
—
—
21,653
(26)
$330 $ 40,319
(1) Represents U.S. and international securities. The U.S. Plan includes IBM common stock of $2 million, representing 0.004 percent of the U.S. Plan assets.
Non-U.S. Plans include IBM common stock of $10 million, representing 0.02 percent of the non-U.S. Plans assets.
(2) Invests in predominantly equity securities.
(3) Includes debt issued by national, state and local governments and agencies.
(4) The U.S. Plan includes IBM corporate bonds of $37 million, representing 0.07 percent of the U.S. Plan assets. Non-U.S. Plans include IBM corporate bonds
of $8 million, representing 0.02 percent of the non-U.S. Plans assets.
(5) Invests in predominantly fixed-income securities.
(6) Includes cash and cash equivalents and short-term marketable securities.
(7) Includes interest-rate derivatives, forwards, exchange-traded and other over-the-counter derivatives.
(8) Invests in both equity and fixed-income securities.
(9) Investments measured at fair value using the net asset value (NAV) per share (or its equivalent) as a practical expedient, including commingled funds,
hedge funds, private equity and real estate partnerships.
(10) Represents net unsettled transactions, relating primarily to purchases and sales of plan assets.
The U.S. nonpension postretirement benefit plan assets of $3 million were invested in cash equivalents, categorized as Level 1 in the
fair value hierarchy. The non-U.S. nonpension postretirement benefit plan assets of $65 million, primarily in Brazil, and, to a lesser
extent, in Mexico and South Africa, were invested primarily in government and related fixed-income securities and corporate bonds,
categorized as Level 2 in the fair value hierarchy.
The following tables present the reconciliation of the beginning and ending balances of Level 3 assets for the years ended December 31,
2020 and 2019 for the U.S. Plan.
($ in millions)
Balance at January 1, 2020
Return on assets held at end of year
Return on assets sold during the year
Purchases, sales and settlements, net
Transfers, net
Balance at December 31, 2020
* Corporate bonds.
Total *
$518
29
0
(5)
0
$542
138
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
($ in millions)
Balance at January 1, 2019
Return on assets held at end of year
Return on assets sold during the year
Purchases, sales and settlements, net
Transfers, net
Balance at December 31, 2019
Corporate
Bonds
$ 359
40
1
105
13
$ 518
Mortgage and
Asset-Backed
Securities
$ 4
—
0
0
(4)
$ —
Total
$ 363
40
1
105
9
$ 518
The following tables present the reconciliation of the beginning and ending balances of Level 3 assets for the years ended December 31,
2020 and 2019 for the non-U.S. Plans.
($ in millions)
Balance at January 1, 2020
Return on assets held at end of year
Return on assets sold during the year
Purchases, sales and settlements, net
Transfers, net
Foreign exchange impact
Balance at December 31, 2020
($ in millions)
Balance at January 1, 2019
Return on assets held at end of year
Return on assets sold during the year
Purchases, sales and settlements, net
Transfers, net
Foreign exchange impact
Balance at December 31, 2019
Valuation Techniques
Government
and Related
Private
Real Estate
$ 2
0
—
—
—
0
$ 2
$328
(29)
2
(14)
4
7
$298
Government
and Related
Private
Real Estate
$ 2
0
0
(1)
—
0
$ 2
$339
(11)
4
(17)
—
13
$328
Total
$330
(29)
2
(14)
4
7
$300
Total
$341
(11)
4
(18)
—
13
$330
The following is a description of the valuation techniques used to measure plan assets at fair value. There were no changes in valuation
techniques during 2020 and 2019.
Equity securities are valued at the closing price reported on the stock exchange on which the individual securities are traded. IBM
common stock is valued at the closing price reported on the New York Stock Exchange. Mutual funds are typically valued based on
quoted market prices. These assets are generally classified as Level 1.
The fair value of fixed-income securities is typically estimated using pricing models, quoted prices of securities with similar
characteristics or discounted cash flows and are generally classified as Level 2. If available, they are valued using the closing price
reported on the major market on which the individual securities are traded.
Cash includes money market accounts that are valued at their cost plus interest on a daily basis, which approximates fair value. Short-
term investments represent securities with original maturities of one year or less. These assets are classified as Level 1 or Level 2.
Real estate valuations require significant judgment due to the absence of quoted market prices, the inherent lack of liquidity and the
long-term nature of such assets. These assets are initially valued at cost and are reviewed periodically utilizing available and relevant
market data, including appraisals, to determine if the carrying value of these assets should be adjusted. These assets are classified as
Level 3.
Exchange-traded derivatives are valued at the closing price reported on the exchange on which the individual securities are traded,
while forward contracts are valued using a mid-close price. Over-the-counter derivatives are typically valued using pricing models. The
models require a variety of inputs, including, for example, yield curves, credit curves, measures of volatility and foreign exchange rates.
These assets are classified as Level 1 or Level 2 depending on availability of quoted market prices.
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
139
Certain investments are measured at fair value using the net asset value (NAV) per share (or its equivalent) as a practical expedient.
These investments, which include commingled funds, hedge funds, private equity and real estate partnerships, are typically valued
using the NAV provided by the administrator of the fund and reviewed by the company. The NAV is based on the value of the underlying
assets owned by the fund, minus liabilities and divided by the number of shares or units outstanding.
Contributions and Direct Benefit Payments
It is the company’s general practice to fund amounts for pensions sufficient to meet the minimum requirements set forth in applicable
employee benefits laws and local tax laws. From time to time, the company contributes additional amounts as it deems appropriate.
The following table presents the contributions made to the non-U.S. DB plans, nonpension postretirement benefit plans, multi-
employer plans, DC plans and direct payments for 2020 and 2019. The cash contributions to the multi-employer plans represent the
annual cost included in the net periodic (income)/cost recognized in the Consolidated Income Statement. The company’s participation
in multi-employer plans has no material impact on the company’s financial statements.
($ in millions)
For the years ended December 31:
Non-U.S. DB plans
Nonpension postretirement benefit plans
Multi-employer plans
DC plans
Direct benefit payments
Total
2020
$ 182
325
29
1,058
567
$ 2,161
2019
$ 243
304
32
1,040
559
$ 2,177
In 2020 and 2019, $452 million and $455 million, respectively, of contributions to the non-U.S. DB plans and nonpension
postretirement benefit plans were made in U.S. Treasury securities. Additionally, in 2020 and 2019, contributions of $288 million and
$180 million, respectively, were made to the Active Medical Trust in U.S. Treasury securities. Contributions made with U.S. Treasury
securities are considered a non-cash transaction.
Defined Benefit Pension Plans
In 2021, the company is not legally required to make any contributions to the U.S. defined benefit pension plans. However, depending
on market conditions, or other factors, the company may elect to make discretionary contributions to the Qualified PPP during the year.
In 2021, the company estimates contributions to its non-U.S. defined benefit and multi-employer plans to be approximately $300
million, the largest of which will be contributed to defined benefit pension plans in Spain and Japan. This amount generally represents
legally mandated minimum contributions.
Financial market performance in 2021 could increase the legally mandated minimum contribution in certain countries which
require monthly or daily remeasurement of the funded status. The company could also elect to contribute more than the legally
mandated amount based on market conditions or other factors.
Expected Benefit Payments
Defined Benefit Pension Plan Expected Payments
The following table presents the total expected benefit payments to defined benefit pension plan participants. These payments have
been estimated based on the same assumptions used to measure the plans’ PBO at December 31, 2020 and include benefits
attributable to estimated future compensation increases, where applicable.
($ in millions)
2021
2022
2023
2024
2025
2026-2030
Qualified
U.S. Plan
Payments
$ 3,522
3,490
3,451
3,393
3,333
15,062
Nonqualified
U.S. Plans
Payments
$123
122
121
120
118
545
Qualified
Non-U.S. Plans
Nonqualified
Non-U.S. Plans
Payments
$ 2,093
2,124
2,140
2,160
2,189
10,529
Payments
$ 364
354
361
368
373
1,943
Total Expected
Benefit
Payments
$ 6,102
6,091
6,073
6,040
6,012
28,078
140
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
The 2021 expected benefit payments to defined benefit pension plan participants not covered by the respective plan assets
(underfunded plans) represent a component of compensation and benefits, within current liabilities, in the Consolidated Balance Sheet.
Nonpension Postretirement Benefit Plan Expected Payments
The following table presents the total expected benefit payments to nonpension postretirement benefit plan participants. These
payments have been estimated based on the same assumptions used to measure the plans’ APBO at December 31, 2020.
($ in millions)
2021
2022
2023
2024
2025
2026-2030
U.S. Plan
Payments
$ 364
377
380
363
339
1,296
Qualified
Non-U.S. Plans
Nonqualified
Non-U.S. Plans
Payments
Payments
$ 16
17
18
19
20
119
$ 25
26
25
26
25
123
Total Expected
Benefit
Payments
$ 405
419
423
408
385
1,538
The 2021 expected benefit payments to nonpension postretirement benefit plan participants not covered by the respective plan assets
represent a component of compensation and benefits, within current liabilities, in the Consolidated Balance Sheet.
Other Plan Information
The following table presents information for defined benefit pension plans with accumulated benefit obligations (ABO) in excess of
plan assets. For a more detailed presentation of the funded status of the company’s defined benefit pension plans, see the table on
page 131.
($ in millions)
At December 31:
Plans with PBO in excess of plan assets
Plans with ABO in excess of plan assets
Plans with plan assets in excess of PBO
2020
Benefit
Obligation
$34,202
33,051
71,024
Plan
Assets
$19,586
18,956
78,632
2019
Benefit
Obligation
$31,714
30,882
66,842
Plan
Assets
$18,398
18,127
73,705
The following table presents information for the nonpension postretirement benefit plan with APBO in excess of plan assets. For a more
detailed presentation of the funded status of the company’s nonpension postretirement benefit plans, see the table on page 131.
($ in millions)
At December 31:
Plans with APBO in excess of plan assets
Plans with plan assets in excess of APBO
NOTE W. SUBSEQUENT EVENTS
2020
Benefit
Obligation
$4,545
21
Plan
Assets
$45
22
2019
Benefit
Obligation
$4,685
19
Plan
Assets
$47
21
On January 26, 2021, the company announced that the Board of Directors approved a quarterly dividend of $1.63 per common share.
The dividend is payable March 10, 2021 to shareholders of record on February 10, 2021.
Performance Graph
International Business Machines Corporation and Subsidiary Companies
141
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN FOR IBM, S&P 500 STOCK INDEX AND S&P INFORMATION
TECHNOLOGY INDEX
The following graph compares the five-year cumulative total returns for IBM common stock with the comparable cumulative returns of
certain Standard & Poor’s (S&P) indices. Due to the fact that IBM is a company included in the S&P 500 Stock Index, the SEC’s rules
require the use of that index for the required five-year graph. Under those rules, the second index used for comparison may be a
published industry or line-of-business index. The S&P Information Technology Index is such an index. IBM is also included in this index.
The graph assumes $100 invested on December 31 (of the initial year shown in the graph) in IBM common stock and $100 invested on
the same date in each of the S&P indices. The comparisons assume that all dividends are reinvested.
400
350
300
250
200
150
100
50
0
12/15
12/16
12/17
12/18
12/19
12/20
(U.S. Dollar)
International Business Machines
S & P 500
S & P Information Technology
• • • •
- - - -
2016
2015
2020
$ 100.00 $ 125.19 $ 120.20 $ 93.11 $ 115.06 $ 113.69
203.04
340.83
136.40
158.06
130.42
157.60
111.96
113.85
100.00
100.00
171.49
236.86
2019
2018
2017
142
Stockholder Information
International Business Machines Corporation and Subsidiary Companies
IBM Stockholder Services
Stockholders with questions about their accounts should contact:
Computershare Trust Company, N.A., P.O. Box 505005, Louisville, Kentucky 40233-5005, (888) IBM-6700.
Investors residing outside the United States, Canada and Puerto Rico should call (781) 575-2727.
Stockholders can also reach Computershare Trust Company, N.A. via e-mail at: ibm@computershare.com
Hearing-impaired stockholders with access to a telecommunications device (TDD) can communicate directly with Computershare Trust
Company, N.A., by calling (800) 490-1493. Stockholders residing outside the United States, Canada and Puerto Rico should call
(781) 575-2694.
IBM on the Internet
Topics featured in this Annual Report can be found online at www.ibm.com. Financial results, news on IBM products, services and
other activities can also be found at that website.
IBM files reports with the Securities and Exchange Commission (SEC), including the annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K and any other filings required by the SEC.
IBM’s website (www.ibm.com/investor) contains a significant amount of information about IBM, including the company’s annual report
on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports filed or furnished
pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after such material is
electronically filed with or furnished to the SEC. These materials are available free of charge on or through IBM’s website.
The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding
issuers that file electronically with the SEC.
Computershare Investment Plan (CIP)
(formerly IBM Investor Services Program)
The Computershare Investment Plan brochure outlines a number of services provided for IBM stockholders and potential IBM
investors, including the reinvestment of dividends, direct purchase and the deposit of IBM stock certificates for safekeeping. The
brochure is available at www.computershare.com/ibmcip or by calling (888) IBM-6700. Investors residing outside the United
States, Canada and Puerto Rico should call (781) 575-2727.
Investors with other requests may write to: IBM Stockholder Relations, New Orchard Road, M/D 325, Armonk, New York 10504.
IBM Stock
IBM common stock is listed on the New York Stock Exchange and the Chicago Stock Exchange under the symbol “IBM”.
Stockholder Communications
Stockholders can get quarterly financial results and voting results from the Annual Meeting by calling (914) 499-7777, by sending an
e-mail to infoibm@us.ibm.com, or by writing to IBM Stockholder Relations, New Orchard Road, M/D 325, Armonk, New York 10504.
Annual Meeting
The IBM Annual Meeting of Stockholders will be held on Tuesday, April 27, 2021, at 10 a.m. (ET).
Literature for IBM Stockholders
The literature mentioned below on IBM is available without charge from:
Computershare Trust Company, N.A., P.O. Box 505005, Louisville, Kentucky 40233-5005 (888) IBM-6700.
Investors residing outside the United States, Canada and Puerto Rico should call (781) 575-2727.
The company’s annual report on Form 10-K and the quarterly reports on Form 10-Q provide additional information on IBM’s business.
The 10-K report is released by the end of February; 10-Q reports are released by early May, August and November.
An audio recording of the 2020 Annual Report will be available for sight-impaired stockholders in June 2021.
The IBM Corporate Responsibility Report highlights IBM’s values and its integrated approach to corporate responsibility, including its
innovative strategies to transform communities through global citizenship. Highlights from the Corporate Responsibility Report are
available online at www.ibm.org/responsibility/2019.
General Information
Stockholders of record can receive account information and answers to frequently asked questions regarding stockholder accounts
online at www.ibm.com/investor. Stockholders of record can also consent to receive future IBM Annual Reports and Proxy Statements
online through this site.
For answers to general questions about IBM from within the continental United States, call (800) IBM-4YOU. From outside the United
States, Canada and Puerto Rico, call (914) 499-1900.
Board of Directors and Senior Leadership
International Business Machines Corporation and Subsidiary Companies
143
BOARD OF DIRECTORS
Thomas Buberl
Chief Executive Officer
AXA S.A.
Michael L. Eskew
Retired Chairman and
Chief Executive Officer
United Parcel Service, Inc.
David N. Farr
Chairman
Emerson Electric Co.
Alex Gorsky
Chairman and Chief Executive Officer
Johnson & Johnson
Michelle J. Howard
Retired Admiral
United States Navy
SENIOR LEADERSHIP
Simon J. Beaumont
Vice President
Tax and Treasurer
Howard Boville
Senior Vice President
IBM Cloud
Michelle H. Browdy
Senior Vice President
Legal and Regulatory Affairs,
and General Counsel
Gary D. Cohn
Vice Chairman
Robert F. Del Bene
Vice President and Controller
Mark Foster
Senior Vice President
IBM Services
Darío Gil
Senior Vice President and Director,
IBM Research
Arvind Krishna
Chairman and Chief Executive Officer
IBM
Andrew N. Liveris
Retired Chairman and
Chief Executive Officer
The Dow Chemical Company
Frederick William McNabb, III
Retired Chairman and
Chief Executive Officer
The Vanguard Group, Inc.
Martha E. Pollack
President
Cornell University
Joseph R. Swedish
Retired Chairman, President and
Chief Executive Officer
Anthem, Inc.
Sidney Taurel*
Chairman Emeritus
Eli Lilly and Company
Chairman
Pearson plc
Peter R. Voser
Retired Chief Executive Officer
Royal Dutch Shell plc
Chairman
ABB Ltd.
Frederick H. Waddell
Retired Chairman and
Chief Executive Officer
Northern Trust Corporation
* Term on the Board ends
on April 27, 2021
Thomas W. Rosamilia
Senior Vice President
Systems
Frank Sedlarcik
Vice President
Assistant General Counsel
and Secretary
Robert D. Thomas
Senior Vice President
Cloud and Data Platform
Bridget A. van Kralingen
Senior Vice President
Global Markets
James M. Whitehurst
President
Juan A. Zufiria
Senior Vice President
Global Technology Services
John Granger
Senior Vice President
Cloud Application Innovation
and Chief Operating Officer,
Global Business Services
James J. Kavanaugh
Senior Vice President and
Chief Financial Officer
Finance and Operations
Arvind Krishna
Chairman and Chief Executive Officer
Nickle J. LaMoreaux
Senior Vice President and
Chief Human Resources Officer
Robert W. Lord
Senior Vice President
Cognitive Applications
Obed Louissaint
Senior Vice President
Transformation and Culture
Carla Piñeyro Sublett
Senior Vice President and
Chief Marketing Officer
International Business Machines Corporation
New Orchard Road, Armonk, New York 10504
(914) 499-1900
AIX, DB2, Global Business Services, Global Technology Services,
IBM, IBM Cloud, IBM Cloud Pak, IBM Garage, IBM iX, IBM Q Network,
IBM Research, IBM Security, IBM Services, IBM Sterling, IBM Watson,
IBM Z, OpenPages, TRIRIGA, POWER, Watson, Watson Discovery Advisor,
WebSphere, z15, z/OS and Z Systems are trademarks or registered
trademarks of International Business Machines Corporation or its wholly
owned subsidiaries. Azure is a trademark of Microsoft. Linux is the
registered trademark of Linus Torvalds in the United States and other
countries. Red Hat, Ansible and OpenShift are trademarks or registered
trademarks of Red Hat, Inc. or its subsidiaries in the United States and
other countries. UNIX is a registered trademark of The Open Group in the
United States and other countries. Other company, product and service
names may be trademarks or service marks of others.
Images: p. 8: Used under license from CRXSS Limited as
representative of Sebastian Nevols. © 2021 Sebastian Nevols;
p. 10: Used under license. © 2021 Gantungalag Tumurchudur.
The IBM Annual Report is printed on papers harvested
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