UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10 - Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 2016
1-2360
(Commission file number)
INTERNATIONAL BUSINESS MACHINES CORPORATION
(Exact name of registrant as specified in its charter)
New York |
|
13-0871985 |
(State of incorporation) |
|
(IRS employer identification number) |
Armonk, New York |
|
10504 |
(Address of principal executive offices) |
|
(Zip Code) |
914-499-1900
(Registrants telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section l3 or l5(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer x |
|
Accelerated filer o |
|
|
|
Non-accelerated filer o |
|
Smaller reporting company o |
(Do not check if a smaller reporting company) |
|
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The registrant had 950,854,551 shares of common stock outstanding at September 30, 2016.
Part I - Financial Information
Item 1. Consolidated Financial Statements:
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF EARNINGS
(UNAUDITED)
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
| ||||||||
(Dollars in millions except per share amounts) |
|
2016 |
|
2015 |
|
2016 |
|
2015 |
| ||||
Revenue: |
|
|
|
|
|
|
|
|
| ||||
Services |
|
$ |
12,938 |
|
$ |
12,327 |
|
$ |
38,347 |
|
$ |
37,290 |
|
Sales |
|
5,872 |
|
6,501 |
|
18,542 |
|
20,990 |
| ||||
Financing |
|
417 |
|
452 |
|
1,260 |
|
1,403 |
| ||||
Total revenue |
|
19,226 |
|
19,280 |
|
58,149 |
|
59,682 |
| ||||
Cost: |
|
|
|
|
|
|
|
|
| ||||
Services |
|
8,418 |
|
8,067 |
|
25,492 |
|
24,776 |
| ||||
Sales |
|
1,536 |
|
1,544 |
|
4,496 |
|
4,895 |
| ||||
Financing |
|
259 |
|
233 |
|
760 |
|
733 |
| ||||
Total cost |
|
10,213 |
|
9,844 |
|
30,748 |
|
30,405 |
| ||||
Gross profit |
|
9,013 |
|
9,436 |
|
27,401 |
|
29,278 |
| ||||
Expense and other (income): |
|
|
|
|
|
|
|
|
| ||||
Selling, general and administrative |
|
4,732 |
|
4,731 |
|
16,093 |
|
15,273 |
| ||||
Research, development and engineering |
|
1,397 |
|
1,287 |
|
4,320 |
|
3,885 |
| ||||
Intellectual property and custom development income |
|
(528 |
) |
(188 |
) |
(1,110 |
) |
(489 |
) | ||||
Other (income) and expense |
|
(8 |
) |
(133 |
) |
281 |
|
(578 |
) | ||||
Interest expense |
|
158 |
|
117 |
|
473 |
|
340 |
| ||||
Total expense and other (income) |
|
5,751 |
|
5,815 |
|
20,056 |
|
18,431 |
| ||||
Income from continuing operations before income taxes |
|
3,263 |
|
3,621 |
|
7,345 |
|
10,846 |
| ||||
Provision for/(benefit from) income taxes |
|
409 |
|
659 |
|
(31 |
) |
1,943 |
| ||||
Income from continuing operations |
|
$ |
2,854 |
|
$ |
2,962 |
|
$ |
7,375 |
|
$ |
8,904 |
|
Loss from discontinued operations, net of tax |
|
(1 |
) |
(12 |
) |
(4 |
) |
(176 |
) | ||||
Net income |
|
$ |
2,853 |
|
$ |
2,950 |
|
$ |
7,371 |
|
$ |
8,727 |
|
|
|
|
|
|
|
|
|
|
| ||||
Earnings/(loss) per share of common stock: |
|
|
|
|
|
|
|
|
| ||||
Assuming dilution: |
|
|
|
|
|
|
|
|
| ||||
Continuing operations |
|
$ |
2.98 |
|
$ |
3.02 |
|
$ |
7.67 |
|
$ |
9.03 |
|
Discontinued operations |
|
0.00 |
|
(0.01 |
) |
0.00 |
|
(0.18 |
) | ||||
Total |
|
$ |
2.98 |
|
$ |
3.01 |
|
$ |
7.67 |
|
$ |
8.85 |
|
Basic: |
|
|
|
|
|
|
|
|
| ||||
Continuing operations |
|
$ |
2.99 |
|
$ |
3.04 |
|
$ |
7.70 |
|
$ |
9.07 |
|
Discontinued operations |
|
0.00 |
|
(0.01 |
) |
0.00 |
|
(0.18 |
) | ||||
Total |
|
$ |
2.99 |
|
$ |
3.03 |
|
$ |
7.70 |
|
$ |
8.89 |
|
|
|
|
|
|
|
|
|
|
| ||||
Weighted-average number of common shares outstanding: (millions) |
|
|
|
|
|
|
|
|
| ||||
Assuming dilution |
|
957.3 |
|
979.0 |
|
960.7 |
|
986.0 |
| ||||
Basic |
|
954.0 |
|
975.1 |
|
957.7 |
|
981.8 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Cash dividend per common share |
|
$ |
1.40 |
|
$ |
1.30 |
|
$ |
4.10 |
|
$ |
3.70 |
|
(Amounts may not add due to rounding.)
(The accompanying notes are an integral part of the financial statements.)
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
| ||||||||
(Dollars in millions) |
|
2016 |
|
2015 |
|
2016 |
|
2015 |
| ||||
Net income |
|
$ |
2,853 |
|
$ |
2,950 |
|
$ |
7,371 |
|
$ |
8,727 |
|
Other comprehensive income/(loss), before tax: |
|
|
|
|
|
|
|
|
| ||||
Foreign currency translation adjustments |
|
(99 |
) |
(1,015 |
) |
(109 |
) |
(1,365 |
) | ||||
Net changes related to available-for-sale securities: |
|
|
|
|
|
|
|
|
| ||||
Unrealized gains/(losses) arising during the period |
|
(1 |
) |
(102 |
) |
(36 |
) |
(85 |
) | ||||
Reclassification of (gains)/losses to net income |
|
(1 |
) |
0 |
|
36 |
|
0 |
| ||||
Total net changes related to available-for-sale securities |
|
(2 |
) |
(101 |
) |
0 |
|
(85 |
) | ||||
Unrealized gains/(losses) on cash flow hedges: |
|
|
|
|
|
|
|
|
| ||||
Unrealized gains/(losses) arising during the period |
|
35 |
|
36 |
|
(221 |
) |
467 |
| ||||
Reclassification of (gains)/losses to net income |
|
15 |
|
(273 |
) |
26 |
|
(843 |
) | ||||
Total unrealized gains/(losses) on cash flow hedges |
|
50 |
|
(237 |
) |
(195 |
) |
(376 |
) | ||||
Retirement-related benefit plans: |
|
|
|
|
|
|
|
|
| ||||
Prior service costs/(credits) |
|
|
|
0 |
|
|
|
6 |
| ||||
Net (losses)/gains arising during the period |
|
11 |
|
(2 |
) |
(57 |
) |
14 |
| ||||
Curtailments and settlements |
|
4 |
|
11 |
|
19 |
|
19 |
| ||||
Amortization of prior service (credits)/costs |
|
(28 |
) |
(25 |
) |
(81 |
) |
(76 |
) | ||||
Amortization of net (gains)/losses |
|
696 |
|
823 |
|
2,079 |
|
2,479 |
| ||||
Total retirement-related benefit plans |
|
683 |
|
807 |
|
1,960 |
|
2,441 |
| ||||
Other comprehensive income/(loss), before tax |
|
632 |
|
(547 |
) |
1,656 |
|
616 |
| ||||
Income tax (expense)/benefit related to items of other comprehensive income |
|
(192 |
) |
(176 |
) |
(213 |
) |
(895 |
) | ||||
Other comprehensive income/(loss) |
|
440 |
|
(724 |
) |
1,442 |
|
(280 |
) | ||||
Total comprehensive income/(loss) |
|
$ |
3,293 |
|
$ |
2,227 |
|
$ |
8,813 |
|
$ |
8,448 |
|
(Amounts may not add due to rounding.)
(The accompanying notes are an integral part of the financial statements.)
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(UNAUDITED)
ASSETS
|
|
At September 30, |
|
At December 31, |
| ||
(Dollars in millions) |
|
2016 |
|
2015 |
| ||
Assets: |
|
|
|
|
| ||
Current assets: |
|
|
|
|
| ||
Cash and cash equivalents |
|
$ |
9,039 |
|
$ |
7,686 |
|
Marketable securities |
|
929 |
|
508 |
| ||
Notes and accounts receivable - trade (net of allowances of $325 in 2016 and $367 in 2015) |
|
8,291 |
|
8,333 |
| ||
Short-term financing receivables (net of allowances of $532 in 2016 and $490 in 2015) |
|
16,032 |
|
19,020 |
| ||
Other accounts receivable (net of allowances of $48 in 2016 and $51 in 2015) |
|
873 |
|
1,201 |
| ||
Inventories, at lower of average cost or market: |
|
|
|
|
| ||
Finished goods |
|
433 |
|
352 |
| ||
Work in process and raw materials |
|
1,297 |
|
1,199 |
| ||
Total inventories |
|
1,729 |
|
1,551 |
| ||
Prepaid expenses and other current assets |
|
4,539 |
|
4,205 |
| ||
Total current assets |
|
41,433 |
|
42,504 |
| ||
Property, plant and equipment |
|
30,842 |
|
29,342 |
| ||
Less: Accumulated depreciation |
|
19,738 |
|
18,615 |
| ||
Property, plant and equipment net |
|
11,104 |
|
10,727 |
| ||
Long-term financing receivables (net of allowances of $116 in 2016 and $118 in 2015) |
|
8,936 |
|
10,013 |
| ||
Prepaid pension assets |
|
3,487 |
|
1,734 |
| ||
Deferred taxes |
|
4,289 |
|
4,822 |
| ||
Goodwill |
|
36,401 |
|
32,021 |
| ||
Intangible assets net |
|
4,881 |
|
3,487 |
| ||
Investments and sundry assets |
|
5,075 |
|
5,187 |
| ||
Total assets |
|
$ |
115,606 |
|
$ |
110,495 |
|
(Amounts may not add due to rounding.)
(The accompanying notes are an integral part of the financial statements.)
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION (CONTINUED)
(UNAUDITED)
LIABILITIES AND EQUITY
|
|
At September 30, |
|
At December 31, |
| ||
(Dollars in millions) |
|
2016 |
|
2015 |
| ||
Liabilities: |
|
|
|
|
| ||
Current liabilities: |
|
|
|
|
| ||
Taxes |
|
$ |
2,137 |
|
$ |
2,847 |
|
Short-term debt |
|
6,920 |
|
6,461 |
| ||
Accounts payable |
|
5,271 |
|
6,028 |
| ||
Compensation and benefits |
|
3,958 |
|
3,560 |
| ||
Deferred income |
|
10,815 |
|
11,021 |
| ||
Other accrued expenses and liabilities |
|
5,346 |
|
4,353 |
| ||
Total current liabilities |
|
34,447 |
|
34,269 |
| ||
Long-term debt |
|
35,563 |
|
33,428 |
| ||
Retirement and nonpension postretirement benefit obligations |
|
16,688 |
|
16,504 |
| ||
Deferred income |
|
3,611 |
|
3,771 |
| ||
Other liabilities |
|
8,138 |
|
8,099 |
| ||
Total liabilities |
|
98,447 |
|
96,071 |
| ||
Equity: |
|
|
|
|
| ||
IBM stockholders equity: |
|
|
|
|
| ||
Common stock, par value $0.20 per share, and additional paid-in capital |
|
53,759 |
|
53,262 |
| ||
Shares authorized: 4,687,500,000 |
|
|
|
|
| ||
Shares issued: 2016 - 2,224,594,441 |
|
|
|
|
| ||
2015 - 2,221,223,449 |
|
|
|
|
| ||
Retained earnings |
|
149,585 |
|
146,124 |
| ||
Treasury stock - at cost |
|
(158,170 |
) |
(155,518 |
) | ||
Shares: 2016 - 1,273,739,890 |
|
|
|
|
| ||
2015 - 1,255,494,724 |
|
|
|
|
| ||
Accumulated other comprehensive income/(loss) |
|
(28,164 |
) |
(29,607 |
) | ||
Total IBM stockholders equity |
|
17,010 |
|
14,262 |
| ||
Noncontrolling interests |
|
149 |
|
162 |
| ||
Total equity |
|
17,159 |
|
14,424 |
| ||
Total liabilities and equity |
|
$ |
115,606 |
|
$ |
110,495 |
|
(Amounts may not add due to rounding.)
(The accompanying notes are an integral part of the financial statements.)
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
|
|
Nine Months Ended September 30, |
| ||||
(Dollars in millions) |
|
2016 |
|
2015 |
| ||
Cash flows from operating activities: |
|
|
|
|
| ||
Net income |
|
$ |
7,371 |
|
$ |
8,727 |
|
Adjustments to reconcile net income to cash provided by operating activities |
|
|
|
|
| ||
Depreciation |
|
2,106 |
|
1,981 |
| ||
Amortization of intangibles |
|
1,148 |
|
884 |
| ||
Stock-based compensation |
|
403 |
|
369 |
| ||
Net (gain)/loss on asset sales and other |
|
100 |
|
584 |
| ||
Loss on Microelectronics business disposal |
|
|
|
48 |
| ||
Changes in operating assets and liabilities, net of acquisitions/divestitures |
|
2,174 |
|
(864 |
) | ||
Net cash provided by operating activities |
|
13,301 |
|
11,729 |
| ||
|
|
|
|
|
| ||
Cash flows from investing activities: |
|
|
|
|
| ||
Payments for property, plant and equipment |
|
(2,594 |
) |
(2,670 |
) | ||
Proceeds from disposition of property, plant and equipment |
|
234 |
|
314 |
| ||
Investment in software |
|
(441 |
) |
(407 |
) | ||
Acquisition of businesses, net of cash acquired |
|
(5,445 |
) |
(821 |
) | ||
Divestitures of businesses, net of cash transferred |
|
35 |
|
(488 |
) | ||
Non-operating finance receivables net |
|
1,130 |
|
1,334 |
| ||
Purchases of marketable securities and other investments |
|
(4,021 |
) |
(2,101 |
) | ||
Proceeds from disposition of marketable securities and other investments |
|
3,501 |
|
2,125 |
| ||
Net cash used in investing activities |
|
(7,600 |
) |
(2,714 |
) | ||
|
|
|
|
|
| ||
Cash flows from financing activities: |
|
|
|
|
| ||
Proceeds from new debt |
|
8,368 |
|
3,701 |
| ||
Payments to settle debt |
|
(5,616 |
) |
(5,389 |
) | ||
Short-term borrowings/(repayments) less than 90 days net |
|
(864 |
) |
1,080 |
| ||
Common stock repurchases |
|
(2,632 |
) |
(3,846 |
) | ||
Common stock transactions other |
|
166 |
|
271 |
| ||
Cash dividends paid |
|
(3,927 |
) |
(3,636 |
) | ||
Net cash used in financing activities |
|
(4,504 |
) |
(7,818 |
) | ||
|
|
|
|
|
| ||
Effect of exchange rate changes on cash and cash equivalents |
|
155 |
|
(194 |
) | ||
Net change in cash and cash equivalents |
|
1,352 |
|
1,004 |
| ||
|
|
|
|
|
| ||
Cash and cash equivalents at January 1 |
|
7,686 |
|
8,476 |
| ||
Cash and cash equivalents at September 30 |
|
$ |
9,039 |
|
$ |
9,480 |
|
(Amounts may not add due to rounding.)
(The accompanying notes are an integral part of the financial statements.)
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(UNAUDITED)
|
|
Common |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
|
|
Stock and |
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
| |||||||
|
|
Additional |
|
|
|
|
|
Other |
|
Total IBM |
|
Non- |
|
|
| |||||||
|
|
Paid-in |
|
Retained |
|
Treasury |
|
Comprehensive |
|
Stockholders |
|
Controlling |
|
Total |
| |||||||
(Dollars in millions) |
|
Capital |
|
Earnings |
|
Stock |
|
Income/(Loss) |
|
Equity |
|
Interests |
|
Equity |
| |||||||
Equity - January 1, 2016 |
|
$ |
53,262 |
|
$ |
146,124 |
|
$ |
(155,518 |
) |
$ |
(29,607 |
) |
$ |
14,262 |
|
$ |
162 |
|
$ |
14,424 |
|
Net income plus other comprehensive income/(loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Net income |
|
|
|
7,371 |
|
|
|
|
|
7,371 |
|
|
|
7,371 |
| |||||||
Other comprehensive income/(loss) |
|
|
|
|
|
|
|
1,442 |
|
1,442 |
|
|
|
1,442 |
| |||||||
Total comprehensive income/(loss) |
|
|
|
|
|
|
|
|
|
$ |
8,813 |
|
|
|
$ |
8,813 |
| |||||
Cash dividends paid common stock |
|
|
|
(3,927 |
) |
|
|
|
|
(3,927 |
) |
|
|
(3,927 |
) | |||||||
Common stock issued under employee plans (3,370,992 shares) |
|
513 |
|
|
|
|
|
|
|
513 |
|
|
|
513 |
| |||||||
Purchases (787,805 shares) and sales (336,480 shares) of treasury stock under employee plans net |
|
|
|
16 |
|
(72 |
) |
|
|
(56 |
) |
|
|
(56 |
) | |||||||
Other treasury shares purchased, not retired (17,793,841 shares) |
|
|
|
|
|
(2,579 |
) |
|
|
(2,579 |
) |
|
|
(2,579 |
) | |||||||
Changes in other equity |
|
(16 |
) |
0 |
|
|
|
|
|
(17 |
) |
|
|
(17 |
) | |||||||
Changes in noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
(12 |
) |
(12 |
) | |||||||
Equity - September 30, 2016 |
|
$ |
53,759 |
|
$ |
149,585 |
|
$ |
(158,170 |
) |
$ |
(28,164 |
) |
$ |
17,010 |
|
$ |
149 |
|
$ |
17,159 |
|
|
|
Common |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
|
|
Stock and |
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
| |||||||
|
|
Additional |
|
|
|
|
|
Other |
|
Total IBM |
|
Non- |
|
|
| |||||||
|
|
Paid-in |
|
Retained |
|
Treasury |
|
Comprehensive |
|
Stockholders |
|
Controlling |
|
Total |
| |||||||
(Dollars in millions) |
|
Capital |
|
Earnings |
|
Stock |
|
Income/(Loss) |
|
Equity |
|
Interests |
|
Equity |
| |||||||
Equity - January 1, 2015 |
|
$ |
52,666 |
|
$ |
137,793 |
|
$ |
(150,715 |
) |
$ |
(27,875 |
) |
$ |
11,868 |
|
$ |
146 |
|
$ |
12,014 |
|
Net income plus other comprehensive income/(loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Net income |
|
|
|
8,727 |
|
|
|
|
|
8,727 |
|
|
|
8,727 |
| |||||||
Other comprehensive income/(loss) |
|
|
|
|
|
|
|
(280 |
) |
(280 |
) |
|
|
(280 |
) | |||||||
Total comprehensive income/(loss) |
|
|
|
|
|
|
|
|
|
$ |
8,448 |
|
|
|
$ |
8,448 |
| |||||
Cash dividends paid common stock |
|
|
|
(3,636 |
) |
|
|
|
|
(3,636 |
) |
|
|
(3,636 |
) | |||||||
Common stock issued under employee plans (4,349,552 shares) |
|
556 |
|
|
|
|
|
|
|
556 |
|
|
|
556 |
| |||||||
Purchases (954,158 shares) and sales (484,817 shares) of treasury stock under employee plans net |
|
|
|
14 |
|
(93 |
) |
|
|
(79 |
) |
|
|
(79 |
) | |||||||
Other treasury shares purchased, not retired (24,293,844 shares) |
|
|
|
|
|
(3,861 |
) |
|
|
(3,861 |
) |
|
|
(3,861 |
) | |||||||
Changes in other equity |
|
(2 |
) |
|
|
|
|
|
|
(2 |
) |
|
|
(2 |
) | |||||||
Changes in noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
11 |
|
11 |
| |||||||
Equity - September 30, 2015 |
|
$ |
53,220 |
|
$ |
142,898 |
|
$ |
(154,669 |
) |
$ |
(28,155 |
) |
$ |
13,294 |
|
$ |
157 |
|
$ |
13,450 |
|
(Amounts may not add due to rounding.)
(The accompanying notes are an integral part of the financial statements.)
Notes to Consolidated Financial Statements:
1. Basis of Presentation: The accompanying Consolidated Financial Statements and footnotes of the International Business Machines Corporation (IBM or the company) have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The financial statements and footnotes are unaudited. In the opinion of the companys management, these statements include all adjustments, which are only of a normal recurring nature, necessary to present a fair statement of the companys results of operations, financial position and cash flows.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amount of assets, liabilities, revenue, costs, expenses and other comprehensive income/(loss) that are reported in the Consolidated Financial Statements and accompanying disclosures. These estimates are based on managements best knowledge of current events, historical experience, actions that the company may undertake in the future and on various other assumptions that are believed to be reasonable under the circumstances. As a result, actual results may be different from these estimates. Refer to the companys recast 2015 Annual Report on Form 8-K, dated June 13, 2016, pages 48 to 51, for a discussion of the companys critical accounting estimates.
On October 20, 2014, the company announced a definitive agreement to divest its Microelectronics business and manufacturing operations to GLOBALFOUNDRIES. The assets and liabilities of the Microelectronics business were reported as held for sale at December 31, 2014, and the operating results of the Microelectronics business have been reported as discontinued operations. The transaction closed on July 1, 2015. Refer to note 9, Acquisitions/Divestitures, for additional information on the transaction.
In January 2016, the company made a number of changes to its organizational structure and management system. These changes impacted the companys reportable segments, but did not impact the Consolidated Financial Statements. Refer to note 6, Segments, on pages 27 to 29 for additional information on the changes in reportable segments. The periods presented in this Form 10-Q are reported on a comparable basis. The company filed a recast 2015 Annual Report in a Form 8-K on June 13, 2016 to recast its historical segment information to reflect these changes.
In the first quarter of 2016, the company reported a benefit from income taxes of $983 million, and its effective tax rate was (95.1) percent, primarily driven by the resolution of a long-standing non-U.S. tax matter in February 2016. For the nine months ended September 30, 2016, the companys benefit from income taxes is $31 million and its effective tax rate is (0.4) percent. See Taxes on pages 71 and 72 for additional information.
Noncontrolling interest amounts of $3.1 million and $2.4 million, net of tax, for the three months ended September 30, 2016 and 2015, respectively, and $7.5 million and $5.9 million, net of tax, for the nine months ended September 30, 2016 and 2015, respectively, are included in the Consolidated Statement of Earnings within the other (income) and expense line item.
Interim results are not necessarily indicative of financial results for a full year. The information included in this Form 10-Q should be read in conjunction with the companys 2015 Annual Report and Form 8-K dated June 13, 2016.
Within the financial statements and tables presented, certain columns and rows may not add due to the use of rounded numbers for disclosure purposes. Percentages presented are calculated from the underlying whole-dollar amounts. Certain prior year amounts have been reclassified to conform to the current year presentation. This is annotated where applicable.
2. Accounting Changes:
New Standards to be Implemented
In June 2016, the Financial Accounting Standards Board (FASB) issued guidance for credit impairment based on an expected loss model rather than an incurred loss model. The guidance 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. The guidance is effective January 1, 2020 with a one year early adoption permitted. The company is evaluating the impact of the new guidance.
In March 2016, the FASB issued guidance which changes the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification in the Consolidated Statement of Cash Flows. The guidance is effective January 1, 2017 and early adoption is permitted. The impact of the guidance could result in increased volatility of the companys provision for income taxes and earnings per share in the Consolidated Statement of Earnings, depending on the companys share price at exercise or vesting of share-based awards compared to grant date. The standard is not expected to have a material impact upon adoption.
Notes to Consolidated Financial Statements (continued)
In February 2016, the FASB issued guidance which changes the accounting for leases. The guidance requires lessees to recognize right-of-use assets and lease liabilities for most leases in the Consolidated Statement of Financial Position. The guidance makes some changes to lessor accounting, including the elimination of the use of residual value guarantee insurance in the capital lease test, and overall aligns with the new revenue recognition guidance. The guidance also requires qualitative and quantitative disclosures to assess the amount, timing and uncertainty of cash flows arising from leases. The guidance is effective January 1, 2019 and early adoption is permitted. The company is currently evaluating the impact of the new guidance. The companys operating lease commitments were $6.4 billion at December 31, 2015, and in 2015, the use of residual value guarantee insurance resulted in the company recognizing $608 million of sales-type lease revenue that would otherwise have been recognized as operating lease revenue over the lease term.
In January 2016, the FASB issued guidance which addresses aspects of recognition, measurement, presentation and disclosure of financial instruments. Certain equity investments will be measured at fair value with changes recognized in net income. The amendment also simplifies the impairment test of equity investments that lack readily determinable fair value. The guidance is effective January 1, 2018 and early adoption is not permitted except for limited provisions. The guidance is not expected to have a material impact in the consolidated financial results.
The FASB issued guidance on the recognition of revenue from contracts with customers in May 2014 with amendments in 2015 and 2016. Revenue recognition will depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented, or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). The guidance was initially effective January 1, 2017 and early adoption was not permitted. The amended guidance provides for a one-year deferral of the effective date to January 1, 2018, with an option of applying the standard on the original effective date. The company will adopt the guidance on January 1, 2018 and apply the cumulative catch-up transition method. The company is continuing to evaluate the impact of the new guidance in the consolidated financial results.
Standards Implemented
In November 2015, the FASB issued guidance which requires deferred tax liabilities and assets be classified as noncurrent in the statement of financial position. The guidance was effective January 1, 2016 with early adoption permitted. The company adopted the guidance in the fourth quarter of 2015 on a retrospective basis. The company reclassified current deferred tax assets of $2.0 billion at December 31, 2014 to deferred tax assets and current deferred tax liabilities of $19 million at December 31, 2014 to other liabilities from other accrued expenses and liabilities in the Consolidated Statement of Financial Position. In order to offset deferred tax assets and liabilities for presentation as a single noncurrent amount by tax jurisdiction, the company also reclassified $178 million at December 31, 2014 from deferred tax assets to other liabilities in the Consolidated Statement of Financial Position.
In September 2015, the FASB issued guidance eliminating the requirement that an acquirer in a business combination account for a measurement-period adjustment retrospectively. Instead, an acquirer will recognize a measurement-period adjustment during the period in which the amount of the adjustment is determined. In addition, the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date should be presented separately on the face of the income statement or disclosed in the notes. The guidance was effective January 1, 2016 on a prospective basis. The guidance did not have a material impact in the consolidated financial results.
In May 2015, the FASB issued guidance which removed the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The amendments also removed the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. Rather, those disclosures are limited to investments for which the entity has elected to measure the fair value using that practical expedient. The guidance was effective January 1, 2016. The guidance was a change in disclosure only and did not have an impact in the consolidated financial results.
In April 2015, the FASB issued guidance about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a services contract. All software licenses recognized under this guidance will be accounted for consistent with other licenses of intangible assets. The guidance was
Notes to Consolidated Financial Statements (continued)
effective January 1, 2016 and the company adopted it on a prospective basis. The guidance did not have a material impact in the consolidated financial results.
In April 2015, the FASB issued guidance which requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The guidance was effective January 1, 2016 with early adoption permitted. The company adopted the guidance in the fourth quarter of 2015 on a retrospective basis. The company had debt issuance costs of $86 million and $74 million at September 30, 2016 and December 31, 2015, respectively. Debt issuance costs were previously included in investments and sundry assets in the Consolidated Statement of Financial Position.
3. Financial Instruments:
Fair Value Measurements
Accounting guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Under this guidance, the company is required to classify certain assets and liabilities based on the following fair value hierarchy:
· Level 1Quoted prices (unadjusted) in active markets for identical assets or liabilities that can be accessed at the measurement date;
· Level 2Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and
· Level 3Unobservable inputs for the asset or liability.
The guidance requires the use of observable market data if such data is available without undue cost and effort.
When available, the company uses unadjusted quoted market prices in active markets to measure the fair value and classifies such items 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 companys own credit risk when valuing all liabilities measured at fair value. The methodology is consistent with that applied in developing counterparty credit risk adjustments, but incorporates the companys own credit risk as observed in the credit default swap market.
As an example, the fair value of derivatives is derived utilizing a discounted cash flow model that uses observable market inputs such as known notional value amounts, yield curves, spot and forward exchange rates as well as discount rates. These inputs relate to liquid, heavily traded currencies with active markets which are available for the full term of the derivative.
Certain financial assets are measured at fair value on a nonrecurring basis. These assets include equity method investments that are recognized at fair value at the measurement date to the extent that they are deemed to be other-than-temporarily impaired. Certain assets that are measured at fair value on a recurring basis can be subject to nonrecurring fair value measurements. These assets include available-for-sale equity investments that are deemed to be other-than-temporarily impaired. In the event of an other-than-temporary impairment of a financial investment, fair value is measured using a model described above.
Non-financial assets such as property, plant and equipment, land, goodwill and intangible assets are also subject to nonrecurring fair value measurements if they are deemed to be impaired. The impairment models used for nonfinancial assets depend on the type of asset. During the nine months ended September 30, 2016, a pre-tax impairment charge related to
Notes to Consolidated Financial Statements (continued)
certain property, plant and equipment of $218 million was recorded. There were no material impairments of non-financial assets for the nine months ended September 30, 2015.
Accounting guidance permits the measurement of eligible financial assets, financial liabilities and firm commitments at fair value, on an instrument-by-instrument basis, that are otherwise not permitted to be accounted for at fair value under other accounting standards. This election is irrevocable. The company has not applied the fair value option to any eligible assets or liabilities.
The following tables present the companys financial assets and financial liabilities that are measured at fair value on a recurring basis at September 30, 2016 and December 31, 2015.
(Dollars in millions) |
|
|
|
|
|
|
|
|
| ||||
At September 30, 2016 |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
| ||||
Assets: |
|
|
|
|
|
|
|
|
| ||||
Cash equivalents (1) |
|
|
|
|
|
|
|
|
| ||||
Time deposits and certificates of deposit |
|
$ |
|
|
$ |
1,948 |
|
$ |
|
|
$ |
1,948 |
|
Money market funds |
|
2,237 |
|
|
|
|
|
2,237 |
| ||||
U.S. government securities |
|
|
|
1,299 |
|
|
|
1,299 |
| ||||
Canadian government securities |
|
|
|
456 |
|
|
|
456 |
| ||||
Other securities |
|
|
|
34 |
|
|
|
34 |
| ||||
Total |
|
2,237 |
|
3,737 |
|
|
|
5,974 |
(6) | ||||
Debt securities - current (2) |
|
|
|
929 |
|
|
|
929 |
(6) | ||||
Debt securities - noncurrent (3) |
|
1 |
|
7 |
|
|
|
9 |
| ||||
Available-for-sale equity investments (3) |
|
12 |
|
|
|
|
|
12 |
| ||||
Derivative assets (4) |
|
|
|
|
|
|
|
|
| ||||
Interest rate contracts |
|
|
|
919 |
|
|
|
919 |
| ||||
Foreign exchange contracts |
|
|
|
245 |
|
|
|
245 |
| ||||
Equity contracts |
|
|
|
2 |
|
|
|
2 |
| ||||
Total |
|
|
|
1,166 |
|
|
|
1,166 |
(7) | ||||
Total assets |
|
$ |
2,250 |
|
$ |
5,840 |
|
$ |
|
|
$ |
8,090 |
(7) |
Liabilities: |
|
|
|
|
|
|
|
|
| ||||
Derivative liabilities (5) |
|
|
|
|
|
|
|
|
| ||||
Foreign exchange contracts |
|
$ |
|
|
$ |
277 |
|
$ |
|
|
$ |
277 |
|
Equity contracts |
|
|
|
9 |
|
|
|
9 |
| ||||
Total liabilities |
|
$ |
|
|
$ |
286 |
|
$ |
|
|
$ |
286 |
(7) |
(1) |
Included within cash and cash equivalents in the Consolidated Statement of Financial Position. |
(2) |
U.S. government securities, time deposits and certificates of deposit reported as marketable securities in the Consolidated Statement of Financial Position. |
(3) |
Included within investments and sundry assets in the Consolidated Statement of Financial Position. |
(4) |
The gross balances of derivative assets contained within prepaid expenses and other current assets, and investments and sundry assets in the Consolidated Statement of Financial Position at September 30, 2016 were $198 million and $967 million, respectively. |
(5) |
The gross balances of derivative liabilities contained within other accrued expenses and liabilities, and other liabilities in the Consolidated Statement of Financial Position at September 30, 2016 were $282 million and $3 million, respectively. |
(6) |
Available-for-sale securities with carrying values that approximate fair value. |
(7) |
If derivative exposures covered by a qualifying master netting agreement had been netted in the Consolidated Statement of Financial Position, the total derivative asset and liability positions each would have been reduced by $185 million. |
Notes to Consolidated Financial Statements (continued)
(Dollars in millions) |
|
|
|
|
|
|
|
|
| ||||
At December 31, 2015 |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
| ||||
Assets: |
|
|
|
|
|
|
|
|
| ||||
Cash equivalents (1) |
|
|
|
|
|
|
|
|
| ||||
Time deposits and certificates of deposit |
|
$ |
|
|
$ |
2,856 |
|
$ |
|
|
$ |
2,856 |
|
Money market funds |
|
2,069 |
|
|
|
|
|
2,069 |
| ||||
Other securities |
|
|
|
18 |
|
|
|
18 |
| ||||
Total |
|
2,069 |
|
2,874 |
|
|
|
4,943 |
(6) | ||||
Debt securities - current (2) |
|
|
|
506 |
|
|
|
506 |
(6) | ||||
Debt securities - noncurrent (3) |
|
1 |
|
6 |
|
|
|
8 |
| ||||
Trading security investments (3) |
|
28 |
|
|
|
|
|
28 |
| ||||
Available-for-sale equity investments (3) |
|
192 |
|
|
|
|
|
192 |
| ||||
Derivative assets (4) |
|
|
|
|
|
|
|
|
| ||||
Interest rate contracts |
|
|
|
656 |
|
|
|
656 |
| ||||
Foreign exchange contracts |
|
|
|
332 |
|
|
|
332 |
| ||||
Equity contracts |
|
|
|
6 |
|
|
|
6 |
| ||||
Total |
|
|
|
994 |
|
|
|
994 |
(7) | ||||
Total assets |
|
$ |
2,290 |
|
$ |
4,381 |
|
$ |
|
|
$ |
6,671 |
(7) |
Liabilities: |
|
|
|
|
|
|
|
|
| ||||
Derivative liabilities (5) |
|
|
|
|
|
|
|
|
| ||||
Foreign exchange contracts |
|
$ |
|
|
$ |
164 |
|
$ |
|
|
$ |
164 |
|
Equity contracts |
|
|
|
19 |
|
|
|
19 |
| ||||
Interest rate contracts |
|
|
|
3 |
|
|
|
3 |
| ||||
Total liabilities |
|
$ |
|
|
$ |
186 |
|
$ |
|
|
$ |
186 |
(7) |
(1) |
Included within cash and cash equivalents in the Consolidated Statement of Financial Position. |
(2) |
Commercial paper and certificates of deposit reported as marketable securities in the Consolidated Statement of Financial Position. |
(3) |
Included within investments and sundry assets in the Consolidated Statement of Financial Position. |
(4) |
The gross balances of derivative assets contained within prepaid expenses and other current assets, and investments and sundry assets in the Consolidated Statement of Financial Position at December 31, 2015 were $292 million and $702 million, respectively. |
(5) |
The gross balances of derivative liabilities contained within other accrued expenses and liabilities, and other liabilities in the Consolidated Statement of Financial Position at December 31, 2015 were $164 million and $22 million, respectively. |
(6) |
Available-for-sale securities with carrying values that approximate fair value. |
(7) |
If derivative exposures covered by a qualifying master netting agreement had been netted in the Consolidated Statement of Financial Position, the total derivative asset and liability positions each would have been reduced by $139 million. |
There were no transfers between Levels 1 and 2 for the nine months ended September 30, 2016 and the year ended December 31, 2015.
Financial Assets and Liabilities Not Measured at Fair Value
Short-Term Receivables and Payables
Notes and other accounts receivable and other investments are financial assets with carrying values that approximate fair value. Accounts payable, other accrued expenses and short-term debt (excluding the current portion of long-term debt) are financial liabilities with carrying values that approximate fair value. If measured at fair value in the financial statements, these financial instruments would be classified as Level 3 in the fair value hierarchy.
Loans and Long-term Receivables
Fair values are based on discounted future cash flows using current interest rates offered for similar loans to clients with similar credit ratings for the same remaining maturities. At September 30, 2016 and December 31, 2015, 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.
Notes to Consolidated Financial Statements (continued)
Long-Term Debt
Fair value of publicly-traded long-term debt is based on quoted market prices for the identical liability when traded as an asset in an active market. For other long-term debt for which a quoted market price is not available, an expected present value 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 $35,563 million and $33,428 million, and the estimated fair value was $38,455 million and $35,220 million at September 30, 2016 and December 31, 2015, respectively. If measured at fair value in the financial statements, long-term debt (including the current portion) would be classified as Level 2 in the fair value hierarchy.
Debt and Marketable Equity Securities
The companys cash equivalents and current debt securities are considered available-for-sale and recorded at fair value, which is not materially different from carrying value, in the Consolidated Statement of Financial Position.
The following tables summarize the companys noncurrent debt and marketable equity securities which are considered available-for-sale and recorded at fair value in the Consolidated Statement of Financial Position.
|
|
|
|
Gross |
|
Gross |
|
|
| ||||
(Dollars in millions) |
|
Adjusted |
|
Unrealized |
|
Unrealized |
|
Fair |
| ||||
At September 30, 2016: |
|
Cost |
|
Gains |
|
Losses |
|
Value |
| ||||
Debt securities noncurrent(1) |
|
$ |
6 |
|
$ |
3 |
|
$ |
|
|
$ |
9 |
|
Available-for-sale equity investments(1) |
|
$ |
3 |
|
$ |
9 |
|
$ |
0 |
|
$ |
12 |
|
(1) Included within investments and sundry assets in the Consolidated Statement of Financial Position.
|
|
|
|
Gross |
|
Gross |
|
|
| ||||
(Dollars in millions) |
|
Adjusted |
|
Unrealized |
|
Unrealized |
|
Fair |
| ||||
At December 31, 2015: |
|
Cost |
|
Gains |
|
Losses |
|
Value |
| ||||
Debt securities noncurrent(1) |
|
$ |
5 |
|
$ |
3 |
|
$ |
|
|
$ |
8 |
|
Available-for-sale equity investments(1) |
|
$ |
186 |
|
$ |
6 |
|
$ |
0 |
|
$ |
192 |
|
(1) Included within investments and sundry assets in the Consolidated Statement of Financial Position.
During the fourth quarter of 2014, the company acquired equity securities in conjunction with the sale of the System x business which were classified as available-for-sale securities. Based on an evaluation of available evidence as of December 31, 2015, the company recorded an other-than-temporary impairment loss of $86 million resulting in an adjusted cost basis of $185 million as of December 31, 2015. In the first quarter of 2016, the company recorded a gross realized loss of $37 million (before taxes) related to the sale of all the outstanding shares. The loss on this sale was recorded in other (income) and expense in the Consolidated Statement of Earnings.
Sales of debt and available-for-sale equity investments during the period were as follows:
(Dollars in millions) |
|
|
|
|
| ||
For the three months ended September 30: |
|
2016 |
|
2015 |
| ||
Proceeds |
|
$ |
1 |
|
$ |
1 |
|
Gross realized gains (before taxes) |
|
1 |
|
0 |
| ||
Gross realized losses (before taxes) |
|
|
|
0 |
| ||
|
|
|
|
|
| ||
(Dollars in millions) |
|
|
|
|
| ||
For the nine months ended September 30: |
|
2016 |
|
2015 |
| ||
Proceeds |
|
$ |
150 |
|
$ |
7 |
|
Gross realized gains (before taxes) |
|
1 |
|
1 |
| ||
Gross realized losses (before taxes) |
|
37 |
|
1 |
|
The after-tax net unrealized holding gains/(losses) on available-for-sale debt and equity securities that have been included in other comprehensive income/(loss) for the period and after-tax net (gains)/losses reclassified from accumulated other comprehensive income/(loss) to net income were as follows:
Notes to Consolidated Financial Statements (continued)
(Dollars in millions) |
|
|
|
|
| ||
For the three months ended September 30: |
|
2016 |
|
2015 |
| ||
Net unrealized gains/(losses) arising during the period |
|
$ |
(1 |
) |
$ |
(63 |
) |
Net unrealized (gains)/losses reclassified to net income* |
|
(1 |
) |
0 |
| ||
*There were no writedowns for the three months ended September 30, 2016 and 2015, respectively.
(Dollars in millions) |
|
|
|
|
| ||
For the nine months ended September 30: |
|
2016 |
|
2015 |
| ||
Net unrealized gains/(losses) arising during the period |
|
$ |
(22 |
) |
$ |
(52 |
) |
Net unrealized (gains)/losses reclassified to net income* |
|
22 |
|
0 |
| ||
* There were no writedowns for the nine months ended September 30, 2016 and 2015, respectively.
The contractual maturities of substantially all available-for-sale debt securities are less than one year at September 30, 2016.
Derivative Financial Instruments
The company operates in multiple functional currencies and is a significant lender and borrower in the global markets. In the normal course of business, the company is exposed to the impact of interest rate changes and foreign currency fluctuations, and to a lesser extent equity and commodity price changes and client credit risk. The company limits these risks by following established risk management policies and procedures, including the use of derivatives, and, where cost effective, financing with debt in the currencies in which assets are denominated. For interest rate exposures, derivatives are used to better align rate movements between the interest rates associated with the companys lease and other financial assets and the interest rates associated with its financing debt. Derivatives are also used to manage the related cost of debt. For foreign currency exposures, derivatives are used to better manage the cash flow volatility arising from foreign exchange rate fluctuations.
As a result of the use of derivative instruments, the company is exposed to the risk that counterparties to derivative contracts will fail to meet their contractual obligations. To mitigate the counterparty credit risk, the company has a policy of only entering into contracts with carefully selected major financial institutions based upon their overall credit profile. The companys established policies and procedures for mitigating credit risk on principal transactions include reviewing and establishing limits for credit exposure and continually assessing the creditworthiness of counterparties. The right of set-off that exists under certain of these arrangements enables the legal entities of the company subject to the arrangement to net amounts due to and from the counterparty reducing the maximum loss from credit risk in the event of counterparty default.
The company is also a party to collateral security arrangements with most of its major derivative counterparties. These arrangements require the company to hold or post collateral (cash or U.S. Treasury securities) when the derivative fair values exceed contractually established thresholds. Posting thresholds can be fixed or can vary based on credit default swap pricing or credit ratings received from the major credit agencies. The aggregate fair value of all derivative instruments under these collateralized arrangements that were in a liability position at September 30, 2016 and December 31, 2015 was $64 million and $28 million, respectively, for which no collateral was posted at September 30, 2016 and December 31, 2015. Full collateralization of these agreements would be required in the event that the companys credit rating falls below investment grade or if its credit default swap spread exceeds 250 basis points, as applicable, pursuant to the terms of the collateral security arrangements. The aggregate fair value of derivative instruments in asset positions as of September 30, 2016 and December 31, 2015 was $1,166 million and $994 million, respectively. This amount represents the maximum exposure to loss at the reporting date if the counterparties failed to perform as contracted. This exposure was reduced by $185 million and $139 million at September 30, 2016 and December 31, 2015, respectively, of liabilities included in master netting arrangements with those counterparties. Additionally, at September 30, 2016 and December 31, 2015, this exposure was reduced by $224 million and $90 million of cash collateral, and $100 million and $40 million of non-cash collateral in U.S. Treasury securities, respectively, received by the company. At September 30, 2016 and December 31, 2015, the net exposure related to derivative assets recorded in the Consolidated Statement of Financial Position was $656 million and $726 million, respectively. At September 30, 2016 and December 31, 2015, the net exposure related to derivative liabilities recorded in the Consolidated Statement of Financial Position was $100 million and $47 million, respectively.
In the Consolidated Statement of Financial Position, the company does not offset derivative assets against liabilities in master netting arrangements nor does it offset receivables or payables recognized upon payment or receipt of cash collateral against the fair values of the related derivative instruments. No amount was recognized in other receivables at September 30,
Notes to Consolidated Financial Statements (continued)
2016 or December 31, 2015 for the right to reclaim cash collateral. The amount recognized in accounts payable for the obligation to return cash collateral was $224 million and $90 million at September 30, 2016 and December 31, 2015, respectively. The company restricts the use of cash collateral received to rehypothecation, and therefore reports it in prepaid expenses and other current assets in the Consolidated Statement of Financial Position. No amount was rehypothecated at September 30, 2016 and December 31, 2015.
The company may employ derivative instruments to hedge the volatility in stockholders equity resulting from changes in currency exchange rates of significant foreign subsidiaries of the company with respect to the U.S. dollar. These instruments, designated as net investment hedges, expose the company to liquidity risk as the derivatives have an immediate cash flow impact upon maturity which is not offset by a cash flow from the translation of the underlying hedged equity. The company monitors this cash loss potential on an ongoing basis and may discontinue some of these hedging relationships by de-designating or terminating the derivative instrument in order to manage the liquidity risk. Although not designated as accounting hedges, the company may utilize derivatives to offset the changes in the fair value of the de-designated instruments from the date of de-designation until maturity.
In its hedging programs, the company uses forward contracts, futures contracts, interest-rate swaps, cross-currency 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 uses interest-rate swaps to convert specific fixed-rate debt issuances into variable-rate debt (i.e., fair value hedges) and to convert specific variable-rate debt issuances into fixed-rate debt (i.e., cash flow hedges). At September 30, 2016 and December 31, 2015, the total notional amount of the companys interest rate swaps was $7.3 billion at both periods. The weighted-average remaining maturity of these instruments at September 30, 2016 and December 31, 2015 was approximately 6.5 years and 7.2 years, respectively.
Forecasted Debt Issuance
The company is exposed to interest rate volatility on future debt issuances. To manage this risk, the company may use forward starting interest-rate swaps to lock in the rate on the interest payments related to the forecasted debt issuance. These swaps are accounted for as cash flow hedges. The company did not have any derivative instruments relating to this program outstanding at September 30, 2016 and December 31, 2015.
At September 30, 2016 and December 31, 2015, net gains of less than $1 million (before taxes), respectively, were recorded in accumulated other comprehensive income/(loss) in connection with cash flow hedges of the companys borrowings. Within these amounts, less than $1 million of gains, respectively, are expected to be reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying transactions.
Foreign Exchange Risk
Long-Term Investments in Foreign Subsidiaries (Net Investment)
A large portion of the companys foreign currency denominated debt portfolio is designated as a hedge of net investment in foreign subsidiaries to reduce the volatility in stockholders equity caused by changes in foreign currency exchange rates in the functional currency of major foreign subsidiaries with respect to the U.S. dollar. The company also uses cross-currency swaps and foreign exchange forward contracts for this risk management purpose. At September 30, 2016 and December 31, 2015, the total notional amount of derivative instruments designated as net investment hedges was $9.1 billion and $5.5 billion, respectively. At September 30, 2016 and December 31, 2015, the weighted-average remaining maturity of these instruments was approximately 0.2 years at both dates.
Notes to Consolidated Financial Statements (continued)
Anticipated Royalties and Cost Transactions
The companys operations generate significant nonfunctional currency, third-party vendor payments and intercompany payments for royalties and goods and services among the companys non-U.S. subsidiaries and with the parent company. In anticipation of these foreign currency cash flows and in view of the volatility of the currency markets, the company selectively employs foreign exchange forward contracts to manage its currency risk. These forward contracts are accounted for as cash flow hedges. The maximum length of time over which the company has hedged its exposure to the variability in future cash flows is four years. At September 30, 2016 and December 31, 2015, the total notional amount of forward contracts designated as cash flow hedges of forecasted royalty and cost transactions was $7.8 billion and $8.2 billion, respectively. The weighted-average remaining maturity of these instruments at September 30, 2016 and December 31, 2015 was 0.6 years and 0.7 years, respectively.
At September 30, 2016 and December 31, 2015, in connection with cash flow hedges of anticipated royalties and cost transactions, the company recorded net losses of $45 million and net gains of $147 million (before taxes), respectively, in accumulated other comprehensive income/(loss). Within these amounts, $108 million of losses and $121 million of gains, respectively, are expected to 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. The maximum length of time over which the company has hedged its exposure to the variability in future cash flows is approximately nine years. At September 30, 2016 the total notional amount of cross-currency swaps designated as cash flow hedges of foreign currency denominated debt was $1.4 billion. At December 31, 2015, no amounts were outstanding under this program.
At September 30, 2016 and December 31, 2015, in connection with cash flow hedges of foreign currency denominated borrowings, the company recorded net losses of $4 million and net losses of $2 million (before taxes), respectively, in accumulated other comprehensive income/(loss). Within these amounts, $25 million of gains and less than $1 million of losses, respectively, are expected to be reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying 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 companys nonfunctional currency assets and liabilities. The terms of these forward and swap contracts are generally less than one year. The changes in the fair values of these contracts and of the underlying hedged exposures are generally offsetting and are recorded in other (income) and expense in the Consolidated Statement of Earnings. At September 30, 2016 and December 31, 2015, the total notional amount of derivative instruments in economic hedges of foreign currency exposure was $13.7 billion and $11.7 billion, respectively.
Equity Risk Management
The company is exposed to market price changes in certain broad market indices and in the companys own stock primarily related to certain obligations to employees. Changes in the overall value of these employee compensation obligations are recorded in selling, general and administrative (SG&A) expense in the Consolidated Statement of Earnings. Although not designated as accounting hedges, the company utilizes derivatives, including equity swaps and futures, to economically hedge the exposures related to its employee compensation obligations. The derivatives are linked to the total return on certain broad market indices or the total return on the companys common stock, and are recorded at fair value with gains or losses also reported in SG&A expense in the Consolidated Statement of Earnings. At September 30, 2016 and December 31, 2015, the total notional amount of derivative instruments in economic hedges of these compensation obligations was $1.2 billion for both periods.
Notes to Consolidated Financial Statements (continued)
Other Risks
The company may hold warrants to purchase shares of common stock in connection with various investments that are deemed derivatives because they contain net share or net cash settlement provisions. The company records the changes in the fair value of these warrants in other (income) and expense in the Consolidated Statement of Earnings. The company did not have any warrants qualifying as derivatives outstanding at September 30, 2016 and December 31, 2015.
The company is exposed to a potential loss if a client fails to pay amounts due under contractual terms. The company may utilize credit default swaps to economically hedge its credit exposures. The swaps are recorded at fair value with gains and losses reported in other (income) and expense in the Consolidated Statement of Earnings. The company did not have any derivative instruments relating to this program outstanding at September 30, 2016 and December 31, 2015.
The company is exposed to market volatility on certain investment securities. The company may utilize options or forwards to economically hedge its market exposure. The derivatives are recorded at fair value with gains and losses reported in other (income) and expense in the Consolidated Statement of Earnings. At September 30, 2016 the company did not have any derivative instruments relating to this program outstanding. At December 31, 2015 the total notional amount of derivative instruments in economic hedges of investment securities was less than $0.1 billion.
The following tables provide a quantitative summary of the derivative and non-derivative instrument-related risk management activity as of September 30, 2016 and December 31, 2015, as well as for the three and nine months ended September 30, 2016 and 2015, respectively.
Notes to Consolidated Financial Statements (continued)
Fair Values of Derivative Instruments in the Consolidated Statement of Financial Position
As of September 30, 2016 and December 31, 2015
|
|
Fair Value of Derivative Assets |
|
Fair Value of Derivative Liabilities |
| ||||||||||||
|
|
Balance Sheet |
|
|
|
|
|
Balance Sheet |
|
|
|
|
| ||||
(Dollars in millions) |
|
Classification |
|
9/30/2016 |
|
12/31/2015 |
|
Classification |
|
9/30/2016 |
|
12/31/2015 |
| ||||
Designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest rate contracts: |
|
Prepaid expenses and other current assets |
|
$ |
|
|
$ |
|
|
Other accrued expenses and liabilities |
|
$ |
|
|
$ |
|
|
|
|
Investments and sundry assets |
|
919 |
|
656 |
|
Other liabilities |
|
|
|
3 |
| ||||
Foreign exchange contracts: |
|
Prepaid expenses and other current assets |
|
123 |
|
197 |
|
Other accrued expenses and liabilities |
|
200 |
|
70 |
| ||||
|
|
Investments and sundry assets |
|
49 |
|
5 |
|
Other liabilities |
|
3 |
|
19 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Fair value of derivative assets |
|
|
|
$ |
1,091 |
|
$ |
858 |
|
Fair value of derivative liabilities |
|
$ |
203 |
|
$ |
92 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Not designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Foreign exchange contracts: |
|
Prepaid expenses and other current assets |
|
$ |
73 |
|
$ |
90 |
|
Other accrued expenses and liabilities |
|
$ |
74 |
|
$ |
75 |
|
|
|
Investments and sundry assets |
|
0 |
|
40 |
|
Other liabilities |
|
|
|
|
| ||||
Equity contracts: |
|
Prepaid expenses and other current assets |
|
2 |
|
6 |
|
Other accrued expenses and liabilities |
|
9 |
|
19 |
| ||||
|
|
Investments and sundry assets |
|
|
|
|
|
Other liabilities |
|
|
|
|
| ||||
Fair value of derivative assets |
|
|
|
$ |
75 |
|
$ |
136 |
|
Fair value of derivative liabilities |
|
$ |
82 |
|
$ |
94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total debt designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Short-term debt |
|
|
|
N/A |
|
N/A |
|
|
|
$ |
829 |
|
$ |
|
| ||
Long-term debt |
|
|
|
N/A |
|
N/A |
|
|
|
$ |
8,412 |
|
$ |
7,945 |
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total |
|
|
|
$ |
1,166 |
|
$ |
994 |
|
|
|
$ |
9,526 |
|
$ |
8,131 |
|
N/A-not applicable
Notes to Consolidated Financial Statements (continued)
The Effect of Derivative Instruments in the Consolidated Statement of Earnings
For the three months ended September 30, 2016 and 2015
|
|
Gain (Loss) Recognized in Earnings |
| ||||||||||||
|
|
Consolidated |
|
Recognized on |
|
Attributable to Risk |
| ||||||||
(Dollars in millions) |
|
Statement of |
|
Derivatives(1) |
|
Being Hedged(2) |
| ||||||||
For the three months ended September 30: |
|
Earnings Line Item |
|
2016 |
|
2015 |
|
2016 |
|
2015 |
| ||||
Derivative instruments in fair value hedges(5): |
|
|
|
|
|
|
|
|
|
|
| ||||
Interest rate contracts |
|
Cost of financing |
|
$ |
(20 |
) |
$ |
125 |
|
$ |
40 |
|
$ |
(99 |
) |
|
|
Interest expense |
|
(21 |
) |
112 |
|
43 |
|
(88 |
) | ||||
Derivative instruments not designated as hedging instruments(1): |
|
|
|
|
|
|
|
|
|
|
| ||||
Foreign exchange contracts |
|
Other (income) and expense |
|
30 |
|
208 |
|
N/A |
|
N/A |
| ||||
Interest rate contracts |
|
Other (income) and expense |
|
0 |
|
0 |
|
N/A |
|
N/A |
| ||||
Equity contracts |
|
SG&A expense |
|
45 |
|
(81 |
) |
N/A |
|
N/A |
| ||||
|
|
Other (income) and expense |
|
0 |
|
(8 |
) |
N/A |
|
N/A |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total |
|
|
|
$ |
34 |
|
$ |
357 |
|
$ |
83 |
|
$ |
(187 |
) |
|
|
Gain (Loss) Recognized in Earnings and Other Comprehensive Income |
| ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(Ineffectiveness) and |
| ||||||||
(Dollars in millions) |
|
Effective Portion |
|
Consolidated |
|
Effective Portion Reclassified |
|
Amounts Excluded from |
| ||||||||||||
For the three months |
|
Recognized in OCI |
|
Statement of |
|
from AOCI |
|
Effectiveness Testing(3) |
| ||||||||||||
ended September 30: |
|
2016 |
|
2015 |
|
Earnings Line Item |
|
2016 |
|
2015 |
|
2016 |
|
2015 |
| ||||||
Derivative instruments in cash flow hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Interest rate contracts |
|
$ |
|
|
$ |
|
|
Interest expense |
|
$ |
(7 |
) |
$ |
0 |
|
$ |
|
|
$ |
|
|
Foreign exchange contracts |
|
35 |
|
36 |
|
Other (income) and expense |
|
(6 |
) |
185 |
|
(1 |
) |
0 |
| ||||||
|
|
|
|
|
|
Cost of sales |
|
(4 |
) |
46 |
|
|
|
|
| ||||||
|
|
|
|
|
|
SG&A expense |
|
2 |
|
43 |
|
|
|
|
| ||||||
Instruments in net investment hedges(4): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Foreign exchange contracts |
|
(131 |
) |
73 |
|
Interest expense |
|
|
|
|
|
25 |
|
4 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total |
|
$ |
(96 |
) |
$ |
109 |
|
|
|
$ |
(15 |
) |
$ |
273 |
|
$ |
24 |
|
$ |
4 |
|
N/A-not applicable
Note: OCI represents Other comprehensive income/(loss) in the Consolidated Statement of Comprehensive Income and AOCI represents Accumulated other comprehensive income/(loss) in the Consolidated Statement of Changes in Equity.
(1) The amount includes changes in clean fair values of the derivative instruments in fair value hedging relationships and the periodic accrual for coupon payments required under these derivative contracts.
(2) The amount includes basis adjustments to the carrying value of the hedged item recorded during the period and amortization of basis adjustments recorded on de-designated hedging relationships during the period.
(3) The amount of gain/(loss) recognized in income represents ineffectiveness on hedge relationships.
(4) Instruments in net investment hedges include derivative and non-derivative instruments.
(5) For the three month periods ended September 30, 2016 and September 30, 2015, fair value hedges resulted in a loss of $3 million and a gain of $1 million in ineffectiveness, respectively.
Notes to Consolidated Financial Statements (continued)
The Effect of Derivative Instruments in the Consolidated Statement of Earnings
For the nine months ended September 30, 2016 and 2015
|
|
Gain (Loss) Recognized in Earnings |
| ||||||||||||
|
|
Consolidated |
|
Recognized on |
|
Attributable to Risk |
| ||||||||
(Dollars in millions) |
|
Statement of |
|
Derivatives(1) |
|
Being Hedged(2) |
| ||||||||
For the nine months ended September 30: |
|
Earnings Line Item |
|
2016 |
|
2015 |
|
2016 |
|
2015 |
| ||||
Derivative instruments in fair value hedges(4): |
|
|
|
|
|
|
|
|
|
|
| ||||
Interest rate contracts |
|
Cost of financing |
|
$ |
195 |
|
$ |
145 |
|
$ |
(127 |
) |
$ |
(63 |
) |
|
|
Interest expense |
|
214 |
|
121 |
|
(140 |
) |
(53 |
) | ||||
Derivative instruments not designated as hedging instruments(1): |
|
|
|
|
|
|
|
|
|
|
| ||||
Foreign exchange contracts |
|
Other (income) and expense |
|
335 |
|
134 |
|
N/A |
|
N/A |
| ||||
Interest rate contracts |
|
Other (income) and expense |
|
0 |
|
(2 |
) |
N/A |
|
N/A |
| ||||
Equity contracts |
|
SG&A expense |
|
87 |
|
(63 |
) |
N/A |
|
N/A |
| ||||
|
|
Other (income) and expense |
|
(1 |
) |
(5 |
) |
N/A |
|
N/A |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total |
|
|
|
$ |
830 |
|
$ |
330 |
|
$ |
(267 |
) |
$ |
(116 |
) |
|
|
Gain (Loss) Recognized in Earnings and Other Comprehensive Income |
| ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(Ineffectiveness) and |
| ||||||||
(Dollars in millions) |
|
Effective Portion |
|
Consolidated |
|
Effective Portion Reclassified |
|
Amounts Excluded from |
| ||||||||||||
For the nine months |
|
Recognized in OCI |
|
Statement of |
|
from AOCI |
|
Effectiveness Testing |
| ||||||||||||
ended September 30: |
|
2016 |
|
2015 |
|
Earnings Line Item |
|
2016 |
|
2015 |
|
2016 |
|
2015 |
| ||||||
Derivative instruments in cash flow hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Interest rate contracts |
|
$ |
|
|
$ |
|
|
Interest expense |
|
$ |
(17 |
) |
$ |
0 |
|
$ |
|
|
$ |
|
|
Foreign exchange contracts |
|
(221 |
) |
467 |
|
Other (income) and expense |
|
6 |
|
565 |
|
(1 |
) |
4 |
| ||||||
|
|
|
|
|
|
Cost of sales |
|
(14 |
) |
154 |
|
|
|
|
| ||||||
|
|
|
|
|
|
SG&A expense |
|
(1 |
) |
124 |
|
|
|
|
| ||||||
Instruments in net investment hedges(3): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Foreign exchange contracts |
|
(1,071 |
) |
592 |
|
Interest expense |
|
|
|
|
|
51 |
|
6 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total |
|
$ |
(1,292 |
) |
$ |
1,059 |
|
|
|
$ |
(26 |
) |
$ |
843 |
|
$ |
49 |
|
$ |
10 |
|
N/A-not applicable
Note: OCI represents Other comprehensive income/(loss) in the Consolidated Statement of Comprehensive Income and AOCI represents Accumulated other comprehensive income/(loss) in the Consolidated Statement of Changes in Equity.
(1) The amount includes changes in clean fair values of the derivative instruments in fair value hedging relationships and the periodic accrual for coupon payments required under these derivative contracts.
(2) The amount includes basis adjustments to the carrying value of the hedged item recorded during the period and amortization of basis adjustments recorded on de-designated hedging relationships during the period.
(3) Instruments in net investment hedges include derivative and non-derivative instruments.
(4) For the nine month periods ended September 30, 2016 and September 30, 2015, fair value hedges resulted in a gain of $1 million and a loss of $2 million in ineffectiveness, respectively.
For the three and nine months ending September 30, 2016 and 2015, there were no significant gains or losses excluded from the assessment of hedge effectiveness (for fair value hedges), or associated with an underlying exposure that did not or was not expected to occur (for cash flow hedges); nor are there any anticipated in the normal course of business.
Notes to Consolidated Financial Statements (continued)
4. Financing Receivables: The following table presents financing receivables, net of allowances for credit losses, including residual values.
|
|
At September 30, |
|
At December 31, |
| ||
(Dollars in millions) |
|
2016 |
|
2015 |
| ||
Current: |
|
|
|
|
| ||
Net investment in sales-type and direct financing leases |
|
$ |
3,171 |
|
$ |
3,057 |
|
Commercial financing receivables |
|
6,856 |
|
8,948 |
| ||
Client loan and installment payment receivables (loans) |
|
6,005 |
|
7,015 |
| ||
Total |
|
$ |
16,032 |
|
$ |
19,020 |
|
Noncurrent: |
|
|
|
|
| ||
Net investment in sales-type and direct financing leases |
|
$ |
4,155 |
|
$ |
4,501 |
|
Client loan and installment payment receivables (loans) |
|
4,782 |
|
5,512 |
| ||
Total |
|
$ |
8,936 |
|
$ |
10,013 |
|
Net investment in sales-type and direct financing leases relates principally to the companys Systems products and are for terms ranging generally from two to six years. Net investment in sales-type and direct financing leases includes unguaranteed residual values of $630 million and $645 million at September 30, 2016 and December 31, 2015, respectively, and is reflected net of unearned income of $533 million and $536 million, and net of allowance for credit losses of $194 million and $213 million at those dates, respectively.
Commercial financing receivables, net of allowance for credit losses of $22 million and $19 million at September 30, 2016 and December 31, 2015, respectively, relate primarily to inventory and accounts receivable financing for dealers and remarketers of IBM and OEM products. Payment terms for inventory and accounts receivable financing generally range from 30 to 90 days.
Client loan and installment payment receivables (loans), net of allowance for credit losses of $432 million and $377 million at September 30, 2016 and December 31, 2015, respectively, are loans that 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.
Client loan and installment payment financing contracts are priced independently at competitive market rates. The company has a history of enforcing the terms of these financing agreements.
The company utilizes certain of its financing receivables as collateral for nonrecourse borrowings. Financing receivables pledged as collateral for borrowings were $527 million and $545 million at September 30, 2016 and December 31, 2015, respectively.
The company did not have any financing receivables held for sale as of September 30, 2016 and December 31, 2015.
Financing Receivables by Portfolio Segment
The following tables present financing receivables on a gross basis, excluding the allowance for credit losses and residual value, by portfolio segment and by class, excluding commercial financing receivables and other miscellaneous financing receivables at September 30, 2016 and December 31, 2015. The company determines its allowance for credit losses based on two portfolio segments: lease receivables and loan receivables, and further segments the portfolio into two classes: major markets and growth markets.
Notes to Consolidated Financial Statements (continued)
(Dollars in millions) |
|
Major |
|
Growth |
|
|
| |||
At September 30, 2016 |
|
Markets |
|
Markets |
|
Total |
| |||
Financing receivables: |
|
|
|
|
|
|
| |||
Lease receivables |
|
$ |
5,180 |
|
$ |
1,626 |
|
$ |
6,806 |
|
Loan receivables |
|
8,678 |
|
2,541 |
|
11,219 |
| |||
Ending balance |
|
$ |
13,858 |
|
$ |
4,167 |
|
$ |
18,025 |
|
Collectively evaluated for impairment |
|
$ |
13,781 |
|
$ |
3,703 |
|
$ |
17,483 |
|
Individually evaluated for impairment |
|
$ |
77 |
|
$ |
464 |
|
$ |
542 |
|
Allowance for credit losses: |
|
|
|
|
|
|
| |||
Beginning balance at January 1, 2016 |
|
|
|
|
|
|
| |||
Lease receivables |
|
$ |
25 |
|
$ |
188 |
|
$ |
213 |
|
Loan receivables |
|
83 |
|
293 |
|
377 |
| |||
Total |
|
$ |
109 |
|
$ |
481 |
|
$ |
590 |
|
Write-offs |
|
(19 |
) |
(26 |
) |
(45 |
) | |||
Provision |
|
3 |
|
69 |
|
72 |
| |||
Other |
|
4 |
|
5 |
|
9 |
| |||
Ending balance at September 30, 2016 |
|
$ |
97 |
|
$ |
529 |
|
$ |
626 |
|
Lease receivables |
|
$ |
7 |
|
$ |
187 |
|
$ |
194 |
|
Loan receivables |
|
$ |
90 |
|
$ |
343 |
|
$ |
432 |
|
|
|
|
|
|
|
|
| |||
Collectively evaluated for impairment |
|
$ |
32 |
|
$ |
80 |
|
$ |
113 |
|
Individually evaluated for impairment |
|
$ |
64 |
|
$ |
449 |
|
$ |
513 |
|
(Dollars in millions) |
|
Major |
|
Growth |
|
|
| |||
At December 31, 2015 |
|
Markets |
|
Markets |
|
Total |
| |||
Financing receivables: |
|
|
|
|
|
|
| |||
Lease receivables |
|
$ |
5,517 |
|
$ |
1,524 |
|
$ |
7,041 |
|
Loan receivables |
|
9,739 |
|
3,165 |
|
12,904 |
| |||
Ending balance |
|
$ |
15,256 |
|
$ |
4,689 |
|
$ |
19,945 |
|
Collectively evaluated for impairment |
|
$ |
15,180 |
|
$ |
4,227 |
|
$ |
19,406 |
|
Individually evaluated for impairment |
|
$ |
76 |
|
$ |
462 |
|
$ |
539 |
|
Allowance for credit losses: |
|
|
|
|
|
|
| |||
Beginning balance at January 1, 2015 |
|
|
|
|
|
|
| |||
Lease receivables |
|
$ |
32 |
|
$ |
133 |
|
$ |
165 |
|
Loan receivables |
|
79 |
|
317 |
|
396 |
| |||
Total |
|
$ |
111 |
|
$ |
450 |
|
$ |
561 |
|
Write-offs |
|
(14 |
) |
(48 |
) |
(62 |
) | |||
Provision |
|
20 |
|
122 |
|
141 |
| |||
Other |
|
(8 |
) |
(43 |
) |
(51 |
) | |||
Ending balance at December 31, 2015 |
|
$ |
109 |
|
$ |
481 |
|
$ |
590 |
|
Lease receivables |
|
$ |
25 |
|
$ |
188 |
|
$ |
213 |
|
Loan receivables |
|
$ |
83 |
|
$ |
293 |
|
$ |
377 |
|
|
|
|
|
|
|
|
| |||
Collectively evaluated for impairment |
|
$ |
43 |
|
$ |
36 |
|
$ |
79 |
|
Individually evaluated for impairment |
|
$ |
65 |
|
$ |
445 |
|
$ |
511 |
|
When determining the allowances, financing receivables are evaluated either on an individual or a collective basis. For individually evaluated receivables, the company determines the expected cash flow for the receivable and calculates an estimate of the potential loss and the probability of loss. For those accounts in which the loss is probable, the company records a specific reserve. In addition, the company records an unallocated reserve that is determined by applying a reserve rate to its different portfolios, excluding accounts that have been specifically reserved. This reserve rate is based upon credit rating, probability of default, term, characteristics (lease/loan) and loss history.
Financing Receivables on Non-Accrual Status
The following table presents the recorded investment in financing receivables which were on non-accrual status at September 30, 2016 and December 31, 2015.
Notes to Consolidated Financial Statements (continued)
|
|
At September 30, |
|
At December 31, |
| ||
(Dollars in millions) |
|
2016 |
|
2015 |
| ||
Major markets |
|
$ |
2 |
|
$ |
2 |
|
Growth markets |
|
42 |
|
63 |
| ||
Total lease receivables |
|
$ |
43 |
|
$ |
65 |
|
|
|
|
|
|
| ||
Major markets |
|
$ |
19 |
|
$ |
13 |
|
Growth markets |
|
139 |
|
91 |
| ||
Total loan receivables |
|
$ |
157 |
|
$ |
104 |
|
|
|
|
|
|
| ||
Total receivables |
|
$ |
200 |
|
$ |
168 |
|
Impaired Loans
The company considers any loan with an individually evaluated reserve as an impaired loan. Depending on the level of impairment, loans will also be placed on non-accrual status.
The following tables present impaired client loan receivables.
|
|
At September 30, 2016 |
|
At December 31, 2015 |
| ||||||||
|
|
Recorded |
|
Related |
|
Recorded |
|
Related |
| ||||
(Dollars in millions) |
|
Investment |
|
Allowance |
|
Investment |
|
Allowance |
| ||||
Major markets |
|
$ |
53 |
|
$ |
50 |
|
$ |
50 |
|
$ |
47 |
|
Growth markets |
|
318 |
|
307 |
|
297 |
|
284 |
| ||||
Total |
|
$ |
371 |
|
$ |
357 |
|
$ |
347 |
|
$ |
331 |
|
|
|
|
|
|
|
Interest |
| |||
|
|
Average |
|
Interest |
|
Income |
| |||
(Dollars in millions) |
|
Recorded |
|
Income |
|
Recognized on |
| |||
For the three months ended September 30, 2016: |
|
Investment |
|
Recognized |
|
Cash Basis |
| |||
Major markets |
|
$ |
64 |
|
$ |
0 |
|
$ |
|
|
Growth markets |
|
318 |
|
0 |
|
|
| |||
Total |
|
$ |
382 |
|
$ |
0 |
|
$ |
|
|
|
|
|
|
|
|
Interest |
| |||
|
|
Average |
|
Interest |
|
Income |
| |||
(Dollars in millions) |
|
Recorded |
|
Income |
|
Recognized on |
| |||
For the three months ended September 30, 2015: |
|
Investment |
|
Recognized |
|
Cash Basis |
| |||
Major markets |
|
$ |
51 |
|
$ |
|
|
$ |
|
|
Growth markets |
|
325 |
|
0 |
|
|
| |||
Total |
|
$ |
376 |
|
$ |
0 |
|
$ |
|
|
Notes to Consolidated Financial Statements (continued)
|
|
|
|
|
|
Interest |
| |||
|
|
Average |
|
Interest |
|
Income |
| |||
(Dollars in millions) |
|
Recorded |
|
Income |
|
Recognized on |
| |||
For the nine months ended September 30, 2016: |
|
Investment |
|
Recognized |
|
Cash Basis |
| |||
Major markets |
|
$ |
61 |
|
$ |
0 |
|
$ |
|
|
Growth markets |
|
307 |
|
0 |
|
|
| |||
Total |
|
$ |
368 |
|
$ |
0 |
|
$ |
|
|
|
|
|
|
|
|
Interest |
| |||
|
|
Average |
|
Interest |
|
Income |
| |||
(Dollars in millions) |
|
Recorded |
|
Income |
|
Recognized on |
| |||
For the nine months ended September 30, 2015: |
|
Investment |
|
Recognized |
|
Cash Basis |
| |||
Major markets |
|
$ |
52 |
|
$ |
|
|
$ |
|
|
Growth markets |
|
320 |
|
0 |
|
|
| |||
Total |
|
$ |
371 |
|
$ |
0 |
|
$ |
|
|
Credit Quality Indicators
The companys 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 Moodys Investors Service credit ratings as shown below. The company uses information provided by Moodys, where available, as one of many inputs in its determination of customer credit ratings.
The following tables present the net recorded investment for each class of receivables, by credit quality indicator, at September 30, 2016 and December 31, 2015. Receivables with a credit quality indicator ranging from Aaa to Baa3 are considered investment grade. All others are considered non-investment grade. The credit quality indicators do not reflect mitigation actions that the company takes to transfer credit risk to third parties.
|
|
Lease Receivables |
|
Loan Receivables |
| ||||||||
(Dollars in millions) |
|
Major |
|
Growth |
|
Major |
|
Growth |
| ||||
At September 30, 2016: |
|
Markets |
|
Markets |
|
Markets |
|
Markets |
| ||||
Credit Rating: |
|
|
|
|
|
|
|
|
| ||||
Aaa Aa3 |
|
$ |
449 |
|
$ |
29 |
|
$ |
745 |
|
$ |
44 |
|
A1 A3 |
|
1,205 |
|
123 |
|
2,000 |
|
188 |
| ||||
Baa1 Baa3 |
|
1,444 |
|
181 |
|
2,398 |
|
276 |
| ||||
Ba1 Ba2 |
|
1,171 |
|
409 |
|
1,944 |
|
624 |
| ||||
Ba3 B1 |
|
520 |
|
403 |
|
864 |
|
615 |
| ||||
B2 B3 |
|
352 |
|
196 |
|
585 |
|
299 |
| ||||
Caa D |
|
32 |
|
99 |
|
53 |
|
151 |
| ||||
Total |
|
$ |
5,173 |
|
$ |
1,439 |
|
$ |
8,588 |
|
$ |
2,199 |
|
At September 30, 2016, the industries which made up Global Financings receivables portfolio consisted of: Financial (34 percent), Manufacturing (14 percent), Government (13 percent), Services (11 percent), Retail (8 percent), Communications (7 percent), Healthcare (6 percent) and Other (6 percent).
Notes to Consolidated Financial Statements (continued)
|
|
Lease Receivables |
|
Loan Receivables |
| ||||||||
(Dollars in millions) |
|
Major |
|
Growth |
|
Major |
|
Growth |
| ||||
At December 31, 2015*; |
|
Markets |
|
Markets |
|
Markets |
|
Markets |
| ||||
Credit Rating: |
|
|
|
|
|
|
|
|
| ||||
Aaa Aa3 |
|
$ |
535 |
|
$ |
34 |
|
$ |
941 |
|
$ |
73 |
|
A1 A3 |
|
1,318 |
|
142 |
|
2,318 |
|
305 |
| ||||
Baa1 Baa3 |
|
1,486 |
|
343 |
|
2,613 |
|
738 |
| ||||
Ba1 Ba2 |
|
1,208 |
|
309 |
|
2,125 |
|
664 |
| ||||
Ba3 B1 |
|
510 |
|
243 |
|
897 |
|
522 |
| ||||
B2 B3 |
|
401 |
|
189 |
|
705 |
|
406 |
| ||||
Caa D |
|
33 |
|
76 |
|
58 |
|
164 |
| ||||
Total |
|
$ |
5,492 |
|
$ |
1,336 |
|
$ |
9,656 |
|
$ |
2,872 |
|
* Reclassified to conform with 2016 presentation.
At December 31, 2015, the industries which made up Global Financings receivables portfolio consisted of: Financial (36 percent), Manufacturing (14 percent), Government (11 percent), Services (11 percent), Retail (9 percent), Communications (7 percent), Healthcare (6 percent) and Other (6 percent).
Past Due Financing Receivables
|
|
|
|
Fully |
|
<90 Days |
|
|
|
Recorded |
| |||||
|
|
Total |
|
Reserved |
|
or Unbilled |
|
Total |
|
Investment |
| |||||
(Dollars in millions) |
|
Past Due |
|
Financing |
|
Financing |
|
Financing |
|
> 90 Days and |
| |||||
At September 30, 2016: |
|
> 90 days (1) |
|
Receivables |
|
Receivables |
|
Receivables |
|
Accruing (2) |
| |||||
Major markets |
|
$ |
8 |
|
$ |
19 |
|
$ |
5,154 |
|
$ |
5,180 |
|
$ |
133 |
|
Growth markets |
|
24 |
|
152 |
|
1,449 |
|
1,626 |
|
55 |
| |||||
Total lease receivables |
|
$ |
32 |
|
$ |
171 |
|
$ |
6,603 |
|
$ |
6,806 |
|
$ |
188 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Major markets |
|
$ |
10 |
|
$ |
40 |
|
$ |
8,628 |
|
$ |
8,678 |
|
$ |
162 |
|
Growth markets |
|
16 |
|
302 |
|
2,223 |
|
2,541 |
|
49 |
| |||||
Total loan receivables |
|
$ |
26 |
|
$ |
342 |
|
$ |
10,851 |
|
$ |
11,219 |
|
$ |
210 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total |
|
$ |
58 |
|
$ |
513 |
|
$ |
17,454 |
|
$ |
18,025 |
|
$ |
399 |
|
(1) Only the portion of a financing receivable which is greater than 90 days past due, excluding amounts that are fully reserved.
(2) At a contract level, which includes total billed and unbilled amounts for aged financing receivables greater than 90 days.
|
|
|
|
Fully |
|
<90 Days |
|
|
|
Recorded |
| |||||
|
|
Total |
|
Reserved |
|
or Unbilled |
|
Total |
|
Investment |
| |||||
(Dollars in millions) |
|
Past Due |
|
Financing |
|
Financing |
|
Financing |
|
> 90 Days and |
| |||||
At December 31, 2015*: |
|
> 90 days (1) |
|
Receivables |
|
Receivables |
|
Receivables |
|
Accruing (2) |
| |||||
Major markets |
|
$ |
5 |
|
$ |
33 |
|
$ |
5,479 |
|
$ |
5,517 |
|
$ |
108 |
|
Growth markets |
|
30 |
|
140 |
|
1,355 |
|
1,524 |
|
60 |
| |||||
Total lease receivables |
|
$ |
35 |
|
$ |
173 |
|
$ |
6,834 |
|
$ |
7,041 |
|
$ |
168 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Major markets |
|
$ |
7 |
|
$ |
35 |
|
$ |
9,696 |
|
$ |
9,739 |
|
$ |
134 |
|
Growth markets |
|
31 |
|
309 |
|
2,825 |
|
3,165 |
|
86 |
| |||||
Total loan receivables |
|
$ |
38 |
|
$ |
344 |
|
$ |
12,521 |
|
$ |
12,904 |
|
$ |
220 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total |
|
$ |
73 |
|
$ |
517 |
|
$ |
19,355 |
|
$ |
19,945 |
|
$ |
388 |
|
(1) Only the portion of a financing receivable which is greater than 90 days past due, excluding amounts that are fully reserved.
(2) At a contract level, which includes total billed and unbilled amounts for aged financing receivables greater than 90 days.
* Reclassified to conform with 2016 presentation.
Notes to Consolidated Financial Statements (continued)
Troubled Debt Restructurings
The company did not have any troubled debt restructurings during the nine months ended September 30, 2016 and for the year ended December 31, 2015.
5. Stock-Based Compensation: Stock-based compensation cost is measured at grant date, based on the fair value of the award, and is recognized over the employee requisite service period. The following table presents total stock-based compensation cost included in income from continuing operations.
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
| ||||||||
(Dollars in millions) |
|
2016 |
|
2015 |
|
2016 |
|
2015 |
| ||||
Cost |
|
$ |
23 |
|
$ |
24 |
|
$ |
67 |
|
$ |
78 |
|
Selling, general and administrative |
|
105 |
|
82 |
|
295 |
|
260 |
| ||||
Research, development and engineering |
|
14 |
|
11 |
|
41 |
|
37 |
| ||||
Other (income) and expense* |
|
|
|
(5 |
) |
|
|
(6 |
) | ||||
Pre-tax stock-based compensation cost |
|
142 |
|
111 |
|
403 |
|
369 |
| ||||
Income tax benefits |
|
(47 |
) |
(38 |
) |
(131 |
) |
(124 |
) | ||||
Total net stock-based compensation cost |
|
$ |
95 |
|
$ |
73 |
|
$ |
272 |
|
$ |
244 |
|
* Reflects the one-time effects related to divestitures.
Pre-tax stock-based compensation cost for the three months ended September 30, 2016 increased $31 million compared to the corresponding period in the prior year. This was due to increases related to performance share units ($20 million), restricted stock units ($6 million), the conversion of stock-based awards previously issued by acquired entities ($5 million) and stock option awards ($1 million).
Pre-tax stock-based compensation cost for the nine months ended September 30, 2016 increased $34 million compared to the corresponding period in the prior year. This was due to increases related to performance share units ($29 million), the conversion of stock-based awards previously issued by acquired entities ($16 million) and stock option awards ($3 million); partially offset by decreases related to restricted stock units ($14 million).
The amount of stock-based compensation cost included in discontinued operations, net of tax, was immaterial in all periods presented.
As of September 30, 2016, the total unrecognized compensation cost of $1,011 million related to non-vested awards was expected to be recognized over a weighted-average period of approximately 2.6 years.
There was no significant capitalized stock-based compensation cost at September 30, 2016 and 2015.
6. Segments: The tables on pages 28 and 29 reflect the results of continuing operations of the companys segments consistent with the management and measurement system utilized within the company. Performance measurement is based on operating 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 January 2016, the company made a number of changes to its organizational structure and management system consistent with its ongoing transformation to a cognitive solutions and cloud platform business. With these changes, the company updated its reportable segments. The company continues to have five reportable segments as follows:
The Cognitive Solutions segment includes solutions units that address many of the companys strategic areas, including analytics, commerce and security, several of the new initiatives around Watson Platform, Watson Health, Watson Internet of Things and Transaction Processing Software. The Technology Services & Cloud Platforms segment includes the companys cloud infrastructure and platform capabilities, the previously reported Global Technology Services business and Integration Software. Operating Systems Software has been aligned with the underlying hardware platforms in the Systems segment. The Global Business Services and Global Financing segments remain unchanged.
The company also realigned a portion of its software support revenue, which was previously managed and reported in Integrated Technology Services within Global Technology Services, to the underlying software product areas.
Notes to Consolidated Financial Statements (continued)
SEGMENT INFORMATION
|
|
Cognitive Solutions & |
|
|
|
|
|
|
|
|
| ||||||||
|
|
Industry Services |
|
Technology |
|
|
|
|
|
|
| ||||||||
|
|
|
|
Global |
|
Services & |
|
|
|
|
|
|
| ||||||
|
|
Cognitive |
|
Business |
|
Cloud |
|
|
|
Global |
|
Total |
| ||||||
(Dollars in millions) |
|
Solutions |
|
Services |
|
Platforms |
|
Systems |
|
Financing |
|
Segments |
| ||||||
For the three months ended September 30, 2016: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
External revenue |
|
$ |
4,235 |
|
$ |
4,191 |
|
$ |
8,748 |
|
$ |
1,558 |
|
$ |
412 |
|
$ |
19,145 |
|
Internal revenue |
|
667 |
|
93 |
|
180 |
|
176 |
|
352 |
|
1,468 |
| ||||||
Total revenue |
|
$ |
4,902 |
|
$ |
4,284 |
|
$ |
8,929 |
|
$ |
1,734 |
|
$ |
763 |
|
$ |
20,613 |
|
Pre-tax income from continuing operations |
|
$ |
1,574 |
|
$ |
544 |
|
$ |
1,288 |
|
$ |
136 |
|
$ |
355 |
|
$ |
3,897 |
|
Revenue year-to-year change |
|
7.0 |
% |
(1.0 |
)% |
2.6 |
% |
(20.5 |
)% |
(26.0 |
)% |
(1.0 |
)% | ||||||
Pre-tax income year-to-year change |
|
(1.4 |
)% |
(18.0 |
)% |
(2.2 |
)% |
(45.3 |
)% |
(36.8 |
)% |
(11.2 |
)% | ||||||
Pre-tax income margin |
|
32.1 |
% |
12.7 |
% |
14.4 |
% |
7.8 |
% |
46.5 |
% |
18.9 |
% | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
For the three months ended September 30, 2015*: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
External revenue |
|
$ |
4,052 |
|
$ |
4,206 |
|
$ |
8,541 |
|
$ |
1,973 |
|
$ |
447 |
|
$ |
19,219 |
|
Internal revenue |
|
528 |
|
120 |
|
161 |
|
209 |
|
584 |
|
1,601 |
| ||||||
Total revenue |
|
$ |
4,580 |
|
$ |
4,326 |
|
$ |
8,702 |
|
$ |
2,182 |
|
$ |
1,031 |
|
$ |
20,821 |
|
Pre-tax income from continuing operations |
|
$ |
1,596 |
|
$ |
664 |
|
$ |
1,317 |
|
$ |
248 |
|
$ |
562 |
|
$ |
4,387 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Pre-tax income margin |
|
34.9 |
% |
15.4 |
% |
15.1 |
% |
11.4 |
% |
54.5 |
% |
21.1 |
% |
* Recast to conform with 2016 presentation.
Reconciliations to IBM as Reported:
(Dollars in millions) |
|
|
|
|
| ||
For the three months ended September 30: |
|
2016 |
|
2015* |
| ||
Revenue: |
|
|
|
|
| ||
Total reportable segments |
|
$ |
20,613 |
|
$ |
20,821 |
|
Eliminations of internal transactions |
|
(1,468 |
) |
(1,601 |
) | ||
Other revenue |
|
81 |
|
60 |
| ||
Total consolidated revenue |
|
$ |
19,226 |
|
$ |
19,280 |
|
|
|
|
|
|
| ||
Pre-tax income from continuing operations: |
|
|
|
|
| ||
Total reportable segments |
|
$ |
3,897 |
|
$ |
4,387 |
|
Amortization of acquired intangible assets |
|
(265 |
) |
(162 |
) | ||
Acquisition-related (charges)/income |
|
(4 |
) |
(4 |
) | ||
Non-operating retirement-related (costs)/income |
|
(139 |
) |
(204 |
) | ||
Eliminations of internal transactions |
|
(185 |
) |
(362 |
) | ||
Unallocated corporate amounts |
|
(42 |
) |
(35 |
) | ||
Total pre-tax income from continuing operations |
|
$ |
3,263 |
|
$ |
3,621 |
|
* Recast to conform with 2016 presentation.
Notes to Consolidated Financial Statements (continued)
SEGMENT INFORMATION
|
|
Cognitive Solutions & |
|
|
|
|
|
|
|
|
| ||||||||
|
|
Industry Services |
|
Technology |
|
|
|
|
|
|
| ||||||||
|
|
|
|
Global |
|
Services & |
|
|
|
|
|
|
| ||||||
|
|
Cognitive |
|
Business |
|
Cloud |
|
|
|
Global |
|
Total |
| ||||||
(Dollars in millions) |
|
Solutions |
|
Services |
|
Platforms |
|
Systems |
|
Financing |
|
Segments |
| ||||||
For the nine months ended September 30, 2016: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
External revenue |
|
$ |
12,889 |
|
$ |
12,578 |
|
$ |
26,029 |
|
$ |
5,184 |
|
$ |
1,245 |
|
$ |
57,926 |
|
Internal revenue |
|
1,929 |
|
310 |
|
501 |
|
594 |
|
1,340 |
|
4,673 |
| ||||||
Total revenue |
|
$ |
14,818 |
|
$ |
12,888 |
|
$ |
26,530 |
|
$ |
5,778 |
|
$ |
2,585 |
|
$ |
62,599 |
|
Pre-tax income from continuing operations |
|
$ |
4,039 |
|
$ |
1,210 |
|
$ |
2,825 |
|
$ |
354 |
|
$ |
1,208 |
|
$ |
9,636 |
|
Revenue year-to-year change |
|
3.5 |
% |
(2.7 |
)% |
0.1 |
% |
(20.0 |
)% |
(20.7 |
)% |
(3.0 |
)% | ||||||
Pre-tax income year-to-year change |
|
(18.4 |
)% |
(36.2 |
)% |
(26.8 |
)% |
(66.2 |
)% |
(28.5 |
)% |
(28.3 |
)% | ||||||
Pre-tax income margin |
|
27.3 |
% |
9.4 |
% |
10.6 |
% |
6.1 |
% |
46.7 |
% |
15.4 |
% | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
For the nine months ended September 30, 2015*: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
External revenue |
|
$ |
12,616 |
|
$ |
12,869 |
|
$ |
25,993 |
|
$ |
6,656 |
|
$ |
1,386 |
|
$ |
59,520 |
|
Internal revenue |
|
1,695 |
|
380 |
|
500 |
|
571 |
|
1,874 |
|
5,020 |
| ||||||
Total revenue |
|
$ |
14,311 |
|
$ |
13,249 |
|
$ |
26,493 |
|
$ |
7,226 |
|
$ |
3,261 |
|
$ |
64,540 |
|
Pre-tax income from continuing operations |
|
$ |
4,949 |
|
$ |
1,895 |
|
$ |
3,861 |
|
$ |
1,048 |
|
$ |
1,690 |
|
$ |
13,444 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Pre-tax income margin |
|
34.6 |
% |
14.3 |
% |
14.6 |
% |
14.5 |
% |
51.8 |
% |
20.8 |
% |
* Recast to conform with 2016 presentation.
Reconciliations to IBM as Reported:
(Dollars in millions) |
|
|
|
|
| ||
For the nine months ended September 30: |
|
2016 |
|
2015* |
| ||
Revenue: |
|
|
|
|
| ||
Total reportable segments |
|
$ |
62,599 |
|
$ |
64,540 |
|
Eliminations of internal transactions |
|
(4,673 |
) |
(5,020 |
) | ||
Other revenue |
|
223 |
|
162 |
| ||
Total consolidated revenue |
|
$ |
58,149 |
|
$ |
59,682 |
|
|
|
|
|
|
| ||
Pre-tax income from continuing operations: |
|
|
|
|
| ||
Total reportable segments |
|
$ |
9,636 |
|
$ |
13,444 |
|
Amortization of acquired intangible assets |
|
(742 |
) |
(492 |
) | ||
Acquisition-related (charges)/income |
|
(1 |
) |
(11 |
) | ||
Non-operating retirement-related (costs)/income |
|
(444 |
) |
(831 |
) | ||
Eliminations of internal transactions |
|
(873 |
) |
(1,175 |
) | ||
Unallocated corporate amounts |
|
(230 |
) |
(88 |
) | ||
Total pre-tax income from continuing operations |
|
$ |
7,345 |
|
$ |
10,846 |
|
* Recast to conform with 2016 presentation.
Notes to Consolidated Financial Statements (continued)
7. Equity Activity:
Reclassifications and Taxes Related to Items of Other Comprehensive Income
(Dollars in millions) |
|
Before Tax |
|
Tax (Expense)/ |
|
Net of Tax |
| |||
For the three months ended September 30, 2016: |
|
Amount |
|
Benefit |
|
Amount |
| |||
Other comprehensive income/(loss): |
|
|
|
|
|
|
| |||
Foreign currency translation adjustments |
|
$ |
(99 |
) |
$ |
50 |
|
$ |
(49 |
) |
Net changes related to available-for-sale securities: |
|
|
|
|
|
|
| |||
Unrealized gains/(losses) arising during the period |
|
$ |
(1 |
) |
$ |
0 |
|
$ |
(1 |
) |
Reclassification of (gains)/losses to other (income) and expense |
|
(1 |
) |
0 |
|
(1 |
) | |||
Total net changes related to available-for-sale securities |
|
$ |
(2 |
) |
$ |
1 |
|
$ |
(1 |
) |
Unrealized gains/(losses) on cash flow hedges: |
|
|
|
|
|
|
| |||
Unrealized gains/(losses) arising during the period |
|
$ |
35 |
|
$ |
(14 |
) |
$ |
21 |
|
Reclassification of (gains)/losses to: |
|
|
|
|
|
|
| |||
Cost of sales |
|
4 |
|
(2 |
) |
2 |
| |||
SG&A expense |
|
(2 |
) |
(1 |
) |
(3 |
) | |||
Other (income) and expense |
|
6 |
|
(2 |
) |
4 |
| |||
Interest expense |
|
7 |
|
(3 |
) |
4 |
| |||
Total unrealized gains/(losses) on cash flow hedges |
|
$ |
50 |
|
$ |
(22 |
) |
$ |
29 |
|
Retirement-related benefit plans(1): |
|
|
|
|
|
|
| |||
Net (losses)/gains arising during the period |
|
$ |
11 |
|
$ |
(5 |
) |
$ |
6 |
|
Curtailments and settlements |
|
4 |
|
(1 |
) |
3 |
| |||
Amortization of prior service (credits)/costs |
|
(28 |
) |
9 |
|
(19 |
) | |||
Amortization of net (gains)/losses |
|
696 |
|
(225 |
) |
471 |
| |||
Total retirement-related benefit plans |
|
$ |
683 |
|
$ |
(222 |
) |
$ |
461 |
|
Other comprehensive income/(loss) |
|
$ |
632 |
|
$ |
(192 |
) |
$ |
440 |
|
(1) |
These AOCI components are included in the computation of net periodic pension cost. (See note 8, Retirement-Related Benefits, for additional information.) |
Notes to Consolidated Financial Statements (continued)
Reclassifications and Taxes Related to Items of Other Comprehensive Income
(Dollars in millions) |
|
Before Tax |
|
Tax (Expense)/ |
|
Net of Tax |
| |||
For the three months ended September 30, 2015: |
|
Amount |
|
Benefit |
|
Amount |
| |||
Other comprehensive income/(loss): |
|
|
|
|
|
|
| |||
Foreign currency translation adjustments |
|
$ |
(1,015 |
) |
$ |
(28 |
) |
$ |
(1,043 |
) |
Net changes related to available-for-sale securities: |
|
|
|
|
|
|
| |||
Unrealized gains/(losses) arising during the period |
|
$ |
(102 |
) |
$ |
39 |
|
$ |
(63 |
) |
Reclassification of (gains)/losses to other (income) and expense |
|
0 |
|
0 |
|
0 |
| |||
Total net changes related to available-for-sale securities |
|
$ |
(101 |
) |
$ |
39 |
|
$ |
(62 |
) |
Unrealized gains/(losses) on cash flow hedges: |
|
|
|
|
|
|
| |||
Unrealized gains/(losses) arising during the period |
|
$ |
36 |
|
$ |
(9 |
) |
$ |
27 |
|
Reclassification of (gains)/losses to: |
|
|
|
|
|
|
| |||
Cost of sales |
|
(46 |
) |
13 |
|
(33 |
) | |||
SG&A expense |
|
(43 |
) |
13 |
|
(30 |
) | |||
Other (income) and expense |
|
(185 |
) |
71 |
|
(114 |
) | |||
Interest expense |
|
0 |
|
0 |
|
0 |
| |||
Total unrealized gains/(losses) on cash flow hedges |
|
$ |
(237 |
) |
$ |
88 |
|
$ |
(149 |
) |
Retirement-related benefit plans(1): |
|
|
|
|
|
|
| |||
Prior service costs/(credits) |
|
$ |
0 |
|
$ |
0 |
|
$ |
0 |
|
Net (losses)/gains arising during the period |
|
(2 |
) |
1 |
|
(1 |
) | |||
Curtailments and settlements |
|
11 |
|
(4 |
) |
7 |
| |||
Amortization of prior service (credits)/costs |
|
(25 |
) |
8 |
|
(16 |
) | |||
Amortization of net (gains)/losses |
|
823 |
|
(281 |
) |
542 |
| |||
Total retirement-related benefit plans |
|
$ |
807 |
|
$ |
(275 |
) |
$ |
531 |
|
Other comprehensive income/(loss) |
|
$ |
(547 |
) |
$ |
(176 |
) |
$ |
(724 |
) |
(1) |
These AOCI components are included in the computation of net periodic pension cost. (See note 8, Retirement-Related Benefits, for additional information.) |
Notes to Consolidated Financial Statements (continued)
Reclassifications and Taxes Related to Items of Other Comprehensive Income
(Dollars in millions) |
|
Before Tax |
|
Tax (Expense)/ |
|
Net of Tax |
| |||
For the nine months ended September 30, 2016: |
|
Amount |
|
Benefit |
|
Amount |
| |||
Other comprehensive income/(loss): |
|
|
|
|
|
|
| |||
Foreign currency translation adjustments |
|
$ |
(109 |
) |
$ |
411 |
|
$ |
303 |
|
Net changes related to available-for-sale securities: |
|
|
|
|
|
|
| |||
Unrealized gains/(losses) arising during the period |
|
$ |
(36 |
) |
$ |
14 |
|
$ |
(22 |
) |
Reclassification of (gains)/losses to other (income) and expense |
|
36 |
|
(14 |
) |
22 |
| |||
Total net changes related to available-for-sale securities |
|
$ |
0 |
|
$ |
0 |
|
$ |
0 |
|
Unrealized gains/(losses) on cash flow hedges: |
|
|
|
|
|
|
| |||
Unrealized gains/(losses) arising during the period |
|
$ |
(221 |
) |
$ |
82 |
|
$ |
(139 |
) |
Reclassification of (gains)/losses to: |
|
|
|
|
|
|
| |||
Cost of sales |
|
14 |
|
(7 |
) |
7 |
| |||
SG&A expense |
|
1 |
|
(3 |
) |
(1 |
) | |||
Other (income) and expense |
|
(6 |
) |
2 |
|
(4 |
) | |||
Interest expense |
|
17 |
|
(6 |
) |
10 |
| |||
Total unrealized gains/(losses) on cash flow hedges |
|
$ |
(195 |
) |
$ |
68 |
|
$ |
(127 |
) |
Retirement-related benefit plans(1): |
|
|
|
|
|
|
| |||
Net (losses)/gains arising during the period |
|
$ |
(57 |
) |
$ |
20 |
|
$ |
(37 |
) |
Curtailments and settlements |
|
19 |
|
(7 |
) |
12 |
| |||
Amortization of prior service (credits)/costs |
|
(81 |
) |
29 |
|
(52 |
) | |||
Amortization of net (gains)/losses |
|
2,079 |
|
(735 |
) |
1,344 |
| |||
Total retirement-related benefit plans |
|
$ |
1,960 |
|
$ |
(693 |
) |
$ |
1,267 |
|
Other comprehensive income/(loss) |
|
$ |
1,656 |
|
$ |
(213 |
) |
$ |
1,442 |
|
(1) |
These AOCI components are included in the computation of net periodic pension cost. (See note 8, Retirement-Related Benefits, for additional information.) |
Notes to Consolidated Financial Statements (continued)
Reclassifications and Taxes Related to Items of Other Comprehensive Income
(Dollars in millions) |
|
Before Tax |
|
Tax (Expense)/ |
|
Net of Tax |
| |||
For the nine months ended September 30, 2015: |
|
Amount |
|
Benefit |
|
Amount |
| |||
Other comprehensive income/(loss): |
|
|
|
|
|
|
| |||
Foreign currency translation adjustments |
|
$ |
(1,365 |
) |
$ |
(227 |
) |
$ |
(1,593 |
) |
Net changes related to available-for-sale securities: |
|
|
|
|
|
|
| |||
Unrealized gains/(losses) arising during the period |
|
$ |
(85 |
) |
$ |
33 |
|
$ |
(52 |
) |
Reclassification of (gains)/losses to other (income) and expense |
|
0 |
|
0 |
|
0 |
| |||
Total net changes related to available-for-sale securities |
|
$ |
(85 |
) |
$ |
33 |
|
$ |
(52 |
) |
Unrealized gains/(losses) on cash flow hedges: |
|
|
|
|
|
|
| |||
Unrealized gains/(losses) arising during the period |
|
$ |
467 |
|
$ |
(166 |
) |
$ |
301 |
|
Reclassification of (gains)/losses to: |
|
|
|
|
|
|
| |||
Cost of sales |
|
(154 |
) |
46 |
|
(109 |
) | |||
SG&A expense |
|
(124 |
) |
36 |
|
(88 |
) | |||
Other (income) and expense |
|
(565 |
) |
217 |
|
(348 |
) | |||
Interest expense |
|
0 |
|
0 |
|
0 |
| |||
Total unrealized gains/(losses) on cash flow hedges |
|
$ |
(376 |
) |
$ |
132 |
|
$ |
(243 |
) |
Retirement-related benefit plans(1): |
|
|
|
|
|
|
| |||
Prior service costs/(credits) |
|
$ |
6 |
|
$ |
(2 |
) |
$ |
4 |
|
Net (losses)/gains arising during the period |
|
14 |
|
(5 |
) |
9 |
| |||
Curtailments and settlements |
|
19 |
|
(6 |
) |
12 |
| |||
Amortization of prior service (credits)/costs |
|
(76 |
) |
26 |
|
(50 |
) | |||
Amortization of net (gains)/losses |
|
2,479 |
|
(846 |
) |
1,633 |
| |||
Total retirement-related benefit plans |
|
$ |
2,441 |
|
$ |
(833 |
) |
$ |
1,608 |
|
Other comprehensive income/(loss) |
|
$ |
616 |
|
$ |
(895 |
) |
$ |
(280 |
) |
(1) |
These AOCI components are included in the computation of net periodic pension cost. (See note 8, Retirement-Related Benefits, for additional information.) |
Notes to Consolidated Financial Statements (continued)
Accumulated Other Comprehensive Income/(Loss) (net of tax)
|
|
|
|
|
|
Net Change |
|
Net Unrealized |
|
|
| |||||
|
|
Net Unrealized |
|
Foreign |
|
Retirement- |
|
Gains/(Losses) |
|
Accumulated |
| |||||
|
|
Gains/(Losses) |
|
Currency |
|
Related |
|
on Available- |
|
Other |
| |||||
|
|
on Cash Flow |
|
Translation |
|
Benefit |
|
For-Sale |
|
Comprehensive |
| |||||
(Dollars in Millions) |
|
Hedges |
|
Adjustments* |
|
Plans |
|
Securities |
|
Income/(Loss) |
| |||||
January 1, 2016 |
|
$ |
100 |
|
$ |
(3,463 |
) |
$ |
(26,248 |
) |
$ |
5 |
|
$ |
(29,607 |
) |
Other comprehensive income before reclassifications |
|
(139 |
) |
303 |
|
(25 |
) |
(22 |
) |
117 |
| |||||
Amount reclassified from accumulated other comprehensive income |
|
12 |
|
0 |
|
1,292 |
|
22 |
|
1,326 |
| |||||
Total change for the period |
|
(127 |
) |
303 |
|
1,267 |
|
0 |
|
1,442 |
| |||||
September 30, 2016 |
|
$ |
(28 |
) |
$ |
(3,161 |
) |
$ |
(24,981 |
) |
$ |
4 |
|
$ |
(28,164 |
) |
* Foreign currency translation adjustments are presented gross except for any associated hedges which are presented net of tax.
|
|
|
|
|
|
Net Change |
|
Net Unrealized |
|
|
| |||||
|
|
Net Unrealized |
|
Foreign |
|
Retirement- |
|
Gains/(Losses) |
|
Accumulated |
| |||||
|
|
Gains/(Losses) |
|
Currency |
|
Related |
|
on Available- |
|
Other |
| |||||
|
|
on Cash Flow |
|
Translation |
|
Benefit |
|
For-Sale |
|
Comprehensive |
| |||||
(Dollars in Millions) |
|
Hedges |
|
Adjustments* |
|
Plans |
|
Securities |
|
Income/(Loss) |
| |||||
January 1, 2015 |
|
$ |
392 |
|
$ |
(1,742 |
) |
$ |
(26,509 |
) |
$ |
(15 |
) |
$ |
(27,875 |
) |
Other comprehensive income before reclassifications |
|
301 |
|
(1,593 |
) |
25 |
|
(52 |
) |
(1,319 |
) | |||||
Amount reclassified from accumulated other comprehensive income |
|
(544 |
) |
0 |
|
1,583 |
|
0 |
|
1,039 |
| |||||
Total change for the period |
|
(243 |
) |
(1,593 |
) |
1,608 |
|
(52 |
) |
(280 |
) | |||||
September 30, 2015 |
|
$ |
148 |
|
$ |
(3,335 |
) |
$ |
(24,901 |
) |
$ |
(67 |
) |
$ |
(28,155 |
) |
* Foreign currency translation adjustments are presented gross except for any associated hedges which are presented net of tax.
8. Retirement-Related Benefits: The company offers defined benefit pension plans, defined contribution pension plans, as well as nonpension postretirement plans primarily consisting of retiree medical benefits. The following tables provide the pre-tax cost for all retirement-related plans.
|
|
|
|
|
|
Yr. to Yr. |
| ||
(Dollars in millions) |
|
|
|
|
|
Percent |
| ||
For the three months ended September 30: |
|
2016 |
|
2015 |
|
Change |
| ||
Retirement-related plans cost |
|
|
|
|
|
|
| ||
Defined benefit and contribution pension plans cost |
|
$ |
421 |
|
$ |
505 |
|
(16.6 |
)% |
Nonpension postretirement plans cost |
|
64 |
|
68 |
|
(4.8 |
) | ||
Total |
|
$ |
486 |
|
$ |
573 |
|
(15.2 |
)% |
|
|
|
|
|
|
Yr. to Yr. |
| ||
(Dollars in millions) |
|
|
|
|
|
Percent |
| ||
For the nine months ended September 30: |
|
2016 |
|
2015 |
|
Change |
| ||
Retirement-related plans cost |
|
|
|
|
|
|
| ||
Defined benefit and contribution pension plans cost |
|
$ |
1,315 |
|
$ |
1,747 |
|
(24.7 |
)% |
Nonpension postretirement plans cost |
|
185 |
|
206 |
|
(10.3 |
) | ||
Total |
|
$ |
1,500 |
|
$ |
1,953 |
|
(23.2 |
)% |
Notes to Consolidated Financial Statements (continued)
The following tables provide the components of the cost/(income) for the companys pension plans.
Cost/(Income) of Pension Plans
(Dollars in millions) |
|
U.S. Plans |
|
Non-U.S. Plans |
| ||||||||
For the three months ended September 30: |
|
2016 |
|
2015 |
|
2016 |
|
2015 |
| ||||
Service cost |
|
$ |
|
|
$ |
|
|
$ |
108 |
|
$ |
116 |
|
Interest cost |
|
512 |
|
507 |
|
257 |
|
270 |
| ||||
Expected return on plan assets |
|
(922 |
) |
(988 |
) |
(468 |
) |
(481 |
) | ||||
Amortization of prior service costs/(credits) |
|
3 |
|
2 |
|
(28 |
) |
(24 |
) | ||||
Recognized actuarial losses |
|
328 |
|
414 |
|
357 |
|
392 |
| ||||
Curtailments and settlements |
|
|
|
|
|
4 |
|
11 |
| ||||
Multi-employer plans/other costs |
|
|
|
|
|
8 |
|
16 |
| ||||
Total net periodic pension (income)/cost of defined benefit plans |
|
(79 |
) |
(65 |
) |
239 |
|
300 |
| ||||
Cost of defined contribution plans |
|
159 |
|
162 |
|
103 |
|
109 |
| ||||
Total defined benefit and contribution plans cost recognized in the Consolidated Statement of Earnings |
|
$ |
79 |
|
$ |
96 |
|
$ |
342 |
|
$ |
409 |
|
(Dollars in millions) |
|
U.S. Plans |
|
Non-U.S. Plans |
| ||||||||
For the nine months ended September 30: |
|
2016 |
|
2015 |
|
2016 |
|
2015 |
| ||||
Service cost |
|
$ |
|
|
$ |
|
|
$ |
318 |
|
$ |
339 |
|
Interest cost |
|
1,536 |
|
1,521 |
|
787 |
|
810 |
| ||||
Expected return on plan assets |
|
(2,767 |
) |
(2,965 |
) |
(1,419 |
) |
(1,446 |
) | ||||
Amortization of prior service costs/(credits) |
|
8 |
|
7 |
|
(79 |
) |
(74 |
) | ||||
Recognized actuarial losses |
|
985 |
|
1,241 |
|
1,062 |
|
1,186 |
| ||||
Curtailments and settlements |
|
|
|
|
|
19 |
|
19 |
| ||||
Multi-employer plan/other costs |
|
|
|
|
|
64 |
|
272 |
| ||||
Total net periodic pension (income)/cost of defined benefit plans |
|
(238 |
) |
(196 |
) |
751 |
|
1,107 |
| ||||
Cost of defined contribution plans |
|
484 |
|
500 |
|
318 |
|
335 |
| ||||
Total defined benefit and contribution plans cost recognized in the Consolidated Statement of Earnings |
|
$ |
246 |
|
$ |
304 |
|
$ |
1,069 |
|
$ |
1,443 |
|
On March 24, 2014, the Supreme Court of Spain issued a ruling against IBM Spain in litigation involving its defined benefit and defined contribution plans. As a result of the ruling, the company recorded pre-tax retirement-related obligations of $233 million in 2015 ($230 million in the first quarter of 2015) in selling, general and administrative expense in the Consolidated Statement of Earnings. These obligations are reflected in Non-U.S. Plans - Multi-employer plans/other costs in the table above.
In March 2016, the company initiated a change to the investment strategy of its U.S. defined benefit plan. The 2016 target asset allocation was modified by reducing equity securities from 34 percent to 21 percent, other investments from 10 percent to 9 percent and increasing debt securities from 56 percent to 70 percent of total plan assets. This change is designed to reduce the risk associated with the potential negative impact that equity markets might have on the funded status of the U.S. defined benefit plan. The change is expected to reduce the 2017 expected long-term rate of return on assets from 7.00 percent to approximately 6.25 percent. See note S, Retirement-Related Benefits, on page 118 in the companys recast 2015 Annual Report on Form 8-K dated June 13, 2016 for additional information regarding the companys investment strategy.
In 2016, the company now expects to contribute approximately $600 million to its non-U.S. defined benefit and multi-employer plans, the largest of which will be contributed to the defined benefit pension plans in the UK and Japan. This amount generally represents the legally mandated minimum contribution. Total net contributions to the non-U.S. plans in the first nine months of 2016 were $261 million, of which $97 million was in cash and $164 million in U.S. Treasury securities. Total net contributions to the non-U.S. plans in the first nine months of 2015 were $271 million in cash. The contribution of U.S. Treasury securities is considered a non-cash transaction in the Consolidated Statement of Cash Flows.
Notes to Consolidated Financial Statements (continued)
The following tables provide the components of the cost/(income) for the companys nonpension postretirement plans.
Cost of Nonpension Postretirement Plans
(Dollars in millions) |
|
U.S. Plan |
|
Non-U.S. Plans |
| ||||||||
For the three months ended September 30: |
|
2016 |
|
2015 |
|
2016 |
|
2015 |
| ||||
Service cost |
|
$ |
4 |
|
$ |
6 |
|
$ |
1 |
|
$ |
2 |
|
Interest cost |
|
41 |
|
41 |
|
15 |
|
12 |
| ||||
Expected return on plan assets |
|
|
|
|
|
(2 |
) |
(2 |
) | ||||
Amortization of prior service costs/(credits) |
|
(2 |
) |
(2 |
) |
(1 |
) |
(1 |
) | ||||
Recognized actuarial losses |
|
5 |
|
10 |
|
2 |
|
2 |
| ||||
Curtailments and settlements |
|
|
|
|
|
0 |
|
0 |
| ||||
Total nonpension postretirement plan cost recognized in Consolidated Statement of Earnings |
|
$ |
49 |
|
$ |
55 |
|
$ |
16 |
|
$ |
13 |
|
(Dollars in millions) |
|
U.S. Plan |
|
Non-U.S. Plans |
| ||||||||
For the nine months ended September 30: |
|
2016 |
|
2015 |
|
2016 |
|
2015 |
| ||||
Service cost |
|
$ |
13 |
|
$ |
18 |
|
$ |
4 |
|
$ |
5 |
|
Interest cost |
|
124 |
|
122 |
|
37 |
|
39 |
| ||||
Expected return on plan assets |
|
|
|
|
|
(5 |
) |
(5 |
) | ||||
Amortization of prior service costs/(credits) |
|
(6 |
) |
(6 |
) |
(4 |
) |
(4 |
) | ||||
Recognized actuarial losses |
|
15 |
|
29 |
|
7 |
|
7 |
| ||||
Curtailments and settlements |
|
|
|
|
|
0 |
|
0 |
| ||||
Total nonpension postretirement plan cost recognized in Consolidated Statement of Earnings |
|
$ |
146 |
|
$ |
164 |
|
$ |
39 |
|
$ |
42 |
|
The company contributed $240 million to the U.S. nonpension postretirement benefit plan of which $40 million was in cash and $200 million was in U.S. Treasury securities during the nine months ended September 30, 2016, and $308 million in cash during the nine months ended September 30, 2015. The contribution of U.S. Treasury securities is considered a non-cash transaction in the Consolidated Statement of Cash Flows.
9. Acquisitions/Divestitures:
Acquisitions: During the nine months ended September 30, 2016, the company completed twelve acquisitions at an aggregate cost of $5,688 million.
The Weather Company (TWC) On January 29, 2016, the company completed the acquisition of TWCs B2B, mobile and cloud-based web-properties, weather.com, Weather Underground, The Weather Company brand and WSI, its global business-to-business brand, for cash consideration of $2,278 million. The cable television segment was not acquired by IBM, but will license weather forecast data and analytics from IBM under a long-term contract. TWC was a privately held business. Goodwill of $1,717 million has been assigned to the Cognitive Solutions segment. It is expected that none of the goodwill will be deductible for tax purposes. The overall weighted-average useful life of the identified intangible assets acquired is 6.9 years.
Truven Health Analytics, Inc. (Truven) On April 8, 2016, the company completed the acquisition of Truven, a leading provider of healthcare analytics solutions, for cash consideration of $2,612 million, of which $200 million will be paid in July 2017. Truven has developed proprietary analytic methods and assembled analytic content assets, creating extensive national healthcare utilization, performance, quality and cost data. Truven was a privately held business. Goodwill of $1,933 million has been assigned to the Cognitive Solutions segment. It is expected that approximately 15 percent of the goodwill will be deductible for tax purposes. The overall weighted-average useful life of the identified intangible assets acquired is 6.9 years.
Other Acquisitions The Technology Services & Cloud Platforms segment completed acquisitions of three businesses: in the first quarter: Ustream, Inc. (Ustream), a privately held business, and AT&Ts application and hosting services business; and in the third quarter, G4Ss cash solutions business. Global Business Services (GBS) completed acquisitions of
Notes to Consolidated Financial Statements (continued)
five privately held businesses: in the first quarter, Resource/Ammirati, ecx International AG (ecx.io) and Optevia Limited (Optevia); and in the second quarter, Aperto AG (Aperto) and Bluewolf Group LLC (Bluewolf). The Cognitive Solutions segment completed acquisitions of two privately held businesses in the second quarter: Resilient Systems Inc. (Resilient) and EZ Legacy Ltd. (EZSource).
Each acquisition is expected to enhance the companys portfolio of product and services capabilities. Ustream provides cloud-based video streaming to enterprises and broadcasters. The acquisition of AT&Ts application and hosting services business is expected to strengthen the companys cloud portfolio. The acquisition of G4Ss cash solutions business brings together the engineering skills of G4S with the companys analytics and remote technology capabilities to expand delivery solutions. Resource/Ammirati is a leading U.S. based digital marketing and creative agency, addressing the rising demand from businesses seeking to reinvent themselves for the digital economy. Ecx.io will enhance IBM Interactive Experience (IBM iX) with new digital marketing, commerce and platform skills to accelerate clients digital transformations. Optevia is a Software-as-a Service systems integrator specializing in CRM solutions for public sector organizations. Aperto will join IBM iX, supporting the companys growth in Europe, with expertise in digital strategy projects, including website and application development. Bluewolf will extend the companys analytics, experience design and industry consulting leadership with one of the worlds leading Salesforce consulting practices to deliver differentiated, consumer-grade experiences via the cloud. Resilient, a provider of incident response solutions, automates and orchestrates the many processes needed when dealing with cyber incidents from breaches to lost devices. EZSource helps developers quickly and easily understand and change mainframe code based on data displayed through dashboards and other visualizations.
Purchase price consideration for all acquisitions as reflected in the following table, was paid primarily in cash. All acquisitions are reported in the Consolidated Statement of Cash Flows net of acquired cash and cash equivalents.
The following table reflects the purchase price related to these acquisitions and the resulting purchase price allocations as of September 30, 2016.
|
|
|
|
The |
|
Truven |
|
|
| |||
|
|
Amortization |
|
Weather |
|
Health |
|
Other |
| |||
(Dollars in millions) |
|
Life (in yrs.) |
|
Company |
|
Analytics |
|
Acquisitions |
| |||
Current assets |
|
|
|
$ |
76 |
|
$ |
171 |
|
$ |
78 |
|
Fixed assets/noncurrent assets |
|
|
|
123 |
|
127 |
|
89 |
| |||
Intangible assets: |
|
|
|
|
|
|
|
|
| |||
Goodwill |
|
N/A |
|
1,717 |
|
1,933 |
|
487 |
| |||
Completed technology |
|
1-7 |
|
160 |
|
338 |
|
75 |
| |||
Client relationships |
|
3-7 |
|
313 |
|
516 |
|
189 |
| |||
Patents/trademarks |
|
2-7 |
|
349 |
|
54 |
|
28 |
| |||
Total assets acquired |
|
|
|
2,738 |
|
3,141 |
|
947 |
| |||
Current liabilities |
|
|
|
(88 |
) |
(148 |
) |
(46 |
) | |||
Noncurrent liabilities |
|
|
|
(372 |
) |
(381 |
) |
(64 |
) | |||
Total liabilities assumed |
|
|
|
(460 |
) |
(529 |
) |
(110 |
) | |||
Bargain purchase gain |
|
|
|
|
|
|
|
(40 |
)* | |||
Total purchase price |
|
|
|
$ |
2,278 |
|
$ |
2,612 |
|
$ |
798 |
|
N/A - not applicable
* Bargain purchase gain relating to AT&Ts application and hosting services business was recognized in selling, general and administrative expense in the Consolidated Statement of Earnings in the three months ended March 31, 2016.
The acquisitions were accounted for as business combinations using the acquisition method, and accordingly, the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquired entity were recorded at their estimated fair values at the date of acquisition. The primary items that generated the goodwill are the value of the synergies between the acquired businesses and IBM and the acquired assembled workforce, neither of which qualify as an amortizable intangible asset.
For the Other Acquisitions, the overall weighted-average life of the identified amortizable intangible assets acquired is 6.4 years. These identified intangible assets will be amortized on a straight-line basis over their useful lives. Goodwill of $91 million was assigned to the Technology Services & Cloud Platforms segment, goodwill of $278 million was assigned to the GBS segment and goodwill of $118 million was assigned to the Cognitive Solutions segment. It is expected that approximately 50 percent of the goodwill will be deductible for tax purposes.
Notes to Consolidated Financial Statements (continued)
On September 29, 2016, the company announced its intent to acquire Promontory Financial Group, LLC (Promontory), a global market-leading risk management and regulatory compliance consulting firm. Promontorys capabilities combined with Watson will address clients escalating regulations and risk management requirements. The transaction is expected to close in the fourth quarter of 2016 and the business will be integrated within the Cognitive Solutions segment.
Divestitures:
Microelectronics On October 20, 2014, IBM and GLOBALFOUNDRIES announced a definitive agreement in which GLOBALFOUNDRIES would acquire the companys Microelectronics business, including existing semiconductor manufacturing assets and operations in East Fishkill, NY and Essex Junction, VT. The commercial OEM business acquired by GLOBALFOUNDRIES includes custom logic and specialty foundry, manufacturing and related operations. The transaction closed on July 1, 2015.
The transaction includes a 10-year exclusive manufacturing sourcing agreement in which GLOBALFOUNDRIES will provide server processor semiconductor technology for use in IBM Systems. The agreement provides the company with capacity and market-based pricing for current semiconductor nodes in production and progression to nodes in the future for both development and production needs. As part of the transaction, the company will provide GLOBALFOUNDRIES with certain transition services, including IT, supply chain, packaging and test services and lab services. The initial term for these transition services is one to three years, with GLOBALFOUNDRIES having the ability to renew.
In the third quarter of 2014, the company recorded a pre-tax charge of $4.7 billion related to the sale of the Microelectronics disposal group, which was part of the Systems reportable segment. The pre-tax charge reflected the fair value less the estimated cost of selling the disposal group including an impairment to the semiconductor long-lived assets of $2.4 billion, $1.5 billion representing the cash consideration expected to be transferred to GLOBALFOUNDRIES and $0.8 billion of other related costs. Additional pre-tax charges of $116 million were recorded during 2015 related to the disposal, and a pre-tax credit of $1 million was recorded during the nine months ended September 30, 2016. The cumulative pre-tax charge was $4.8 billion as of September 30, 2016. Any additional charges that may be recorded in future periods are expected to be immaterial.
All assets and liabilities of the business, classified as held for sale at June 30, 2015, were transferred at closing. The company transferred $515 million of net cash to GLOBALFOUNDRIES in the third quarter of 2015. This amount included $750 million of cash consideration, adjusted by the amount of working capital due from GLOBALFOUNDRIES and other miscellaneous items. The remaining cash consideration will be transferred over two years, with a payment of $500 million expected in the fourth quarter of 2016.
Reporting the related assets and liabilities initially as held for sale at September 30, 2014 was based on meeting all of the criteria for such reporting in the applicable accounting guidance. While the company met certain criteria for held for sale reporting in prior periods, it did not meet all of the criteria until September 30, 2014. In addition, at September 30, 2014, the company concluded that the Microelectronics business met the criteria for discontinued operations reporting. The disposal group constitutes a component under accounting guidance. The continuing cash inflows and outflows with the discontinued component are related to the manufacturing sourcing arrangement and the transition, packaging and test services. These cash flows are not direct cash flows as they are not significant and the company will have no significant continuing involvement.
Summarized financial information for discontinued operations is shown in the table below.
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
| ||||||||
(Dollars in millions) |
|
2016 |
|
2015 |
|
2016 |
|
2015 |
| ||||
Total revenue |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
720 |
|
Income/(loss) from discontinued operations |
|
$ |
(2 |
) |
$ |
2 |
|
$ |
(8 |
) |
$ |
(177 |
) |
Gain/(loss) on disposal, before tax |
|
0 |
|
(57 |
) |
1 |
|
(108 |
) | ||||
Total loss from discontinued operations, before income taxes |
|
$ |
(2 |
) |
$ |
(54 |
) |
$ |
(7 |
) |
$ |
(285 |
) |
Provision/(benefit) for income taxes |
|
(1 |
) |
(43 |
) |
(3 |
) |
(108 |
) | ||||
Loss from discontinued operations, net of tax |
|
$ |
(1 |
) |
$ |
(12 |
) |
$ |
(4 |
) |
$ |
(176 |
) |
Industry Standard Server On January 23, 2014, IBM and Lenovo Group Limited (Lenovo) announced a definitive agreement in which Lenovo would acquire the companys industry standard server portfolio (System x) for an adjusted
Notes to Consolidated Financial Statements (continued)
purchase price of $2.1 billion, consisting of approximately $1.8 billion in cash, with the balance in Lenovo common stock. The stock represented less than 5 percent equity ownership in Lenovo. As of March 31, 2016, all Lenovo common stock was sold. The company sold to Lenovo its System x, BladeCenter and Flex System blade servers and switches, x86-based Flex integrated systems, NeXtScale and iDataPlex servers and associated software, blade networking and maintenance operations.
IBM and Lenovo entered into a strategic relationship which included a global OEM and reseller agreement for sales of IBMs industry-leading entry and midrange Storwize disk storage systems, tape storage systems, General Parallel File System software, SmartCloud Entry offering, and elements of IBMs system software, including Systems Director and Platform Computing solutions. Effective with the initial closing of the transaction, Lenovo assumed related customer service and maintenance operations. IBM will continue to provide maintenance delivery on Lenovos behalf for an extended period of time. In addition, as part of the transaction agreement, the company will provide Lenovo with certain transition services, including IT and supply chain services. The initial term for these transition services ranges from less than one year to three years. Lenovo can renew certain services for an additional year.
The initial closing was completed on October 1, 2014. A subsequent closing occurred in most other countries in which there was a large business footprint on December 31, 2014. The remaining countries closed on March 31, 2015. An assessment of the ongoing contractual terms of the transaction resulted in the recognition of a pre-tax gain of $63 million in 2015 and $36 million in the nine months ended September 30, 2016.
Overall, the company expects to recognize a total pre-tax gain on the sale of approximately $1.6 billion, which does not include associated costs related to transition and performance-based costs. Net of these charges, the pre-tax gain was approximately $1.3 billion, of which the cumulative gain recorded as of September 30, 2016 is $1.2 billion. The balance of the gain is expected to be recognized in 2019 upon conclusion of the maintenance agreement.
Customer Care On September 10, 2013, IBM and SYNNEX announced a definitive agreement in which SYNNEX would acquire the companys worldwide customer care business process outsourcing services business for $501 million, consisting of approximately $430 million in cash, net of balance sheet adjustments, and $71 million in SYNNEX common stock, which represented less than 5 percent equity ownership in SYNNEX. As part of the transaction, SYNNEX entered into a multi-year agreement with the company, and Concentrix, SYNNEXs outsourcing business, became an IBM strategic business partner for global customer care business process outsourcing services.
The initial closing was completed on January 31, 2014, with subsequent closings occurring during 2014. For the full year of 2014, the company recorded a pre-tax gain of $202 million related to this transaction.
In the second quarter of 2015, resolution of the final balance sheet adjustments was concluded. An assessment of the ongoing contractual terms of the transaction resulted in the recognition of a pre-tax gain of $7 million in 2015. Through September 30, 2016, the cumulative pre-tax gain attributed to this transaction was $213 million.
Others In the first quarter of 2016, the company completed four software product-related divestitures. The financial terms related to these transactions were not material. Overall, the company recorded a pre-tax gain of $36 million related to these transactions in the first quarter of 2016. There were no divestitures in the second and third quarters of 2016.
Notes to Consolidated Financial Statements (continued)
10. Intangible Assets Including Goodwill: The following table details the companys intangible asset balances by major asset class:
|
|
At September 30, 2016 |
| |||||||
(Dollars in millions) |
|
Gross Carrying |
|
Accumulated |
|
Net Carrying |
| |||
Intangible asset class |
|
Amount |
|
Amortization |
|
Amount |
| |||
Capitalized software |
|
$ |
1,512 |
|
$ |
(630 |
) |
$ |
882 |
|
Client relationships |
|
2,831 |
|
(1,163 |
) |
1,668 |
| |||
Completed technology |
|
3,336 |
|
(1,577 |
) |
1,759 |
| |||
Patents/trademarks |
|
723 |
|
(183 |
) |
540 |
| |||
Other* |
|
46 |
|
(14 |
) |
32 |
| |||
Total |
|
$ |
8,447 |
|
$ |
(3,566 |
) |
$ |
4,881 |
|
* Other intangibles are primarily acquired proprietary and non-proprietary business processes, methodologies and systems.
|
|
At December 31, 2015 |
| |||||||
(Dollars in millions) |
|
Gross Carrying |
|
Accumulated |
|
Net Carrying |
| |||
Intangible asset class |
|
Amount |
|
Amortization |
|
Amount |
| |||
Capitalized software |
|
$ |
1,348 |
|
$ |
(581 |
) |
$ |
767 |
|
Client relationships |
|
1,856 |
|
(927 |
) |
929 |
| |||
Completed technology |
|
2,960 |
|
(1,397 |
) |
1,563 |
| |||
Patents/trademarks |
|
335 |
|
(142 |
) |
193 |
| |||
Other* |
|
44 |
|
(10 |
) |
35 |
| |||
Total |
|
$ |
6,543 |
|
$ |
(3,057 |
) |
$ |
3,487 |
|
* Other intangibles are primarily acquired proprietary and non-proprietary business processes, methodologies and systems.
The net carrying amount of intangible assets increased $1,394 million during the first nine months of 2016, primarily due to intangible asset additions resulting from acquisitions, partially offset by amortization. The aggregate intangible amortization expense was $403 million and $1,148 million for the third quarter and first nine months of 2016, respectively, versus $290 million and $884 million for the third quarter and first nine months of 2015, respectively. In addition, in the first nine months of 2016, the company retired $634 million of fully amortized intangible assets, impacting both the gross carrying amount and accumulated amortization by this amount.
The amortization expense for each of the five succeeding years relating to intangible assets currently recorded in the Consolidated Statement of Financial Position is estimated to be the following at September 30, 2016:
|
|
Capitalized |
|
Acquired |
|
|
| |||
(Dollars in millions) |
|
Software |
|
Intangibles |
|
Total |
| |||
2016 (for Q4) |
|
$ |
138 |
|
$ |
254 |
|
$ |
392 |
|
2017 |
|
444 |
|
944 |
|
1,388 |
| |||
2018 |
|
250 |
|
798 |
|
1,048 |
| |||
2019 |
|
50 |
|
635 |
|
685 |
| |||
2020 |
|
|
|
535 |
|
535 |
| |||
The change in the goodwill balances by reportable segment, for the nine months ended September 30, 2016 and for the year ended December 31, 2015 are as follows:
Notes to Consolidated Financial Statements (continued)
|
|
|
|
|
|
|
|
|
|
Foreign |
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
Currency |
|
|
| ||||||
|
|
|
|
|
|
Purchase |
|
|
|
Translation |
|
|
| ||||||
(Dollars in millions) |
|
Balance |
|
Goodwill |
|
Price |
|
|
|
And Other |
|
Balance |
| ||||||
Segment |
|
1/1/2016* |
|
Additions |
|
Adjustments |
|
Divestitures |
|
Adjustments** |
|
9/30/16 |
| ||||||
Cognitive Solutions |
|
$ |
15,621 |
|
$ |
3,769 |
|
$ |
4 |
|
$ |
(12 |
) |
$ |
134 |
|
$ |
19,516 |
|
Global Business Services |
|
4,396 |
|
278 |
|
5 |
|
(1 |
) |
16 |
|
4,693 |
| ||||||
Technology Services & Cloud Platforms |
|
10,156 |
|
91 |
|
1 |
|
(5 |
) |
89 |
|
10,333 |
| ||||||
Systems |
|
1,848 |
|
|
|
2 |
|
|
|
10 |
|
1,859 |
| ||||||
Total |
|
$ |
32,021 |
|
$ |
4,137 |
|
$ |
11 |
|
$ |
(17 |
) |
$ |
248 |
|
$ |
36,401 |
|
* Recast to conform with 2016 presentation.
** Primarily driven by foreign currency translation.
|
|
|
|
|
|
|
|
|
|
Foreign |
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
Currency |
|
|
| ||||||
|
|
|
|
|
|
Purchase |
|
|
|
Translation |
|
|
| ||||||
(Dollars in millions) |
|
Balance |
|
Goodwill |
|
Price |
|
|
|
And Other |
|
Balance |
| ||||||
Segment |
|
1/1/2015* |
|
Additions* |
|
Adjustments* |
|
Divestitures* |
|
Adjustments* ** |
|
12/31/15* |
| ||||||
Cognitive Solutions |
|
$ |
15,156 |
|
$ |
1,020 |
|
$ |
(2 |
) |
$ |
(18 |
) |
$ |
(535 |
) |
$ |
15,621 |
|
Global Business Services |
|
4,555 |
|
74 |
|
0 |
|
(1 |
) |
(232 |
) |
4,396 |
| ||||||
Technology Services & Cloud Platforms |
|
9,373 |
|
1,087 |
|
(1 |
) |
(7 |
) |
(296 |
) |
10,156 |
| ||||||
Systems |
|
1,472 |
|
410 |
|
0 |
|
|
|
(33 |
) |
1,848 |
| ||||||
Total |
|
$ |
30,556 |
|
$ |
2,590 |
|
$ |
(3 |
) |
$ |
(26 |
) |
$ |
(1,096 |
) |
$ |
32,021 |
|
* Recast to conform with 2016 presentation.
** Primarily driven by foreign currency translation.
In January 2016, the company made a number of changes to its organizational structure and management system consistent with the ongoing transformation to a cognitive solutions and cloud platform business. With these changes, the company revised its reportable segments. Goodwill was reallocated to the new reporting segments, and as a result, an impairment assessment was performed. There were no goodwill impairment losses recorded during the first nine months of 2016 or the full year of 2015 and the company has no accumulated impairment losses. For further information regarding the segment change, refer to note 6, Segments.
Purchase price adjustments recorded in the first nine months of 2016 and full year 2015 were related to acquisitions that were completed on or prior to June 30, 2016 or December 31, 2014, respectively, and were still subject to the measurement period that ends at the earlier of 12 months from the acquisition date or when information becomes available. Net purchase price adjustments of $11 million were recorded during the first nine months of 2016 with the primary drivers being accounts receivable, inventory, deferred tax assets, deferred income and other current and noncurrent liabilities.
11. Borrowings:
Short-Term Debt
|
|
At September 30, |
|
At December 31, |
| ||
(Dollars in millions) |
|
2016 |
|
2015 |
| ||
Commercial paper |
|
$ |
|
|
$ |
600 |
|
Short-term loans |
|
359 |
|
590 |
| ||
Long-term debt current maturities |
|
6,561 |
|
5,271 |
| ||
Total |
|
$ |
6,920 |
|
$ |
6,461 |
|
The weighted-average interest rate for commercial paper at December 31, 2015 was 0.4 percent. The weighted-average interest rate for short-term loans was 9.5 percent and 5.2 percent at September 30, 2016 and December 31, 2015, respectively.
Notes to Consolidated Financial Statements (continued)
Long-Term Debt
Pre-Swap Borrowing
|
|
|
|
Balance |
|
Balance |
| ||
(Dollars in millions) |
|
Maturities |
|
9/30/2016 |
|
12/31/2015 |
| ||
U.S. dollar notes and debentures (average interest rate at September 30, 2016): |
|
|
|
|
|
|
| ||
3.94% |
|
20162017 |
|
$ |
5,151 |
|
$ |
9,351 |
|
3.20% |
|
20182019 |
|
8,846 |
|
7,591 |
| ||
1.79% |
|
20202021 |
|
4,944 |
|
3,717 |
| ||
2.35% |
|
2022 |
|
1,902 |
|
1,900 |
| ||
3.38% |
|
2023 |
|
1,500 |
|
1,500 |
| ||
3.63% |
|
2024 |
|
2,000 |
|
2,000 |
| ||
7.00% |
|
2025 |
|
600 |
|
600 |
| ||
3.45% |
|
2026 |
|
1,350 |
|
|
| ||
6.22% |
|
2027 |
|
469 |
|
469 |
| ||
6.50% |
|
2028 |
|
313 |
|
313 |
| ||
5.88% |
|
2032 |
|
600 |
|
600 |
| ||
8.00% |
|
2038 |
|
83 |
|
83 |
| ||
5.60% |
|
2039 |
|
745 |
|
745 |
| ||
4.00% |
|
2042 |
|
1,107 |
|
1,107 |
| ||
7.00% |
|
2045 |
|
27 |
|
27 |
| ||
4.70% |
|
2046 |
|
650 |
|
|
| ||
7.13% |
|
2096 |
|
316 |
|
316 |
| ||
|
|
|
|
$ |
30,604 |
|
$ |
30,319 |
|
Other currencies (average interest rate at September 30, 2016, in parentheses): |
|
|
|
|
|
|
| ||
Euros (1.6%) |
|
20162028 |
|
$ |
7,582 |
|
$ |
4,892 |
|
Pound sterling (2.7%) |
|
20172022 |
|
1,366 |
|
1,555 |
| ||
Japanese yen (0.3%) |
|
20172022 |
|
1,400 |
|
1,180 |
| ||
Swiss francs (6.3%) |
|
2020 |
|
8 |
|
9 |
| ||
Canadian (2.2%) |
|
2017 |
|
381 |
|
360 |
| ||
Other (15.4%) |
|
20162020 |
|
659 |
|
506 |
| ||
|
|
|
|
$ |
42,001 |
|
$ |
38,820 |
|
Less: net unamortized discount |
|
|
|
847 |
|
838 |
| ||
Less: net unamortized debt issuance cost |
|
|
|
86 |
|
74 |
| ||
Add: fair value adjustment* |
|
|
|
1,057 |
|
790 |
| ||
|
|
|
|
$ |
42,124 |
|
$ |
38,699 |
|
Less: current maturities |
|
|
|
6,561 |
|
5,271 |
| ||
Total |
|
|
|
$ |
35,563 |
|
$ |
33,428 |
|
* The portion of the companys fixed-rate debt obligations that is hedged is reflected in the Consolidated Statement of Financial Position as an amount equal to the sum of the debts carrying value plus a fair value adjustment representing changes in the fair value of the hedged debt obligations attributable to movements in benchmark interest rates.
There are no debt securities issued and outstanding by IBM International Group Capital LLC, which is an indirect, 100 percent owned finance subsidiary of International Business Machines Corporation, the parent. Any debt securities issued by IBM International Group Capital LLC, would be fully and unconditionally guaranteed by the parent.
The companys 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 companys consolidated net tangible assets, and restrict the companys ability to merge or consolidate unless certain conditions are met. The credit facilities also include a covenant on the companys 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 significant 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.
Notes to Consolidated Financial Statements (continued)
Pre-swap annual contractual maturities of long-term debt outstanding at September 30, 2016, are as follows:
(Dollars in millions) |
|
Total |
| |
2016 (for Q4) |
|
$ |
61 |
|
2017 |
|
6,961 |
| |
2018 |
|
4,749 |
| |
2019 |
|
5,262 |
| |
2020 |
|
4,747 |
| |
2021 and beyond |
|
20,220 |
| |
Total |
|
$ |
42,001 |
|
Interest on Debt
(Dollars in millions) |
|
|
|
|
| ||
For the nine months ended September 30: |
|
2016 |
|
2015 |
| ||
Cost of financing |
|
$ |
432 |
|
$ |
407 |
|
Interest expense |
|
523 |
|
346 |
| ||
Net investment derivative activity |
|
(51 |
) |
(6 |
) | ||
Interest capitalized |
|
3 |
|
(1 |
) | ||
Total interest paid and accrued |
|
$ |
907 |
|
$ |
746 |
|
12. 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. Also, as is typical for companies of IBMs 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 companys 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 quarter ended September 30, 2016 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 companys 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 companys 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 companys 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
Notes to Consolidated Financial Statements (continued)
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 companys 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 companys 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&Ts UNIX IP rights, and alleges copyright infringement, unfair competition, interference with contract and breach of contract with regard to the companys 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 Novells waiver of SCOs claims against IBM and Sequent for breach of UNIX license agreements. On August 30, 2011, the Tenth Circuit Court of Appeals affirmed the district courts ruling and denied SCOs appeal of this matter. In June 2013, the Federal Court in Utah granted SCOs motion to reopen the SCO v. IBM case. In February 2016, the Federal Court ruled in favor of IBM on all of SCOs remaining claims, and in March 2016, SCO filed a notice of appeal to the Tenth Circuit Court of Appeals.
On May 13, 2010, IBM and the State of Indiana (acting on behalf of the Indiana Family and Social Services Administration) sued one another in a dispute over a 2006 contract regarding the modernization of social service program processing in Indiana. After six weeks of trial, on July 18, 2012, the Indiana Superior Court in Marion County rejected the States claims in their entirety and awarded IBM $52 million plus interest and costs. On February 13, 2014, the Indiana Court of Appeals reversed portions of the trial judges findings, found IBM in material breach, and ordered the case remanded to the trial judge to determine the States damages, if any. The Indiana Court of Appeals also affirmed approximately $50 million of the trial courts award of damages to IBM. On March 22, 2016, the Indiana Supreme Court affirmed the outcome of the Indiana Court of Appeals and remanded the case to the Indiana Superior Court.
On April 16, 2014, Iusacell SA de C.V. (Iusacell) sued IBM, claiming that IBM made fraudulent misrepresentations that induced Iusacell to enter into an agreement with IBM Mexico. Iusacell claims damages for lost profits. Iusacells complaint relates to a contractual dispute in Mexico, which is the subject of a pending arbitration proceeding in Mexico initiated by IBM Mexico against Iusacell for breach of the underlying agreement. On November 14, 2014, the District Court in the Southern District of New York granted IBMs motion to stay Iusacells action against the company pending the arbitration in Mexico between Iusacell and IBM Mexico.
IBM United Kingdom Limited (IBM UK) initiated legal proceedings in May 2010 before the High Court in London against the IBM UK Pensions Trust (the UK Trust) and two representative beneficiaries of the UK Trust membership. IBM UK is seeking a declaration that it acted lawfully both in notifying the Trustee of the UK Trust that it was closing its UK defined benefit plans to future accruals for most participants and in implementing the companys new retirement policy. In April 2014, the High Court acknowledged that the changes made to its UK defined benefit plans were within IBMs discretion, but ruled that IBM breached its implied duty of good faith both in implementing these changes and in the manner in which it consulted with employees. Proceedings to determine remedies were held in July 2014, and in February 2015 the High Court held that for IBM to make changes to accruals under the plan would require a new consultation of the participants, but other changes (including to early retirement policy) would not require such consultation. IBM UK has appealed both the breach and remedies judgments. If the appeal is unsuccessful, the Courts rulings would require IBM to reverse the changes made to the UK defined benefit plans retroactive to their effective dates. This could result in an estimated non-operating one-time pre-tax charge of approximately $250 million, plus ongoing defined benefit related accruals. In addition, IBM UK is a defendant in approximately 290 individual actions brought since early 2010 by participants of the defined benefits plans who left IBM UK. These actions, which allege constructive dismissal and age discrimination, are pending before the Employment Tribunal in Southampton UK.
Notes to Consolidated Financial Statements (continued)
In March 2011, the company announced that it had agreed to settle a civil enforcement action with the Securities and Exchange Commission (SEC) relating to alleged violations of the Foreign Corrupt Practices Act of 1977 (FCPA). On July 25, 2013, the court approved that 2011 settlement and required that for a two-year period IBM make reports to the SEC and the court on certain matters, including those relating to compliance with the FCPA. The two-year period expired in July 2015. In early 2012, IBM notified the SEC of an investigation by the Polish Central Anti-Corruption Bureau involving allegations of illegal activity by a former IBM Poland employee in connection with sales to the Polish government. IBM is cooperating with the SEC and Polish authorities in this matter. In April 2013, IBM learned that the U.S. Department of Justice (DOJ) is also investigating allegations related to the Poland matter, as well as allegations relating to transactions in Argentina, Bangladesh and Ukraine. The DOJ is also seeking information regarding the companys global FCPA compliance program and its public sector business. The company is cooperating with the DOJ in this matter.
In March 2015, putative class action litigation was commenced in the United States District Court for the Southern District of New York related to the companys October 2014 announcement that it was divesting its global commercial semiconductor technology business. The company and three of its officers were named as defendants. Plaintiffs allege that defendants violated Sections 20(a) and 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. In May 2015, a related putative class action was also commenced in the United States District Court for the Southern District of New York based on the same underlying facts, alleging violations of the Employee Retirement Income Security Act (ERISA). The company, managements Retirement Plans Committee, and three current or former IBM executives were named as defendants. On September 7, 2016, the Court granted the companys motions to dismiss the plaintiffs claims in both actions. On October 21, 2016, the ERISA plaintiffs filed an amended complaint, dropping the company as a defendant. The matter remains pending in the United States District Court.
In August 2015, IBM learned that the SEC is conducting an investigation relating to revenue recognition with respect to the accounting treatment of certain transactions in the U.S., UK and Ireland. The company is cooperating with the SEC in this matter.
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. In the third quarter of 2016, the company received a new non-income tax assessment. The total potential amount related to these matters for all applicable years is approximately $740 million. The company believes it will prevail on these matters and that this amount is not a meaningful indicator of liability.
13. Commitments: The companys extended lines of credit to third-party entities include unused amounts of $7,348 million and $5,477 million at September 30, 2016 and December 31, 2015, respectively. A portion of these amounts was available to the companys 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 approximately $2,220 million and $2,097 million at September 30, 2016 and December 31, 2015, respectively.
The company has applied the guidance requiring a guarantor to disclose certain types of guarantees, even if the likelihood of requiring the guarantors 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 (IP) 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 partys claims. While typically indemnification provisions do not include a contractual maximum on the companys payment,
Notes to Consolidated Financial Statements (continued)
the companys 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 companys 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 companys 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 was $30 million and $34 million at September 30, 2016 and December 31, 2015, respectively. The fair value of the guarantees recognized in the Consolidated Statement of Financial Position is not material.
Changes in the companys warranty liability for standard warranties and deferred income for extended warranty contracts are presented in the following tables.
Standard Warranty Liability
(Dollars in millions) |
|
2016 |
|
2015 |
| ||
Balance at January 1 |
|
$ |
181 |
|
$ |
197 |
|
Current period accruals |
|
107 |
|
117 |
| ||
Accrual adjustments to reflect actual experience |
|
4 |
|
4 |
| ||
Charges incurred |
|
(132 |
) |
(147 |
) | ||
Balance at September 30 |
|
$ |
160 |
|
$ |
172 |
|
Extended Warranty Liability
(Dollars in millions) |
|
2016 |
|
2015 |
| ||
Aggregate deferred revenue at January 1 |
|
$ |
538 |
|
$ |
536 |
|
Revenue deferred for new extended warranty contracts |
|
176 |
|
182 |
| ||
Amortization of deferred revenue |
|
(198 |
) |
(192 |
) | ||
Other* |
|
12 |
|
(28 |
) | ||
Aggregate deferred revenue at September 30 |
|
$ |
528 |
|
$ |
498 |
|
Current portion |
|
$ |
287 |
|
$ |
232 |
|
Noncurrent portion |
|
$ |
241 |
|
$ |
267 |
|
* Other primarily consists of foreign currency translation adjustments.
14. Subsequent Events: On October 25, 2016, the company announced that the Board of Directors approved a quarterly dividend of $1.40 per common share. The dividend is payable December 10, 2016 to shareholders of record on November 10, 2016.
On October 25, 2016, the company announced that the Board of Directors authorized $3.0 billion in additional funds for use in the companys stock repurchase program.
Item 2.
MANAGEMENTS DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016
Snapshot
Financial Results Summary - Three Months Ended September 30:
|
|
|
|
|
|
Yr. to Yr. |
| ||
|
|
|
|
|
|
Percent/ |
| ||
(Dollars and shares in millions except per share amounts) |
|
|
|
|
|
Margin |
| ||
For the three months ended September 30: |
|
2016 |
|
2015 |
|
Change |
| ||
Revenue |
|
$ |
19,226 |
|
$ |
19,280 |
|
(0.3 |
)%* |
Gross profit margin |
|
46.9 |
% |
48.9 |
% |
(2.1 |
)pts. | ||
Total expense and other (income) |
|
$ |
5,751 |
|
$ |
5,815 |
|
(1.1 |
)% |
Total expense and other (income)-to-revenue ratio |
|
29.9 |
% |
30.2 |
% |
(0.2 |
)pts. | ||
Income from continuing operations, before income taxes |
|
$ |
3,263 |
|
$ |
3,621 |
|
(9.9 |
)% |
Provision for income taxes from continuing operations |
|
$ |
409 |
|
$ |
659 |
|
(38.0 |
)% |
Income from continuing operations |
|
$ |
2,854 |
|
$ |
2,962 |
|
(3.6 |
)% |
Income from continuing operations margin |
|
14.8 |
% |
15.4 |
% |
(0.5 |
)pts. | ||
Loss from discontinued operations, net of tax |
|
$ |
(1 |
) |
$ |
(12 |
) |
(91.2 |
)% |
Net income |
|
$ |
2,853 |
|
$ |
2,950 |
|
(3.3 |
)% |
Earnings per share from continuing operations: |
|
|
|
|
|
|
| ||
Assuming dilution |
|
$ |
2.98 |
|
$ |
3.02 |
|
(1.3 |
)% |
Basic |
|
$ |
2.99 |
|
$ |
3.04 |
|
(1.6 |
)% |
Consolidated earnings per share - assuming dilution |
|
$ |
2.98 |
|
$ |
3.01 |
|
(1.0 |
)% |
Weighted-average shares outstanding: |
|
|
|
|
|
|
| ||
Assuming dilution |
|
957.3 |
|
979.0 |
|
(2.2 |
)% | ||
Basic |
|
954.0 |
|
975.1 |
|
(2.2 |
)% |
* (1.1) percent adjusted for currency
Organization of Information:
In January 2016, the company made a number of changes to its organizational structure and management system. These changes impacted the companys reportable segments, but did not impact the Consolidated Financial Statements. Refer to note 6, Segments, on pages 27 to 29 for additional information on the changes in reportable segments. The periods presented in this Form 10-Q are reported on a comparable basis. The company filed a recast 2015 Annual Report in a Form 8-K on June 13, 2016 to recast its historical segment information to reflect these changes.
In October 2014, the company announced a definitive agreement to divest its Microelectronics business. The assets and liabilities of the Microelectronics business were reported as held for sale at December 31, 2014 and June 30, 2015. The operating results of the Microelectronics business are reported as discontinued operations. The transaction closed on July 1, 2015.
Currency:
When the company refers to growth rates at constant currency or adjusted for currency in the Management Discussion, 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 its business performance. Financial results adjusted for currency are calculated by translating current period activity in local currency using the comparable prior year periods 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 on pages 78 and 79 for additional information.
Management Discussion (continued)
Operating (non-GAAP) Earnings:
In an effort to provide better transparency into the operational results of the business, the company 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, retirement-related costs, discontinued operations and related tax impacts. For acquisitions, operating earnings exclude the amortization of purchased intangible assets and acquisition-related charges such as in-process research and development, transaction costs, applicable restructuring and related expenses and tax charges related to acquisition integration. These charges are excluded as they may be inconsistent in amount and timing from period to period and are dependent on the size, type and frequency of the companys acquisitions. For retirement-related costs, the company characterizes certain items as operating and others as non-operating. The company includes defined benefit plan and nonpension postretirement benefit plan service cost, amortization of prior service cost and the cost of defined contribution plans in operating earnings. Non-operating retirement-related cost includes defined benefit plan and nonpension postretirement benefit plan interest cost, expected return on plan assets, amortized actuarial gains/losses, the impacts of any plan curtailments/settlements and multi-employer plan costs, 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, the company believes that 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 companys pension plans; improves visibility to management decisions and their impacts on operational performance; enables better comparisons to peer companies; and allows the company to provide a long-term strategic view of the business going forward. The companys reportable segment financial results reflect operating earnings from continuing operations, consistent with the companys management and measurement system.
The following table provides the companys (non-GAAP) operating earnings for the third quarter of 2016 and 2015.
|
|
|
|
|
|
Yr. to Yr. |
| ||
(Dollars in millions except per share amounts) |
|
|
|
|
|
Percent |
| ||
For the three months ended September 30: |
|
2016 |
|
2015 |
|
Change |
| ||
Net income as reported |
|
$ |
2,853 |
|
$ |
2,950 |
|
(3.3 |
)% |
Loss from discontinued operations, net of tax |
|
(1 |
) |
(12 |
) |
(91.2 |
) | ||
Income from continuing operations |
|
$ |
2,854 |
|
$ |
2,962 |
|
(3.6 |
)% |
Non-operating adjustments (net of tax): |
|
|
|
|
|
|
| ||
Acquisition-related charges |
|
197 |
|
170 |
|
15.6 |
| ||
Non-operating retirement-related costs/(income) |
|
99 |
|
140 |
|
(29.7 |
) | ||
Operating (non-GAAP) earnings* |
|
$ |
3,149 |
|
$ |
3,272 |
|
(3.8 |
)% |
Diluted operating (non-GAAP) earnings per share |
|
$ |
3.29 |
|
$ |
3.34 |
|
(1.5 |
)% |
* See page 87 for a more detailed reconciliation of net income to operating earnings.
Financial Performance Summary Three Months Ended September 30:
In the third quarter of 2016, the company delivered $19.2 billion in revenue, $2.9 billion in income from continuing operations and $3.1 billion in operating (non-GAAP) earnings, resulting in diluted earnings per share from continuing operations of $2.98 as reported and $3.29 on an operating (non-GAAP) basis. The company generated $4.2 billion in cash from operations and $2.4 billion in free cash flow in the third quarter of 2016 driving shareholder returns of $2.2 billion in gross common stock repurchases and dividends. In the quarter the company made progress across the business, with continued strong growth in the strategic imperatives, some moderation in the declines of the core businesses, remixing skills and adding new capabilities through organic investments, acquisitions and partnerships.
Total consolidated revenue decreased 0.3 percent as reported and 1.1 percent year to year adjusted for currency in the third quarter of 2016, with sequential improvement of 2.5 points as reported and 1.5 points adjusted for currency from the second quarter growth rates. The year to year growth rates in the third quarter improved in each reportable segment sequentially compared to the second quarter on both an as reported and adjusted for currency basis. Clients are focused on becoming digital businesses and the companys third quarter revenue growth in cloud, security, mobile and across the analytics portfolio reflects this shift. Cloud delivered as-a-Service is part of a solid recurring revenue base across software and services. Annuity revenue continued to grow year to year. In addition, acquisitions made over the past 12 months continued to contribute revenue growth.
Management Discussion (continued)
The third quarter results reflect the success the company is having in helping its clients leverage cloud for speed and innovation, and become cognitive businesses. In the third quarter, the company had continued strong revenue growth in its strategic imperatives cloud, analytics and engagement which grew 16 percent year to year as reported and 15 percent adjusted for currency. Over the past 12 months, the strategic imperatives have generated $31.8 billion in revenue, which represents 40 percent of the companys total revenue, an increase of 5 points from full-year 2015. Total Cloud revenue of $3.4 billion increased 44 percent as reported and 42 percent adjusted for currency in the third quarter, with cloud as-a-Service revenue up over 60 percent as reported and adjusted for currency. The company exited the third quarter of 2016 with an annual run rate for cloud as-a-Service revenue of $7.5 billion, up from $6.7 billion in the second quarter of 2016 with the majority of the increase from organic growth. Analytics revenue of $4.8 billion in the third quarter increased 15 percent as reported (14 percent adjusted for currency) with contribution from the core analytics platform as well as the cognitive offerings including Watson Platform, Watson Health and Watson IoT. Security revenue increased 11 percent in the third quarter both as reported and adjusted for currency. Mobile revenue increased 19 percent year to year both as reported and adjusted for currency.
In the third quarter, the company made continued progress in moving into new areas and becoming a cognitive solutions and cloud platform company, including:
· Delivered significant sequential increase in cloud as-a-Service revenue for the second consecutive quarter.
· Continued global expansion of cloud centers.
· Expanded partnerships to accelerate cloud adoption.
· Added new cognitive offerings and capabilities in Watson Platform, Watson Health and Watson IoT.
· Launched an Industry Platforms business to initially address opportunity areas in blockchain solutions and Watson Financial Services.
From a segment perspective, Cognitive Solutions revenue increased 4.5 percent as reported and 5 percent adjusted for currency led by growth in Solutions Software. Technology Services & Cloud Platforms revenue increased 2.4 percent as reported and 1 percent adjusted for currency with continued strength in Infrastructure Services and growth in Integration Software as clients build their hybrid cloud capabilities. Global Business Services (GBS) revenue decreased 0.4 percent as reported and 2 percent adjusted for currency and continues to reflect a shift in the segments business and mix towards digital offerings. The GBS year-to-year revenue growth rate improved sequentially compared to second-quarter on both an as reported and adjusted for currency basis. Systems revenue decreased 21.0 percent (21 percent adjusted for currency) reflecting the z Systems product cycle dynamics and declines in Power Systems.
From a geographic perspective, Americas revenue decreased 0.4 percent as reported and was flat adjusted for currency. There was improvement in the revenue growth trajectory compared with the second quarter of 2016 on both an as reported and adjusted for currency basis. EMEA revenue decreased 3.4 percent, but was flat adjusted for currency in the third quarter of 2016 and improved sequentially as reported and adjusted for currency driven primarily by Germany, France and the Nordics. Asia Pacific revenue increased 4.6 percent as reported, but decreased 4 percent adjusted for currency.
The consolidated gross profit margin of 46.9 percent decreased 2.1 points year to year. The decline was driven primarily by higher levels of investments including acquisitions and the mix to as-a-Service capabilities that are not yet at scale. The operating (non-GAAP) gross margin of 48.0 percent decreased 2.1 points compared to the prior year driven primarily by the same factors.
Management Discussion (continued)
Total expense and other (income) decreased 1.1 percent in the third quarter of 2016 compared to the prior year. Total operating (non-GAAP) expense and other (income) decreased 1.8 percent year to year. The key year-to-year drivers were approximately:
|
|
Total |
|
Operating |
|
|
|
Consolidated |
|
(non-GAAP) |
|
Currency* |
|
3 points |
|
3 points |
|
Acquisitions** |
|
6 points |
|
5 points |
|
Base |
|
(10) points |
|
(10) points |
|
* |
Reflects impacts of translation and hedging programs. |
** |
Includes acquisitions completed in prior 12-month period; operating (non-GAAP) is net of non-operating acquisition-related charges. |
Base expense performance reflects a higher level of intellectual property (IP) income ($341 million) in the third quarter year to year as the company revitalizes its IP income base by utilizing partnerships that enable innovation in some of the more traditional high-value areas of the business. The company is continuing to invest in new opportunity areas and building new markets, as well as delivering innovation in its existing businesses. This includes investing at a higher level in organic capabilities such as cognitive, security, cloud and blockchain as well as through acquisitions. The decrease in operating (non-GAAP) expense was driven primarily by the same factors.
Pre-tax income from continuing operations of $3.3 billion in the third quarter of 2016 decreased 9.9 percent year to year and the pre-tax margin was 17.0 percent, a decrease of 1.8 points. The continuing operations effective tax rate for the third quarter of 2016 was 12.5 percent compared to an effective tax rate of 18.2 percent in the third quarter of 2015. Income from continuing operations of $2.9 billion decreased 3.6 percent and the net income margin was 14.8 percent, a decrease of 0.5 points versus the third quarter of 2015. Losses from discontinued operations, net of tax, were $1 million in the third quarter of 2016 compared to $12 million in the third quarter of 2015. Net income of $2.9 billion decreased 3.3 percent year to year. Operating (non-GAAP) pre-tax income from continuing operations of $3.7 billion decreased 8.0 percent year to year and the operating (non-GAAP) pre-tax margin from continuing operations decreased 1.6 points to 19.1 percent. Operating (non-GAAP) income from continuing operations of $3.1 billion decreased 3.8 percent. The operating (non-GAAP) income margin from continuing operations of 16.4 percent decreased 0.6 points. The operating (non-GAAP) effective tax rate from continuing operations in the third quarter of 2016 was 14.2 percent versus 18.0 percent in the prior year.
In the third quarter of 2016, the company repurchased 5.5 million shares of its common stock at a cost of $0.9 billion. Diluted earnings per share from continuing operations of $2.98 in the third quarter of 2016 decreased 1.3 percent year to year. Operating (non-GAAP) diluted earnings per share of $3.29 decreased 1.5 percent versus the third quarter of 2015.
The company generated $4.2 billion in cash flow provided by operating activities which was flat compared to the third quarter of 2015. Net cash used in investing activities of $1.0 billion in the third quarter of 2016 decreased $0.3 billion year to year, primarily due to the net payment made in the third quarter of 2015 associated with the Microelectronics divestiture. Net cash used in financing activities of $4.2 billion in the third quarter of 2016 increased $2.3 billion compared to the third quarter of 2015, primarily driven by higher net debt payments ($3.0 billion), partially offset by a decline in common stock repurchases ($0.7 billion).
In October 2016, the company disclosed that it continues to expect GAAP earnings per share from continuing operations of at least $12.23 and operating (non-GAAP) earnings of at least $13.50 per diluted share for 2016. The company continues to expect free cash flow to be at the high end of the $11 billion to $12 billion range. Refer to page 79 in the Liquidity and Capital Resources section for additional information on this non-GAAP measure. Refer to the Looking Forward section on pages 77 and 78 for additional information on the companys expectations.
Management Discussion (continued)
Financial Results Summary - Nine Months Ended September 30:
|
|
|
|
|
|
Yr. to Yr. |
| ||
|
|
|
|
|
|
Percent/ |
| ||
(Dollars and shares in millions except per share amounts) |
|
|
|
|
|
Margin |
| ||
For the nine months ended September 30: |
|
2016 |
|
2015 |
|
Change |
| ||
Revenue |
|
$ |
58,149 |
|
$ |
59,682 |
|
(2.6 |
)%* |
Gross profit margin |
|
47.1 |
% |
49.1 |
% |
(1.9 |
)pts. | ||
Total expense and other (income) |
|
$ |
20,056 |
|
$ |
18,431 |
|
8.8 |
% |
Total expense and other (income)-to-revenue ratio |
|
34.5 |
% |
30.9 |
% |
3.6 |
pts. | ||
Income from continuing operations, before income taxes |
|
$ |
7,345 |
|
$ |
10,846 |
|
(32.3 |
)% |
Provision for/(benefit from) income taxes from continuing operations |
|
$ |
(31 |
) |
$ |
1,943 |
|
nm |
|
Income from continuing operations |
|
$ |
7,375 |
|
$ |
8,904 |
|
(17.2 |
)% |
Income from continuing operations margin |
|
12.7 |
% |
14.9 |
% |
(2.2 |
)pts. | ||
Loss from discontinued operations, net of tax |
|
$ |
(4 |
) |
$ |
(176 |
) |
(97.6 |
)% |
Net income |
|
$ |
7,371 |
|
$ |
8,727 |
|
(15.5 |
)% |
Earnings per share from continuing operations: |
|
|
|
|
|
|
| ||
Assuming dilution |
|
$ |
7.67 |
|
$ |
9.03 |
|
(15.1 |
)% |
Basic |
|
$ |
7.70 |
|
$ |
9.07 |
|
(15.1 |
)% |
Consolidated earning per share - assuming dilution |
|
$ |
7.67 |
|
$ |
8.85 |
|
(13.3 |
)% |
Weighted-average shares outstanding: |
|
|
|
|
|
|
| ||
Assuming dilution |
|
960.7 |
|
986.0 |
|
(2.6 |
)% | ||
Basic |
|
957.7 |
|
981.8 |
|
(2.5 |
)% | ||
|
|
|
|
|
|
|
| ||
|
|
9/30/16 |
|
12/31/15 |
|
|
| ||
Assets |
|
$ |
115,606 |
|
$ |
110,495 |
|
4.6 |
% |
Liabilities |
|
$ |
98,447 |
|
$ |
96,071 |
|
2.5 |
% |
Equity |
|
$ |
17,159 |
|
$ |
14,424 |
|
19.0 |
% |
* (1.9) percent adjusted for currency
nm - not meaningful
The following table provides the companys (non-GAAP) operating earnings for the first nine months of 2016 and 2015.
|
|
|
|
|
|
Yr. to Yr. |
| ||
(Dollars in millions except per share amounts) |
|
|
|
|
|
Percent |
| ||
For the nine months ended September 30: |
|
2016 |
|
2015 |
|
Change |
| ||
Net income as reported |
|
$ |
7,371 |
|
$ |
8,727 |
|
(15.5 |
)% |
Loss from discontinued operations, net of tax |
|
(4 |
) |
(176 |
) |
(97.6 |
) | ||
Income from continuing operations |
|
$ |
7,375 |
|
$ |
8,904 |
|
(17.2 |
)% |
Non-operating adjustments (net of tax): |
|
|
|
|
|
|
| ||
Acquisition-related charges |
|
542 |
|
452 |
|
19.9 |
| ||
Non-operating retirement-related costs/(income) |
|
338 |
|
597 |
|
(43.4 |
) | ||
Operating (non-GAAP) earnings* |
|
$ |
8,255 |
|
$ |
9,953 |
|
(17.1 |
)% |
Diluted operating (non-GAAP) earnings per share |
|
$ |
8.59 |
|
$ |
10.09 |
|
(14.9 |
)% |
* See page 88 for a more detailed reconciliation of net income to operating earnings.
Financial Performance Summary Nine Months Ended September 30:
In the first nine months of 2016, the company reported $58.1 billion in revenue, and delivered $7.4 billion in income from continuing operations resulting in diluted earnings per share from continuing operations of $7.67 as reported and $8.59 on an operating (non-GAAP) basis. The company generated $13.3 billion in cash from operations and $6.9 billion in free cash flow in the first nine months of 2016 driving shareholder returns of $6.6 billion in gross common stock repurchases and dividends.
Enterprise clients are looking for greater value from their data and IT environments. They are looking to become digital enterprises that are differentiated by cognitive, using data to improve decision making and outcomes. The companys strategy is based on the point of view that solving clients needs requires solutions, industry expertise and innovative technology, all supported by leading edge skills. The company is creating cognitive solutions that join digital business with digital
Management Discussion (continued)
intelligence, bringing its industry expertise together with these cognitive solutions, and building it all on cloud platforms. The company is in a unique position to move its clients to the future as it is already running their most critical business processes. The company has continued its acceleration of shifting investments and resources to be more aligned with its strategy.
Total consolidated revenue decreased 2.6 percent as reported and 1.9 percent year to year adjusted for currency in the first nine months of 2016.
In the first nine months of 2016, the company had strong revenue growth in the strategic imperatives of 14 percent year to year as reported and adjusted for currency. Total Cloud revenue of $9.5 billion was up 36 percent as reported and adjusted for currency year to year with as-a-Service revenue up 53 percent as reported (54 percent adjusted for currency). Analytics revenue of $13.9 billion increased 9 percent as reported and adjusted for currency. Security revenue increased 16 percent as reported and adjusted for currency and mobile revenue was up 42 percent year to year as reported and adjusted for currency.
From a segment perspective, Cognitive Solutions revenue increased 2.2 percent as reported and 3 percent adjusted for currency with growth in Solutions Software partially offset by a decline in Transaction Processing Software. GBS revenue decreased 2.3 percent as reported and 2 percent adjusted for currency primarily driven by a decline in Consulting revenue. GBS strategic imperatives revenue had double-digit growth year to year as reported and adjusted for currency. Technology Services & Cloud Platforms revenue was essentially flat year to year as reported, but increased 1 percent adjusted for currency led by growth in Infrastructure Services which was up 1.8 percent as reported (3 percent adjusted for currency) as the hybrid cloud strategy continues to resonate with clients. Technology Services & Cloud Platforms strategic imperatives revenue was up 40 percent (41 percent adjusted for currency) year to year. Systems revenue decreased 22.1 percent as reported (22 percent adjusted for currency) with z Systems down 40.2 percent (40 percent adjusted for currency) and Power Systems down 23.5 percent (23 percent adjusted for currency).
From a geographic perspective, Americas revenue decreased 3.6 percent as reported (2 percent adjusted for currency) with the U.S. down 2.0 percent. EMEA revenue decreased 3.8 percent as reported (2 percent adjusted for currency). Asia Pacific revenue increased 1.7 percent as reported, but decreased 2 percent adjusted for currency.
The consolidated gross margin of 47.1 percent decreased 1.9 points year to year with performance reflecting higher levels of investment and the building of scale in as-a-Service capabilities. The operating (non-GAAP) gross margin of 48.2 percent decreased 1.9 points versus the prior year driven primarily by the same factors.
Total expense and other (income) increased 8.8 percent in the first nine months of 2016 compared to the prior year. Total operating (non-GAAP) expense and other (income) increased 9.9 percent compared to the first nine months of 2015. The key year-to-year drivers were:
|
|
Total |
|
Operating |
|
|
|
Consolidated |
|
(non-GAAP) |
|
Currency* |
|
2 points |
|
2 points |
|
Acquisitions** |
|
5 points |
|
4 points |
|
Base |
|
2 points |
|
4 points |
|
* |
Reflects impacts of translation and hedging programs. |
** |
Includes acquisitions completed in prior 12-month period; operating (non-GAAP) is net of non-operating acquisition-related charges. |
The increase in base expense in the first nine months of 2016 was primarily driven by first-quarter 2016 charges for actions taken to accelerate the transformation of the companys workforce and shift its skill base, as well as increased investments in the strategic areas of cognitive, security and cloud. This included a higher level of workforce rebalancing charges ($464 million) year to year and charges for real estate actions ($294 million); partially offset by a higher level of intellectual property income ($621 million). The increase in operating (non-GAAP) expense was driven primarily by the same factors.
Pre-tax income from continuing operations of $7.3 billion decreased 32.3 percent and the pre-tax margin was 12.6 percent, a decrease of 5.5 points versus the first nine months of 2015. The continuing operations effective tax rate for the first nine months of 2016 was (0.4) percent compared to an effective tax rate of 17.9 percent in the prior year. The negative tax rate in the first nine months of 2016 was primarily the result of a refund ($1.0 billion) of previously paid non-U.S. taxes plus interest in the first quarter of 2016. Income from continuing operations of $7.4 billion decreased 17.2 percent and the net income margin was 12.7 percent, a decrease of 2.2 points compared to the first nine months of 2015. Losses from discontinued operations, net of tax, were $4 million in the first nine months of 2016 versus $176 million in the first nine
Management Discussion (continued)
months of 2015. Net income of $7.4 billion decreased 15.5 percent year to year. Operating (non-GAAP) pre-tax income from continuing operations of $8.5 billion decreased 30.0 percent year to year and the operating (non-GAAP) pre-tax margin from continuing operations decreased 5.7 points to 14.7 percent. Operating (non-GAAP) income from continuing operations of $8.3 billion decreased 17.1 percent and the operating (non-GAAP) income margin from continuing operations of 14.2 percent decreased 2.5 points. The operating (non-GAAP) effective tax rate from continuing operations in the first nine months of 2016 was 3.2 percent versus 18.3 percent in the first nine months of 2015. Profit and margin performance in the first nine months of 2016 reflects the companys investments, product cycle dynamics and the actions taken to accelerate its transformation in the first quarter of 2016.
Diluted earnings per share from continuing operations of $7.67 decreased 15.1 percent year to year. In the first nine months of 2016, the company repurchased 17.8 million shares of its common stock and had $3.0 billion remaining in the current share repurchase authorization at September 30, 2016. Operating (non-GAAP) diluted earnings per share of $8.59 decreased 14.9 percent versus the prior year. Diluted earnings per share from discontinued operations was $0.00 in the first nine months of 2016 compared to ($0.18) in the same period of 2015.
At September 30, 2016, the company continued to have the financial flexibility to support the business over the long term. Cash and marketable securities at quarter end were $10.0 billion, an increase of $1.8 billion from December 31, 2015. Key drivers in the balance sheet and total cash flows were:
Total assets increased $5.1 billion ($3.0 billion adjusted for currency) from December 31, 2015 driven by:
· Increases in goodwill ($4.4 billion), cash and marketable securities ($1.8 billion), retirement plan assets ($1.8 billion) and intangible assets ($1.4 billion); partially offset by
· Decreases in total receivables ($4.4 billion).
Total liabilities increased $2.4 billion (decreased $0.2 billion adjusted for currency) from December 31, 2015 driven by:
· Increases in total debt ($2.6 billion), other accrued expenses and liabilities ($1.0 billion) and compensation and benefits ($0.4 billion); partially offset by
· Decreases in accounts payable ($0.8 billion) and taxes payable ($0.7 billion).
Total equity of $17.2 billion increased $2.7 billion from December 31, 2015 as a result of:
· Increases from net income ($7.4 billion), retirement-related ($1.3 billion) and equity translation adjustments ($0.3 billion); partially offset by
· Decreases from dividends ($3.9 billion) and share repurchases ($2.6 billion).
The company generated $13.3 billion in cash flow provided by operating activities, an increase of $1.6 billion compared to the first nine months of 2015, driven primarily by lower income tax payments and an increase in cash provided by financing receivables; partially offset by operational performance. Net cash used in investing activities of $7.6 billion was $4.9 billion higher than the prior year, primarily driven by an increase in cash used related to acquisitions ($4.6 billion). Net cash used in financing activities of $4.5 billion decreased $3.3 billion compared to the first nine months of 2015, driven primarily by higher net debt issuances ($2.5 billion) and a decline in common share repurchases ($1.2 billion).
Management Discussion (continued)
Third Quarter and First Nine Months in Review
Results of Continuing Operations
Segment Details
The following is an analysis of the third quarter and first nine months of 2016 versus the third quarter and first nine months of 2015 reportable segment external revenue and gross margin results. Segment pre-tax income includes transactions between the segments that are intended to reflect an arms-length transfer price and excludes certain unallocated corporate items.
|
|
|
|
|
|
|
|
Yr. to Yr. |
| ||
|
|
|
|
|
|
|
|
Percent |
| ||
|
|
|
|
|
|
Yr. to Yr. |
|
Change |
| ||
(Dollars in millions) |
|
|
|
|
|
Percent/Margin |
|
Adjusted For |
| ||
For the three months ended September 30: |
|
2016 |
|
2015* |
|
Change |
|
Currency |
| ||
Revenue: |
|
|
|
|
|
|
|
|
| ||
Cognitive Solutions |
|
$ |
4,235 |
|
$ |
4,052 |
|
4.5 |
% |
4.5 |
% |
Gross margin |
|
80.4 |
% |
84.4 |
% |
(3.9 |
)pts. |
|
| ||
Global Business Services |
|
4,191 |
|
4,206 |
|
(0.4 |
)% |
(1.6 |
)% | ||
Gross margin |
|
28.8 |
% |
29.7 |
% |
(0.9 |
)pts. |
|
| ||
Technology Services & Cloud Platforms |
|
8,748 |
|
8,541 |
|
2.4 |
% |
1.4 |
% | ||
Gross margin |
|
42.0 |
% |
42.2 |
% |
(0.2 |
)pts. |
|
| ||
Systems |
|
1,558 |
|
1,973 |
|
(21.0 |
)% |
(21.5 |
)% | ||
Gross margin |
|
51.1 |
% |
55.9 |
% |
(4.8 |
)pts. |
|
| ||
Global Financing |
|
412 |
|
447 |
|
(7.9 |
)% |
(9.2 |
)% | ||
Gross margin |
|
37.8 |
% |
48.4 |
% |
(10.6 |
)pts. |
|
| ||
Other |
|
81 |
|
60 |
|
34.7 |
% |
33.4 |
% | ||
Gross margin |
|
(279.2 |
)% |
(260.4 |
)% |
(18.7 |
)pts. |
|
| ||
Total consolidated revenue |
|
$ |
19,226 |
|
$ |
19,280 |
|
(0.3 |
)% |
(1.1 |
)% |
Total consolidated gross profit |
|
$ |
9,013 |
|
$ |
9,436 |
|
(4.5 |
)% |
|
|
Total consolidated gross margin |
|
46.9 |
% |
48.9 |
% |
(2.1 |
)pts. |
|
| ||
Non-operating adjustments: |
|
|
|
|
|
|
|
|
| ||
Amortization of acquired intangible assets |
|
129 |
|
89 |
|
44.8 |
% |
|
| ||
Retirement-related costs/(income) |
|
79 |
|
118 |
|
(33.3 |
)% |
|
| ||
Operating (non-GAAP) gross profit |
|
$ |
9,221 |
|
$ |
9,643 |
|
(4.4 |
)% |
|
|
Operating (non-GAAP) gross margin |
|
48.0 |
% |
50.0 |
% |
(2.1 |
)pts. |
|
|
* Recast to conform with 2016 presentation.
Management Discussion (continued)
|
|
|
|
|
|
|
|
Yr. to Yr. |
| ||
|
|
|
|
|
|
|
|
Percent |
| ||
|
|
|
|
|
|
Yr. to Yr. |
|
Change |
| ||
(Dollars in millions) |
|
|
|
|
|
Percent/Margin |
|
Adjusted For |
| ||
For the nine months ended September 30: |
|
2016 |
|
2015* |
|
Change |
|
Currency |
| ||
Revenue: |
|
|
|
|
|
|
|
|
| ||
Cognitive Solutions |
|
$ |
12,889 |
|
$ |
12,616 |
|
2.2 |
% |
2.9 |
% |
Gross margin |
|
81.5 |
% |
84.9 |
% |
(3.4 |
) pts. |
|
| ||
Global Business Services |
|
12,578 |
|
12,869 |
|
(2.3 |
)% |
(2.2 |
)% | ||
Gross margin |
|
27.0 |
% |
28.2 |
% |
(1.2 |
) pts. |
|
| ||
Technology Services & Cloud Platforms |
|
26,029 |
|
25,993 |
|
0.1 |
% |
1.0 |
% | ||
Gross margin |
|
41.5 |
% |
42.2 |
% |
(0.6 |
) pts. |
|
| ||
Systems |
|
5,184 |
|
6,656 |
|
(22.1 |
)% |
(21.9 |
)% | ||
Gross margin |
|
55.1 |
% |
55.8 |
% |
(0.6 |
) pts. |
|
| ||
Global Financing |
|
1,245 |
|
1,386 |
|
(10.2 |
)% |
(8.5 |
)% | ||
Gross margin |
|
39.6 |
% |
47.5 |
% |
(7.9 |
) pts. |
|
| ||
Other |
|
223 |
|
162 |
|
37.4 |
% |
38.4 |
% | ||
Gross margin |
|
(295.2 |
)% |
(237.0 |
)% |
(58.2 |
) pts. |
|
| ||
Total consolidated revenue |
|
$ |
58,149 |
|
$ |
59,682 |
|
(2.6 |
)% |
(1.9 |
)% |
Total consolidated gross profit |
|
$ |
27,401 |
|
$ |
29,278 |
|
(6.4 |
)% |
|
|
Total consolidated gross margin |
|
47.1 |
% |
49.1 |
% |
(1.9 |
) pts. |
|
| ||
Non-operating adjustments: |
|
|
|
|
|
|
|
|
| ||
Amortization of acquired intangible assets |
|
371 |
|
268 |
|
38.2 |
% |
|
| ||
Retirement-related costs/(income) |
|
238 |
|
350 |
|
(32.0 |
)% |
|
| ||
Operating (non-GAAP) gross profit |
|
$ |
28,010 |
|
$ |
29,896 |
|
(6.3 |
)% |
|
|
Operating (non-GAAP) gross margin |
|
48.2 |
% |
50.1 |
% |
(1.9 |
) pts. |
|
|
* Recast to conform with 2016 presentation.
Cognitive Solutions
|
|
|
|
|
|
|
|
Yr. to Yr. |
| ||
|
|
|
|
|
|
|
|
Percent |
| ||
|
|
|
|
|
|
Yr. to Yr. |
|
Change |
| ||
(Dollars in millions) |
|
|
|
|
|
Percent |
|
Adjusted For |
| ||
For the three months ended September 30: |
|
2016 |
|
2015* |
|
Change |
|
Currency |
| ||
Cognitive Solutions external revenue: |
|
$ |
4,235 |
|
$ |
4,052 |
|
4.5 |
% |
4.5 |
% |
Solutions Software |
|
$ |
2,919 |
|
$ |
2,710 |
|
7.7 |
% |
7.9 |
% |
Transaction Processing Software |
|
1,316 |
|
1,343 |
|
(2.0 |
) |
(2.2 |
) |
* Recast to conform with 2016 presentation.
|
|
|
|
|
|
|
|
Yr. to Yr. |
| ||
|
|
|
|
|
|
|
|
Percent |
| ||
|
|
|
|
|
|
Yr. to Yr. |
|
Change |
| ||
(Dollars in millions) |
|
|
|
|
|
Percent |
|
Adjusted For |
| ||
For the nine months ended September 30: |
|
2016 |
|
2015* |
|
Change |
|
Currency |
| ||
Cognitive Solutions external revenue: |
|
$ |
12,889 |
|
$ |
12,616 |
|
2.2 |
% |
2.9 |
% |
Solutions Software |
|
$ |
8,842 |
|
$ |
8,417 |
|
5.0 |
% |
5.8 |
% |
Transaction Processing Software |
|
4,048 |
|
4,199 |
|
(3.6 |
) |
(2.9 |
) |
* Recast to conform with 2016 presentation.
In the third quarter of 2016, Cognitive Solutions revenue of $4,235 million grew 4.5 percent as reported and 5 percent year to year adjusted for currency with sequential improvement in the year to year growth rate for the third consecutive quarter, both as reported and adjusted for currency. For the first nine months of the year, Cognitive Solutions revenue of $12,889 million grew 2.2 percent as reported and 3 percent adjusted for currency. On an as reported and constant currency basis, Solutions Software revenue grew, partially offset by declines in Transaction Processing Software.
In the third quarter, Solutions Software revenue of $2,919 million grew 7.7 percent as reported (8 percent adjusted for currency), while Transaction Processing Software of $1,316 million declined 2.0 percent as reported (2 percent adjusted for
Management Discussion (continued)
currency). Analytics, which is the largest portion of the Software Solutions portfolio, continued to grow in key areas including Watson. There was strong Software-as-a-Service (SaaS) performance in the quarter with double digit growth in revenue as reported and adjusted for currency.
In the third quarter 2016, Watson technology, which underpins the companys cognitive strategy, continued to gain momentum, as the company continued to expand cognitive capabilities in the IBM Cloud. Across Watson, focus continues on scaling Watson Health, growing Watson IoT and expanding industry differentiation.
Within Cognitive Solutions, total third quarter 2016 strategic imperatives revenue of $2.7 billion grew 11 percent as reported (11 percent adjusted for currency) year to year. Cloud revenue of $0.6 billion grew 74 percent as reported (75 percent adjusted for currency), with an as-a-Service exit run rate of $1.6 billion. For the first nine months of the year, strategic imperatives revenue within Cognitive Solutions of $8.2 billion grew 7 percent as reported (8 percent adjusted for currency), with Cloud revenue of $1.5 billion growing 54 percent year to year as reported (55 percent adjusted for currency).
|
|
|
|
|
|
Yr. to Yr. |
| ||
|
|
|
|
|
|
Percent/ |
| ||
(Dollars in millions) |
|
|
|
|
|
Margin |
| ||
For the three months ended September 30: |
|
2016 |
|
2015* |
|
Change |
| ||
Cognitive Solutions: |
|
|
|
|
|
|
| ||
External gross profit |
|
$ |
3,407 |
|
$ |
3,418 |
|
(0.3 |
)% |
External gross profit margin |
|
80.4 |
% |
84.4 |
% |
(3.9 |
) pts. | ||
Pre-tax income |
|
$ |
1,574 |
|
$ |
1,596 |
|
(1.4 |
)% |
Pre-tax margin |
|
32.1 |
% |
34.9 |
% |
(2.7 |
) pts. |
* Recast to conform with 2016 presentation.
|
|
|
|
|
|
Yr. to Yr. |
| ||
|
|
|
|
|
|
Percent/ |
| ||
(Dollars in millions) |
|
|
|
|
|
Margin |
| ||
For the nine months ended September 30: |
|
2016 |
|
2015* |
|
Change |
| ||
Cognitive Solutions: |
|
|
|
|
|
|
| ||
External gross profit |
|
$ |
10,509 |
|
$ |
10,709 |
|
(1.9 |
)% |
External gross profit margin |
|
81.5 |
% |
84.9 |
% |
(3.4 |
) pts. | ||
Pre-tax income |
|
$ |
4,039 |
|
$ |
4,949 |
|
(18.4 |
)% |
Pre-tax margin |
|
27.3 |
% |
34.6 |
% |
(7.3 |
) pts. |
* Recast to conform with 2016 presentation.
The Cognitive Solutions gross profit margin decreased 3.9 points to 80.4 percent in the third quarter primarily due to investments in Software-as-a-Service and acquisition content. For the first nine months of the year, the gross profit margin declined 3.4 points to 81.5 percent compared to the prior year.
In the third quarter, pre-tax income of $1,574 million decreased 1.4 percent year to year with a pre-tax margin decline of 2.7 points to 32.1 percent. For the first nine months of 2016, pre-tax income decreased 18.4 percent with a pre-tax margin of 27.3 percent down 7.3 points year to year. Performance continued to reflect the companys higher level of investment in the strategic growth areas, including the Watson businesses.
Management Discussion (continued)
Global Business Services
|
|
|
|
|
|
|
|
Yr. to Yr. |
| ||
|
|
|
|
|
|
|
|
Percent |
| ||
|
|
|
|
|
|
Yr. to Yr. |
|
Change |
| ||
(Dollars in millions) |
|
|
|
|
|
Percent |
|
Adjusted For |
| ||
For the three months ended September 30: |
|
2016 |
|
2015* |
|
Change |
|
Currency |
| ||
Global Business Services external revenue: |
|
$ |
4,191 |
|
$ |
4,206 |
|
(0.4 |
)% |
(1.6 |
)% |
Consulting |
|
$ |
1,799 |
|
$ |
1,863 |
|
(3.4 |
)% |
(5.1 |
)% |
Global Process Services |
|
354 |
|
359 |
|
(1.3 |
) |
(0.9 |
) | ||
Application Management |
|
2,038 |
|
1,981 |
|
2.9 |
|
1.6 |
|
* Recast to conform with 2016 presentation.
|
|
|
|
|
|
|
|
Yr. to Yr. |
| ||
|
|
|
|
|
|
|
|
Percent |
| ||
|
|
|
|
|
|
Yr. to Yr. |
|
Change |
| ||
(Dollars in millions) |
|
|
|
|
|
Percent |
|
Adjusted For |
| ||
For the nine months ended September 30: |
|
2016 |
|
2015* |
|
Change |
|
Currency |
| ||
Global Business Services external revenue: |
|
$ |
12,578 |
|
$ |
12,869 |
|
(2.3 |
)% |
(2.2 |
)% |
Consulting |
|
$ |
5,520 |
|
$ |
5,763 |
|
(4.2 |
)% |
(4.7 |
)% |
Global Process Services |
|
1,048 |
|
1,078 |
|
(2.8 |
) |
(1.5 |
) | ||
Application Management |
|
6,011 |
|
6,027 |
|
(0.3 |
) |
0.1 |
|
* Recast to conform with 2016 presentation.
In the third quarter of 2016, Global Business Services revenue of $4,191 million decreased 0.4 percent as reported and 2 percent adjusted for currency. There was improvement in the revenue growth trajectory compared with the prior quarter both as reported and adjusted for currency. Digital practices, which now make up more than half of GBS, grew double digits as reported and adjusted for currency including strong growth in cloud, analytics and mobile. This growth was more than offset by declines in the more traditional areas. For the first nine months of the year, GBS revenue of $12,578 million declined 2.3 percent as reported and 2 percent adjusted for currency.
In the third quarter, Application Management revenue of $2,038 million grew 2.9 percent as reported (2 percent adjusted for currency), compared to the prior year driven by growth in the companys digital foundation and mobile platforms. Consulting revenue of $1,799 million declined 3.4 percent as reported (5 percent adjusted for currency) as some larger contracts wound down and clients continue to move away from on-premise enterprise application work to new business models focused on digital and cloud. Global Process Services (GPS) revenue of $354 million decreased 1.3 percent as reported (1 percent adjusted for currency).
Within GBS, total third quarter strategic imperatives revenue of $2.3 billion grew 13 percent as reported (12 percent adjusted for currency) year to year. Cloud revenue of $0.8 billion grew 74 percent as reported (69 percent adjusted for currency), with an as-a-Service exit run rate of $0.8 billion. For the first nine months of the year, strategic imperatives revenue within GBS of $6.6 billion grew 15 percent as reported (15 percent adjusted for currency), with Cloud revenue of $2.1 billion growing 64 percent year to year as reported (62 percent adjusted for currency).
The company continues to respond to enterprises looking for new ways to reach their customers and empower their employees to make faster decisions. There was continued revenue growth, as reported and adjusted for currency, in enterprise mobility solutions that are helping clients redesign work flows with specific industry context. The growing collection of MobileFirst for iOS applications are delivered on the cloud and can connect back to clients core systems and infrastructure. A new IBM MobileFirst Garage was opened in Bangalore, which is part of a network of centers that helps clients around the world achieve mobile-led digital transformations at speed and at scale.
Management Discussion (continued)
|
|
|
|
|
|
Yr. to Yr. |
| ||
|
|
|
|
|
|
Percent/ |
| ||
(Dollars in millions) |
|
|
|
|
|
Margin |
| ||
For the three months ended September 30: |
|
2016 |
|
2015* |
|
Change |
| ||
Global Business Services: |
|
|
|
|
|
|
| ||
External gross profit |
|
$ |
1,206 |
|
$ |
1,249 |
|
(3.4 |
)% |
External gross profit margin |
|
28.8 |
% |
29.7 |
% |
(0.9 |
) pts. | ||
Pre-tax income |
|
$ |
544 |
|
$ |
664 |
|
(18.0 |
)% |
Pre-tax margin |
|
12.7 |
% |
15.4 |
% |
(2.6 |
) pts. |
* Recast to conform with 2016 presentation.
|
|
|
|
|
|
Yr. to Yr. |
| ||
|
|
|
|
|
|
Percent/ |
| ||
(Dollars in millions) |
|
|
|
|
|
Margin |
| ||
For the nine months ended September 30: |
|
2016 |
|
2015* |
|
Change |
| ||
Global Business Services: |
|
|
|
|
|
|
| ||
External gross profit |
|
$ |
3,393 |
|
$ |
3,625 |
|
(6.4 |
)% |
External gross profit margin |
|
27.0 |
% |
28.2 |
% |
(1.2 |
) pts. | ||
Pre-tax income |
|
$ |
1,210 |
|
$ |
1,895 |
|
(36.2 |
)% |
Pre-tax margin |
|
9.4 |
% |
14.3 |
% |
(4.9 |
) pts. |
* Recast to conform with 2016 presentation.
In the third quarter, the GBS gross profit margin decreased 0.9 points to 28.8 percent compared to the prior year, with an improvement in Application Management offset by declines in Consulting and GPS. Margin expanded in Application Management as the mix moves to the new cloud and digital platforms and as a result of workforce rebalancing driving productivity in the delivery model. Consulting gross profit margin declined, reflecting the companys investments to grow the digital practices. In addition, similar to last quarter, there was additional spending incurred to meet commitments. These dynamics are also reflected in the pre-tax margin for the quarter. In the third quarter, pre-tax income of $544 million decreased 18.0 percent and the pre-tax margin declined 2.6 points to 12.7 percent.
The company continues to shift the business to the strategic imperatives within GBS. While recent acquisitions impact near term profit, they have added important capabilities, including cloud consulting skills. The IBM Interactive Experience has been expanded as well as digital design capabilities. The company is focused on integrating and scaling these new skills as it continues to expand the digital practices.
Technology Services & Cloud Platforms
|
|
|
|
|
|
|
|
Yr. to Yr. |
| ||
|
|
|
|
|
|
|
|
Percent |
| ||
|
|
|
|
|
|
Yr. to Yr. |
|
Change |
| ||
(Dollars in millions) |
|
|
|
|
|
Percent |
|
Adjusted For |
| ||
For the three months ended September 30: |
|
2016 |
|
2015* |
|
Change |
|
Currency |
| ||
Technology Services & Cloud Platforms external revenue: |
|
$ |
8,748 |
|
$ |
8,541 |
|
2.4 |
% |
1.4 |
% |
Infrastructure Services |
|
$ |
5,901 |
|
$ |
5,714 |
|
3.3 |
% |
1.9 |
% |
Technical Support Services |
|
1,831 |
|
1,841 |
|
(0.5 |
) |
(1.5 |
) | ||
Integration Software |
|
1,016 |
|
986 |
|
3.1 |
|
3.6 |
|
* Recast to conform with 2016 presentation.
Management Discussion (continued)
|
|
|
|
|
|
|
|
Yr. to Yr. |
| ||
|
|
|
|
|
|
|
|
Percent |
| ||
|
|
|
|
|
|
Yr. to Yr. |
|
Change |
| ||
(Dollars in millions) |
|
|
|
|
|
Percent |
|
Adjusted For |
| ||
For the nine months ended September 30: |
|
2016 |
|
2015* |
|
Change |
|
Currency |
| ||
Technology Services & Cloud Platforms external revenue: |
|
$ |
26,029 |
|
$ |
25,993 |
|
0.1 |
% |
1.0 |
% |
Infrastructure Services |
|
$ |
17,458 |
|
$ |
17,146 |
|
1.8 |
% |
2.5 |
% |
Technical Support Services |
|
5,446 |
|
5,603 |
|
(2.8 |
) |
(1.4 |
) | ||
Integration Software |
|
3,126 |
|
3,244 |
|
(3.7 |
) |
(2.6 |
) |
* Recast to conform with 2016 presentation.
In the third quarter of 2016, Technology Services & Cloud Platforms revenue of $8,748 million grew 2.4 percent as reported and 1 percent adjusted for currency compared to the prior year. As the business shifts from systems integration to services integration, there is continued momentum in new offerings. Infrastructure Services and Integration Software revenue grew as reported and adjusted for currency, partially offset by declines in Technical Support Services. For the first nine months of the year, Technology Services & Cloud Platforms revenue of $26,029 million increased 0.1 percent as reported and 1 percent adjusted for currency.
Infrastructure Services revenue of $5,901 million grew 3.3 percent as reported (2 percent adjusted for currency) in the third quarter. Technical Support Services third quarter revenue of $1,831 million decreased 0.5 percent as reported (1 percent adjusted for currency). Integration Software revenue of $1,016 million grew 3.1 percent as reported (4 percent adjusted for currency) compared to the third quarter of the prior year.
In Infrastructure Services, the companys hybrid cloud strategy continues to resonate with clients moving to enterprise grade cloud solutions that are secure, agile and leverage the data and investments in their core systems. The company continues to expand its cloud infrastructure, announcing the opening of new cloud data centers in South Korea and Norway in the third quarter. The company now has 49 cloud centers around the world, enabling low latency connectivity to cloud infrastructure.
In Integration Software, there was continued strength in Connect products that integrate applications, data and processes for on-premise and cloud environments. There was also a continued shift of the portfolio to an as-a-Service model through IBMs Bluemix cloud platform which continues to scale across a broad catalog of high value services.
Within Technology Services & Cloud Platforms, total third quarter strategic imperatives revenue of $2.3 billion grew 45 percent as reported (42 percent adjusted for currency) year to year. Cloud revenue of $1.5 billion grew 58 percent as reported (55 percent adjusted for currency), with an as-a-Service exit run rate of $5.1 billion. For the first nine months of the year, strategic imperatives revenue within Technology Services & Cloud Platforms of $6.2 billion grew 40 percent as reported (41 percent adjusted for currency), with Cloud revenue of $4.1 billion growing 49 percent as reported (49 percent adjusted for currency).
|
|
|
|
|
|
Yr. to Yr. |
| ||
|
|
|
|
|
|
Percent/ |
| ||
(Dollars in millions) |
|
|
|
|
|
Margin |
| ||
For the three months ended September 30: |
|
2016 |
|
2015* |
|
Change |
| ||
Technology Services & Cloud Platforms: |
|
|
|
|
|
|
| ||
External Technology Services gross profit |
|
$ |
2,825 |
|
$ |
2,774 |
|
1.8 |
% |
External Technology Services gross profit margin |
|
36.5 |
% |
36.7 |
% |
(0.2 |
) pts. | ||
External Integration Software gross profit |
|
$ |
851 |
|
$ |
833 |
|
2.2 |
% |
External Integration Software gross profit margin |
|
83.8 |
% |
84.5 |
% |
(0.7 |
) pts. | ||
External total gross profit |
|
$ |
3,676 |
|
$ |
3,607 |
|
1.9 |
% |
External total gross profit margin |
|
42.0 |
% |
42.2 |
% |
(0.2 |
) pts. | ||
Pre-tax income |
|
$ |
1,288 |
|
$ |
1,317 |
|
(2.2 |
)% |
Pre-tax margin |
|
14.4 |
% |
15.1 |
% |
(0.7 |
) pts. |
* Recast to conform with 2016 presentation.
Management Discussion (continued)
|
|
|
|
|
|
Yr. to Yr. |
| ||
|
|
|
|
|
|
Percent/ |
| ||
(Dollars in millions) |
|
|
|
|
|
Margin |
| ||
For the nine months ended September 30: |
|
2016 |
|
2015* |
|
Change |
| ||
Technology Services & Cloud Platforms: |
|
|
|
|
|
|
| ||
External Technology Services gross profit |
|
$ |
8,176 |
|
$ |
8,190 |
|
(0.2 |
)% |
External Technology Services gross profit margin |
|
35.7 |
% |
36.0 |
% |
(0.3 |
) pts. | ||
External Integration Software gross profit |
|
$ |
2,630 |
|
$ |
2,768 |
|
(5.0 |
)% |
External Integration Software gross profit margin |
|
84.2 |
% |
85.3 |
% |
(1.2 |
) pts. | ||
External total gross profit |
|
$ |
10,806 |
|
$ |
10,958 |
|
(1.4 |
)% |
External total gross profit margin |
|
41.5 |
% |
42.2 |
% |
(0.6 |
) pts. | ||
Pre-tax income |
|
$ |
2,825 |
|
$ |
3,861 |
|
(26.8 |
)% |
Pre-tax margin |
|
10.6 |
% |
14.6 |
% |
(3.9 |
) pts. |
* Recast to conform with 2016 presentation.
The Technology Services & Cloud Platforms gross profit margin decreased 0.2 points to 42.0 percent in the third quarter with improvement in Infrastructure Services offset by declines in Technical Support Services and Integration Software. The margin expansion in Infrastructure Services reflects the benefits from productivity actions to streamline processes. The company is investing in its technology and using its cognitive capabilities to shift to a more automated delivery model to improve performance and drive efficiencies. The Technical Support Services margin decline was driven by the mix to multi-vendor support offerings. For the first nine months of 2016, gross margin decreased 0.6 points to 41.5 percent compared to the prior year.
In the third quarter, pre-tax income of $1,288 million decreased 2.2 percent and pre-tax margin declined 0.7 points to 14.4 percent. For the first nine months of 2016, pre-tax income decreased 26.8 percent with a pre-tax margin of 10.6 percent down 4.0 points year to year. The pre-tax margins reflect the dynamics impacting gross profit as well as the continued investments to build out the cloud platform.
Services Backlog and Signings
|
|
|
|
|
|
|
|
Yr. to Yr. |
| ||
|
|
|
|
|
|
|
|
Percent |
| ||
|
|
|
|
|
|
Yr. to Yr. |
|
Change |
| ||
|
|
At September |
|
At September |
|
Percent |
|
Adjusted For |
| ||
(Dollars in billions) |
|
2016 |
|
2015* |
|
Change |
|
Currency |
| ||
Total backlog |
|
$ |
121.3 |
|
$ |
120.1 |
|
0.9 |
% |
(0.7 |
)% |
* Recast to conform with 2016 presentation.
The estimated total services backlog at September 30, 2016 was $121 billion, an increase of 0.9 percent as reported and a decrease of 1 percent adjusted for currency compared to the September 30, 2015 balance.
Total services backlog includes Infrastructure Services, Consulting, Global Process Services, Application Management and Technical Support Services. Total backlog is intended to be a statement of overall work under contract for these businesses and therefore includes Technical Support Services. It does not include as-a-Service offerings that have flexibility in 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.
Services signings are managements initial estimate of the value of a clients 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 clients commitment, including the type and duration of the agreement, and the presence of termination charges or wind-down costs.
Signings include Infrastructure 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. Technical Support Services is not included in signings as maintenance contracts tend to be more steady state, where revenues equal renewals.
Management Discussion (continued)
Contract portfolios purchased in an acquisition are treated as positive backlog adjustments provided those contracts meet the companys 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.
|
|
|
|
|
|
|
|
Yr. to Yr. |
| ||
|
|
|
|
|
|
|
|
Percent |
| ||
|
|
|
|
|
|
Yr. to Yr. |
|
Change |
| ||
(Dollars in millions) |
|
|
|
|
|
Percent |
|
Adjusted For |
| ||
For the three months ended September 30: |
|
2016 |
|
2015* |
|
Change |
|
Currency |
| ||
Total signings |
|
$ |
8,955 |
|
$ |
8,918 |
|
0.4 |
% |
(1.1 |
)% |
* Recast to conform with 2016 presentation.
|
|
|
|
|
|
|
|
Yr. to Yr. |
| ||
|
|
|
|
|
|
|
|
Percent |
| ||
|
|
|
|
|
|
Yr. to Yr. |
|
Change |
| ||
(Dollars in millions) |
|
|
|
|
|
Percent |
|
Adjusted For |
| ||
For the nine months ended September 30: |
|
2016 |
|
2015* |
|
Change |
|
Currency |
| ||
Total signings |
|
$ |
30,031 |
|
$ |
30,317 |
|
(0.9 |
)% |
0.1 |
% |
* Recast and reclassified to conform with 2016 presentation.
Systems
|
|
|
|
|
|
|
|
Yr. to Yr. |
| ||
|
|
|
|
|
|
|
|
Percent |
| ||
|
|
|
|
|
|
Yr. to Yr. |
|
Change |
| ||
(Dollars in millions) |
|
|
|
|
|
Percent |
|
Adjusted For |
| ||
For the three months ended September 30: |
|
2016 |
|
2015* |
|
Change |
|
Currency |
| ||
Systems external revenue: |
|
$ |
1,558 |
|
$ |
1,973 |
|
(21.0 |
)% |
(21.5 |
)% |
Systems Hardware |
|
$ |
1,128 |
|
$ |
1,491 |
|
(24.3 |
)% |
(24.8 |
)% |
z Systems |
|
|
|
|
|
(35.0 |
) |
(35.3 |
) | ||
Power Systems |
|
|
|
|
|
(30.8 |
) |
(31.2 |
) | ||
Storage Systems |
|
|
|
|
|
(8.0 |
) |
(8.8 |
) | ||
Operating Systems Software |
|
430 |
|
482 |
|
(10.8 |
) |
(11.3 |
) |
* Recast to conform with 2016 presentation.
|
|
|
|
|
|
|
|
Yr. to Yr. |
| ||
|
|
|
|
|
|
|
|
Percent |
| ||
|
|
|
|
|
|
Yr. to Yr. |
|
Change |
| ||
(Dollars in millions) |
|
|
|
|
|
Percent |
|
Adjusted For |
| ||
For the nine months ended September 30: |
|
2016 |
|
2015* |
|
Change |
|
Currency |
| ||
Systems external revenue: |
|
$ |
5,184 |
|
$ |
6,656 |
|
(22.1 |
)% |
(21.9 |
)% |
Systems Hardware |
|
$ |
3,852 |
|
$ |
5,204 |
|
(26.0 |
)% |
(25.9 |
)% |
z Systems |
|
|
|
|
|
(40.2 |
) |
(40.0 |
) | ||
Power Systems |
|
|
|
|
|
(23.5 |
) |
(23.2 |
) | ||
Storage Systems |
|
|
|
|
|
(9.7 |
) |
(9.8 |
) | ||
Operating Systems Software |
|
1,332 |
|
1,451 |
|
(8.2 |
) |
(7.5 |
) |
* Recast to conform with 2016 presentation.
In the third quarter of 2016, Systems revenue of $1,558 million decreased 21.0 percent as reported and 21 percent adjusted for currency compared to the prior year reflecting important market shifts in this business and product cycle dynamics. For the first nine months of the year, Systems revenue of $5,184 million declined 22.1 percent as reported and 22 percent adjusted for currency.
Systems Hardware revenue of $1,128 million decreased 24.3 percent as reported (25 percent adjusted for currency) in the third quarter. Operating Systems Software third quarter revenue of $430 million decreased 10.8 percent as reported (11 percent adjusted for currency) compared to the prior year.
Management Discussion (continued)
Across Systems, the company faces product cycle headwinds and some transitions in Power and Storage, while continuing to deliver innovative technologies and significant new capabilities to address cognitive and cloud.
Within Systems Hardware, z Systems third quarter revenue decreased 35.0 percent as reported (35 percent adjusted for currency) year to year. Seven quarters into the z13 cycle, this performance reflects product cycle dynamics. The company continues to add new clients to the platform and introduce new technologies including blockchain. As the blockchain platform is built, it is being engineered to run on multiple platforms, but it is optimized for scale, security and resilience on both the IBM mainframe and IBM Cloud. The companys z Systems are well suited for these new workloads due to their advanced security features that help protect data and ensure the integrity of the overall blockchain networks.
Power Systems third quarter revenue decreased 30.8 percent as reported (31 percent adjusted for currency) year to year reflecting the companys performance in a declining UNIX market partially offset by growth in an expanding Linux market. The company is shifting its platform to address Linux which now represents over 15 percent of Power revenue in the third quarter. There has been success with HANA where the company is bringing in new clients and replicating this strategy with others. The UNIX market remains a high-value space for clients and, at the end of the third quarter, new midrange and high end systems were introduced. These systems are designed for hybrid cloud computing and flexible consumption models to transform on-premise IT to the Cloud. In Power, the company is shifting to Linux while continuing to serve the UNIX space, but it is a long transition. In the near term, the company is focused on stabilizing the margin base.
Storage Systems third quarter revenue decreased by 8.0 percent as reported (9 percent adjusted for currency) year to year, with continued market shift to software. The third quarter decline was mainly driven by low-end and midrange traditional disk storage. High-end disk storage revenue grew this quarter both as reported and adjusted for currency. The company recently rolled out new products and transitioned to a full suite of flash offerings improving its competitive position. While not within the Systems segment, Software-Defined Storage had continued double-digit revenue growth as reported and adjusted for currency in the third quarter.
Within Systems, total third quarter strategic imperatives revenue of $0.7 billion decreased 18 percent as reported (18 percent adjusted for currency) year to year. Cloud revenue of $0.5 billion decreased 16 percent as reported (16 percent adjusted for currency). For the first nine months of the year, strategic imperatives revenue within Systems of $2.3 billion decreased 13 percent as reported (13 percent adjusted for currency), with Cloud revenue of $1.8 billion decreasing 9 percent as reported (9 percent adjusted for currency).
|
|
|
|
|
|
Yr. to Yr. |
| ||
|
|
|
|
|
|
Percent/ |
| ||
(Dollars in millions) |
|
|
|
|
|
Margin |
| ||
For the three months ended September 30: |
|
2016 |
|
2015* |
|
Change |
| ||
Systems: |
|
|
|
|
|
|
| ||
External Systems Hardware gross profit |
|
$ |
416 |
|
$ |
668 |
|
(37.6 |
)% |
External Systems Hardware gross profit margin |
|
36.9 |
% |
44.8 |
% |
(7.9 |
) pts. | ||
External Operating Systems Software gross profit |
|
$ |
380 |
|
$ |
435 |
|
(12.8 |
)% |
External Operating Systems Software gross profit margin |
|
88.3 |
% |
90.2 |
% |
(2.0 |
) pts. | ||
External total gross profit |
|
$ |
796 |
|
$ |
1,103 |
|
(27.8 |
)% |
External total gross profit margin |
|
51.1 |
% |
55.9 |
% |
(4.8 |
) pts. | ||
Pre-tax income/(loss) |
|
$ |
136 |
|
$ |
248 |
|
(45.3 |
)% |
Pre-tax margin |
|
7.8 |
% |
11.4 |
% |
(3.5 |
) pts. |
* Recast to conform with 2016 presentation.
Management Discussion (continued)
|
|
|
|
|
|
Yr. to Yr. |
| ||
|
|
|
|
|
|
Percent/ |
| ||
(Dollars in millions) |
|
|
|
|
|
Margin |
| ||
For the nine months ended September 30: |
|
2016 |
|
2015* |
|
Change |
| ||
Systems: |
|
|
|
|
|
|
| ||
External Systems Hardware gross profit |
|
$ |
1,676 |
|
$ |
2,399 |
|
(30.1 |
)% |
External Systems Hardware gross profit margin |
|
43.5 |
% |
46.1 |
% |
(2.6 |
) pts. | ||
External Operating Systems Software gross profit |
|
$ |
1,182 |
|
$ |
1,312 |
|
(9.9 |
)% |
External Operating Systems Software gross profit margin |
|
88.7 |
% |
90.4 |
% |
(1.7 |
) pts. | ||
External total gross profit |
|
$ |
2,858 |
|
$ |
3,711 |
|
(23.0 |
)% |
External total gross profit margin |
|
55.1 |
% |
55.8 |
% |
(0.6 |
) pts. | ||
Pre-tax income/(loss) |
|
$ |
354 |
|
$ |
1,048 |
|
(66.2 |
)% |
Pre-tax margin |
|
6.1 |
% |
14.5 |
% |
(8.4 |
) pts. |
* Recast to conform with 2016 presentation.
The Systems gross profit margin decreased 4.8 points to 51.1 percent in the third quarter of 2016 compared to the prior year. This decrease was due to margin (4.7 points) with declines in Power and Storage partially offset by expansion in z Systems margins. The Systems gross profit margin decreased 0.6 points to 55.1 percent in the first nine months of 2016 compared to the prior year. This decrease was due to a less favorable product mix (0.5 points) and decline in margin (0.1 points).
In the third quarter, pre-tax income of $136 million decreased 45.3 percent and the pre-tax margin declined 3.5 points to 7.8 percent, consistent with the product cycle and portfolio transition dynamics impacting revenue and profit.
Global Financing
See pages 81 through 86 for a discussion of Global Financings segment results.
Total Software
Under the companys new segment structure total Software no longer exists as a segment, instead the companys software revenue is included within the Cognitive Solutions, Technology Services & Cloud Platforms and Systems segments. Given the focus on IBMs software revenue performance, the company will continue to report total software revenue performance throughout 2016. The company has a broad software portfolio, from solutions that provide cognitive, analytics and security solutions, to core transaction processing, to connecting on-premises data and processes to private and public cloud environments. This software is open, running on IBM and non-IBM environments.
Total software revenue, which includes Cognitive Solutions, Integration Software and Operating Systems software, of $5,681 million increased 2.9 percent as reported and 3 percent adjusted for currency in the third quarter of 2016 compared to the prior year period. Overall, third quarter performance reflected sequential improvement of 2 points from the second quarter of 2016 as reported and adjusted for currency. This represents the third consecutive quarter of improvement in constant currency software revenue growth trajectory. From a business area perspective, there was growth in Cognitive Solutions and Integration Software as reported and adjusted for currency, while Operating Systems was down year to year, in line with the longer term secular trend. Across software, annuity revenue grew mid-single digits year to year as reported and adjusted for currency. This growth was led by the SaaS offerings which grew both on an organic basis and from acquisitions. Transactional revenue declined mid-single digits as reported and adjusted for currency in the quarter.
For the first nine months of 2016, total Software revenue of $17,347 million grew 0.2 percent as reported and 1 percent adjusted for currency, with growth in Cognitive Solutions, partially offset by declines in Integration Software and Operating Systems software.
Management Discussion (continued)
Geographic Revenue
In addition to the revenue presentation by reportable segment, the company also measures revenue performance on a geographic basis. The following geographic, regional and country-specific revenue performance excludes OEM revenue.
|
|
|
|
|
|
|
|
Yr. to Yr. |
| ||
|
|
|
|
|
|
|
|
Percent |
| ||
|
|
|
|
|
|
Yr. to Yr. |
|
Change |
| ||
(Dollars in millions) |
|
|
|
|
|
Percent |
|
Adjusted For |
| ||
For the three months ended September 30: |
|
2016 |
|
2015 |
|
Change |
|
Currency |
| ||
Total Revenue |
|
$ |
19,226 |
|
$ |
19,280 |
|
(0.3 |
)% |
(1.1 |
)% |
Geographies: |
|
$ |
19,159 |
|
$ |
19,214 |
|
(0.3 |
)% |
(1.1 |
)% |
Americas |
|
9,070 |
|
9,105 |
|
(0.4 |
) |
(0.2 |
) | ||
Europe/Middle East/Africa (EMEA) |
|
5,851 |
|
6,059 |
|
(3.4 |
) |
(0.3 |
) | ||
Asia Pacific |
|
4,238 |
|
4,051 |
|
4.6 |
|
(4.4 |
) |
|
|
|
|
|
|
|
|
Yr. to Yr. |
| ||
|
|
|
|
|
|
|
|
Percent |
| ||
|
|
|
|
|
|
Yr. to Yr. |
|
Change |
| ||
(Dollars in millions) |
|
|
|
|
|
Percent |
|
Adjusted For |
| ||
For the nine months ended September 30: |
|
2016 |
|
2015 |
|
Change |
|
Currency |
| ||
Total Revenue |
|
$ |
58,149 |
|
$ |
59,682 |
|
(2.6 |
)% |
(1.9 |
)% |
Geographies: |
|
$ |
57,932 |
|
$ |
59,442 |
|
(2.5 |
)% |
(1.9 |
)% |
Americas |
|
27,229 |
|
28,234 |
|
(3.6 |
) |
(2.0 |
) | ||
Europe/Middle East/Africa (EMEA) |
|
18,032 |
|
18,753 |
|
(3.8 |
) |
(1.7 |
) | ||
Asia Pacific |
|
12,671 |
|
12,454 |
|
1.7 |
|
(1.9 |
) |
Total geographic revenue of $19,159 million decreased 0.3 percent as reported and 1 percent adjusted for currency in the third quarter of 2016 compared to the prior year. Americas revenue of $9,070 million decreased 0.4 percent as reported and was flat adjusted for currency. EMEA third quarter revenue of $5,851 million decreased 3.4 percent as reported, but was flat adjusted for currency. Both Americas and EMEA third quarter revenue improved sequentially from the prior quarter (both as reported and adjusted for currency). Asia Pacific revenue of $4,238 million grew 4.6 percent as reported, but decreased 4 percent adjusted for currency.
Within Americas, the U.S. third quarter revenue was flat compared to the prior year, but improved sequentially from the prior quarter. Canada was down 6.3 percent as reported and 7 percent adjusted for currency. Latin America increased 3.7 percent as reported and 5 percent adjusted for currency in the third quarter compared to the prior year. Within Latin America, Brazil increased 23.5 percent as reported and 17 percent adjusted for currency, reflecting the importance of z Systems software and hardware to the banking sector.
In the third quarter, within EMEA, revenue in the UK decreased 12.5 percent as reported, but increased 3 percent adjusted for currency. Germany decreased 2.7 percent as reported and 3 percent adjusted for currency. France decreased 3.2 percent as reported and 4 percent adjusted for currency. The Nordics increased 4.2 percent as reported and 4 percent adjusted for currency. Third quarter revenue in EMEA improved sequentially from the prior quarter as reported and adjusted for currency, including Germany, France and the Nordics. In the Central and Eastern European region, third quarter revenue decreased as reported and adjusted for currency, with Russia declining 24.7 percent. The Middle East and Africa region grew 5.0 percent as reported and 6 percent adjusted for currency.
Within Asia Pacific, Japan grew 15.9 percent as reported, but decreased 3 percent adjusted for currency. Australia decreased 0.8 percent as reported and 5 percent adjusted for currency, but improved sequentially from the prior quarter (both as reported and adjusted for currency). India increased 6.5 percent as reported and 9 percent adjusted for currency. China decreased 20.8 percent as reported and 18 percent adjusted for currency.
Total geographic revenue of $57,932 million decreased 2.5 percent as reported and 2 percent adjusted for currency in the first nine months of 2016 compared to the prior year. Americas revenue of $27,229 million decreased 3.6 percent as reported and 2 percent adjusted for currency. EMEA revenue of $18,032 million decreased 3.8 percent as reported and 2 percent adjusted for currency. Asia Pacific revenue of $12,671 million grew 1.7 percent as reported, but declined 2 percent adjusted for currency.
Management Discussion (continued)
Within Americas, the U.S. decreased 2.0 percent compared to the first nine months of the prior year. Canada was down 6.4 percent as reported and 2 percent adjusted for currency. Latin America decreased 11.4 percent as reported and 2 percent adjusted for currency. Within Latin America, Brazil declined 13.8 percent as reported and 6 percent adjusted for currency.
Within EMEA, revenue in the UK decreased 8.4 percent as reported, but increased 1 percent adjusted for currency compared to the first nine months of the prior year. Germany decreased 4.2 percent as reported and 4 percent adjusted for currency. France decreased 3.4 percent as reported and 3 percent adjusted for currency. Italy grew 1.6 percent as reported and 1 percent adjusted for currency year to year. There was a decline in the Central and Eastern European region as reported and adjusted for currency including a year-to-year decline in Russia of 21.6 percent. The Middle East and Africa region grew 2.7 percent as reported and 7 percent adjusted for currency.
Within Asia Pacific, Japan grew 11.3 percent as reported, but was flat adjusted for currency compared to the first nine months of the prior year. Australia decreased 9.0 percent as reported and 6 percent adjusted for currency. India grew 7.5 percent as reported and 13 percent adjusted for currency. China decreased 10.5 percent as reported and 8 percent adjusted for currency.
Expense
Total Expense and Other (Income)
|
|
|
|
|
|
Yr. to Yr. |
| ||
(Dollars in millions) |
|
|
|
|
|
Percent |
| ||
For the three months ended September 30: |
|
2016 |
|
2015 |
|
Change |
| ||
Total consolidated expense and other (income) |
|
$ |
5,751 |
|
$ |
5,815 |
|
(1.1 |
)% |
Non-operating adjustments: |
|
|
|
|
|
|
| ||
Amortization of acquired intangible assets |
|
$ |
(136 |
) |
$ |
(73 |
) |
87.2 |
% |
Acquisition-related charges |
|
(4 |
) |
(4 |
) |
19.2 |
| ||
Non-operating retirement-related (costs)/income |
|
(60 |
) |
(86 |
) |
(30.3 |
) | ||
Operating (non-GAAP) expense and other (income) |
|
$ |
5,550 |
|
$ |
5,652 |
|
(1.8 |
)% |
Total consolidated expense-to-revenue ratio |
|
29.9 |
% |
30.2 |
% |
(0.2 |
)pts. | ||
Operating (non-GAAP) expense-to-revenue ratio |
|
28.9 |
% |
29.3 |
% |
(0.4 |
)pts. |
|
|
|
|
|
|
Yr. to Yr. |
| ||
(Dollars in millions) |
|
|
|
|
|
Percent |
| ||
For the nine months ended September 30: |
|
2016 |
|
2015 |
|
Change |
| ||
Total consolidated expense and other (income) |
|
$ |
20,056 |
|
$ |
18,431 |
|
8.8 |
% |
Non-operating adjustments: |
|
|
|
|
|
|
| ||
Amortization of acquired intangible assets |
|
$ |
(371 |
) |
$ |
(224 |
) |
65.8 |
% |
Acquisition-related charges |
|
(1 |
) |
(11 |
) |
(88.7 |
) | ||
Non-operating retirement-related (costs)/income |
|
(206 |
) |
(481 |
) |
(57.1 |
) | ||
Operating (non-GAAP) expense and other (income) |
|
$ |
19,478 |
|
$ |
17,715 |
|
9.9 |
% |
Total consolidated expense-to-revenue ratio |
|
34.5 |
% |
30.9 |
% |
3.6 |
pts. | ||
Operating (non-GAAP) expense-to-revenue ratio |
|
33.5 |
% |
29.7 |
% |
3.8 |
pts. |
Total expense and other (income) decreased 1.1 percent in the third quarter and increased 8.8 percent in the first nine months of 2016 compared to the prior year periods. Total operating (non-GAAP) expense and other (income) decreased 1.8 percent in the third quarter and increased 9.9 percent in the first nine months of 2016 compared to the third quarter and first nine months of 2015, respectively. The key drivers of the year-to-year change in total expense and other (income) were approximately:
Management Discussion (continued)
|
|
Total Consolidated |
|
Operating (non-GAAP) |
| ||||
For the three and nine months ended September 30, 2016: |
|
Three Months |
|
Nine Months |
|
Three Months |
|
Nine Months |
|
Currency* |
|
3 points |
|
2 points |
|
3 points |
|
2 points |
|
Acquisitions** |
|
6 points |
|
5 points |
|
5 points |
|
4 points |
|
Base |
|
(10) points |
|
2 points |
|
(10) points |
|
4 points |
|
* |
Reflects impacts of translation and hedging programs. |
** |
Includes acquisitions completed in prior 12-month period; operating (non-GAAP) is net of non-operating acquisition-related charges. |
For additional information regarding total expense and other (income) for both expense presentations, see the following analyses by category.
Selling, general and administrative expense
|
|
|
|
|
|
Yr. to Yr. |
| ||
(Dollars in millions) |
|
|
|
|
|
Percent |
| ||
For the three months ended September 30: |
|
2016 |
|
2015 |
|
Change |
| ||
Selling, general and administrative expense: |
|
|
|
|
|
|
| ||
Selling, general and administrative other |
|
$ |
3,983 |
|
$ |
3,922 |
|
1.6 |
% |
Advertising and promotional expense |
|
341 |
|
315 |
|
8.4 |
| ||
Workforce rebalancing charges |
|
25 |
|
112 |
|
(77.3 |
) | ||
Retirement-related costs |
|
174 |
|
202 |
|
(13.7 |
) | ||
Amortization of acquired intangible assets |
|
136 |
|
73 |
|
87.2 |
| ||
Stock-based compensation |
|
105 |
|
82 |
|
28.9 |
| ||
Bad debt expense |
|
(32 |
) |
27 |
|
nm |
| ||
Total consolidated selling, general and administrative expense |
|
$ |
4,732 |
|
$ |
4,731 |
|
0.0 |
% |
Non-operating adjustments: |
|
|
|
|
|
|
| ||
Amortization of acquired intangible assets |
|
$ |
(136 |
) |
$ |
(73 |
) |
87.2 |
% |
Acquisition-related charges |
|
(3 |
) |
(4 |
) |
(25.9 |
) | ||
Non-operating retirement-related (costs)/income |
|
(53 |
) |
(74 |
) |
(28.5 |
) | ||
Operating (non-GAAP) selling, general and administrative expense |
|
$ |
4,541 |
|
$ |
4,581 |
|
(0.9 |
)% |
nm not meaningful
|
|
|
|
|
|
Yr. to Yr. |
| ||
(Dollars in millions) |
|
|
|
|
|
Percent |
| ||
For the nine months ended September 30: |
|
2016 |
|
2015 |
|
Change |
| ||
Selling, general and administrative expense: |
|
|
|
|
|
|
| ||
Selling, general and administrative other |
|
$ |
12,697 |
|
$ |
12,234 |
|
3.8 |
% |
Advertising and promotional expense |
|
1,051 |
|
968 |
|
8.5 |
| ||
Workforce rebalancing charges |
|
1,038 |
|
575 |
|
80.7 |
| ||
Retirement-related costs |
|
551 |
|
827 |
|
(33.4 |
) | ||
Amortization of acquired intangible assets |
|
371 |
|
224 |
|
65.8 |
| ||
Stock-based compensation |
|
295 |
|
260 |
|
13.4 |
| ||
Bad debt expense |
|
90 |
|
184 |
|
(50.9 |
) | ||
Total consolidated selling, general and administrative expense |
|
$ |
16,093 |
|
$ |
15,273 |
|
5.4 |
% |
Non-operating adjustments: |
|
|
|
|
|
|
| ||
Amortization of acquired intangible assets |
|
$ |
(371 |
) |
$ |
(224 |
) |
65.8 |
% |
Acquisition-related charges |
|
6 |
|
(6 |
) |
nm |
| ||
Non-operating retirement-related (costs)/income |
|
(183 |
) |
(445 |
) |
(58.8 |
) | ||
Operating (non-GAAP) selling, general and administrative expense |
|
$ |
15,545 |
|
$ |
14,598 |
|
6.5 |
% |
nm - not meaningful
Total selling, general and administrative (SG&A) expense was flat year to year in the third quarter of 2016 driven primarily by the following factors:
· Lower workforce rebalancing charges (2 points); and
· Lower base spending (4 points); offset by
Management Discussion (continued)
· Higher acquisition-related spending (6 points); and
· The effects of currency (1 point).
Operating (non-GAAP) expense decreased 0.9 percent year to year in the third quarter of 2016 driven primarily by:
· Lower workforce rebalancing charges (2 points); and
· Lower base spending (4 points); partially offset by
· Acquisition-related spending (4 points); and
· The effects of currency (1 point).
SG&A expense increased 5.4 percent in the first nine months of 2016 versus the first nine months of 2015 driven primarily by the following factors:
· Acquisition-related spending (4 points); and
· Higher workforce rebalancing charges (3 points); partially offset by
· A prior year pension obligation related to litigation in Spain (2 points).
Operating (non-GAAP) expense increased 6.5 percent year to year driven primarily by the same factors excluding the benefit from the prior-year pension obligation which was not reflected in operating (non-GAAP) expense.
Bad debt expense decreased $94 million year to year. The receivables provision coverage was 2.9 percent at September 30, 2016, an increase of 30 basis points from December 31, 2015 and an increase of 10 basis points from September 30, 2015.
Research, Development and Engineering
|
|
|
|
|
|
Yr. to Yr. |
| ||
(Dollars in millions) |
|
|
|
|
|
Percent |
| ||
For the three months ended September 30: |
|
2016 |
|
2015 |
|
Change |
| ||
Total consolidated research, development and engineering expense |
|
$ |
1,397 |
|
$ |
1,287 |
|
8.5 |
% |
Non-operating adjustment: |
|
|
|
|
|
|
| ||
Non-operating retirement-related (costs)/income |
|
$ |
(7 |
) |
$ |
(12 |
) |
(41.3 |
)% |
Operating (non-GAAP) research, development and engineering expense |
|
$ |
1,390 |
|
$ |
1,275 |
|
9.0 |
% |
|
|
|
|
|
|
Yr. to Yr. |
| ||
(Dollars in millions) |
|
|
|
|
|
Percent |
| ||
For the nine months ended September 30: |
|
2016 |
|
2015 |
|
Change |
| ||
Total consolidated research, development and engineering expense |
|
$ |
4,320 |
|
$ |
3,885 |
|
11.2 |
% |
Non-operating adjustment: |
|
|
|
|
|
|
| ||
Non-operating retirement-related (costs)/income |
|
$ |
(23 |
) |
$ |
(36 |
) |
(36.7 |
)% |
Operating (non-GAAP) research, development and engineering expense |
|
$ |
4,297 |
|
$ |
3,849 |
|
11.6 |
% |
Research, development and engineering (RD&E) expense was 7.3 percent and 7.4 percent of revenue in the third quarter and first nine months of 2016, respectively, compared to 6.7 percent and 6.5 percent in prior year periods, respectively. The company continues to increase its investment in research & development as it builds new markets and maintains its leadership in enterprise IT.
RD&E expense increased 8.5 percent in the third quarter of 2016 versus the third quarter of 2015 primarily driven by:
· Higher expense due to acquisitions (9 points); and
Management Discussion (continued)
· Increased base spending (1 point); partially offset by
· The effects of currency (1 point).
Operating (non-GAAP) RD&E expense increased 9.0 percent in the third quarter of 2016 compared to the prior year driven primarily by the same factors.
RD&E expense increased 11.2 percent in the first nine months of 2016 versus the first nine months of 2015 primarily driven by:
· Higher expense due to acquisitions (7 points); and
· Increased base spending (5 points); partially offset by
· The effects of currency (1 point).
Operating (non-GAAP) RD&E expense increased 11.6 percent in the first nine months of 2016 compared to the prior year driven primarily by the same factors.
Intellectual Property and Custom Development Income
|
|
|
|
|
|
Yr. to Yr. |
| ||
(Dollars in millions) |
|
|
|
|
|
Percent |
| ||
For the three months ended September 30: |
|
2016 |
|
2015 |
|
Change |
| ||
Intellectual Property and Custom Development Income: |
|
|
|
|
|
|
| ||
Sales and other transfers of intellectual property |
|
$ |
443 |
|
$ |
99 |
|
345.8 |
% |
Licensing/royalty-based fees |
|
32 |
|
27 |
|
21.3 |
| ||
Custom development income |
|
53 |
|
62 |
|
(14.2 |
) | ||
Total |
|
$ |
528 |
|
$ |
188 |
|
181.2 |
% |
|
|
|
|
|
|
Yr. to Yr. |
| ||
(Dollars in millions) |
|
|
|
|
|
Percent |
| ||
For the nine months ended September 30: |
|
2016 |
|
2015 |
|
Change |
| ||
Intellectual Property and Custom Development Income: |
|
|
|
|
|
|
| ||
Sales and other transfers of intellectual property |
|
$ |
843 |
|
$ |
201 |
|
319.1 |
% |
Licensing/royalty-based fees |
|
110 |
|
85 |
|
29.1 |
| ||
Custom development income |
|
158 |
|
203 |
|
(22.2 |
) | ||
Total |
|
$ |
1,110 |
|
$ |
489 |
|
127.1 |
% |
Sales and other transfers of intellectual property increased in the third quarter and first nine months of 2016 compared to the prior year periods, primarily due to transfers of certain intellectual property in the second and third quarters of 2016 within the companys software portfolio, which included three transactions with period income greater than $100 million in the nine-month period. The company is licensing IP to partners who are allocating their skills to extend the value of assets that are high value, but not necessarily in growing markets. There were no significant individual IP transactions in the three or nine month periods of 2015. The timing and amount of Sales and other transfers of IP may vary significantly from period to period depending upon the timing of divestitures/licensing agreements, economic conditions, industry consolidation and the timing of new patents and know-how development.
Management Discussion (continued)
Other (income) and expense
|
|
|
|
|
|
Yr. to Yr. |
| ||
(Dollars in millions) |
|
|
|
|
|
Percent |
| ||
For the three months ended September 30: |
|
2016 |
|
2015 |
|
Change |
| ||
Other (income) and expense: |
|
|
|
|
|
|
| ||
Foreign currency transaction losses/(gains) |
|
$ |
93 |
|
$ |
329 |
|
(71.8 |
)% |
(Gains)/losses on derivative instruments |
|
(23 |
) |
(385 |
) |
(93.9 |
) | ||
Interest income |
|
(22 |
) |
(16 |
) |
41.2 |
| ||
Net (gains)/losses from securities and investment assets |
|
(5 |
) |
(8 |
) |
(41.3 |
) | ||
Other |
|
(51 |
) |
(53 |
) |
(5.1 |
) | ||
Total consolidated other (income) and expense |
|
$ |
(8 |
) |
$ |
(133 |
) |
(93.7 |
)% |
Non-operating adjustment: |
|
|
|
|
|
|
| ||
Acquisition-related charges |
|
$ |
(2 |
) |
$ |
0 |
|
nm |
|
Operating (non-GAAP) other (income) and expense |
|
$ |
(10 |
) |
$ |
(133 |
) |
(92.5 |
)% |
nm - not meaningful
|
|
|
|
|
|
Yr. to Yr. |
| ||
(Dollars in millions) |
|
|
|
|
|
Percent |
| ||
For the nine months ended September 30: |
|
2016 |
|
2015 |
|
Change |
| ||
Other (income) and expense: |
|
|
|
|
|
|
| ||
Foreign currency transaction losses/(gains) |
|
$ |
514 |
|
$ |
394 |
|
30.4 |
% |
(Gains)/losses on derivative instruments |
|
(339 |
) |
(696 |
) |
(51.3 |
) | ||
Interest income |
|
(76 |
) |
(52 |
) |
44.6 |
| ||
Net (gains)/losses from securities and investment assets |
|
29 |
|
(31 |
) |
nm |
| ||
Other |
|
153 |
|
(193 |
) |
nm |
| ||
Total consolidated other (income) and expense |
|
$ |
281 |
|
$ |
(578 |
) |
nm |
|
Non-operating adjustment: |
|
|
|
|
|
|
| ||
Acquisition-related charges |
|
$ |
(7 |
) |
$ |
(5 |
) |
38.0 |
% |
Operating (non-GAAP) other (income) and expense |
|
$ |
274 |
|
$ |
(583 |
) |
nm |
|
nm - not meaningful
Total consolidated other (income) and expense was income of $8 million in the third quarter of 2016 compared to income of $133 million in the third quarter of 2015. The decrease in income of $125 million year over year was primarily driven by:
· Lower gains on derivative instruments ($362 million); partially offset by
· Lower foreign currency transaction losses ($236 million).
The consolidated other (income) and expense was expense of $281 million in the first nine months of 2016 compared to income of $578 million in the first nine months of 2015. The decrease in income of $859 million year over year was primarily driven by:
· Lower gains on derivative instruments ($357 million); and
· Real estate capacity charges related to the first-quarter 2016 workforce transformation ($294 million); and
· Higher foreign currency transaction losses ($120 million); and
· Increased losses from securities and investment assets ($60 million) primarily related to the sale of Lenovo shares ($37 million) in the first quarter of 2016.
Management Discussion (continued)
Interest Expense
|
|
|
|
|
|
Yr. to Yr. |
| ||
(Dollars in millions) |
|
|
|
|
|
Percent |
| ||
For the three months ended September 30: |
|
2016 |
|
2015 |
|
Change |
| ||
Interest expense |
|
$ |
158 |
|
$ |
117 |
|
34.7 |
% |
|
|
|
|
|
|
Yr. to Yr. |
| ||
(Dollars in millions) |
|
|
|
|
|
Percent |
| ||
For the nine months ended September 30: |
|
2016 |
|
2015 |
|
Change |
| ||
Interest expense |
|
$ |
473 |
|
$ |
340 |
|
39.0 |
% |
The increase in interest expense in the third quarter and first nine months of 2016 versus the same periods of 2015 was primarily driven by higher average debt levels and higher average interest rates. Interest expense is presented in cost of financing in the Consolidated Statement of Earnings only if the related external borrowings are to support the Global Financing external business. Overall interest expense (excluding capitalized interest) for the third quarter and first nine months of 2016 was $306 million and $904 million, respectively, an increase of $57 million and $157 million, respectively, versus the comparable prior-year periods.
Retirement-Related Plans
The following tables provide the total pre-tax cost for all retirement-related plans. These amounts are included in the Consolidated Statement of Earnings within the caption (e.g., Cost, SG&A, RD&E) relating to the job function of the plan participants.
|
|
|
|
|
|
Yr. to Yr. |
| ||
(Dollars in millions) |
|
|
|
|
|
Percent |
| ||
For the three months ended September 30: |
|
2016 |
|
2015 |
|
Change |
| ||
Retirement-related plans cost: |
|
|
|
|
|
|
| ||
Service cost |
|
$ |
114 |
|
$ |
123 |
|
(7.7 |
)% |
Amortization of prior service costs/(credits) |
|
(28 |
) |
(25 |
) |
13.3 |
| ||
Cost of defined contribution plans |
|
262 |
|
271 |
|
(3.3 |
) | ||
Total operating costs/(income) |
|
$ |
347 |
|
$ |
369 |
|
(5.9 |
)% |
Interest cost |
|
$ |
826 |
|
$ |
829 |
|
(0.4 |
)% |
Expected return on plan assets |
|
(1,392 |
) |
(1,471 |
) |
(5.4 |
) | ||
Recognized actuarial losses |
|
692 |
|
818 |
|
(15.3 |
) | ||
Curtailments/settlements |
|
4 |
|
11 |
|
(61.8 |
) | ||
Multi-employer plans/other costs |
|
8 |
|
16 |
|
(50.1 |
) | ||
Total non-operating costs/(income) |
|
$ |
139 |
|
$ |
204 |
|
(32.1 |
)% |
Total retirement-related plans cost |
|
$ |
486 |
|
$ |
573 |
|
(15.2 |
)% |
Management Discussion (continued)
|
|
|
|
|
|
Yr. to Yr. |
| ||
(Dollars in millions) |
|
|
|
|
|
Percent |
| ||
For the nine months ended September 30: |
|
2016 |
|
2015 |
|
Change |
| ||
Retirement-related plans cost: |
|
|
|
|
|
|
| ||
Service cost |
|
$ |
335 |
|
$ |
362 |
|
(7.5 |
)% |
Amortization of prior service costs/(credits) |
|
(81 |
) |
(76 |
) |
6.9 |
| ||
Cost of defined contribution plans |
|
802 |
|
835 |
|
(4.0 |
) | ||
Total operating costs/(income) |
|
$ |
1,056 |
|
$ |
1,122 |
|
(5.9 |
)% |
Interest cost |
|
$ |
2,483 |
|
$ |
2,493 |
|
(0.4 |
)% |
Expected return on plan assets |
|
(4,190 |
) |
(4,416 |
) |
(5.1 |
) | ||
Recognized actuarial losses |
|
2,069 |
|
2,464 |
|
(16.0 |
) | ||
Curtailments/settlements |
|
19 |
|
19 |
|
(1.0 |
) | ||
Multi-employer plans/other costs |
|
64 |
|
272 |
|
(76.6 |
) | ||
Total non-operating costs/(income) |
|
$ |
444 |
|
$ |
831 |
|
(46.6 |
)% |
Total retirement-related plans cost |
|
$ |
1,500 |
|
$ |
1,953 |
|
(23.2 |
)% |
In the third quarter of 2016, total pre-tax retirement-related plan cost decreased by $87 million compared to the third quarter of 2015, primarily driven by a decrease in recognized actuarial losses ($125 million); partially offset by lower expected return on plan assets ($79 million). Total cost for the first nine months of 2016 decreased by $453 million versus the first nine months of 2015, primarily driven by a decrease in recognized actuarial losses ($394 million), a prior year pension obligation related to litigation ($230 million), and lower defined contribution plan costs ($33 million); partially offset by lower expected return on plan assets ($226 million).
As discussed in the Snapshot on page 48, the company characterizes certain retirement-related costs as operating and others as non-operating. Utilizing this characterization, operating retirement-related costs in the third quarter of 2016 were $347 million, a decrease of $22 million compared to the third quarter of 2015, primarily driven by lower service cost ($9 million) and lower defined contribution plans cost ($9 million). Non-operating costs of $139 million in the third quarter of 2016 decreased $65 million year to year, driven primarily by a decrease in recognized actuarial losses ($125 million); partially offset by lower expected return on plan assets ($79 million). For the first nine months of 2016, operating retirement-related costs were $1,056 million, a decrease of $66 million compared to the first nine months of 2015, primarily driven by lower defined contribution plan costs ($33 million) and lower service cost ($27 million). Non-operating costs of $444 million decreased $387 million in the first nine months of 2016 compared to the prior year, driven primarily by a decrease in recognized actuarial losses ($394 million) and a prior year pension obligation related to litigation ($230 million); partially offset by lower expected return on plan assets ($226 million).
Taxes
The continuing operations effective tax rate for the third quarter of 2016 was 12.5 percent, a decrease of 5.7 points compared to the third quarter of 2015. The continuing operations effective tax rate for the first nine months of 2016 was (0.4) percent, a decrease of 18.3 points compared to the first nine months of 2015. The operating (non-GAAP) tax rate for the third quarter of 2016 was 14.2 percent, a decrease of 3.8 points compared to the third quarter of 2015. The operating (non-GAAP) tax rate for the first nine months of 2016 was 3.2 percent, a decrease of 15.0 points compared to the first nine months of 2015.
The lower continuing operations effective tax rate and the lower operating (non-GAAP) tax rates for the third quarter of 2016 were primarily driven by a one-time discrete benefit in the quarter due to foreign tax audit activity ($91 million), and a more favorable mix of geographic income year to year. The decrease in the continuing operations effective tax rate for the first nine months of 2016 compared to 2015 was primarily driven by the favorable resolution of a long-standing tax matter in February 2016 related to the determination of certain foreign tax losses incurred by the company in Japan (15.9 points), the discrete benefit in the third quarter of 2016 due to foreign tax audit activity (1.2 points), a favorable settlement of the remaining open items on the companys U.S. income tax returns for 2011 and 2012 (0.5 points), a benefit related to the first quarter 2016 real estate capacity actions (0.7 points), as well as a more favorable mix of geographic income year to year. These benefits were partially offset by a 2016 tax charge related to intercompany royalties from foreign subsidiaries (1.0 points) and the year-to-year impact of the 2015 foreign tax audit benefit (1.2 points). The decline in the operating (non-GAAP) tax rate was primarily driven by the same factors.
Management Discussion (continued)
In April 2010, the company appealed the determination of the Japanese Tax Authorities with respect to certain foreign tax losses. The tax benefit of these losses, approximately $1.0 billion adjusted for currency, had been included in unrecognized tax benefits as of December 2015. In April 2011, the company received notification that the appeal was denied, and in June 2011, the company filed a lawsuit challenging this decision. In May 2014, the Tokyo District Court ruled in favor of the company. The Japanese government appealed the ruling to the Tokyo High Court. On March 25, 2015, the Tokyo High Court ruled in favor of IBM and, on April 7, 2015, the Japanese government appealed the ruling to the Japan Supreme Court. On February 18, 2016, the Supreme Court denied the government appeal thereby upholding the Tokyo High Courts decision in favor of the company as the final judgment in this matter. This led to a refund of the taxes previously paid of $1.0 billion, which the company received in the first quarter and included in the effective tax rate. Interest of $0.2 billion was also received.
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 2011. 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 and interest have been provided for any adjustments that are expected to result for these years.
The amount of unrecognized tax benefits at December 31, 2015 decreased by $40 million in the third quarter of 2016 and decreased by $917 million in the first nine months of 2016 to $3,657 million. The overall decrease was primarily due to the first quarter favorable resolution of the Japan tax matter. The total amount of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate was $2,767 million at September 30, 2016.
In the fourth quarter of 2013, the company received a draft tax assessment notice for approximately $866 million (approximately $804 million at third quarter 2016 currency rates) from the Indian Tax Authorities for 2009. In July 2016, the Karnataka High Court in Bangalore set aside this assessment by way of court order and the company has reached a mutual agreement with the Income Tax Department for a new assessment, which will take place over an 18 month period. At September 30, 2016, the company has recorded $582 million as prepaid income taxes in India. A significant portion of this balance represents cash tax deposits paid over time to protect the companys right to appeal various income tax assessments made by the Indian Tax Authorities.
In the first quarter of 2016, the IRS commenced its audit of the companys U.S. tax returns for 2013 and 2014. The company anticipates that this audit will be completed by the end of 2017.
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.
|
|
|
|
|
|
Yr. to Yr. |
| ||
|
|
|
|
|
|
Percent |
| ||
For the three months ended September 30: |
|
2016 |
|
2015 |
|
Change |
| ||
Earnings per share of common stock from continuing operations: |
|
|
|
|
|
|
| ||
Assuming dilution |
|
$ |
2.98 |
|
$ |
3.02 |
|
(1.3 |
)% |
Basic |
|
$ |
2.99 |
|
$ |
3.04 |
|
(1.6 |
)% |
Diluted operating (non-GAAP) |
|
$ |
3.29 |
|
$ |
3.34 |
|
(1.5 |
)% |
Weighted-average shares outstanding: (in millions) |
|
|
|
|
|
|
| ||
Assuming dilution |
|
957.3 |
|
979.0 |
|
(2.2 |
)% | ||
Basic |
|
954.0 |
|
975.1 |
|
(2.2 |
)% |
Management Discussion (continued)
|
|
|
|
|
|
Yr. to Yr. |
| ||
|
|
|
|
|
|
Percent |
| ||
For the nine months ended September 30: |
|
2016 |
|
2015 |
|
Change |
| ||
Earnings per share of common stock from continuing operations: |
|
|
|
|
|
|
| ||
Assuming dilution |
|
$ |
7.67 |
|
$ |
9.03 |
|
(15.1 |
)% |
Basic |
|
$ |
7.70 |
|
$ |
9.07 |
|
(15.1 |
)% |
Diluted operating (non-GAAP) |
|
$ |
8.59 |
|
$ |
10.09 |
|
(14.9 |
)% |
Weighted-average shares outstanding: (in millions) |
|
|
|
|
|
|
| ||
Assuming dilution |
|
960.7 |
|
986.0 |
|
(2.6 |
)% | ||
Basic |
|
957.7 |
|
981.8 |
|
(2.5 |
)% |
Actual shares outstanding at September 30, 2016 were 950.9 million. The weighted-average number of common shares outstanding assuming dilution during the third quarter and first nine months of 2016 were 21.6 million and 25.3 million shares lower, respectively, than the same periods of 2015. The decrease was primarily the result of the common stock repurchase program.
Results of Discontinued Operations
The loss from discontinued operations, net of tax, was $1 million and $4 million in the third quarter and first nine months of 2016, respectively, compared to $12 million and $176 million in the third quarter and first nine months of 2015, respectively. The discontinued operations effective tax rate in the third quarter of 2016 was 39.0 percent compared to 78.8 percent in the third quarter of 2015 and was 38.4 percent in the first nine months of 2016 compared to 38.0 percent in the prior-year period.
Financial Position
Dynamics
At September 30, 2016, the company continued to have the financial flexibility to support the business over the long term. Cash and marketable securities at quarter end were $9,968 million. Total debt of $42,483 million increased $2,594 million from prior year-end levels, driven by new debt issuances of $8,342 million, partially offset by maturities of $5,582 million. Within total debt, $26,133 million, or approximately 62 percent, is in support of the Global Financing business. The company continues to manage the investment portfolio to meet its capital preservation and liquidity objectives. In the first nine months of 2016, the company generated $13,301 million in cash from operations, an increase of $1,572 million versus the first nine months of 2015. The company has consistently generated strong cash flow from operations and continues to have access to additional sources of liquidity through the capital markets and its $10 billion global credit facility. In October 2016, the size of the global credit facility was increased to $10.25 billion and the term of the five-year global credit facility was extended by one year. It now expires on November 10, 2021.
The assets and debt associated with the Global Financing business are a significant part of the companys financial position. The financial position amounts appearing on pages 5 and 6 are the consolidated amounts including Global Financing. The amounts appearing in the separate Global Financing section, beginning on page 82, are supplementary data presented to facilitate an understanding of the Global Financing business.
Working Capital
|
|
At September 30, |
|
At December 31, |
| ||
(Dollars in millions) |
|
2016 |
|
2015 |
| ||
Current assets |
|
$ |
41,433 |
|
$ |
42,504 |
|
Current liabilities |
|
34,447 |
|
34,269 |
| ||
Working capital |
|
$ |
6,986 |
|
$ |
8,235 |
|
|
|
|
|
|
| ||
Current ratio |
|
1.20:1 |
|
1.24:1 |
|
Management Discussion (continued)
Working capital decreased $1,250 million from the year-end 2015 position. The key changes are described below:
Current assets decreased $1,072 million ($1,931 million adjusted for currency) due to:
· A decline of $2,987 million ($3,401 million adjusted for currency) in financing receivables primarily due to collections of higher year-end balances; partially offset by
· An increase of $1,352 million ($1,197 million adjusted for currency) in cash and cash equivalents; and
· An increase of $421 million ($400 million adjusted for currency) in marketable securities.
Current liabilities increased $178 million (decreased $1,097 million adjusted for currency) as a result of:
· An increase in other accrued expenses and liabilities of $993 million ($332 million adjusted for currency) driven by workforce rebalancing net accruals ($467 million); and
· An increase in short-term debt of $459 million ($381 million adjusted for currency) primarily as a result of reclassifications of $6,438 million from long term to reflect upcoming maturities; partially offset by maturities of $5,582 million and a decrease in commercial paper of $600 million; partially offset by
· A decrease in accounts payable of $757 million ($849 million adjusted for currency) reflecting declines from typically higher year-end balances; and
· A decrease in taxes payable of $710 million ($805 million adjusted for currency) primarily driven by tax payments.
Cash Flow
The companys cash flows from operating, investing and financing activities, as reflected in the Consolidated Statement of Cash Flows on page 7, are summarized in the following table. These amounts include the cash flows associated with the Global Financing business.
(Dollars in millions) |
|
|
|
|
| ||
For the nine months ended September 30: |
|
2016 |
|
2015 |
| ||
Net cash provided by/(used in) continuing operations: |
|
|
|
|
| ||
Operating activities |
|
$ |
13,301 |
|
$ |
11,729 |
|
Investing activities |
|
(7,600 |
) |
(2,714 |
) | ||
Financing activities |
|
(4,504 |
) |
(7,818 |
) | ||
Effect of exchange rate changes on cash and cash equivalents |
|
155 |
|
(194 |
) | ||
Net change in cash and cash equivalents |
|
$ |
1,352 |
|
$ |
1,004 |
|
Net cash provided by operating activities increased by $1,572 million as compared to the first nine months of 2015 driven by the following factors:
· A decline in income tax payments of $1,898 million; and
· An increase in cash provided by financing receivables of $1,684 million; and
· A decline in cash contributions for postretirement plans of $442 million; partially offset by
· Performance-related declines within net income.
Net cash used in investing activities increased $4,886 million compared to the first nine months of 2015 driven by:
· An increase in net cash used related to acquisitions of $4,624 million.
Management Discussion (continued)
Net cash used in financing activities decreased $3,314 million as compared to the first nine months of 2015 driven by:
· An increase in net cash sourced from debt transactions of $2,495 million primarily driven by higher levels of issuances in the current period; and
· A decrease of $1,214 million of cash used for gross share repurchases.
Noncurrent Assets and Liabilities
|
|
At September 30, |
|
At December 31, |
| ||
(Dollars in millions) |
|
2016 |
|
2015 |
| ||
Noncurrent assets |
|
$ |
74,173 |
|
$ |
67,991 |
|
Long-term debt |
|
$ |
35,563 |
|
$ |
33,428 |
|
Noncurrent liabilities (excluding debt) |
|
$ |
28,437 |
|
$ |
28,374 |
|
The increase in noncurrent assets of $6,183 million ($4,942 million adjusted for currency) was driven by:
· An increase of $4,380 million in goodwill ($4,132 million adjusted for currency) and $1,394 million in net intangible assets driven by acquisitions; and
· An increase in retirement plans assets of $1,753 million ($1,786 million adjusted for currency) driven by the expected returns on plan assets; partially offset by
· A decrease of $1,077 million in long-term financing receivables ($1,439 million adjusted for currency) reflecting seasonal reductions from higher year-end balances.
Long-term debt increased $2,135 million ($1,831 million adjusted for currency) from the year-end balance primarily driven by:
· Issuances of $8,031 million; partially offset by
· Reclassification to short-term debt of $6,438 million to reflect upcoming maturities.
The increase in noncurrent liabilities (excluding debt) of $63 million (a decrease of $953 million adjusted for
currency) was driven by:
· An increase in retirement and nonpension postretirement liabilities of $184 million driven by a currency impact of $611 million.
Debt
The companys funding requirements are continually monitored and strategies are executed to manage the overall asset and liability profile. Additionally, the company maintains sufficient flexibility to access global funding sources as needed.
|
|
At September 30, |
|
At December 31, |
| ||
(Dollars in millions) |
|
2016 |
|
2015 |
| ||
Total company debt |
|
$ |
42,483 |
|
$ |
39,890 |
|
Total Global Financing segment debt |
|
$ |
26,133 |
|
$ |
27,205 |
|
Debt to support external clients |
|
22,200 |
|
23,934 |
| ||
Debt to support internal clients |
|
3,933 |
|
3,271 |
| ||
Non-Global Financing debt |
|
$ |
16,351 |
|
$ |
12,684 |
|
Total debt of $42,483 million was up $2,594 million from December 31, 2015.
Global Financing provides financing predominantly for the companys external client assets, as well as for assets under contract by other IBM units. These assets, primarily for Technology Services & Cloud Platforms, generate long-term, stable revenue streams similar to the Global Financing asset portfolio. Based on their attributes, these Technology Services & Cloud
Management Discussion (continued)
Platforms assets are leveraged with the balance of the Global Financing asset base. The debt analysis above is further detailed in the Global Financing section on page 85.
Non-Global Financing debt of $16,351 million was up $3,666 million from December 31, 2015 and up $2,734 million from September 30, 2015.
Consolidated debt-to-capitalization ratio at September 30, 2016 was 71.2 percent versus 73.4 percent at December 31, 2015 and 74.6 percent at September 30, 2015.
Given the significant leverage, the company also presents a debt-to-capitalization ratio which excludes Global Financing debt and equity as management believes this is more representative of the companys core business operations. This ratio can vary from period to period as the company manages its global cash and debt positions. Core debt-to-capitalization ratio (excluding Global Financing debt and equity) was 54.6 percent at September 30, 2016 compared to 54.3 percent at December 31, 2015 and 58.3 percent at September 30, 2015.
Equity
Total equity increased by $2,735 million from December 31, 2015 as a result of an increase in retained earnings of $3,460 million, an increase in retirement-related amounts of $1,267 million and an increase of $303 million related to currency translation, partially offset by an increase in treasury stock of $2,652 million primarily due to common stock repurchases.
Management Discussion (continued)
Looking Forward
The companys strategies, investments and actions are all taken with an objective of optimizing long-term performance. A long-term perspective ensures that the company is well-positioned to take advantage of major shifts occurring in technology, business and the global economy.
Within the IT industry, there are major shifts occurringdriven by data and analytics, cloud and changes in the ways individuals and enterprises are engaging. The company has differentiated itself from other technology providers by moving into new spaces, and in some cases, creating entirely new markets.
The companys strategic direction is clear and compelling, and the company will continue to shift to the higher value areas of enterprise IT and manage clients most critical business processes. In January 2016, to support this ongoing shift, the company made a number of changes to its management system and organizational structure. In February, the company met with investors to discuss its progress and detailed how IBM is becoming more than a hardware, software and services company; it is emerging as a cognitive solutions and cloud platform company. The companys strategic imperativescloud, analytics, mobile, social and security solutionsare focused on these market shifts.
Overall, the company expects to continue to grow in many areas of the business, including continued strong growth in the strategic imperatives. In addition, the company expects to continue to allocate its capital efficiently and effectively to investments, and to return value to its shareholders through a combination of dividends and share repurchases. Over the long term, in consideration of the opportunities it will continue to develop, the company expects to have the ability to generate low single-digit revenue growth, and with a higher value business mix, high single-digit operating (non-GAAP) earnings per share growth, with free cash flow realization in the 90 to 100 percent range.
In the third quarter of 2016, the company made progress across the business, with continued strong growth in the strategic imperatives, some moderation in the declines in the core businesses, remixing skills, and adding new capabilities through organic investments, acquisitions and partnerships.
In the first nine months of 2016, the company had strong performance in its strategic imperatives, with revenue growth of 14 percent year to year as reported and adjusted for currency. Over the past 12 months, the strategic imperatives generated $31.8 billion in revenue, which represents 40 percent of the companys total revenue. From a segment perspective, in the first nine months of 2016, Cognitive Solutions revenue grew, led by analytics in Solutions Software and the company broadened the reach of Watson with new services, products and partnerships. Services backlog of $121.3 billion increased 0.9 percent year to year as reported, but decreased 1 percent at constant currency, with improvement in Technology Services & Cloud Platforms and declines in GBS. In GBS, the engineered shift to digital has driven strong revenue growth in the strategic imperatives, but GBS gross margins have declined year to year, reflecting increased investment in digital and additional spending incurred to meet commitments. In Systems, z Systems mainframe revenues decreased and margins improved consistent with product cycle dynamics. Under the new segment structure introduced in January, software value has been integrated into three of the segments: Cognitive Solutions, Technology Services & Cloud Platforms, and Systems. The software annuity base continued to grow with high renewal rates, growth in the Software-as-a-Service offerings and contribution from acquisitions.
Looking forward to the fourth quarter of 2016, given third quarter performance, the company expects the second half improvement to be in line with the expectations provided in July. Less of that improvement may result from software revenue mix, though the company has been more successful in monetizing software through IP partnerships. The company continues to expect the annuity business to grow year to year in the fourth quarter and with good opportunity pipeline would expect the typical third quarter to fourth quarter sequential increase in transactional business of $2.5 billion.
Overall for 2016, the company continues to expect GAAP earnings per share from continuing operations to be at least $12.23. The company continues to expect operating (non-GAAP) earnings per share to be at least $13.50, which excludes acquisition-related charges of $0.84 per share and non-operating retirement-related items of $0.43 per share.
Free cash flow realization, defined as free cash flow to income from continuing operations (GAAP), was 98 percent as reported in 2015 and is expected to be above 90 percent again in 2016. At the profit level associated with the earnings per share expectations, this translates to an expected free cash flow range of $11 billion to $12 billion in 2016. The company continues to expect free cash flow for 2016 at the high end of that range at the expected profit level. Free cash flow realization is also expected to be in the 90 to 100 percent range in 2017.
Management Discussion (continued)
The GAAP tax rate is expected to be approximately 1 point lower than the operating (non-GAAP) tax rate which the company expects to be 18 percent for the rest of the year, excluding discrete tax benefits. However, other factors could impact the rate and the operating tax rate could be in the range of 18 percent, plus or minus a couple of percentage points. The rate will change year to year 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, the timing and amount of foreign dividend repatriation, state and local taxes and the effects of various global income tax strategies.
The company expects 2016 pre-tax retirement-related plan cost to be approximately $2.0 billion, a decrease of approximately $600 million compared to 2015. This estimate reflects current pension plan assumptions at December 31, 2015. Within total retirement-related plan cost, operating retirement-related plan cost is expected to be approximately $1.4 billion, a decrease of approximately $100 million versus 2015. Non-operating retirement-related plan cost is expected to be approximately $600 million, a decrease of approximately $400 million compared to 2015, driven by decreased recognized actuarial losses and the Spanish pension litigation impacts in 2015. Contributions for all retirement-related plans are expected to be approximately $2.6 billion in 2016, approximately flat compared to 2015. Consistent with accounting guidance, the company will remeasure its defined benefit pension plans at December 31, 2016. As described in the companys Critical Accounting Estimates (refer to the companys recast 2015 Annual Report on Form 8-K, pages 48 to 51), the measurement of the benefit obligation to employees requires the use of certain assumptions, including, among others, estimates of discount rates. If the company were to use September 2016 discount rates, there would be a material impact to Stockholders Equity but it would not impact the companys cash flows.
Currency Rate Fluctuations
Changes in the relative values of non-U.S. currencies to the U.S. dollar (USD) affect the companys financial results and financial position. At September 30, 2016, currency changes resulted in assets and liabilities denominated in local currencies being translated into more dollars than at year-end 2015. The company uses financial hedging instruments to limit specific currency risks related to financing transactions and other foreign currency-based transactions.
Foreign currency fluctuations often drive operational responses that mitigate the simple mechanical translation of earnings. During periods of sustained movements in currency, the marketplace and competition adjust to the changing rates. For example, when pricing offerings in the marketplace, the company may use some of the advantage from a weakening U.S. dollar to improve its position competitively, and price more aggressively to win the business, essentially passing on a portion of the currency advantage to its customers. Competition will frequently take the same action. Consequently, the company believes that some of the currency-based changes in cost impact the prices charged to clients. The company also maintains currency hedging programs for cash management purposes which mitigate, but do not eliminate, the volatility of currency impacts on the companys financial results.
The company translates revenue, cost and expense in its 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 the company utilizes to disclose this information does not incorporate any operational actions that management could take to mitigate fluctuating currency rates. Currency movements impacted the companys year-to-year revenue and earnings per share growth in the first nine months of 2016. Based on the currency rate movements in the first nine months of 2016, total revenue decreased 2.6 percent as reported and decreased 1.9 percent at constant currency versus the first nine months of 2015. On an income from continuing operations before income tax 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 $50 million in the first nine months of 2016 on an as-reported basis and an increase of approximately $75 million on an operating (non-GAAP) basis. The same mathematical exercise resulted in a decrease of approximately $700 million in the first nine months of 2015 on an as-reported basis and a decrease of approximately $900 million on an operating (non-GAAP) basis. The company views these amounts as a theoretical maximum impact to its 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 the company believes 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, the company manages currency risk in these entities by linking prices and contracts to U.S. dollars.
Management Discussion (continued)
The company continues to monitor the economic conditions in Venezuela. In mid-February 2016, changes to the currency exchange systems were announced which eliminated the SICAD exchange rate and replaced the SIMADI rate with DICOM, which is expected to be a floating exchange rate. The company recorded a pre-tax loss of $43 million in the first quarter of 2016 in other (income) and expense in the Consolidated Statement of Earnings as a result of the elimination of SICAD and devaluation in the new exchange. The system for currency exchange in Venezuela has remained constant through the third quarter and the company continued to use the SIMADI rate since the DICOM rate had not been instrumented by the authorities. Total pre-tax loss for the first nine months of 2016 was $46 million. The companys net assets denominated in local currency were $8 million at September 30, 2016. The companys operations in Venezuela comprised less than 1 percent of total 2015 and 2014 revenue, respectively.
Liquidity and Capital Resources
In the companys recast 2015 Annual Report on Form 8-K dated June 13, 2016, on pages 45 to 48, there is a discussion of the companys liquidity including two tables that present five years of data. The table presented on page 45 includes net cash from operating activities, cash and marketable securities and the size of the companys global credit facilities for each of the past five years. For the nine months ended, or as of, as applicable, September 30, 2016, those amounts are $13.3 billion for net cash from operating activities, $10.0 billion of cash and marketable securities and $10 billion in global credit facilities, respectively.
The major rating agencies ratings on the companys debt securities at September 30, 2016 appear in the table below. The agency ratings remain unchanged from December 31, 2015. Standard and Poors, Moodys Investors Service and Fitch Ratings reaffirmed their credit ratings on April 27, 2016, March 30, 2016 and September 30, 2016, respectively. The company does not have ratings trigger provisions in its 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. The companys contractual agreements governing derivative instruments contain standard market clauses which can trigger the termination of the agreement if the companys credit rating were to fall below investment grade. At September 30, 2016, the fair value of those instruments that were in a liability position was $286 million, before any applicable netting, and this position is subject to fluctuations in fair value period to period based on the level of the companys outstanding instruments and market conditions. The company has no other contractual arrangements that, in the event of a change in credit rating, would result in a material adverse effect on its financial position or liquidity.
|
|
STANDARD |
|
MOODYS |
|
|
|
|
|
AND |
|
INVESTORS |
|
FITCH |
|
|
|
POORS |
|
SERVICE |
|
RATINGS |
|
Senior long-term debt |
|
AA- |
|
Aa3 |
|
A+ |
|
Commercial paper |
|
A-1+ |
|
Prime-1 |
|
F1 |
|
The company prepares its Consolidated Statement of Cash Flows in accordance with applicable accounting standards for cash flow presentation on page 7 of this Form 10-Q and highlights causes and events underlying sources and uses of cash in that format on pages 74 and 75. For the purpose of running its business, the company manages, monitors and analyzes cash flows in a different manner.
The company 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. The company defines 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 increasing receivables is the basis for 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 outflows. The company views Global Financing receivables as a profit-generating investment which it seeks to maximize and therefore it is not considered when formulating guidance for free cash flow. As a result the company does not estimate a GAAP net cash from operating activities expectation metric.
Management Discussion (continued)
The following is managements view of cash flows for the first nine months of 2016 and 2015 prepared in a manner consistent with the description above.
(Dollars in millions) |
|
|
|
|
| ||
For the nine months ended September 30: |
|
2016 |
|
2015 |
| ||
Net cash from operating activities per GAAP |
|
$ |
13,301 |
|
$ |
11,729 |
|
Less: change in Global Financing receivables |
|
3,647 |
|
1,962 |
| ||
Net cash from operating activities, excluding Global Financing receivables |
|
9,655 |
|
9,767 |
| ||
Capital expenditures, net |
|
(2,801 |
) |
(2,764 |
) | ||
Free cash flow |
|
6,854 |
|
7,003 |
| ||
Acquisitions |
|
(5,445 |
) |
(821 |
) | ||
Divestitures |
|
35 |
|
(488 |
) | ||
Share repurchases |
|
(2,632 |
) |
(3,846 |
) | ||
Dividends |
|
(3,927 |
) |
(3,636 |
) | ||
Non-Global Financing debt |
|
3,365 |
|
770 |
| ||
Other (includes Global Financing receivables and Global Financing debt) |
|
3,523 |
|
2,108 |
| ||
Change in cash, cash equivalents and short-term marketable securities |
|
$ |
1,773 |
|
$ |
1,091 |
|
In the first nine months of 2016 net cash from operating activities increased $1.6 billion year to year and free cash flow of $6.9 billion declined $0.1 billion year to year. Within free cash flow, performance-related declines in net income were largely offset by a reduction in cash tax payments. Net capital expenditures of $2.8 billion were flat year to year. In the first nine months of 2016, the company continued to focus its cash utilization on returning value to shareholders including $3.9 billion in dividends and $2.6 billion in gross common stock repurchases.
Events that could temporarily change the historical cash flow dynamics discussed above and in the companys recast 2015 Annual Report on Form 8-K dated June 13, 2016 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 12, Contingencies, in this Form 10-Q. With respect to pension funding, the company expects to make pension plan contributions, which are generally legally mandated, to certain non-U.S. plans of approximately $600 million in 2016. Contributions related to all retirement-related plans are expected to be approximately $2.6 billion in 2016. Financial market performance could change the legally mandated minimum contributions in certain non-U.S. countries that require more frequent remeasurement of the funded status. The company is 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.
The companys U.S. cash flows continue to be sufficient to fund its current domestic operations and obligations, including investing and financing activities such as dividends and debt service. The companys U.S. operations generate substantial cash flows, and, in those circumstances where the company has additional cash requirements in the U.S., the company has several liquidity options available. These options may include the ability to borrow additional funds at reasonable interest rates, utilizing its committed global credit facility, repatriating certain foreign earnings and utilizing intercompany loans with certain foreign subsidiaries.
The company does earn a significant amount of its pre-tax income outside the U.S. The companys policy is to indefinitely reinvest the undistributed earnings of its foreign subsidiaries, and accordingly, no provision for federal income taxes has been made on accumulated earnings of foreign subsidiaries. The company periodically repatriates a portion of these earnings to the extent that it does not incur an additional U.S. tax liability. Quantification of the deferred tax liability, if any, associated with indefinitely reinvested earnings is not practicable. While the company currently does not have a need to repatriate funds held by its foreign subsidiaries, if these funds are needed for operations and obligations in the U.S., the company could elect to repatriate these funds which could result in a reassessment of the companys policy and increased tax expense.
Management Discussion (continued)
Global Financing
Global Financing is a reportable segment that is measured as a stand-alone entity. Global Financing facilitates IBM clients acquisition of information technology systems, software and services by providing financing solutions in the areas where the company has the expertise, while generating solid returns on equity.
Results of Operations
|
|
Three Months Ended |
|
Nine Months Ended |
| ||||||||
|
|
September 30, |
|
September 30, |
| ||||||||
(Dollars in millions) |
|
2016 |
|
2015 |
|
2016 |
|
2015 |
| ||||
External revenue |
|
$ |
412 |
|
$ |
447 |
|
$ |
1,245 |
|
$ |
1,386 |
|
Internal revenue |
|
352 |
|
584 |
|
1,340 |
|
1,874 |
| ||||
Total revenue |
|
763 |
|
1,031 |
|
2,585 |
|
3,261 |
| ||||
Cost |
|
267 |
|
328 |
|
836 |
|
1,045 |
| ||||
Gross profit |
|
$ |
497 |
|
$ |
703 |
|
$ |
1,748 |
|
$ |
2,216 |
|
Gross profit margin |
|
65.1 |
% |
68.2 |
% |
67.6 |
% |
68.0 |
% | ||||
Pre-tax income |
|
$ |
355 |
|
$ |
562 |
|
$ |
1,208 |
|
$ |
1,690 |
|
After-tax income |
|
$ |
244 |
|
$ |
376 |
|
$ |
829 |
|
$ |
1,131 |
|
Return on equity* |
|
27.2 |
% |
40.5 |
% |
30.3 |
% |
39.7 |
% |
* See page 86 for the details of the after-tax income and return on equity calculation.
The decrease in revenue in the third quarter, as compared to the same period in 2015, was due to:
· A decline in internal revenue of 39.8 percent, due to a decrease in used equipment sales revenue (down 46.5 percent to $268 million); and
· A decline in external revenue of 7.9 percent (9.2 percent adjusted for currency), due to a decrease in financing revenue (down 12.2 percent to $305 million), partially offset by an increase in used equipment sales revenue (up 6.7 percent to $107 million).
The decrease in revenue in the first nine months, as compared to the same period in 2015, was due to:
· A decline in internal revenue of 28.5 percent, due to decreases in used equipment sales revenue (down 32.1 percent to $1,100 million) and financing revenue (down 5.8 percent to $239 million); and
· A decline in external revenue of 10.2 percent (8.5 percent adjusted for currency), due to decreases in financing revenue (down 11.8 percent to $935 million) and used equipment sales revenue (down 4.9 percent to $310 million).
The decrease in internal financing revenue in the first nine months of 2016, compared to the same period in 2015, was due to lower asset yields, partially offset by an increase in average asset balance. The decreases in external financing revenue in the third quarter of 2016 and for the first nine months of 2016, compared to the same periods in 2015, were due to lower asset yields and a decrease in the average asset balance.
Global Financing gross profit decreased 29.4 percent and 21.1 percent in the third quarter and the first nine months respectively, of 2016, compared to the same periods in 2015, due to decreases in used equipment sales gross profit and financing gross profit. The gross profit margin decreased 3.1 points in the third quarter and 0.3 points in the first nine months respectively, of 2016, compared to the same periods in 2015, due to a decrease in the sales margin, partially offset by an increase in the financing margin.
Global Financing pre-tax income decreased 36.8 percent to $355 million in the third quarter of 2016, compared to the same period in 2015, due to lower gross profit ($207 million) and an increase in selling, general and administrative expenses ($16 million), partially offset by a decrease in financing receivables provisions ($16 million). Pre-tax income decreased 28.5 percent to $1,208 million in the first nine months of 2016, compared to the same period in 2015, due to lower gross profit
Management Discussion (continued)
($468 million) and an increase in selling, general and administrative expenses ($47 million), partially offset by a decrease in financing receivables provisions ($33 million). The decrease in financing receivables provisions in the third quarter of 2016, compared to the same period in 2015, was due to lower specific reserve requirements in China in the current year. The decrease in financing receivables provisions in the first nine months of 2016, compared to the same period in 2015, was due to lower specific reserve requirements in China, partially offset by higher reserve requirements in Brazil in the current year.
The decrease in return on equity in the third quarter and first nine months of 2016, compared to the same periods of 2015, was due to the decrease in net income, partially offset by a decrease in equity.
Financial Position
Balance Sheet
|
|
At September 30, |
|
At December 31, |
| ||
(Dollars in millions) |
|
2016 |
|
2015 |
| ||
Cash and cash equivalents |
|
$ |
1,830 |
|
$ |
1,555 |
|
Net investment in sales-type and direct financing leases |
|
7,361 |
|
7,594 |
| ||
Equipment under operating leases external clients (1) |
|
616 |
|
605 |
| ||
Client loans |
|
10,757 |
|
12,525 |
| ||
Total client financing assets |
|
18,734 |
|
20,725 |
| ||
Commercial financing receivables |
|
6,855 |
|
8,948 |
| ||
Intercompany financing receivables (2) (3) |
|
4,932 |
|
4,245 |
| ||
Other receivables |
|
175 |
|
308 |
| ||
Other assets |
|
625 |
|
378 |
| ||
Total assets |
|
$ |
33,152 |
|
$ |
36,157 |
|
Intercompany payables (2) |
|
$ |
1,268 |
|
$ |
3,089 |
|
Debt (4) |
|
26,133 |
|
27,205 |
| ||
Other liabilities |
|
2,192 |
|
2,134 |
| ||
Total liabilities |
|
29,593 |
|
32,428 |
| ||
Total equity |
|
3,559 |
|
3,729 |
| ||
Total liabilities and equity |
|
$ |
33,152 |
|
$ |
36,157 |
|
(1) Includes intercompany mark-up, priced on an arms-length basis, on products purchased from the companys product divisions which is eliminated in IBMs consolidated results.
(2) Entire amount eliminated for purposes of IBMs consolidated results and therefore does not appear on pages 5 and 6.
(3) These assets, along with all other financing assets in this table, are leveraged at the value in the table using Global Financing debt.
(4) Global Financing debt is comprised of intercompany loans and external debt. A portion of Global Financing debt is in support of the companys internal business, or related to intercompany mark-up embedded in the Global Financing assets.
Sources and Uses of Funds
The primary use of funds in Global Financing is to originate client and commercial financing assets. Client financing assets for end users consist primarily of IBM systems, software and services, but also OEM equipment, software and services to meet IBM clients total solutions requirements. Client financing assets are primarily sales-type, direct financing and operating leases for systems products, as well as loans and installment payment plans for systems, software and services, with terms up to seven years. Global Financings client loans and installment payment plans are primarily for software and services and are unsecured. These agreements are subjected to credit analysis to evaluate the associated risk and, when deemed necessary, actions are taken to mitigate risks, which include covenants to protect against credit deterioration during the life of the obligation.
Commercial financing receivables arise primarily from inventory and accounts receivable financing for dealers and remarketers of IBM and OEM products. Payment terms for inventory financing and accounts receivable financing generally range from 30 to 90 days. These short-term receivables are primarily unsecured and are also subjected to additional credit analysis in order to evaluate the associated risk.
In addition to the actions previously described, the company has a long-standing practice of taking mitigation actions, in
Management Discussion (continued)
certain circumstances, to transfer credit risk to third parties, including credit insurance, financial guarantees, non-recourse borrowings, transfers of receivables recorded as true sales in accordance with accounting guidance or sales of equipment under operating lease.
At September 30, 2016, substantially all financing assets were IT related assets, and approximately 51 percent of the total external portfolio was with investment grade clients with no direct exposure to consumers. The reduction in investment grade year to year (4 points) was driven primarily by rating changes within the existing portfolio, not by changing the companys approach to the market. This investment grade percentage is based on the credit ratings of the companies in the portfolio. Additionally, as noted above, the company takes actions to transfer exposure to third parties. On that basis, the investment grade content would increase by 14 points to 65 percent, a reduction of 3 points year to year.
Originations
The following are total financing originations:
|
|
Three Months Ended |
|
Nine Months Ended |
| ||||||||
|
|
September 30, |
|
September 30, |
| ||||||||
(Dollars in millions) |
|
2016 |
|
2015 |
|
2016 |
|
2015 |
| ||||
Client financing |
|
$ |
2,525 |
|
$ |
2,598 |
|
$ |
7,863 |
|
$ |
9,561 |
|
Commercial financing |
|
10,177 |
|
9,828 |
|
29,714 |
|
28,143 |
| ||||
Total |
|
$ |
12,702 |
|
$ |
12,425 |
|
$ |
37,576 |
|
$ |
37,705 |
|
Cash collections of both commercial financing and client financing assets exceeded new financing originations in both the third quarter of 2016 and in the first nine months of 2016 which resulted in a net decline in financing assets compared to the same periods in 2015. The increase in originations in the three month period ending September 30, 2016 versus 2015 was due to an increase in commercial financing volumes. The decrease in originations in the first nine months of 2016, versus 2015 was due to a decrease in client financing volumes. Internal loan financing with Technology Services & Cloud Platforms is executed under a loan facility and is not considered originations.
Cash generated by Global Financing was deployed to pay intercompany payables and dividends to IBM as well as business partners and OEM suppliers.
Global Financing Receivables and Allowances
The following table presents external financing receivables, excluding residual values, and the allowance for credit losses.
|
|
At September 30, |
|
At December 31, |
| ||
(Dollars in millions) |
|
2016 |
|
2015 |
| ||
Gross financing receivables |
|
$ |
25,082 |
|
$ |
29,086 |
|
Specific allowance for credit losses |
|
527 |
|
517 |
| ||
Unallocated allowance for credit losses |
|
121 |
|
93 |
| ||
Total allowance for credit losses |
|
648 |
|
610 |
| ||
Net financing receivables |
|
$ |
24,434 |
|
$ |
28,475 |
|
Allowance for credit losses coverage |
|
2.6 |
% |
2.1 |
% |
Roll Forward of Global Financing Receivables Allowance for Credit Losses
(Dollars in millions) |
|
Allowance |
|
Additions/ |
|
|
|
|
| |||||
January 1, 2016 |
|
Used* |
|
(Reductions) |
|
Other** |
|
September 30, 2016 |
| |||||
$ |
610 |
|
$ |
(45 |
) |
$ |
75 |
|
$ |
7 |
|
$ |
648 |
|
* Represents reserved receivables, net of recoveries, that were written off during the period.
** Primarily represents translation adjustments.
The percentage of Global Financing receivables reserved increased from 2.1 percent at December 31, 2015, to 2.6 percent at September 30, 2016, primarily due to an increase in unallocated reserve requirements. Unallocated reserves
Management Discussion (continued)
increased 30 percent from $93 million at December 31, 2015, to $121 million at September 30, 2016, primarily due to Brazil. Specific reserves increased 2 percent from $517 million at December 31, 2015, to $527 million at September 30, 2016.
Global Financings bad debt expense was ($2) million for the three months ended September 30, 2016, compared to $14 million for the same period in 2015. Global Financings bad debt expense was $75 million for the nine months ended September 30, 2016, compared to $108 million for the same period in 2015. The year-to-year decrease in bad debt expense for the three months ended September 30, 2016, compared to the same period in 2015, was due to higher specific reserve requirements in China in the prior year. The year-to-year decrease in bad debt expense for the nine months ended September 30, 2016, compared to the same period in 2015, was due to lower specific reserve requirements in China, partially offset by higher reserve requirements in Brazil in the current year.
Residual Value
Residual value is a risk unique to the financing business and management of this risk is dependent upon the ability to accurately project future equipment values at lease inception. Global Financing has insight into product plans and cycles for the IBM products under lease. Based upon this product information, Global Financing continually monitors projections of future equipment values and compares them with the residual values reflected in the portfolio.
Global Financing optimizes the recovery of residual values by selling assets sourced from end of lease, leasing used equipment to new clients, or extending lease arrangements with current clients. Sales of equipment include equipment returned at the end of a lease, surplus internal equipment, or used equipment purchased externally. These sales represented 49.1 percent and 54.6 percent of Global Financings revenue in the third quarter and first nine months, respectively, of 2016, and 58.2 percent and 59.7 percent in the third quarter and first nine months, respectively, of 2015. The decreases in both periods were due to a lower volume of used equipment sales for internal transactions. The gross profit margins on these sales were 54.6 percent and 65.6 percent in the third quarter of 2016 and 2015, respectively. The gross profit margins were 60.8 percent and 65.5 percent in the first nine months of 2016 and 2015, respectively. The decrease in the gross profit margin for the three months period ending September 30, 2016 was driven by a shift in mix away from higher margin internal equipment sales, and from decreases in external and internal equipment sales margins. The decrease in the gross profit margin for the nine months period ending September 30, 2016 was driven by a shift in mix away from higher margin internal equipment sales and a decrease in external equipment sales margin, partially offset by an increase in internal equipment sales margin.
The table on page 85 presents the recorded amount of unguaranteed residual value for sales-type, direct financing and operating leases at January 1, 2016 and September 30, 2016. In addition, the table presents the residual value as a percentage of the related original amount financed and a run out of when the unguaranteed residual value assigned to equipment on leases at September 30, 2016 is expected to be returned to the company. In addition to the unguaranteed residual value, on a limited basis, Global Financing will obtain guarantees of the future value of the equipment to be returned at end of lease. While primarily focused on IBM products, guarantees are also obtained for certain OEM products. These third-party guarantees are included in minimum lease payments as provided for by accounting standards in the determination of lease classifications for the covered equipment and provide protection against risk of loss arising from declines in equipment values for these assets.
The residual value guarantee increases the minimum lease payments that are utilized in determining the classification of a lease as a sales-type lease, direct financing lease or operating lease. The aggregate asset values associated with the guarantees of sales-type leases were $43 million and $105 million for the financing transactions originated during the quarters ended September 30, 2016 and 2015, respectively and $201 million and $565 million for the nine months ended September 30, 2016 and 2015, respectively. The aggregate asset values associated with the guarantees of direct financing leases were $43 million and $44 million for the financing transactions originated during the quarters ended September 30, 2016 and 2015, respectively and $128 million and $141 million for the nine months ended September 30, 2016 and 2015, respectively. The associated aggregate guaranteed future values at the scheduled end of lease were $4 million and $6 million for the financing transactions originated during the quarters ended September 30, 2016 and 2015, respectively and $12 million and $39 million for the nine months ended September 30, 2016 and 2015, respectively. The cost of guarantees was $0.4 million and $0.6 million for the quarters ended September 30, 2016 and 2015, respectively and $1.2 million and $3.9 million for the nine months ended September 30, 2016 and 2015, respectively.
Management Discussion (continued)
Unguaranteed Residual Value
|
|
|
|
|
|
Estimated Run Out of |
| ||||||||||||
|
|
At |
|
At |
|
September 30, 2016 Balance |
| ||||||||||||
|
|
January 1, |
|
September 30, |
|
|
|
|
|
|
|
2019 and |
| ||||||
(Dollars in millions) |
|
2016 |
|
2016 |
|
2016 |
|
2017 |
|
2018 |
|
Beyond |
| ||||||
Sales-type and direct financing leases |
|
$ |
645 |
|
$ |
630 |
|
$ |
37 |
|
$ |
137 |
|
$ |
197 |
|
$ |
258 |
|
Operating leases |
|
144 |
|
152 |
|
31 |
|
47 |
|
38 |
|
36 |
| ||||||
Total unguaranteed residual value |
|
$ |
789 |
|
$ |
782 |
|
$ |
68 |
|
$ |
184 |
|
$ |
235 |
|
$ |
294 |
|
Related original amount financed |
|
$ |
14,223 |
|
$ |
13,806 |
|
|
|
|
|
|
|
|
| ||||
Percentage |
|
5.6 |
% |
5.7 |
% |
|
|
|
|
|
|
|
|
Debt
|
|
At September 30, |
|
At December 31, |
|
|
|
2016 |
|
2015 |
|
Debt-to-equity ratio |
|
7.3x |
|
7.3x |
|
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 and currency underlying the financing receivable and are based on arms-length pricing.
Global Financing provides financing predominantly for the companys external client assets, as well as for assets under contract by other IBM units. As previously stated, the company measures Global Financing as a stand-alone entity, and accordingly, interest expense relating to debt supporting Global Financings external client and internal business is included in the Global Financing Results of Operations on page 81 and in Segment Information on pages 28 and 29.
In the companys Consolidated Statement of Earnings, the external debt-related interest expense supporting Global Financings internal financing to the company is reclassified from cost of financing to interest expense.
The following table provides additional information on total company debt. In this table, intercompany activity includes internal loans and leases at arms-length pricing in support of long-term services contracts and other internal activity. The company believes these assets should be appropriately leveraged in line with the overall Global Financing business model.
(Dollars in millions) |
|
At September 30, 2016 |
|
At December 31, 2015 |
| ||||||||
Global Financing Segment |
|
|
|
$ |
26,133 |
|
|
|
$ |
27,205 |
| ||
Debt to support external clients |
|
$ |
22,200 |
|
|
|
$ |
23,934 |
|
|
| ||
Debt to support internal clients |
|
3,933 |
|
|
|
3,271 |
|
|
| ||||
Non-Global Financing Segments |
|
|
|
16,351 |
|
|
|
12,684 |
| ||||
Debt supporting operations |
|
20,283 |
|
|
|
15,955 |
|
|
| ||||
Intercompany activity |
|
(3,933 |
) |
|
|
(3,271 |
) |
|
| ||||
Total company debt |
|
|
|
$ |
42,483 |
|
|
|
$ |
39,890 |
| ||
Liquidity and Capital Resources
Global Financing is a segment of the company, and therefore is supported by the companys overall liquidity position and access to capital markets. Cash generated by Global Financing was deployed to pay dividends to the company in order to maintain an appropriate debt-to-equity ratio.
Management Discussion (continued)
Return on Equity
|
|
Three Months Ended |
|
Nine Months Ended |
| ||||||||
|
|
September 30, |
|
September 30, |
| ||||||||
(Dollars in millions) |
|
2016 |
|
2015 |
|
2016 |
|
2015 |
| ||||
Numerator |
|
|
|
|
|
|
|
|
| ||||
Global Financing after-tax income* |
|
$ |
244 |
|
$ |
376 |
|
$ |
829 |
|
$ |
1,131 |
|
Annualized after-tax income (a) |
|
$ |
977 |
|
$ |
1,504 |
|
$ |
1,106 |
|
$ |
1,508 |
|
Denominator |
|
|
|
|
|
|
|
|
| ||||
Average Global Financing equity (b)** |
|
$ |
3,595 |
|
$ |
3,716 |
|
$ |
3,647 |
|
$ |
3,799 |
|
Global Financing return on equity (a)/(b) |
|
27.2 |
% |
40.5 |
% |
30.3 |
% |
39.7 |
% |
* Calculated based upon an estimated tax rate principally based on Global Financings geographic mix of earnings as IBMs provision for income taxes is determined on a consolidated basis.
** Average of the ending equity for Global Financing for the last 2 quarters and 4 quarters, for the three months ended September 30, and for the nine months ended September 30, respectively.
Looking Forward
Global Financings financial position provides flexibility and funding capacity which enables the company to be well positioned in the current environment. Global Financings assets and new financing volumes are IBM and OEM products and services financed to the companys clients and business partners, and substantially all financing assets are IT related assets which provide a stable base of business for future growth. Global Financings offerings are competitive and available to clients as a result of the companys borrowing cost and access to the capital markets. Overall, Global Financings originations will be dependent upon the demand for IT products and services as well as client participation rates.
IBM continues to access both the short-term commercial paper market and the medium- and long-term debt markets. A protracted period where IBM could not access the capital markets would likely lead to a slowdown in originations.
Interest rates and the overall economy (including currency fluctuations) will have an effect on both revenue and gross profit. The companys interest rate risk management policy, however, combined with the Global Financing pricing strategy should mitigate gross margin erosion due to changes in interest rates.
The economy could impact the credit quality of the Global Financing receivables portfolio and therefore the level of provision for credit losses. Global Financing will continue to apply rigorous credit policies in both the origination of new business and the evaluation of the existing portfolio.
As previously discussed, Global Financing has historically been able to manage residual value risk both through insight into the companys product cycles, as well as through its remarketing business.
Global Financing has policies in place to manage each of the key risks involved in financing. These policies, combined with product and client knowledge, should allow for the prudent management of the business going forward, even during periods of uncertainty with respect to the global economy.
Management Discussion (continued)
GAAP Reconciliation
The tables below provide a reconciliation of the companys income statement results as reported under GAAP to its operating earnings presentation which is a non-GAAP measure. The companys calculation of operating (non-GAAP) earnings, as presented, may differ from similarly titled measures reported by other companies. Refer to the Snapshot section on page 48 for the companys rationale for presenting operating earnings information.
(Dollars in millions except per share amounts) |
|
|
|
Acquisition-related |
|
Retirement-related |
|
Operating |
| ||||
For the three months ended September 30, 2016 |
|
GAAP |
|
adjustments |
|
adjustments |
|
(Non-GAAP) |
| ||||
Gross profit |
|
$ |
9,013 |
|
$ |
129 |
|
$ |
79 |
|
$ |
9,221 |
|
Gross profit margin |
|
46.9 |
% |
0.7 |
pts. |
0.4 |
pts. |
48.0 |
% | ||||
S,G&A |
|
$ |
4,732 |
|
$ |
(138 |
) |
$ |
(53 |
) |
$ |
4,541 |
|
R,D&E |
|
1,397 |
|
|
|
(7 |
) |
1,390 |
| ||||
Other (income) and expense |
|
(8 |
) |
(2 |
) |
|
|
(10 |
) | ||||
Total expense and other (income) |
|
5,751 |
|
(140 |
) |
(60 |
) |
5,550 |
| ||||
Pre-tax income from continuing operations |
|
3,263 |
|
269 |
|
139 |
|
3,671 |
| ||||
Pre-tax margin from continuing operations |
|
17.0 |
% |
1.4 |
pts. |
0.7 |
pts. |
19.1 |
% | ||||
Provision for income taxes* |
|
$ |
409 |
|
$ |
73 |
|
$ |
40 |
|
$ |
521 |
|
Effective tax rate |
|
12.5 |
% |
1.1 |
pts. |
0.7 |
pts. |
14.2 |
% | ||||
Income from continuing operations |
|
$ |
2,854 |
|
$ |
197 |
|
$ |
99 |
|
$ |
3,149 |
|
Income margin from continuing operations |
|
14.8 |
% |
1.0 |
pts. |
0.5 |
pts. |
16.4 |
% | ||||
Diluted earnings per share from continuing operations |
|
$ |
2.98 |
|
$ |
0.21 |
|
$ |
0.10 |
|
$ |
3.29 |
|
* 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.
(Dollars in millions except per share amounts) |
|
|
|
Acquisition-related |
|
Retirement-related |
|
Operating |
| ||||
For the three months ended September 30, 2015 |
|
GAAP |
|
adjustments |
|
adjustments |
|
(Non-GAAP) |
| ||||
Gross profit |
|
$ |
9,436 |
|
$ |
89 |
|
$ |
118 |
|
$ |
9,643 |
|
Gross profit margin |
|
48.9 |
% |
0.5 |
pts. |
0.6 |
pts. |
50.0 |
% | ||||
S,G&A |
|
$ |
4,731 |
|
$ |
(76 |
) |
$ |
(74 |
) |
$ |
4,581 |
|
R,D&E |
|
1,287 |
|
|
|
(12 |
) |
1,275 |
| ||||
Other (income) and expense |
|
(133 |
) |
0 |
|
|
|
(133 |
) | ||||
Total expense and other (income) |
|
5,815 |
|
(76 |
) |
(86 |
) |
5,652 |
| ||||
Pre-tax income from continuing operations |
|
3,621 |
|
165 |
|
204 |
|
3,991 |
| ||||
Pre-tax margin from continuing operations |
|
18.8 |
% |
0.9 |
pts. |
1.1 |
pts. |
20.7 |
% | ||||
Provision for income taxes* |
|
$ |
659 |
|
$ |
(5 |
) |
$ |
64 |
|
$ |
718 |
|
Effective tax rate |
|
18.2 |
% |
(0.9 |
)pts. |
0.7 |
pts. |
18.0 |
% | ||||
Income from continuing operations |
|
$ |
2,962 |
|
$ |
170 |
|
$ |
140 |
|
$ |
3,272 |
|
Income margin from continuing operations |
|
15.4 |
% |
0.9 |
pts. |
0.7 |
pts. |
17.0 |
% | ||||
Diluted earnings per share from continuing operations |
|
$ |
3.02 |
|
$ |
0.18 |
|
$ |
0.14 |
|
$ |
3.34 |
|
* 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 (continued)
(Dollars in millions except per share amounts) |
|
|
|
Acquisition-related |
|
Retirement-related |
|
Operating |
| ||||
For the nine months ended September 30, 2016 |
|
GAAP |
|
adjustments |
|
adjustments |
|
(Non-GAAP) |
| ||||
Gross profit |
|
$ |
27,401 |
|
$ |
371 |
|
$ |
238 |
|
$ |
28,010 |
|
Gross profit margin |
|
47.1 |
% |
0.6 |
pts. |
0.4 |
pts. |
48.2 |
% | ||||
S,G&A |
|
$ |
16,093 |
|
$ |
(365 |
) |
$ |
(183 |
) |
$ |
15,545 |
|
R,D&E |
|
4,320 |
|
|
|
(23 |
) |
4,297 |
| ||||
Other (income) and expense |
|
281 |
|
(7 |
) |
|
|
274 |
| ||||
Total expense and other (income) |
|
20,056 |
|
(372 |
) |
(206 |
) |
19,478 |
| ||||
Pre-tax income from continuing operations |
|
7,345 |
|
743 |
|
444 |
|
8,532 |
| ||||
Pre-tax margin from continuing operations |
|
12.6 |
% |
1.3 |
pts. |
0.8 |
pts. |
14.7 |
% | ||||
Provision for/(benefit from) income taxes* |
|
$ |
(31 |
) |
$ |
201 |
|
$ |
106 |
|
$ |
277 |
|
Effective tax rate |
|
(0.4 |
)% |
2.5 |
pts. |
1.4 |
pts. |
3.2 |
% | ||||
Income from continuing operations |
|
$ |
7,375 |
|
$ |
542 |
|
$ |
338 |
|
$ |
8,255 |
|
Income margin from continuing operations |
|
12.7 |
% |
0.9 |
pts. |
0.6 |
pts. |
14.2 |
% | ||||
Diluted earnings per share from continuing operations |
|
$ |
7.67 |
|
$ |
0.57 |
|
$ |
0.35 |
|
$ |
8.59 |
|
* 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.
(Dollars in millions except per share amounts) |
|
|
|
Acquisition-related |
|
Retirement-related |
|
Operating |
| ||||
For the nine months ended September 30, 2015 |
|
GAAP |
|
adjustments |
|
adjustments |
|
(Non-GAAP) |
| ||||
Gross profit |
|
$ |
29,278 |
|
$ |
268 |
|
$ |
350 |
|
$ |
29,896 |
|
Gross profit margin |
|
49.1 |
% |
0.4 |
pts. |
0.6 |
pts. |
50.1 |
% | ||||
S,G&A |
|
$ |
15,273 |
|
$ |
(230 |
) |
$ |
(445 |
) |
$ |
14,598 |
|
R,D&E |
|
3,885 |
|
|
|
(36 |
) |
3,849 |
| ||||
Other (income) and expense |
|
(578 |
) |
(5 |
) |
|
|
(583 |
) | ||||
Total expense and other (income) |
|
18,431 |
|
(235 |
) |
(481 |
) |
17,715 |
| ||||
Pre-tax income from continuing operations |
|
10,846 |
|
503 |
|
831 |
|
12,181 |
| ||||
Pre-tax margin from continuing operations |
|
18.2 |
% |
0.8 |
pts. |
1.4 |
pts. |
20.4 |
% | ||||
Provision for income taxes* |
|
$ |
1,943 |
|
$ |
52 |
|
$ |
234 |
|
$ |
2,228 |
|
Effective tax rate |
|
17.9 |
% |
(0.3 |
)pts. |
0.7 |
pts. |
18.3 |
% | ||||
Income from continuing operations |
|
$ |
8,904 |
|
$ |
452 |
|
$ |
597 |
|
$ |
9,953 |
|
Income margin from continuing operations |
|
14.9 |
% |
0.8 |
pts. |
1.0 |
pts. |
16.7 |
% | ||||
Diluted earnings per share from continuing operations |
|
$ |
9.03 |
|
$ |
0.46 |
|
$ |
0.60 |
|
$ |
10.09 |
|
* 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 (continued)
Forward-Looking and Cautionary Statements
Except for the historical information and discussions contained herein, statements contained in this Form 10-Q may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on the companys current assumptions regarding future business and financial performance. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, including the following: a downturn in the economic environment and client spending budgets; the companys failure to meet growth and productivity objectives; a failure of the companys innovation initiatives; risks from investing in growth opportunities; failure of the companys intellectual property portfolio to prevent competitive offerings and the failure of the company to obtain necessary licenses; cybersecurity and data privacy considerations; fluctuations in financial results; impact of local legal, economic, political and health conditions; adverse effects from environmental matters, tax matters and the companys pension plans; ineffective internal controls; the companys use of accounting estimates; the companys ability to attract and retain key personnel and its reliance on critical skills; impacts of relationships with critical suppliers; product quality issues; impacts of business with government clients; currency fluctuations and customer financing risks; impact of changes in market liquidity conditions and customer credit risk on receivables; reliance on third party distribution channels and ecosystems; the companys ability to successfully manage acquisitions, alliances and dispositions; risks from legal proceedings; risk factors related to IBM securities; and other risks, uncertainties and factors discussed in the companys Form 10-Qs, Form 10-K and in the companys other filings with the U.S. Securities and Exchange Commission (SEC) or in materials incorporated therein or herein by reference. The company assumes no obligation to update or revise any forward-looking statements.
Item 4. Controls and Procedures
The companys management evaluated, with the participation of the Chief Executive Officer and Chief Financial Officer, the effectiveness of the companys disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the companys disclosure controls and procedures were effective as of the end of the period covered by this report. There has been no change in the companys internal control over financial reporting that occurred during the quarter covered by this report that has materially affected, or is reasonably likely to materially affect, the companys internal control over financial reporting.
Refer to note 12, Contingencies, on pages 43 to 45 of this Form 10-Q.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds and Issuer Repurchases of Equity Securities
The following table provides information relating to the companys repurchase of common stock for the third quarter of 2016.
|
|
|
|
|
|
Total Number |
|
Approximate |
| ||
|
|
|
|
|
|
of Shares |
|
Dollar Value |
| ||
|
|
|
|
|
|
Purchased as |
|
of Shares that |
| ||
|
|
Total Number |
|
Average |
|
Part of Publicly |
|
May Yet Be |
| ||
|
|
of Shares |
|
Price Paid |
|
Announced |
|
Purchased Under |
| ||
Period |
|
Purchased |
|
per Share |
|
Program |
|
The Program* |
| ||
July 1, 2016 - July 31, 2016 |
|
1,300,447 |
|
$ |
157.41 |
|
1,300,447 |
|
$ |
3,649,644,866 |
|
|
|
|
|
|
|
|
|
|
| ||
August 1, 2016 - August 31, 2016 |
|
2,145,783 |
|
$ |
160.86 |
|
2,145,783 |
|
$ |
3,304,478,461 |
|
|
|
|
|
|
|
|
|
|
| ||
September 1, 2016 - September 30, 2016 |
|
2,042,234 |
|
$ |
156.89 |
|
2,042,234 |
|
$ |
2,984,081,850 |
|
|
|
|
|
|
|
|
|
|
| ||
Total |
|
5,488,464 |
|
$ |
158.56 |
|
5,488,464 |
|
|
|
* On October 27, 2015, the Board of Directors authorized $4.0 billion in funds for use in the companys common stock repurchase program. The company stated that it would repurchase shares on the open market or in private transactions depending on market conditions. The common stock repurchase program does not have an expiration date. This table does not include shares tendered to satisfy the exercise price in connection with cashless exercises of employee stock options or shares tendered to satisfy tax withholding obligations in connection with employee equity awards.
Exhibit Number
11 |
|
Statement re: computation of per share earnings. |
|
|
|
12 |
|
Statement re: computation of ratios. |
|
|
|
31.1 |
|
Certification by principal executive officer pursuant to Rule 13A-14(a) or 15D-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2 |
|
Certification by principal financial officer pursuant to Rule 13A-14(a) or 15D-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1 |
|
Certification by principal executive officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.2 |
|
Certification by principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
101.INS |
|
XBRL Instance Document |
|
|
|
101.SCH |
|
XBRL Taxonomy Extension Schema Document |
|
|
|
101.CAL |
|
XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
|
101.DEF |
|
XBRL Taxonomy Extension Definition Linkbase Document |
|
|
|
101.LAB |
|
XBRL Taxonomy Extension Label Linkbase Document |
|
|
|
101.PRE |
|
XBRL Taxonomy Extension Presentation Linkbase Document |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
International Business Machines Corporation | ||
|
|
(Registrant) | ||
|
|
|
| |
Date: |
October 25, 2016 |
|
|
|
|
|
By: |
/s/ Stanley J. Sutula III | |
|
|
|
Stanley J. Sutula III | |
|
|
|
Vice President and Controller | |