Q International Business Machines Corporation
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Table of Contents 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 JUNE 30, 2017 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 (Registrant’s telephone number) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section l3 or l5(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _ No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes _ No Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer _ Accelerated filer Non-accelerated filer Smaller reporting company (Do not check if a smaller reporting company) Emerging growth company If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act). Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No _ The registrant had 931,940,297 shares of common stock outstanding at June 30, 2017. Table of Contents Index Page Part I - Financial Information: Item 1. Consolidated Financial Statements (Unaudited): Consolidated Statement of Earnings for the three and six months ended June 30, 2017 and 2016 3 Consolidated Statement of Comprehensive Income for the three and six months ended June 30, 2017 and 2016 4 Consolidated Statement of Financial Position at June 30, 2017 and December 31, 2016 5 Consolidated Statement of Cash Flows for the six months ended June 30, 2017 and 2016 7 Consolidated Statement of Changes in Equity for the six months ended June 30, 2017 and 2016 8 Notes to Consolidated Financial Statements 9 Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition 47 Item 4. Controls and Procedures 84 Part II - Other Information: Item 1. Legal Proceedings 84 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds and Issuer Repurchases of Equity Securities 84 Item 5. Other Information 85 Item 6. Exhibits 85 2 Table of Contents Part I - Financial Information Item 1. Consolidated Financial Statements: INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED) Three Months Ended June 30, Six Months Ended June 30, (Dollars in millions except per share amounts) 2017 2016 2017 2016 Revenue: Services $ 12,547 $ 13,018 $ 24,889 $ 25,409 Sales 6,324 6,792 11,727 12,671 Financing 418 429 827 843 Total revenue 19,289 20,238 37,443 38,923 Cost: Services 8,523 8,691 17,076 17,074 Sales 1,684 1,582 3,234 2,960 Financing 289 263 568 501 Total cost 10,495 10,536 20,878 20,535 Gross profit 8,794 9,702 16,565 18,388 Expense and other (income): Selling, general and administrative 5,160 5,349 10,312 11,361 Research, development and engineering 1,484 1,465 3,018 2,923 Intellectual property and custom development income (365) (365) (810) (582) Other (income) and expense (76)37 (104) 289 Interest expense 147 167 283 315 Total expense and other (income) 6,351 6,653 12,699 14,306 Income from continuing operations before income taxes 2,443 3,049 3,867 4,082 Provision for/(benefit from) income taxes 111 544 (218) (439) Income from continuing operations $ 2,332 $ 2,505 $ 4,085 $ 4,521 Loss from discontinued operations, net of tax (1) 0 (3) (3) Net income $ 2,331 $ 2,504 $ 4,082 $ 4,518 Earnings/(loss) per share of common stock: Assuming dilution: Continuing operations $ 2.48 $ 2.61 $ 4.32 $ 4.69 Discontinued operations 0.00 0.00 0.00 0.00 Total $ 2.48 $ 2.61 $ 4.32 $ 4.69 Basic: Continuing operations $ 2.49 $ 2.62 $ 4.35 $ 4.71 Discontinued operations 0.00 0.00 0.00 0.00 Total $ 2.49 $ 2.62 $ 4.35 $ 4.71 Weighted-average number of common shares outstanding: (millions) Assuming dilution 939.6 960.5 943.7 962.4 Basic 934.9 957.4 938.7 959.5 Cash dividend per common share $ 1.50 $ 1.40 $ 2.90 $ 2.70 (Amounts may not add due to rounding.) (The accompanying notes are an integral part of the financial statements.) 3 Table of Contents INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED) Three Months Ended June 30, Six Months Ended June 30, (Dollars in millions) 2017 2016 2017 2016 Net income $ 2,331 $ 2,504 $ 4,082 $ 4,518 Other comprehensive income/(loss), before tax: Foreign currency translation adjustments (38) (248) 124 (10) Net changes related to available-for-sale securities: Unrealized gains/(losses) arising during the period 4 1 3 (35) Reclassification of (gains)/losses to net income 00137 Total net changes related to available-for-sale securities 3 1 4 2 Unrealized gains/(losses) on cash flow hedges: Unrealized gains/(losses) arising during the period (96) 9 (128) (256) Reclassification of (gains)/losses to net income (176) 102 (274) 11 Total unrealized gains/(losses) on cash flow hedges (272) 111 (402) (245) Retirement-related benefit plans: Prior service costs/(credits) — — 0 — Net (losses)/gains arising during the period 44 78 105 (68) Curtailments and settlements 3 10 1 14 Amortization of prior service (credits)/costs (22) (27) (44) (53) Amortization of net (gains)/losses 713 693 1,423 1,383 Total retirement-related benefit plans 738 754 1,486 1,277 Other comprehensive income/(loss), before tax 432 617 1,211 1,023 Income tax (expense)/benefit related to items of other comprehensive income 88 (223) (3) (21) Other comprehensive income/(loss) 520 394 1,208 1,002 Total comprehensive income/(loss) $2,852$2,899$5,290 $5,520 (Amounts may not add due to rounding.) (The accompanying notes are an integral part of the financial statements.) 4 Table of Contents INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENT OF FINANCIAL POSITION (UNAUDITED) ASSETS At June 30, At December 31, (Dollars in millions) 2017 2016 Assets: Current assets: Cash and cash equivalents $ 11,696 $ 7,826 Marketable securities 599 701 Notes and accounts receivable - trade (net of allowances of $304 in 2017 and $290 in 2016) 8,401 9,182 Short-term financing receivables (net of allowances of $272 in 2017 and $337 in 2016) 17,563 19,006 Other accounts receivable (net of allowances of $38 in 2017 and $48 in 2016) 994 1,057 Inventories, at lower of average cost or market: Finished goods 424 358 Work in process and raw materials 1,180 1,195 Total inventories 1,604 1,553 Prepaid expenses and other current assets 4,155 4,564 Total current assets 45,013 43,888 Property, plant and equipment 31,291 30,133 Less: Accumulated depreciation 20,388 19,303 Property, plant and equipment — net 10,903 10,830 Long-term financing receivables (net of allowances of $122 in 2017 and $101 in 2016) 8,296 9,021 Prepaid pension assets 4,015 3,034 Deferred taxes 6,812 5,224 Goodwill 36,517 36,199 Intangible assets — net 4,179 4,688 Investments and sundry assets 4,759 4,585 Total assets $ 120,495 $ 117,470 (Amounts may not add due to rounding.) (The accompanying notes are an integral part of the financial statements.) 5 Table of Contents INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENT OF FINANCIAL POSITION — (CONTINUED) (UNAUDITED) LIABILITIES AND EQUITY At June 30, At December 31, (Dollars in millions) 2017 2016 Liabilities: Current liabilities: Taxes $ 2,779 $ 3,235 Short-term debt 8,061 7,513 Accounts payable 5,126 6,209 Compensation and benefits 3,865 3,577 Deferred income 11,541 11,035 Other accrued expenses and liabilities 4,594 4,705 Total current liabilities 35,966 36,275 Long-term debt 37,612 34,655 Retirement and nonpension postretirement benefit obligations 17,320 17,070 Deferred income 3,617 3,600 Other liabilities 7,437 7,477 Total liabilities 101,951 99,078 Equity: IBM stockholders’ equity: Common stock, par value $0.20 per share, and additional paid-in capital 54,235 53,935 Shares authorized: 4,687,500,000 Shares issued: 2017 - 2,228,061,851 2016 - 2,225,116,815 Retained earnings 154,234 152,759 Treasury stock - at cost (161,860) (159,050) Shares: 2017 - 1,296,121,555 2016 - 1,279,249,412 Accumulated other comprehensive income/(loss) (28,189) (29,398) Total IBM stockholders’ equity 18,419 18,246 Noncontrolling interests 125 146 Total equity 18,544 18,392 Total liabilities and equity $ 120,495 $ 117,470 (Amounts may not add due to rounding.) (The accompanying notes are an integral part of the financial