EX-13 6 a2233835zex-13.htm EX-13

Exhibit 13

 

Report of Financials

International Business Machines Corporation and Subsidiary Companies

 

MANAGEMENT DISCUSSION

 

 

Overview

 

26

Forward-Looking and Cautionary Statements

 

27

Management Discussion Snapshot

 

27

Description of Business

 

30

Year in Review

 

35

Prior Year in Review

 

56

Other Information

 

66

Looking Forward

 

66

Liquidity and Capital Resources

 

67

Critical Accounting Estimates

 

70

Currency Rate Fluctuations

 

73

Market Risk

 

74

Cybersecurity

 

75

Employees and Related Workforce

 

75

 

 

 

Report of Management

 

76

 

 

 

Report of Independent Registered Public Accounting Firm

 

77

 

 

 

CONSOLIDATED FINANCIAL STATEMENTS

 

 

Earnings

 

78

Comprehensive Income

 

79

Financial Position

 

80

Cash Flows

 

81

Changes in Equity

 

82

 

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

A

 Significant Accounting Policies

 

84

B

Accounting Changes

 

94

C

Acquisitions/Divestitures

 

96

D

Financial Instruments

 

100

E

Inventories

 

107

F

Financing Receivables

 

107

G

Property, Plant and Equipment

 

111

H

Investments and Sundry Assets

 

111

I

Intangible Assets Including Goodwill

 

111

J

Borrowings

 

112

K

Other Liabilities

 

115

L

Equity Activity

 

116

M

Contingencies and Commitments

 

119

N

Taxes

 

121

O

Research, Development and Engineering

 

124

P

Earnings Per Share of Common Stock

 

124

Q

Rental Expense and Lease Commitments

 

125

R

Stock-Based Compensation

 

125

S

Retirement-Related Benefits

 

128

T

Segment Information

 

142

U

Subsequent Events

 

146

 

 

 

Five-Year Comparison of Selected Financial Data

 

147

 

 

 

Selected Quarterly Data

 

148

 

 

 

Performance Graphs

 

149

 

 

 

Stockholder Information

 

150

 

25


 

Management Discussion

International Business Machines Corporation and Subsidiary Companies

 

OVERVIEW

 

The financial section of the International Business Machines Corporation (IBM or the company) 2017 Annual Report includes the Management Discussion, the Consolidated Financial Statements and the Notes to Consolidated Financial Statements. This Overview is designed to provide the reader with some perspective regarding the information contained in the financial section.

 

Organization of Information

 

·             The Management Discussion is designed to provide readers with an overview of the business and a narrative on the company’s financial results and certain factors that may affect its future prospects from the perspective of the company’s management. The “Management Discussion Snapshot,” beginning on page 27, presents an overview of the key performance drivers in 2017.

 

·             Beginning with the “Year in Review” on page 35, the Management Discussion contains the results of operations for each reportable segment of the business and a discussion of the company’s financial position and cash flows. Other key sections within the Management Discussion include: “Looking Forward” on page 66, and “Liquidity and Capital Resources” on page 67, which includes a description of management’s definition and use of free cash flow.

 

·             The Consolidated Financial Statements are presented on pages 78 through 83. These statements provide an overview of the company’s income and cash flow performance and its financial position.

 

·             The Notes follow the Consolidated Financial Statements. Among other items, the Notes contain the company’s accounting policies (pages 84 to 93), acquisitions and divestitures (pages 96 to 99), detailed information on specific items within the financial statements, certain contingencies and commitments (pages 119 to 121) and retirement-related plans information (pages 128 to 142).

 

·             The Consolidated Financial Statements and the Notes have been prepared in accordance with accounting principles generally accepted in the United States (GAAP).

 

·             On December 22, 2017, the Tax Cuts and Jobs Act (“U.S. tax reform”) was enacted in the U.S. This Act resulted in the company recognizing a fourth quarter provisional one-time charge of $5.5 billion. Refer to note N, “Taxes,” on pages 121 to 124 for additional information.

 

·             The references to “adjusted for currency” or “at constant currency” in the Management Discussion do not include operational impacts that could result from fluctuations in foreign currency rates. When the company refers to growth rates at constant currency or adjusts such growth rates for currency, it is done so that certain financial results can be viewed without the impact of fluctuations in foreign currency exchange rates, thereby facilitating period-to-period comparisons of its business performance. Financial results adjusted for currency are calculated by translating current period activity in local currency using the comparable prior year period’s currency conversion rate. This approach is used for countries where the functional currency is the local currency. Generally, when the dollar either strengthens or weakens against other currencies, the growth at constant currency rates or adjusting for currency will be higher or lower than growth reported at actual exchange rates. See “Currency Rate Fluctuations” on page 73 for additional information.

 

·             Within the financial statements and tables in this Annual Report, certain columns and rows may not add due to the use of rounded numbers for disclosure purposes. Percentages reported are calculated from the underlying whole-dollar numbers.

 

Operating (non-GAAP) Earnings

 

In an effort to provide better transparency into the operational results of the business, 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, intangible asset amortization expense resulting from basis differences on equity method investments, retirement-related costs, discontinued operations and related tax impacts. For the fourth-quarter and full-year 2017, operating (non-GAAP) earnings also exclude a one-time charge associated with the enactment of U.S. tax reform due to its unique and non-recurring nature. For acquisitions, operating (non-GAAP) earnings exclude the amortization of purchased intangible assets and acquisition-related charges such as in-process research and development, transaction costs, applicable 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 company’s acquisitions. All other spending for acquired companies is included in both earnings from continuing operations and in operating (non-GAAP) earnings.

 

Throughout the Management Discussion and Analysis, the impact of acquisitions over the prior 12-month period may be a driver of higher expense year to year. 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. Effective January 1, 2018, the company adopted the new Financial Accounting Standards Board (FASB) guidance on presentation of net periodic pension and nonpension postretirement benefits costs, and as a result, the company will align its presentation for operating (non-GAAP) earnings to conform to the FASB presentation of these costs included in the Consolidated Statement of Earnings. Operating (non-GAAP) earnings will no longer include amortization of prior service costs and will now include multi-employer plan costs. The full-year 2018 operating (non-GAAP) earnings per share expectation has been calculated under this new definition.

 

Overall, the company believes that providing investors with a view of operating earnings as described here provides increased transparency and clarity into both the operational results of the business and the performance of the company’s pension plans;

 

26



 

Management Discussion

International Business Machines Corporation and Subsidiary Companies

 

improves visibility to management decisions and their impacts on operational performance; enables better comparison to peer companies; and allows the company to provide a long-term strategic view of the business going forward. The company’s reportable segment financial results reflect operating earnings from continuing operations, consistent with the company’s management and measurement system.

 

FORWARD-LOOKING AND CAUTIONARY STATEMENTS

 

Certain statements contained in this Annual Report may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any forward-looking statement in this Annual Report speaks only as of the date on which it is made; the company assumes no obligation to update or revise any such statements. Forward-looking statements are based on the company’s current assumptions regarding future business and financial performance; these statements, by their nature, address matters that are uncertain to different degrees. Forward-looking statements involve a number of risks, uncertainties and other factors that could cause actual results to be materially different, as discussed more fully elsewhere in this Annual Report and in the company’s filings with the Securities and Exchange Commission (SEC), including the company’s 2017 Form 10-K filed on February 27, 2018.

 

MANAGEMENT DISCUSSION SNAPSHOT

 

($ and shares in millions except per share amounts)

 

 

 

 

 

 

 

Yr.-to-Yr.

 

 

 

 

 

 

 

Percent/

 

 

 

 

 

 

 

Margin

 

For the year ended December 31:

 

2017

 

2016

 

Change

 

Revenue

 

$

79,139

 

$

79,919

 

(1.0

)%*

Gross profit margin

 

45.8

%

47.9

%

(2.1

)pts.

Total expense and other (income)

 

$

24,827

 

$

25,964

 

(4.4

)%

Total expense and other (income)-to-revenue ratio

 

31.4

%

32.5

%

(1.1

)pts.

Income from continuing operations before income taxes

 

$

11,400

 

$

12,330

 

(7.5

)%

Provision for income taxes from continuing operations

 

$

5,642

**

$

449

 

NM

 

Income from continuing operations

 

$

5,758

**

$

11,881

 

(51.5

)%

Income from continuing operations margin

 

7.3

%

14.9

%

(7.6.

)pts

Loss from discontinued operations, net of tax

 

$

(5

)

$

(9

)

(44.7

)%

Net income

 

$

5,753

**

$

11,872

 

(51.5

)%

Earnings per share from continuing operations:

 

 

 

 

 

 

 

Assuming dilution

 

$

6.14

**

$

12.39

 

(50.4

)%

Consolidated earnings per share—assuming dilution

 

$

6.14

**

$

12.38

 

(50.4

)%

Weighted-average shares outstanding

 

 

 

 

 

 

 

Assuming dilution

 

937.4

 

958.7

 

(2.2

)%

Assets+

 

$

125,356

 

$

117,470

 

6.7

%

Liabilities+

 

$

107,631

 

$

99,078

 

8.6

%

Equity+

 

$

17,725

 

$

18,392

 

(3.6

)%


*       (1.3) percent adjusted for currency.

**Includes a one-time charge of $5.5 billion associated with the enactment of U.S. tax reform, or $5.84 of diluted earnings per share in 2017.

+       At December 31

NM—Not meaningful

 

The following table provides the company’s (non-GAAP) operating earnings for 2017 and 2016.

 

($ in millions except per share amounts)

 

 

 

 

 

 

 

Yr.-to-Yr.

 

 

 

 

 

 

 

Percent

 

For the year ended December 31:

 

2017

 

2016

 

Change

 

Net income as reported

 

$

5,753

**

$

11,872

 

(51.5

)%

Loss from discontinued operations, net of tax

 

(5

)

(9

)

(44.7

)

Income from continuing operations

 

$

5,758

**

$

11,881

 

(51.5

)%

Non-operating adjustments (net of tax)

 

 

 

 

 

 

 

Acquisition-related charges

 

718

 

735

 

(2.3

)

Non-operating retirement-related costs/(income)

 

983

 

415

 

137.0

 

U.S. tax reform one-time charge

 

5,475

 

 

NM

 

Operating (non-GAAP) earnings*

 

$

12,935

 

$

13,031

 

(0.7

)%

Diluted operating (non-GAAP) earnings per share

 

$

13.80

 

$

13.59

 

1.5

%

 


*       See page 49 for a more detailed reconciliation of net income to operating earnings.

**Includes a one-time charge of $5.5 billion associated with the enactment of U.S. tax reform in 2017.

NM—Not meaningful

 

27



 

Management Discussion

International Business Machines Corporation and Subsidiary Companies

 

In 2017, the company reported $79.1 billion in revenue and $5.8 billion in income from continuing operations, which includes a one-time charge of $5.5 billion associated with the enactment of U.S. tax reform. Operating (non-GAAP) earnings were $12.9 billion, which excludes the one-time charge. Diluted earnings per share from continuing operations were $6.14 as reported and $13.80 on an operating (non-GAAP) basis. The company generated $16.7 billion in cash from operations, $13.0 billion in free cash flow and delivered shareholder returns of $9.8 billion in gross common stock repurchases and dividends.

 

Total consolidated revenue in 2017 decreased 1.0 percent as reported and 1.3 percent year to year adjusted for currency. The company returned to revenue growth in the fourth quarter with an increase of 3.6 percent as reported and 0.9 percent adjusted for currency. Year-to-year revenue performance improved sequentially in the second half of 2017 compared to first-half performance. Contributors to the second-half improvement included: momentum in cloud and as-a-Service offerings, strong Systems growth across IBM Z, Power and Storage, improved software transactional performance and improved growth in Consulting.

 

In 2017, the company continued to deliver solid revenue growth in its strategic imperatives which generated $36.5 billion of revenue and grew 11 percent as reported and adjusted for currency, with double-digit growth in cloud, security and mobile, as the company continues to build new products and offerings and continuously reinvent its platforms. These are not separate businesses, they are offerings across the segments that address opportunities in analytics, cloud, security and mobile. The company is embedding cloud and cognitive capabilities across the business and the strategic imperatives reflect the progress being made in helping enterprise clients extract value from data and become digital businesses. Strategic imperatives growth in 2017 largely represented organic growth as the acquisitive content leveled on a year-to-year basis. Total Cloud revenue of $17.0 billion increased 24 percent as reported and adjusted for currency, with as-a-Service revenue up 31 percent as reported and adjusted for currency. The annual exit run rate for as-a-Service revenue increased to $10.3 billion in 2017 compared to $8.6 billion in 2016. Analytics revenue of $20.6 billion increased 6 percent as reported and adjusted for currency. Mobile revenue increased 19 percent as reported and adjusted for currency and Security revenue increased 55 percent (54 percent adjusted for currency), driven by security software solutions and strong demand for the pervasive encryption capabilities in the new z14 mainframe.

 

From a segment perspective, Cognitive Solutions revenue increased 1.5 percent as reported and 1 percent adjusted for currency with growth in Solutions Software and Transaction Processing Software as reported and adjusted for currency. Solutions Software performance included growth in annuity revenue, led by as-a-Service solutions. Global Business Services (GBS) revenue decreased 2.1 percent as reported and 2 percent adjusted for currency with declines across all lines of business. However, GBS strategic imperatives revenue increased 10 percent as reported and adjusted for currency year to year. The GBS business continued to shift resources and move into the high-value strategic areas of digital, cloud and analytics. Technology Services & Cloud Platforms revenue decreased 3.0 percent as reported and 3 percent adjusted for currency, primarily driven by a decline in Infrastructure Services. Within Technology Services & Cloud Platforms, strategic imperatives revenue was up 19 percent as reported and 18 percent adjusted for currency year to year, driven by hybrid cloud services, security and mobile. Systems revenue increased 6.2 percent as reported and 5 percent adjusted for currency driven by contribution from the z14 mainframe in the second half of 2017 and growth in Storage Systems.

 

From a geographic perspective, Americas revenue was essentially flat year to year as reported (decreased 1 percent adjusted for currency) with the U.S. decline of 1.4 percent, partially offset by growth in Latin America (5.1 percent as reported, 3 percent adjusted for currency) and Canada (4.9 percent as reported, 3 percent adjusted for currency). Europe/ Middle East/Africa (EMEA) revenue decreased 1.7 percent (3 percent adjusted for currency) driven primarily by declines in the UK (11.2 percent as reported, 7 percent adjusted for currency) and Germany (3.2 percent as reported, 6 percent adjusted for currency). Asia Pacific revenue decreased 2.0 percent (1 percent adjusted for currency) with a decline in China of 10.6 percent (10 percent adjusted for currency). Japan declined 1.1 percent as reported (increased 2 percent adjusted for currency) and India grew 8.6 percent (5 percent adjusted for currency).

 

The consolidated gross margin of 45.8 percent decreased 2.1 points year to year and reflects investments, mix and higher retirement-related costs, partially offset by benefits from productivity. The operating (non-GAAP) gross margin of 47.4 percent decreased 1.6 points versus the prior year primarily driven by the same factors, excluding the impact of higher non-operational retirement-related costs.

 

28



 

Management Discussion

International Business Machines Corporation and Subsidiary Companies

 

Total expense and other (income) decreased 4.4 percent in 2017 compared to the prior year. The year-to-year decrease was primarily the result of continued focus on efficiency in spending and reduced expenses for workforce transformation. This included a lower level of workforce rebalancing charges (3 points), lower operational spending (2 points) and a prior-year charge for real estate actions (1 point). The year-to-year decrease in expense and other (income) was partially offset by spending related to acquisitions completed in the prior 12 months (1 point) and a decline in intellectual property (IP) income (1 point). Total operating (non-GAAP) expense and other (income) decreased 6.2 percent year to year, driven primarily by the same factors.

 

Pre-tax income from continuing operations of $11.4 billion decreased 7.5 percent and the pre-tax margin was 14.4 percent, a decrease of 1.0 points versus 2016. The continuing operations effective tax rate for 2017 was 49.5 percent, which includes a one-time charge of $5.5 billion from the enactment of U.S. tax reform in December 2017, compared to 3.6 percent in 2016. The charge encompasses several elements, including taxes on accumulated overseas profits and the revaluation of certain deferred tax assets and liabilities. The tax rate in 2016 was primarily the result of a refund ($1.0 billion) of previously paid Japan taxes plus interest in the first quarter of 2016. Income from continuing operations of $5.8 billion decreased 51.5 percent, impacted by the one-time charge, and the net income margin was 7.3 percent, a decrease of 7.6 points versus 2016. Losses from discontinued operations, net of tax, were $5 million in 2017 compared to $9 million in 2016. Net income of $5.8 billion decreased 51.5 percent year to year. Operating (non-GAAP) pre-tax income from continuing operations of $13.9 billion decreased 0.5 percent year to year and the operating (non-GAAP) pre-tax margin from continuing operations was essentially flat at 17.5 percent. Operating (non-GAAP) income from continuing operations of $12.9 billion decreased 0.7 percent with an operating (non-GAAP) income margin from continuing operations of 16.3 percent, flat year to year. The operating (non-GAAP) effective tax rate from continuing operations in 2017 was 6.7 percent, which includes the effect of discrete tax benefits in the first and second quarters of 2017.

 

Diluted earnings per share from continuing operations of $6.14 in 2017, which includes the one-time charge associated with U.S. tax reform, decreased 50.4 percent year to year. In 2017, the company repurchased 27.2 million shares of its common stock at a cost of $4.3 billion and had $3.8 billion remaining in the current share repurchase authorization at December 31, 2017. Operating (non-GAAP) diluted earnings per share of $13.80 increased 1.5 percent versus 2016.

 

At December 31, 2017, the balance sheet remains strong, and with the newly reorganized financing entity, IBM Credit LLC, the company is better positioned to support the business over the long term. Cash and marketable securities at December 31, 2017 were $12.6 billion, an increase of $4.1 billion from December 31, 2016. Key drivers in the balance sheet and total cash flows were:

 

Total assets increased $7.9 billion ($3.0 billion adjusted for currency) from December 31, 2016 driven by:

 

·             Increases in cash and marketable securities ($4.1 billion), total receivables ($2.9 billion), retirement plan assets ($1.6 billion) and goodwill ($0.6 billion); partially offset by

 

·             Decreases in intangible assets ($0.9 billion).

 

Total liabilities increased $8.6 billion ($4.0 billion adjusted for currency) from December 31, 2016 driven by:

 

·             Increases in total debt ($4.7 billion) and taxes ($3.5 billion).

 

Total equity of $17.7 billion decreased $0.7 billion from December 31, 2016 as a result of:

 

·             Decreases from dividends ($5.5 billion) and share repurchases ($4.3 billion); partially offset by

 

·             Increases from net income ($5.8 billion), retirement-related benefit plans ($2.3 billion) and equity translation adjustments ($0.8 billion).

 

The company generated $16.7 billion in cash flow provided by operating activities, a decrease of $0.4 billion compared to 2016, driven primarily by performance-related declines within net income and an increase in cash tax payments, partially offset by an increase in cash provided by receivables. Net cash used in investing activities of $7.1 billion was $3.9 billion lower than the prior year, primarily driven by a decrease in cash used for acquisitions ($5.2 billion). Net cash used in financing activities of $6.4 billion increased $0.5 billion compared to 2016, driven primarily by increased gross common share repurchases ($0.8 billion).

 

29


 

Management Discussion

International Business Machines Corporation and Subsidiary Companies

 

In January 2018, the company disclosed that it is expecting GAAP earnings per share from continuing operations of at least $11.70 and operating (non-GAAP) earnings of at least $13.80 per diluted share for 2018. The company expects free cash flow to be approximately $12 billion in 2018. Free cash flow realization is expected to be in excess of 100 percent of GAAP net income. Refer to page 68 in the Liquidity and Capital Resources section for additional information on this non-GAAP measure. Refer to the Looking Forward section on pages 66 and 67 for additional information on the company’s expectations.

 

DESCRIPTION OF BUSINESS

 

Please refer to IBM’s Annual Report on Form 10-K filed with the SEC on February 27, 2018 for Item 1A. entitled “Risk Factors.”

 

The company creates value for clients through integrated solutions and products that leverage: data, information technology, deep expertise in industries and business processes, and a broad ecosystem of partners and alliances. IBM solutions typically create value by enabling new capabilities for clients that transform their businesses and help them engage with their customers and employees in new ways. These solutions draw from an industry-leading portfolio of consulting and IT implementation services, cloud and cognitive offerings, and enterprise systems and software which are all bolstered by one of the world’s leading research organizations.

 

Strategy

 

The IBM strategy starts with its clients.

 

As a uniquely integrated technology and services company, IBM helps clients change the way the world works by building smarter businesses.

 

IBM’s clients include many of the world’s most successful enterprises. These clients are at an inflection point, facing tremendous new opportunity and incredible competition. Digital technologies are unlocking unparalleled insight from previously inaccessible data. Work processes are being reimagined for speed and vastly smarter decision-making.

 

To win in these disruptive times requires that businesses learn — learn by extracting insights from their data and by applying those insights to how work is done. Smarter businesses do this faster and more effectively supported by IBM’s combination of Innovative TechnologyIndustry Expertise and Trust and Security.

 

The company’s capabilities include:

 

Cloud

 

Cloud is enabling the emergence of platforms through standardization, agility and innovation in both IT and business processes. Enterprise cloud is very different from consumer cloud: enterprises must bridge together mission-critical assets from on-premise systems with private cloud and public cloud. Hybrid cloud technology provides that bridge. All three must coexist and interoperate as a single platform.

 

The IBM Cloud is uniquely:

 

·        Built for all applications: Applications require data. That data is in on-premise systems, in private clouds and in the public cloud. The IBM Cloud enables one data platform that, regardless of data’s location, can run all applications. IBM’s hybrid cloud capabilities make this single platform operate seamlessly.

 

·        Artificial intelligence (AI)-ready: The IBM Cloud is built from the ground up to handle the demanding data and computational requirements of AI.

 

·        Secure to the Core: IBM has a long history of helping clients keep data and transactions secure. Security is even more important in an increasingly connected world, and IBM has extended this unparalleled level of security to the cloud. For example, IBM’s cybersecurity offerings act as a business immune system, with AI technology at its core, delivered from the IBM Cloud. These systems help to defend and respond to cyber-attacks across an organization’s data, applications, mobile and endpoint devices.

 

The IBM Cloud is delivered with leading edge technology, including:

 

·        Modern infrastructure: IBM’s systems, including servers, storage and operating system software, have been refreshed and redesigned for cloud and enterprise AI workloads. IBM’s new z14 is the world’s first system to offer pervasive encryption of data without requiring changes to applications, and with no performance degradation. With IBM’s systems, clients can build an IT infrastructure that is optimized for the scalability, reliability and growth that businesses need in today’s data-driven world.

 

·        Future infrastructure: The Q Network on the IBM Cloud enables clients around the world to explore quantum computing capabilities. IBM is the leader in quantum computing. Clients are signing on to explore how to overcome foreseen constraints in traditional computing models.

 

AI and Data

 

Artificial intelligence can help clients extract insight and make intelligent decisions from data. Like cloud, enterprise AI is very different from consumer AI. Enterprise applications deal with more complex use cases that benefit from expert knowledge, such as in healthcare or in the identification of business risk. Enterprise AI applications are trained by expert data, through data sets of all sizes and with more specialization than those in the general-knowledge consumer world. IBM AI — through the Watson platform:

 

·        Learns more from less data: The ability to extract deep insights from both large and small data sets is essential for enterprise applications. Watson excels at this and can produce more insights with less data than other AI systems. That means clients can get started more quickly and begin to gain experience deploying AI in the enterprise.

 

30



 

Management Discussion

International Business Machines Corporation and Subsidiary Companies

 

·        Protects clients’ insights: While Watson builds on cumulative experience and knowledge, IBM recognizes that data and insights are clients’ most important assets and a true competitive advantage. Watson is built to safeguard this type of information.

 

·        Reimagines your workflows: Watson has been built for — and trained in — areas requiring deep expertise. Watson brings AI to professionals so that work can be done more efficiently, and even more importantly, can improve as the systems learn from the data.

 

Solutions

 

Creating smarter businesses requires reimagining a company’s core processes — for example, in healthcare, managing risk or optimizing a supply chain. In addition to building solutions based on IBM’s experience, IBM is also creating a series of AI solutions — cognitive solutions — that embed artificial intelligence and data to change how work is done. Examples include:

 

·        Global Industry Platforms: provides cognitive, analytics, security and cloud technology in comprehensive industry-specific platforms to remove much of the cost and complexity of delivering core business functions. For example:  Banking, wealth management, and insurance are some of the areas poised for dramatic change by using cognitive and AI solutions from IBM Watson Financial Services.  Watson Health provides technology and expertise to empower leaders, advocates and influencers in health to accelerate discovery, make essential connections and gain confidence on their path to solving the world’s biggest health challenges.

 

·        Blockchain Solutions: IBM is working with clients and developers across multiple industries to use blockchain to transform how business is done in areas such as banking and financial services and supply chain. For example, blockchain technology can be used to digitize global trade processes, providing a more efficient and secure method of moving goods across borders and trading zones.

 

·        Watson IoT: includes both a cloud-based platform and industry solutions infused with AI, helping organizations mine intelligence from billions of connected devices.

 

Enterprise Services

 

Through Global Business Services and Global Technology Services, IBM has helped the world’s most successful enterprises transition from era to era. Using proven methods, IBM Services bring globally delivered outcomes using proven methods by focusing on:

 

·        Digital Reinvention for growth: a unique framework for business transformation focused on growth opportunities.

 

·        End-to-end Services integration: Global Technology Services brings the ability to connect previously disconnected parts of an organization. By embedding Watson into these mission critical services, new levels of quality, resiliency and automation are achieved.

 

·        Pragmatic journey to Cloud and AI: Global Business Services brings its deep experience when guiding clients through the journey to cloud and AI. Clients gain from the thorough understanding of technology and the best ways to utilize it.

 

As clients reinvent their businesses to be smarter, they need all of this to work together. This is what they expect from IBM, what they need from IBM and what sets IBM apart.

 

****

 

Responsible stewardship is an enduring principle that underscores all IBM endeavors. While IBM is constantly ushering in new technology it does so by:

 

·         Leading in data responsibility, ethics and transparency;

 

·         Preparing workforces of the world;

 

·         Continuing the company’s century-long commitment to diversity and inclusion, and

 

·         Remaining grounded in a set of enduring IBM Values:

 

·  Dedication to every client’s success

 

·  Innovation that matters — for our company and for the world

 

·  Trust and personal responsibility in all relationships

 

IBM has built a reputation and track record of trust with its clients for more than a century. IBM safeguards a client’s privacy, data and insights. For example, IBM was one of the first companies to appoint a Chief Privacy Officer, to develop and publish a genetics privacy policy, to be certified under the APEC Cross Borders Privacy Rules system and to sign the EU Data Protection Code of Conduct for Cloud Service Providers.

 

****

 

This is an era where being faster, more productive and lower cost is important but frankly not enough. To win, a business must be smarter: Being smarter means having deeper expertise, extracting better insights from data and being capable of rapidly changing the way in which one does work.

 

This is core to the strategy of IBM’s clients and is at the heart of the IBM strategy.

 

Business Model

 

The company’s business model is built to support two principal goals: helping enterprise clients to move from one era to the next by bringing together innovative technology and industry expertise, and providing long-term value to shareholders. The business model has been developed over time through strategic investments in capabilities and technologies that have long-term growth and profitability prospects based on the value they deliver to clients.

 

31



 

Management Discussion

International Business Machines Corporation and Subsidiary Companies

 

The company’s global capabilities include services, software, systems, fundamental research and related financing. The broad mix of businesses and capabilities are combined to provide integrated solutions and platforms to the company’s clients.

 

The business model is dynamic, adapting to the continuously changing industry and economic environment, including the company’s transformation into cloud and as-a-Service delivery models. The company continues to strengthen its position through strategic organic investments and acquisitions in higher-value areas, broadening its industry expertise and integrating AI into more of what the company offers. In addition, the company is transforming into a more agile enterprise to drive innovation and speed, as well as helping to drive productivity, which supports investments for participation in markets with significant long-term opportunity.

 

This business model, supported by the company’s financial model, has enabled the company to deliver strong earnings, cash flows and returns to shareholders over the long term.

 

Business Segments and Capabilities

 

The company’s major operations consist of five business segments: Cognitive Solutions, Global Business Services, Technology Services & Cloud Platforms, Systems and Global Financing.

 

Cognitive Solutions comprises a broad portfolio of capabilities that help IBM’s clients to identify actionable new insights and inform decision-making for competitive advantage. Leveraging IBM’s research, technology and industry expertise, this business delivers a full spectrum of capabilities, from descriptive, predictive and prescriptive analytics to cognitive systems. Cognitive Solutions includes Watson, the first commercially available AI platform that has the ability to interact in natural language, process vast amounts of big data, and learn from interactions with people and systems. These solutions are provided through the most contemporary delivery methods including through cloud environments and “as-a-Service” models. Cognitive Solutions consists of Solutions Software and Transaction Processing Software.

 

Cognitive Solutions Capabilities

 

Solutions Software: provides the basis for many of the company’s strategic areas. IBM has established the world’s deepest portfolio of data and analytics solutions, including analytics and data management platforms, cloud data services, talent management solutions, and solutions tailored by industry. Watson Platform, Watson Health and Watson Internet of Things (IoT) are certain capabilities included in Solutions Software. IBM’s world-class security platform delivers integrated security intelligence across clients’ entire operations, including their cloud, applications, networks and data, helping them to prevent, detect and remediate potential threats.

 

Transaction Processing Software: includes software that primarily runs mission-critical systems in industries such as banking, airlines and retail. Most of this software is on-premise and annuity in nature.

 

Global Business Services (GBS) provides clients with consulting, application management services and business process services. These professional services deliver value and innovation to clients through solutions which leverage industry, technology and business strategy and process expertise. GBS is the digital reinvention partner for IBM clients, combining industry knowledge, functional expertise, and applications with the power of business design and cognitive and cloud technologies. The full portfolio of GBS services is backed by its globally integrated delivery network and integration with technologies, solutions and services from IBM units including IBM Watson, IBM Cloud, IBM Research, and Global Technology Services.

 

In 2017, GBS deployed a new operating model designed to address specific client digital transformation imperatives and take full advantage of IBM and GBS’s competitive differentiators in industry, cognitive and cloud. The operating model features Digital Strategy and iX, Cognitive Process Transformation and Cloud Application Innovation. To bring value at scale to clients around the world, GBS has implemented global service lines within each of the three focus areas, which are populated with new practices staffed by practitioners with deep domain skills and industry expertise.

 

GBS Capabilities

 

Consulting: provides business consulting services focused on bringing to market solutions that help clients shape their digital blueprints and customer experiences, define their cognitive operating models, unlock the potential in all data to improve decision-making, set their next-generation talent strategies and create new technology architectures in a cloud-centric world.

 

Application Management: delivers system integration, application management, maintenance and support services for packaged software, as well as custom and legacy applications. Value is delivered through advanced capabilities in areas such as security and privacy, application testing and modernization, cloud application migration and automation.

 

Global Process Services: delivers finance, procurement, talent and engagement, and industry-specific business process outsourcing services. These services deliver improved business results to clients through our consult-to-operate model which includes the strategic change and/or operation of the client’s processes, applications and infrastructure. GBS is redefining process services for both growth and efficiency through the application of the power of cognitive technologies like Watson, as well as the IoT, blockchain and deep analytics.

 

Technology Services & Cloud Platforms provides comprehensive IT infrastructure services creating business value for clients. By leveraging insights and experience drawn from IBM’s global scale, skills and technology, with applied innovation from IBM Research, clients gain access to leading-edge, high-quality services with improved outcomes in productivity, flexibility and cost.

 

32



 

Management Discussion

International Business Machines Corporation and Subsidiary Companies

 

Technology Services & Cloud Platforms Capabilities

 

Infrastructure Services: delivers a portfolio of cloud, project-based, outsourcing and other managed services focused on clients’ enterprise IT infrastructure environments to enable digital transformation and deliver improved quality, flexibility, risk management and financial value. The portfolio includes a comprehensive set of hybrid cloud services and solutions to assist clients in building and running enterprise IT environments that utilize public and private clouds and traditional IT. The IBM Cloud Platform offers leading-edge services to developers and IBM’s Cloud Infrastructure-as-a-Service covers a wide variety of workloads with high-quality performance. These offerings integrate long-standing expertise in service management and technology with the ability to utilize the power of new technologies, drawn from across IBM’s businesses and ecosystem partners. The portfolio is built around a key set of predictive and proactive solutions addressing systems, mobility, resiliency, networking, cloud and security. The company’s capabilities, including IBM Cloud, cognitive computing and hybrid cloud implementation, provide high-performance, end-to-end innovation and an improved ability to achieve business objectives.

 

Technical Support Services: delivers comprehensive support services to maintain and improve the availability of clients’ IT infrastructures. These offerings include maintenance for IBM products and other technology platforms, as well as software and solution support, drawing on innovative technologies and leveraging the Watson platform’s predictive capabilities.

 

Integration Software: delivers industry-leading hybrid cloud solutions that empower clients to achieve rapid innovation, hybrid integration, and process transformation with choice and consistency across public, dedicated and local cloud environments, leveraging the IBM Platform-as-a-Service solution. Integration Software offerings and capabilities help clients address the digital imperatives to create, connect and optimize their applications, data and infrastructure on their journey to become cognitive businesses.

 

Systems provides clients with innovative infrastructure platforms to help meet the new requirements of hybrid cloud and cognitive workloads. Approximately half of Systems Hardware’s server and storage sales transactions are through the company’s business partners, with the balance direct to end-user clients. IBM Systems also designs advanced semiconductor and systems technology in collaboration with IBM Research, primarily for use in the company’s systems.

 

Systems Capabilities

 

Servers: a range of high-performance systems designed to address computing capacity, security and performance needs of businesses, hyperscale cloud service providers and scientific computing organizations. The portfolio includes IBM Z, a trusted enterprise platform for integrating data, transactions and insight, and Power Systems, a system designed from the ground up for big data and analytics, optimized for scale-out cloud and Linux, and delivering open innovation with OpenPOWER.

 

Storage: data storage products and solutions that allow clients to retain and manage rapidly growing, complex volumes of digital information and to fuel data-centric cognitive applications. These solutions address critical client requirements for information retention and archiving, security, compliance and storage optimization including data deduplication, availability and virtualization. The portfolio consists of a broad range of software-defined storage solutions, flash storage, disk and tape storage solutions.

 

Operating Systems Software: The company’s z/OS is a security-rich, scalable, high-performance enterprise operating system for IBM Z. Power Systems offers a choice of AIX or Linux operating systems. These operating systems leverage POWER architecture to deliver secure, reliable and high performing enterprise-class workloads across a breadth of server offerings.

 

Global Financing encompasses two primary businesses: financing, primarily conducted through IBM Credit LLC (IBM Credit), and remanufacturing and remarketing. In 2017, the company reorganized its client and commercial financing business as a wholly owned subsidiary, IBM Credit LLC, and it began accessing the capital markets directly in September 2017. IBM Credit, through its financing solutions, facilitates IBM clients’ acquisition of information technology systems, software and services in the areas where the company has the expertise. The financing arrangements are predominantly for products or services that are critical to the end users’ business operations. The company conducts a comprehensive credit evaluation of its clients prior to extending financing. As a captive financier, Global Financing has the benefit of both deep knowledge of its client base and a clear insight into the products and services financed. These factors allow the business to effectively manage two of the major risks associated with financing, credit and residual value, while generating strong returns on equity. Global Financing also maintains a long-term partnership with the company’s clients through various stages of the IT asset life cycle—from initial purchase and technology upgrades to asset disposition decisions.

 

Global Financing Capabilities

 

Client Financing: lease, installment payment plan and loan financing to end users and internal clients for terms up to seven years. Assets financed are primarily new and used IT hardware, software and services where the company has expertise. Internal financing is predominantly in support of Technology Services & Cloud Platforms’ long-term client service contracts. All internal financing arrangements are at arm’s-length rates and are based upon market conditions.

 

Commercial Financing: short-term working capital financing to suppliers, distributors and resellers of IBM and OEM products and services. This includes internal activity where Global Financing factors a selected portion of the company’s accounts receivable primarily for cash management purposes, at arm’s-length rates.

 

33



 

Management Discussion

International Business Machines Corporation and Subsidiary Companies

 

Remanufacturing and Remarketing: assets include used equipment returned from lease transactions, or used and surplus equipment acquired internally or externally. These assets may be refurbished or upgraded and sold or leased to new or existing clients both externally or internally. Externally remarketed equipment revenue represents sales or leases to clients and resellers. Internally remarketed equipment revenue primarily represents used equipment that is sold internally to Systems and Technology Services & Cloud Platforms. Systems may also sell the equipment that it purchases from Global Financing to external clients.

 

IBM Worldwide Organizations

 

The following worldwide organizations play key roles in IBM’s delivery of value to its clients:

 

·             Global Markets

 

·             Research, Development and Intellectual Property

 

Global Markets

 

IBM has a global presence, operating in more than 175 countries with a broad-based geographic distribution of revenue. The company’s Global Markets organization manages IBM’s global footprint, working closely with dedicated country-based operating units to serve clients locally. These country teams have client relationship managers who lead integrated teams of consultants, solution specialists and delivery professionals to enable clients’ growth and innovation.

 

By complementing local expertise with global experience and digital capabilities, IBM builds deep and broad-based client relationships. This local management focus fosters speed in supporting clients, addressing new markets and making investments in emerging opportunities. The Global Markets organization serves clients with expertise in their industry as well as through the products and services that IBM and partners supply. IBM is also expanding its reach to new and existing clients through digital marketplaces, digital sales and local Business Partner resources.

 

Research, Development and Intellectual Property

 

IBM’s research and development (R&D) operations differentiate the company from its competitors. IBM annually invests 7 to 8 percent of total revenue for R&D, focusing on high-growth, high-value opportunities. IBM Research works with clients and the company’s business units through global labs on near-term and mid-term innovations. It delivers many new technologies to IBM’s portfolio every year and helps clients address their most difficult challenges. IBM Research scientists are conducting pioneering work in artificial intelligence, quantum computing, blockchain, security, cloud, nanotechnology, silicon and post-silicon computing architectures and more—applying these technologies across industries including healthcare, IoT, education and financial services.

 

In 2017, for the 25th consecutive year, IBM was awarded more U.S. patents than any other company. IBM’s 9,043 patents awarded in 2017 represent a diverse range of inventions in artificial intelligence, cloud, cybersecurity and other strategic growth areas for the company.

 

The company continues to actively seek IP protection for its innovations, while increasing emphasis on other initiatives designed to leverage its IP leadership. Some of IBM’s technological breakthroughs are used exclusively in IBM products, while others are licensed and may be used in IBM products and/or the products of the licensee. As part of its business model, the company licenses certain of its intellectual property, which is high-value technology, but may be in more mature markets. The licensee drives the future development of the IP and ultimately expands the customer base. This would generate IP income for the company both upon licensing, and with any ongoing royalty arrangements between it and the licensee. While the company’s various proprietary IP rights are important to its success, IBM believes its business as a whole is not materially dependent on any particular patent or license, or any particular group of patents or licenses. IBM owns or is licensed under a number of patents, which vary in duration, relating to its products.

 

34


 

Management Discussion

International Business Machines Corporation and Subsidiary Companies

 

YEAR IN REVIEW

 

Results of Continuing Operations

 

Segment Details

 

The following is an analysis of the 2017 versus 2016 reportable segment results. The table below presents each reportable segment’s external revenue and gross margin results. Segment pre-tax income includes transactions between segments that are intended to reflect an arm’s-length transfer price and excludes certain unallocated corporate items.

 

($ in millions)

 

 

 

 

 

 

 

Yr.-to-Yr

 

Yr.-to-Yr.

 

 

 

 

 

 

 

Percent/

 

Percent Change

 

 

 

 

 

 

 

Margin

 

Adjusted for

 

For the year ended December 31:

 

2017

 

2016

 

Change

 

Currency

 

Revenue

 

 

 

 

 

 

 

 

 

Cognitive Solutions

 

$

18,453

 

$

18,187

 

1.5

%

1.0

%

Gross margin

 

78.6

%

81.9

%

(3.2

)pts.

 

 

Global Business Services

 

16,348

 

16,700

 

(2.1

)%

(1.8

)%

Gross margin

 

25.2

%

27.0

%

(1.8

)pts.

 

 

Technology Services & Cloud Platforms

 

34,277

 

35,337

 

(3.0

)%

(3.4

)%

Gross margin

 

40.4

%

41.9

%

(1.5

)pts.

 

 

Systems

 

8,194

 

7,714

 

6.2

%

5.4

%

Gross margin

 

53.2

%

55.7

%

(2.5

)pts.

 

 

Global Financing

 

1,696

 

1,692

 

0.3

%

(0.7

)%

Gross margin

 

29.3

%

38.7

%

(9.4

)pts.

 

 

Other

 

171

 

289

 

(40.7

)%

(41.1

)%

Gross margin

 

(640.3

)%

(293.9

)%

(346.4

)pts.

 

 

Total consolidated revenue

 

$

79,139

 

$

79,919

 

(1.0

)%

(1.3

)%

 

 

 

 

 

 

 

 

 

 

Total consolidated gross profit

 

$

36,227

 

$

38,294

 

(5.4

)%

 

 

Total consolidated gross margin

 

45.8

%

47.9

%

(2.1

)pts.

 

 

Non-operating adjustments

 

 

 

 

 

 

 

 

 

Amortization of acquired intangible assets

 

449

 

494

 

(9.2

)%

 

 

Retirement-related costs/(income)

 

799

 

316

 

153.2

%

 

 

Operating (non-GAAP) gross profit

 

$

37,475

 

$

39,104

 

(4.2

)%

 

 

Operating (non-GAAP) gross margin

 

47.4

%

48.9

%

(1.6

)pts.

 

 

 

35



 

Management Discussion

International Business Machines Corporation and Subsidiary Companies

 

Cognitive Solutions

 

($ in millions)

 

 

 

 

 

 

 

 

 

Yr.-to-Yr.

 

 

 

 

 

 

 

Yr.-to-Yr.

 

Percent Change

 

 

 

 

 

 

 

Percent

 

Adjusted for

 

For the year ended December 31:

 

2017

 

2016

 

Change

 

Currency

 

Cognitive Solutions external revenue

 

$

18,453

 

$

18,187

 

1.5

%

1.0

%

Solutions Software

 

$

12,806

 

$

12,589

 

1.7

%

1.3

%

Transaction Processing Software

 

5,647

 

5,598

 

0.9

 

0.3

 

 

Cognitive Solutions revenue of $18,453 million grew 1.5 percent as reported and 1 percent adjusted for currency in 2017 compared to the prior year. On an as-reported and constant currency basis, there was growth in Solutions Software, which addresses many of the company’s strategic areas, while Transaction Processing Software was relatively flat year to year.

 

Solutions Software revenue of $12,806 million grew 1.7 percent as reported (1 percent adjusted for currency) compared to the prior year led by key areas including security, industry platforms and Watson offerings, as the company continued to embed cognitive into its security offerings and drive vertical solutions. In 2017, the company continued to expand the market for Watson Health which had strong double-digit revenue growth as reported and adjusted for currency compared to the prior year. Most of the strategic areas within Solutions Software have a Software-as-a-Service (SaaS) delivery model and the company continues to build scale in these areas. For the full year, there was year-to-year growth in annuity revenue as reported and at constant currency with strong double-digit growth in SaaS revenue as reported and adjusted for currency.

 

Transaction Processing Software revenue of $5,647 million grew 0.9 percent as reported (flat adjusted for currency) in 2017 compared to the prior year. In the second half of 2017, there was improved revenue performance with growth both sequentially versus the first half 2017 and year to year as reported and adjusted for currency reflecting clients’ ongoing long-term commitment and the value the company’s platform provides to them. This portfolio predominately runs on-premise mission critical workloads running on IBM Z in industries such as banking, airlines and retail.

 

Cognitive Solutions total strategic imperatives revenue of $12.0 billion grew 2 percent year to year as reported and adjusted for currency. Cloud revenue of $2.5 billion grew 19 percent as reported and adjusted for currency, with an as-a-Service exit run rate of $2.1 billion.

 

($ in millions)

 

 

 

 

 

 

 

Yr.-to-Yr.

 

 

 

 

 

 

 

Percent/

 

 

 

 

 

 

 

Margin

 

For the year ended December 31:

 

2017

 

2016

 

Change

 

Cognitive Solutions

 

 

 

 

 

 

 

External gross profit

 

$

14,510

 

$

14,890

 

(2.6

)%

External gross profit margin

 

78.6

%

81.9

%

(3.2

)pts.

Pre-tax income

 

$

6,817

 

$

6,352

 

7.3

%

Pre-tax margin

 

32.3

%

30.5

%

1.8

pts.

 

Cognitive Solutions gross profit margin decreased 3.2 points to 78.6 percent in 2017 compared to the prior year. The gross profit margin decline year to year was driven by continued investment and an increasing mix toward SaaS which has a different margin profile than traditional software delivery offerings and is not yet at scale. Margins were impacted by a higher level of royalty cost associated with IP licensing agreements in 2017 compared to the prior year.

 

Pre-tax income of $6,817 million increased 7.3 percent compared to the prior year with a pre-tax margin improvement of 1.8 points to 32.3 percent as the company continues to invest to embed cognitive into offerings, scale platforms and build high-value vertical solutions.

 

36



 

Management Discussion

International Business Machines Corporation and Subsidiary Companies

 

Global Business Services

 

($ in millions)

 

 

 

 

 

 

 

 

 

Yr.-to-Yr.

 

 

 

 

 

 

 

Yr.-to-Yr.

 

Percent Change

 

 

 

 

 

 

 

Percent

 

Adjusted for

 

For the year ended December 31:

 

2017

 

2016

 

Change

 

Currency

 

Global Business Services external revenue

 

$

16,348

 

$

16,700

 

(2.1

)%

(1.8

)%

Consulting

 

$

7,262

 

$

7,332

 

(1.0

)%

(0.4

)%

Global Process Services

 

1,265

 

1,388

 

(8.8

)

(9.0

)

Application Management

 

7,821

 

7,980

 

(2.0

)

(1.9

)

 

Global Business Services revenue of $16,348 million decreased 2.1 percent as reported and 2 percent adjusted for currency in 2017 compared to the prior year. The company continues to transform this business and shift its practices to digital, cognitive and cloud. GBS signings grew each quarter of the year as reported and adjusted for currency, and strategic imperatives revenue for the full year 2017 had strong growth year to year as reported and adjusted for currency. However, this growth continues to be more than offset by declines in the more traditional areas that the company is shifting away from such as large ERP and on-premise enterprise application implementation.

 

Consulting revenue of $7,262 million decreased 1.0 percent year to year as reported (flat adjusted for currency). There was improved performance in the second half of 2017 with revenue growth both sequentially versus the first half of 2017 and year to year as reported and adjusted for currency. The improvement was driven by the company’s digital strategy and iX platform, and a return to growth as reported and at constant currency in the Consulting backlog. Global Process Services (GPS) revenue of $1,265 million decreased 8.8 percent as reported (9 percent adjusted for currency) compared to the prior year. Application Management revenue of $7,821 million decreased 2.0 percent as reported (2 percent adjusted for currency). The company continues to help clients implement new cloud-centric architectures in their critical applications. However, overall revenue performance in Application Management was impacted by certain areas that are not as differentiated and are experiencing pricing pressure, as well as the successful completion of some large contracts.

 

Within GBS, total strategic imperatives revenue of $9.8 billion grew 10 percent as reported and adjusted for currency year to year. Cloud revenue of $4.0 billion grew 34 percent as reported (35 percent adjusted for currency), with an as-a-Service exit run rate of $1.3 billion.

 

($ in millions)

 

 

 

 

 

 

 

Yr.-to-Yr.

 

 

 

 

 

 

 

Percent/

 

 

 

 

 

 

 

Margin

 

For the year ended December 31:

 

2017

 

2016

 

Change

 

Global Business Services

 

 

 

 

 

 

 

External gross profit

 

$

4,112

 

$

4,501

 

(8.6

)%

External gross profit margin

 

25.2

%

27.0

%

(1.8

)pts.

Pre-tax income

 

$

1,401

 

$

1,732

 

(19.1

)%

Pre-tax margin

 

8.4

%

10.1

%

(1.7

)pts.

 

GBS gross profit margin decreased 1.8 points to 25.2 percent year to year and pre-tax income of $1,401 million decreased 19.1 percent year to year. The pre-tax margin declined 1.7 points to 8.4 percent. Pre-tax income performance for the year included a lower level of charges related to workforce rebalancing and real estate actions as compared to the prior year.

 

GBS margin has been impacted by investments to drive transformation and reflects pricing and profit pressure in the more traditional IT services. The company will continue to focus on improving productivity with a streamlined practice model and new project management approaches.

 

37


 

Management Discussion

International Business Machines Corporation and Subsidiary Companies

 

Technology Services & Cloud Platforms

 

($ in millions)

 

 

 

 

 

 

 

 

 

Yr.-to-Yr.

 

 

 

 

 

 

 

Yr.-to-Yr.

 

Percent Change

 

 

 

 

 

 

 

Percent

 

Adjusted for

 

For the year ended December 31:

 

2017

 

2016

 

Change

 

Currency

 

Technology Services & Cloud Platforms external revenue

 

$

34,277

 

$

35,337

 

(3.0

)%

(3.4

)%

Infrastructure Services

 

$

22,690

 

$

23,543

 

(3.6

)%

(4.1

)%

Technical Support Services

 

7,196

 

7,272

 

(1.0

)

(1.5

)

Integration Software

 

4,390

 

4,521

 

(2.9

)

(3.4

)

 

Technology Services & Cloud Platforms revenue of $34,277 million decreased 3.0 percent as reported and 3 percent adjusted for currency in 2017 compared to the prior year. For the full year, there were declines across all lines of business, however, within the segment there was strong revenue growth year to year in cloud, analytics, mobile and security, as reported and adjusted for currency.

 

Infrastructure Services revenue of $22,690 million declined 3.6 percent as reported (4 percent adjusted for currency) compared to the prior year. In Infrastructure Services, the business model is to deliver productivity to clients and then grow by expanding the scope of work and adding new clients to the platform. The revenue decline in 2017 reflects the continued impact associated with contract conclusions at the end of 2016 and the shift away from certain lower value work within this business. During 2017, there were some substantial new transactions signed to implement hybrid cloud environments. Technical Support Services revenue of $7,196 million decreased 1.0 percent as reported (2 percent adjusted for currency) year to year. Within this line of business, the company is focused on growing its multi-vendor support services which provide clients with a single source of expertise and visibility across different vendor solutions. Integration Software full-year revenue of $4,390 million decreased 2.9 percent as reported (3 percent adjusted for currency) compared to the prior year. While the annuity base remains relatively stable and there was strong double-digit growth in SaaS offerings, transactional revenue declined year to year as more of this portfolio shifts to the IBM Cloud.

 

Within Technology Services & Cloud Platforms, strategic imperatives revenue of $10.4 billion grew 19 percent year to year as reported (18 percent adjusted for currency). Cloud revenue of $7.1 billion grew 21 percent as reported (20 percent adjusted for currency), with an as-a-Service exit run rate of $6.9 billion.

 

($ in millions)

 

 

 

 

 

 

 

Yr.-to-Yr.

 

 

 

 

 

 

 

Percent/

 

 

 

 

 

 

 

Margin

 

For the year ended December 31:

 

2017

 

2016

 

Change

 

Technology Services & Cloud Platforms

 

 

 

 

 

 

 

External Technology Services gross profit

 

$

10,256

 

$

10,969

 

(6.5

)%

External Technology Services gross profit margin

 

34.3

%

35.6

%

(1.3

) pts.

External Integration Software gross profit

 

$

3,587

 

$

3,830

 

(6.4

)%

External Integration Software gross profit margin

 

81.7

%

84.7

%

(3.0

) pts.

External total gross profit

 

$

13,842

 

$

14,800

 

(6.5

)%

External total gross profit margin

 

40.4

%

41.9

%

(1.5

) pts.

Pre-tax income

 

$

4,344

 

$

4,707

 

(7.7

)%

Pre-tax margin

 

12.4

%

13.1

%

(0.6

) pts.

 

Technology Services & Cloud Platforms gross profit margin decreased 1.5 points year to year in 2017 to 40.4 percent driven primarily by large contract conclusions, delays in productivity improvements, mix from Integration Software and investments in cloud. The current-year margin reflects savings from the prior-year workforce transformation action. Pre-tax income of $4,344 million decreased 7.7 percent. The pre-tax margin declined 0.6 points year to year to 12.4 percent. The year-to-year performance in 2017 compared to the prior year includes a lower level of charges related to workforce and real estate actions.

 

The company continues to focus on scaling its platforms, delivering productivity through automation, infusing AI into its offerings and investing to expand its cloud infrastructure. There are approximately 60 cloud centers across 19 countries providing clients with flexibility in how and where they store their data. However, these investments to transform the business continued to impact margins in 2017.

 

38



 

Management Discussion

International Business Machines Corporation and Subsidiary Companies

 

Services Backlog and Signings

 

($ in billions)

 

 

 

 

 

 

 

 

 

Yr.-to-Yr.

 

 

 

 

 

 

 

Yr.-to-Yr.

 

Percent Change

 

 

 

 

 

 

 

Percent

 

Adjusted for

 

At December 31:

 

2017

 

2016

 

Change

 

Currency

 

Total backlog

 

$

121.0

 

$

118.7

 

1.9

%

(3.4

)%

 

The estimated total services backlog at December 31, 2017 was $121 billion, an increase of 1.9 percent as reported (decrease of 3 percent adjusted for currency). There was growth in Global Technology Services backlog as reported, but a decrease year to year adjusted for currency. GBS backlog decreased year to year as reported and adjusted for currency compared to the December 31, 2016 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 management’s initial estimate of the value of a client’s commitment under a services contract. There are no third-party standards or requirements governing the calculation of signings. The calculation used by management involves estimates and judgments to gauge the extent of a client’s commitment, including the type and duration of the agreement, and the presence of termination charges or wind-down costs.

 

Signings include Infrastructure 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 the maintenance contracts tend to be more steady state, where revenues equal renewals.

 

Contract portfolios purchased in an acquisition are treated as positive backlog adjustments provided those contracts meet the company’s requirements for initial signings. A new signing will be recognized if a new services agreement is signed incidental or coincidental to an acquisition or divestiture.

 

($ in millions)

 

 

 

 

 

 

 

 

 

Yr.-to-Yr.

 

 

 

 

 

 

 

Yr.-to-Yr.

 

Percent Change

 

 

 

 

 

 

 

Percent

 

Adjusted for

 

For the year ended December 31:

 

2017

 

2016

 

Change

 

Currency

 

Total signings

 

$

42,869

 

$

44,645

 

(4.0

)%

(4.4

)%

 

Systems

 

($ in millions)

 

 

 

 

 

 

 

 

 

Yr.-to-Yr.

 

 

 

 

 

 

 

Yr.-to-Yr.

 

Percent Change

 

 

 

 

 

 

 

Percent

 

Adjusted for

 

For the year ended December 31:

 

2017

 

2016

 

Change

 

Currency

 

Systems external revenue

 

$

8,194

 

$

7,714

 

6.2

%

5.4

%

Systems Hardware

 

$

6,494

 

$

5,926

 

9.6

%

8.6

%

IBM Z

 

 

 

 

 

24.0

 

22.3

 

Power Systems

 

 

 

 

 

(3.7

)

(4.3

)

Storage Systems

 

 

 

 

 

7.7

 

7.0

 

Operating Systems Software

 

1,701

 

1,788

 

(4.9

)

(5.3

)

 

Systems revenue of $8,194 million grew 6.2 percent year to year as reported (5 percent adjusted for currency) in 2017 driven by a combination of strong z14 market acceptance and four consecutive quarters of growth as reported and adjusted for currency in Storage Systems. Systems Hardware revenue of $6,494 million grew 9.6 percent as reported (9 percent adjusted for currency) with growth in IBM Z and Storage Systems partially offset by a decrease in Power Systems, as reported and adjusted for currency. Operating Systems Software revenue of $1,701 million decreased 4.9 percent as reported (5 percent adjusted for currency) compared to the prior year.

 

Within Systems Hardware, IBM Z revenue grew 24.0 percent as reported (22 percent adjusted for currency) year to year, driven by the successful launch of the z14 mainframe in the third quarter of 2017. This success is due to the strong demand for technology that helps address the growing threat of global data breaches and the need for clients to operate within regulated environments. With unprecedented encryption capabilities, there has been strong demand for the z14 across a mix of industries and geographies since its introduction. The company’s mainframe is a franchise that continues to deliver a high value, secure and scalable platform that clients rely on for their mission critical applications.

 

39



 

Management Discussion

International Business Machines Corporation and Subsidiary Companies

 

Power Systems revenue decreased 3.7 percent as reported (4 percent adjusted for currency) year to year with revenue growth in the company’s high-end portfolio more than offset by declines in mid-range and low-range products, as reported and adjusted for currency. Overall performance reflects the company’s continued shift to a growing Linux market while continuing to serve a high-value, but declining UNIX market. Linux revenue grew year to year as reported and adjusted for currency, while UNIX revenue declined as reported and adjusted for currency in 2017. In the fourth quarter of 2017, Power Systems revenue returned to growth as reported and adjusted for currency, and the company released its next generation POWER9 system in the low-end Linux portfolio. With the new POWER9 processor, these systems bring unprecedented speed to AI workloads.

 

Storage Systems revenue increased by 7.7 percent as reported (7 percent adjusted for currency) year to year. With the company’s most competitive storage offerings in some time, there was growth as reported and adjusted for currency in each quarter of the year. All-flash array offerings were a catalyst for Storage Systems growth in 2017 with strong double-digit growth as reported and adjusted for currency throughout the year.

 

Within Systems, total strategic imperatives revenue of $4.3 billion grew 28 percent year to year as reported (26 percent adjusted for currency). Cloud revenue of $3.4 billion grew 26 percent as reported (25 percent adjusted for currency).

 

($ in millions)

 

 

 

 

 

 

 

Yr.-to-Yr.

 

 

 

 

 

 

 

Percent/

 

 

 

 

 

 

 

Margin

 

For the year ended December 31:

 

2017

 

2016

 

Change

 

Systems

 

 

 

 

 

 

 

External Systems Hardware gross profit

 

$

2,894

 

$

2,720

 

6.4

%

External Systems Hardware gross profit margin

 

44.6

%

45.9

%

(1.3

) pts.

External Operating Systems Software gross profit

 

$

1,469

 

$

1,577

 

(6.9

)%

External Operating Systems Software gross profit margin

 

86.4

%

88.2

%

(1.8

) pts.

External total gross profit

 

$

4,363

 

$

4,298

 

1.5

%

External total gross profit margin

 

53.2

%

55.7

%

(2.5

) pts.

Pre-tax income

 

$

1,135

 

$

933

 

21.6

%

Pre-tax margin

 

12.7

%

11.0

%

1.7

pts.

 

The Systems gross profit margin decreased 2.5 points to 53.2 percent in 2017 compared to the prior year. The overall decrease year to year was driven by margin declines across all product lines, partially offset by product mix primarily toward the higher margin IBM Z, reflecting product cycle dynamics.

 

Pre-tax income of $1,135 million grew 21.6 percent and pre-tax margin increased 1.7 points year to year to 12.7 percent driven by the strong performance in Systems Hardware.

 

Overall Systems performance in 2017 reflected a successful repositioning of the business through continuous reinvention of core platforms and expansion into new workloads.

 

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 strong returns on equity. Global Financing also 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 and used equipment purchased externally. 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.

 

Results of Operations

 

($ in millions)

 

 

 

 

 

 

 

Yr.-to-Yr.

 

 

 

 

 

 

 

Percent

 

For the year ended December 31:

 

2017

 

2016

 

Change

 

External revenue

 

$

1,696

 

$

1,692

 

0.3

%

Internal revenue

 

1,471

 

1,802

 

(18.4

)

Total revenue

 

$

3,168

 

$

3,494

 

(9.3

)%

Pre-tax income

 

$

1,279

 

$

1,656

 

(22.7

)%

 

40


 

Management Discussion

International Business Machines Corporation and Subsidiary Companies

 

In 2017, Global Financing delivered external revenue of $1,696 million and total revenue of $3,168 million, with a decline in gross margin of 6.7 points. Total pre-tax income of $1,279 million decreased 22.7 percent compared to 2016 and return on equity increased 2.3 points to 32.9 percent.

 

Global Financing total revenue of $3,168 million decreased 9.3 percent compared to the prior year. This was due to a decline in internal revenue of 18.4 percent, driven by a decrease in internal used equipment sales (down 25.2 percent to $1,111 million) partially offset by an increase in internal financing (up 13.9 percent to $360 million). External revenue grew 0.3 percent due to an increase in external used equipment sales (up 14.9 percent to $530 million), partially offset by a decline in external financing (down 5.2 percent to $1,167 million).

 

The decrease in external financing revenue was due to lower asset yields, partially offset by an increase in average asset balances. The increase in internal financing revenue was primarily due to higher average asset balances and higher asset yields.

 

Global Financing pre-tax income decreased 22.7 percent year to year in 2017 primarily driven by a decrease in gross profit ($430 million), partially offset by a decline in financing receivables provisions ($52 million). This decrease was primarily due to lower reserves in Brazil in the current year. At December 31, 2017 the overall allowance for credit losses coverage rate was 1.1 percent, a decrease of 48 basis points year over year primarily due to the write-off of previously reserved receivables.

 

The increase in return on equity from 2016 to 2017 was primarily due to a lower average equity balance. See page 48 for the details of the after-tax income and return on equity calculations.

 

Total unguaranteed residual value of leases at December 31, 2017 and 2016 were $724 million and $725 million, respectively. 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.

 

Third-party residual value guarantees increase the minimum lease payments as provided for by accounting standards 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 $716 million and $329 million for the financing transactions originated during the years ended December 31, 2017 and December 31, 2016, respectively. In 2017, the residual value guarantee program resulted in the company recognizing approximately $452 million of revenue that would otherwise have been recognized in future periods as operating lease revenue. If the company had chosen to not participate in a residual value guarantee program in 2017 and prior years, the 2017 impact would be substantially mitigated by the effect of prior year asset values being recognized as operating lease revenue in the current year. The aggregate asset values associated with the guarantees of direct financing leases were $154 million and $169 million for the financing transactions originated during the years ended December 31, 2017 and 2016, respectively. The associated aggregate guaranteed future values at the scheduled end of lease were $45 million and $19 million for the financing transactions originated during the years ended December 31, 2017 and 2016, respectively. The cost of guarantees was $4 million and $2 million for the years ended December 31, 2017 and 2016, respectively.

 

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.

 

($ in millions)

 

 

 

 

 

 

 

 

 

Yr.-to-Yr.

 

 

 

 

 

 

 

Yr.-to-Yr.

 

Percent Change

 

 

 

 

 

 

 

Percent

 

Adjusted for

 

For the year ended December 31:

 

2017

 

2016

 

Change

 

Currency

 

Total revenue

 

$

79,139

 

$

79,919

 

(1.0

)%

(1.3

)%

Geographies

 

$

78,793

 

$

79,594

 

(1.0

)%

(1.4

)%

Americas

 

37,479

 

37,513

 

(0.1

)

(0.6

)

Europe/Middle East/Africa

 

24,345

 

24,769

 

(1.7

)

(2.8

)

Asia Pacific

 

16,970

 

17,313

 

(2.0

)

(1.1

)

 

Total geographic revenue of $78,793 million in 2017 decreased 1.0 percent as reported (1 percent adjusted for currency) compared to the prior year.

 

41



 

Management Discussion

International Business Machines Corporation and Subsidiary Companies

 

Americas revenue was essentially flat year to year as reported, but decreased 1 percent adjusted for currency with a decline in North America partially offset by growth in Latin America, both as reported and adjusted for currency. Within North America, the U.S. decreased 1.4 percent and Canada increased 4.9 percent (3 percent adjusted for currency). In Latin America, Brazil increased 7.6 percent (1 percent adjusted for currency) and Mexico increased 9.2 percent (10 percent adjusted for currency).

 

EMEA revenue decreased 1.7 percent as reported and 3 percent adjusted for currency. Revenue declined in the UK and Germany, while there was growth in France and Spain. The UK decreased 11.2 percent (7 percent adjusted for currency) and Germany decreased 3.2 percent (6 percent adjusted for currency). France increased 6.3 percent (3 percent adjusted for currency), and Spain was up 8.3 percent (6 percent adjusted for currency).

 

Asia Pacific revenue decreased 2.0 percent as reported and 1 percent adjusted for currency. Japan decreased 1.1 percent as reported, but increased 2 percent adjusted for currency. India grew 8.6 percent as reported and 5 percent adjusted for currency. China decreased 10.6 percent (10 percent adjusted for currency) and Australia decreased 5.8 percent (9 percent adjusted for currency).

 

Total Expense and Other (Income)

 

($ in millions)

 

 

 

 

 

 

 

Yr.-to-Yr.

 

 

 

 

 

 

 

Percent/

 

 

 

 

 

 

 

Margin

 

For the year ended December 31:

 

2017

 

2016

 

Change

 

Total consolidated expense and other (income)

 

$

24,827

 

$

25,964

 

(4.4

)%

Non-operating adjustments

 

 

 

 

 

 

 

Amortization of acquired intangible assets

 

(496

)

(503

)

(1.4

)

Acquisition-related charges

 

(52

)

(5

)

NM

 

Non-operating retirement- related (costs)/income

 

(669

)

(282

)

137.2

 

Operating (non-GAAP) expense and other (income)

 

$

23,609

 

$

25,174

 

(6.2

)%

Total consolidated expense-to-revenue ratio

 

31.4

%

32.5

%

(1.1

)pts.

Operating (non-GAAP) expense-to-revenue ratio

 

29.8

%

31.5

%

(1.7

)pts.

 

NM—Not meaningful

 

For additional information regarding total expense and other (income) for both expense presentations, see the following analyses by category.

 

Selling, General and Administrative

 

($ in millions)

 

 

 

 

 

 

 

Yr.-to-Yr.

 

 

 

 

 

 

 

Percent

 

For the year ended December 31:

 

2017

 

2016

 

Change

 

Selling, general and administrative expense administrative expense

 

 

 

 

 

 

 

Selling, general and administrative—other

 

$

16,568

 

$

16,971

 

(2.4

)%

Advertising and promotional expense

 

1,445

 

1,327

 

8.9

 

Workforce rebalancing charges

 

199

 

1,038

 

(80.9

)

Retirement-related costs

 

959

 

742

 

29.3

 

Amortization of acquired intangible assets

 

496

 

503

 

(1.4

)

Stock-based compensation

 

384

 

401

 

(4.1

)

Bad debt expense

 

55

 

87

 

(36.5

)

Total consolidated selling, general and administrative expense

 

$

20,107

 

$

21,069

 

(4.6

)%

Non-operating adjustments

 

 

 

 

 

 

 

Amortization of acquired intangible assets

 

(496

)

(503

)

(1.4

)

Acquisition-related charges

 

(13

)

2

 

NM

 

Non-operating retirement- related (costs)/income

 

(472

)

(253

)

86.6

 

Operating (non-GAAP) selling, general and administrative expense

 

$

19,126

 

$

20,315

 

(5.9

)%

 

NM—Not meaningful

 

Total selling, general and administrative (SG&A) expense decreased 4.6 percent in 2017 versus 2016, driven primarily by the following factors:

 

·    Lower workforce rebalancing charges (4 points); and

 

·    Lower spending (2 points); partially offset by

 

·    Spending related to acquisitions in the prior 12 months (1 point); and

 

·    Higher retirement-related costs (1 point).

 

Operating (non-GAAP) expense decreased 5.9 percent year to year driven primarily by the same factors.

 

Bad debt expense decreased $32 million in 2017 compared to 2016. The receivables provision coverage was 1.6 percent at December 31, 2017, a decrease of 40 basis points from December 31, 2016.

 

42



 

Management Discussion

International Business Machines Corporation and Subsidiary Companies

 

Research, Development and Engineering

 

($ in millions)

 

 

 

 

 

 

 

Yr.-to-Yr.

 

 

 

 

 

 

 

Percent

 

For the year ended December 31:

 

2017

 

2016

 

Change

 

Total consolidated research, development and engineering

 

$

5,787

 

$

5,751

 

0.6

%

Non-operating adjustment

 

 

 

 

 

 

 

Non-operating retirement-related (costs)/income

 

(197

)

(29

)

575.5

 

Operating (non-GAAP) research, development and engineering

 

$

5,590

 

$

5,722

 

(2.3

)%

 

Research, development and engineering (RD&E) expense was 7.3 percent of revenue in 2017 and 7.2 percent of revenue in 2016.

 

RD&E expense increased 0.6 percent in 2017 versus 2016 primarily driven by:

 

·    The impact of acquisitions completed in the prior 12-month period (1 point); and

 

·    The effects of currency; partially offset by

 

·    Lower spending, net of higher retirement-related costs (1 point).

 

Operating (non-GAAP) RD&E expense decreased 2.3 percent in 2017 compared to the prior year, driven primarily by the same factors, excluding higher non-operating retirement-related costs.

 

Intellectual Property and Custom

Development Income

 

($ in millions)

 

 

 

 

 

 

 

Yr.-to-Yr.

 

 

 

 

 

 

 

Percent

 

For the year ended December 31:

 

2017

 

2016

 

Change

 

Licensing of intellectual property including royalty-based fees

 

$

1,193

 

$

1,390

 

(14.1

)%

Custom development income

 

252

 

214

 

17.5

 

Sales/other transfers of intellectual property

 

21

 

27

 

(24.2

)

Total

 

$

1,466

 

$

1,631

 

(10.2

)%

 

Licensing of intellectual property including royalty-based fees decreased 14.1 percent in 2017 compared to 2016. The company entered into new partnership agreements in 2017, which included three transactions with period income greater than $100 million, compared to four transactions greater than $100 million in 2016. The company licenses IP to partners who allocate their skills to extend the value of assets that are high value, but may be in mature markets. The timing and amount of licensing, sales or other transfers of IP may vary significantly from period to period depending upon the timing of licensing agreements, economic conditions, industry consolidation and the timing of new patents and know-how development.

 

Other (Income) and Expense

 

($ in millions)

 

 

 

 

 

 

 

Yr.-to-Yr.

 

 

 

 

 

 

 

Percent

 

For the year ended December 31:

 

2017

 

2016

 

Change

 

Other (income) and expense

 

 

 

 

 

 

 

Foreign currency transaction losses/(gains)

 

$

405

 

$

(116

)

NM

 

(Gains)/losses on derivative instruments

 

(341

)

260

 

NM

 

Interest income

 

(144

)

(108

)

33.5

%

Net (gains)/losses from securities and investment assets

 

(20

)

23

 

NM

 

Other

 

(116

)

85

 

NM

 

Total consolidated other (income) and expense

 

$

(216

)

$

145

 

NM

 

Non-operating adjustment

 

 

 

 

 

 

 

Acquisition-related charges

 

(39

)

(7

)

444.6

 

Operating (non-GAAP) other (income) and expense

 

$

(255

)

$

138

 

NM

 

 

NM—Not meaningful

 

Total consolidated other (income) and expense was income of $216 million in 2017 compared to expense of $145 million in 2016. The decrease in expense of $361 million year over year was primarily driven by:

 

·             Real estate capacity charges (reflected in Other in the table above) in the prior year related to workforce transformation ($328 million);

 

·             Lower net exchange losses ($81 million);

 

·             Reduced losses from securities and investment assets ($43 million), primarily related to the sale of Lenovo shares in 2016; and

 

·             Higher interest income ($36 million); partially offset by

 

·             Lower gains on divestitures ($61 million).

 

Interest Expense

 

($ in millions)

 

 

 

 

 

 

 

Yr.-to-Yr.

 

 

 

 

 

 

 

Percent

 

For the year ended December 31:

 

2017

 

2016

 

Change

 

Interest expense

 

 

 

 

 

 

 

Total

 

$

615

 

$

630

 

(2.3

)%

 

Interest expense decreased $15 million compared to 2016. 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) in 2017 was $1,273 million, an increase of $67 million year to year, primarily driven by higher average interest rates.

 

43



 

Management Discussion

International Business Machines Corporation and Subsidiary Companies

 

Stock-Based Compensation

 

Pre-tax stock-based compensation cost of $534 million decreased $10 million compared to 2016. This was due primarily to decreases related to the conversion of stock-based awards previously issued by acquired entities ($23 million) and performance share units ($14 million); partially offset by an increase in restricted stock units ($27 million). Stock-based compensation cost, and the year-to-year change, was reflected in the following categories: Cost: $91 million, up $3 million; SG&A expense: $384 million, down $16 million and RD&E expense: $59 million, up $3 million.

 

Retirement-Related Plans

 

The following table provides 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.

 

($ in millions)

 

 

 

 

 

 

 

Yr.-to-Yr.

 

 

 

 

 

 

 

Percent

 

For the year ended December 31:

 

2017

 

2016

 

Change

 

Retirement-related plans—cost

 

 

 

 

 

 

 

Service cost

 

$

429

 

$

443

 

(3.0

)%

Amortization of prior service costs/(credits)

 

(88

)

(107

)

(18.5

)

Cost of defined contribution plans

 

1,046

 

1,070

 

(2.2

)

Total operating costs/(income)

 

$

1,388

 

$

1,405

 

(1.2

)%

Interest cost

 

$

2,961

 

$

3,300

 

(10.3

)%

Expected return on plan assets

 

(4,346

)

(5,563

)

(21.9

)

Recognized actuarial losses

 

2,871

 

2,751

 

4.4

 

Curtailments/settlements

 

19

 

(16

)

NM

 

Multi-employer plan/other

 

(36

)

126

 

NM

 

Total non-operating costs/(income)

 

$

1,468

 

$

598

 

145.6

%

Total retirement-related plans—cost

 

$

2,857

 

$

2,003

 

42.6

%

 

NM—Not meaningful

 

Total pre-tax retirement-related plan cost increased by $854 million compared to 2016, primarily driven by lower expected return on plan assets ($1,217 million) and an increase in recognized actuarial losses ($120 million); partially offset by lower interest costs ($339 million) and other costs ($162 million) primarily due to impacts from pension litigation in both years.

 

As discussed in the “Operating (non-GAAP) Earnings” section on pages 26 and 27, the company characterizes certain retirement-related costs as operating and others as non-operating. Utilizing this characterization, operating retirement-related costs in 2017 were $1,388 million, a decrease of $17 million compared to 2016, primarily driven by lower defined contribution plans cost ($23 million). Non-operating costs of $1,468 million increased $871 million in 2017 compared to 2016, driven primarily by lower expected return on plan assets ($1,217 million) and an increase in recognized actuarial losses ($120 million); partially offset by lower interest costs ($339 million) and other costs ($162 million) primarily due to impacts from pension litigation in both years. Effective January 1, 2018, the company adopted the new FASB guidance on presentation of net periodic pension and nonpension postretirement benefit costs, and as a result, beginning in 2018, the company will align its presentation of operating and non-operating costs to the FASB presentation. Prior period non-operating cost/(income) will be recast for comparability.

 

Income Taxes

 

The continuing operations effective tax rate for 2017 was 49.5 percent, an increase of 45.8 points versus the prior year. The fourth quarter charge of $5.5 billion related to the impact of the enactment of the U.S. Tax Cuts and Jobs Act resulted in an increase to the effective tax rate of 48.0 points. Without this impact, the continuing operations tax rate would have been 1.5 percent compared to a 2016 rate of 3.6 percent, with the remaining change in the rate year to year driven by the following factors:

 

·             An increased benefit year to year in the utilization of foreign tax credits of 5.4 points;

 

·             A benefit related to an intra-entity asset transfer in the first quarter of 2017 of 5.1 points;

 

·             A benefit due to the tax write down of an investment in the fourth quarter of 2017 of 1.7 points; and

 

·             A benefit due to the geographic mix of pre-tax earnings in 2017 of 1.0 points; partially offset by

 

·             The favorable resolution of the longstanding tax matter in Japan in 2016 of 9.5 points; and

 

·             An increase year to year in tax charges related to intercompany payments of 1.5 points.

 

The continuing operations operating (non-GAAP) effective tax rate was 6.7 percent, an increase of 0.3 points versus 2016, principally driven by the same factors described above. In 2017, the geographic and product mix of pre-tax earnings were more favorable than the company expected and there was increased utilization of foreign tax credits. These impacts drove the underlying continuing operations operating (non-GAAP) effective tax rate to approximately 12 percent before discrete period benefits.

 

For more information on the Tax Cuts and Jobs Act impact, see note N, “Taxes,” on pages 121 and 124.

 

44



 

Management Discussion

International Business Machines Corporation and Subsidiary Companies

 

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 year ended December 31:

 

2017

 

2016

 

Change

 

Earnings per share of common stock from continuing operations

 

 

 

 

 

 

 

Assuming dilution

 

$

6.14

*

$

12.39

 

(50.4

)%

Basic

 

$

6.17

 

$

12.44

 

(50.4

)%

Diluted operating (non-GAAP)

 

$

13.80

 

$

13.59

 

1.5

%

Weighted-average shares outstanding (in millions)

 

 

 

 

 

 

 

Assuming dilution

 

937.4

 

958.7

 

(2.2

)%

Basic

 

932.8

 

955.4

 

(2.4

)%

 


*       Includes a charge of $5.5 billion associated with the enactment of U.S. tax reform, or $5.84 of diluted earnings per share in 2017.

 

Actual shares outstanding at December 31, 2017 and 2016 were 922.2 million and 945.9 million, respectively. The average number of common shares outstanding assuming dilution was 21.3 million shares lower in 2017 versus 2016. The decrease was primarily the result of the common stock repurchase program.

 

Financial Position

 

Dynamics

 

At December 31, 2017, the company continued to have the financial flexibility to support the business over the long term. Cash and marketable securities at year end were $12,580 million. During the year, the company continued to manage the investment portfolio to meet its capital preservation and liquidity objectives.

 

Total debt of $46,824 million increased $4,655 million from prior year-end levels. The commercial paper balance at December 31, 2017, was $1,496 million, an increase of $597 million from the prior year end. Within total debt, $31,434 million is in support of the Global Financing business which is leveraged at a 9.0 to 1 ratio. The company continues to have substantial flexibility in the debt markets. During 2017, the company completed bond issuances totaling $7,986 million, with terms ranging from 2 to 12 years, and interest rates ranging from 0.95 to 3.30 percent depending on maturity. This includes IBM Credit’s first public debt issuance of $3,000 million in September 2017. 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 Credit Facilities.

 

Consistent with accounting standards, the company remeasured the funded status of its retirement and postretirement plans at December 31. At December 31, 2017, the overall net underfunded position was $12,890 million, a decrease of $1,949 million from December 31, 2016 driven by asset returns, partially offset by interest cost and a decrease in discount rates. At year end, the company’s qualified defined benefit plans were well funded and the cash requirements related to these plans remain stable going forward at approximately $400 million per year through 2020. In 2017, the return on the U.S. Personal Pension Plan assets was 9.6 percent and the plan was 104 percent funded at December 31. Overall, global asset returns were 8.3 percent and the qualified defined benefit plans worldwide were 100 percent funded at December 31, 2017.

 

During 2017, the company generated $16,724 million in cash from operations, a decrease of $360 million compared to 2016. In addition, the company generated $12,992 million in free cash flow, an increase of $1,293 million versus the prior year. See page 68 for additional information on free cash flow. The company returned $9,847 million to shareholders in 2017, with $5,506 million in dividends and $4,340 million in gross share repurchases. In 2017, the company repurchased 27.2 million shares and had $3.8 billion remaining in share repurchase authorization at year end. The company’s cash generation permits the company to invest and deploy capital to areas with the most attractive long-term opportunities.

 

Global Financing Financial Position Key Metrics:

 

($ in millions)

 

At December 31:

 

2017

 

2016

 

Cash and cash equivalents

 

$

2,696

 

$

1,844

 

Net investment in sales-type and direct financing leases

 

7,253

 

6,893

 

Equipment under operating leases—external clients(1)

 

477

 

548

 

Client loans

 

12,450

 

11,478

 

Total client financing assets

 

20,180

 

18,920

 

Commercial financing receivables

 

11,590

 

9,700

 

Intercompany financing receivables(2)(3)

 

5,056

 

4,959

 

Total assets

 

$

41,096

 

$

36,492

 

Debt

 

31,434

 

27,859

 

Total equity

 

$

3,484

 

$

3,812

 

 


(1)   Includes intercompany mark-up, priced on an arm’s-length basis, on products purchased from the company’s product divisions which is eliminated in IBM’s consolidated results.

(2)   Entire amount eliminated for purposes of IBM’s consolidated results and therefore does not appear on page 80.

(3)   These assets, along with all other financing assets in this table, are leveraged at the value in the table using Global Financing debt.

 

45


 

Management Discussion

International Business Machines Corporation and Subsidiary Companies

 

At December 31, 2017, substantially all financing assets were IT related assets, and approximately 53 percent of the total external portfolio was with investment-grade clients with no direct exposure to consumers. The improvement in investment-grade year to year (1 point) was driven primarily by rating changes within the existing portfolio, not by changing the company’s approach to the market. This investment-grade percentage is based on credit ratings of the companies in the portfolio. Additionally, the company takes actions to transfer exposure to third parties. On that basis, the investment-grade content would increase by 17 points to 70 percent, an increase of 5 points year to year.

 

The company has a long-standing practice of taking mitigation actions, in certain circumstances, to transfer credit risk to third parties, including credit insurance, financial guarantees, nonrecourse borrowings, transfers of receivables recorded as true sales in accordance with accounting guidance or sales of equipment under operating lease.

 

IBM Working Capital

 

($ in millions)

 

At December 31:

 

2017

 

2016

 

Current assets

 

$

49,735

 

$

43,888

 

Current liabilities

 

37,363

 

36,275

 

Working capital

 

$

12,373

 

$

7,613

 

Current ratio

 

1.33:1

 

1.21:1

 

 

Working capital increased $4,760 million from the year-end 2016 position. The key changes are described below:

 

Current assets increased $5,847 million ($3,239 million adjusted for currency), as a result of:

 

·             An increase of $4,053 million ($3,105 million adjusted for currency) in cash and marketable securities; and

 

·             An increase of $2,386 million ($993 million adjusted for currency) in receivables driven by financing receivables; partially offset by

 

·             A decrease of $622 million ($841 million adjusted for currency) in prepaid expenses and other current assets.

 

Current liabilities increased $1,087 million (a decrease of $542 million adjusted for currency), as a result of:

 

·             An increase in taxes of $984 million ($849 million adjusted for currency); and

 

·             An increase in deferred income of $517 million driven by currency-related increases of $583 million; partially offset by

 

·             A decrease in short-term debt of $526 million ($537 million adjusted for currency).

 

Receivables and Allowances

 

Roll Forward of Total IBM Receivables Allowance for Credit Losses

 

($ in millions)

 

January 1,

 

 

 

 

 

 

 

December 31,

 

2017

 

Additions*

 

Write-offs**

 

Other+

 

2017

 

$

776

 

$

55

 

$

(199

)

$

37

 

$

668

 

 


*       Additions for Allowance for Credit Losses are charged to expense.

 

**Refer to note A, “Significant Accounting Policies,” on pages 92 and 93 for additional information regarding Allowance for Credit Loss write-offs.

 

+         Primarily represents translation adjustments.

 

The total IBM receivables provision coverage was 1.6 percent at December 31, 2017, a decrease of 40 basis points compared to December 31, 2016. The majority of the write-offs during 2017 related to Global Financing receivables, which had been previously reserved.

 

Global Financing Receivables and Allowances

 

The following table presents external financing receivables excluding residual values, and the allowance for credit losses:

 

($ in millions)

 

At December 31:

 

2017

 

2016

 

Gross financing receivables

 

$

31,044

 

$

28,043

 

Specific allowance for credit losses

 

258

 

335

 

Unallocated allowance for credit losses

 

78

 

103

 

Total allowance for credit losses

 

336

 

438

 

Net financing receivables

 

$

30,709

 

$

27,605

 

Allowance for credit losses coverage

 

1.1

%

1.6

%

 

The percentage of Global Financing receivables reserved was 1.1 percent at December 31, 2017, compared to 1.6 percent at December 31, 2016. In 2017, write-offs of $144 million of receivables previously reserved, primarily in China, resulted in a 23 percent reduction in the specific reserves, from $335 million at December 31, 2016, to $258 million at December 31, 2017. See note F, “Financing Receivables,” on page 107 for additional information. Unallocated reserves decreased 24 percent from $103 million at December 31, 2016, to $78 million at December 31, 2017 due to higher general reserve requirements in Brazil in the prior year.

 

46



 

Management Discussion

International Business Machines Corporation and Subsidiary Companies

 

Roll Forward of Global Financing Receivables Allowance for Credit Losses (included in Total IBM)

 

($ in millions)

 

January 1,

 

 

 

 

 

 

 

December 31,

 

2017

 

Additions*

 

Write-offs**

 

Other+

 

2017

 

$

438

 

$

17

 

$

(144

)

$

24

 

$

336

 

 


*       Additions for Allowance for Credit Losses are charged to expense.

 

**Refer to note A, “Significant Accounting Policies,” on pages 92 and 93 for additional information regarding Allowance for Credit Loss write-offs.

 

+         Primarily represents translation adjustments.

 

Global Financing’s bad debt expense was $17 million in 2017, compared to $69 million in 2016. The year-to-year decrease in bad debt expense was primarily due to lower general reserve requirements in Brazil.

 

Noncurrent Assets and Liabilities

 

($ in millions)

 

At December 31:

 

2017

 

2016

 

Noncurrent assets

 

$

75,621

 

$

73,582

 

Long-term debt

 

$

39,837

 

$

34,655

 

Noncurrent liabilities (excluding debt)

 

$

30,432

 

$

28,147

 

 

The increase in noncurrent assets of $2,039 million (a decrease of $233 million adjusted for currency) was driven by:

 

·        An increase in prepaid pension assets of $1,609 million ($1,357 million adjusted for currency) driven by the expected returns on plan assets partially offset by interest costs.

 

Long-term debt increased $5,182 million ($4,120 million adjusted for currency) driven by:

 

·        Bond issuances of $7,986 million; partially offset by

 

·        Current upcoming maturities of long-term debt of $5,214 million.

 

Other noncurrent liabilities, excluding debt, increased $2,285 million ($378 million adjusted for currency) primarily driven by:

 

·        An increase of $2,488 million ($1,953 million adjusted for currency) in other liabilities driven by the charge associated with the enactment of U.S. tax reform.

 

Debt

 

The company’s 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.

 

($ in millions)

 

At December 31:

 

2017

 

2016

 

Total company debt

 

$

46,824

 

$

42,169

 

Total Global Financing segment debt

 

$

31,434

 

$

27,859

 

Debt to support external clients

 

27,556

 

24,034

 

Debt to support internal clients

 

3,878

 

3,825

 

Non-Global Financing debt

 

15,390

 

14,309

 

 

Global Financing provides financing predominantly for the company’s 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 Platforms assets are leveraged with the balance of the Global Financing asset base. The increase in debt was consistent with the company’s expectations in 2017 to increase leverage in the Global Financing business.

 

Non-Global Financing debt of $15,390 million was up $1,081 million from prior year-end levels.

 

Consolidated debt-to-capitalization ratio at December 31, 2017 was 72.5 percent, which includes a 5.7 point impact from the onetime charge of $5.5 billion associated with the enactment of U.S. tax reform in 2017, versus 69.6 percent at December 31, 2016.

 

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 company’s 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 51.9 percent at December 31, 2017, which includes an 8.1 point impact from the charge of $5.5 billion associated with the enactment of U.S. tax reform in 2017, compared to 49.5 percent at December 31, 2016.

 

At December 31:

 

2017

 

2016

 

Global Financing debt-to-equity ratio

 

9.0

x

7.3

x

 

The debt used to fund Global Financing assets is composed of intercompany loans and external debt. Total debt changes generally correspond with the level of client and commercial financing receivables, the level of cash and cash equivalents, the change in intercompany and external payables and the change in intercompany investment from IBM. The terms of the intercompany loans are set by the company to substantially match the term, currency and interest rate variability underlying the financing receivable and are based on arm’s-length pricing.

 

47



 

Management Discussion

International Business Machines Corporation and Subsidiary Companies

 

Global Financing provides financing predominantly for the company’s 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 Financing’s external client and internal business is included in the “Global Financing Results of Operations” on page 40 and in note T, “Segment Information,” on pages 142 to 146. In the company’s Consolidated Statement of Earnings, the external debt-related interest expense supporting Global Financing’s internal financing to the company is reclassified from cost of financing to interest expense.

 

Equity

 

Total equity decreased by $667 million from December 31, 2016 as a result of an increase in treasury stock of $4,457 million mainly due to gross common stock repurchases, partially offset by lower accumulated other comprehensive losses of $2,806 million primarily due to retirement plan remeasurements, an increase in common stock of $631 million and an increase in retained earnings of $368 million.

 

Cash Flow

 

The company’s cash flows from operating, investing and financing activities, as reflected in the Consolidated Statement of Cash Flows on page 81 are summarized in the table below. These amounts include the cash flows associated with the Global Financing business.

 

($ in millions)

 

For the year ended December 31:

 

2017

 

2016

 

Net cash provided by/(used in) continuing operations

 

 

 

 

 

Operating activities

 

$

16,724

 

$

17,084

*

Investing activities

 

(7,096

)

(10,976

)

Financing activities

 

(6,418

)

(5,917

)*

Effect of exchange rate changes on cash and cash equivalents

 

937

 

(51

)

Net change in cash and cash equivalents

 

$

4,146

 

$

140

 

 


* Reclassified to reflect adoption of the FASB guidance on share-based compensation.

 

Net cash provided by operating activities decreased by $360 million in 2017 driven by the following key factors:

 

·        Performance-related declines within net income; and

 

·        An increase in cash income tax payments of $519 million; partially offset by

 

·        An increase in cash provided by receivables of $585 million.

 

Net cash used in investing activities decreased $3,881 million driven by:

 

·        A decrease in cash used related to acquisitions of $5,184 million, partially offset by an increase of net non-operating financing receivables of $1,137 million.

 

Net cash used in financing activities increased $502 million as compared to the prior year driven by the following factors:

 

·        An increase of $838 million of cash used for gross common share repurchases; partially offset by

 

·        An increase in net cash sourced from debt transactions of $683 million driven by a higher level of issuances in the current year.

 

Global Financing Return on Equity Calculation

 

($ in millions)

 

At December 31:

 

2017

 

2016

 

Numerator

 

 

 

 

 

Global Financing after-tax income(1) *

 

$

1,116

 

$

1,126

 

Denominator

 

 

 

 

 

Average Global Financing equity(2) **

 

$

3,394

 

$

3,680

 

Global Financing return on equity(1)/ (2)

 

32.9

%

30.6

%

 


*       Calculated based upon an estimated tax rate principally based on Global Financing’s geographic mix of earnings as IBM’s provision for income taxes is determined on a consolidated basis.

 

**Average of the ending equity for Global Financing for the last five quarters.

 

48



 

Management Discussion

International Business Machines Corporation and Subsidiary Companies

 

GAAP Reconciliation

 

The tables below provide a reconciliation of the company’s income statement results as reported under GAAP to its operating earnings presentation which is a non-GAAP measure. The company’s calculation of operating (non-GAAP) earnings, as presented, may differ from similarly titled measures reported by other companies. Please refer to the “Operating (non-GAAP) Earnings” section on pages 26 and 27 for the company’s rationale for presenting operating earnings information.

 

($ in millions except per share amounts)

 

 

 

 

 

Acquisition-

 

Retirement-

 

Tax Reform

 

 

 

 

 

 

 

Related

 

Related

 

One-Time

 

Operating

 

For the year ended December 31, 2017:

 

GAAP

 

Adjustments

 

Adjustments

 

Charge(1)

 

(non-GAAP)

 

Gross profit

 

$

 36,227

 

$

  449

 

$

  799

 

$

 —

 

$

 37,475

 

Gross profit margin

 

45.8

%

0.6

pts.

1.0

pts.

pts.

47.4

%

SG&A

 

$

 20,107

 

$

 (509

)

$

  (472

)

$

 —

 

$

 19,126

 

RD&E

 

5,787

 

 

(197

)

 

5,590

 

Other (income) and expense

 

(216

)

(39

)

 

 

(255

)

Total expense and other (income)

 

24,827

 

(548

)

(669

)

 

23,609

 

Pre-tax income from continuing operations

 

11,400

 

997

 

1,468

 

 

13,886

 

Pre-tax margin from continuing operations

 

14.4

%

1.3

pts.

1.9

pts.

pts.

17.5

%

Provision for income taxes*

 

$

 5,642

 

$

  279

 

$

  485

 

$

 (5,475

)

$

 931

 

Effective tax rate

 

49.5

%

(1.5

)pts.

(1.7

)pts.

(39.5

)pts.

6.7

%

Income from continuing operations

 

$

 5,758

 

$

  718

 

$

  983

 

$

 5,475

 

$

 12,935

 

Income margin from continuing operations

 

7.3

%

0.9

pts.

1.2

pts.

6.9

pts.

16.3

%

Diluted earnings per share from continuing operations

 

$

 6.14

 

$

 0.77

 

$

  1.05

 

$

 5.84

 

$

 13.80

 

 


*       The tax impact on operating (non-GAAP) pre-tax income is calculated under the same accounting principles applied to the GAAP pre-tax income which employs an annual effective tax rate method to the results.

 

(1)   Operating (non-GAAP) earnings excludes a charge of $5.5 billion associated with the enactment of U.S. tax reform due to its unique non-recurring nature.

 

($ in millions except per share amounts)

 

 

 

 

 

Acquisition-

 

Retirement-

 

 

 

 

 

 

 

Related

 

Related

 

Operating

 

For the year ended December 31, 2016:

 

GAAP

 

Adjustments

 

Adjustments

 

(non-GAAP)

 

Gross profit

 

$

 38,294

 

$

 494

 

$

 316

 

$

 39,104

 

Gross profit margin

 

47.9

%

0.6

pts.

0.4

pts.

48.9

%

SG&A

 

$

 21,069

 

$

 (501

)

$

 (253

)

$

 20,315

 

RD&E

 

5,751

 

 

(29

)

5,722

 

Other (income) and expense

 

145

 

(7

)

 

138

 

Total expense and other (income)

 

25,964

 

(508

)

(282

)

25,174

 

Pre-tax income from continuing operations

 

12,330

 

1,003

 

598

 

13,931