0.100.100.100.100.1000000.100.100.100.100.100.100.100.100.100.100.100.100.10ibm:OtherIncomeAndExpenseibm:OtherIncomeAndExpenseibm:OtherIncomeAndExpenseibm:OtherIncomeAndExpenseibm:OtherIncomeAndExpenseibm:OtherIncomeAndExpenseibm:OtherIncomeAndExpenseibm:OtherIncomeAndExpenseibm:OtherIncomeAndExpenseibm:OtherIncomeAndExpenseibm:OtherIncomeAndExpenseibm:OtherIncomeAndExpenseibm:OtherIncomeAndExpenseibm:OtherIncomeAndExpenseibm:OtherIncomeAndExpenseibm:OtherIncomeAndExpenseibm:OtherIncomeAndExpenseibm:OtherIncomeAndExpenseibm:OtherIncomeAndExpenseibm:OtherIncomeAndExpenseibm:OtherIncomeAndExpenseibm:OtherIncomeAndExpenseibm:OtherIncomeAndExpenseibm:OtherIncomeAndExpenseibm:OtherIncomeAndExpenseibm:OtherIncomeAndExpenseibm:OtherIncomeAndExpenseibm:OtherIncomeAndExpenseibm:OtherIncomeAndExpenseibm:OtherIncomeAndExpenseibm:OtherIncomeAndExpenseibm:OtherIncomeAndExpenseibm:OtherIncomeAndExpenseibm:OtherIncomeAndExpenseibm:OtherIncomeAndExpenseibm:OtherIncomeAndExpenseibm:OtherIncomeAndExpenseibm:OtherIncomeAndExpenseibm:OtherIncomeAndExpenseibm:OtherIncomeAndExpenseibm:OtherIncomeAndExpenseibm:OtherIncomeAndExpenseibm:OtherIncomeAndExpenseibm:OtherIncomeAndExpenseibm:OtherIncomeAndExpenseibm:OtherIncomeAndExpenseibm:OtherIncomeAndExpenseibm:OtherIncomeAndExpenseibm:OtherIncomeAndExpenseibm:OtherIncomeAndExpenseibm:OtherIncomeAndExpenseibm:OtherIncomeAndExpenseibm:OtherIncomeAndExpenseibm:OtherIncomeAndExpenseibm:OtherIncomeAndExpenseP3YP1YP1YP2YP1YP3Y1P2Y213000000194000000ibm:OtherIncomeAndExpense

Table of Contents

Exhibit 13

Report of Financials

International Business Machines Corporation and Subsidiary Companies

                        17

MANAGEMENT DISCUSSION

Overview

18

Forward-Looking and Cautionary Statements

19

Management Discussion Snapshot

19

Description of Business

23

Year in Review

30

Prior Year in Review

53

Other Information

55

Looking Forward

55

Liquidity and Capital Resources

56

Critical Accounting Estimates

59

Currency Rate Fluctuations

62

Market Risk

63

Cybersecurity

64

 

Report of Management

65

Report of Independent Registered
Public Accounting Firm

66

CONSOLIDATED FINANCIAL STATEMENTS

Income Statement

68

Comprehensive Income

69

Balance Sheet

70

Cash Flows

71

Equity

72

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Basis & Policies

ASignificant Accounting Policies

74

BAccounting Changes

87

Performance & Operations

CRevenue Recognition

90

DSegments

91

EAcquisitions & Divestitures

96

FResearch, Development & Engineering

100

GTaxes

100

HEarnings Per Share

104

Balance Sheet & Liquidity

IFinancial Assets & Liabilities

105

JInventory

106

KFinancing Receivables

106

LProperty, Plant & Equipment

110

MLeases

110

NIntangible Assets Including Goodwill

112

OInvestments & Sundry Assets

114

PBorrowings

114

QOther Liabilities

117

RCommitments & Contingencies

118

SEquity Activity

120

Risk Management, Compensation/Benefits & Other

TDerivative Financial Instruments

123

UStock-Based Compensation

126

VRetirement-Related Benefits

128

WSubsequent Events

140

Performance Graph

141

Stockholder Information

142

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18Management Discussion

International Business Machines Corporation and Subsidiary Companies

OVERVIEW

The financial section of the International Business Machines Corporation (IBM or the company) 2020 Annual Report includes the Management Discussion, the Consolidated Financial Statements and the Notes to Consolidated Financial Statements. This Overview is designed to provide the reader with some perspective regarding the information contained in the financial section.

Organization of Information

The Management Discussion is designed to provide readers with an overview of the business and a narrative on our financial results and certain factors that may affect our future prospects from the perspective of management. The “Management Discussion Snapshot” presents an overview of the key performance drivers in 2020.
Beginning with the “Year in Review,” the Management Discussion contains the results of operations for each reportable segment of the business and a discussion of our financial position and cash flows. Other key sections within the Management Discussion include: “Looking Forward” and “Liquidity and Capital Resources,” which includes a description of management’s definition and use of free cash flow.
The Consolidated Financial Statements provide an overview of income and cash flow performance and financial position.
The Notes follow the Consolidated Financial Statements. Among other items, the Notes contain our accounting policies, revenue information, acquisitions and divestitures, certain commitments and contingencies and retirement-related plans information.
On October 8, 2020, we announced our plan to separate the managed infrastructure services unit of our Global Technology Services (GTS) segment into a new public company (currently referred to as NewCo and to be named later). The separation is expected to be achieved through a U.S. federal tax-free spin-off to IBM shareholders and completed by the end of 2021. It will be subject to customary market, regulatory and other closing conditions, including final IBM Board of Directors’ approval. The announcement did not have any classification impact to our consolidated financial statements or segment reporting. We will report the managed infrastructure services unit as discontinued operations after its separation.
In the first quarter of 2020, we realigned offerings and the related management system to reflect divestitures completed in the second half of 2019 and tighter integration of certain industry-specific consulting services. These changes impacted Cloud & Cognitive Software and Global Business Services (GBS) but did not impact the Consolidated Financial Statements. Total recast revenue for full-year 2019 and 2018 was approximately $0.3 billion and $0.4 billion, respectively. The periods presented in this Annual Report are reported on a comparable basis.
On July 9, 2019, IBM acquired 100 percent of the outstanding shares of Red Hat, Inc. (Red Hat). Red Hat is reported within the Cloud & Cognitive Software segment, in Cloud & Data Platforms. Refer to note E, “Acquisitions & Divestitures,” for additional information.
The references to “adjusted for currency” or “at constant currency” in the Management Discussion do not include operational impacts that could result from fluctuations in foreign currency rates. When we refer to growth rates at constant currency or adjust such growth rates for currency, it is done so that certain financial results can be viewed without the impact of fluctuations in foreign currency exchange rates, thereby facilitating period-to-period comparisons of business performance. Financial results adjusted for currency are calculated by translating current period activity in local currency using the comparable prior-year period’s currency conversion rate. This approach is used for countries where the functional currency is the local currency. Generally, when the dollar either strengthens or weakens against other currencies, the growth at constant currency rates or adjusting for currency will be higher or lower than growth reported at actual exchange rates. See “Currency Rate Fluctuations” for additional information.
To provide better transparency on the recurring performance of the ongoing business, the company provides total revenue, geographic revenue and cloud revenue growth rates excluding divested businesses and at constant currency. These divested businesses are included in the category “Other—divested businesses.”
Within the financial statements and tables in this Annual Report, certain columns and rows may not add due to the use of rounded numbers for disclosure purposes. Percentages reported are calculated from the underlying whole-dollar numbers.

Operating (non-GAAP) Earnings

In an effort to provide better transparency into the operational results of the business, supplementally, management separates business results into operating and non-operating categories. Operating earnings from continuing operations is a non-GAAP measure that excludes the effects of certain acquisition-related charges, intangible asset amortization, expense resulting from basis differences on equity method investments, retirement-related costs, discontinued operations and certain managed infrastructure services spin-off charges and their related tax impacts. Management characterizes direct and incremental charges incurred to accomplish the managed infrastructure services spin-off as non-operating given their unique and non-recurring nature. These charges primarily relate to transaction and third-party support costs, business separation and applicable employee retention fees, pension settlement charges and related tax charges. All other spending for the managed infrastructure services business operations is included in both earnings from continuing operations and in operating (non-GAAP) earnings. Due to the unique, non-recurring nature of the enactment of the U.S.

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International Business Machines Corporation and Subsidiary Companies

                       19

Tax Cuts and Jobs Act (U.S. tax reform), management characterizes the one-time provisional charge recorded in the fourth quarter of 2017 and adjustments to that charge as non-operating. Adjustments include true-ups, accounting elections and any changes to regulations, laws, audit adjustments, etc. that affect the recorded one-time charge. For acquisitions, operating (non-GAAP) earnings exclude the amortization of purchased intangible assets and acquisition-related charges such as in-process research and development, transaction costs, applicable retention, restructuring and related expenses, tax charges related to acquisition integration and pre-closing charges, such as financing costs. These charges are excluded as they may be inconsistent in amount and timing from period to period and are significantly impacted by the size, type and frequency of the company’s acquisitions. All other spending for acquired companies is included in both earnings from continuing operations and in operating (non-GAAP) earnings. Throughout the Management Discussion, the impact of acquisitions over the prior 12-month period may be a driver of higher expense year to year. For retirement-related costs, management characterizes certain items as operating and others as non-operating, consistent with GAAP. We include defined benefit plan and nonpension postretirement benefit plan service costs, multi-employer plan costs and the cost of defined contribution plans in operating earnings. Non-operating retirement-related costs include defined benefit plan and nonpension postretirement benefit plan amortization of prior service costs, interest cost, expected return on plan assets, amortized actuarial gains/losses, the impacts of any plan curtailments/settlements and pension insolvency costs and other costs. Non-operating retirement-related costs are primarily related to changes in pension plan assets and liabilities which are tied to financial market performance, and the company considers these costs to be outside of the operational performance of the business.

Overall, management believes that supplementally providing investors with a view of operating earnings as described above provides increased transparency and clarity into both the operational results of the business and the performance of the company’s pension plans; improves visibility to management decisions and their impacts on operational performance; enables better comparison to peer companies; and allows the company to provide a long-term strategic view of the business going forward. Our reportable segment financial results reflect pre-tax operating earnings from continuing operations, consistent with our management and measurement system. In addition, these non-GAAP measures provide a perspective consistent with areas of interest we routinely receive from investors and analysts.

FORWARD-LOOKING AND CAUTIONARY STATEMENTS

Certain statements contained in this Annual Report may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any forward-looking statement in this Annual Report speaks only as of the date on which it is made; IBM assumes no obligation to update or revise any such statements except as required by law. Forward-looking statements are based on IBM’s current assumptions regarding future business and financial performance; these statements, by their nature, address matters that are uncertain to different degrees. Forward-looking statements involve a number of risks, uncertainties and other factors that could cause actual results to be materially different, as discussed more fully elsewhere in this Annual Report and in the company’s filings with the Securities and Exchange Commission (SEC), including IBM’s 2020 Form 10-K filed on February 23, 2021.

MANAGEMENT DISCUSSION SNAPSHOT

($ and shares in millions except per share amounts)

Yr.-to-Yr.

 

Percent/Margin

 

For year ended December 31:

    

2020

    

2019

    

Change

Revenue

 

$

73,620

 

$

77,147

 

(4.6)

%*

Gross profit margin

48.3

%  

47.3

%  

1.0

pts.

Total expense and other (income)

 

$

30,937

**

$

26,322

 

17.5

%

Income from continuing operations before income taxes

 

$

4,637

**

$

10,166

 

(54.4)

%

Provision for/(benefit from) income taxes from continuing operations

 

$

(864)

 

$

731

NM

Income from continuing operations

 

$

5,501

**

$

9,435

(41.7)

%

Income from continuing operations margin

7.5

%  

12.2

%  

(4.8)

pts.

Income/(loss) from discontinued operations, net of taxÉ

$

89

$

(4)

NM

Net income

 

$

5,590

**

$

9,431

(40.7)

%

Earnings per share from continuing operations–assuming dilution

 

$

6.13

**

$

10.57

(42.0)

%

Weighted-average shares outstanding–assuming dilution

896.6

892.8

 

0.4

%

AssetsÉÉ

 

$

155,971

 

$

152,186

 

2.5

%

LiabilitiesÉÉ

 

$

135,244

 

$

131,202

 

3.1

%

EquityÉÉ

 

$

20,727

 

$

20,985

 

(1.2)

%

*

(4.7) percent adjusted for currency; (3.5) percent excluding divested businesses and adjusted for currency.

** Includes a $2.0 billion pre-tax charge for structural actions in the fourth quarter resulting in an impact to diluted earnings per share from continuing operations of ($1.84).

É Relates to discontinued operations of Microelectronics, divested in 2015. 

ÉÉ At December 31

NM–Not meaningful

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20Management Discussion

International Business Machines Corporation and Subsidiary Companies

The following table provides the company’s operating (non-GAAP) earnings for 2020 and 2019. See page 45 for additional information.

($ in millions except per share amounts)

Yr.-to-Yr.

 

For year ended December 31:

    

2020

    

2019

    

Percent Change

Net income as reported

 

$

5,590

*

$

9,431

(40.7)

%

Income/(loss) from discontinued operations, net of tax**

89

(4)

NM

Income from continuing operations

 

$

5,501

*

$

9,435

(41.7)

%

Non-operating adjustments (net of tax)

Acquisition-related charges

1,454

1,343

 

8.3

Non-operating retirement-related costs/(income)

908

512

 

77.2

U.S. tax reform impacts

(110)

146

 

NM

Spin-off-related charges

21

 

NM

Operating (non-GAAP) earnings

 

$

7,774

*

$

11,436

 

(32.0)

%

Diluted operating (non-GAAP) earnings per share

 

$

8.67

*

$

12.81

 

(32.3)

%

*

Includes a $2.0 billion pre-tax charge for structural actions in the fourth quarter resulting in an impact to diluted operating (non-GAAP) earnings per share of ($1.84).

**

Relates to discontinued operations of Microelectronics, divested in 2015. 

NM–Not meaningful

Strategic Announcement

IBM is redefining its future as a hybrid cloud platform and AI company. The October 8, 2020 announcement of our plan to separate the managed infrastructure services unit of our GTS segment into a new public company will create two industry-leading companies, each with strategic focus and flexibility to capitalize on their respective missions and drive client and shareholder value. Client buying needs for application and infrastructure services are diverging, while adoption of our hybrid cloud platform is accelerating. This change in clients’ needs makes it the right time to create two market-leading companies focused on what they do best. IBM will focus on its open hybrid cloud platform and AI capabilities to accelerate clients’ digital transformations. Upon separation, NewCo will immediately be the world's leading managed infrastructure services provider and will have greater agility to design, run and modernize the infrastructure of the world’s most important organizations. Both IBM and NewCo will have greater ability to focus on their operating and financial models, have more freedom to partner with others and both will align their investments and capital structure to their strategic focus areas. We are on track to complete the separation by the end of 2021.

Environmental Dynamics

On March 11, 2020, the World Health Organization (WHO) declared the novel coronavirus (COVID-19) a global pandemic. This resulted in significant governmental measures being initiated around the globe, including travel bans and border closings, shelter-in-place orders, closures of non-essential businesses and social distancing requirements in efforts to slow down and control the spread of the virus.

Throughout 2020, the health of IBM employees, our clients, business partners and community continued to be our primary focus. We are actively engaged to ensure our plans and response activities continue to be aligned with recommendations of the WHO, the U.S. Centers for Disease Control and Prevention, and governmental regulations.

IBM continues to be well positioned to support our clients through this crisis. The pandemic has driven companies to accelerate their digital transformations, resulting in the removal of traditional barriers to progress. The reliance on technology, particularly hybrid cloud and AI technologies that give clients the scalability and flexibility needed to adjust to the rapid market changes, has become more acute. We are helping to advise, build, move and manage our clients’ journey to the cloud. We are also working with our clients to apply AI, automation and other technologies to make their workflows more intelligent and responsive. As our clients are intensifying their focus on their most important asset, their people, we are partnering with clients to help them enhance employee engagement and productivity, reskill the workforce faster and reimagine ways of working.

The COVID-19 pandemic and broader macroeconomic uncertainty has placed every company in uncharted waters. In this environment, the underlying fundamentals of our business continue to remain sound:

Our diversification and mix by industry, geography and client segment provides some stability during these times;
IBM has always focused on the enterprise space, and within that our business is more concentrated in large enterprises, which in total have been relatively more stable throughout the pandemic;
From an industry perspective, the majority of our revenue comes from clients in financial services, telecom, and the public sector – industries that run the world’s most critical processes;
From a geographic perspective, we are continuing to see markets experience different impacts from the pandemic over time. Our global footprint provides some natural hedge;

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Management Discussion

International Business Machines Corporation and Subsidiary Companies

                       21

Approximately 60 percent of our annual revenue is in recurring revenue streams;
Our balance sheet remains strong with ample liquidity and access to capital.

All of this provides some level of stability, not only in our revenue, but also in profit and cash, as we continue to manage through these challenging times. However, in this macroeconomic environment, clients balanced near-term needs and opportunities for transformation. Their near-term priorities were focused on operational stability, flexibility and cash preservation, and as such, in 2020, we experienced some disruptions in transactional performance, shorter duration software transactions and delays in some services projects.

At the same time, this environment has only reinforced the need for clients to modernize their businesses to succeed in this new normal, with hybrid cloud and AI at the core of their digital transformations. While the current environment poses certain short-term challenges, it also presents long-term opportunities that IBM will seize as our open hybrid platform and AI-driven model delivers greater innovation, higher productivity and more strategic optionality to our clients.  

Financial Performance Summary

In 2020, we reported $73.6 billion in revenue and income from continuing operations of $5.5 billion, which included a $2.0 billion pre-tax charge for structural actions (primarily workforce rebalancing) in the fourth quarter to simplify and optimize our operating model. Operating (non-GAAP) earnings in 2020 were $7.8 billion, which also included the charge for workforce rebalancing. Diluted earnings per share from continuing operations was $6.13 as reported and $8.67 on an operating (non-GAAP) basis. We also generated $18.2 billion in cash from operations, $10.8 billion in free cash flow and delivered shareholder returns of $5.8 billion in dividends. With the unprecedented COVID-19 pandemic and macroeconomic uncertainty beginning in March 2020, client priorities shifted to maintaining operational stability, flexibility and preservation of cash. While there was continued demand for offerings that support their digital transformation, clients moved to shorter term duration engagements and prioritized operational expenditures over capital expenditures, which impacted the company’s performance in 2020. However, our results reflect strong performance in hybrid cloud led by Red Hat, gross margin expansion and solid cash generation. We also continued to strengthen our position as a hybrid cloud platform and AI company through strategic organic investments and acquisitions.

Total consolidated revenue decreased 4.6 percent as reported and 4.7 percent adjusted for currency compared to the prior year. Excluding divested businesses and adjusted for currency, revenue decreased 3.5 percent. Cloud & Cognitive Software increased 2.1 percent as reported and 2 percent adjusted for currency, with strong performance from Red Hat, offset by declines in transactional performance in other areas of the portfolio. Within Cloud & Cognitive Software, Cloud & Data Platforms, which includes Red Hat, grew 20.9 percent as reported (20 percent adjusted for currency), while Cognitive Applications decreased 3.0 percent as reported (3 percent adjusted for currency), and Transaction Processing Platforms declined 16.8 percent as reported (17 percent adjusted for currency) reflecting the impacts of the macroeconomic uncertainty, with purchase deferrals and clients opting for shorter duration contracts. Global Business Services decreased 3.8 percent as reported and 4 percent adjusted for currency with declines across all lines of business due to project delays and less discretionary spending by clients. Global Technology Services decreased 5.7 percent as reported and 5 percent adjusted for currency with declines in Infrastructure & Cloud Services and Technology Support Services driven by lower business volumes primarily with clients in industries more impacted by the macroeconomic environment. Systems decreased 8.2 percent year to year as reported and 9 percent adjusted for currency due to product cycle dynamics. Across the segments, total IBM cloud revenue of $25.1 billion in 2020 grew 19 percent as reported (18 percent adjusted for currency) and 20 percent excluding divested businesses and adjusted for currency.

From a geographic perspective, Americas revenue declined 6.0 percent year to year as reported (4 percent excluding divested businesses and adjusted for currency). Europe/Middle East/Africa (EMEA) decreased 3.3 percent (4 percent excluding divested businesses and adjusted for currency). Asia Pacific declined 3.5 percent (4 percent excluding divested businesses and adjusted for currency).

The consolidated gross margin of 48.3 percent increased 1.0 points year to year, and the operating (non-GAAP) gross margin of 49.3 percent increased 1.3 points versus the prior year, reflecting portfolio mix with strong software contribution and our focus on productivity.

Total expense and other (income) increased 17.5 percent in 2020 compared to the prior year. The year-to-year performance was driven by higher charges for workforce rebalancing, a full year of Red Hat operational spending in 2020 compared to six months in 2019, lower gains from divestitures and higher non-operating retirement-related costs, partially offset by lower spending including reductions in travel and other expenses associated with COVID-19 restrictions. Total operating (non-GAAP) expense and other (income) increased 16.8 percent year to year, driven primarily by the same factors excluding the non-operating retirement-related costs.

Pre-tax income from continuing operations of $4.6 billion decreased 54.4 percent and the pre-tax margin was 6.3 percent, a decrease of 6.9 points versus 2019, primarily due to higher workforce rebalancing charges in 2020, lower gains from divestitures and higher retirement-related costs in the current year. The continuing operations effective tax rate for 2020 was (18.6) percent compared to 7.2

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22Management Discussion

International Business Machines Corporation and Subsidiary Companies

percent in 2019. The benefit from income taxes in 2020 was primarily due to the tax impacts of an intra-entity sale of certain of the company’s intellectual property and related impacts in the first quarter, which resulted in a net tax benefit of $0.9 billion. Net income from continuing operations of $5.5 billion decreased 41.7 percent and the net income from continuing operations margin was 7.5 percent, down 4.8 points year to year, primarily due to the fourth-quarter workforce rebalancing charge. Operating (non-GAAP) pre-tax income from continuing operations of $7.7 billion decreased 38.7 percent year to year and the operating (non-GAAP) pre-tax margin from continuing operations decreased 5.8 points to 10.4 percent, reflecting the higher workforce rebalancing charges and lower gains from divestitures in the current year. The operating (non-GAAP) effective tax rate for 2020 was (1.5) percent compared to 8.5 percent in 2019. The current year operating (non-GAAP) benefit from income taxes was primarily driven by the net tax benefit from an intra-entity IP sale in the first quarter. Operating (non-GAAP) income from continuing operations of $7.8 billion decreased 32.0 percent and the operating (non-GAAP) income margin from continuing operations of 10.6 percent was down 4.3 points year to year.

Diluted earnings per share from continuing operations of $6.13 in 2020 decreased 42.0 percent and operating (non-GAAP) diluted earnings per share of $8.67 decreased 32.3 percent versus 2019, both including a ($1.84) impact from the fourth-quarter 2020 structural actions.

During 2020, we continued to take actions to further enhance our balance sheet and liquidity position. At December 31, 2020, the balance sheet remained strong with flexibility to support and invest in the business, with a strong cash position and ample credit available during these uncertain times. Cash and cash equivalents, restricted cash and marketable securities at year end were $14.3 billion, an increase of $5.3 billion from December 31, 2019. Throughout 2020, we took mitigation actions to preserve liquidity as well as strategic actions to optimize our capital structure, for example, we re-focused our Global Financing portfolio reducing our external debt needs. We have reduced total debt by $1.4 billion from prior year end and $11.5 billion since the second quarter of 2019 (immediately preceding the Red Hat transaction).

Total assets increased $3.8 billion (increased $0.9 billion adjusted for currency) from December 31, 2019 primarily driven by:

An increase of $5.3 billion in cash and cash equivalents, restricted cash and marketable securities;
An increase in deferred taxes of $4.1 billion primarily due to the intra-entity sale of IP in the first quarter; and
An increase in prepaid pension assets of $0.7 billion driven by higher returns on plan assets and plan remeasurements; partially offset by
A decline in receivables of $6.5 billion mainly due to sales of financing receivables, continued focus on collections, including collection of divestiture-related receivables and a decline in revenue.

Total liabilities increased $4.0 billion (increased $0.1 billion adjusted for currency) from December 31, 2019 driven by:

An increase in other accrued expenses and liabilities of $2.5 billion primarily due to the workforce rebalancing charge in the fourth quarter of 2020;
An increase in deferred income of $1.3 billion; and
An increase in retirement and nonpension postretirement benefit obligations of $1.1 billion mainly driven by plan remeasurements; partially offset by
A decrease in total debt of $1.4 billion.

Total equity of $20.7 billion decreased $0.3 billion from December 31, 2019 as a result of:

Dividends paid of $5.8 billion; partially offset by
Net income of $5.6 billion.

Cash provided by operating activities was $18.2 billion in 2020, an increase of $3.4 billion compared to 2019, driven primarily by an increase in cash provided by receivables ($4.8 billion); partially offset by performance-related declines within net income.

Net cash used in investing activities of $3.0 billion decreased $23.9 billion compared to the prior year, primarily driven by a decrease in net cash used for acquisitions ($32.3 billion) due to the acquisition of Red Hat in the prior year, partially offset by a decrease in cash provided by net non-operating finance receivables ($6.2 billion), primarily driven by the wind down of the OEM IT commercial financing operations.

Financing activities were a net use of cash of $9.7 billion in 2020 compared to a net source of cash of $9.0 billion in 2019. The year-to-year change of $18.8 billion was driven by a decrease in net cash provided from debt transactions ($20.0 billion) primarily driven by a higher level of net additions in the prior year to fund the Red Hat acquisition and a decrease in cash used for gross common stock repurchases ($1.4 billion).

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Management Discussion

International Business Machines Corporation and Subsidiary Companies

                       23

DESCRIPTION OF BUSINESS

Please refer to IBM’s Annual Report on Form 10-K filed with the SEC on February 23, 2021, for Item 1A. entitled “Risk Factors.”

We create value for clients by providing integrated solutions and products that leverage: data, information technology, deep expertise in industries and business processes, with trust and security and a broad ecosystem of partners and alliances. Our hybrid cloud platform and AI technology and services capabilities support clients’ digital transformations and help them engage with their customers and employees in new ways. These solutions draw from an industry-leading portfolio of consulting and IT implementation services, cloud, digital and cognitive offerings, and enterprise systems and software which are all bolstered by one of the world’s leading research organizations.

IBM Strategy

As technology has increasingly become a key engine of business success, enterprises around the world are prioritizing digital transformation. The pressing need to adapt to evolving market requirements and adopt new business models that improve customer experience and streamline business performance has accelerated the urgency of this transformation.

To date, only 25 percent of enterprise workloads have made it onto a public cloud– mostly limited to greenfield cloud applications or ones that are easy to “lift and shift”. The remaining 75 percent have not moved, as enterprises wrestle with how to handle the mission-critical workloads and data that require heightened security, particularly for highly regulated industries with complex, often cross-border, compliance needs.

Hybrid cloud and AI are the only way to deliver the digital transformation businesses are looking for across all their processes, applications and data. Together, they have a multiplier effect on the speed and breadth of transformation. Only a fraction of enterprise data is being leveraged for business insights, in part because it is spread across public clouds, datacenters and increasingly, edge computing. The emergence of edge computing across many industries will only expand the kinds of hybrid environments our clients use.

A hybrid cloud approach bridges the silos within this existing enterprise infrastructure, maintaining security for mission-critical workloads while enabling the data collection and analysis that accelerates development and deployment of AI at scale. AI unlocks the value of enterprise data, using it to reinvent processes, predict outcomes and transform businesses.

The pressing need to pivot to remote work and reinvent their business models during the pandemic accelerated the urgency of this transformation for many enterprises. Companies are focused more than ever on moving workloads to the cloud.  

IBM’s Commitment to Hybrid Cloud and AI

That makes hybrid cloud and AI an enormous opportunity for IBM. Hybrid cloud alone represents a $1 trillion market.

We are targeting this market because we recognize the value it brings to our clients. Through deep engagement with a wide breadth of clients, we know that a hybrid cloud approach on average creates 2.5 times more value for enterprises than a public cloud-alone strategy, and IBM leads in delivering better return on investment (ROI) through hybrid cloud. This higher ROI comes from enhanced business acceleration, developer productivity, infrastructure cost efficiency and regulatory compliance and security.

We have built a hybrid cloud platform, based on open technologies, that allows clients to realize their digital and AI transformations across the applications, data and environments in which they operate. Watson is IBM’s industry leading AI for business, a portfolio of enterprise-ready pre-built applications and tools designed to reduce the costs and hurdles of AI adoption through industry-leading natural language processing, automation and trust in our responsible use of AI. Building on our hybrid cloud platform, our software collects and analyzes data from across our clients’ enterprises, training our AI to provide insights into their business processes. These insights enable intelligent workflows, reinventing the way businesses operate and driving improved business outcomes that accelerate our clients’ adoption of AI.

Trust is a key differentiator for IBM’s AI, and of paramount importance to our clients. In a recent survey, 76 percent of AI professionals said being able to trust their AI’s output is fair, safe and reliable is “critically” or “very” important to their business. That is why we believe that AI must be transparent and explainable, and that data and insights belong to the creator. In keeping with this belief, we have designed hybrid cloud and AI solutions that give our clients sole control of their encryption keys. Our homomorphic encryption takes data privacy and security one step further, allowing data to be processed without decryption.  

We have pivoted all of IBM to deliver on this hybrid cloud and AI value for our clients. We believe we have the portfolio that will support IBM’s success as well our clients’ and ecosystem partners’ success. It includes the services capabilities that drive consumption of our technology and enable digital transformation, our software portfolio that can achieve transformational business outcomes through AI and automation, and our systems and infrastructure that can run this platform for mission critical applications.

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IBM’s Technology Stack and Platform Approach

IBM offers clients a full technology stack that meets them wherever they are on their journey, from their existing IT infrastructure to our hybrid cloud platform to our cloud-native software to our services professionals who can advise on custom solutions that create the most value for our clients. Our ecosystem partners enhance the client experience and innovation that can be derived from IBM technology.

Our hybrid cloud approach is platform-centric, with Linux, containers and Kubernetes as the architectural foundation. Platforms provide compelling economics:  every $1 of platform spend on average drives $3 to $5 of software revenue, $6 to $8 of services and $1 to $2 of enterprise infrastructure. The multiplier effect of our technology stack creates more value for IBM and our growing ecosystem of partners.

Graphic

Hybrid cloud platforms and software comprise a $450 billion market opportunity and are the key to any hybrid cloud architecture.

Red Hat OpenShift is the leading hybrid cloud software platform, and the only one that is fully integrated and open source, with built-in development, security and operations features. It takes advantage of an ecosystem of millions of developers to accelerate innovation. Leveraging the power of Kubernetes and containers, OpenShift creates the foundation that allows our clients to manage siloed, multi-cloud, edge and legacy infrastructure as a single platform. These capabilities are a clear differentiator, enabling our clients to “write once, deploy anywhere” for their hybrid architecture. We are seeing strong momentum, with more than 2,800 clients using our hybrid cloud platform at the end of 2020.

Cloud Paks are IBM’s containerized, modernized software built to extend the value of OpenShift. They are key to realizing value through digital transformation in four important ways. They help our clients to modernize applications to take advantage of the hybrid platform, automate processes for speed and efficiency, use the power of AI for data driven decision-making and prediction, and secure the entire platform from the data center to the edge. Cloud Paks provide a powerful addition to IBM’s traditional middleware. Our traditional middleware is an industry standard that creates tremendous value for our clients through connectivity on all kinds of systems and gives IBM a leadership position in the market.

IBM’s software enables solutions that can transform businesses. It is the software that solves industry or business-specific problems such as supply chain or asset management and uses our breakthrough natural language processing and automation capabilities as well as other technologies including analytics, encryption, blockchain and machine learning. IBM Research continues to advance these technologies, for example integrating neural and symbolic techniques to build AI that can perform more complex tasks by understanding and reasoning more like humans.

Business transformation and hybrid cloud services provide a $300 billion market opportunity. Key to how our technology is delivered, IBM Global Business Services (GBS) is a leading design, consulting and systems integration organization, with more OpenShift certified experts than any of the competition. They are the leaders in helping enterprises move workloads onto OpenShift – the top hybrid cloud platform – and have built or migrated hybrid cloud applications for more than 500 clients.

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Our consultants have the trust of clients around the world, many having worked in the same industries as the clients they serve. Our services professionals bring that deep knowledge to helping clients develop their hybrid cloud infrastructure, applying the full range of IBM’s and its partners’ capabilities to build intelligent workflows enabled by our technology stack. GBS works with our ecosystem partners and IBM developers to create the custom solutions that realize digital transformation for our clients in any country and any industry.

Infrastructure, a $230 billion market, is at the base of our stack, incorporating the public and private cloud technology that integrates with our hybrid cloud approach.

Our clients are using a combination of public and private cloud infrastructure to keep their mission-critical data and workloads secure. IBM provides both in a way that can easily be slotted into our hybrid cloud platform and AI. IBM public cloud is the technology behind our clouds for highly regulated industries, such as IBM Cloud for Financial Services and IBM Cloud for Telecommunications, with industry-specific security and compliance features. To help clients integrate their private clouds into a hybrid cloud strategy using IBM IT infrastructure, we have made investments in our IBM Z, LinuxONE, Power and Storage offerings to support our hybrid cloud platform and software.

Investing in the Future

Investment in future technologies is an important part of our strategy. Hybrid cloud and AI are the technologies of today, but IBM’s investment in quantum computing positions us to win in the next era of computing. We were the first technology company to publish plans to produce a quantum processor with more than 1,000 qubits by 2023 giving us a significant first mover advantage.  

We already have more than 285,000 registered users in our market-leading quantum network. The 130+ members of the IBM Q Network – including universities, banks, auto companies, telcos and a wide array of companies from other industries – have run over 500 billion quantum circuits.

IBM Research continues to develop new technologies and improve on our existing ones, ensuring that IBM stays in the vanguard of technological innovation that helps enterprises achieve their digital transformations.

Aligning Structure to Strategy

As we focus our strategy on hybrid cloud and AI, IBM is making it easier for our clients to consume our technology and gain better access to our deep technical expertise.

We are adjusting our portfolio to align to our strategy. The announced spin-off of our managed infrastructure services business will better align IBM to our hybrid cloud platform and AI strategy and create clearer focus for both companies. With over 4,600 technology-intensive, highly regulated clients in 115 countries and more than twice the scale of its nearest competitor, NewCo will pursue a $500 billion market opportunity in managed infrastructure services.

At the same time, we continue to invest organically and inorganically. The acquisitions we announced in 2020 extend our hybrid cloud and AI technology and services capabilities to provide value for our clients.  

We are changing the way we go to market to simplify our client segmentation and better align IBM’s salesforce with our clients so that we more consistently deliver the value of our platform. We will demonstrate the value of our hybrid cloud and AI approach through technical and experiential selling. IBM Garage, a market-leading immersive experience for co-creating solutions, helps our clients and partners grasp the value of the platform by seeing it in practice.

We are expanding our ecosystem by adding hundreds of new global systems integrators, independent software vendors and major third-party software partners. We are investing $1 billion in our ecosystem to ensure that our partners have the resources they need to develop software and build their businesses on our platform expanding IBM’s go-to-market reach.

When our partners succeed, our clients succeed, and that translates to success for IBM. Our hybrid cloud and AI strategy is designed for our mutual success. It is the engine to propel growth across our entire business, enhanced by a revised sales strategy, ecosystem priority and go-to-market approach. The focus of 2021 will be to accelerate that engine.

Business Segments and Capabilities

Our hybrid cloud and AI strategy is realized through our operations and consist of five business segments: Cloud & Cognitive Software, Global Business Services, Global Technology Services, Systems and Global Financing.

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Cloud & Cognitive Software

Cloud & Cognitive Software brings together IBM’s software platforms and solutions, enabling us to help clients predict, automate, secure and modernize, on a secure hybrid cloud. It includes all software, except operating system software reported in the Systems segment.

Cloud & Cognitive Software comprises three business areas–Cognitive Applications, Cloud & Data Platforms and Transaction Processing Platforms, which have the following capabilities:

Cognitive Applications: includes software that address vertical and domain-specific solutions, increasingly infused with AI, enabled by IBM’s Watson technology. Application areas such as health, financial services, supply chain, asset management, weather and security software and services are among the offerings.

Cloud & Data Platforms: includes the company’s distributed middleware and data platform software, including Red Hat, which enables the operation of clients’ hybrid cloud environments, whether on-premise or in public and private clouds. Included are IBM Cloud Paks, which are pre-integrated enterprise grade solutions built on Red Hat OpenShift and a combination of containerized IBM and Red Hat software and services. It also includes product areas such as WebSphere distributed, analytics platform software such as DB2 distributed, information integration, and enterprise content management, as well as blockchain and AI/Watson platforms.

As clients increasingly move more of their mission-critical workloads to the cloud, their multi-cloud environments will be based on a foundation of Linux, with Kubernetes open source software to deploy, manage and scale container-based applications. Red Hat, which provides the leading Linux operating system–Red Hat Enterprise Linux (RHEL)–and the leading hybrid cloud platform–Red Hat OpenShift–is at the center of this transformational shift among clients.

Transaction Processing Platforms: the software that supports client mission critical on-premise workloads in industries such as banking, airlines and retail. This includes transaction processing software such as Customer Information Control System and storage software, as well as the analytics and integration software running on IBM operating systems (e.g., DB2 and WebSphere running on z/OS).

Global Business Services

Global Business Services provides clients with consulting, business process and application management services, focused on implementing AI-enabled intelligent workflows and modernizing application suites, optimized for hybrid cloud environments. These professional services deliver value and innovation to clients through solutions which leverage industry, technology and business strategy and process expertise. GBS is the digital reinvention partner for IBM clients, combining industry knowledge, functional expertise, and applications with the power of business design and cognitive and cloud technologies. The full portfolio of GBS services is backed by its globally integrated delivery network and integration with technologies, solutions and services across IBM.

GBS assists clients in their digital transformations, helping them build business platform strategies and experiences, transform processes to intelligent workflows using AI and other exponential technologies, and build hybrid, open cloud infrastructures.

Global Business Services comprises three business areas–Consulting, Application Management and Global Process Services, which have the following capabilities:

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

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

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

Global Technology Services

Global Technology Services provides comprehensive IT infrastructure and platform services that create business value for clients. Clients gain access to leading-edge capabilities and realize high-quality performance, greater flexibility and economic value. GTS delivers these outcomes through insights drawn from IBM’s decades of experience across thousands of engagements, the skills of practitioners, advanced technologies, applied innovation from IBM Research and global scale.

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Global Technology Services comprises two business areas–Infrastructure & Cloud Services and Technology Support Services, which have the following capabilities:

Infrastructure & Cloud Services:  delivers a portfolio of project, managed, outsourcing and cloud-delivered services focused on clients’ enterprise IT infrastructure environments with improved quality, flexibility and economic value. The portfolio consists of Infrastructure Services and IBM Cloud.

Infrastructure Services modernizes and manages IT environments to accelerate clients’ digital transformations. It provides a comprehensive set of services and solutions that include resiliency, security, and network capabilities. These solutions embed unique insights drawn from depth of expertise and scale to enable high performance of mission-critical systems and services. The portfolio is built leveraging platforms, such as the MultiCloud Management Platform and the IBM Services Platform with Watson, which augment human intelligence with cognitive technologies to address complex client environments. This portfolio is delivered by skilled and experienced practitioners to ensure secure, resilient and reliable client environments. On October 8, 2020, IBM announced our plan to separate the managed infrastructure services unit into a new public company. We are on track to complete the separation by the end of 2021.

The IBM Cloud infrastructure layer is built on an open architecture and specifically designed for clients to run mission critical workloads with leading edge security capabilities including confidential computing and keep your own keys to ensure our clients data is their data. It also includes industry specific public clouds with built-in controls for highly regulated industries such as financial services, telecommunications, government and healthcare. IBM Cloud powered by deep AI capabilities across the hybrid cloud platform helps our clients extract insights from their data from multiple sources, all within a secure and open architecture. Built on enterprise grade hardware, it also provides storage, network functionality, and a full range of compute options such as virtual machines, containers, bare metal, and serverless, as well as virtualization for enterprise deployments.

Technology Support Services: delivers comprehensive support services to maintain and improve the availability of clients’ IT infrastructures. These offerings include maintenance for IBM products and other technology platforms, as well as open source and cross-vendor software and solution support, drawing on innovative technologies and leveraging IBM Services Platform with Watson capabilities.

Systems

Systems provides clients with innovative infrastructure platforms to help meet the new requirements of hybrid multi-cloud and enterprise AI workloads. IBM Systems also designs advanced semiconductor and systems technology in collaboration with IBM Research, primarily for use in our systems.

Systems comprises Systems Hardware and Systems Operating Software, which have the following capabilities:

Systems Hardware: includes IBM’s servers and Storage Systems.

Servers: a range of high-performance systems designed to address computing capacity, security and performance needs of businesses, hyperscale cloud service providers and scientific computing organizations. The portfolio includes IBM Z and LinuxONE, trusted enterprise platforms for integrating data, transactions and insight; and Power Systems, a system designed from the ground up for big data and enterprise AI, optimized for hybrid cloud and Linux.

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

Operating Systems Software: IBM Z operating system environments include z/OS, a security-rich, high-performance enterprise operating system, as well as Linux. Power Systems offers a choice of AIX, IBM i or Linux operating systems that leverage POWER architecture to deliver secure, reliable and high performing enterprise-class workloads across a breadth of server offerings.

Global Financing

Global Financing encompasses two primary businesses: financing, primarily conducted through IBM Credit LLC (IBM Credit), and remanufacturing and remarketing. IBM Credit, a wholly owned subsidiary of IBM, facilitates IBM clients’ acquisition of information technology systems, software and services through its financing solutions. The financing arrangements are predominantly for products or services that are critical to the end users’ business operations and support IBM’s hybrid cloud platform and AI strategy. Global Financing conducts a comprehensive credit evaluation of its clients prior to extending financing. As a captive financier, Global Financing has the benefit of both deep knowledge of its client base and a clear insight into the products and services financed. These factors allow the business to effectively manage two of the major risks associated with financing, credit and residual value, while generating

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strong returns on equity. Global Financing also maintains a long-term partnership with IBM’s clients through various stages of the IT asset life cycle–from initial purchase and technology upgrades to asset disposition decisions.

Global Financing comprises the following business areas:

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

Commercial Financing: short-term working capital financing to suppliers, distributors and resellers primarily of IBM products. In 2019, we wound down the Original Equipment Manufacturer (OEM) IT portion of our commercial financing operations. In the fourth-quarter 2020, Global Financing expanded its financial flexibility by entering into an agreement with a third-party investor to sell up to $3 billion of its IBM commercial financing receivables, at any one time, on a revolving basis over the agreement’s three-year term.

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

IBM Worldwide Organizations

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

Global Markets
Research, Development and Intellectual Property

Global Markets

IBM operates in more than 175 countries with a broad distribution of revenue. To manage this global footprint, Global Markets leads our dedicated country-based IBM operations in order to serve clients, develop markets, and ultimately, ensure IBM is led through a client lens.

These teams serve our clients locally, complemented by digital capabilities, global talent and resources, and an extensive partner ecosystem. These country teams have client leaders, IBM consultants, solution specialists, delivery professionals and business partners all working on behalf of clients. Their mission is to provide insights and innovation and co-create with clients to help them address their most pressing business challenges and opportunities.

In this way, we serve as a trusted partner to clients, establishing and maintaining relationships that deliver long-term value based on industry expertise, innovative technologies and an ability to deliver mission critical capabilities to an enterprise at scale.

Research, Development and Intellectual Property

Our research and development (R&D) operations differentiate us from our competitors. In 2020, we invested approximately 9 percent of total revenue for R&D, focusing on high-growth, high-value opportunities. IBM Research works with clients and our business units through global labs on near-and mid-term innovations. It delivers many new technologies to our portfolio every year and helps clients address their most difficult challenges. IBM Research scientists are conducting pioneering work in hybrid cloud, AI, quantum computing, security, systems and more–applying these technologies across industries including financial services, healthcare, automotive, pharmaceuticals and energy.

We actively continue to seek IP protection for our innovations. Some of our technological breakthroughs are used exclusively in IBM products, while others are licensed and may be used in IBM products and/or the products of the licensee. As part of our business model, we license certain of our IP assets, which constitute high-value technology, but may be applicable in more mature markets. While our various proprietary IP rights are important to our success, we believe our business as a whole is not materially dependent on any particular patent or license, or any particular group of patents or licenses. In addition, IBM owns or is licensed under a number of third-party patents, which vary in duration, relating to its products.

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Human Capital

Employees and Related Workforce

(In thousands)

For the year ended December 31:

    

2020

IBM/wholly owned subsidiaries

 

345.9

Less-than-wholly owned subsidiaries

 

10.5

Complementary*

 

18.9

*

The complementary workforce is an approximation of equivalent full-time employees hired under temporary, part-time and limited-term employment arrangements to meet specific business needs in a flexible and cost-effective manner.

As a globally integrated enterprise, IBM operates in more than 175 countries and is continuing to shift our business to the higher value segments of enterprise IT. Our global workforce is highly skilled, reflective of the work we do for our clients’ digital transformations and in support of their mission-critical operations. Our global workforce includes developers, consultants, client delivery and services specialists, research scientists and others. Our employees are among the world’s leading experts in cloud, AI, quantum computing, cybersecurity and industry-specific solutions.

Talent and Culture

IBM attracts, develops, engages and retains talent in a dynamic and competitive environment. IBM offers a compelling employee value proposition: we develop and deliver innovative technologies including hybrid cloud, AI, and quantum, for clients whose businesses the world relies on. IBM is continuously transforming and developing its talent, both through learning and hiring. In 2020, more than 30,000 people from 75 countries joined IBM. Employees are encouraged and enabled to learn and grow their careers, with employees completing more than 80 hours of learning on average in 2020. Our digital learning platform, Your Learning, uses Watson AI to generate personalized recommendations and includes peer-to-peer collaboration and internal social sharing. Hundreds of thousands of employees globally participate in our annual engagement survey, which measures elements such as workplace experience, inclusion, pride and propensity to recommend IBM as an employer. Our industry-leading talent practices enabled IBM to improve employee engagement by more than 2 points year to year and retain employees above historical levels. Every manager and leader in IBM has access to their team and organization engagement levels along with actionable data-driven insights.

Diversity and Inclusion

IBM has a long, proud history as a pioneer in diversity and inclusion. A diverse and inclusive workplace leads to greater innovation, agility, performance and engagement, enabling both business growth and societal impact. We ensure employees from diverse backgrounds are engaged, can be their authentic selves, build skills and achieve their greatest potential. With the full support of our Board of Directors, beginning in April 2021 we will disclose annually an overview of our diversity, pay equity and inclusion efforts and programs, including diversity representation data. We are proud of our inclusive culture, with nine out of ten employees responding that they can be their authentic selves at work. Our focus on creating a diverse and inclusive workplace led to increased engagement levels for women, Black and Hispanic employees. We are also focused on meeting or exceeding the diversity of skilled talent in the labor market, for every underrepresented group, and at every level of our company. Women now make up more than 33 percent of our workforce, and we increased representation of women, Black and Hispanic employees in 2020 compared to the prior year. While we have taken significant actions and made progress, we have ongoing work to do. IBM believes in pay equity: we have had an equal pay policy since 1935 and a long-standing practice of maintaining pay equity. To this end, we conduct statistical pay equity analysis that includes all countries with IBM employees. We also empower employees to understand their pay by providing comprehensive education and transparent access to pay statements including a comparison to market pay ranges.

Health, Safety and Well-Being

We have a long-standing commitment to the health, safety and well-being of our employees. Never has this been more important than in 2020 as we faced the COVID-19 pandemic. From early in the course of the outbreak, we supported the health, safety and well-being of our employees by restricting travel, cancelling in-person meetings and events and transitioning nearly 95 percent of our workforce to work from home. We have a robust case management system to manage COVID-19 exposures and a comprehensive playbook on workplace health and safety measures that allow our offices to reopen when conditions improve. Employees are supported with 24/7 access to IBM’s world-class Health and Safety team, education, timely updates and forums to ask questions and raise concerns.

Additionally, from the outset of the COVID-19 pandemic, IBM has focused on mental health and supporting our employees for the long run with programs shaped by frequent survey polls and employee input sessions. Such programs include: four weeks additional paid time off for working parents and caregivers facing disruption, robust case management through our Employee Assistance Program to manage COVID-19 exposures and develop comprehensive guidance, training for employees on resilience and for managers on how to identify and address mental health issues and financial counseling offerings tailored to pandemic-related matters.

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YEAR IN REVIEW

Results of Continuing Operations

Segment Details

The following is an analysis of the 2020 versus 2019 reportable segment results. The table below presents each reportable segment’s external revenue and gross margin results. Segment pre-tax income includes transactions between segments that are intended to reflect an arm’s-length transfer price and excludes certain unallocated corporate items.

($ in millions)

Yr.-to-Yr.

Yr.-to-Yr.

 

Percent/

Percent Change

 

Margin

Adjusted for

 

For the year ended December 31:

    

2020

    

2019

    

Change

    

Currency

Revenue

Cloud & Cognitive Software

 

$

23,376

 

$

22,891

*

2.1

%

1.9

%

Gross margin

77.5

%

77.1

%*

0.4

pts.

Global Business Services

16,162

16,798

*

(3.8)

%

(4.1)

%

Gross margin

29.7

%

27.7

%*

2.0

pts.

Global Technology Services

25,812

27,361

(5.7)

%

(5.4)

%

Gross margin

34.8

%

34.8

%

0.0

pts.

Systems

6,978

7,604

 

(8.2)

%

(8.7)

%

Gross margin

55.9

%

53.1

%

2.8

pts.

Global Financing

1,123

1,400

 

(19.8)

%

(19.2)

%

Gross margin

37.7

%

35.6

%

2.1

pts.

Other

169

1,092

*

(84.5)

%

(84.4)

%

Gross margin

NM

12.5

%*

NM

Total consolidated revenue

 

$

73,620

 

$

77,147

 

(4.6)

%**

(4.7)

%

Total consolidated gross profit

 

$

35,575

 

$

36,488

 

(2.5)

%

Total consolidated gross margin

48.3

%

47.3

%

1.0

pts.

Non-operating adjustments

Amortization of acquired intangible assets

732

534

 

37.1

%

Acquisition-related charges

13

(100.0)

%

Spin-off-related charges

1

 

NM

Operating (non-GAAP) gross profit

 

$

36,308

 

$

37,035

 

(2.0)

%

Operating (non-GAAP) gross margin

49.3

%

48.0

%

1.3

pts.

*

Recast to reflect segment changes.

** (3.5) percent excluding divested businesses and adjusted for currency.

NM–Not meaningful

Cloud & Cognitive Software

($ in millions)

 

Yr.-to-Yr.

 

Yr.-to-Yr.

Percent Change

 

Percent

Adjusted for

 

For the year ended December 31:

    

2020

    

2019

Change 

Currency

Cloud & Cognitive Software external revenue

 

$

23,376

 

$

22,891

*

2.1

%  

1.9

%

Cloud & Data Platforms

$

11,481

**

$

9,499

 

20.9

%  

20.5

%

Cognitive Applications

 

5,290

 

5,456

*

(3.0)

(3.2)

Transaction Processing Platforms

6,606

7,936

 

(16.8)

 

(17.0)

* Recast to reflect segment changes.

** Red Hat was acquired on July 9, 2019. Results in 2020 include a full year of Red Hat revenue.

Cloud & Cognitive Software revenue of $23,376 million increased 2.1 percent as reported (2 percent adjusted for currency) in 2020 compared to the prior year. There was strong growth in Cloud & Data Platforms, as reported and at constant currency, driven primarily by Red Hat, as our hybrid cloud and AI solutions are resonating with clients. Both Cognitive Applications and Transaction Processing Platforms revenue decreased year to year as reported and adjusted for currency, driven by declines in transactional software performance as clients delayed longer term commitments in the current environment.

Cloud & Data Platforms revenue of $11,481 million increased 20.9 percent as reported (20 percent adjusted for currency) compared to the prior year, driven by a full year of Red Hat revenue contribution and Red Hat’s strong performance in infrastructure and application development and emerging technologies. Red Hat OpenShift, the leading open source hybrid cloud platform, helped clients modernize mission-critical workloads, build cloud native applications, and deploy and manage data and applications across various clouds within an environment that is open, flexible and secure. We now have more than 2,800 clients using our hybrid cloud platform, which is an increase of more than 1,000 new enterprise clients since the acquisition of Red Hat in July 2019.

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Cognitive Applications revenue of $5,290 million decreased 3.0 percent as reported (3 percent adjusted for currency) compared to the prior year. We had good client adoption in security solutions such as Cloud Pak for Security and growth in security services as clients focused on their secure digital transformations. This growth was offset by declines in solutions used by some of the more impacted industries in the current macroeconomic environment, where clients deferred transformational investments to focus on their core operations.

Transaction Processing Platforms revenue of $6,606 million decreased 16.8 percent as reported (17 percent adjusted for currency) in 2020 compared to the prior year. With the macroeconomic environment due to the COVID-19 pandemic, clients focused on near-term priorities resulting in purchase deferrals, which impacted our transactional software performance in 2020. However, our subscription and support revenue grew in 2020 compared to the prior year.

Within Cloud & Cognitive Software, cloud revenue of $7.0 billion grew 67 percent as reported and adjusted for currency year to year.

($ in millions)

 

Yr.-to-Yr.

 

Percent/

 

Margin

 

For the year ended December 31:

    

2020

    

2019

*

Change

Cloud & Cognitive Software

External gross profit

 

$

18,118

 

$

17,650

 

2.7

%

External gross profit margin

77.5

%  

77.1

%  

0.4

pts.

Pre-tax income

 

$

6,362

 

$

7,811

 

(18.5)

%

Pre-tax margin

24.0

%  

30.4

%  

(6.4)

pts.

* Recast to reflect segment changes.

The Cloud & Cognitive Software gross profit margin increased 0.4 points to 77.5 percent in 2020 compared to the prior year. The gross profit margin expansion was driven primarily by the full-year contribution from Red Hat and year-to-year improvement in services margins as we continued to focus on shifting to higher value services, such as Software-as-a-Service and security services, and driving AI-powered automation across the portfolio. Pre-tax income of $6,362 million decreased 18.5 percent compared to the prior year with a pre-tax margin decline of 6.4 points to 24.0 percent. The decline in pre-tax income and margin was driven primarily by the revenue decline in Transaction Processing Platforms, our continued investment in our strategic areas of cloud and AI, and the impact of higher workforce rebalancing charges year-to-year which had 2.6 points of impact on the pre-tax margin.

Global Business Services

($ in millions)

Yr.-to-Yr.

 

Yr.-to-Yr.

Percent Change

 

Percent

Adjusted for

 

For the year ended December 31:

    

2020

    

2019

Change

    

Currency

Global Business Services external revenue

 

$

16,162

 

$

16,798

*

(3.8)

%  

(4.1)

%

Consulting

 

$

8,083

 

$

8,157

*

(0.9)

%  

(1.3)

%

Application Management

7,133

7,646

(6.7)

 

(6.9)

Global Process Services

945

995

(5.0)

 

(4.7)

* Recast to reflect segment changes.

GBS revenue of $16,162 million decreased 3.8 percent as reported (4 percent adjusted for currency) in 2020 compared to the prior year. As the global pandemic intensified through the year, we aligned our offerings to help clients focus on engaging customers virtually, modernizing and migrating applications to the cloud, empowering a remote workforce, and focusing on cybersecurity and IT resiliency. In 2020, GBS accelerated the number of engagements using Red Hat technology and continued to drive client adoption of Red Hat OpenShift and IBM Cloud Paks.

Consulting revenue of $8,083 million decreased 0.9 percent as reported (1 percent adjusted for currency) compared to the prior year. Given the macroeconomic environment during 2020, clients shifted priorities, which led to project delays and less demand for more discretionary offerings. As we pivoted our offerings and capabilities to help address clients’ priorities around application modernization, our GBS Consulting total signings grew for the year at a mid-single digit rate compared to 2019.

Application Management revenue of $7,133 million decreased 6.7 percent as reported (7 percent adjusted for currency) driven primarily by the decline in our more traditional on-premise application management services, partially offset by growth in higher value offerings to develop, modernize and manage cloud applications. Our incumbency in Application Management creates the opportunity and trust to be the partner of choice for our clients’ digital journeys, and helps drive adoption of our hybrid cloud platform.

Global Process Services revenue of $945 million decreased 5.0 percent as reported (5 percent adjusted for currency), reflecting the impact of the ongoing macroeconomic environment on volume-based services. GPS returned to growth in the fourth quarter of 2020,

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32Management Discussion

International Business Machines Corporation and Subsidiary Companies

as we continued to deliver efficiency and flexibility to our clients’ processes by infusing innovative technology and redesigning intelligent workflows.

Within GBS, cloud revenue of $5.8 billion grew 11 percent as reported and adjusted for currency. GBS continued to drive the adoption of our hybrid cloud platform to help our clients accelerate their digital reinventions by modernizing their application infrastructures and leveraging business transformation services built on hybrid cloud.

($ in millions)

Yr.-to-Yr.

 

Percent/

 

Margin

 

For the year ended December 31:

    

2020

    

2019

*  

Change

Global Business Services

External gross profit

 

$

4,795

 

$

4,655

 

3.0

%

External gross profit margin

29.7

%

27.7

%

2.0

pts.

Pre-tax income

 

$

1,351

 

$

1,623

 

(16.8)

%

Pre-tax margin

8.3

%

9.5

%

(1.2)

pts.

* Recast to reflect segment changes.

The GBS gross profit margin increased 2.0 points to 29.7 percent compared to the prior year, driven by margin improvements across all three areas of the business. The gross margin expansion reflects our shift to higher-value offerings, improved productivity and operational efficiency created by our investments in innovative delivery capabilities and our ability to leverage our variable and global delivery resource model. Pre-tax income of $1,351 million decreased 16.8 percent compared to the prior year and the pre-tax margin declined 1.2 points to 8.3 percent. The year-to-year declines in pre-tax income and margin were driven by the higher workforce rebalancing charges year to year, which had 2.6 points of impact to pre-tax margin, partially offset by the gross margin expansion.

Global Technology Services

($ in millions)

Yr.-to-Yr.

 

Yr.-to-Yr.

Percent Change

 

Percent

Adjusted for

 

For the year ended December 31:

    

2020

    

2019

    

Change

    

Currency

Global Technology Services external revenue

 

$

25,812

 

$

27,361

(5.7)

%  

(5.4)

%

Infrastructure & Cloud Services

 

$

19,669

 

$

20,736

(5.1)

%

(5.2)

%

Technology Support Services

6,144

6,625

 

(7.3)

 

(6.0)

GTS revenue of $25,812 million decreased 5.7 percent as reported (5 percent adjusted for currency) in 2020 compared to the prior year. The revenue decline was driven by lower client business volumes primarily with clients in industries more impacted by the macroeconomic environment. However, cloud revenue grew as reported and adjusted for currency in 2020 compared to the prior year. We had strong contract renewals and added a number of new clients in the fourth quarter.

Infrastructure & Cloud Services revenue of $19,669 million decreased 5.1 percent as reported (5 percent adjusted for currency) compared to the prior year. Revenue was impacted by lower client-based business volumes year to year in the more economically sensitive industries. Clients took a longer-term view, with a focus on modernizing their core infrastructure to create operational efficiency and move their mission-critical workloads to a hybrid cloud platform. These clients turn to GTS’s managed infrastructure services with its deep expertise in managing clients’ mission-critical infrastructures and next generation service delivery capabilities infused with AI and automation. As we prepare to separate our managed infrastructure services business in 2021, we are deeply engaged with our clients to ensure a smooth transition to NewCo, the world’s leading provider of infrastructure services.

Technology Support Services (TSS) revenue of $6,144 million decreased 7.3 percent as reported (6 percent adjusted for currency) in 2020, driven primarily by the Systems hardware product cycles and a shift away from lower value services.

Within GTS, cloud revenue of $9.4 billion grew 10 percent as reported and adjusted for currency.

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                       33

($ in millions)

Yr.-to-Yr.

 

Percent/

 

Margin

 

For the year ended December 31:

    

2020

    

2019

Change

Global Technology Services

External total gross profit

 

$

8,975

 

$

9,515

 

(5.7)

%

External total gross profit margin

34.8

%

34.8

%

0.0

pts.

Pre-tax income

 

$

117

 

$

1,645

 

(92.9)

%

Pre-tax margin

0.4

%

5.8

%

(5.3)

pts.

The GTS gross profit margin of 34.8 percent was flat compared to the prior year. We had margin improvement across the portfolio from the benefits of workforce rebalancing actions taken earlier in the year and from the shift to higher-value business, partially offset by revenue declines in TSS. Pre-tax income of $117 million decreased 92.9 percent and pre-tax margin decreased 5.3 points year to year to 0.4 percent, reflecting the higher level of workforce rebalancing charges in the current year, which had 4.2 points of impact on the pre-tax margin. A significant portion of the structural actions in the fourth quarter of 2020 impacted GTS in order to further improve margins and the overall financial profile of the business.

Services Backlog and Signings

($ in billions)

Yr.-to-Yr.

 

Yr.-to-Yr.

Percent Change

 

    

    

    

Percent

    

Adjusted for

 

At December 31:

 

2020

 

2019

 

Change

 

Currency

Total backlog

 

$

110.8

 

$

112.4

 

(1.5)

%  

(4.5)

%

The estimated total services backlog at December 31, 2020 was $111 billion, a decrease of 1.5 percent as reported (4 percent adjusted for currency).

Total services backlog includes Infrastructure & Cloud Services, Security Services, Consulting, Global Process Services, Application Management and TSS. Total backlog is intended to be a statement of overall work under contract which is either noncancellable, or which historically has very low likelihood of termination, given the criticality of certain services to the company’s clients. Total backlog does not include as-a-Service arrangements that allow for termination under contractual commitment terms. Backlog estimates are subject to change and are affected by several factors, including terminations, changes in the scope of contracts, periodic revalidations, adjustments for revenue not materialized and adjustments for currency.

($ in millions)

Yr.-to-Yr.

 

Yr.-to-Yr.

Percent Change

 

    

    

    

Percent

    

Adjusted for

 

For the year ended December 31:

 

2020

 

2019

 

Change

 

Currency

Total signings

 

$

38,770

 

$

40,741

 

(4.8)

%  

(5.1)

%

Services signings are management’s initial estimate of the value of a client’s commitment under a services contract. There are no third-party standards or requirements governing the calculation of signings. The calculation used by management involves estimates and judgments to gauge the extent of a client’s commitment, including the type and duration of the agreement, and the presence of termination charges or wind-down costs.

Signings include Infrastructure & Cloud Services, Security Services, Consulting, Global Process Services and Application Management contracts. Contract extensions and increases in scope are treated as signings only to the extent of the incremental new value. Total services signings can vary over time due to a variety of factors including, but not limited to, the timing of signing a small number of larger contracts, such as in Infrastructure & Cloud Services or Global Process Services. TSS is generally not included in signings as the maintenance contracts tend to be more steady state, where revenues equal renewals. Certain longer-term TSS contracts that have characteristics similar to outsourcing contracts are included in signings.

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

Management believes that the estimated values of services backlog and signings disclosed herein provide insight into our potential future revenue, which is used by management as a tool to monitor the performance of the business and viewed as useful decision-making information for investors. The conversion of signings and backlog into revenue may vary based on the types of services and

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34Management Discussion

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solutions, customer decisions, and as well as other factors, which may include, but are not limited to, macroeconomic environment or external events.

Systems

($ in millions)

    

    

    

    

    

Yr.-to-Yr.

 

Yr.-to-Yr.

Percent Change

 

Percent

Adjusted for

 

For the year ended December 31:

 

2020

 

2019

 

Change

 

Currency

Systems external revenue

 

$

6,978

 

$

7,604

 

(8.2)

%  

(8.7)

%

Systems Hardware

 

$

5,481

 

$

5,918

 

(7.4)

%  

(8.0)

%

IBM Z

 

1.9

 

1.2

Power Systems

 

(22.4)

 

(22.9)

Storage Systems

 

(6.1)

 

(6.7)

Operating Systems Software

1,497

1,686

 

(11.2)

 

(11.2)

Systems revenue of $6,978 million decreased 8.2 percent year to year as reported (9 percent adjusted for currency). Our Systems portfolio continues to deliver critical and lasting value to enterprise clients in support of our hybrid cloud strategy. Systems Hardware revenue of $5,481 million declined 7.4 percent as reported (8 percent adjusted for currency), driven primarily by declines in Power Systems and Storage Systems, partially offset by year-to-year growth in IBM Z. Operating Systems Software revenue of $1,497 million declined 11.2 percent as reported (11 percent adjusted for currency) compared to the prior year.

Within Systems Hardware, IBM Z revenue increased 1.9 percent as reported (1 percent adjusted for currency) despite an elongated z15 adoption cycle as a result of the challenging environment. The full-year growth in IBM Z reflects the importance of this high-value, secure and scalable platform with cloud native development capabilities. Our installed base of MIPS is more than 3.5 times the level of a decade ago, with 60 percent of our install base in new workload areas such as Linux.

Power Systems revenue decreased 22.4 percent as reported (23 percent adjusted for currency) year to year, reflecting the product cycles across the Power Systems portfolio.

Storage Systems revenue decreased 6.1 percent as reported (7 percent adjusted for currency) year to year, driven primarily by declines in high-end storage which is a reflection of the IBM Z cycle.

Within Systems, cloud revenue of $2.9 billion declined 3 percent as reported and adjusted for currency.

($ in millions)

Yr.-to-Yr.

 

Percent/

 

Margin

 

For the year ended December 31:

    

2020

    

2019

    

Change

    

Systems

External Systems Hardware gross profit

 

$

2,668

 

$

2,622

 

1.8

%

External Systems Hardware gross profit margin

48.7

%

44.3

%

4.4

pts.

External Operating Systems Software gross profit

 

$

1,232

 

$

1,412

 

(12.8)

%

External Operating Systems Software gross profit margin

82.3

%

83.8

%

(1.5)

pts.

External total gross profit

 

$

3,899

 

$

4,034

 

(3.3)

%

External total gross profit margin

55.9

%

53.1

%

2.8

pts.

Pre-tax income

 

$

449

 

$

701

 

(36.0)

%

Pre-tax margin

5.8

%

8.4

%

(2.7)

pts.

The Systems gross profit margin increased 2.8 points to 55.9 percent in 2020 compared to the prior year, driven primarily by margin improvements in IBM Z and Power Systems, and a mix to IBM Z hardware. Pre-tax income of $449 million declined 36.0 percent and pre-tax margin decreased 2.7 points year to year to 5.8 percent, driven primarily by the higher level of workforce rebalancing charges in the current year, which had 2.5 points of impact on the pre-tax margin.

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                       35

Global Financing

($ in millions)

Yr.-to-Yr.

 

Percent

 

For the year ended December 31:

    

2020

    

2019

    

Change

External revenue

 

$

1,123

 

$

1,400

 

(19.8)

%

Internal revenue

894

1,232

 

(27.5)

Total revenue

 

$

2,017

 

$

2,632

 

(23.4)

%

Pre-tax income

 

$

761

 

$

1,055

 

(27.8)

%

In 2019, we began the wind down of our OEM Commercial Financing business to refocus our Global Financing business on IBM’s products and services. In 2020, we entered into arrangements to sell certain financing receivables to third parties. While the strategic actions we have taken are the primary driver of the decline in external revenue and pre-tax income on a year-to-year basis, our repositioning of the Global Financing business has strengthened our liquidity position, improved the quality of our portfolio and lowered our debt needs.

Global Financing total revenue decreased 23.4 percent compared to the prior year. This was due to a decrease in internal revenue of 27.5 percent, driven by decreases in internal used equipment sales (down 22.3 percent to $670 million) and internal financing (down 39.5 percent to $224 million). The decrease in internal financing was due to lower average asset balances and yields. External revenue declined 19.8 percent due to decreases in external financing (down 25.5 percent to $834 million), reflecting the wind down of the OEM IT commercial financing operations and a decline in client financing revenue.

Sales of used equipment represented 47.5 percent and 43.4 percent of Global Financing’s revenue for the years ended December 31, 2020 and 2019, respectively, which reflects lower financing revenue compared to 2019. The gross profit margin on used sales was 50.7 percent and 52.2 percent for the years ended December 31, 2020 and 2019, respectively.

Global Financing pre-tax income decreased 27.8 percent year to year primarily driven by a decline in gross profit ($339 million) due to lower revenue, partially offset by a decrease in expense ($46 million), which was in line with the segment’s performance.

Geographic Revenue

In addition to the revenue presentation by reportable segment, we also measure revenue performance on a geographic basis.

($ in millions)

Yr.-to-Yr.

 

Percent Change

 

Yr.-to-Yr.

Excluding Divested

 

Yr.-to-Yr.

Percent Change

Businesses And

 

Percent

Adjusted for

Adjusted for

 

For the year ended December 31:

    

2020

    

2019

    

Change

    

Currency

    

Currency

Total revenue

 

$

73,620

 

$

77,147

 

(4.6)

%

(4.7)

%

(3.5)

%

Americas

 

$

34,114

 

$

36,274

 

(6.0)

%

(4.8)

%

(3.5)

%

Europe/Middle East/Africa

23,644

24,443

 

(3.3)

 

(4.7)

 

(3.6)

Asia Pacific

15,863

16,430

 

(3.5)

 

(4.3)

 

(3.5)

Total revenue of $73,620 million in 2020 decreased 4.6 percent year to year as reported (5 percent adjusted for currency and 4 percent excluding divested businesses and adjusted for currency).

Americas revenue decreased 6.0 percent as reported (5 percent adjusted for currency and 4 percent excluding divested businesses and adjusted for currency). Within North America, the U.S. decreased 4.9 percent and Canada decreased 6.0 percent as reported (5 percent adjusted for currency). Latin America declined 12.9 percent as reported (3 percent adjusted for currency). Within Latin America, Brazil declined 17.9 percent as reported (3 percent adjusted for currency).

EMEA revenue decreased 3.3 percent as reported (5 percent adjusted for currency and 4 percent excluding divested businesses and adjusted for currency). As reported, the UK, Germany, France and Italy decreased 9.5 percent, 6.3 percent, 3.4 percent and 1.0 percent, respectively, and declined 10 percent, 9 percent, 5 percent and 3 percent, respectively, adjusted for currency.

Asia Pacific revenue decreased 3.5 percent as reported (4 percent adjusted for currency and excluding divested businesses and adjusted for currency). Japan was flat as reported and decreased 2 percent adjusted for currency. As reported, China, Australia and India decreased 13.0 percent, 5.8 percent and 6.7 percent, respectively, and declined 13 percent, 5 percent and 2 percent, respectively, adjusted for currency.

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36Management Discussion

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Total Expense and Other (Income)

($ in millions)

Yr.-to-Yr.

 

Percent/

 

Margin

 

For the year ended December 31:

    

2020

    

2019

    

Change

Total consolidated expense and other (income)

 

$

30,937

*

$

26,322

 

17.5

%

Non-operating adjustments

Amortization of acquired intangible assets

(1,126)

(764)

 

47.3

Acquisition-related charges

(13)

(409)

 

(96.8)

Non-operating retirement-related (costs)/income

(1,123)

(615)

 

82.5

Spin-off-related charges

(28)

 

NM

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

 

$

28,648

*

$

24,533

 

16.8

%

Total consolidated expense-to-revenue ratio

42.0

%

34.1

%

7.9

pts.

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

38.9

%

31.8

%

7.1

pts.

* Includes a $2.0 billion pre-tax charge for structural actions in the fourth quarter.

NM–Not meaningful

Total expense and other (income) year-to-year results for the year ended December 31, 2020 were impacted by the Red Hat acquisition which closed in July 2019. As a result, in the current year, there was a full year of expenses for Red Hat operational spending and amortization of acquired intangible assets associated with the transaction. The current year also included a fourth-quarter $2.0 billion pre-tax charge for structural actions (primarily workforce rebalancing) to simplify and optimize our operating model.

Total expense and other (income) increased 17.5 percent in 2020 versus the prior year primarily driven by the fourth-quarter charge for workforce rebalancing, higher Red Hat operational spending, lower gains from divestitures and higher non-operating retirement-related costs, partially offset by lower spending including reductions in travel and other expenses associated with COVID-19 restrictions. Total operating (non-GAAP) expense and other (income) increased 16.8 percent year to year, driven primarily by the factors above excluding the higher non-operating retirement-related costs.

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

Selling, General and Administrative Expense

($ in millions)

Yr.-to-Yr.

 

Percent

 

For the year ended December 31:

    

2020

    

2019

    

Change

Selling, general and administrative expense

Selling, general and administrative–other

 

$

16,800

 

$

17,099

 

(1.8)

%

Advertising and promotional expense

1,542

1,647

 

(6.3)

Workforce rebalancing charges

2,922

*

555

 

426.3

Amortization of acquired intangible assets

1,123

762

 

47.5

Stock-based compensation

586

453

 

29.5

Provision for/(benefit from) expected credit loss expense

109

89

 

22.4

Total consolidated selling, general and administrative expense

 

$

23,082

*

$

20,604

 

12.0

%

Non-operating adjustments

Amortization of acquired intangible assets

(1,123)

(762)

 

47.5

Acquisition-related charges

(13)

(282)

(95.3)

Spin-off-related charges

(28)

 

NM

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

 

$

21,917

*

$

19,560

 

12.1

%

* Includes a $2.0 billion pre-tax charge for structural actions in the fourth quarter.

NM–Not meaningful

Total selling, general and administrative (SG&A) expense increased 12.0 percent in 2020 versus 2019, driven primarily by the following factors:

Fourth-quarter workforce rebalancing charge (10 points);
Higher spending (2 points) driven by a full year of Red Hat operational expense in 2020 compared to six months in 2019 (5 points), partially offset by spending reductions associated with COVID-19 restrictions;
Higher amortization of acquired intangible assets associated with the Red Hat transaction (1 point); partially offset by
Lower acquisition-related charges associated with the Red Hat transaction (2 points).

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Management Discussion

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                       37

Operating (non-GAAP) expense increased 12.1 percent year to year primarily driven by the same factors excluding the acquisition-related charges and amortization of acquired intangible assets associated with the Red Hat transaction.

Provisions for expected credit loss expense increased $19.8 million in 2020 compared to 2019. The receivables provision coverage was 2.4 percent at December 31, 2020, an increase of 70 basis points from December 31, 2019. The higher coverage rate at December 31, 2020 also reflects the adoption of the new guidance for current expected credit losses.

Research, Development and Engineering Expense

($ in millions)