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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549



FORM 10-K
ANNUAL REPORT
pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
FOR THE YEAR ENDED DECEMBER 31, 2017

1-2360
(Commission file number)

INTERNATIONAL BUSINESS MACHINES CORPORATION
(Exact name of registrant as specified in its charter)

NEW YORK
(State of Incorporation)
  13-0871985
(IRS Employer Identification Number)

ARMONK, NEW YORK
(Address of principal executive offices)

 

10504
(Zip Code)

914-499-1900
(Registrant's telephone number)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class
  Voting shares outstanding
at February 9, 2018
  Name of each exchange
on which registered
Capital stock, par value $.20 per share   921,167,894   New York Stock Exchange
        Chicago Stock Exchange

1.375%  Notes due 2019

 

 

 

New York Stock Exchange
2.750%  Notes due 2020       New York Stock Exchange
1.875%  Notes due 2020       New York Stock Exchange
0.500%  Notes due 2021       New York Stock Exchange
2.625%  Notes due 2022       New York Stock Exchange
1.25%    Notes due 2023       New York Stock Exchange
1.125%  Notes due 2024       New York Stock Exchange
2.875%  Notes due 2025       New York Stock Exchange
0.950%  Notes due 2025       New York Stock Exchange
0.300%  Notes due 2026       New York Stock Exchange
1.750%  Notes due 2028       New York Stock Exchange
1.500%  Notes due 2029       New York Stock Exchange
8.375%  Debentures due 2019       New York Stock Exchange
7.00%    Debentures due 2025       New York Stock Exchange
6.22%    Debentures due 2027       New York Stock Exchange
6.50%    Debentures due 2028       New York Stock Exchange
7.00%    Debentures due 2045       New York Stock Exchange
7.125%  Debentures due 2096       New York Stock Exchange

          Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. Yes  ý     No  o

          Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  o     No  ý

          Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ý     No  o

          Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  ý     No  o

          Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

          Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ý   Accelerated filer  o   Non-Accelerated filer  o
Smaller reporting company  o       (Do not check if a smaller reporting company)
        Emerging growth company  o

          If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  o

          Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes  o     No  ý

          The aggregate market value of the voting stock held by non-affiliates of the registrant as of the last business day of the registrant's most recently completed second fiscal quarter was $143.3 billion.

Documents incorporated by reference:

          Portions of IBM's Annual Report to Stockholders for the year ended December 31, 2017 are incorporated by reference into Parts I, II and IV of this Form 10-K.

          Portions of IBM's definitive Proxy Statement to be filed with the Securities and Exchange Commission and delivered to stockholders in connection with the Annual Meeting of Stockholders to be held April 24, 2018 are incorporated by reference into Part III of this Form 10-K.

   



PART I

Item 1. Business:

        International Business Machines Corporation (IBM or the company) was incorporated in the State of New York on June 16, 1911, as the Computing-Tabulating-Recording Co. (C-T-R), a consolidation of the Computing Scale Co. of America, the Tabulating Machine Co. and The International Time Recording Co. of New York. Since that time, IBM has focused on the intersection of business insight and technological innovation, and its operations and aims have been international in nature. This was signaled over 90 years ago, in 1924, when C-T-R changed its name to International Business Machines Corporation. And it continues today—the company creates value for clients through integrated solutions and products that leverage data, information technology, deep expertise in industries and business processes, and a broad ecosystem of partners and alliances. IBM solutions typically create value by enabling new capabilities for clients that transform their businesses and help them engage with their customers and employees in new ways. These solutions draw from an industry-leading portfolio of consulting and IT implementation services, cloud and cognitive offerings, and enterprise systems and software; all bolstered by one of the world's leading research organizations.

Strategy

        The IBM strategy starts with its clients.

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

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

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

        The company's capabilities include:

Cloud

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

        The IBM Cloud is uniquely:

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

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

    Secure to the Core: IBM has a long history of helping clients keep data and transactions secure. Security is even more important in an increasingly connected world, and IBM has extended this unparalleled level of security to the cloud. For example, IBM's cybersecurity offerings act as a business immune system, with AI technology at its core, delivered from the IBM Cloud. These

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      systems help to defend and respond to cyber-attacks across an organization's data, applications, mobile and endpoint devices.

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

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

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

AI and Data

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

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

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

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

Solutions

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

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

    Blockchain Solutions: IBM is working with clients and developers across multiple industries to use blockchain to transform how business is done in areas such as banking and financial services and supply chain. For example, blockchain technology can be used to digitize global trade

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      processes, providing a more efficient and secure method of moving goods across borders and trading zones.

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

Enterprise Services

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

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

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

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

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

*                *                *                 *

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

    Leading in data responsibility, ethics and transparency;

    Preparing workforces of the world;

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

    Remaining grounded in a set of enduring IBM Values:

    Dedication to every client's success

    Innovation that matters—for our company and for the world

    Trust and personal responsibility in all relationships

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

*                *                *                 *

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

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

Business Model

        The company's business model is built to support two principal goals: helping enterprise clients to move from one era to the next by bringing together innovative technology and industry expertise, and providing long-term value to shareholders. The business model has been developed over time through

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strategic investments in capabilities and technologies that have long-term growth and profitability prospects based on the value they deliver to clients.

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

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

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

Business Segments and Capabilities

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

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

Cognitive Solutions Capabilities

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

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

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

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

GBS Capabilities

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

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

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

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

Technology Services & Cloud Platforms Capabilities

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

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

        Integration Software: delivers industry-leading hybrid cloud solutions that empower clients to achieve rapid innovation, hybrid integration, and process transformation with choice and consistency across public, dedicated and local cloud environments, leveraging the IBM Platform-as-a-Service solution. Integration Software offerings and capabilities help clients address the digital imperatives to

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create, connect and optimize their applications, data and infrastructure on their journey to become cognitive businesses.

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

Systems Capabilities

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

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

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

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

Global Financing Capabilities

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

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

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

IBM Worldwide Organizations

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

    Global Markets

    Research, Development and Intellectual Property

Global Markets

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

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

Research, Development and Intellectual Property

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

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

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

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COMPETITION

        The company is a globally-integrated enterprise, operating in more than 175 countries. The company participates in a highly competitive environment, where its competitors vary by industry segment, and range from large multinational enterprises to smaller, more narrowly focused entities. Overall, across its business segments, the company recognizes hundreds of competitors worldwide.

        Across its business, the company's principal methods of competition are: technology innovation; performance; price; quality; brand; its broad range of capabilities, products and services; client relationships; the ability to deliver business value to clients; and service and support. In order to maintain leadership, a corporation must continue to invest, innovate and integrate. The company has been executing a strategy to transform its business, including shifting to higher value market segments and offerings and increasing its capabilities through organic investments, partnerships and strategic acquisitions. As the company executes its strategy, it has entered into new markets, such as cloud and cognitive, including business analytics and "as-a-service" solutions, which exposes the company to new competitors. Overall, the company is the leader or among the leaders in each of its business segments.

        A summary of the competitive environment for each business segment is included below:

Cognitive Solutions:

        The Cognitive Solutions segment leads the burgeoning market for artificial intelligence infused software solutions. Increasingly, technology companies are looking to implement software solutions that will take advantage of the massive amounts of data businesses hold in order to improve business outcomes for their clients. The Watson platform is integrated throughout the Cognitive Solutions segment. Watson is the first commercially available cognitive computing capability, representing a new era in computing. Delivered through the cloud, the platform analyzes data, understands complex questions posed in natural language, and proposes evidence-based answers. Watson continuously learns in three ways: by being taught by its users, by learning from prior interactions, and by being presented with new information.

        The segment's key competitive factors include a wide range of powerful Watson AI services—machine learning to deep learning. IBM is unique in that it allows clients to retain ownership of their data and AI insights, trains with small specialized data sets, and is focused on embedding AI into business workflows. The insights produced by IBM's cognitive systems are trained and designed for specific industries including Health, Financial Services, Education, Retail and others.

        Specifically, Cognitive Solutions includes solutions software, delivered both on-premise and "as-a-Service", and transaction processing software. The solutions software portfolio, which spans data management, analytics, security, and social capabilities, provides comprehensive business and industry-specific offerings to IT decision makers. IT buyers include chief information officers as well as line of business buyers, such as chief marketing and procurement officers, chief information security officers and chief financial officers. The transaction processing software portfolio, mostly delivered on-premise, runs mission-critical systems in industries such as banking, airlines and retail.

        The depth and breadth of the software offerings, coupled with the company's global markets and technical support infrastructure, differentiate its capabilities from its competitors. The company's research and development capabilities and intellectual property patent portfolio also contribute to its differentiation. The company's principal competitors in this segment include Alphabet Inc. (Google), Amazon.com, Inc. (Amazon), Cisco Systems, Inc. (Cisco), Microsoft Corporation (Microsoft), Oracle Corporation (Oracle), Salesforce.com and SAP. The company also competes with smaller, niche competitors in specific geographic or product markets worldwide.

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Global Business Services and Technology Services & Cloud Platforms:

        The company's services segments, Global Business Services and Technology Services & Cloud Platforms, operate in a highly competitive and continually evolving global market. Competitive factors in these business segments include: technical skills and capabilities, innovative service and product offerings, industry knowledge and experience, value and speed, price, client relationships, quality of sales and delivery, reliability, security and the availability of resources. The company's competitive advantages in these businesses comes from its ability to deliver integrated solutions that address clients' needs, leveraging cloud, automation and AI, its global reach and scale, a global delivery model, best-of-breed process and industry skills, extensive expertise in technology and innovation, services assets, and a strong set of relationships with clients and strategic business partners worldwide. The IBM Cloud is built for the enterprise-designed for all data, AI-ready and secure to the core.

Global Business Services:

        GBS competes in consulting, systems integration, application management and business process outsourcing services. The company competes with broad based competitors including: Accenture, Capgemini, DXC Technology (DXC), Fujitsu, Google and Microsoft; India-based service providers; the consulting practices of public accounting firms; and many companies that primarily focus on local markets or niche service areas.

Technology Services & Cloud Platforms:

        Technology Services & Cloud Platforms competes in strategic outsourcing, cloud services, and a wide range of technical and IT support services. The company competes with broad based competitors including: Amazon, DXC, Fujitsu, Google, Microsoft and Oracle; India-based service providers; and many companies that primarily focus on local markets or niche service areas.

        This segment also includes the company's Integration Software offerings. Integration Software helps clients address the digital imperatives to create, connect and optimize their applications, data and infrastructure on their journey to become cognitive businesses. The company competes with Amazon, BMC, Microsoft, Oracle, VMWare as well as companies that primarily focus on niche solutions and offerings.

Systems:

        The enterprise server and storage market is characterized by competition in technology and service innovation focused on value, function, reliability, price and cost performance. The company's principal competitors include Dell Technologies, Hewlett-Packard Enterprise (HPE), Intel, Pure Storage, Oracle, and lower cost original device manufacturer systems that are often re-branded. Also, alternative as-a-service providers are leveraging innovation in technology and service delivery both to compete with traditional providers and to offer new routes to market for server and storage systems. These alternative providers include Amazon, Google, Microsoft, and IBM's own cloud-based services.

        The company gains advantage and differentiation through investments in higher value capabilities—from semiconductor through software stack innovation—that increase efficiency, lower cost and improve performance. The company's research and development capabilities and intellectual property patent portfolio contribute significantly to this segment's leadership across areas as diverse as high performance computing, virtualization technologies, software optimization, power management, security, multi-operating system capabilities and open technologies like interconnect standards to be leveraged by broad ecosystems.

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Global Financing:

        Global Financing provides client financing, commercial financing and participates in the remarketing of used equipment. Global Financing's access to capital and its ability to manage increased exposures generates a competitive advantage for the company. The key competitive factors include interest rates charged, IT product experience, client service, contract flexibility, ease of doing business, global capabilities and residual values. In client and commercial financing, Global Financing competes with three types of companies in providing financial services to IT customers: other captive financing entities of IT companies such as Cisco and HPE, non-captive financing entities and banks or financial institutions. In remarketing, the company competes with local and regional brokers plus original manufacturers in the fragmented worldwide used IT equipment market.

Forward-looking and Cautionary Statements

        Certain statements contained in this Form 10-K may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 ("Reform Act"). Forward-looking statements are based on the company's current assumptions regarding future business and financial performance. These statements by their nature address matters that are uncertain to different degrees. The company may also make forward-looking statements in other reports filed with the Securities and Exchange Commission, in materials delivered to stockholders and in press releases. In addition, the company's representatives may from time to time make oral forward-looking statements. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Words such as "anticipates," "believes," "expects," "estimates," "intends," "plans," "projects," and similar expressions, may identify such forward-looking statements. Any forward-looking statement in this Form 10-K speaks only as of the date on which it is made. The company assumes no obligation to update or revise any forward-looking statements. In accordance with the Reform Act, set forth under Item 1A. "Risk Factors" on pages 11 to 17 are cautionary statements that accompany those forward-looking statements. Readers should carefully review such cautionary statements as they identify certain important factors that could cause actual results to differ materially from those in the forward-looking statements and from historical trends. Those cautionary statements are not exclusive and are in addition to other factors discussed elsewhere in this Form 10-K, in the company's filings with the Securities and Exchange Commission or in materials incorporated therein by reference.

        The following information is included in IBM's 2017 Annual Report to Stockholders and is incorporated herein by reference:

        Segment information and revenue by classes of similar products or services—pages 142 to 146.

        Financial information by geographic areas—page 146.

        Amount spent during each of the last three years on R&D activities—page 124.

        Financial information regarding environmental activities—page 115.

        The number of persons employed by the registrant—page 75.

        The management discussion overview—pages 27 to 30.

        Available information—page 151.

Also refer to Item 1A. entitled "Risk Factors" in Part I of this Form.

10


Executive Officers of the Registrant (at February 27, 2018):

 
  Age   Officer since  

Virginia M. Rometty, Chairman of the Board, President and Chief Executive Officer*

    60     2005  

Michelle H. Browdy, Senior Vice President, Legal and Regulatory Affairs, and General Counsel

    53     2015  

Erich Clementi, Senior Vice President, IBM Global Integrated Accounts

    59     2010  

Robert F. Del Bene, Vice President and Controller

    58     2017  

Diane J. Gherson, Senior Vice President and Chief Human Resources Officer

    60     2013  

James J. Kavanaugh, Senior Vice President and Chief Financial Officer

    51     2008  

John E. Kelly III, Senior Vice President, IBM Cognitive Solutions and IBM Research

    64     2000  

Kenneth M. Keverian, Senior Vice President, Corporate Strategy

    61     2014  

Martin J. Schroeter, Senior Vice President, IBM Global Markets

    53     2014  

*
Member of the Board of Directors.

        All executive officers are elected by the Board of Directors annually as provided in the By-laws. Each executive officer named above, with the exception of Kenneth M. Keverian, has been an executive of IBM or its subsidiaries during the past five years.

        Mr. Keverian was a Senior Partner at the Boston Consulting Group, a global management consulting firm, until joining IBM in 2014. He was with Boston Consulting Group for 26 years and he focused on serving technology companies in the computing and communications sectors.

Item 1A. Risk Factors:

         Downturn in Economic Environment and Client Spending Budgets could impact the Company's Business: If overall demand for IBM's products and solutions decreases, whether due to general economic conditions or a shift in client buying patterns, the company's revenue and profit could be impacted.

         The Company may not meet its Growth and Productivity Objectives under its Internal Business Transformation and Global Integration Initiatives: On an ongoing basis, IBM seeks to drive greater agility, productivity, flexibility and cost savings by transforming and globally integrating its own business processes, functions and technologies to remain competitive and to enable scaling of resources and offerings in both emerging and more established markets. These various initiatives may not yield their intended gains in speed, quality, productivity and enablement of rapid scaling, which may impact the company's competitiveness and its ability to meet its growth and productivity objectives.

         Failure of Innovation Initiatives could impact the Long-Term Success of the Company: IBM has been moving away from certain segments of the IT industry and into areas in which it can differentiate itself through innovation, by leveraging its investments in R&D and attracting a successful developer ecosystem. If IBM is unable to continue its cutting-edge innovation in a highly competitive and rapidly evolving environment or is unable to commercialize such innovations, expand and scale them with sufficient speed and versatility, the company could fail in its ongoing efforts to maintain and increase its market share and its profit margins.

         Damage to IBM's Reputation Could Impact the Company's Business: IBM has one of the strongest brand names in the world, and its brand and overall reputation could be negatively impacted by many factors, including if the company does not continue to be recognized for its industry-leading technology and solutions and as a cognitive leader. IBM's reputation is potentially susceptible to damage by events such as significant disputes with clients, product defects, internal control deficiencies, delivery failures, cybersecurity incidents, government investigations or legal proceedings or actions of current or former clients, directors, employees, competitors, vendors, alliance partners or joint venture partners. If the

11


company's brand image is tarnished by negative perceptions, its ability to attract and retain customers could be impacted.

         Risks from Investing in Growth Opportunities could impact the Company's Business: The company continues to invest significantly in its strategic imperatives to drive revenue growth and market share gains. Client adoption rates and viable economic models are less certain in the high-value, highly competitive, and rapidly-growing segments, and new delivery models may unfavorably impact demand and profitability for our other products or services. In addition, as the company expands to capture emerging growth opportunities, it needs to rapidly secure the appropriate mix of trained, skilled and experienced employees, and develop ecosystems and collaborative partnerships. In emerging growth countries, the developing nature presents potential political, social, legal and economic risks from evolving governmental policy, inadequate infrastructure, creditworthiness of customers and business partners, labor disruption and corruption, which could impact the company's ability to meet its growth objectives and to deliver to its clients around the world.

         IBM's Intellectual Property Portfolio may not prevent Competitive Offerings, and IBM may not be able to Obtain Necessary Licenses: The company's patents and other intellectual property may not prevent competitors from independently developing products and services similar to or duplicative to the company's, nor can there be any assurance that the resources invested by the company to protect its intellectual property will be sufficient or that the company's intellectual property portfolio will adequately deter misappropriation or improper use of the company's technology. In addition, the company may be the target of aggressive and opportunistic enforcement of patents by third parties, including non-practicing entities. Also, there can be no assurances that IBM will be able to obtain from third parties the licenses it needs in the future. The company's ability to protect its intellectual property could also be impacted by changes to existing laws, legal principles and regulations governing intellectual property, including the ownership and protection of patents.

         Cybersecurity and Privacy Considerations could impact the Company's Business: In the current environment there are numerous and evolving risks to cybersecurity and privacy, including criminal hackers, hacktivists, state-sponsored intrusions, industrial espionage, employee malfeasance, and human or technological error. Computer hackers and others routinely attempt to breach the security of technology products, services and systems, and to fraudulently induce employees, customers, and other third parties to disclose information or unwittingly provide access to systems or data. The risk of such attacks to the company includes attempted breaches not only of our own products, services and systems, but also those of customers, contractors, business partners, vendors and other third parties. The company's products, services and systems may be used in critical company, customer or third-party operations, or involve the storage, processing and transmission of sensitive data, including valuable intellectual property, other proprietary or confidential data, regulated data, and personal information of employees, customers and others. Successful breaches, employee malfeasance, or human or technological error could result in, for example, unauthorized access to, disclosure, modification, misuse, loss, or destruction of company, customer, or other third party data or systems; theft of sensitive, regulated, or confidential data including personal information and intellectual property; the loss of access to critical data or systems through ransomware, destructive attacks or other means; and business delays, service or system disruptions or denials of service. In the event of such actions, the company, its customers and other third parties could be exposed to potential liability, litigation, and regulatory or other government action, as well as the loss of existing or potential customers, damage to brand and reputation, and other financial loss. In addition, the cost and operational consequences of responding to breaches and implementing remediation measures could be significant. The company also experiences and responds to cybersecurity threats. To date, there has not been a cybersecurity attack that has had a material adverse effect on the company, though there is no assurance that there will not be a material adverse effect in the future. As the company's business and the cybersecurity landscape evolve, the company may also find it necessary to make significant further investments to protect data and infrastructure. In the company's industry, security vulnerabilities are increasingly discovered and

12


publicized across a broad range of hardware and software products, elevating the risk of attacks and the potential cost of response and remediation for the company and its customers. In addition, the fast-paced, evolving, pervasive, and sophisticated nature of certain cyber threats and vulnerabilities, as well as the scale and complexity of the business and infrastructure, make it possible that certain threats or vulnerabilities will be undetected or unmitigated in time to prevent an attack on the company and its customers. Cybersecurity risk to the company and its customers will also depend on factors such as actions, practices and investments of customers, contractors, business partners, vendors and other third parties. Cyber attacks or other catastrophic events resulting in disruptions to or failures in power, information technology, communication systems or other critical infrastructure could result in interruptions or delays to company, customer, or other third party operations or services, financial loss, injury to persons or property, potential liability, and damage to brand and reputation. Although the company takes significant steps to mitigate cybersecurity risk across a range of functions, such measures can never eliminate the risk entirely or provide absolute security.

        As a global enterprise, the regulatory environment with regard to cybersecurity, privacy and data protection issues is increasingly complex and may have impacts on the company's business, including increased risk, costs, and expanded compliance obligations. As the company's business focus on data grows, the potential impact of these vulnerabilities and regulations on the company's business, risks, and reputation may grow accordingly. The General Data Protection Regulation that will come into force in the European Union in May 2018 will continue to cause the company to incur additional compliance costs.

         The Company's Financial Results for Particular Periods are Difficult to Predict: IBM's revenues are affected by such factors as the introduction of new products and services, our ability to compete effectively in increasingly competitive marketplaces, the length of the sales cycles and the seasonality of technology purchases. Moreover, the company's strategic imperatives involve new products, new customers, new and evolving competitors, and new markets, all of which contribute to the difficulty of predicting the company's financial results. The company's financial results may also be impacted by the structure of products and services contracts and the nature of its customers' businesses; for example, certain of the company's services contracts with commercial customers in regulated industries are subject to periodic review by regulators with respect to controls and processes. As a result of the above-mentioned factors, the company's financial results are difficult to predict. Historically, the company has had lower revenue in the first quarter than in the immediately preceding fourth quarter. In addition, the high volume of products typically ordered at the end of each quarter, especially at the end of the fourth quarter, make financial results for a given period difficult to predict.

         Due to the Company's Global Presence, its Business and Operations could be impacted by Local Legal, Economic, Political and Health Conditions: The company is a globally integrated entity, operating in over 175 countries worldwide and deriving more than sixty percent of its revenues from sales outside the United States. Changes in the laws or policies of the countries in which the company operates, or inadequate enforcement of laws or policies, could affect the company's business and the company's overall results of operations. The company's results of operations also could be affected by economic and political changes in those countries and by macroeconomic changes, including recessions, inflation, currency fluctuations between the U.S. dollar and non-U.S. currencies and adverse changes in trade relationships amongst those countries. Further, as the company expands its customer base and the scope of its offerings, both within the U.S. and globally, it may be impacted by additional regulatory or other risks, including compliance with U.S. and foreign data privacy requirements, labor relations laws, laws relating to anti-corruption, anti-competition regulations, import and trade restrictions and export requirements. In addition, any widespread outbreak of an illness, pandemic or other local or global health issue or uncertain political climates, international hostilities, natural disasters, or any terrorist activities, could adversely affect customer demand and the company's operations and its ability to source and deliver products and services to its customers.

13


         The Company could incur Substantial Costs for Environmental Matters: The company is subject to various federal, state, local and foreign laws and regulations concerning the discharge of materials into the environment or otherwise related to environmental protection, including the U.S. Superfund law. The company could incur substantial costs, including cleanup costs, fines and civil or criminal sanctions, as well as third-party claims for property damage or personal injury, if it were to violate or become liable under environmental laws and regulations. Compliance with environmental laws and regulations is not expected to have a material adverse effect on the company's financial position, results of operations and competitive position.

         Tax Matters could impact the Company's Results of Operations and Financial Condition: The company is subject to income taxes in both the United States and numerous foreign jurisdictions. IBM's provision for income taxes and cash tax liability in the future could be adversely affected by numerous factors including, but not limited to, income before taxes being lower than anticipated in countries with lower statutory tax rates and higher than anticipated in countries with higher statutory tax rates, changes in the valuation of deferred tax assets and liabilities, and changes in tax laws, regulations, accounting principles or interpretations thereof, which could adversely impact the company's results of operations and financial condition in future periods. The Organization for Economic Cooperation and Development (OECD) is issuing guidelines that are different, in some respects, than long-standing international tax principles. As countries unilaterally amend their tax laws to adopt certain parts of the OECD guidelines, this may increase tax uncertainty and may adversely impact the company's income taxes. Local country, state, provincial or municipal taxation may also be subject to review and potential override by regional, federal, national or similar forms of government. In addition, IBM is subject to the continuous examination of its income tax returns by the United States Internal Revenue Service and other tax authorities around the world. The company regularly assesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of its provision for income taxes. There can be no assurance that the outcomes from these examinations will not have an adverse effect on the company's provision for income taxes and cash tax liability.

         The Company's Results of Operations and Financial Condition could be negatively impacted by its U.S. and non-U.S. Pension Plans: Adverse financial market conditions and volatility in the credit markets may have an unfavorable impact on the value of the company's pension trust assets and its future estimated pension liabilities. As a result, the company's financial results in any period could be negatively impacted. In addition, in a period of an extended financial market downturn, the company could be required to provide incremental pension plan funding with resulting liquidity risk which could negatively impact the company's financial flexibility. Further, the company's results could be negatively impacted by premiums for mandatory pension insolvency insurance coverage outside the United States. Premium increases could be significant due to the level of insolvencies of unrelated companies in the country at issue. IBM's 2017 Annual Report to Stockholders includes information about potential impacts from pension funding and the use of certain assumptions regarding pension matters.

         Ineffective Internal Controls could impact the Company's Business and Operating Results: The company's internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud. Even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. If the company fails to maintain the adequacy of its internal controls, including any failure to implement required new or improved controls, or if the company experiences difficulties in their implementation, the company's business and operating results could be harmed and the company could fail to meet its financial reporting obligations.

         The Company's Use of Accounting Estimates involves Judgment and could impact the Company's Financial Results: The application of generally accepted accounting principles requires the company to make estimates and assumptions about certain items and future events that directly affect its reported

14


financial condition. The company's most critical accounting estimates are described in the Management Discussion in IBM's 2017 Annual Report to Stockholders, under "Critical Accounting Estimates." In addition, as discussed in note M, "Contingencies and Commitments," in IBM's 2017 Annual Report to Stockholders, the company makes certain estimates including decisions related to legal proceedings and reserves. These estimates and assumptions involve the use of judgment. As a result, actual financial results may differ.

         The Company Depends on Skilled Employees and could be impacted by the loss of Critical Skills: Much of the future success of the company depends on the continued service, availability and integrity of skilled employees, including technical, marketing and staff resources. Skilled and experienced personnel in the areas where the company competes are in high demand, and competition for their talents is intense. Changing demographics and labor work force trends may result in a loss of or insufficient knowledge and skills. In addition, as global opportunities and industry demand shifts, realignment, training and scaling of skilled resources may not be sufficiently rapid or successful. Further, many of IBM's key employees receive a total compensation package that includes equity awards. Any new regulations, volatility in the stock market and other factors could diminish the company's use, and the value, of the company's equity awards, putting the company at a competitive disadvantage or forcing the company to use more cash compensation.

         The Company's Business could be impacted by its Relationships with Critical Suppliers: IBM's business employs a wide variety of components, supplies, services and raw materials from a substantial number of suppliers around the world. Certain of the company's businesses rely on a single or a limited number of suppliers, and with the completion of GLOBALFOUNDRIES' acquisition of IBM's global commercial semiconductor business in 2015, it became IBM's exclusive server processor technology provider for certain semiconductors. Changes in the business condition (financial or otherwise) of these suppliers could subject the company to losses and affect its ability to bring products to market. Further, the failure of the company's suppliers to deliver components, supplies, services and raw materials in sufficient quantities, in a timely manner, and in compliance with all applicable laws and regulations could adversely affect the company's business. In addition, any defective components, supplies or materials, or inadequate services received from suppliers could reduce the reliability of the company's products and services and harm the company's reputation.

         Product Quality Issues could impact the Company's Business and Operating Results: The company has rigorous quality control standards and processes intended to prevent, detect and correct errors, malfunctions and other defects in its products and services. If errors, malfunctions, defects or disruptions in service are experienced by customers or in the company's operations there could be negative consequences that could impact customers' business operations and harm the company's business's operating results.

         The Company could be impacted by its Business with Government Clients: The company's customers include numerous governmental entities within and outside the U.S., including the U.S. Federal Government and state and local entities. Some of the company's agreements with these customers may be subject to periodic funding approval. Funding reductions or delays could adversely impact public sector demand for our products and services. Also, some agreements may contain provisions allowing the customer to terminate without cause and providing for higher liability limits for certain losses. In addition, the company could be suspended or debarred as a governmental contractor and could incur civil and criminal fines and penalties, which could negatively impact the company's results of operations and financial results.

         The Company is exposed to Currency and Financing Risks that could impact its Revenue and Business: The company derives a significant percentage of its revenues and costs from its affiliates operating in local currency environments, and those results are affected by changes in the relative values of non-U.S. currencies and the U.S. dollar. Further, inherent in the company's financing business are risks related to the concentration of credit, client creditworthiness, interest rate and currency fluctuations on

15


the associated debt and liabilities, the determination of residual values and the financing of other than traditional IT assets. The company employs a number of strategies to manage these risks, including the use of derivative financial instruments, which involve the risk of non-performance by the counterparty. In addition, there can be no assurance that the company's efforts to manage its currency and financing risks will be successful.

         The Company's Financial Performance could be impacted by Changes in Market Liquidity Conditions and by Customer Credit Risk on Receivables: The company's financial performance is exposed to a wide variety of industry sector dynamics worldwide. The company's earnings and cash flows, as well as its access to funding, could be negatively impacted by changes in market liquidity conditions. IBM's 2017 Annual Report to Stockholders includes information about the company's liquidity position. The company's client base includes many worldwide enterprises, from small and medium businesses to the world's largest organizations and governments, with a significant portion of the company's revenue coming from global clients across many sectors. Most of the company's sales are on an open credit basis, and the company performs ongoing credit evaluations of its clients' financial conditions. If the company becomes aware of information related to the creditworthiness of a major customer, or, if future actual default rates on receivables in general differ from those currently anticipated, the company may have to adjust its allowance for credit losses, which could affect the company's consolidated net income in the period the adjustments are made.

         The Company's Reliance on Third Party Distribution Channels and Ecosystems could impact its Business: The company offers its products directly and through a variety of third party distributors, resellers and ecosystem partners. Changes in the business condition (financial or otherwise) of these distributors, resellers and ecosystem partners could subject the company to losses and affect its ability to bring its products to market. As the company moves into new areas, distributors, resellers and ecosystem partners may be unable to keep up with changes in technology and offerings, and the company may be unable to recruit and enable appropriate partners to achieve growth objectives. In addition, the failure of third party distributors, resellers and ecosystem partners to comply with all applicable laws and regulations may prevent the company from working with them and could subject the company to losses and affect its ability to bring products to market.

         Risks to the Company from Acquisitions, Alliances and Dispositions include Integration Challenges, Failure to Achieve Objectives, and the Assumption of Liabilities: The company has made and expects to continue to make acquisitions, alliances and dispositions. Acquisitions and alliances present significant challenges and risks relating to the integration of the business into the company, and there can be no assurances that the company will manage acquisitions and alliances successfully or that strategic acquisition opportunities will be available to the company on acceptable terms or at all. The related risks include the company failing to achieve strategic objectives and anticipated revenue improvements and cost savings, as well as the failure to retain key personnel of the acquired business and the assumption of liabilities related to litigation or other legal proceedings involving the acquired business. From time to time, the company disposes or attempts to dispose of assets that are no longer central to its strategic objectives. Any such disposition or attempted disposition is subject to risks, including risks related to the terms and timing of such disposition, risks related to obtaining necessary governmental or regulatory approvals and risks related to retained liabilities not subject to the company's control.

         The Company is Subject to Legal Proceedings Risks: As a company with a substantial employee population and with clients in more than 175 countries, IBM is involved, either as plaintiff or defendant, in a variety of ongoing claims, demands, suits, investigations, tax matters and proceedings that arise from time to time in the ordinary course of its business. The risks associated with such legal proceedings are described in more detail in note M, "Contingencies and Commitments," in IBM's 2017 Annual Report to Stockholders. The company believes it has adopted appropriate risk management and compliance programs. Legal and compliance risks, however, will continue to exist and additional legal

16


proceedings and other contingencies, the outcome of which cannot be predicted with certainty, may arise from time to time.

         Risk Factors Related to IBM Securities: The company and its subsidiaries issue debt securities in the worldwide capital markets from time to time, with a variety of different maturities and in different currencies. The value of the company's debt securities fluctuates based on many factors, including the methods employed for calculating principal and interest, the maturity of the securities, the aggregate principal amount of securities outstanding, the redemption features for the securities, the level, direction and volatility of interest rates, changes in exchange rates, exchange controls, governmental and stock exchange regulations and other factors over which the company has little or no control. The company's ability to pay interest and repay the principal for its debt securities is dependent upon its ability to manage its business operations, as well as the other risks described under this Item 1A. entitled "Risk Factors." There can be no assurance that the company will be able to manage any of these risks successfully.

        The company also issues its common stock from time to time in connection with various compensation plans, contributions to its pension plan and certain acquisitions. The market price of IBM common stock is subject to significant volatility, due to other factors described under this Item 1A. entitled "Risk Factors," as well as economic and geopolitical conditions generally, trading volumes, speculation by the press or investment community about the company's financial condition, and other factors, many of which are beyond the company's control. Since the market price of IBM's common stock fluctuates significantly, stockholders may not be able to sell the company's stock at attractive prices.

        In addition, changes by any rating agency to the company's outlook or credit ratings can negatively impact the value and liquidity of both the company's debt and equity securities. The company does not make a market in either its debt or equity securities and cannot provide any assurances with respect to the liquidity or value of such securities.

Item 1B. Unresolved Staff Comments:

        Not applicable.

Item 2. Properties:

        The company's corporate headquarters are located at an owned site in Armonk, New York. As of December 31, 2017, in aggregate, the company owns or leases facilities for current use consisting of approximately 78 million square feet worldwide.

        At December 31, 2017, IBM's manufacturing and development facilities in the United States had aggregate floor space of 9 million square feet, of which 7 million was owned and 2 million was leased. Similar facilities in 15 other countries totaled 6 million square feet, of which 3 million was owned and 3 million was leased. The company's facilities are utilized for current operations of all its segments.

        Although improved production techniques, productivity gains, divestitures and infrastructure reduction actions have resulted in reduced manufacturing floor space, continuous maintenance and upgrading of facilities is essential to maintain technological leadership, improve productivity and meet customer demand.

Item 3. Legal Proceedings:

        Refer to note M, "Contingencies and Commitments," on pages 119 to 121 of IBM's 2017 Annual Report to Stockholders, which is incorporated herein by reference.

Item 4. Mine Safety Disclosures:

        Not applicable.

17



PART II

Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities:

        Refer to pages 148 and 151 of IBM's 2017 Annual Report to Stockholders, which are incorporated herein by reference solely as they relate to this item.

        IBM common stock is listed on the New York Stock Exchange and the Chicago Stock Exchange. There were 408,697 common stockholders of record at February 9, 2018.

        The following table provides information relating to the company's repurchase of common stock for the fourth quarter of 2017.

 
  Total Number
of Shares
Purchased
  Average
Price Paid
per Share
  Total Number
of Shares
Purchased
as Part of Publicly
Announced
Program
  Approximate
Dollar Value
of Shares that
May Yet Be
Purchased
Under
the Program(1)
 

October 1, 2017—
October 31, 2017

    1,267,625   $ 150.98     1,267,625   $ 4,262,056,220  

November 1, 2017—
November 30, 2017

    1,422,789   $ 151.26     1,422,789   $ 4,046,839,737  

December 1, 2017—
December 31, 2017

    1,695,005   $ 154.11     1,695,005   $ 3,785,623,565  

Total

    4,385,419   $ 152.28     4,385,419        

(1)
On October 25, 2016, the Board of Directors authorized $3.0 billion in funds for use in the company's common stock repurchase program. On October 31, 2017, the Board of Directors authorized an additional $3.0 billion in funds for use in such program. In each case, the company stated that it would repurchase shares on the open market or in private transactions depending on market conditions. The common stock repurchase program does not have an expiration date. This table does not include shares tendered to satisfy the exercise price in connection with cashless exercises of employee stock options or shares tendered to satisfy tax withholding obligations in connection with employee equity awards.

Item 6. Selected Financial Data:

        Refer to pages 147 and 148 of IBM's 2017 Annual Report to Stockholders, which are incorporated herein by reference.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations:

        Refer to pages 26 through 75 of IBM's 2017 Annual Report to Stockholders, which are incorporated herein by reference.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk:

        Refer to the section titled "Market Risk" on page 74 of IBM's 2017 Annual Report to Stockholders, which is incorporated herein by reference.

18


Item 8. Financial Statements and Supplementary Data:

        Refer to pages 78 through 146 of IBM's 2017 Annual Report to Stockholders, which are incorporated herein by reference. Also refer to the Financial Statement Schedule on page S-1 of this Form 10-K.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure:

        Not applicable.

Item 9A. Controls and Procedures:

        The company's management evaluated, with the participation of the Chief Executive Officer and Chief Financial Officer, the effectiveness of the company's disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by this report.

        Refer to "Report of Management" and "Report of Independent Registered Public Accounting Firm" on pages 76 and 77 of IBM's 2017 Annual Report to Stockholders, which are incorporated herein by reference. There has been no change in the company's internal control over financial reporting that occurred during the fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting.

Item 9B. Other Information:

        Not applicable.

19



PART III

Item 10. Directors, Executive Officers and Corporate Governance:

        Refer to the information under the captions "Election of Directors for a Term of One Year," "General Information—Committees of the Board," "General Information—Audit Committee" and "2017 Director Compensation Narrative—Section 16(a) Beneficial Ownership Reporting Compliance" in IBM's definitive Proxy Statement to be filed with the Securities and Exchange Commission and delivered to stockholders in connection with the Annual Meeting of Stockholders to be held April 24, 2018, all of which information is incorporated herein by reference. Also refer to Item 1 of this Form 10-K under the caption "Executive Officers of the Registrant (at February 27, 2018)" on page 11 for additional information on the company's executive officers.

Item 11. Executive Compensation:

        Refer to the information under the captions "2017 Director Compensation Narrative," "2017 Director Compensation Narrative—2017 Director Compensation Table," "2017 Compensation Discussion and Analysis," "2017 Summary Compensation Table Narrative," "2017 Summary Compensation Table," "2017 Grants of Plan-Based Awards Table," "2017 Outstanding Equity Awards at Fiscal Year-End Narrative," "2017 Outstanding Equity Awards at Fiscal Year-End Table," "2017 Option Exercises and Stock Vested Table," "2017 Retention Plan Narrative," "2017 Retention Plan Table," "2017 Pension Benefits Narrative," "2017 Pension Benefits Table," "2017 Nonqualified Deferred Compensation Narrative," "2017 Nonqualified Deferred Compensation Table," "2017 Potential Payments Upon Termination Narrative," "2017 Potential Payments Upon Termination Table," "General Information—Compensation Committee Interlocks and Insider Participation" and "Executive Compensation—2017 Report of the Executive Compensation and Management Resources Committee of the Board of Directors" in IBM's definitive Proxy Statement to be filed with the Securities and Exchange Commission and delivered to stockholders in connection with the Annual Meeting of Stockholders to be held April 24, 2018, all of which information is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters:

        Refer to the information under the caption "Ownership of Securities—Security Ownership of Certain Beneficial Owners" and "Ownership of Securities—Common Stock and Stock-based Holdings of Directors and Executive Officers" in IBM's definitive Proxy Statement to be filed with the Securities and Exchange Commission and delivered to stockholders in connection with the Annual Meeting of Stockholders to be held April 24, 2018, all of which information is incorporated herein by reference.

20


EQUITY COMPENSATION PLAN INFORMATION

Plan Category
  Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights(1)
(a)
  Weighted-average
exercise price of
outstanding options,
warrants and rights(1)
(b)
  Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column(a))
(c)
 

Equity compensation plans approved by security holders

                   

Options

    1,500,000   $ 139.83      

RSUs

    8,012,387     N/A      

PSUs

    3,811,335 (2)   N/A      

Subtotal

    13,323,722   $ 139.83     88,463,462  

Equity compensation plans not approved by security holders

                   

Options

      $      

RSUs

    542,876     N/A      

PSUs

    162,635 (2)   N/A      

DCEAP shares

    190,526     N/A      

Subtotal

    896,036   $     15,664,747  

Total

    14,219,758   $ 139.83     104,128,209  

N/A is not applicable

RSUs = Restricted Stock Units, including Retention Restricted Stock Units

PSUs = Performance Share Units

DCEAP Shares = Promised Fee Shares under the DCEAP (see plan description below)

(1)
In connection with 35 acquisition transactions, 284,617 additional share based awards, consisting of stock options, were outstanding at December 31, 2017 as a result of the Company's assumption of awards granted by the acquired entities. The weighted-average exercise price of these awards was $41.73. The Company has not made, and will not make, any further grants or awards of equity securities under the plans of these acquired companies.

(2)
The numbers included for PSUs in column (a) above reflect the maximum number payout. Assuming target number payout, the number of securities to be issued upon exercise of PSUs for equity compensation plans approved by security holders is 2,540,890 and for equity compensation plans not approved by security holders is 108,423. For additional information about PSUs, including payout calculations, refer to the information under "2017 Summary Compensation Table Narrative," in IBM's definitive Proxy Statement to be filed with the Securities and Exchange Commission and delivered to stockholders in connection with the Annual Meeting of Stockholders to be held April 24, 2018.

        The material features of each equity compensation plan under which equity securities are authorized for issuance that was adopted without stockholder approval are described below:

2001 Long-Term Performance Plan

        The 2001 Long-Term Performance Plan (the "2001 Plan") has been used to fund awards for employees other than senior executives of the Company. Awards for senior executives of the Company have been and will continue to be funded from the stockholder-approved 1999 Long-Term Performance Plan (the "1999 Plan"); the 1999 Plan is also used to fund awards for employees other than senior executives, Otherwise, the provisions of the 2001 Plan are identical to the 1999 Plan, including the type of awards that may be granted under the plan (stock options, restricted stock and unit awards and long-term performance incentive awards).

21


        The 2001 Plan is administered by the Executive Compensation and Management Resources Committee of the Board of Directors (the "Committee"), and that Committee may delegate to officers of the company certain of its duties, powers and authority. Payment of awards may be made in the form of cash, stock or combinations thereof and may be deferred with Committee approval. Awards are not transferable or assignable except (i) by law, will or the laws of descent and distribution, (ii) as a result of the disability of the recipient, or (iii) with the approval of the Committee.

        If the employment of a participant terminates, other than as a result of the death or disability of a participant, all unexercised, deferred and unpaid awards shall be canceled immediately, unless the award agreement provides otherwise. In the event of the death of a participant or in the event a participant is deemed by the company to be disabled and eligible for benefits under the terms of the IBM Long-Term Disability Plan (or any successor plan or similar plan of another employer), the participant's estate, beneficiaries or representative, as the case may be, shall have the rights and duties of the participant under the applicable award agreement. In addition, unless the award agreement specifies otherwise, the Committee may cancel, rescind, suspend, withhold or otherwise limit or restrict any unexpired, unpaid, or deferred award at any time if the participant is not in compliance with all applicable provisions of the awards agreement and the 2001 Plan. In addition, awards may be cancelled if the participant engages in any conduct or act determined to be injurious, detrimental or prejudicial to any interest of the company.

PWCC Acquisition Long-Term Performance Plan

        The IBM PWCC Acquisition Long-Term Performance Plan (the "PWCC Plan") was adopted by the Board of Directors in connection with the company's acquisition of PricewaterhouseCoopers Consulting ("PwCC") from PricewaterhouseCoopers LLP, as announced on October 1, 2002. The PWCC Plan has been and will continue to be used solely to fund awards for employees of PwCC who have become employed by the company as a result of the acquisition. Awards for senior executives of the company will not be funded from the PWCC Plan. The terms and conditions of the PWCC Plan are substantively identical to the terms and conditions of the 2001 Plan, described above.

IBM Deferred Compensation and Equity Award Plan

        The IBM Deferred Compensation and Equity Award Plan (the "DCEAP") was adopted in 1993 and amended and restated effective January 1, 2014. Under the Amended and Restated DCEAP, non-management directors receive Promised Fee Shares in connection with deferred annual retainer payments. Each Promised Fee Share is equal in value to one share of the company's common stock. Upon a director's retirement or other completion of service as a director, amounts deferred into Promised Fee Shares are payable in either cash and/or shares of the company's stock either as lump sum or installments pursuant to the director's distribution election. For additional information about the DCEAP, see "2017 Director Compensation Narrative" in IBM's definitive Proxy Statement to be filed with the Securities and Exchange Commission and delivered to stockholders in connection with the Annual Meeting of Stockholders to be held April 24, 2018.

Item 13. Certain Relationships and Related Transactions, and Director Independence:

        Refer to the information under the captions "General Information—IBM Board of Directors" and "General Information—Certain Transactions and Relationships" in IBM's definitive Proxy Statement to be filed with the Securities and Exchange Commission and delivered to stockholders in connection with the Annual Meeting of Stockholders to be held April 24, 2018, which information is incorporated herein by reference.

Item 14. Principal Accounting Fees and Services:

        Refer to the information under the captions "Report of the Audit Committee of the Board of Directors" and "Audit and Non-Audit Fees" in IBM's definitive Proxy Statement to be filed with the Securities and Exchange Commission and delivered to stockholders in connection with the Annual Meeting of Stockholders to be held April 24, 2018, all of which information is incorporated herein by reference.

22



PART IV

Item 15. Exhibits, Financial Statement Schedules:

    (a)
    The following documents are filed as part of this report:

    1.
    Financial statements from IBM's 2017 Annual Report to Stockholders, which are incorporated herein by reference:

        Report of Independent Registered Public Accounting Firm (page 77).

        Consolidated Statement of Earnings for the years ended December 31, 2017, 2016 and 2015 (page 78).

        Consolidated Statement of Comprehensive Income for the years ended December 31, 2017, 2016 and 2015 (page 79).

        Consolidated Statement of Financial Position at December 31, 2017 and 2016 (page 80).

        Consolidated Statement of Cash Flows for the years ended December 31, 2017, 2016 and 2015 (page 81).

        Consolidated Statement of Changes in Equity at December 31, 2017, 2016 and 2015 (pages 82 and 83).

        Notes to Consolidated Financial Statements (pages 84 through 146).

      2.
      Financial statement schedule required to be filed by Item 8 of this Form:
Page
  Schedule
Number
   
 

XX

       

Report of Independent Registered Public Accounting Firm on Financial Statement Schedule.

 

S-1

    II  

Valuation and Qualifying Accounts and Reserves for the years ended December 31, 2017, 2016 and 2015.

        All other schedules are omitted as the required matter is not present, the amounts are not significant or the information is shown in the Consolidated Financial Statements or the notes thereto.

      3.
      Exhibits:
Reference
Number per
Item 601 of
Regulation S-K
  Description of Exhibits   Exhibit Number
in this
Form 10-K
  (2)   Plan of acquisition, reorganization, arrangement, liquidation or succession.    Not applicable

 

(3)

 

Certificate of Incorporation and By-laws. 

 

 

 

 

 

The Certificate of Incorporation of IBM is Exhibit 3.2 to Form 8-K filed April 27, 2007, and is hereby incorporated by reference.

 

 

 

 

 

The By-laws of IBM, as amended through December 12, 2017, is Exhibit 3.2 to Form 8-K filed December 15, 2017, and is hereby incorporated by reference.

 

 

 

(4)

 

Instruments defining the rights of security holders. 

 

 

 

 

 

The instruments defining the rights of the holders of the 8.375% Debentures due 2019 are Exhibits 4(a)(b)(c) and (d), respectively, to Registration Statement No. 33-31732 on Form S-3, filed on October 24, 1989, and are hereby incorporated by reference. 

 

P

23


Reference
Number per
Item 601 of
Regulation S-K
  Description of Exhibits   Exhibit Number
in this
Form 10-K
      The instruments defining the rights of the holders of the 7.00% Debentures due 2025 and the 7.00% Debentures due 2045 are Exhibits 2 and 3, respectively, to Form 8-K, filed on October 30, 1995, and are hereby incorporated by reference.    

 

 

 

The instrument defining the rights of the holders of the 7.125% Debentures due 2096 is Exhibit 4.2 to Form 8-K/A, filed on December 6, 1996, and is hereby incorporated by reference.

 

 

 

 

 

The instrument defining the rights of the holders of the 6.22% Debentures due 2027 is Exhibit 3 to Form 8-K, filed on August 1, 1997, and is hereby incorporated by reference.

 

 

 

 

 

The instrument defining the rights of the holders of the 6.50% Debentures due 2028 is Exhibit 2 to Form 8-K, filed on January 8, 1998, and is hereby incorporated by reference.

 

 

 

 

 

The instrument defining the rights of the holders of the 2.900% Notes due 2021 is Exhibit 3.1 to Form 8-K, filed October 31, 2011, and is hereby incorporated by reference.

 

 

 

 

 

The instrument defining the rights of the holders of the 1.875% Notes due 2019 is Exhibit 3.1 to Form 8-K, filed May 10, 2012, and is hereby incorporated by reference.

 

 

 

 

 

The instruments defining the rights of the holders of the 1.875% Notes due 2022 is Exhibit 2.1 to Form 8-K, filed July 27, 2012, and is hereby incorporated by reference.

 

 

 

 

 

The instrument defining the rights of the holders of the 1.375% Notes due 2019 is Exhibit 2.1 to Form 8-K, filed November 16, 2012, and is hereby incorporated by reference.

 

 

 

 

 

The instrument defining the rights of the holders of the 1.250% Notes due 2018 is Exhibits 2.1 to Form 8-K, filed February 7, 2013, and is hereby incorporated by reference.

 

 

 

 

 

The instrument defining the rights of the holders of the 1.625% Notes due 2020 is 3.1 to Form 8-K, filed May 6, 2013, and is hereby incorporated by reference.

 

 

 

 

 

The instrument defining the rights of the holders of the 3.375% Notes due 2023 is Exhibit 2 to Form 8-K, filed July 31, 2013, and is hereby incorporated by reference.

 

 

 

 

 

The instruments defining the rights of the holders of the 1.875% Notes due 2020 and 2.875% Notes due 2025 are Exhibits 2.1 and 3.1 to Form 8-K, filed November 6, 2013, and are hereby incorporated by reference.

 

 

 

 

 

The instrument defining the rights of the holders of the 2.750% Notes due 2020 is Exhibit 2 to Form 8-K, filed November 20, 2013, and is hereby incorporated by reference.

 

 

24


Reference
Number per
Item 601 of
Regulation S-K
  Description of Exhibits   Exhibit Number
in this
Form 10-K
      The instruments defining the rights of the holders of the 1.950% Notes due 2019, Floating Rate Notes due 2019 and 3.625% due 2024 are Exhibits 3, 4 and 5 to Form 8-K, filed February 11, 2014, and are hereby incorporated by reference.    

 

 

 

The instrument defining the rights of the holders of the Floating Rate Notes due 2021 is Exhibit 2 to Form 8-K, filed November 5, 2014, and is hereby incorporated by reference.

 

 

 

 

 

The instrument defining the rights of the holders of the 1.25% Notes due 2023 is Exhibit 2 to Form 8-K, filed November 25, 2014, and is hereby incorporated by reference.

 

 

 

 

 

The instruments defining the rights of the holders of the 1.125% Notes due 2018 and Floating Rate Notes due 2018 are Exhibits 2 and 3 to Form 8-K, filed February 5, 2015, and are hereby incorporated by reference.

 

 

 

 

 

The instrument defining the rights of the holders of the 2.625% Notes due 2022 is Exhibit 2 to Form 8-K, filed on August 4, 2015, and is hereby incorporated by reference.

 

 

 

 

 

The instrument defining the rights of the holders of the 2.875% Notes due 2022 is Exhibit 2 to Form 8-K, filed on November 6, 2015, and is hereby incorporated by reference.

 

 

 

 

 

The instruments defining the rights of the holders of the 1.800% Notes due 2019, 2.250% Notes due 2021, 3.450% Notes due 2026 and 4.700% Notes due 2046 are Exhibits 4.2, 4.3, 4.4 and 4.5 to Form 8-K filed February 18, 2016, and are hereby incorporated by reference.

 

 

 

 

 

The instruments defining the rights of the holders of the 0.500% Notes due 2021, 1.125% Notes due 2024 and 1.750% Notes due 2028 are Exhibits 4.1, 4.2 and 4.3 to Form 8-K filed March 4, 2016 and are hereby incorporated by reference.

 

 

 

 

 

The instrument defining the rights of the holders of the 0.30% Notes due 2026 is Exhibit 4 to Form 8-K filed November 1, 2016 and is hereby incorporated by reference.

 

 

 

 

 

Indenture dated as of October 1, 1993 between IBM and The Bank of New York Mellon, (as successor to The Chase Manhattan Bank (National Association)) as Trustee, is Exhibit 4.1 to Form 10-Q for the quarter ended September 30, 2017, and is hereby incorporated by reference.

 

 

 

 

 

First Supplemental Indenture to Indenture dated as of October 1, 1993 between IBM and The Bank of New York Mellon, (as successor to The Chase Manhattan Bank (National Association)) as Trustee, dated as of December 15, 1995, is Exhibit 4.2 to Form 10-Q for the quarter ended September 30, 2017, and is hereby incorporated by reference.

 

 

 

(9)

 

Voting trust agreement

 

Not applicable

 

(10)

 

Material contracts

 

 

25


Reference
Number per
Item 601 of
Regulation S-K
  Description of Exhibits   Exhibit Number
in this
Form 10-K
      The IBM 2001 Long-Term Performance Plan, a compensatory plan, contained in Registration Statement No. 333-87708 on Form S-8, as such amended plan was filed as Exhibit 10.1 to Form 10-Q for the quarter ended September 30, 2007, is hereby incorporated by reference.*    

 

 

 

The IBM PWCC Acquisition Long-Term Performance Plan, a compensatory plan, contained in Registration Statement No. 333-102872 on Form S-8, as such amended plan was filed as Exhibit 10.2 to Form 10-Q for the quarter ended September 30, 2007, is hereby incorporated by reference.*

 

 

 

 

 

The IBM 1999 Long-Term Performance Plan, a compensatory plan, contained in Registration Statement No. 333-30424 on Form S-8, as such amended plan was filed as Exhibit 10.3 to Form 10-Q for the quarter ended September 30, 2007, is hereby incorporated by reference.*

 

 

 

 

 

The IBM 1997 Long-Term Performance Plan, a compensatory plan, contained in Registration Statement No. 333-31305 on Form S-8, as such amended plan was filed as Exhibit 10.4 to Form 10-Q for the quarter ended September 30, 2007, is hereby incorporated by reference.*

 

 

 

 

 

Forms of LTPP equity award agreements for (i) stock options, restricted stock, restricted stock units, cash-settled restricted stock units, SARS and (ii) retention restricted stock unit awards. Such equity award agreement forms and the related terms and conditions document, effective June 9, 2014, were filed under Exhibit 10.1 as Exhibit 10.2 to Form 10-Q for the quarter ended March 31, 2014, are hereby incorporated by reference.*

 

 

 

 

 

Form of LTPP equity award agreement for performance share units was filed as Exhibit 10.1 to Form 10-Q for the quarter ended March 31, 2015, and is hereby incorporated by reference.*

 

 

 

 

 

Terms and Conditions of LTPP equity award agreements was filed as Exhibit 10.1 to Form 10-Q for the quarter ended June 30, 2016, and is hereby incorporated by reference.*

 

 

 

 

 

Board of Directors compensatory plans, as described under the caption "General Information—2017 Director Compensation" in IBM's definitive Proxy Statement to be filed with the Securities and Exchange Commission and delivered to stockholders in connection with the Annual Meeting of Stockholders to be held April 24, 2018, are hereby incorporated by reference.*

 

 

 

 

 

The IBM Non-Employee Directors Stock Option Plan, contained in Registration Statement 33-60227 on Form S-8, is hereby incorporated by reference.*

 

 

 

 

 

The IBM Board of Directors Deferred Compensation and Equity Award Plan, a compensatory plan, as amended and restated effective January 1, 2014, which was filed as Exhibit 10.1 to Form 10-K for the year ended December 31, 2013, and is hereby incorporated by reference.*

 

 

26


Reference
Number per
Item 601 of
Regulation S-K
  Description of Exhibits   Exhibit Number
in this
Form 10-K
      Amendment No. 1 to the Amended and Restated Deferred Compensation and Equity Award Plan, effective January 30, 2018   10.1

 

 

 

The IBM Supplemental Executive Retention Plan, a compensatory plan, as amended and restated through December 31, 2008, which was filed as Exhibit 10.2 to Form 10-K for the year ended December 31, 2008, is hereby incorporated by reference.*

 

 

 

 

 

Amendment No. 1 to the IBM Supplemental Executive Retention Plan, a compensatory plan, effective December 9, 2014, which was filed as Exhibit 10.1 to the Form 10-K for the year ended December 31, 2014, and is hereby incorporated by reference.*

 

 

 

 

 

The IBM Excess 401(k) Plus Plan, a compensatory plan (formerly the IBM Executive Deferred Compensation Plan), as amended and restated through January 1, 2010, which was filed as Exhibit 10.1 to the Form 10-K for the year ended December 31, 2009 contained in Registration Statement No. 333-171968 on Form S-8, is hereby incorporated by reference.*

 

 

 

 

 

Amendment No. 1 to the IBM Excess 401(k) Plus Plan, a compensatory plan, effective January 1, 2013 which was filed as Exhibit 10.1 to the Form 10-K for the year ended December 31, 2012, and is hereby incorporated by reference.*

 

 

 

 

 

Amendment No. 2 to the IBM Excess 401(k) Plus Plan, a compensatory plan, effective January 1, 2013 which was filed as Exhibit 10.2 to the Form 10-K for the year ended December 31, 2012, and is hereby incorporated by reference.*

 

 

 

 

 

Amendment No. 3 to the IBM Excess 401(k) Plus Plan, a compensatory plan, effective January 1, 2013 which was filed as Exhibit 10.2 to the Form 10-K for the year ended December 31, 2013, and is hereby incorporated by reference.*

 

 

 

 

 

Amendment No. 4 to the IBM Excess 401(k) Plus Plan, a compensatory plan, dated as of February 25, 2014, which was filed as Exhibit 10.1 to the Form 10-Q for the quarter ended March 31, 2014, and is hereby incorporated by reference.*

 

 

 

 

 

Amendment No. 5 to the IBM Excess 401(k) Plus Plan, a compensatory plan, dated as of December 9, 2014 , which was filed as Exhibit 10.2 to the Form 10-K for the year ended December 31, 2014, and is hereby incorporated by reference.*

 

 

 

 

 

Amendment No. 6 to the IBM Excess 401(k) Plus Plan, a compensatory plan, dated as of December 18, 2015, which was filed as Exhibit 10.1 to the Form 10-K for the year ended December 31, 2015, and is hereby incorporated by reference.*

 

 

 

 

 

Amendment No. 7 to the IBM Excess 401 (k) Plus Plan, a compensatory plan, dated as of June 30, 2016, which was filed as Exhibit 10.2 to the Form 10-Q for the quarter ended June 30, 2016, and is hereby incorporated by reference.*

 

 

27


Reference
Number per
Item 601 of
Regulation S-K
  Description of Exhibits   Exhibit Number
in this
Form 10-K
      Amendment No. 8 to the IBM Excess 401(k) Plus Plan, a compensatory plan, dated as of December 31, 2017*   10.2

 

 

 

The IBM 2003 Employees Stock Purchase Plan, contained in Registration Statement 333-104806 on Form S-8, as amended through April 1, 2005, which was filed as Exhibit 10.3 to Form 10-Q for the quarter ended March 31, 2005, is hereby incorporated by reference.*

 

 

 

 

 

Form of Noncompetition Agreement, filed as Exhibit 10.2 to Form 10-Q for the quarter ended March 31, 2009, is hereby incorporated by reference.*

 

 

 

 

 

Form of Noncompetition Agreement, filed as Exhibit 10.1 to Form 10-Q for the quarter ended March 31, 2012, is hereby incorporated by reference.*

 

 

 

 

 

Form of Noncompetition Agreement, filed as Exhibit 10.2 to the Form 10-K for the year ended December 31, 2015, is hereby incorporated by reference.*

 

 

 

 

 

Form of Noncompetition Agreement, filed as Exhibit 10.3 to Form 10-Q for the quarter ended June 30, 2016, is hereby incorporated by reference.*

 

 

 

 

 

Form of Noncompetition Agreement, filed as Exhibit 10.1 to Form 10-K for the year ended December 31, 2016, is hereby incorporated by reference.*

 

 

 

 

 

Form of Noncompetition Agreement*

 

10.3

 

 

 

Letter dated December 4, 2008, signed by Erich Clementi and IBM, effective January 1, 2009, filed as Exhibit 10.2 to Form 10-K for the year ended December 31, 2016, is hereby incorporated by reference.

 

 

 

 

 

The $10,000,000 5-Year Credit Agreement dated as of November 10, 2011, among International Business Machines Corporation, the Subsidiary Borrowers parties thereto, the Lenders parties thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, and the Syndication and Documentation Agents named therein, which was filed as Exhibit 10.1 to Form 8-K dated November 14, 2011, the term of which was extended through November 10, 2020, is hereby incorporated by reference.

 

 

 

 

 

First Amendment, dated as of October 16, 2014, to the 5-Year Credit Agreement, among International Business Machines Corporation, JPMorgan Chase Bank, N.A., as Administrative Agent, the Subsidiary Borrowers parties thereto, the Lenders parties thereto and the Syndication Agents and Documentation Agents therein, which was filed as Exhibit 10.4 to Form 10-K for the year ended December 31, 2014, is hereby incorporated by reference.

 

 

28


Reference
Number per
Item 601 of
Regulation S-K
  Description of Exhibits   Exhibit Number
in this
Form 10-K
      Second Amendment, dated as of October 21, 2016, to the 5-Year Credit Agreement, among International Business Machines Corporation, JPMorgan Chase Bank, N.A., as Administrative Agent, the Subsidiary Borrowers parties thereto, the Lenders parties thereto and the Syndication Agents and Documentation Agents therein, which was filed as Exhibit 10.4 to Form 10-K for the year ended December 31, 2016, is hereby incorporated by reference.    

 

 

 

Agent Letter dated October 21, 2016 from JPMorgan Chase Bank, N.A., as Administrative Agent to the Five-Year Credit Agreement (as amended), confirming the extension of the Termination Date of the Five-Year Credit Agreement to November 10, 2021, with Schedule 1 reflecting Revolving Credit Commitments of $10,250,000,000, which was filed as Exhibit 10.5 to Form 10-K for the year ended December 31, 2016, is hereby incorporated by reference.

 

 

 

 

 

The $2,500,000,000 364-Day Credit Agreement dated as of July 20, 2017, among International Business Machines Corporation and IBM Credit LLC, as Borrowers, The Several Lenders from Time to Time Parties to such Agreement, JPMorgan Chase Bank, N.A., as Administrative Agent, BNP Paribas, Citibank N.A., Royal Bank of Canada and Mizuho Bank, Ltd., as Syndication Agents, and the Documentation Agents named therein, which was filed as Exhibit 10.1 to Form 10-Q for the quarter ended June 30, 2017, and is hereby incorporated by reference.

 

 

 

 

 

The $2,500,000,000 Three-Year Credit Agreement, dated as of July 20, 2017, among International Business Machines Corporation and IBM Credit LLC, as Borrowers, The Several Lenders from Time to Time Parties to such Agreement, JPMorgan Chase Bank, N.A., as Administrative Agent, BNP Paribas, Citibank N.A., Royal Bank of Canada and Mizuho Bank, Ltd., as Syndication Agents, and the Documentation Agents named therein, which was filed as Exhibit 10.2 to Form 10-Q for the quarter ended June 30, 2017, and is hereby incorporated by reference.

 

 

 

 

 

Third Amendment, dated as of July 20, 2017, to the 5-Year Credit Agreement dated as of November 10, 2011 (as amended from time to time), among International Business Machines Corporation, JPMorgan Chase Bank, N.A., as Administrative Agent, the Subsidiary Borrowers parties thereto, the Lenders parties thereto, and the Syndication Agents and the Documentation Agents named therein, which was filed as Exhibit 10.3 to Form 10-Q for the quarter ended June 30, 2017, and is hereby incorporated by reference.

 

 

 

(11)

 

Statement re computation of per share earnings

 

 

 

 

 

The statement re computation of per share earnings is note [P], "Earnings Per Share of Common Stock," on page 124 of IBM's 2017 Annual Report to Stockholders, and is hereby incorporated by reference.

 

 

 

(12)

 

Statement re computation of ratios

 

12

 

(13)

 

Annual report to security holders**

 

13

29


Reference
Number per
Item 601 of
Regulation S-K
  Description of Exhibits   Exhibit Number
in this
Form 10-K
  (18)   Letter re: change in accounting principles   Not applicable

 

(19)

 

Previously unfiled documents

 

Not applicable

 

(21)

 

Subsidiaries of the registrant

 

21

 

(22)

 

Published report regarding matters submitted to vote of security holders

 

Not applicable

 

(23)

 

Consent of experts

 

23.1

 

(24)

 

Powers of attorney

 

24.1

 

 

 

Resolution of the IBM Board of Directors authorizing execution of this report by Powers of Attorney

 

24.2

 

(28)

 

Information from reports furnished to state insurance regulatory authorities

 

Not applicable

 

(31)

 

Certification by CEO pursuant to Rule 13A-14(a) or 15D-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

31.1

 

 

 

Certification by CFO pursuant to Rule 13A-14(a) or 15D-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

31.2

 

(32)

 

Certification by CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

32.1

 

 

 

Certification by CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

32.2

 

101.INS

 

XBRL Instance Document

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

101

*
Management contract or compensatory plan or arrangement.

**
The Performance Graphs, set forth on page 149 of IBM's 2017 Annual Report to Stockholders, are deemed to be furnished but not filed.

Item 16.    Form 10-K Summary:

        None.

30



SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

    INTERNATIONAL BUSINESS MACHINES CORPORATION
(Registrant)

 

 

By:

 

/s/ VIRGINIA M. ROMETTY

Virginia M. Rometty
Chairman of the Board,
President and Chief Executive Officer

 

 

 

 

Date: February 27, 2018

        Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature
 
Title
 
Date

 

 

 

 

 

/s/ VIRGINIA M. ROMETTY


Virginia M. Rometty
 

    Chairman of the Board,
President and Chief Executive
Officer

  February 27, 2018


/s/ JAMES J. KAVANAUGH


James J. Kavanaugh

 


Senior Vice President and Chief
Financial Officer


 


February 27, 2018


/s/ ROBERT F. DEL BENE


Robert F. Del Bene

 


Vice President and Controller
(Chief Accounting Officer)


 


February 27, 2018

 


Kenneth I. Chenault

 

Director

 

By:

 

/s/ CHRISTINA M. MONTGOMERY

Christina M. Montgomery
Michael L. Eskew   Director       Attorney-in-fact
February 27, 2018
David N. Farr   Director        

Mark Fields

 

Director

 

 

 

 

Alex Gorsky

 

Director

 

 

 

 

Shirley Ann Jackson

 

Director

 

 

 

 

Andrew N. Liveris

 

Director

 

 

 

 

W. James McNerney, Jr.

 

Director

 

 

 

 

Hutham S. Olayan

 

Director

 

 

 

 

James W. Owens

 

Director

 

 

 

 

Joseph R. Swedish

 

Director

 

 

 

 

Sidney Taurel

 

Director

 

 

 

 

Peter R. Voser

 

Director

 

 

 

 

Frederick H. Waddell

 

Director

 

 

 

 

31



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON FINANCIAL STATEMENT SCHEDULE

To the Board of Directors and Stockholders of
International Business Machines Corporation:

        Our audits of the consolidated financial statements referred to in our report dated February 27, 2018 appearing in the 2017 Annual Report to Shareholders of International Business Machines Corporation (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the Financial Statement Schedule listed in Item 15(a)(2) of this Form 10-K. In our opinion, this Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.

/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
New York, New York
February 27, 2018

32



SCHEDULE II

INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
For the Years Ended December 31:
(Dollars in Millions)

Description
  Balance at
Beginning
of Period
  Additions/
(Deductions)*
  Write-offs   Other**   Balance at
End of
Period
 

Allowance For Credit Losses

                               

2017

                               

—Current

  $ 675   $ 65   $ (157 ) $ 11   $ 594  

—Noncurrent

  $ 101   $ (10 ) $ (42 ) $ 26   $ 74  

2016

                               

—Current

  $ 909   $ 87   $ (307 ) $ (13 ) $ 675  

—Noncurrent

  $ 118   $ (2 ) $ (7 ) $ (8 ) $ 101  

2015

                               

—Current

  $ 829   $ 226   $ (92 ) $ (55 ) $ 909  

—Noncurrent

  $ 126   $ 8   $ (1 ) $ (14 ) $ 118  

Allowance For Inventory Losses

                               

2017

  $ 525   $ 164   $ (139 ) $ 23   $ 574  

2016

  $ 483   $ 178   $ (150 ) $ 14   $ 525  

2015

  $ 564   $ 165   $ (230 ) $ (15 ) $ 483  

Revenue Based Provisions

                               

2017

  $ 481   $ 1,292   $ (1,342 ) $ 20   $ 451  

2016

  $ 505   $ 1,377   $ (1,392 ) $ (9 ) $ 481  

2015

  $ 616   $ 1,658   $ (1,741 ) $ (28 ) $ 505  

*
Additions for Allowance for Credit Losses and Allowance for Inventory Losses are charged to expense and cost accounts, respectively, while Revenue Based Provisions are charged to revenue accounts. Deductions represent the reversal of such charges.

**
Primarily comprises currency translation adjustments.

S-1




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PART I
PART II
PART III
PART IV
SIGNATURES
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL STATEMENT SCHEDULE
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES VALUATION AND QUALIFYING ACCOUNTS AND RESERVES For the Years Ended December 31: (Dollars in Millions)

Exhibit 10.1

 

IBM Board of Directors

 

Amended and Restated

Deferred Compensation and Equity Award Plan

 

Amendment No. 1

 

Instrument of Amendment

 

International Business Machines Corporation (“IBM”) has established and maintains the Amended and Restated Deferred Compensation and Equity Award Plan (the “Plan”).

 

In accordance with Article X of the Plan, the Board has reserved the right to amend the Plan at any time and from time to time.

 

The Board amended and restated the Plan effective as of January 1, 2014.

 

The Board has determined to amend the Plan, as heretofore restated and amended, in the manner set forth in this Instrument of Amendment, effective upon adoption, except as otherwise set forth herein.

 

Amendment:

 

1.               Article II(f) is amended to read in its entirety as follows:

 

“(f)                              F orm of Payment of Fees earned prior to January 1, 2014

 

Except as provided in accordance with a valid election change on or after January 30, 2018 under subsections (f)(i) and (f)(ii) below, any Fees earned prior to January 1, 2014 shall be distributed as a lump sum payment as of the first business day that is at least 30 business days after the date on which the Outside Director ceases to be a member of the Board. Effective January 30, 2018, an Outside Director may, in accordance with the procedures described in subsection (f)(i) below, change this lump sum payment default for Fees earned prior to January 1, 2014 to one of the payment options described in subsection (f)(ii) below.

 

However, payment may be made on any other day to the extent that such payment is treated as being paid on the date specified above under Treasury Regulation section 1.409A-3(d), which permits payment to be made within 30 days before the specified date and later within the same calendar year, or, if later, within 2-1/2 months following the specified date, provided that the Outside Director is not permitted to designate the taxable year of payment.

 



 

(i)                                      Changing the Lump Sum Payment Default for Fees earned prior to January 1, 2014

 

Effective January 30, 2018, an Outside Director may change the time and/or form of his or her lump sum payment default for Fees earned prior to January 1, 2014 by submitting to the Secretary a completed Payment Election Change Form, provided that:

 

(A)                    the Outside Director must make such election at least 12 months prior to the date on which he or she ceases to be a member of the Board;

 

(B)                    the payment date for any lump sum or the start date for any series of installments provided for under the new Payment Election Change Form shall be no earlier than the fifth anniversary of the payment date or start date that would have applied absent a Payment Election Change; and

 

(C)                    the Outside Director may make only one Payment Election Change.

 

(ii)                                   Forms of Payment pursuant to a Payment Election Change for Fees earned prior to January 1, 2014

 

By submitting a completed Payment Election Change Form to the Secretary pursuant to subsection (f)(i) above, each Outside Director may elect to change the lump sum payment default to one of the following payment options, for his or her deferred Fees earned prior to January 1, 2014:

 

(A)                    a lump sum payment as of the last business day in January of the calendar year immediately following the date on which the Outside Director ceases to be a member of the Board; or

 

(B)                    between two and ten annual installments, each paid as of the last business day in January beginning with the January immediately following the date on which the Outside Director ceases to be a member of the Board, until the elected number of installments has been paid.  This installment option is treated as the entitlement to a single payment for purposes of Treasury Regulation section 1.409A-2(b)(2)(iii).

 

To satisfy the five-year delay required pursuant to subsection (f)(i)(B) above and as set forth in ARTICLE VI(c)(i) below, any such new payment

 



 

will be made (or begin to be made in the case of installments) as of the last business day in January following the calendar year in which occurs the fifth anniversary of the date on which the Outside Director ceases to be a member of the Board.”

 

2.               Article II(g)(iv) is amended and clarified as follows:

 

replacing the clause “shall be the fifth anniversary of” in subparagraph (B) thereof with “shall be no earlier than the fifth anniversary of.”

 

3.               Article IV(a)(i) is amended to read in its entirety as follows:

 

“(i)                                The Pre-2014 Cash Account, if applicable, is credited with the amount of Fees earned prior to December 31, 2013 that were accrued and deferred as cash (such credit made when such Fees become payable), plus (A) from the date of crediting to December 31, 2013, interest at an annual rate equal to the average of the first 26-week Treasury Bill issued in January and July of each year, and (B) on and after January 1, 2014, an amount equal to interest at an annual rate earned from an investment vehicle selected by the Directors and Corporate Governance Committee (the “Committee”).”

 

4.               Article IV(a) is amended by adding a new subsection (iii) to read in its entirety as follows:

 

“(iii)                          Interest credited under subsections (i) or (ii) above will continue until:

 

(A)                                the first day after the date on which the Outside Director ceases to be a member of the Board for immediate lump sum payments as described in ARTICLE II(f) or ARTICLE II(g)(i)(A); or

 

(B)                                the last business day of the January immediately preceding the lump sum payment for lump sum amounts or each installment payment for installment payments, as applicable, payable as of the last business day of January.”

 

5.               Article VI is amended by replacing existing subsection (c) thereof with the following new subsections (c) and (d):

 

“(c)                             Delivery in the Event of 5-Year Delay Resulting from a Payment Election Change

 

To the extent payment is delayed in accordance with ARTICLE II(f)(i)(B) or ARTICLE II(g)(iv)(B), delivery of amounts will be made (or begin to be made in the case of installments) as follows, in accordance with the Payment Election Change:

 



 

(i)                                      For amounts that, absent the Payment Election Change delay would have been payable in an immediate lump sum under ARTICLE II(f) or II(g)(i)(A), delivery will be made as of the last business day in January of the calendar year immediately following the calendar year in which occurs the fifth anniversary of the date on which the Outside Director ceases to be a member of the Board.

 

(ii)                                   Otherwise, delivery will be made as of the last business day of January that is the fifth anniversary of the date delivery would otherwise have occurred absent the Payment Election Change delay.

 

In accordance with subsections (a) and (b) above, an Outside Director electing cash payment(s) in lieu of Shares must provide written notice to the Secretary no later than the date on which the Outside Director ceases to be a member of the Board. Such cash payment election will be a one-time election. Any such payment of Shares in cash shall be equal to the Fair Market Value of the Shares on the last business day of the January immediately preceding such payment.

 

(d)                                  Delivery in the Event of an Outside Director’s Death

 

Notwithstanding any other provision of the Plan to the contrary, in the event of an Outside Director’s death, delivery of unpaid amounts from the Pre-2014 Cash Account and the Post-2013 Cash Account and Shares (including fractional shares) from the Pre-2014 Promised Fee Shares Account and the Post-2013 Promised Fee Shares Account will be made to the Outside Director’s estate or beneficiaries, as appropriate, in a lump sum no later than 90 days after the date of death.”

 




Exhibit 10.2

 

IBM EXCESS 401(k) PLUS PLAN

(As Amended and Restated effective as of January 1, 2010)

 

AMENDMENT No. 8

 

Instrument of Amendment

 

Recitals:

 

International Business Machines Corporation (“IBM”) has established and maintains the IBM Excess 401(k) Plus Plan (the “Plan”), an unfunded deferred compensation plan described in Sections 201(2), 301(a)(3) and 401(a)(1) of the Employee Retirement Income Security Act of 1974, as amended (ERISA).

 

In accordance with Section 10.01 of the Plan, IBM has reserved the right to amend the Plan at any time and from time to time.

 

IBM amended and restated the Plan effective as of January 1, 2010 and has subsequently amended the Plan.

 

IBM has determined to amend the Plan, as heretofore restated, in the manner set forth in this Instrument of Amendment, to be effective July 1, 2017, except as set forth herein.

 

Amendment:

 

1.             In Article II (“Definitions”), the definition of “Retirement” is amended by modifying the last sentence thereof to read as follows:

 

Effective July 1, 2014, Retirement also does not include a termination of employment while participating in the Transition to Retirement program, unless the Participant satisfies (a), (b), (c) or (d) above at the time of termination; provided, however, that an individual will be deemed to satisfy this Retirement definition if the individual participates in the Transition to Retirement Program that is effective July 1, 2017 and terminates employment with the Company upon the individual’s applicable completion date of either March 31, 2018 or June 30, 2018.

 

2.             Section 5.01 (“Automatic Contributions”) is amended by replacing the second paragraph thereof (immediately following subsection (b)) with the following:

 

Notwithstanding the foregoing, for purposes of calculating the Automatic Contributions (if any) payable to Employees participating in the Transition to Retirement program that commenced in 2014 or the Transition to Retirement program that commenced July 1, 2017, the Employee’s Elective Deferrals and Excess 401(k) Eligible Pay shall be calculated based on the Employee’s actual Performance Pay, and the Base Pay the Employee would have received if the Employee had received a full-time rate of Base Pay for all portions of the Plan Year in which the Employee received the Transition-to-

 

1



 

Retirement-reduced rate of Base Pay. Also notwithstanding the foregoing, for Employees whose 2013 Base Pay is adjusted as part of a broad-based, one-week mandatory time off program, Automatic Contributions (if any) for 2013 shall be calculated based on the Base Pay the Employee would have received for that week if the mandatory time off program had not occurred. No other element of Excess 401(k) Eligible pay shall be adjusted in this manner.

 

2




Exhibit 10.3

 

NONCOMPETITION AGREEMENT

 

In recognition of your critical role as a senior executive with International Business Machines Corporation (“IBM”) and in recognition of your access to IBM Confidential Information and/or IBM customer goodwill by virtue of your position, and/or your membership on the Growth & Transformation Team, and/or your appointment as an IBM Fellow, and/or as consideration for your promotion or hiring as a senior executive, along with your eligibility for awards to be granted to you under an IBM Long-Term Performance Plan, and/or for other good and valuable consideration, you (“Employee” or “you”) agree to the terms and conditions herein of this Noncompetition Agreement (the “Agreement”).  Capitalized terms not otherwise defined shall have the meaning ascribed to them in Paragraph 2.

 

1.              Covenants.

 

You acknowledge and agree that:

 

a)            the compensation that you will receive in connection with this Agreement, including any equity awards, cash and other compensation, your position as a senior executive, and/or your appointment to or continued membership on the Growth & Transformation Team or any successor team or group (“G&TT”), if applicable, and/or your appointment as an IBM Fellow, if applicable, is consideration both for your work at IBM and for your compliance with the post-employment restrictive covenants included in this Agreement.

 

b)            (i) the business in which IBM and its affiliates (collectively, the “Company”) are engaged is intensely competitive and your employment by IBM and/or your membership on the G&TT, if applicable, and/or your role as an IBM Fellow, if applicable, requires that you have access to, and knowledge of, IBM Confidential Information, including IBM Confidential Information that pertains not only to your business or unit, but also to the Company’s global operations; (ii) you are given access to, and develop relationships with, customers of the Company at the time and expense of the Company; and (iii) by your training, experience and expertise, your services to the Company are, and will continue to be, extraordinary, special and unique.

 

c)             (i) the disclosure of IBM Confidential Information would place the Company at a serious competitive disadvantage and would do serious damage, financial and

 



 

otherwise, to the business of the Company; and (ii) you will keep in strict confidence, and will not, directly or indirectly, at any time during or after your employment with IBM, disclose, furnish, disseminate, make available or use, except in the course of performing your duties of employment with IBM, any IBM Confidential Information or any other trade secrets or confidential business and technical information of the Company’s customers or vendors, without limitation as to when or how you may have acquired such information.

 

d)            IBM Confidential Information, whether reduced to writing, maintained on any form of electronic media, or maintained in your mind or memory and whether compiled by the Company and/or you, is owned by the Company, and (i) IBM Confidential Information includes, but is not limited to, information that derives independent economic value from not being generally known to or readily ascertainable through proper means by others who can obtain economic value from its disclosure or use, and is the subject of efforts that are reasonable under the circumstances to maintain the secrecy of such information; (ii) IBM Confidential Information includes, but is not limited to, information that constitutes a trade secret of the Company; and (iii) the retention and/or use of such IBM Confidential Information by you during or after your employment with IBM (except in the course of performing your duties and obligations to the Company) shall constitute a misappropriation of the Company’s trade secrets.

 

e)             during your employment with IBM and for twelve (12) months following the termination of your employment either by you or by IBM: (i) you will not directly or indirectly, within the Restricted Area, Engage in or Associate with (a) any Business Enterprise or (b) any competitor of the Company, if performing the duties and responsibilities of such engagement or association could result in you (1) intentionally or unintentionally using, disclosing, or relying upon IBM Confidential Information to which you had access by virtue of your job duties or other responsibilities with IBM or (2) exploiting customer goodwill cultivated in the course of your employment with IBM; however, in the event that your employment with IBM is terminated by IBM as a direct result of a resource action or similar restructuring action and not for Cause, the post-employment restriction in this clause will not apply; and (ii) you will not directly or indirectly solicit, for competitive business purposes, any actual or prospective customer of the Company with which you were directly or indirectly involved as part of your job responsibilities during the last twelve (12) months of your employment with IBM.

 

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f)             during your employment with IBM and for two (2) years following the termination of your employment either by you or by IBM for any reason, you will not directly or indirectly, within the Restricted Area, hire, solicit or make an offer to, or attempt to or participate or assist in any effort to hire, solicit, or make an offer to, any Employee of the Company to be employed or to perform services outside of the Company.

 

2.              Definitions.

 

The following terms have the meanings provided below.

 

a)            “Business Enterprise” means any entity that engages in, or owns or controls an interest in any entity that engages in, competition with any business unit or division of the Company in which you worked at any time during the three (3) year period prior to the termination of your employment.

 

b)            “Cause” means, as reasonably determined by IBM, the occurrence of any of the following: (i) embezzlement, misappropriation of corporate funds or other material acts of dishonesty; (ii) commission or conviction of any felony or of any misdemeanor involving moral turpitude, or entry of a plea of guilty or nolo contendere to any felony or misdemeanor (other than a minor traffic violation or other minor infraction); (iii) engagement in any activity that you know or should know could harm the business or reputation of the Company; (iv) failure to adhere to the Company’s corporate codes, policies or procedures; (v) a breach of any covenant in any employment agreement or any intellectual property agreement, or a breach of any other provision of your employment agreement, in either case if the breach is not cured to the Company’s satisfaction within a reasonable period after you are provided with notice of the breach (no notice and cure period is required if the breach cannot be cured), provided, however , that the mere failure to achieve performance objectives shall not constitute Cause; (vi) failure by you to perform your duties or follow management direction, which failure is not cured to the Company’s satisfaction within a reasonable period of time after a written demand for substantial performance is delivered to you (no notice or cure period is required if the failure to perform cannot be cured); (vii) violation of any statutory, contractual or common law duty or obligation to the Company, including, without limitation, the duty of loyalty; (viii) rendering of services for any organization or engaging directly or indirectly in any business which is or becomes competitive with the Company, or which organization or business, or the rendering of services to

 

3



 

such organization or business, is or becomes otherwise prejudicial to or in conflict with the interests of the Company; or (ix) acceptance of an offer to Engage in or Associate with any business which is or becomes competitive with the Company.

 

c)             “Employee of the Company” means any employee of the Company who worked within the Restricted Area at any time in the twelve (12) month period immediately preceding any actual or attempted hiring, solicitation or making of an offer.

 

d)            “Engage in or Associate with” includes, without limitation, engagement or association as a sole proprietor, owner, employer, director, partner, principal, joint venturer, associate, employee, member, consultant, or contractor.  The phrase also includes engagement or association as a shareholder or investor during the course of your employment with IBM, and includes beneficial ownership of five percent (5%) or more of any class of outstanding stock of a Business Enterprise or competitor of the Company following the termination of your employment with IBM.

 

e)             “IBM Confidential Information” is any information of a confidential or secret nature that is disclosed to you, or created or learned by you that relates to the business of the Company, including trade secrets.  Examples of IBM Confidential Information include, but are not limited to:  the Company’s formulae, patterns, compilations, programs, devices, methods, techniques, software, tools, systems, and processes, the Company’s selling, manufacturing, and servicing methods and business techniques, implementation strategies, and information about any of the foregoing, the Company’s training, service, and business manuals, promotional materials, training courses, and other training and instructional materials, vendor and product information, customer and prospective customer lists, other customer and prospective customer information, client data, global strategic plans, marketing plans, information about the Company’s management techniques and management strategies, information regarding long-term business opportunities, information regarding the development status of specific Company products, assessments of the global competitive landscape of the industries in which the Company competes, plans for acquisition or disposition of products or companies or business units, expansion plans, financial status and plans, compensation information, and personnel information.

 

4



 

f)             “Restricted Area” means any geographic area in the world in which you worked or for which you had job responsibilities, including supervisory responsibilities, during the last twelve (12) months of your employment with IBM.  You acknowledge that IBM is a global company and that the responsibilities of certain IBM employees, including, without limitation, G&TT members, are global in scope.

 

3.              Acknowledgements.

 

You acknowledge that a mere agreement not to disclose, use, or rely on IBM Confidential Information after your employment by IBM ends would be inadequate, standing alone, to protect IBM’s legitimate business interests.  You acknowledge that disclosure of, use of, or reliance on IBM Confidential Information, whether or not intentional, is often difficult or impossible for the Company to detect until it is too late to obtain any effective remedy.  You acknowledge that the Company will suffer irreparable harm if you fail to comply with Paragraph 1 or otherwise improperly disclose, use, or rely on IBM Confidential Information.  You acknowledge that the restrictions set forth in Paragraph 1 are reasonable as to geography, scope and duration.

 

4.              Injunctive Relief.

 

You agree that the Company would suffer irreparable harm if you were to breach, or threaten to breach, any provision of this Agreement and that the Company would by reason of such breach, or threatened breach, be entitled to injunctive relief in a court of appropriate jurisdiction, without the need to post any bond, and you further consent and stipulate to the entry of such injunctive relief in such a court prohibiting you from breaching, or further breaching, this Agreement.  This Paragraph shall not, however, diminish the right of the Company to claim and recover damages in addition to injunctive relief.

 

5.              Severability.

 

In the event that any one or more of the provisions of this Agreement shall be held to be invalid or unenforceable, the validity and enforceability of the remaining provisions shall not in any way be affected or impaired thereby.  Moreover, if any one or more of the provisions contained in this Agreement shall be held to be excessively broad as to duration, activity or subject, such provisions shall be construed by limiting and reducing them so as to be enforceable

 

5



 

to the maximum extent allowed by applicable law.  Furthermore, a determination in any jurisdiction that this Agreement, in whole or in part, is invalid or unenforceable shall not in any way affect or impair the validity or enforceability of this Agreement in any other jurisdiction.

 

6.              Headings.

 

The headings in this Agreement are inserted for convenience and reference only and shall in no way affect, define, limit, or describe the scope, intent or construction of any provision hereof.

 

7.              Waiver.

 

The failure of IBM to enforce any terms, provisions or covenants of this Agreement shall not be construed as a waiver of the same or of the right of IBM to enforce the same.  Waiver by IBM of any breach or default by you (or by any other employee or former employee of IBM) of any term or provision of this Agreement (or any similar agreement between IBM and you or any other employee or former employee of IBM) shall not operate as a waiver of any other breach or default.

 

8.              Successors and Assigns.

 

This Agreement shall inure to the benefit of and be binding upon IBM, any successor organization which shall succeed to IBM by acquisition, merger, consolidation or operation of law, or by acquisition of assets of IBM and any assigns.  You may not assign your obligations under this Agreement.

 

9.              Disclosure of Existence of Covenants.

 

You agree that while employed by IBM and for two (2) years thereafter, you will communicate the contents of this Agreement to any person, firm, association, partnership, corporation or other entity which you intend to be employed by, associated with or represent, prior to or at the time of accepting such employment, association or representation.

 

10.           Notice to IBM of Prospective Position.

 

You agree that if, at any time during your employment or within twelve (12) months following the termination of your employment with IBM, you are offered and intend to accept a position with any person, firm, association, partnership, corporation or other entity other

 

6



 

than the Company, you will provide the Senior Vice President of Human Resources for IBM Corporation with two (2) week written notice prior to accepting any such position.  This two (2) week written notice is separate from any other notice obligations you may have under agreements with IBM.  If for any reason you cannot, despite using your best efforts, provide the two (2) week written notice prior to accepting any such position, you agree that you will provide two (2) week written notice prior to commencing that new position.  You acknowledge and agree that a two (2) week written notice period is appropriate and necessary to permit IBM to determine whether, in its view, your proposed new position could lead to a violation of this Agreement, and you agree that you will provide IBM with such information as IBM may request to allow IBM to complete its assessment (except that you need not provide any information that would constitute confidential or trade secret information of any entity other than the Company).  During the notice period required by this Paragraph, IBM may choose, in its sole discretion, to limit your duties in your position with IBM and to restrict your access to IBM’s premises, systems, products, information, and employees.  IBM is committed to protect its trade secrets and other confidential and proprietary information, and will take all necessary and appropriate steps to do so.  Upon giving notice, you agree to cooperate with IBM in good faith to ensure that its trade secrets and other confidential and proprietary information are not disclosed, either intentionally or inadvertently.

 

11.           No Oral Modification.

 

This Agreement may not be changed orally, but may be changed only in a writing signed by the Employee and a duly authorized representative of IBM.

 

12.           Entire Agreement.

 

Although this Agreement sets forth the entire understanding between the Employee and IBM concerning the restrictive covenants herein, this Agreement does not impair, diminish, restrict or waive any other restrictive covenant, nondisclosure obligation or confidentiality obligation of the Employee to the Company under any other agreement, policy, plan or program of the Company.  Nothing herein affects your rights, immunities, or obligations under any federal, state or local law, including under the Defend Trade Secrets Act of 2016, as described in the Company’s Business Conduct Guidelines, or prohibits you from reporting possible violations of law or regulation to a government agency, as protected by law.  The

 

7



 

Employee and IBM represent that, in executing this Agreement, the Employee and IBM have not relied upon any representations or statements made, other than those set forth herein, with regard to the subject matter, basis or effect of this Agreement.

 

13.           Governing Law and Choice of Forum.

 

This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York, without regard to its conflict of law rules.  The parties agree that any action or proceeding with respect to this Agreement shall be brought exclusively in the state and federal courts sitting in New York County or Westchester County, New York.  The parties agree to the personal jurisdiction thereof, and irrevocably waive any objection to the venue of such action, including any objection that the action has been brought in an inconvenient forum.

 

[INSERT EMPLOYEE NAME HERE]

INTERNATIONAL BUSINESS MACHINES CORPORATION

 

 

By:

 

 

By:

 

 

(Employee Signature)

 

 

Diane J. Gherson

 

 

 

Senior Vice President, Human Resources

 

 

 

 

 

 

 

 

 

 

Employee Serial No.

 

Date

 

 

 

 

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EXHIBIT 12

COMPUTATION OF RATIO OF INCOME FROM CONTINUING OPERATIONS
TO FIXED CHARGES
(Unaudited)

 
  Years Ended December 31:  
(Dollars in millions)
  2017   2016   2015   2014   2013  

Income from continuing operations before income taxes(1)

  $ 11,407   $ 12,332   $ 15,953   $ 19,993   $ 20,252  

Add:

                               

Fixed charges, excluding capitalized interest

    1,880     1,709     1,500     1,556     1,575  

Income as adjusted before income taxes

  $ 13,286   $ 14,041   $ 17,453   $ 21,549   $ 21,827  

Fixed charges:

                               

Interest expense

    1,273     1,206   $ 1,009   $ 1,025   $ 989  

Capitalized interest

    5     2     0     4     22  

Portion of rental expense representative of interest

    607     503     491     531     586  

Total fixed charges

  $ 1,885   $ 1,711   $ 1,500   $ 1,560   $ 1,597  

Ratio of income from continuing operations to fixed charges

    7.0     8.2     11.6     13.8     13.7  

(1)
Income from continuing operations before income taxes excludes (a) amortization of capitalized interest and (b) the company's share in the income and losses of less-than-fifty percent owned affiliates.



QuickLinks

COMPUTATION OF RATIO OF INCOME FROM CONTINUING OPERATIONS TO FIXED CHARGES (Unaudited)

Exhibit 13

 

Report of Financials

International Business Machines Corporation and Subsidiary Companies

 

MANAGEMENT DISCUSSION

 

 

Overview

 

26

Forward-Looking and Cautionary Statements

 

27

Management Discussion Snapshot

 

27

Description of Business

 

30

Year in Review

 

35

Prior Year in Review

 

56

Other Information

 

66

Looking Forward

 

66

Liquidity and Capital Resources

 

67

Critical Accounting Estimates

 

70

Currency Rate Fluctuations

 

73

Market Risk

 

74

Cybersecurity

 

75

Employees and Related Workforce

 

75

 

 

 

Report of Management

 

76

 

 

 

Report of Independent Registered Public Accounting Firm

 

77

 

 

 

CONSOLIDATED FINANCIAL STATEMENTS

 

 

Earnings

 

78

Comprehensive Income

 

79

Financial Position

 

80

Cash Flows

 

81

Changes in Equity

 

82

 

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

A

 Significant Accounting Policies

 

84

B

Accounting Changes

 

94

C

Acquisitions/Divestitures

 

96

D

Financial Instruments

 

100

E

Inventories

 

107

F

Financing Receivables

 

107

G

Property, Plant and Equipment

 

111

H

Investments and Sundry Assets

 

111

I

Intangible Assets Including Goodwill

 

111

J

Borrowings

 

112

K

Other Liabilities

 

115

L

Equity Activity

 

116

M

Contingencies and Commitments

 

119

N

Taxes

 

121

O

Research, Development and Engineering

 

124

P

Earnings Per Share of Common Stock

 

124

Q

Rental Expense and Lease Commitments

 

125

R

Stock-Based Compensation

 

125

S

Retirement-Related Benefits

 

128

T

Segment Information

 

142

U

Subsequent Events

 

146

 

 

 

Five-Year Comparison of Selected Financial Data

 

147

 

 

 

Selected Quarterly Data

 

148

 

 

 

Performance Graphs

 

149

 

 

 

Stockholder Information

 

150

 

25


 

Management Discussion

International Business Machines Corporation and Subsidiary Companies

 

OVERVIEW

 

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

 

Organization of Information

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Operating (non-GAAP) Earnings

 

In an effort to provide better transparency into the operational results of the business, the company separates business results into operating and non-operating categories. Operating earnings from continuing operations is a non-GAAP measure that excludes the effects of certain acquisition-related charges, intangible asset amortization expense resulting from basis differences on equity method investments, retirement-related costs, discontinued operations and related tax impacts. For the fourth-quarter and full-year 2017, operating (non-GAAP) earnings also exclude a one-time charge associated with the enactment of U.S. tax reform due to its unique and non-recurring nature. For acquisitions, operating (non-GAAP) earnings exclude the amortization of purchased intangible assets and acquisition-related charges such as in-process research and development, transaction costs, applicable restructuring and related expenses and tax charges related to acquisition integration. These charges are excluded as they may be inconsistent in amount and timing from period to period and are dependent on the size, type and frequency of the company’s acquisitions. All other spending for acquired companies is included in both earnings from continuing operations and in operating (non-GAAP) earnings.

 

Throughout the Management Discussion and Analysis, the impact of acquisitions over the prior 12-month period may be a driver of higher expense year to year. For retirement-related costs, the company characterizes certain items as operating and others as non-operating. The company includes defined benefit plan and nonpension postretirement benefit plan service cost, amortization of prior service cost and the cost of defined contribution plans in operating earnings. Non-operating retirement-related cost includes defined benefit plan and nonpension postretirement benefit plan interest cost, expected return on plan assets, amortized actuarial gains/losses, the impacts of any plan curtailments/settlements and multi-employer plan costs, pension insolvency costs and other costs. Non-operating retirement-related costs are primarily related to changes in pension plan assets and liabilities which are tied to financial market performance, and the company considers these costs to be outside of the operational performance of the business. Effective January 1, 2018, the company adopted the new Financial Accounting Standards Board (FASB) guidance on presentation of net periodic pension and nonpension postretirement benefits costs, and as a result, the company will align its presentation for operating (non-GAAP) earnings to conform to the FASB presentation of these costs included in the Consolidated Statement of Earnings. Operating (non-GAAP) earnings will no longer include amortization of prior service costs and will now include multi-employer plan costs. The full-year 2018 operating (non-GAAP) earnings per share expectation has been calculated under this new definition.

 

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

 

26



 

Management Discussion

International Business Machines Corporation and Subsidiary Companies

 

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

 

FORWARD-LOOKING AND CAUTIONARY STATEMENTS

 

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

 

MANAGEMENT DISCUSSION SNAPSHOT

 

($ and shares in millions except per share amounts)

 

 

 

 

 

 

 

Yr.-to-Yr.

 

 

 

 

 

 

 

Percent/

 

 

 

 

 

 

 

Margin

 

For the year ended December 31:

 

2017

 

2016

 

Change

 

Revenue

 

$

79,139

 

$

79,919

 

(1.0

)%*

Gross profit margin

 

45.8

%

47.9

%

(2.1

)pts.

Total expense and other (income)

 

$

24,827

 

$

25,964

 

(4.4

)%

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

 

31.4

%

32.5

%

(1.1

)pts.

Income from continuing operations before income taxes

 

$

11,400

 

$

12,330

 

(7.5

)%

Provision for income taxes from continuing operations

 

$

5,642

**

$

449

 

NM

 

Income from continuing operations

 

$

5,758

**

$

11,881

 

(51.5

)%

Income from continuing operations margin

 

7.3

%

14.9

%

(7.6.

)pts

Loss from discontinued operations, net of tax

 

$

(5

)

$

(9

)

(44.7

)%

Net income

 

$

5,753

**

$

11,872

 

(51.5

)%

Earnings per share from continuing operations:

 

 

 

 

 

 

 

Assuming dilution

 

$

6.14

**

$

12.39

 

(50.4

)%

Consolidated earnings per share—assuming dilution

 

$

6.14

**

$

12.38

 

(50.4

)%

Weighted-average shares outstanding

 

 

 

 

 

 

 

Assuming dilution

 

937.4

 

958.7

 

(2.2

)%

Assets +

 

$

125,356

 

$

117,470

 

6.7

%

Liabilities +

 

$

107,631

 

$

99,078

 

8.6

%

Equity +

 

$

17,725

 

$

18,392

 

(3.6

)%


*        (1.3) percent adjusted for currency.

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

+        At December 31

NM—Not meaningful

 

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

 

($ in millions except per share amounts)

 

 

 

 

 

 

 

Yr.-to-Yr.

 

 

 

 

 

 

 

Percent

 

For the year ended December 31:

 

2017

 

2016

 

Change

 

Net income as reported

 

$

5,753

**

$

11,872

 

(51.5

)%

Loss from discontinued operations, net of tax

 

(5

)

(9

)

(44.7

)

Income from continuing operations

 

$

5,758

**

$

11,881

 

(51.5

)%

Non-operating adjustments (net of tax)

 

 

 

 

 

 

 

Acquisition-related charges

 

718

 

735

 

(2.3

)

Non-operating retirement-related costs/(income)

 

983

 

415

 

137.0

 

U.S. tax reform one-time charge

 

5,475

 

 

NM

 

Operating (non-GAAP) earnings*

 

$

12,935

 

$

13,031

 

(0.7

)%

Diluted operating (non-GAAP) earnings per share

 

$

13.80

 

$

13.59

 

1.5

%

 


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

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

NM—Not meaningful

 

27



 

Management Discussion

International Business Machines Corporation and Subsidiary Companies

 

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

 

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

 

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

 

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

 

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

 

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

 

28



 

Management Discussion

International Business Machines Corporation and Subsidiary Companies

 

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

 

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

 

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

 

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

 

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

 

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

 

·              Decreases in intangible assets ($0.9 billion).

 

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

 

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

 

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

 

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

 

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

 

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

 

29


 

Management Discussion

International Business Machines Corporation and Subsidiary Companies

 

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

 

DESCRIPTION OF BUSINESS

 

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

 

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

 

Strategy

 

The IBM strategy starts with its clients.

 

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

 

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

 

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

 

The company’s capabilities include:

 

Cloud

 

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

 

The IBM Cloud is uniquely:

 

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

 

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

 

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

 

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

 

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

 

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

 

AI and Data

 

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

 

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

 

30



 

Management Discussion

International Business Machines Corporation and Subsidiary Companies

 

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

 

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

 

Solutions

 

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

 

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

 

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

 

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

 

Enterprise Services

 

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

 

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

 

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

 

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

 

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

 

****

 

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

 

·          Leading in data responsibility, ethics and transparency;

 

·          Preparing workforces of the world;

 

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

 

·          Remaining grounded in a set of enduring IBM Values:

 

·   Dedication to every client’s success

 

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

 

·   Trust and personal responsibility in all relationships

 

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

 

****

 

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

 

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

 

Business Model

 

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

 

31



 

Management Discussion

International Business Machines Corporation and Subsidiary Companies

 

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

 

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

 

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

 

Business Segments and Capabilities

 

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

 

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

 

Cognitive Solutions Capabilities

 

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

 

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

 

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

 

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

 

GBS Capabilities

 

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

 

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

 

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

 

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

 

32



 

Management Discussion

International Business Machines Corporation and Subsidiary Companies

 

Technology Services & Cloud Platforms Capabilities

 

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

 

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

 

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

 

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

 

Systems Capabilities

 

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

 

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

 

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

 

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

 

Global Financing Capabilities

 

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

 

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

 

33



 

Management Discussion

International Business Machines Corporation and Subsidiary Companies

 

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

 

IBM Worldwide Organizations

 

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

 

·              Global Markets

 

·              Research, Development and Intellectual Property

 

Global Markets

 

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

 

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

 

Research, Development and Intellectual Property

 

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

 

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

 

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

 

34


 

Management Discussion

International Business Machines Corporation and Subsidiary Companies

 

YEAR IN REVIEW

 

Results of Continuing Operations

 

Segment Details

 

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

 

($ in millions)

 

 

 

 

 

 

 

Yr.-to-Yr

 

Yr.-to-Yr.

 

 

 

 

 

 

 

Percent/

 

Percent Change

 

 

 

 

 

 

 

Margin

 

Adjusted for

 

For the year ended December 31:

 

2017

 

2016

 

Change

 

Currency

 

Revenue

 

 

 

 

 

 

 

 

 

Cognitive Solutions

 

$

18,453

 

$

18,187

 

1.5

%

1.0

%

Gross margin

 

78.6

%

81.9

%

(3.2

)pts.

 

 

Global Business Services

 

16,348

 

16,700

 

(2.1

)%

(1.8

)%

Gross margin

 

25.2

%

27.0

%

(1.8

)pts.

 

 

Technology Services & Cloud Platforms

 

34,277

 

35,337

 

(3.0

)%

(3.4

)%

Gross margin

 

40.4

%

41.9

%

(1.5

)pts.

 

 

Systems

 

8,194

 

7,714

 

6.2

%

5.4

%

Gross margin

 

53.2

%

55.7

%

(2.5

)pts.

 

 

Global Financing

 

1,696

 

1,692

 

0.3

%

(0.7

)%

Gross margin

 

29.3

%

38.7

%

(9.4

)pts.

 

 

Other

 

171

 

289

 

(40.7

)%

(41.1

)%

Gross margin

 

(640.3

)%

(293.9

)%

(346.4

)pts.

 

 

Total consolidated revenue

 

$

79,139

 

$

79,919

 

(1.0

)%

(1.3

)%

 

 

 

 

 

 

 

 

 

 

Total consolidated gross profit

 

$

36,227

 

$

38,294

 

(5.4

)%

 

 

Total consolidated gross margin

 

45.8

%

47.9

%

(2.1

)pts.

 

 

Non-operating adjustments

 

 

 

 

 

 

 

 

 

Amortization of acquired intangible assets

 

449

 

494

 

(9.2

)%

 

 

Retirement-related costs/(income)

 

799

 

316

 

153.2

%

 

 

Operating (non-GAAP) gross profit

 

$

37,475

 

$

39,104

 

(4.2

)%

 

 

Operating (non-GAAP) gross margin

 

47.4

%

48.9

%

(1.6

)pts.

 

 

 

35



 

Management Discussion

International Business Machines Corporation and Subsidiary Companies

 

Cognitive Solutions

 

($ in millions)

 

 

 

 

 

 

 

 

 

Yr.-to-Yr.

 

 

 

 

 

 

 

Yr.-to-Yr.

 

Percent Change

 

 

 

 

 

 

 

Percent

 

Adjusted for

 

For the year ended December 31:

 

2017

 

2016

 

Change

 

Currency

 

Cognitive Solutions external revenue

 

$

18,453

 

$

18,187

 

1.5

%

1.0

%

Solutions Software

 

$

12,806

 

$

12,589

 

1.7

%

1.3

%

Transaction Processing Software

 

5,647

 

5,598

 

0.9

 

0.3

 

 

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

 

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

 

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

 

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

 

($ in millions)

 

 

 

 

 

 

 

Yr.-to-Yr.

 

 

 

 

 

 

 

Percent/

 

 

 

 

 

 

 

Margin

 

For the year ended December 31:

 

2017

 

2016

 

Change

 

Cognitive Solutions

 

 

 

 

 

 

 

External gross profit

 

$

14,510

 

$

14,890

 

(2.6

)%

External gross profit margin

 

78.6

%

81.9

%

(3.2

)pts.

Pre-tax income

 

$

6,817

 

$

6,352

 

7.3

%

Pre-tax margin

 

32.3

%

30.5

%

1.8

pts.

 

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

 

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

 

36



 

Management Discussion

International Business Machines Corporation and Subsidiary Companies

 

Global Business Services

 

($ in millions)

 

 

 

 

 

 

 

 

 

Yr.-to-Yr.

 

 

 

 

 

 

 

Yr.-to-Yr.

 

Percent Change

 

 

 

 

 

 

 

Percent

 

Adjusted for

 

For the year ended December 31:

 

2017

 

2016

 

Change

 

Currency

 

Global Business Services external revenue

 

$

16,348

 

$

16,700

 

(2.1

)%

(1.8

)%

Consulting

 

$

7,262

 

$

7,332

 

(1.0

)%

(0.4

)%

Global Process Services

 

1,265

 

1,388

 

(8.8

)

(9.0

)

Application Management

 

7,821

 

7,980

 

(2.0

)

(1.9

)

 

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

 

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

 

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

 

($ in millions)

 

 

 

 

 

 

 

Yr.-to-Yr.

 

 

 

 

 

 

 

Percent/

 

 

 

 

 

 

 

Margin

 

For the year ended December 31:

 

2017

 

2016

 

Change

 

Global Business Services

 

 

 

 

 

 

 

External gross profit

 

$

4,112

 

$

4,501

 

(8.6

)%

External gross profit margin

 

25.2

%

27.0

%

(1.8

)pts.

Pre-tax income

 

$

1,401

 

$

1,732

 

(19.1

)%

Pre-tax margin

 

8.4

%

10.1

%

(1.7

)pts.

 

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

 

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

 

37


 

Management Discussion

International Business Machines Corporation and Subsidiary Companies

 

Technology Services & Cloud Platforms

 

($ in millions)

 

 

 

 

 

 

 

 

 

Yr.-to-Yr.

 

 

 

 

 

 

 

Yr.-to-Yr.

 

Percent Change

 

 

 

 

 

 

 

Percent

 

Adjusted for

 

For the year ended December 31:

 

2017

 

2016

 

Change

 

Currency

 

Technology Services & Cloud Platforms external revenue

 

$

34,277

 

$

35,337

 

(3.0

)%

(3.4

)%

Infrastructure Services

 

$

22,690

 

$

23,543

 

(3.6

)%

(4.1

)%

Technical Support Services

 

7,196

 

7,272

 

(1.0

)

(1.5

)

Integration Software

 

4,390

 

4,521

 

(2.9

)

(3.4

)

 

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

 

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

 

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

 

($ in millions)

 

 

 

 

 

 

 

Yr.-to-Yr.