01—Abstract
Summary
Summary of the 10-K filed February 23, 2021. Cited figures are marked; the original filing is the authoritative source.
International Business Machines Corporation (IBM) closed 2020 with revenue of $73.6 billiona, down 4.6% as reported (4.7% adjusted for currency), while GAAP income from continuing operations fell 41.7% to $5.5 billion and diluted EPS from continuing operations was $6.13.
Results absorbed a $2.0 billionb pre-tax charge for structural actions (primarily workforce rebalancing) in Q4 2020. Excluding that charge, operating (non-GAAP) diluted EPS was $8.67, down 32.3% year over year. Weakness was concentrated in Transaction Processing Platforms (down 16.8%), Systems (down 8.2%) and Global Technology Services (down 5.7%), partly offset by Red Hat-driven growth in Cloud & Data Platforms (up 20.9%).
Total cloud revenue reached $25.1 billionc, up 19%. Cash generation remained solid. Operating cash flow was $18.2 billion and free cash flow was $10.8 billion, covering $5.8 billion of dividends.
Total debt declined $1.4 billion to $61.5 billiond, and roughly $11.5 billion has been repaid since the Red Hat acquisition closed in mid-2019. The share repurchase program remains suspended, with about $2.0 billion of authorization left. Working capital turned negative (current ratio 0.98:1), largely due to the workforce charge accrual and current debt maturities.
Strategically, IBM is repositioning as a hybrid cloud and AI company. It plans to spin off its Managed Infrastructure Services unit (to be called NewCo) into a standalone public company by the end of 2021. Management also flagged risks around the spin-off's execution, the pandemic-driven shift to shorter-duration contracts, an unresolved IRS dispute over roughly $4.5 billion of proposed adjustments, and $8.6 billion of gross unrecognized tax benefits.
02—Key points
Key Highlights
- Revenue fell 4.6% to $73.6B; cloud revenue grew 19% to $25.1B, led by Red Hat (Cloud & Data Platforms +20.9%).
- GAAP diluted EPS from continuing operations was $6.13 (down 42%); operating (non-GAAP) EPS was $8.67 (down 32.3%), both including a $2.0B structural-action charge (-$1.84/share).
- Free cash flow was $10.8B, down $1.1B year over year, against $5.8B of dividends paid; the quarterly dividend was raised to $1.63 per share.
- Total debt fell $1.4B to $61.5B, and about $11.5B has been reduced since the Red Hat deal closed in July 2019; the buyback remains suspended with $2.0B authorized.
- Planned spin-off of the Managed Infrastructure Services unit of Global Technology Services into a standalone public company, targeted for completion by end-2021.
- Transaction Processing Platforms (-16.8%), Systems (-8.2%) and GBS (-3.8%) declined as clients deferred purchases and shifted to shorter contracts during COVID-19.
- The IRS proposed roughly $4.5B of additional taxable income from 2013-2014 cross-border transactions, which IBM disputes; a 2020 tax benefit from an intra-entity IP sale (~$0.9B net) lowered the effective tax rate to -18.6%.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2020, International Business Machines Corp kept $0.10.
- Revenue$55.18B100.0%
- Cost of revenue−$24.31B44.1%
- Gross profit$30.86B55.9%
- Operating costs−$26.93B48.8%
- Operating income$3.93B7.1%
- Interest, other & tax$1.66B3.0%
- Net income$5.59B10.1%
Where FY2020 revenue went
$55.18B- Cost of revenue: $24.31B, 44% of revenue
- SG&A: $20.56B, 37% of revenue
- Operating income: $3.93B, 7.1% of revenue
- R&D: $6.26B, 11% of revenue
Kept 7.1% as operating incomeOperating income $3.93B · 7.1%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2020filed February 23, 2021Financial Statements
FY2020 against FY2019
| Line item | FY2020FY2019 | Change |
|---|---|---|
| Revenue | $55.18B$57.71B | −4.4% |
| Cost of Revenue | $24.31B$26.18B | −7.1% |
| Gross Profit | $30.86B$31.53B | −2.1% |
| R&D Expenses | $6.26B$5.91B | +6.0% |
| SG&A Expenses | $20.56B$18.72B | +9.8% |
| Operating Income | $3.93B$7.15B | −45.0% |
| Interest Expense | $1.29B$1.34B | −4.2% |
| Net Income | $5.59B$9.43B | −40.7% |
| EPS (Basic) | $6.28$10.63 | −40.9% |
| EPS (Diluted) | $6.23$10.56 | −41.0% |
| Shares Outstanding (Basic) | 890.35M887.24M | +0.4% |
| Shares Outstanding (Diluted) | 896.56M892.81M | +0.4% |
05—Questions
Frequently Asked Questions
Why did IBM's reported earnings fall so sharply in 2020?
Income from continuing operations fell 41.7% to $5.5 billion. The main driver was a $2.0 billion pre-tax charge for workforce rebalancing in Q4 2020, along with lower divestiture gains, higher non-operating retirement costs, and a full year of Red Hat operating expenses. Excluding the charge and other non-operating items, operating (non-GAAP) earnings were $7.8 billion, down 32%.
Is IBM's dividend at risk given the weaker results?
The 10-K indicates management remains committed to its dividend policy. Dividends paid were $5.8 billion in 2020, about 1.3 times... (not exceeding) free cash flow of $10.8 billion, and the Board raised the quarterly dividend to $1.63 per share in 2020. Investors should still watch free cash flow coverage, which was about 1.8x in 2020, versus 2.0x-plus in prior years.
What is the NewCo spin-off, and what risks does it carry?
NewCo is the planned standalone company holding IBM's Managed Infrastructure Services unit, which IBM expects to be the world's leading managed infrastructure services provider. The separation is intended to be tax-free and completed by end-2021, but it depends on NewCo's readiness, final financial statements, IRS tax-free treatment, and board approval. The company expects significant separation costs and warns of possible business disruption or less favorable terms.
How strong is IBM's balance sheet and liquidity?
IBM held $14.3 billion of cash, restricted cash and marketable securities at year-end 2020 and had $15.3 billion of committed global credit facilities. Total debt was $61.5 billion, and the company is rated A by S&P and A2 by Moody's. Working capital was negative at $(705) million because of the workforce charge accrual and about $7.0 billion of current debt maturities.
What are the main tax and legal exposures disclosed?
The company recorded $8.6 billion of gross unrecognized tax benefits at year-end 2020. The IRS has proposed roughly $4.5 billion of additional income from 2013-2014 cross-border transactions, which IBM is contesting. Other items include about $750 million of non-income tax assessments in Brazil and $742 million of prepaid income taxes in India. IBM considers the probability of material loss from most legal matters to be remote or not yet estimable.
06—Continue