01—Abstract
Summary
Summary of the 10-K filed February 28, 2023. Cited figures are marked; the original filing is the authoritative source.
International Business Machines Corporation (IBM) filed its 2022 Form 10-K on February 28, 2023, reporting a year defined by a one-time, non-cash $5.9 billiona pre-tax pension settlement charge tied to the transfer of roughly $16 billion of U.S. Qualified PPP pension obligations to insurers.
Revenue grew 5.5% as reported (12% adjusted for currency) to $60.5 billionb, with the growth heavily aided by roughly 4 points of incremental sales to Kyndryl, the managed infrastructure spin-off completed in November 2021. Reported net income fell 71.5% to $1.6 billion and diluted EPS from continuing operations fell to $1.95, but operating (non-GAAP) diluted EPS rose 15.1% to $9.13 and free cash flow reached $9.3 billion, which management views as the more representative measure of performance. Management frames the company as a hybrid cloud and AI business, with Software (about 41% of revenue) and Consulting (about 32%) as its growth engines, Red Hat as a key driver, and hybrid cloud revenue of $22.4 billion (37% of revenue).
Margins were mixed: gross margin declined 0.9 points to 54.0%, and Consulting's gross margin fell 2.5 points to 25.5% on labor-cost inflation, though management reports improvement in the second half. The balance sheet remains substantial but levered, with total debt of $50.9 billionc, $8.8 billion of cash and marketable securities, and a dividend of $5.9 billion paid, while share repurchases remain suspended since the Red Hat acquisition.
Key risks flagged in the filing include currency headwinds (about $3.5 billiond revenue impact in 2022), the loss of roughly $650 million in hedging gains that will not repeat in 2023, a pending IRS dispute over roughly $4.5 billion of additional taxable income, a $718 million BMC punitive and direct damages judgment under appeal, and ongoing litigation with GlobalFoundries. Management guided to a roughly $300 million restructuring charge in Q1 2023 and a benefit of over $200 million to 2023 pre-tax profit from extending server useful lives.
02—Key points
Key Highlights
- Revenue rose 5.5% to $60.5 billion as reported and 12% adjusted for currency, including about 4 points of incremental sales to Kyndryl.
- A one-time, non-cash $5.9 billion pre-tax pension settlement charge drove GAAP net income down 71.5% to $1.6 billion and diluted EPS from continuing operations to $1.95.
- Operating (non-GAAP) diluted EPS increased 15.1% to $9.13, and operating pre-tax margin from continuing operations rose 2.5 points to 16.2%.
- Free cash flow reached $9.3 billion, up $2.8 billion year over year, while cash from operations was $10.4 billion.
- Hybrid cloud revenue reached $22.4 billion (37% of revenue), growing 11% as reported and 17% adjusted for currency; Red Hat revenue grew 12.6% as reported.
- Consulting gross margin declined 2.5 points to 25.5% on labor cost inflation, though management reports improvement in the second half of 2022.
- Currency was a significant headwind of about $3.5 billion to 2022 revenue, and over $650 million of hedging gains will not repeat in 2023.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2022, International Business Machines Corp kept $0.03.
- Revenue$60.53B100.0%
- Cost of revenue−$27.84B46.0%
- Gross profit$32.69B54.0%
- Operating costs−$30.90B51.1%
- Operating income$1.78B2.9%
- Interest, other & tax−$144.0M0.2%
- Net income$1.64B2.7%
Where FY2022 revenue went
$60.53B- Cost of revenue: $27.84B, 46% of revenue
- SG&A: $18.61B, 31% of revenue
- Net income: $1.64B, 2.7% of revenue
- R&D: $6.57B, 11% of revenue
- Other operating costs: $5.73B, 9.5% of revenue
Kept 2.7% as net incomeNet income $1.64B · 2.7%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2022filed February 28, 2023Financial Statements
FY2022 against FY2021
| Line item | FY2022FY2021 | Change |
|---|---|---|
| Revenue | $60.53B$57.35B | +5.5% |
| Cost of Revenue | $27.84B$25.86B | +7.6% |
| Gross Profit | $32.69B$31.49B | +3.8% |
| R&D Expenses | $6.57B$6.49B | +1.2% |
| SG&A Expenses | $18.61B$18.75B | −0.7% |
| Operating Income | $1.78B$4.71B | −62.2% |
| Interest Expense | $1.22B$1.16B | +5.3% |
| Net Income | $1.64B$5.74B | −71.5% |
| EPS (Basic) | $1.82$6.41 | −71.6% |
| EPS (Diluted) | $1.80$6.35 | −71.7% |
| Shares Outstanding (Basic) | 902.66M895.99M | +0.7% |
| Shares Outstanding (Diluted) | 912.27M904.64M | +0.8% |
05—Questions
Frequently Asked Questions
Why did GAAP net income fall so sharply in 2022 if the underlying business grew?
The decline was driven mainly by a one-time, non-cash, pre-tax pension settlement charge of $5.9 billion ($4.4 billion after tax) recorded in Q3 2022, which resulted from transferring about $16 billion of U.S. Qualified PPP pension obligations and assets to insurers. Excluding this charge and other non-operating items, operating earnings rose 16.0% to $8.3 billion, and operating diluted EPS grew 15.1% to $9.13.
How much of IBM's 2022 revenue growth came from Kyndryl, and how does this affect the outlook?
Incremental sales to Kyndryl contributed approximately 4 points of total revenue growth in 2022, with the largest effects in Transaction Processing (about 19 points) and Infrastructure (about 6 points). Because Kyndryl is a former IBM business that is now a separate public company, investors should consider how much of future growth is dependent on these commercial relationships when assessing organic momentum.
What are the main financial and legal risks identified in the filing?
Key items include currency exposure, with a theoretical maximum pre-tax impact of about $335 million on an as-reported basis in 2022; the expected loss of over $650 million in 2022 hedging gains in 2023; a pending IRS challenge to cross-border transactions that, if sustained, would add about $4.5 billion of taxable income; a $718 million direct and $718 million punitive damages award to BMC under appeal, which IBM says it does not believe creates material exposure; and ongoing litigation with GlobalFoundries seeking more than $1.5 billion.
What is the company's capital return and balance sheet position?
IBM paid $5.9 billion in dividends in 2022 at a quarterly rate of $1.65 per share, which was announced for 2023. Share repurchases have been suspended since the 2019 Red Hat acquisition, with about $2.0 billion of authorization remaining. Total debt was $50.9 billion at year-end, with $8.8 billion of cash, restricted cash and marketable securities. Ratings were A- from S&P and A3 from Moody's, and management says the company has the financial flexibility to operate at a single-A rating.
What should investors expect for 2023 profitability?
Management expects several items to affect 2023 profit: a roughly $300 million stranded-cost charge in Q1 2023 with savings in the second half; a benefit of over $200 million to pre-tax profit from extending the useful life of server and network equipment; and a loss of over $650 million in hedging gains that do not recur. Currency is expected to be roughly neutral to revenue at mid-January spot rates. Total retirement-related plan cost is expected to fall to about $1.2 billion, with non-operating costs decreasing by about $6.5 billion.
06—Continue