IBM Annual Report 2018 PDF

2018
Annual
Report
Dear IBM Investor:
2018 was a defining year for IBM and our
clients. Your company returned to growth,
just as businesses readied to enter
Chapter 2 of their digital reinventions.
For years, we have focused on building the tools businesses 2018: Return to Growth
need in the 21st century. Our investments have reshaped IBM In 2018, IBM achieved $79.6 billion in revenue and operating
to lead in the emerging, high-value segments of the IT market, earnings per share of $13.81. For the full year, we returned to
including analytics, artificial intelligence, cloud, security, revenue growth, grew earnings per share and stabilized margins.
blockchain and quantum computing. At the same time, we have Our strategic and continued investment in innovative
deepened our longstanding commitment to the responsible technology drove our improved competitive position and profit
stewardship of technology. dynamics. Offerings that address data, AI, cloud, analytics and
IBM is now ready to help our clients advance their cybersecurity now represent more than half of our revenue—up
business transformations. from a quarter just four years ago—accounting for approximately
In my letter to you this year, I will describe IBM’s $40 billion in revenue in 2018.
performance in 2018. I will outline how clients are poised Our investment of more than $5 billion in research and
to enter Chapter 2 of their digital reinventions, with help from development produced thousands of breakthrough innovations,
IBM, and how this translates to growth for IBM, for businesses which led to IBM’s 26th consecutive year of U.S. patent leadership.
and for the world. Of the 9,100 patents granted to IBM in 2018, more than 1,600
were related to AI and 1,400 to cybersecurity—more than any
other company in either area.
2
This focus on breakthrough innovation has created New IBM investments are further energizing our portfolio.
IBM’s strongest portfolio ever and has driven results: In late 2018, we announced plans to acquire Red Hat, the world’s
leading open source technology provider for the enterprise.
–– Total cloud revenues were more than $19 billion in 2018, up With this acquisition, which is expected to close in the second
12 percent. In the fourth quarter alone, IBM signed 16 client half of 2019, IBM will enhance our position as the world’s number
services agreements worth more than $100 million to help one hybrid cloud provider, helping clients unlock the full business
optimize business performance on the IBM Cloud. Today, value of the cloud.
47 of the Fortune 50 depend on the IBM Cloud. We also continued to divest stand-alone software and
services assets that are no longer strategic for IBM.
–– IBM is the world’s enterprise AI leader. Solutions enabled At the same time, we remained committed to returning
by IBM Watson are helping produce better decision-making capital to our shareholders. In 2018, we returned more than
and business outcomes through more than 20,000 client $10 billion to you, our shareholders, including dividends
engagements, across 20 industries to date. IDC ranked of $5.7 billion and gross share repurchases of $4.4 billion.
IBM number one in AI market share. We continue to pioneer We raised our dividend for the 23rd consecutive year—IBM’s
innovations in natural language processing, speech processing, 103rd straight year of providing one.
computer vision and machine learning.
Moving Clients to the Next Chapter of Digital Reinvention
–– IBM Blockchain is the global leader in improving trust and For the past several years, businesses around the world have been
transparency across business networks by creating a new driving their digital reinventions to take advantage of data, their
way for clients to share and secure data. IBM Blockchain most powerful source of competitive advantage.
now powers more than 500 client projects, with more than This first chapter has been defined largely by experimenting
85 active networks transforming supply chains, global with narrow and disparate AI applications and moving simple
shipping and cross-border finance. workloads—typically consumer and customer-facing applications—
to the cloud.
–– IBM Security, the world’s largest cybersecurity enterprise, Now, we are beginning to see the contours of Chapter 2
has 8,000 subject matter experts serving more than 17,000 among pioneering businesses: moving from experimentation to
clients in more than 130 countries. The industry’s leading true business transformation at scale with AI and hybrid cloud.
AI and cloud-based security solutions include IBM Security This next chapter of digital reinvention will be enterprise-
Connect, launched in 2018, which allows clients to gather, driven. It will be characterized first by scaling AI and embedding
integrate and analyze security data across multiple applications it everywhere in business. Second, in cloud, it will be characterized
and tools, in a vendor-agnostic way. by moving mission-critical applications to hybrid cloud—
using a combination of multiple public clouds, private clouds,
–– IBM Systems produces innovative infrastructure for AI and on-premise IT capabilities, so businesses can create
and hybrid cloud. The z14 is one of IBM’s most successful the environment most suitable for their enterprise workloads.
mainframe programs in history, with broad global adoption Underpinning it all is the growing importance of trust, both
across 27 different industry segments. In addition, the in technologies and in their impact on the world.
U.S. Department of Energy’s POWER9-based supercomputers,
Summit and Sierra, were ranked the most powerful Scaling AI throughout the Enterprise
supercomputers in the world in 2018. In Chapter 2 of their digital reinventions, businesses will begin
to scale AI across the enterprise, as some first movers are already
–– IBM Services was a key driver of IBM’s performance in 2018. demonstrating.
Forty-seven engagements worth more than $100 million Take the world’s leading banks, for example. While many
each helped major clients—like Bank of the Philippine Islands, have been applying AI to specific challenges, some first movers
Juniper Networks, Nordea, Westpac and Aditya Birla Retail— are scaling AI across the enterprise. Orange Bank, one of the
move to the next stage of their digital transformations. fastest growing mobile banks in France, now manages all customer
service through IBM Watson. Similarly, Banco Bradesco
is now using IBM Watson to assist every member of its services
team—resolving customer inquiries in seconds with nearly
95 percent accuracy.
IBM brought AI for business into the mainstream
with the introduction of our Watson platform in 2014. Today,
IBM Watson is the most open and trusted AI for business,
available to run on any environment—on premise, and in private
and public clouds. Businesses can apply Watson to data wherever
it is hosted and infuse AI into their applications, regardless of
where they reside.
With Watson Studio, Watson Machine Learning and Watson
OpenScale, IBM delivers a suite of tools that allow enterprises
to build, deploy and manage their AI models in a hybrid cloud
environment. IBM Watson OpenScale, a first-of-a-kind platform
introduced in 2018, also enables businesses to manage their AI—
no matter where it was built or where it runs—with transparency,
explainability and bias mitigation. Addressing these factors, which
traditionally have held businesses back, is critical for scaling
AI throughout an enterprise.
Through IBM Services, we are helping our clients around
the world apply AI to core business processes and workflows,
infusing their businesses with automation, intelligence and
continuous learning to transform everything from supply chains
and HR to finance and operations.
In 2018, we also launched a new service called IBM Talent
and Transformation that addresses the often overlooked cultural
aspects of AI. This service helps our clients ensure their teams Virginia M. Rometty
have the right skills and talent—and the supporting culture and Chairman, President and
work environment—to support a new way of working that is critical Chief Executive Officer
to scaling AI for business.
Moving Mission-Critical Work to Hybrid Cloud

In the first chapter of digital reinvention, cloud deployments
largely focused on easily portable workloads for productivity and
commodity computing. This primarily was driven by user-facing
applications inspired by advances in consumer technology.
As a result, only 20 percent of enterprise workloads today have
moved to the cloud.
The remaining 80 percent of enterprise workloads provides
the real value opportunity for business—transforming mission-
critical workloads and applications for the cloud. The challenge is
that most businesses have unique regulatory or data requirements
and anywhere from five to 15 clouds across multiple providers.
IBM Leadership That is why businesses moving to Chapter 2 will need to embrace
a new, hybrid cloud approach. It is one that will allow them to more
easily move data and scale AI and other applications across public,
private and on-premise IT in their enterprises, with consistent
#1 AI for business
management and security protocols, using open source technology.
20,000+ IBM Watson client
For example, BNP Paribas, a leading European bank,
engagements across 20 industries.
is working with IBM to speed and scale the launch of new digital
and AI customer services across the cloud, while protecting
the security and confidentiality of customer data. Similarly, global
telecom leader Vodafone Business is partnering with IBM to
#1 in hybrid cloud innovate the way it delivers
47 of the Fortune 50 rely on multicloud and digital “We are ready for this
IBM Cloud. Revenue for IBM Cloud capabilities—including AI, moment of moving
topped $19 billion in 2018. edge computing, 5G and clients to Chapter 2
software-defined networking of their digital
solutions—to its customers. reinventions with our
IBM Services provides unique integration of
#1 in enterprise services
end-to-end cloud integration innovative technology,
IBM Services, with end-to-end
capabilities and is helping industry expertise
cloud and AI capabilities, closed
thousands of businesses and a reputation for
47 client agreements worth more
migrate, integrate and trust and security
than $100 million each in 2018.
manage applications and earned over decades.”
workloads seamlessly and
#1 in enterprise security securely across any cloud environment. Industry experts from
IBM Security manages 70 billion IBM Services are co-creating cloud-enabled solutions with clients
cybersecurity events per day for in our IBM Garages. Using design thinking and agile methods,
clients in more than 130 countries. we are helping clients implement new ways of working, such as
rapid prototyping and iteration to more quickly move technology
projects from pilot to production at scale.
We are ready for this moment of moving clients to Chapter 2
#1 in enterprise systems of their digital reinventions with our unique integration of innovative
IBM Z is at the heart of world
technology, industry expertise and a reputation for trust and
commerce with 30 billion transactions
security earned over decades. IBM is now moving the world’s
per day, including 87 percent of all
major enterprises to the next era, an effort that will be enhanced
credit card transactions.
by our planned acquisition of Red Hat.
#1 in blockchain Chapter 2 of Trust and Responsible Stewardship

IBM Blockchain Platform was We recognize that our clients and the consumers they serve
ranked number one by analyst ﬁrms expect more than groundbreaking innovation and industry
Juniper Research and Everest Group. expertise. They want to work with technology partners they
can trust to protect their data and handle it responsibly.
They want to work with partners who know how to bring new
technologies into the world safely and help society benefit from
#1 in U.S. patents for the them. And they want their partners to create inclusive workplaces
26th consecutive year and communities where diversity thrives.
IBM inventors received a record 9,100
patents, including more than 3,000
in AI, cloud and quantum computing.
#1 and #2 fastest
supercomputers in the world
Built by IBM for the U.S. Department
of Energy, based on IBM POWER9 CPUs
tuned for AI workloads.
5
These expectations are linked by a common theme: As IBM sees it, the promise of technology is to empower
responsibility. Responsibility has been a hallmark of IBM’s culture people to do good, access new opportunities and make the world
for 107 years—from our labs to our boardroom. IBMers’ unwavering better, safer and smarter—for the many, not just the few.
global commitment to the responsible stewardship of data and
powerful new technologies has earned us the trust of clients IBM Poised to Lead
and society as a whole. In summary, we have returned your company to growth. We have
In 2018, as trust in technology came under heightened positioned IBM’s products, services and people to enable clients
global scrutiny, we published our IBM Principles for Trust and to write the next chapter of their digital reinventions. And we have
Transparency, which have long guided our company. They stress done it all while reaffirming IBM’s longstanding reputation for
our belief that the purpose of new technologies is to augment— trust, integrity and responsibility.
not replace—human intelligence, and that the data and insights Our work ahead is to build on this progress and bring these
derived from technology belong to the businesses who own capabilities to life for our clients. I want to thank all of our clients
them. The principles also emphasize that new technologies for partnering with us while we reinvented IBM, and for choosing
brought into the world must be open, transparent, explainable us for their own journeys of transformation.
and free of bias. I also would like to thank our investors for their confidence
We know that AI, like other transformative technologies in IBM. Finally, I would like to thank the hundreds of thousands
before it, will have a profound impact on peoples’ jobs and the of IBMers whose expertise has prepared us to lead in this new
workplace. That is why, in 2018, IBM further expanded access to chapter of digital reinvention.
the pathways through which students and professionals can build I am honored to steward this great company, and I am filled
skills for today’s technology era. That includes “new collar” jobs, with optimism about what we can achieve in partnership with our
where having the right skills matters more than having a specific clients and society. Together, we are changing work and business—
degree. Through our work in 11 U.S. states and 13 countries, there and ultimately, the world.
will be 200 Pathways in Technology Early College High Schools—
or P-TECHs—serving a pipeline of 125,000 students in the 2019
school year.
2018 also saw the rapid growth of our IBM Apprenticeship
Program, which trains people in 21st-century skills ranging
from blockchain and digital design to cybersecurity—and which Virginia M. Rometty
expanded nearly twice as fast as we had projected in its first year. Chairman, President and Chief Executive Officer
Yet skills are only part of today’s workforce opportunity.
In 2018, fueled by record diverse hiring, promotion and retention,
we achieved our greatest progress in a decade on diversity
representation among global executive women and
underrepresented minorities. We also continued advocating
with governments around the world for policies that help
ensure workplaces are as inclusive and diverse as the world
we live in.
Recognizing that responsible stewardship should not
be confined within IBM’s walls, we also are working aggressively
to empower others to do lasting good. We are, for example,
a founding partner in Call for Code, a global initiative that
works with software developers to create solutions that can
help save lives. Last year, 100,000 open source developers from
156 countries responded to the call, creating more than 2,500
applications to help communities recover from natural disasters.
In an effort to provide additional and useful information regarding the company’s

financial results and other financial information, as determined by generally
accepted accounting principles (GAAP), these materials contain non-GAAP financial
measures on a continuing operations basis, including operating earnings per share
and operating pre-tax income. The rationale for management’s use of this non-GAAP
information is included on pages 18 and 19 of the company’s 2018 Annual Report,
which is Exhibit 13 to the Form 10-K submitted with the SEC on February 26, 2019.
For reconciliation of these non-GAAP financial measures to GAAP and other
information, please refer to page 41 of the company’s 2018 Annual Report.
Leading
businesses
are reinventing
themselves with
IBM Services
and Solutions
across AI, cloud,
blockchain,
quantum
and more.
7
IBM Services
United Airlines:
Reinvention
takes flight
To ignite a major business transformation, United Airlines Flight attendant Deb Winchell knows
better than most how stressful
turned to IBM iX—the business design arm of IBM Services—and a delay can be—for customers and
a set of business applications from a global partnership between staff alike.
IBM and Apple called IBM MobileFirst for iOS. These applications
combine the power of enterprise data and analytics with an
elegant user experience, allowing United to broadly rethink how
its crews work and how its work flows.
United and IBM used the IBM Garage method to design
apps for the airline’s growing deployment of iOS devices.
The IBM Garage method, used by IBM Services with clients around More than 60%
savings in app development
the world, emphasizes co-creation and frequent iteration. It has costs, compared to a
traditional approach
allowed United to build complete, integrated mobile platforms that
start with a user’s experience and extend to all the airline’s core
business processes. United is now able to foster better and faster
collaboration across diverse teams and time zones, enabling
it to focus on its core mission of transporting customers to their even report an issue while a plane is still in the air, so the ground
destinations on time. The apps are also giving flight attendants crew can get to work as soon as the plane lands. Customers on
like Deb Winchell new ways to help customers enjoy their flights, the next flight are far less likely to be affected because the app
which makes everyday travel just a little less stressful for streamlines communication. “It’s been a game changer for us,”
everyone involved. Deb says. “It lets us care for our customers right in the moment—
Frontline crews know that many factors can contribute and nothing’s better than that.”
to delays. “Most challenges stem from things I can’t control,” The agile IBM Garage method helps organizations think
Deb says. “But when I can make a difference in a customer’s travel beyond their existing systems and focus on what customers
experience, it can be huge.” That’s why it’s important to resolve actually need. When combined with IBM Cloud and IBM Watson,
issues before they affect customers. Deb can now be more it’s nothing less than a way for organizations to reinvent
proactive with apps co-designed by United and IBM iX. Deb can themselves—an approach that’s being adopted by enterprises
around the world as they move to the next stage of digital
reinvention. For example, it has helped create a startup culture in
With new mobile tools, United staff can Banco Bradesco, one of Brazil’s largest banks. Bradesco can now
quickly report and resolve issues that quickly respond to the rising demand from its 75 million mobile
previously required multiple steps.
banking customers. It has also showed East Carolina University
new value in discarded data that enabled the school to predict
possible outcomes, report strengths, weaknesses and deficits, and
enable advisors to better assist students and improve educational
programs. Digital reinvention isn’t just a product or a platform.
And it’s certainly more than just a buzzword. It’s a promise:
a new way to innovate and rethink a company from the ground
up and help customers and businesses alike.
8
IBM Blockchain
Walmart:
Linked by
safer food
It starts with a single report of severe food-borne illness. With the IBM Food Trust, Walmart’s
food safety professionals can
Then more reports pour in from around the country and from trace produce back to its source
them, a culprit emerges: a common type of lettuce. But where, in just seconds.
specifically, did the tainted lettuce come from? The work of

Walmart and IBM, powered by IBM Blockchain, is giving us tracing time was reduced from seven days to just 2.2 seconds.
a better way to answer this question. “With blockchain, all the trace media’s already there,” explains
Until recently, tracing food hasn’t been easy or fast. Tejas Bhatt, senior director, Food Safety, for Walmart.
And the risk that represents is significant. The World Health Blockchain technology is also changing the way companies
Organization has estimated that there are 600 million cases like Walmart collaborate with their supply chains—even with
of foodborne illness each year, leading to 420,000 deaths. potential competitors. The IBM Food Trust ecosystem connects
And it can be daunting to trace how food goes through the supply supply chains like Walmart’s and also those of other major retailers
chain. For example, four days of a farm’s production of red- and global companies such as Carrefour, Dole, Golden State Foods,
and green-leaf lettuce and cauliflower can generate more than Driscoll’s and Nestlé—all without sharing any information they
200 separate tracking numbers that are printed onto cartons don’t want to share. Beyond safety, consumers increasingly value
and pallets for shipping to buyers. Finding individual boxes of the kind of information that a system built on IBM Blockchain can
particular at-risk produce in this environment means searching provide. With blockchain, growers, distributors and retailers can
through a haystack of paper records. IBM Food Trust—using provide consumers digitized certifications of existing organic or fair
blockchain technology—connects growers, processors, distributors trade products along with detailed documentation from different
and retailers through a permissioned, permanent and shared points in the process, from farm to table. Ed Treacy, vice president,
record of food-system data that drastically cuts the time Supply Chain and Sustainability at the Produce Marketing
needed to trace produce from farm to store. In a pilot program, Association, says blockchain “can speed up investigations into
contaminated food, authenticating the origin of food and providing
insights about the conditions and pathway through which the
food traveled.”
As more companies adopt a digital, end-to-end traceability
protocol, the IBM Food Trust’s goal is to make the world’s food
From Down to
supply safer—something that is sorely needed. In 2018, the U.S.
7 days 2.2 seconds
Food and Drug Administration and U.S. Department of Agriculture
issued more than 300 food recalls. In addition to the societal and
IBM Blockchain adds new transparancy business impact, these recalls waste huge stocks of food and
to the global food supply chain.
erode consumer trust. And if outbreaks multiply and answers are
slow in coming, customers can become desensitized and begin to
ignore overly broad warnings such as “throw away all lettuce in
your refrigerator.” Work by companies like Walmart and other
participants in the IBM Food Trust are laying the foundation for
better management of our global food supply: rapid insight into
what’s happened when something goes wrong, reducing waste,
and a safer journey from the farm to our local markets and,
ultimately, to our dinner table.
9
Experts from
Crédit Mutuel and
IBM Services are
working together in
a “Cognitive Factory.”
Watson eliminates distractions
that come between branch
director François-Xavier Maille
and his clients.
IBM Cloud · IBM Watson But that’s just the start. Crédit Mutuel is making important
decisions—about data, compliance and regulation, cybersecurity,
and managing applications across the enterprise. To achieve
Crédit Mutuel: digital banking at scale, IBM and Crédit Mutuel are crafting a hybrid
cloud strategy that encompasses multiple clouds and on-premise
systems, including the mainframe. At the same time, experts
A bank thinks from Crédit Mutuel and IBM Services are working together
in a “Cognitive Factory” that provides a fertile environment for
bigger
identifying, building and deploying new AI solutions. With many
internal IT teams involved, IBM and Crédit Mutuel are also creating
industrial tools and training assets to efficiently expand cognitive
solutions to 100% of the business lines of the company.
Crédit Mutuel’s reinvention represents a synthesis of human
and machine that gives banking new power. Employees can find
the optimal blend of talent and data, use their talents to the fullest,
When Crédit Mutuel embarked on its “together#newworld” delve more deeply into clients’ financial challenges and develop
initiative—a five-year project to become a leading digital bank— smarter, more creative solutions. Extrapolate IBM’s immediate
it brought in IBM to help it reinvent itself. impact on Crédit Mutuel to the entire world of financial services,
Crédit Mutuel’s goal: to engage with customers more
deeply, both online and offline, while providing new products
and the fastest service—all in an environment of trust and security.
To do that, the bank is infusing IBM Watson into the applications
its advisors use and is embracing IBM Cloud as a platform
for innovation, trust and security. 60% 175,000
François-Xavier Maille, director of one of the premier faster responses to daily emails routed
business inquiries and prioritized
branches of Crédit Mutuel bank in Paris, was the first to deploy
the initial AI solution: a Watson virtual assistant that helps
employees answer customers’ questions. “The application has and you can see the implications for how banking consumers
liberated our people from a few recurring tasks so they can devote experience and engage with their financial institutions: More
their time and talents to understanding our clients’ aspirations, relevant innovation for customers. Lower client turnover for banks.
challenges, and circumstances,” says François-Xavier. Today, Greater confidence in asset management for consumers. Higher
23,000 Crédit Mutuel advisors across France rely on the Watson employee engagement and contributions. Growing customer
tool, which helps employees answer business-related questions satisfaction. And more predictable performance for institutions.
60% faster. The bank intends to use Watson across all of its AI accelerates access to relevant information and liberates people
business lines. to provide a human touch.
DeKalb is shifting to a systems-based approach to care.
The IBM Watson Health solution helped Ellen Hargett, executive
director of DeKalb’s Quality Institute, and her team change the way
they measure system-wide performance by organizing data and
analysis into a usable dashboard. For each key performance metric
on the dashboard, Ellen established tactical teams to fully
understand the metrics, determine the “why” behind them and
recommend tactics for improvement. Across healthcare, a
systems-based approach can also produce a significant positive
impact on resources. For example, sepsis is not only a medical
challenge for hospitals. It’s also the most costly reason for
hospitalization, consuming $24 billion each year in the U.S. alone.
Christina English is helping to lead DeKalb’s efforts to quantify, analyze and shift the diagnosis and
DeKalb Medical’s fight against sepsis.
treatment of sepsis have not only led to a lower mortality rate but
also significantly reduced the length of stay for patients.
Individual treatments are now based on data informed
IBM Watson Health by large-scale findings across large populations. Historically,
doctors diagnosed through trained intuition. In recent decades,
however, this approach has been replaced by “empirical medicine”
DeKalb Medical:
that’s based on data. The result is more standardized treatments
and improved outcomes. At DeKalb, data is shared with healthcare
professionals, providing them with information to spot large
Stronger medicine patterns or gaps. Watson Health’s data-driven tools allow

healthcare institutions to organize and visualize data and take
fast action to address weaknesses or roll out improvements.
A data-driven approach to challenges like sepsis also helps
doctors expand their understanding of the syndrome, improving
diagnosis and treatment. This trajectory will eventually create
DeKalb Medical takes a systems-based, data-intensive a new era of healthcare. As medical professionals tap data at both
approach to fighting dangerous infections with the help the systemic and individual levels, an age of “precision medicine”
of IBM Watson Health. One of the lesser-known challenges will arise. It will be a time when understanding derived from the
it faces is sepsis, which is caused by an infection that triggers many can be tailored and applied to the needs of the individual.
an inflammatory immune response. Sepsis is notoriously
difficult to diagnose and treat, making it the third-leading
cause of death in the U.S.
Nurses see it all, and sepsis requires them to race
This data-driven
against the clock. But with the intelligent use of data, delivered
by IBM Watson Health and deployed by a team led by Christina approach will eventually
English, a quality management specialist and former bedside
create a new era
nurse, clinicians at DeKalb are getting a step ahead to help
patients get better, faster. Previously, Christina and her team had of healthcare.
to fight sepsis with siloed and sometimes subjective information.
“We knew what to look for, but we didn’t understand the
importance of the symptoms, how they worked together and how
a clearly defined set of treatment measures is critical to success,”
she says. Using IBM CareDiscovery, part of Watson Health’s set
of performance-improvement solutions for healthcare providers, 30%
Christina and her team were able to gather and analyze industry fewer lives lost
to sepsis
benchmarks as well as their own performance metrics in order
to identify sepsis “flags” and pinpoint where DeKalb could take
proactive measures.
11
IBM Watson
Hydro One:
Outsmarting
the storm
Another late spring storm was rolling toward the Canadian With Watson, Hydro One’s
Derek Roles, director, Emergency
utility Hydro One. But in its ongoing battle with ice, snow, Preparedness and Restoration,
wind and thunderstorms, this time the utility found calm in the can restore power more quickly
after a storm.
predictive power of The Weather Company and IBM Watson.
Derek Roles, director, Emergency Preparedness and
Restoration, is Hydro One’s first line of defense for a service area
that covers most of Ontario. Twenty years of experience and
an encyclopedic knowledge of winter storms have helped him Predictive intelligence is
manage through many major disruptions, so Derek can usually
plan for the worst. Now, though, he can predict it. And that
starting to create new options
changes everything. In the past, recovery teams were deployed that can make extreme
only after the weather had passed. Now, however, Derek doesn’t
just keep up with the weather—he stays ahead of it. This shift
weather more manageable
was made possible because Derek and his team put data and and less disruptive.
AI to work: they trained Watson to predict outages using five years
of Hydro One historical outage data and a massive amount of
Ontario’s historical weather information. Derek’s new predictive
tools help him paint a clearer picture of how a storm will affect
the utility’s electrical distribution network. 33% Emergency
Recovery Award
Hydro One has committed itself to a more proactive faster electricity
from the Edison
restoration than
approach, and the utility has not only gained a new way to similar storms Electric Institute
fight storms, but has also changed its basic business operations
to strengthen its customers’ experience and service quality.
The predictive power of AI enables Hydro One to activate its Weather exerts a tremendous influence on the economy.
emergency organization structure in advance and create detailed It affects productivity, sales and energy consumption, and
team deployment plans, positioning some crews in the storm’s it can disrupt supply chains and transportation systems.
predicted path while making sure other crews are well rested. Severe weather can upend lives and businesses for hours, weeks,
The utility is also able to staff call centers more effectively and years or even forever. So there’s a logic behind the expression
notify customers of a storm’s potential impact on their service. “ride out the storm”—that’s often been the only option.
So when a storm hits, restoration plans are already in motion and But predictive intelligence is starting to create new options that
work crews can spring into action faster than ever before, quickly can make extreme weather more manageable and less disruptive.
and safely scaling repairs from the main transmission grid to This is especially critical at a time when severe weather is the
smaller circuits to individual customer locations in remote areas. leading cause of power disruptions in many countries. Global
economic losses resulting from weather disasters totaled
$215 billion last year. By putting the power of data and Watson
to work, Hydro One is modeling new solutions for previously
intractable weather problems everywhere—problems that
can now be better understood and managed, along with human
risks that can now be met head-on with artificial intelligence.
12
IBM Quantum
ExxonMobil:
Quantum
understanding
ExxonMobil’s vice president
for Research and Development,
Vijay Swarup, is leading
the company’s exploration
of quantum computing.
on quantum, as do Samsung and Daimler. Working as part of the

Every energy company’s IBM Q Network alongside global universities and national research
dual challenge:
labs, these corporations see the potential of a massive shift in how
computers can help solve some of the most enduring challenges—
issues that, once solved, could transform entire industries.
Provide access Reduce “IBM Q System One is the world’s first integrated universal quantum
to scalable, the risks computing system designed for scientific and commercial use,”
affordable of climate
energy change says Dario Gil, director, IBM Research. “We are at the beginning
of an exciting journey. Our research, systems and business teams—
along with our IBM Q Network partners—have a bold vision.
Vijay Swarup, ExxonMobil vice president for Research
They are thinking big. These are the true pioneers.”
and Development, says energy research requires curiosity,
Nature is no longer estimated but predicted and
optimism, patience and dissatisfaction. Dissatisfaction because
understood. That’s the goal. So when IBM unveiled its quantum
he believes things can be better. But what, exactly, can be better?
machines, companies like ExxonMobil saw great promise. But when
Nothing less than our understanding of the world.
you talk to Vijay about promise, his thoughts turn to the great needs
Researchers now have a new tool to explore new ways
that are facing the world. “Our global population is increasing
to solve problems: quantum computing. And Vijay’s quite precise
from 7 billion to 9 billion and, all across the world, a growing middle
about the trouble with our current understanding. “There are some
class requires more resources and, especially, more energy.”
problems so big, all we can do is approximate,” he says. Whether
Quantum might be well suited to solve super-complex problems,
he’s in a business suit or the lab coat he wears at ExxonMobil’s
such as advanced models which could lead to better approaches
expansive New Jersey research facility, Vijay clearly enjoys trying
to carbon capture and lower emissions sources of energy. But what
to solve what he calls today’s pressing dual challenge: ensuring
excites Vijay most is that the collaboration with IBM researchers
that people have access to scalable, affordable energy, and doing
could lead to a fresh ability to predict and anticipate how nature
so in the context of climate change and the need for sustainable
operates—which could lead to an understanding of what’s actually
solutions. This is where IBM Q comes into the picture. Quantum
happening, as opposed to an approximation of what might be
computers have long been considered theoretical. But today,
happening. “With a little curiosity, patience and not settling for
they’re becoming a reality, with huge potential for energy
the status quo, I know we can get there,” he says.
companies like ExxonMobil. That said, using a quantum computer
also calls for significant change in how researchers think about
approaching their work. “Computation has always been an integral
IBM Q System One is the world’s
part of the research we’ve done here, but quantum’s radically first integrated quantum computing
system for commercial use.
different,” Vijay explains. “Now, we must first figure out which
problems are most suited to a quantum approach and only then
can we answer a more interesting question: How can you program
a quantum computer to solve energy problems?”
ExxonMobil joins a group of global corporations
partnering with IBM to work side-by-side on IBM’s fully
functional quantum computers. As Vijay says, quantum’s a
priority that requires pairing the “best minds with the best minds.”
So ExxonMobil has a team that will meet regularly with IBM’s
quantum researchers. Barclays has its own team working
13
KPMG is using IBM Watson to

power a contract analysis solution
for its clients. The solution examines
More clients contracts, breaks them into their

component parts and interprets each
are partnering part with a high degree of accuracy.

It’s faster and less expensive than
with IBM to write

manual methods, while freeing up
skilled resources to perform more
productive tasks.
the next chapters Maersk, the container logistics giant,
is using IBM Blockchain to create
Whirlpool Corporation is using
IBM Cloud to help manage all
of their digital
TradeLens, a global blockchain the data from its manufacturing
solution for the shipping ecosystem. of connected home appliances.
This global transformation will lead Whirlpool will be using the cloud
reinventions. to faster delivery times, lower costs
and a noticeable difference in the way
to manage critical enterprise
applications, which will give it more
we get the things we use every day. flexibility to scale and innovate.
KMD, Denmark’s largest technology

company, is dedicated to connecting
its clients to the latest technologies. Krungsri Bank, one of Thailand’s
The company is using IBM Services largest financial institutions,
to provide a critical foundation is working with IBM Services to
of servers, networks and other lay the foundation for its future.
technologies that help it handle An IBM Blockchain pilot is in
large volumes of data with high progress, and the bank is planning
levels of security. to develop new services for
its customers.
Belron applied IBM Watson Visual Telefónica turned to IBM Blockchain
Recognition to its Autoglass Body to capture call data in real time
Repair business to speed up insurance and save it in a format that’s trusted,
processing, move repairs along traceable and accessible to network
quickly and help its customers get providers and carriers worldwide,
back on the road fast. making international phone calls feel
seamless despite all the technological
Thought Machine, a London-based leaps they require.
fintech startup, has built Vault,
a new, cloud-native core banking
infrastructure launching on Bausch + Lomb simplified the
IBM Cloud. It has also partnered with service and maintenance process Profility, a post-surgery rehabilitation
IBM Services to provide advisory for its high-tech Stellaris Elite Vision solutions provider, needed to integrate
and delivery capabilities to its clients. Enhancement System for cataract and large volumes of data as well as
retina surgery. Using IBM Cloud, the meet stringent HIPAA regulations.
company can now pinpoint or respond They chose IBM Cloud because
to technical and service requests of its flexible software and secure,
and limit or minimize downtime. dedicated hardware. Their system
is widely used and has resulted
Smart Dubai, working with
in shorter rehab stays and fewer
IBM Blockchain and IBM Cloud,
hospital readmissions.
has launched the region’s first
government-endorsed blockchain
service: Dubai Blockchain Platform.
It is designed to make the technology
Travelport, a travel commerce more accessible to the Dubai
platform, is working with IBM Watson government, the UAE national
to integrate disparate information government and private companies.
sources and make stronger corporate
travel recommendations. As a result, Fluor Corporation builds mega-
finding the lowest travel costs for projects across the globe. Data
a company will be quicker and easier. generated by these projects has
been harnessed by working with The Australian Federal Government
IBM Research and IBM Services. has set its sights on being one of the
Fluor recently introduced two new world’s top three digital governments
AI-powered systems to uncover by 2025. In July 2018, it announced
and predict how unmitigated trends a five-year agreement that covers
could affect key project indicators. solutions from IBM Cloud, IBM Watson,
IBM Security, IBM Research and the
BNP Paribas is accelerating its digital Suunto, creator of the Movesense
IBM Q quantum computing initiative.
transformation and improving its microsensor, launched a Movesense
operational efficiency. The bank will development community enabled
now integrate IBM Cloud-hosted data in the IBM Cloud. This let Suunto
Japan Airlines is using an IBM Watson- dramatically scale its offerings.
centers dedicated to the bank, and
powered chatbot, Makana-chan, Today, more than 800 developers
will strengthen its hybrid cloud “as a
to answer customers’ questions about are working with Movesense, helping
service” capabilities while ensuring
its popular Tokyo-to-Honolulu flights. Suunto bring the device to new
the security and confidentiality of their
Makana-chan eases the burden
customers’ data—including not using customers all over the world. View these stories
on live agents and is very popular
with passengers.
public clouds for hosting any customer
and more at
or other production environments
with sensitive information. ibm.com/annualreport
14
Responsible Data Responsibility

At IBM, we’ve always followed straightforward principles
stewardship and
to act responsibly and earn trust. Today, our principles include:
–– The purpose of new technologies is to augment—not replace—
human intelligence.
trust have been

–– Data and insights belong to their owner.
–– New technology, including AI, must be transparent
and explainable.
hallmarks of
Recent actions demonstrate our principles at work, including:
• Advocating for public policies to protect the privacy and
IBM’s culture—
security of data and working with governments worldwide
on strategies that will ensure privacy and responsible handling
of data, without undermining innovation.
from our labs to • Partnering with STOP THE TRAFFIK, law enforcement and
the boardroom—
financial services institutions to stop human trafficking by using
IBM software analytics to identify suspicious trends, hotspots
and financial transactions.
for more than

a century.
Modern slavery, a $150 billion business, has a new foe:
an AI data hub on the IBM Cloud.
• Launching AI Fairness 360, an open source software toolkit to

help developers actively detect and reduce bias in datasets and AI.
• Releasing Diversity in Faces, a first-of-its-kind dataset,

to help reduce bias in facial recognition systems, making them
fairer and more accurate.
1 million annotated human facial images

IBM is recognized as
one of the World’s Most
Ethical Companies by
the Ethisphere Institute,
highlighting our influence
in driving positive change
in business and society
around the world.
15
Jobs and Skills Diversity and Inclusion

In the 1940s, IBM partnered with Columbia University to create In 2018, fueled by record diverse hiring, promotion and
a new discipline: computer science. In 2018, we continued this retention, IBM achieved our greatest progress in a decade
tradition by expanding training and education for the growing on diversity representation among global executive women
number of “new collar” jobs for today’s era of data and AI. and underrepresented minorities. We also continued advocating
Recent examples include: with governments around the world for policies that help
ensure workplaces are as inclusive and diverse as the world
• Developing new talent with our 12-month IBM Apprenticeship we live in. We received widespread recognition in 2018
Program in areas including cybersecurity, digital design, for this leadership, including:
mainframe administration and software development. Hundreds
of apprentices—ranging in age from 18 to 59—have joined the • Being honored with a 2018
program, which includes training and on-the-job experience Catalyst Award for leadership
guided by an IBM mentor. in advancing women in business,
becoming the first company to
win the award four times and the
only tech company so honored
in the last 20 years.
• Being named a 2018 Diversity Best Practices Leading

Inclusion Index Company by Working Mother.
• Scoring a perfect 100 percent for the 15th consecutive year

Brandon Whittington, IBM Blockchain Solutions support
in the Human Rights Campaign Corporate Equality Index.
engineer and graduate of the IBM’s Apprenticeship Program
• Launching Skills Build, an IBM volunteer initiative that helps

more than three million primary and secondary school students
learn about new technologies.
• Continuing to transform education via P-TECH—Pathways

to Technology Early College High School. In the 2019 school
year, there will be:
200 P-TECH schools serving a pipeline of

125,000 students across
13 countries and 11 U.S. states
IBMers at the Pride March in New York
P-TECH students at a graduation ceremony

16 Financial Highlights
International Business Machines Corporation and Subsidiary Companies
($ in millions except per share amounts)

For the year ended December 31: 2018 2017
Revenue $ 79,591 $ 79,139
Net Income $ 8,728* $ 5,753*
Income from continuing operations $ 8,723* $ 5,758*
Operating (non-GAAP) earnings** $ 12,657 $ 12,807***
Earnings per share of common stock—continuing operations

Assuming dilution $ 9.51* $ 6.14*
Basic $ 9.56* $ 6.17*
Diluted operating (non-GAAP)** $ 13.81 $ 13.66***
Net cash provided by operating activities $ 15,247 $ 16,724

Capital expenditures, net $ 3,716 $ 3,312
Share repurchases $ 4,443 $ 4,340
Cash dividends paid on common stock $ 5,666 $ 5,506
Per share of common stock $ 6.21 $ 5.90
At December 31: 2018 2017

Cash, cash equivalents, restricted cash and marketable securities $ 12,222 $ 12,842****
Total assets $123,382 $125,356
Working capital $ 10,918 $ 12,373
Total debt $ 45,812 $ 46,824
Total equity $ 16,929 $ 17,725
Common shares outstanding (in millions) 892 922
Stock price per common share $ 113.67 $ 153.42
* Includes charges of $2.0 billion in 2018 and $5.5 billion in 2017 associated with U.S. tax reform.
** See page 41 for a reconciliation of net income to operating earnings.
*** Recast to reflect adoption of the FASB guidance on presentation of net periodic pension and nonpension postretirement benefit costs.
****Recast to reflect adoption of the FASB guidance on restricted cash.
Report of Financials 17
MANAGEMENT DISCUSSION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Overview18 A Significant Accounting Policies 76
Forward-Looking and Cautionary Statements 19 B Accounting Changes 89
Management Discussion Snapshot 19 C Acquisitions/Divestitures 91
Description of Business 22 D Financial Instruments 95
Year in Review 27 E Inventories 103
Prior Year in Review 48 F Financing Receivables 103
Other Information 59 G Property, Plant and Equipment 106
Looking Forward 59 H Investments and Sundry Assets 107
Liquidity and Capital Resources 60 I Intangible Assets Including Goodwill 107
Critical Accounting Estimates 63 J Borrowings 108
Currency Rate Fluctuations 66 K Other Liabilities 111
Market Risk 66 L Equity Activity 111
Cybersecurity 67 M Contingencies and Commitments 115
Employees and Related Workforce 67 N Taxes 117
O Revenue Recognition 120
Report of Management68 P Research, Development and Engineering 122
Report of Independent Registered Q Earnings Per Share of Common Stock 123

Public Accounting Firm69
R Rental Expense and Lease Commitments 124
S Stock-Based Compensation 124
CONSOLIDATED FINANCIAL STATEMENTS T Retirement-Related Benefits 127

Earnings70
U Segment Information 141
Comprehensive Income 71
V Subsequent Events 146
Financial Position 72
Cash Flows 73
Five-Year Comparison of Selected Financial Data 147
Changes in Equity 74
Selected Quarterly Data 148
Performance Graphs 149
Stockholder Information 150
Board of Directors and Senior Leadership 151

18 Management Discussion
OVERVIEW • The references to “adjusted for currency” or “at constant

The financial section of the International Business Machines currency” in the Management Discussion do not include
Corporation (IBM or the company) 2018 Annual Report includes operational impacts that could result from fluctuations in
the Management Discussion, the Consolidated Financial foreign currency rates. When the company refers to growth
Statements and the Notes to Consolidated Financial State rates at constant currency or adjusts such growth rates for
ments. This Overv iew is designed to provide the reader with currency, it is done so that certain financial results can be
some perspective regarding the information contained in the viewed without the impact of fluctuations in foreign
financial section. currency exchange rates, thereby facilitating period-to-
period comparisons of its business performance. Financial
Organization of Information results adjusted for currency are calculated by translating
• The Management Discussion is designed to provide readers current period activity in local currency using the comparable
with an overview of the business and a narrative on the prior-year period’s currency conversion rate. This approach
company’s financial results and certain factors that may is used for countries where the functional currency is the
affect its future prospects from the perspective of the local currency. Generally, when the dollar either strengthens
company’s management. The “Management Discussion or weakens against other currencies, the growth at constant
Snapshot,” beginning on page 19, presents an overview of currency rates or adjusting for currency will be higher or lower
the key performance drivers in 2018. than growth reported at actual exchange rates. See “Currency
Rate Fluctuations” on page 66 for additional information.
• Beginning with the “Year in Review” on page 27, the Manage
ment Discussion contains the results of operations for each • Within the financial statements and tables in this Annual
reportable segment of the business and a discussion of Report, certain columns and rows may not add due to the
the company’s financial position and cash flows. Other key use of rounded numbers for disclosure purposes.
sections within the Management Discussion include: Percentages reported are calculated from the underlying
“Looking Forward” on page 59, and “Liquidity and Capital whole-dollar numbers.
Resources” on page 60, which includes a description of
management’s definition and use of free cash flow. Operating (non-GAAP) Earnings
In an effort to provide better transparency into the operational
• The Consolidated Financial Statements are presented on
results of the business, the company separates business results
pages 70 through 75. These statements provide an overview
into operating and non-operating categories. Operating earnings
of the company’s income and cash flow performance and
from continuing operations is a non-GAAP measure that excludes
its financial position.
the effects of certain acquisition-related charges, intangible asset
• The Notes follow the Consolidated Financial Statements. amortization expense resulting from basis differences on equity
Among other items, the Notes contain the company’s method investments, retirement-related costs, discontinued
accounting policies (pages 76 to 88), acquisitions and operations and related tax impacts. Due to the unique, non-
divestitures (pages 91 to 94), certain contingencies and recurring nature of the enactment of U.S. tax reform, the company
commitments (pages 115 to 117), revenue (pages 120 to 122) characterizes the one-time provisional charge recorded in the
and retirement-related plans information (pages 127 to 141). fourth quarter of 2017 and all 2018 adjustments to that charge
as non-operating. Adjustments include true-ups, accounting
• The Consolidated Financial Statements and the Notes have
elections, any changes to regulations, laws, audit adjustments,
been prepared in accordance with accounting principles
etc. that affect the recorded one-time charge. For acquisitions,
generally accepted in the United States (GAAP).
operating (non-GAAP) earnings exclude the amortization of
• On December 22, 2017, the Tax Cuts and Jobs Act (U.S. purchased intangible assets and acquisition-related charges
tax reform) was enacted in the U.S. This Act resulted in the such as in-process research and development, transaction costs,
company recording a charge of $5.5 billion in the fourth- applicable restructuring and related expenses, tax charges
quarter 2017. For the full-year 2018, the company recorded related to acquisition integration and pre-closing charges. For
additional charges of $2.0 billion, including $1.9 billion in the 2019 operating (non-GAAP) earnings per share expectation,
the fourth quarter, primarily related to the election to acquisition-related charges associated with the Red Hat, Inc. (Red
include Global Intangible Low-Taxed Income (GILTI) in Hat) acquisition exclude pre-closing charges, such as financing
measuring deferred taxes. Refer to note N, “Taxes,” on costs. These charges are excluded as they may be inconsistent
pages 117 to 119 for additional information. in amount and timing from period to period and are dependent
on the size, type and frequency of the company’s acquisitions.
• Effective January 1, 2018, the company adopted the
All other spending for acquired companies is included in both
Financial Accounting Standards Board (FASB) guidance on
earnings from continuing operations and in operating (non-GAAP)
presentation of net periodic pension and nonpension
earnings. Throughout the Management Discussion and Analysis,
postretirement benefit costs (net benefit cost). The
the impact of acquisitions over the prior 12-month period may
guidance is primarily a change in financial statement
be a driver of higher expense year to year. For retirement-related
presentation, but it did impact the consolidated and
costs, the company characterizes certain items as operating and
reportable segment gross profit margins and expense and
others as non-operating, consistent with GAAP. The company
other income. As a result, the company aligned its
includes defined benefit plan and nonpension postretirement
presentation of operating (non-GAAP) earnings to conform
benefit plan service cost, multi-employer plan costs and the
to the FASB presentation of these costs in the Consolidated
cost of defined contribution plans in operating earnings. Non-
Statement of Earnings. The periods presented in this
operating retirement-related costs include defined benefit
Annual Report are reported on a comparable basis.
plan and nonpension postretirement benefit plan amortization
of prior service cost, interest cost, expected return on plan
Management Discussion 19
assets, amortized actuarial gains/losses, the impacts of any plan FORWARD-LOOKING AND CAUTIONARY STATEMENTS
curtailments/settlements, pension insolvency costs and other Certain statements contained in this Annual Report may
costs. Non-operating retirement-related costs are primarily constitute forward-looking statements within the meaning of the
related to changes in pension plan assets and liabilities which are Private Securities Litigation Reform Act of 1995. Any forward-
tied to financial market performance, and the company considers looking statement in this Annual Report speaks only as of the
these costs to be outside of the operational performance of date on which it is made; the company assumes no obligation
the business. to update or revise any such statements. Forward-looking
statements are based on the company’s current assumptions
Overall, the company believes that providing investors with a regarding future business and financial performance; these
view of operating earnings as described above provides increased statements, by their nature, address matters that are uncertain
transparency and clarity into both the operational results of the to different degrees. Forward-looking statements involve a
business and the performance of the company’s pension plans; number of risks, uncertainties and other factors that could cause
improves visibility to management decisions and their impacts actual results to be materially different, as discussed more fully
on operational performance; enables better comparison to peer elsewhere in this Annual Report and in the company’s filings with
companies; and allows the company to provide a long-term the Securities and Exchange Commission (SEC), including the
strategic view of the business going forward. The company’s company’s 2018 Form 10-K filed on February 26, 2019.
reportable segment financial results reflect operating earnings
from continuing operations, consistent with the company’s
management and measurement system.
MANAGEMENT DISCUSSION SNAPSHOT
($ and shares in millions except per share amounts)

Yr.-to-Yr.
Percent/Margin
For the year ended December 31: 2018 2017 Change
Revenue $ 79,591 $ 79,139 0.6%*
Gross profit margin 46.4% 46.7%** (0.3) pts.
Total expense and other (income) $ 25,594 $ 25,543** 0.2%
Total expense and other (income)-to-revenue ratio 32.2% 32.3%** (0.1 ) pts.
Income from continuing operations before income taxes $ 11,342 $ 11,400 (0.5)%
Provision for income taxes from continuing operations $ 2,619+ $ 5,642+ (53.6)%
Income from continuing operations $ 8,723+ $ 5,758+ 51.5%
Income from continuing operations margin 11.0% 7.3% 3.7 pts.
Income/(loss) from discontinued operations, net of tax $ 5 $ (5) NM
Net income $ 8,728+ $ 5,753+ 51.7%
Earnings per share from continuing operations:
Assuming dilution $ 9.51+ $ 6.14+ 54.9%
Consolidated earnings per share—assuming dilution $ 9.52+ $ 6.14+ 55.0%
Weighted-average shares outstanding
Assuming dilution 916.3 937.4 (2.2)%
Assets++ $123,382 $125,356 (1.6)%
Liabilities++ $106,452 $107,631 (1.1)%
Equity++ $ 16,929 $ 17,725 (4.5)%
* 0.0 percent adjusted for currency.

** Recast to reflect adoption of FASB guidance on presentation of net periodic pension and nonpension postretirement benefit costs.
+ Includes charges of $2.0 billion or $2.23 of diluted earnings per share in 2018 and $5.5 billion or $5.84 of diluted earnings per share in 2017
associated with U.S. tax reform.
++At December 31
NM—Not meaningful
The following table provides the company’s operating (non-

GAAP) earnings for 2018 and 2017.

Yr.-to-Yr.
For the year ended December 31: 2018 2017 Percent Change
Net income as reported $ 8,728+ $ 5,753+ 51.7%
Income/(loss) from discontinued operations, net of tax 5 (5) NM
Income from continuing operations $ 8,723+ $ 5,758+ 51.5%
Non-operating adjustments (net of tax)
Acquisition-related charges 649 718 (9.7)
Non-operating retirement-related costs/(income) 1,248 856** 45.9
U.S. tax reform charge 2,037 5,475 NM
Operating (non-GAAP) earnings* $12,657 $12,807** (1.2)%
Diluted operating (non-GAAP) earnings per share $ 13.81 $ 13.66** 1.1%
* See page 41 for a more detailed reconciliation of net income to operating (non-GAAP) earnings.
** Recast to reflect adoption of FASB guidance on presentation of net periodic pension and nonpension postretirement benefit costs.
+ Includes charges of $2.0 billion in 2018 and $5.5 billion in 2017 associated with U.S. tax reform.
NM—Not meaningful
In 2018, the company reported $79.6 billion in revenue and $8.7 In 2018, the company delivered solid strategic imperatives revenue
billion in income from continuing operations, which included growth, generating $39.8 billion of revenue and growing 9 percent
charges of $2.0 billion associated with U.S. tax reform. Operating as reported and adjusted for currency, with double-digit growth
(non-GAAP) earnings were $12.7 billion, which excludes the tax in cloud and security. Cloud revenue of $19.2 billion increased 12
reform charges. Diluted earnings per share from continuing percent as reported and adjusted for currency, with as-a-Service
operations were $9.51 as reported and $13.81 on an operating revenue up 22 percent as reported and adjusted for currency. The
(non-GAAP) basis. The company generated $15.2 billion in cash annual exit run rate for as-a-Service revenue increased to $12.2
from operations, $11.9 billion in free cash flow and delivered billion in 2018 compared to $10.3 billion in 2017.
shareholder returns of $10.1 billion in gross common stock
repurchases and dividends. From a geographic perspective, Americas revenue declined
1.7 percent year to year as reported (1 percent adjusted for
Total consolidated revenue in 2018 increased 0.6 percent as currency) with a decline in the U.S. of 2.4 percent. Europe/Middle
reported and was flat adjusted for currency compared to the prior East/Africa (EMEA) increased 4.5 percent (1 percent adjusted
year. Cognitive Solutions increased 0.2 percent as reported and for currency). Asia Pacific was essentially flat year to year as
was essentially flat adjusted for currency. Solutions Software reported and adjusted for currency.
grew 0.8 percent as reported (essentially flat adjusted for
currency), while Transaction Processing Software declined 1.2 The consolidated gross margin of 46.4 percent decreased 0.3
percent as reported (2 percent adjusted for currency). Global points year to year and reflects the impacts of portfolio mix and
Business Services (GBS) increased 2.9 percent as reported and investment, partially offset by benefits from productivity and
2 percent adjusted for currency led by growth in Consulting. improving services margins through the year. The operating (non-
Technology Services & Cloud Platforms (TS&CP) grew 0.5 GAAP) gross margin of 46.9 percent decreased 0.4 points versus
percent as reported and was flat adjusted for currency, with the prior year primarily driven by the same factors.
growth in Infrastructure Services and Integration Software
offset by declines in Technical Support Services. Within TS&CP,
there was continued strong growth in cloud revenue which
increased 23 percent year to year as reported and adjusted
for currency. Systems decreased 2 percent as reported and
adjusted for currency, with IBM Z declining year to year reflecting
product cycle dynamics. Storage Systems also decreased in a
competitive environment with ongoing pricing pressures, while
Power Systems grew as reported and adjusted for currency,
with strong performance in Power9-based processors and Linux
throughout the year.
Total expense and other (income) increased 0.2 percent in Total liabilities decreased $1.2 billion (increased $1.3 billion
2018 compared to the prior year. The year-to-year performance adjusted for currency) from December 31, 2017 driven by:
was driven by decline in intellectual property (IP) income (2
• Decreases in total debt ($1.0 billion), deferred income
points) and a higher level of workforce rebalancing charges
($0.7 billion) and compensation and benefits ($0.5 billion);
(1 point), offset by continued focus on efficiency resulting in
partially offset by
lower spending (3 points). Total operating (non-GAAP) expense
and other (income) decreased 0.4 percent year to year, driven • Increases in taxes ($1.1 billion).
primarily by the same factors.
Total equity of $16.9 billion decreased $0.8 billion from
Pre-tax income from continuing operations of $11.3 billion December 31, 2017 as a result of:
decreased 0.5 percent and the pre-tax margin was 14.3 percent,
• Decreases from dividends ($5.7 billion) and treasury stock
a decrease of 0.2 points versus 2017. The continuing operations
($4.6 billion) primarily due to share repurchases; partially
effective tax rate for 2018 was 23.1 percent, including charges
offset by
of $2.0 billion associated with U.S. tax reform. This is compared
to an effective tax rate of 49.5 percent in 2017 which included • Increases from net income ($8.7 billion) and the transition
a $5.5 billion charge associated with U.S. tax reform. Without adjustment related to the adoption of the new revenue
these impacts, the continuing operations tax rate for 2018 would standard ($0.6 billion).
have been 5.4 percent, compared to a 2017 rate of 1.5 percent.
Net income of $8.7 billion increased 51.7 percent year to year The company generated $15.2 billion in cash flow provided
as a result of the lower tax reform charges in 2018. Operating by operating activities, a decrease of $1.5 billion compared to
(non-GAAP) pre-tax income from continuing operations of 2017, driven primarily by a decrease in cash provided by financing
$13.7 billion was flat year to year and the operating (non-GAAP) receivables ($0.8 billion), a decrease in cash sourced from sales
pre-tax margin from continuing operations decreased 0.1 points cycle working capital ($0.2 billion) and an increase in cash
to 17.3 percent. Operating (non-GAAP) income from continuing income tax payments ($0.1 billion). Net cash used in investing
operations of $12.7 billion decreased 1.2 percent with an activities of $4.9 billion was $2.2 billion lower than the prior year,
operating (non-GAAP) income margin from continuing operations primarily driven by decreases in cash used for net non-operating
of 15.9 percent, down 0.3 points year to year. The operating receivables ($1.5 billion) and lower net purchases of marketable
(non-GAAP) effective tax rate from continuing operations in 2018 securities and other investments ($0.5 billion). Net cash used
was 7.9 percent, compared to 6.8 percent in the prior year. in financing activities of $10.5 billion increased $4.1 billion
compared to 2017, driven primarily by a decrease in net cash
Diluted earnings per share from continuing operations of $9.51 in sourced from debt transactions ($3.7 billion), with a lower level
2018 increased 54.9 percent year to year, which included lower of issuances and a higher level of maturities in the current year.
year-to-year charges associated with U.S. tax reform. Operating
(non-GAAP) diluted earnings per share of $13.81 increased In January 2019, the company disclosed that it is expecting
1.1 percent versus 2017. In 2018, the company repurchased GAAP earnings per share from continuing operations of at least
32.9 million shares of its common stock at a cost of $4.4 billion $12.45 and operating (non-GAAP) earnings of at least $13.90 per
and had $3.3 billion remaining in the current share repurchase diluted share for 2019. The company expects free cash flow to be
authorization at December 31, 2018. approximately $12 billion in 2019. Free cash flow realization is
expected to be approximately 100 percent of GAAP net income.
At December 31, 2018, the balance sheet remains strong and Refer to page 61 in the Liquidity and Capital Resources section
the company continues to be committed to maintaining a strong for additional information on this non-GAAP measure. Refer to
investment grade rating. Cash, restricted cash and marketable the Looking Forward section on pages 59 and 60 for additional
securities at December 31, 2018 were $12.2 billion, a decrease information on the company’s expectations.
of $0.6 billion from December 31, 2017. Key drivers in the
balance sheet and total cash flows were:
Total assets decreased $2.0 billion (increased $1.2 billion

adjusted for currency) from December 31, 2017 driven by:
• A decline in receivables of $1.6 billion ($0.6 billion adjusted

for currency) driven by a decline in trade receivables of
$1.5 billion, and
• A decrease in net intangibles and goodwill of $1.2 billion

($0.6 billion adjusted for currency) resulting from currency
impacts and intangibles amortization; partially offset by
• An increase in deferred costs of $1.0 billion ($1.2 billion

adjusted for currency) driven primarily by capitalized sales
commissions costs due to the adoption of the new revenue
standard.
DESCRIPTION OF BUSINESS What IBM Brings to Clients

Please refer to IBM’s Annual Report on Form 10-K filed with the Businesses are choosing IBM because they want to partner
SEC on February 26, 2019 for Item 1A. entitled “Risk Factors.” with a company that can uniquely integrate three core
capabilities:
The company creates value for clients by providing integrated
1. They want the most innovative technology, like AI,
solutions and products that leverage: data, information
blockchain, cybersecurity and quantum delivered in a
technology, deep expertise in industries and business processes,
hybrid cloud environment.
with trust and security and a broad ecosystem of partners and
alliances. IBM solutions typically create value by enabling new 2. They want industry expertise—from a partner that deeply
capabilities for clients that transform their businesses and understands their industry and can apply innovation to
help them engage with their customers and employees in new their business processes to drive transformation and
ways. These solutions draw from an industry-leading portfolio competitive advantage.
of consulting and IT implementation services, cloud, digital
3. A nd, finally, they want a total commitment to trust and
and cognitive offerings, and enterprise systems and software
security. Clients want to partner with a company that will
which are all bolstered by one of the world’s leading research
protect their valuable data and insights, and one that
organizations.
develops and deploys new innovations with a commitment
to do so responsibly.
IBM Strategy
IBM’s strategy is wholly focused on the needs of its clients. IBM IBM is unique in that it can integrate all three core capabilities
is a technology company, but first and foremost it is an enterprise for clients.
company. IBM serves enterprises of all sizes, and IBM’s longest-
standing clients are leaders in their industries—the world’s Innovative Technology
leading financial services institutions, airlines, manufacturers, IBM has a long history of bringing innovative technology to the
consumer goods and retail companies. IBM’s mission is to help world. For 26 years, IBM has led the world in U.S. patents; six
its clients transform their companies and lead in their industries. IBMers are Nobel Laureates; and IBM engineers have developed
innumerable first-of-its-kind products and services. Current
One of the biggest priorities for IBM clients is to derive examples of IBM’s innovative technology include:
competitive advantage through insights and the latest digital
• Analytics and AI: IBM’s long-standing leadership in
technologies. Better insight about the wants and needs of
managing and extracting insights from data starts with a
their customers will help them distinguish themselves in the
portfolio of analytics and database offerings. A few years
marketplace. Data-driven insight will also influence how they
ago, IBM brought AI into the mainstream with the Watson
design and produce their own products, as well as help them
platform, which to date has been the foundation of many
identify opportunities in new markets.
Enterprise AI implementations in production. Recently, IBM
augmented its Watson platform with a set of AI tools that
However, most companies are harnessing only a small percent
enable clients to trace the origins of the data their AI models
of the valuable data they collect. As IBM clients embark on
use, explain what is behind their recommendations and
the next chapter of their digital journey, the proper collection,
ensure that bias has not crept into results. These
use, safeguarding and management of data is of paramount
innovations are making AI more consumable by everyday
importance. Choosing the right digital technologies to analyze
users—not just data scientists.
the data is also necessary.
• Security: Businesses built around data require an
IBM helps clients harness the power of their data through unparalleled level of data security. IBM is the leader in
technologies like AI, analytics and blockchain; on a hybrid cloud information security for enterprises—with leadership in
that connects data across traditional and new environments; with both security software and services. Security is embedded
services that put a client’s data and insight to use in and for their inside all of IBM’s products and services. For example,
business. Underpinning all of this, IBM safeguards client data IBM Z offers pervasive security by building data encryption
with world-class technologies and approaches to security. directly in its computing processor. In addition, IBM’s
services businesses are world class in embedding security
By reinventing themselves digitally around insight, clients into the solutions they build and run for IBM clients.
become what IBM calls Cognitive Enterprises.
• Blockchain is an exciting technology that is just beginning to
transform business processes. IBM’s platform has been
rated number one by leading analyst firms such as Juniper
Research and Everest Group. Blockchain technology
enables multiple parties to conduct business with each
other on a single, unified distributed system, eliminating the
costly and time-consuming hand-offs of fragmented
systems. IBM is deploying blockchain technology with
clients to transform how global trade is transacted, how
food safety is tracked and how supply chains are managed.
• Cloud: Enterprise clients are in the very early stages of Trust and Security
the move to cloud. IBM estimates that only 20 percent of Data and AI—together, they are both the opportunity and
workloads have moved to the cloud—with work ahead for the issue of current times. They can make the world a better,
the remaining 80 percent. The first part was to move healthier and more productive place; but only if businesses and
business workloads that exist as a layer over core consumers trust the companies putting data and AI to work.
processes. The hard part is ahead: moving the mission-
critical systems that run banking, retail, telecom and other IBM is a 107-year old business—and the reason it has been
industries. Some of these workloads will remain in successful for so long is because it has earned the trust of
traditional IT systems, some will move to a private cloud its clients. IBM has not only followed guidelines around the
inside the safety of a client’s firewall, others will move to responsible handling of data and the stewardship of new
public clouds, and some will surge between all of these. technology, but created them, published them, and invited others
Wherever a workload may reside, it will need to share to adopt similar commitments. IBM’s principles make clear that:
its data across environments. All of this requires an
• The purpose of new technologies is to augment—not
approach that is open, highly interoperable between
replace—human expertise;
environments, and even interoperable between different
public clouds. This is what IBM has long called hybrid • Data and insights derived from AI belong to their owners
cloud—and this describes the solution for the 80 percent of and creators (not their IT partners); and,
the workloads that is to come. With in-depth experience
• New technologies must be transparent and explainable.
across all three environments, IBM brings the strongest
hybrid cloud solution to the market for enterprises—which
There are many companies in the IT industry who bring
will be strengthened through the acquisition of Red Hat.
technology products to the marketplace. Many bring technology
services to the marketplace. A few companies do both, but no one
Industry Expertise
can do it as well as IBM when it comes to meeting the needs of
Changing a business requires in-depth understanding of how a
clients. By bringing together technology and workflow, combining
business works and how technology can make it work differently.
it with industry expertise, innovation and deployment, IBM helps
clients and industries truly transform themselves.
IBM brings both industry expertise and innovative technology to
clients through the IBM services and products businesses. This
This is what truly sets IBM apart.
combination makes IBM unique and essential.
Business Model
A few examples of this capability are highlighted below:
The company’s business model is built to support two principal
• Global Business Services: the IBM GBS business is one of goals: helping enterprise clients to move from one era to the
the world’s largest professional services businesses. Its next by bringing together innovative technology and industry
mission is to help clients along the journey to becoming a expertise, and providing long-term value to shareholders. The
Cognitive Enterprise. business model has been developed over time through strategic
investments in capabilities and technologies that have long-term
• Global Technology Services: the IBM GTS business runs
growth and profitability prospects based on the value they deliver
some of the world’s largest data centers—and thereby
to clients.
some of the world’s most mission-critical workflows and
franchises. GTS helps clients along their journey to
The company’s global capabilities include services, software,
the hybrid cloud—leveraging the best of their existing
systems, fundamental research and related financing. The broad
systems in the context of the regulatory, security and
mix of businesses and capabilities are combined to provide
workflow of their industry.
integrated solutions and platforms to the company’s clients.
• Industry and Domain-Specific Solutions: augmenting IBM’s
services businesses are software and solutions designed for The business model is dynamic, adapting to the continuously
specific industries and domains. For example: changing industry and economic environment, including the
company’s transformation into cloud and as-a-Service delivery
Health: IBM has become a leader in applying advanced
models. The company continues to strengthen its position
digital technologies to healthcare, including the
through strategic organic investments and acquisitions in higher-
application of AI and data analytics to the diagnosis and
value areas, broadening its industry expertise and integrating AI
treatment of patients, bringing smart decisions to Health
into more of what the company offers. In addition, the company
Care payers, and helping Life Sciences companies
is transforming into a more agile enterprise to drive innovation
develop innovative products and services.
and speed, as well as helping to drive productivity, which
Financial Services: IBM is a leading provider in the supports investments for participation in markets with significant
Financial Services industry; with IBM’s Promontory
Financial Group, a leading advisor in Financial Regulation
and Compliance, IBM offers an advanced set of solutions
for managing Risk and Compliance, a critical workflow in
the Financial Services industry.
long-term opportunity. The company also regularly evaluates its Transaction Processing Software: includes software that
portfolio and proactively maximizes shareholder value of non- primarily runs mission-critical systems in industries such as
strategic assets by bringing products to end of life, engaging in banking, airlines and retail.
IP partnerships or executing divestitures.
Global Business Services (GBS) provides clients with consulting,
This business model, supported by the company’s financial application management and business process services.
model, has enabled the company to deliver strong earnings, cash These professional services deliver value and innovation to
flows and returns to shareholders over the long term. clients through solutions which leverage industry, technology
and business strategy and process expertise. GBS is the
Business Segments and Capabilities digital reinvention partner for IBM clients, combining industry
The company’s major operations consist of five business knowledge, functional expertise, and applications with the power
segments: Cognitive Solutions, Global Business Services, of business design and cognitive and cloud technologies. The
Technology Services & Cloud Platforms, Systems and Global full portfolio of GBS services is backed by its globally integrated
Financing. delivery network and integration with technologies, solutions and
services from IBM units including IBM Watson, IBM Cloud, IBM
Cognitive Solutions comprises a broad portfolio of primarily Research, and Global Technology Services.
software capabilities that help IBM’s clients to identify actionable
new insights and inform decision-making for competitive In 2018, focused on digital reinvention, GBS assisted clients on
advantage. Leveraging IBM’s research, technology and industry their journeys to becoming Cognitive Enterprises, helping them
expertise, this business delivers a full spectrum of capabilities, engage their customers with new digital value propositions,
from descriptive, predictive and prescriptive analytics to transform workflows using AI, and build hybrid, open cloud
artificial intelligence. Cognitive Solutions includes Watson, the infrastructures. This was delivered by the operating model
first enterprise AI platform that specializes in driving value and rolled out in 2017—Digital Strategy and iX, Cognitive Process
knowledge from the 80 percent of the world’s data that sits Transformation and Cloud Application Innovation, cross industry
behind company firewalls. It enables businesses to reimagine and globally.
their workflows across a variety of industries and professions
and gives organizations complete control of their insights, data, GBS Capabilities
training and IP. Consulting: provides business consulting services focused on
bringing to market solutions that help clients shape their digital
Additionally, Cognitive Solutions includes the new Watson blueprints and customer experiences, define their cognitive
OpenScale technology—a first of a kind, open technology operating models, unlock the potential in all data to improve
platform that addresses key challenges of AI adoption. It enables decision-making, set their next-generation talent strategies and
companies to manage AI transparently throughout the full AI create new technology architectures in a cloud-centric world.
lifecycle, irrespective of where their AI applications were built
or in which environment they currently run. Application Management: delivers system integration,
application management, maintenance and support services for
IBM’s solutions are provided through the most contemporary packaged software, as well as custom and legacy applications.
delivery methods including through cloud environments and Value is delivered through advanced capabilities in areas such
as-a-Service models. Cognitive Solutions consists of Solutions as security and privacy, application testing and modernization,
Software and Transaction Processing Software. cloud application migration and automation.
Cognitive Solutions Capabilities Global Process Services (GPS): delivers finance, procurement,
Solutions Software: provides the basis for many of the talent and engagement, and industry-specific business process
company’s strategic areas. IBM has established the world’s outsourcing services. These services deliver improved business
deepest portfolio of enterprise AI, including analytics and data results to clients through a consult-to-operate model which
management platforms, cloud data services, talent management includes the strategic change and/or operation of the client’s
solutions, and solutions tailored by industry. Watson Platform, processes, applications and infrastructure. GBS is redefining
Watson Health and Watson Internet of Things (IoT) are certain process services for both growth and efficiency through the
capabilities included in Solutions Software. IBM’s world-class application of the power of cognitive technologies like Watson,
security platform weaves in AI to deliver integrated security as well as the IoT, blockchain and deep analytics.
intelligence across clients’ entire operations, including their
cloud, applications, networks and data, helping them to prevent, Technology Services & Cloud Platforms (TS&CP) provides
detect and remediate potential threats. compreh ensive IT infrastructure and platform services that
create business value for clients. Clients gain access to leading-
edge, high-quality services, flexibility and economic value. This is
enabled through leverage of insights drawn from IBM’s decades
of experience across thousands of engagements, the skills of
practitioners, advanced technologies, applied innovation from
IBM Research and global scale.
TS&CP Capabilities Storage Systems: data storage products and solutions that
Infrastructure Services: delivers a portfolio of project services, allow clients to retain and manage rapidly growing, complex
managed and outsourcing services, and cloud-delivered services volumes of digital information and to fuel data-centric cognitive
focused on clients’ enterprise IT infrastructure environments applications. These solutions address critical client requirements
to enable digital transformation and deliver improved quality, for information retention and archiving, security, compliance and
flexibility and economic value. The portfolio includes a storage optimization, including data deduplication, availability
comprehensive set of hybrid cloud services and solutions to and virtualization. The portfolio consists of a broad range of flash
assist enterprise clients in building and running contemporary IT storage, disk and tape storage solutions.
environments. These offerings integrate long-standing expertise in
service management and technology with the ability to utilize the Operating Systems Sof tware: IBM Z operating system
power of new technologies, drawn from across IBM’s businesses environments include z/OS, a security-rich, high-performance
and ecosystem partners. The portfolio is built using the IBM enterprise operating system, as well as Linux. Power Systems
Services Platform with Watson, designed to augment human offers a choice of AIX, IBM i or Linux operating systems. These
intelligence with cognitive technologies, and addresses hybrid operating systems leverage POWER architecture to deliver
cloud, digital workplace, business resiliency, network, managed secure, reliable and high performing enterprise-class workloads
applications, cloud and security. The company’s capabilities, across a breadth of server offerings.
including IBM Cloud, cognitive computing and hybrid cloud
implementation, provide high-performance, end-to-end innovation Global Financing encompasses two primary businesses:
and an improved ability for clients to achieve business objectives. financing, primarily conducted through IBM Credit LLC (IBM
Credit), and remanufacturing and remarketing. IBM Credit is
Technical Support Services: delivers comprehensive support a wholly owned subsidiary of IBM that accesses the capital
services to maintain and improve the availability of clients’ IT markets directly. IBM Credit, through its financing solutions,
infrastructures. These offerings include maintenance for IBM facilitates IBM clients’ acquisition of information technology
products and other technology platforms, as well as open source systems, software and services in the areas where the company
and vendor software and solution support, drawing on innovative has expertise. The financing arrangements are predominantly
technologies and leveraging the IBM Services Platform with for products or services that are critical to the end users’
Watson capabilities. business operations. The company conducts a comprehensive
credit evaluation of its clients prior to extending financing. As
Integration Software: delivers industry-leading hybrid cloud a captive financier, Global Financing has the benefit of both
solutions that empower clients to achieve rapid innovation, deep knowledge of its client base and a clear insight into the
hybrid integration and process transformation with choice products and services financed. These factors allow the business
and consistency across public, dedicated and local cloud to effectively manage two of the major risks associated with
environments, leveraging the IBM Platform-as-a-Service financing, credit and residual value, while generating strong
solution. Integration Software offerings and capabilities help returns on equity. Global Financing also maintains a long-term
clients address the digital imperatives to create, connect and partnership with the company’s clients through various stages
optimize their applications, data and infrastructure on their of the IT asset life cycle—from initial purchase and technology
journey to become cognitive businesses. upgrades to asset disposition decisions.
Systems provides clients with innovative infrastructure Global Financing Capabilities

platforms to help meet the new requirements of hybrid cloud Client Financing: lease, installment payment plan and loan
and enterprise AI workloads. More than one-third of Systems financing to end users and internal clients for terms up to seven
Hardware’s server and storage sales transactions are through the years. Assets financed are primarily new and used IT hardware,
company’s business partners, with the balance direct to end-user software and services where the company has expertise. Internal
clients. IBM Systems also designs advanced semiconductor and financing is predominantly in support of Technology Services &
systems technology in collaboration with IBM Research, primarily Cloud Platforms’ long-term client service contracts. All internal
for use in the company’s systems. financing arrangements are at arm’s-length rates and are based
upon market conditions.
Systems Capabilities
Systems Hardware: includes IBM’s servers: IBM Z, Power Commercial Financing: short-term working capital financing
Systems and Storage Systems. to suppliers, distributors and resellers of IBM and Original
Equipment Manufacturer (OEM) products and services. The OEM
Servers: a range of high-performance systems designed to portion will begin winding down starting in the second quarter of
address computing capacity, security and performance needs 2019 and continuing throughout the calendar year. Commercial
of businesses, hyperscale cloud service providers and scientific Financing also includes internal activity where Global Financing
computing organizations. The portfolio includes IBM Z, a trusted factors a selected portion of the company’s accounts receivable
enterprise platform for integrating data, transactions and insight, primarily for cash management purposes, at arm’s-length rates.
and Power Systems, a system designed from the ground up for
big data and enterprise AI, optimized for hybrid cloud and Linux,
and delivering open innovation with OpenPOWER.
Remanufacturing and Remarketing: assets include used Research, Development and Intellectual Property
equipment returned from lease transactions, or used and surplus IBM’s research and development (R&D) operations differentiate
equipment acquired internally or externally. These assets may the company from its competitors. IBM annually invests
be refurbished or upgraded, and sold or leased to new or existing approximately 7 percent of total revenue for R&D, focusing on
clients both externally or internally. Externally remarketed high-growth, high-value opportunities. IBM Research works
equipment revenue represents sales or leases to clients and with clients and the company’s business units through global
resellers. Internally remarketed equipment revenue primarily labs on near-term and mid-term innovations. It delivers many
represents used equipment that is sold internally to Systems new technologies to IBM’s portfolio every year and helps clients
and Technology Services & Cloud Platforms. Systems may also address their most difficult challenges. IBM Research scientists
sell the equipment that it purchases from Global Financing to are conducting pioneering work in artificial intelligence, quantum
external clients. computing, blockchain, security, cloud, nanotechnology, silicon
and post-silicon computing architectures and more—applying
IBM Worldwide Organizations these technologies across industries including financial services,
The following worldwide organizations play key roles in IBM’s healthcare, blockchain and IoT.
delivery of value to its clients:
In 2018, for the 26th consecutive year, IBM was awarded more
• Global Markets
U.S. patents than any other company. IBM’s 9,100 patents
• Research, Development and Intellectual Property awarded in 2018 represent a diverse range of inventions in
strategic growth areas for the company, including more than
Global Markets 3,000 patents related to work in artificial intelligence, cloud,
IBM has a global presence, operating in more than 175 countries cybersecurity and quantum computing.
with a broad-based geographic distribution of revenue. The
company’s Global Markets organization manages IBM’s global The company actively continues to seek IP protection for its
footprint, working closely with dedicated country-based innovations, while increasing emphasis on other initiatives
operating units to serve clients locally. These country teams designed to leverage its IP leadership. Some of IBM’s
have client relationship managers who lead integrated teams of technological breakthroughs are used exclusively in IBM
consultants, solution specialists and delivery professionals to products, while others are licensed and may be used in IBM
enable clients’ growth and innovation. products and/or the products of the licensee. As part of its
business model, the company licenses certain of its intellectual
By complementing local expertise with global experience and property assets, which constitute high-value technology, but
digital capabilities, IBM builds deep and broad-based client may be applicable in more mature markets. The licensee drives
relationships. This local management focus fosters speed the future development of the IP and ultimately expands the
in supporting clients, addressing new markets and making customer base. This generates IP income for the company both
investments in emerging opportunities. The Global Markets upon licensing, and with any ongoing royalty arrangements
organization serves clients with expertise in their industry as between it and the licensee. While the company’s various
well as through the products and services that IBM and partners proprietary IP rights are important to its success, IBM believes its
supply. IBM continues to expand its reach to new and existing business as a whole is not materially dependent on any particular
clients through digital marketplaces, digital sales and local patent or license, or any particular group of patents or licenses.
Business Partner resources. IBM owns or is licensed under a number of patents, which vary
in duration, relating to its products.
YEAR IN REVIEW
Results of Continuing Operations
Segment Details
The following is an analysis of the 2018 versus 2017 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: 2018 2017 Change Currency
Revenue
Cognitive Solutions $18,481 $18,453 0.2% (0.4)%
Gross margin 77.5% 78.6%* (1.1) pts.
Global Business Services 16,817 16,348 2.9% 2.0%
Gross margin 26.7% 24.9%* 1.7 pts.
Technology Services & Cloud Platforms 34,462 34,277 0.5% (0.1)%
Systems 8,034 8,194 (2.0)% (2.3)%
Gross margin 49.8% 53.2%* (3.4) pts.
Global Financing 1,590 1,696 (6.3)% (6.5)%
Gross margin 29.1% 29.3% (0.2) pts.
Other 207 171 21.0% 19.9%
Gross margin (140.7)% (173.9)%* 33.2 pts.
Total consolidated revenue $79,591 $79,139 0.6% 0.0%
Total consolidated gross profit $36,936 $36,943* 0.0%

Total consolidated gross margin 46.4% 46.7%* (0.3) pts.
Non-operating adjustments
Amortization of acquired intangible assets 372 449 (17.2)%
Retirement-related costs/(income) — —* —%
Operating (non-GAAP) gross profit $37,307 $37,392* (0.2)%
Operating (non-GAAP) gross margin 46.9% 47.2%* (0.4) pts.
* Recast to reflect adoption of the FASB guidance on presentation of net benefit cost.
Cognitive Solutions
($ in millions)
Yr.-to-Yr.
Yr.-to-Yr. Percent Change
Percent Adjusted for
Cognitive Solutions external revenue $18,481 $18,453 0.2% (0.4)%
Solutions Software $12,903 $12,806 0.8% 0.3%
Transaction Processing Software 5,578 5,647 (1.2) (1.9)
Cognitive Solutions revenue of $18,481 million was essentially commitment to the company’s platform for the long-term and
flat as reported and adjusted for currency in 2018 compared to the value it provides in managing mission-critical workloads and
the prior year. On an as-reported and constant currency basis, predictability in spending.
there was growth in Solutions Software, while Transaction
Processing Software declined year to year. Cognitive Solutions total strategic imperatives revenue of $12.3
billion grew 3 percent as reported and 2 percent adjusted for
Solutions Software revenue of $12,903 million grew 0.8 percent currency year to year. Cloud revenue of $2.6 billion grew 2 percent
as reported (essentially flat adjusted for currency) compared as reported and adjusted for currency, with an as-a-Service exit
to the prior year, led by the company’s analytics and security run rate of $2.0 billion.
platforms. Within analytics, the company had broad-based
growth across the Db2 portfolio, including analytics appliances ($ in millions)
and increasing demand for IBM Cloud Private for Data, which Yr.-to-Yr.
accelerated in the fourth quarter of 2018. The company Percent/
Margin
continued to have solid demand for integrated security and For the year ended December 31: 2018 2017* Change
services solutions with strong growth in security intelligence and Cognitive Solutions
orchestration offerings. Across the industry verticals, Watson
External gross profit $14,319 $14,503 (1.3)%
Health and Watson Media & Weather grew revenue as reported
External gross profit
and adjusted for currency compared to the prior year. Certain
margin 77.5% 78.6% (1.1) pts.
Solutions Software offerings which address horizontal domains,
Pre-tax income $ 7,154 $ 6,795 5.3%
specifically collaboration, commerce and talent, have been
impacted by secular shifts in the market. In December 2018, Pre-tax margin 33.8% 32.2% 1.5 pts.
the company announced its intent to divest its collaboration * Recast to reflect adoption of the FASB guidance on presentation of net
and on-premise marketing and commerce products to HCL. This benefit cost.
transaction is expected to close by mid-year 2019.
Cognitive Solutions gross profit margin decreased 1.1 points to
Transaction Processing Software revenue of $5,578 million 77.5 percent in 2018 compared to the prior year. The gross profit
decreased 1.2 percent as reported (2 percent adjusted for margin decline was driven by an increasing mix toward SaaS and
currency) in 2018 compared to the prior year. There was increased royalty cost associated with IP licensing agreements
improved revenue performance sequentially in the fourth in 2018 compared to the prior year.
quarter 2018 versus the third quarter 2018 reflecting clients’
Pre-tax income of $7,154 million increased 5.3 percent
compared to the prior year with a pre-tax margin improvement
of 1.5 points to 33.8 percent, primarily driven by operational
efficiencies and mix.
Global Business Services
($ in millions)
Yr.-to-Yr.
Global Business Services external revenue $16,817 $16,348 2.9% 2.0%
Consulting $ 7,705 $ 7,262 6.1% 5.1%
Global Process Services 1,259 1,265 (0.5) (0.5)
Application Management 7,852 7,821 0.4 (0.5)
Global Business Services revenue of $16,817 million increased 2.9 Within GBS, total strategic imperatives revenue of $10.8 billion
percent as reported and 2 percent adjusted for currency in 2018 grew 10 percent year to year as reported (9 percent adjusted
compared to the prior year. This performance reflects the progress for currency). Cloud revenue of $4.7 billion grew 19 percent as
the company has made to reposition this business, with strong reported and adjusted for currency, with an as-a-Service exit run
growth in Consulting, led by key offerings in digital and cloud rate of $2.1 billion.
application, where the business is bringing together technology
and industry expertise to help clients on their digital journey. ($ in millions)
Yr.-to-Yr.
Consulting revenue of $7,705 million increased 6.1 percent as Percent/
Margin
reported (5 percent adjusted for currency) compared to the For the year ended December 31: 2018 2017* Change
prior year. The improvement was driven by the company’s digital Global Business Services
strategy, including Digital Commerce and CRM offerings and
External gross profit $4,484 $4,077 10.0%
accelerated growth in next generation enterprise applications,
led by strong demand for consulting and implementation services.
margin 26.7% 24.9% 1.7 pts.
GPS revenue of $1,259 million was essentially flat year to year
Pre-tax income $1,676 $1,362 23.0%
as reported and decreased 1 percent adjusted for currency.
GPS performance improved during the second half of 2018 on a Pre-tax margin 9.8% 8.2% 1.6 pts.
year-to-year basis as reported and adjusted for currency, as the * Recast to reflect adoption of the FASB guidance on presentation of net
business has been reinventing industry workflows by leveraging benefit cost.
automation and infusing AI. In January 2019, the company
announced the intent to divest its Seterus mortgage servicing GBS gross profit margin increased 1.7 points to 26.7 percent
platform business (reported within GPS), which is expected year to year and pre-tax income of $1,676 million increased
to close in the first quarter of 2019. Application Management 23.0 percent year to year. The pre-tax margin increased 1.6
revenue of $7,852 million was flat as reported and declined 1 points to 9.8 percent. The year-to-year improvements in margins
percent adjusted for currency compared to 2017. The company and pre-tax income are the result of the shift to higher-value
continues to help clients move to the cloud with offerings such as offerings, realignment of resources to key skill areas, increased
Cloud Migration Factory and cloud application development. The productivity and utilization as well as a benefit from currency,
business continued to decline in the more traditional application due to the company’s global delivery model.
management engagements.
Technology Services & Cloud Platforms
($ in millions)
Yr.-to-Yr.
Technology Services & Cloud Platforms external revenue $34,462 $34,277 0.5% (0.1)%
Infrastructure Services $23,007 $22,690 1.4% 0.7%
Technical Support Services 6,961 7,196 (3.3) (3.5)
Integration Software 4,493 4,390 2.3 1.9
Technology Services & Cloud Platforms revenue of $34,462 ($ in millions)

million increased 0.5 percent as reported (flat adjusted for Yr.-to-Yr.
currency) in 2018 compared to the prior year, with growth in Percent/
Margin
Infrastructure Services and Integration Software, offset by For the year ended December 31: 2018 2017* Change
a decline in Technical Support Services. Cloud revenue grew Technology Services &
double-digits as reported and adjusted for currency. New Cloud Platforms
and existing clients are engaging IBM to manage their critical External Technology
infrastructure and deliver innovation, including migrating Services gross profit $10,307 $10,215 0.9%
their operations to an open hybrid cloud environment, while External Technology
simultaneously achieving predictable spending. Services gross profit
margin 34.4% 34.2% 0.2 pts.
Infrastructure Services revenue of $23,007 million increased 1.4 External Integration
percent as reported (1 percent adjusted for currency) compared Software gross profit $ 3,651 $ 3,587 1.8%
to the prior year. In Infrastructure Services, the business has External Integration
prioritized the portfolio to deliver high-value solutions that bring Software gross profit
productivity to clients and allow for expanding workloads, while margin 81.3% 81.7% (0.4) pts.
exiting some lower-value offerings. Technical Support Services External total gross profit $13,958 $13,802 1.1%
revenue of $6,961 million decreased 3.3 percent as reported
External total gross
(3 percent adjusted for currency) year to year. This business profit margin 40.5% 40.3% 0.2 pts.
was impacted by the hardware product cycle dynamics in 2018,
Pre-tax income $ 3,786 $ 4,286 (11.7)%
but continued to grow its multi-vendor services offerings which
Pre-tax margin 10.7% 12.3% (1.5) pts.
provide clients with an integrated approach by bringing expertise
and access to different vendor solutions. Integration Software * Recast to reflect adoption of the FASB guidance on presentation of net
revenue of $4,493 million grew 2.3 percent as reported (2 benefit cost.
percent adjusted for currency) compared to the prior year. There
was strong double-digit growth year to year in SaaS offerings, Technology Services & Cloud Platforms gross profit margin
with continued strong adoption of IBM Cloud Private, which of 40.5 percent was essentially flat year to year. The 2018
helps clients modernize their traditional workloads and provides margin reflects benefits from productivity initiatives, including
access to over 100 integrated IBM software offerings including automation of delivery processes infused with AI and global
blockchain, Watson, IoT and analytics. workforce optimization. Pre-tax income of $3,786 million
decreased 11.7 percent. The pre-tax margin declined 1.5 points
Within Technology Services & Cloud Platforms, strategic year to year to 10.7 percent, reflecting the company’s continued
imperatives revenue of $12.2 billion increased 18 percent year to investment to expand its go-to-market capabilities and develop
year as reported and adjusted for currency. Cloud revenue of $8.8 new offerings for the hybrid market.
billion grew 23 percent as reported and adjusted for currency,
with an as-a-Service exit run rate of $8.0 billion.
Services Backlog and Signings
($ in billions)
Yr.-to-Yr.
At December 31: 2018 2017 Change Currency
Total backlog $116.1 $121.0 (4.1)% (0.6)%
The estimated total services backlog at December 31, 2018 was calculation of signings. The calculation used by management
$116 billion, a decrease of 4.1 percent as reported (1 percent involves estimates and judgments to gauge the extent of a client’s
adjusted for currency). commitment, including the type and duration of the agreement,
and the presence of termination charges or wind-down costs.
Total services backlog includes Infrastructure Services,
Consulting, Global Process Services, Application Management Signings include Infrastructure Services, Consulting, GPS and
and Technical Support Services (TSS). Total backlog is intended Application Management contracts. Contract extensions and
to be a statement of overall work under contract which is either increases in scope are treated as signings only to the extent
noncancellable, or which historically has very low likelihood of the incremental new value. TSS is generally not included in
of termination, given the criticality of certain services to the signings as the maintenance contracts tend to be more steady
company’s clients. Total backlog does not include as-a-Service state, where revenues equal renewals. Certain longer-term
arrangements that allow for termination under contractual TSS contracts that have characteristics similar to outsourcing
commitment terms. Backlog estimates are subject to change and contracts are included in signings.
are affected by several factors, including terminations, changes
in the scope of contracts, periodic revalidations, adjustments for Contract portfolios purchased in an acquisition are treated as
revenue not materialized and adjustments for currency. positive backlog adjustments provided those contracts meet the
company’s requirements for initial signings. A new signing will be
Services signings are management’s initial estimate of the recognized if a new services agreement is signed incidental or
value of a client’s commitment under a services contract. There coincidental to an acquisition or divestiture.
are no third-party standards or requirements governing the
($ in millions)
Yr.-to-Yr.
Total signings $44,700 $42,869 4.3% 4.9%
Systems
($ in millions)
Yr.-to-Yr.
Systems external revenue $8,034 $8,194 (2.0)% (2.3)%
Systems Hardware $6,363 $6,494 (2.0)% (2.3)%
IBM Z (5.4) (5.6)
Power Systems 8.8 8.7
Storage Systems (5.5) (5.9)
Operating Systems Software 1,671 1,701 (1.7) (2.4)
Systems revenue of $8,034 million decreased 2.0 percent year for currency in 2018). Systems Hardware revenue of $6,363
to year as reported (2 percent adjusted for currency) driven by million declined 2.0 percent as reported (2 percent adjusted
strong IBM Z performance in the prior year and continuing price for currency). Operating Systems Software revenue of $1,671
pressures impacting Storage Systems. Both hardware platforms million decreased 1.7 percent as reported (2 percent adjusted
were down year to year for the full year, as reported and adjusted for currency) compared to the prior year.
for currency. This performance was partially offset by strong
growth in Power Systems (which grew as reported and adjusted
Within Systems Hardware, IBM Z revenue decreased 5.4 percent ($ in millions)

as reported (6 percent adjusted for currency) year to year, driven Yr.-to-Yr.
by the strong performance in 2017 of the z14 mainframe which Percent/
Margin
was launched in the third quarter of 2017. The z14 continues to For the year ended December 31: 2018 2017* Change
be one of the most successful programs within IBM Z history, Systems
and the company continued to grow the install base by adding
External Systems
new clients and new mission-critical workloads to the platform.
Hardware gross profit $2,590 $2,893 (10.5)%
External Systems
Power Systems revenue increased 8.8 percent as reported
Hardware gross
(9 percent adjusted for currency) year to year. As reported and profit margin 40.7% 44.6% (3.8) pts.
adjusted for currency, there was double-digit revenue growth in
External Operating
both the low-end and high-end portfolio, mitigated by a decline
Systems Software
in the midrange products. Overall performance was driven by gross profit $1,412 $1,469 (3.9)%
Linux and continued strong adoption of the new POWER9-based
External Operating
architecture. In the fourth quarter of 2018, the business released Systems Software
the next generation POWER9 processors in the high-end. gross profit margin 84.5% 86.4% (1.9) pts.
These systems are designed for handling advanced analytics, External total
cloud environments and data-intensive workloads in AI, HANA gross profit $4,002 $4,362 (8.2)%
and UNIX markets. In 2018, the company delivered the most
powerful commercially available supercomputers built with profit margin 49.8% 53.2% (3.4) pts.
POWER9 technology to the U.S. Department of Energy labs.
Pre-tax income $ 904 $1,128 (19.9)%
Pre-tax margin 10.2% 12.6% (2.4 ) pts.
Storage Systems revenue decreased 5.5 percent as reported
(6 percent adjusted for currency) year to year, with declines in * Recast to reflect adoption of the FASB guidance on presentation of net
midrange products, mitigated by continued strong growth in flash benefit cost.
array offerings. The storage market remains very competitive,
with ongoing pricing pressures. The company continues to The Systems gross profit margin decreased 3.4 points to 49.8
introduce new innovative products with enhanced functionality percent in 2018 compared to the prior year. The overall decrease
into its products, such as the extension of the next-generation year to year was driven by the mix away from IBM Z and margin
NVMe technology into its midrange products in December 2018. declines in Power Systems and Storage Systems.
This technology is expected to be extended across the storage
portfolio in the first half of 2019. Pre-tax income of $904 million declined 19.9 percent and pre-tax
margin decreased 2.4 points year to year to 10.2 percent driven
Within Systems, total strategic imperatives revenue of $4.5 billion by the strong performance in IBM Z in the prior year, and the
grew 4 percent year to year as reported (3 percent adjusted for continued investment in innovation across the Systems portfolio.
currency). Cloud revenue of $3.1 billion declined 10 percent as
reported and adjusted for currency, reflecting IBM Z product Global Financing
cycle dynamics. Global Financing is a reportable segment that is measured as
a stand-alone entity. Global Financing facilitates IBM clients’
acquisition of information technology systems, software and
services by providing financing solutions in the areas where the
company has expertise, while generating strong returns on equity.
Global Financing also optimizes the recovery of residual values by
selling assets sourced from end of lease, leasing used equipment
to new clients, or extending lease arrangements with current
clients. Sales of equipment include equipment returned at the
end of a lease, surplus internal equipment and used equipment
purchased externally. Residual value is a risk unique to the
financing business and management of this risk is dependent
upon the ability to accurately project future equipment values
at lease inception. Global Financing has insight into product
plans and cycles for the IBM products under lease. Based upon
this product information, Global Financing continually monitors
projections of future equipment values and compares them with
the residual values reflected in the portfolio.
Results of Operations Global Financing pre-tax income increased 6.5 percent year to
year primarily driven by an increase in gross profit ($52 million)
($ in millions)
and a decrease in total expense ($32 million).
Yr.-to-Yr.
Percent
For the year ended December 31: 2018 2017 Change The decrease in return on equity from 2017 to 2018 was primarily
External revenue $1,590 $1,696 (6.3)% due to lower net income. Refer to page 40 for the details of the
Internal revenue 1,610 1,471 9.5 after-tax income and return on equity calculations.
Total revenue $3,200 $3,168 1.0%
Total unguaranteed residual value of leases, including operating
Pre-tax income $1,361 $1,278* 6.5%
leases, at December 31, 2018 and 2017 was $699 million and
* Recast to reflect adoption of the FASB guidance on presentation of net $724 million, respectively. In addition to the unguaranteed
benefit cost. residual value, on a limited basis, Global Financing will obtain
guarantees of the future value of the equipment to be returned
In 2018, Global Financing delivered external revenue of $1,590 at end of lease.
million and total revenue of $3,200 million, with an increase in
gross margin of 1.0 points. Total pre-tax income of $1,361 million Third-party residual value guarantees increase the minimum
increased 6.5 percent compared to 2017 and return on equity lease payments as provided for by accounting standards that
decreased 2.0 points to 30.8 percent. are utilized in determining the classification of a lease as a
sales-type lease, direct financing lease or operating lease. The
In 2018, Global Financing total revenue increased 1.0 percent aggregate asset values associated with the guarantees of sales-
compared to the prior year. This was due to an increase in internal type leases were $231 million and $716 million for the financing
revenue of 9.5 percent, driven by an increase in internal financing transactions originated during the years ended December 31,
(up 17.6 percent to $424 million), and an increase in internal used 2018 and December 31, 2017, respectively. In 2018, the residual
equipment sales (up 6.8 percent to $1,187 million). External value guarantee program resulted in the company recognizing
revenue declined 6.3 percent due to a decrease in external used approximately $148 million of revenue that would otherwise have
equipment sales (down 30.8 percent to $366 million), partially been recognized in future periods as operating lease revenue. If
offset by an increase in external financing (up 4.9 percent to the company had chosen to not participate in a residual value
$1,223 million). guarantee program in 2018 and prior years, the 2018 impact
would be substantially mitigated by the effect of prior year
The increase in external financing revenue was due to the asset values being recognized as operating lease revenue in
increase in the average asset balances, partially offset by lower the current year. The aggregate asset values associated with
asset yields. The increase in internal financing revenue was the guarantees of direct financing leases were $163 million and
primarily due to higher asset yields and average asset balances. $154 million for the financing transactions originated during the
years ended December 31, 2018 and 2017, respectively. The
Total sales of used equipment represented 48.5 percent and 51.8 associated aggregate guaranteed future values at the scheduled
percent of Global Financing’s revenue for the years ended December 31, end of lease were $18 million and $45 million for the financing
2018 and December 31, 2017, respectively. The decrease in 2018 transactions originated during the years ended December 31,
was due to lower volume of external used equipment sales, partially 2018 and 2017, respectively. The cost of guarantees was $2
offset by increases in internal transactions. The gross profit margin million and $4 million for the years ended December 31, 2018
on used sales was 54.2 percent and 47.4 percent for the years and 2017, respectively.
ended December 31, 2018 and December 31, 2017, respectively.
The increase in the gross profit margin was driven by a shift toward
higher margin internal equipment sales.
Geographic Revenue
In addition to the revenue presentation by reportable segment, the company also measures revenue performance on a geographic basis.
($ in millions)
Yr.-to-Yr.
For the year ended December 31: 2018 2017* Change Currency
Total revenue $79,591 $79,139 0.6% 0.0%
Americas $36,994 $37,641 (1.7)% (0.7)%
Europe/Middle East/Africa 25,491 24,397 4.5 1.3
Asia Pacific 17,106 17,102 0.0 (0.4)
* Recast to conform to current period presentation.
Total revenue of $79,591 million in 2018 increased 0.6 percent as reported (flat adjusted for currency) compared to the prior year.
Americas revenue decreased 1.7 percent year to year as reported Selling, General and Administrative Expense
(1 percent adjusted for currency) with a decline in North America,
($ in millions)
as reported and adjusted for currency, and a decline in Latin
Yr.-to-Yr.
America as reported, but growth adjusted for currency. Within Percent
North America, the U.S. decreased 2.4 percent and Canada For the year ended December 31: 2018 2017 Change
increased 1.4 percent (2 percent adjusted for currency). In Latin Selling, general and
America, Brazil decreased 0.9 percent as reported, but grew 8 administrative expense
percent adjusted for currency, and Mexico increased 2.8 percent Selling, general and
(4 percent adjusted for currency). administrative—other $16,438 $17,100* (3.9)%
Advertising and promotional
EMEA revenue increased 4.5 percent as reported and 1 percent expense 1,466 1,445 1.5
adjusted for currency. Germany increased 8.0 percent (4 percent Workforce rebalancing
adjusted for currency) and the UK increased 6.2 percent (3 charges 598 199 202.2
percent adjusted for currency). Spain increased 15.4 percent Amortization of acquired
(11 percent adjusted for currency) and France grew 3.4 percent intangible assets 435 496 (12.2)
as reported, but declined 1 percent adjusted for currency. Italy Stock-based compensation 361 384 (6.0)
increased 4.0 percent as reported (flat adjusted for currency).
Bad debt expense 67 55 (20.9)
Total consolidated
Asia Pacific revenue was essentially flat year to year as reported
selling, general and
and adjusted for currency. Japan increased 3.0 percent as
administrative expense $19,366 $19,680* (1.6)%
reported (1 percent adjusted for currency). Australia grew 2.0
percent as reported (5 percent adjusted for currency). China
decreased 7.8 percent (9 percent adjusted for currency) and Amortization of acquired
intangible assets (435) (496) (12.2)
India decreased 10.1 percent (6 percent adjusted for currency).
Acquisition-related charges (15) (13) 17.6
Total Expense and Other (Income) Non-operating retirement-
related (costs)/income — —* —
($ in millions)
Operating (non-GAAP)
Yr.-to-Yr. selling, general and
Percent/
Margin administrative expense $18,915 $19,170* (1.3)%
* Recast to reflect adoption of the FASB guidance on presentation of net
Total consolidated expense benefit cost.
and other (income) $25,594 $25,543* 0.2%
Non-operating adjustments Total selling, general and administrative (SG&A) expense
Amortization of acquired decreased 1.6 percent in 2018 versus 2017, driven primarily by
intangible assets (437) (496) (11.9) the following factors:
Acquisition-related charges (16) (52) (70.2)
• Lower spending (4 points); partially offset by
Non-operating retirement-
related (costs)/income (1,572) (1,341)* 17.3 • Higher workforce rebalancing charges (2 points).
expense and Operating (non-GAAP) SG&A expense decreased 1.3 percent
other (income) $23,569 $23,654* (0.4)% year to year driven primarily by the same factors.
Total consolidated
expense-to-revenue ratio 32.2% 32.3%* (0.1) pts. Bad debt expense increased $12 million in 2018 compared to
Operating (non-GAAP) 2017. The receivables provision coverage was 1.6 percent at
expense-to-revenue ratio 29.6% 29.9%* (0.3) pts. December 31, 2018, unchanged from December 31, 2017.

benefit cost.
For additional information regarding total expense and other

(income) for both expense presentations, see the following
analyses by category.
Research, Development and Engineering Expense Other (Income) and Expense
($ in millions) ($ in millions)
Percent Percent
For the year ended December 31: 2018 2017* Change For the year ended December 31: 2018 2017 Change
Total consolidated Other (income) and expense
research, development Foreign currency transaction
and engineering $5,379 $5,590 (3.8)% losses/(gains) $ (427) $ 405 NM
Non-operating adjustment (Gains)/losses on
Non-operating retirement- derivative instruments 434 (341) NM
related (costs)/income — — — Interest income (264) (144) 83.7%
Operating (non-GAAP) Net (gains)/losses from
research, development securities and
and engineering $5,379 $5,590 (3.8)% investment assets (101) (20) 404.2
* Recast to reflect adoption of the FASB guidance on presentation of net Retirement-related
benefit cost. costs/(income) 1,572 1,341* 17.3%
Other (63) (116) (46.0)
Research, development and engineering (RD&E) expense was Total consolidated other
6.8 percent of revenue in 2018 and 7.1 percent of revenue in 2017. (income) and expense $ 1,152 $ 1,125* 2.5%
RD&E expense decreased 3.8 percent in 2018 versus 2017
Amortization of acquired
primarily driven by the company’s leveraging of development
intangible assets (2) — NM
partnerships consistent with its IP licensing strategy and lower
Acquisition-related
spending year to year.
charges 0 (39) (99.2)%
Intellectual Property and Custom Development Income
related costs/(income) (1,572) (1,341)* 17.3
($ in millions) Operating (non-GAAP) other
Yr.-to-Yr. (income) and expense $ (422) $ (255) 65.3%
Percent
For the year ended December 31: 2018 2017 Change * Recast to reflect adoption of the FASB guidance on presentation of net
Licensing of intellectual benefit cost.
property including NM—Not meaningful
royalty-based fees $ 723 $1,193 (39.4)%
Custom development income 275 252 9.3 Total consolidated other (income) and expense was expense of
Sales/other transfers of $1,152 million in 2018 compared to $1,125 million in 2017. The
intellectual property 28 21 35.0 increase in expense of $28 million year over year was primarily
driven by:
Total $1,026 $1,466 (30.0)%
• Higher retirement-related costs ($232 million); partially
offset by
Licensing of intellectual property including royalty-based
fees decreased 39.4 percent in 2018 compared to 2017. The • Higher interest income ($120 million); and
company entered into new partnership agreements in 2018,
• Higher gains from securities and investment assets
which included three transactions with period income greater
($81 million).
than $100 million. There were also three transactions greater
than $100 million in 2017. The company licenses IP to partners
Interest Expense
who allocate their skills to extend the value of assets that are
high value, but may be in mature markets. The timing and amount ($ in millions)
of licensing, sales or other transfers of IP may vary significantly Yr.-to-Yr.
Percent
from period to period depending upon the timing of licensing
agreements, economic conditions, industry consolidation and
Interest expense
the timing of new patents and know-how development.
Total $723 $615 17.6%
Interest expense increased $108 million compared to 2017.

Interest expense is presented in cost of financing in the
Consolidated Statement of Earnings only if the related external
borrowings are to support the Global Financing external business.
Overall interest expense (excluding capitalized interest) in 2018
was $1,480 million, an increase of $207 million year to year, driven
by higher average interest rates and higher average debt levels.
Stock-Based Compensation As discussed in the “Operating (non-GAAP) Earnings” section on

Pre-tax stock-based compensation cost of $510 million pages 18 and 19, the company characterizes certain retirement-
decreased $24 million compared to 2017. This was due primarily related costs as operating and others as non-operating. Utilizing
to decreases related to the conversion of stock-based awards this characterization, operating retirement-related costs in 2018
previously issued by acquired entities ($4 million), performance were $1,494 million, a decrease of $22 million compared to
share units ($7 million) and restricted stock units ($13 million). 2017, primarily driven by lower defined contribution plans cost
Stock-based compensation cost, and the year-to-year change, ($22 million). Non-operating costs of $1,572 million increased
was reflected in the following categories: Cost: $82 million, down $232 million in 2018 compared to 2017, driven primarily
$9 million; SG&A expense: $361 million, down $23 million; and by lower expected return on plan assets ($296 million), an
RD&E expense: $67 million, up $8 million. increase in other costs ($93 million) related to benefits from
pension litigation in the prior year and an increase in recognized
Retirement-Related Plans actuarial losses ($70 million); partially offset by lower interest
The following table provides the total pre-tax cost for all costs ($235 million).
retirement-related plans. These amounts are included in the
Consolidated Statement of Earnings within the caption (e.g., Cost, Income Taxes
SG&A, RD&E) relating to the job function of the plan participants. The continuing operations effective tax rate for 2018 was 23.1
percent, a decrease of 26.4 points versus the prior year. In 2018,
($ in millions) the accounting for impacts of U.S. tax reform was completed and
Yr.-to-Yr. the effects of measurement period adjustments were recognized
Percent as a net full-year 2018 charge of $2.0 billion (17.7 points). This is
compared to a charge of $5.5 billion (48.0 points) in 2017 related
Retirement-related
to the impact of the enactment of U.S. tax reform, a year-to-year
plans—cost
decrease of 30.4 points. Without these impacts, the continuing
Service cost $ 431 $ 429 0.4%
operations tax rate for 2018 would have been 5.4 percent,
Multi-employer plans 38 40* (5.4) compared to a 2017 rate of 1.5 percent. The adjusted year-to-year
Cost of defined increase of 3.9 points is primarily driven by the following factors:
contribution plans 1,024 1,046 (2.1)
• A lower benefit year to year in the utilization of foreign
Total operating costs/
(income) $ 1,494 $ 1,516* (1.5)% tax credits of 5.9 points;
Interest cost $ 2,726 $ 2,961 (7.9)% • Benefits in 2017 related to an intra-entity asset transfer
Expected return on of 5.1 points and the tax write down of an investment
plan assets (4,049) (4,346) (6.8) of 1.7 points;
Recognized actuarial • A year-to-year increase in tax charges related to
losses 2,941 2,871 2.5
intercompany payments of 1.3 points; partially offset by
Amortization of prior
service costs/(credits) (73) (88)* (16.6) • Benefits in 2018 related to domestic and foreign audit
Curtailments/settlements 11 19 (39.9) activity (6.8 points), geographic mix of pre-tax earnings in
2018 (2.1 points) and the re-assessment of valuation
Other costs 16 (76)* NM
allowances (1.2 points).
Total non-operating
costs/(income) $ 1,572 $ 1,341* 17.3%
The continuing operations operating (non-GAAP) effective tax
Total retirement-related
rate was 7.9 percent in 2018, an increase of 1.1 points versus
plans—cost $ 3,066 $ 2,857 7.3%
2017, principally driven by the same factors described above.
benefit cost. For more information on U.S. tax reform impacts, see note N,
NM—Not meaningful “Taxes,” on pages 117 to 119.
Total pre-tax retirement-related plan cost increased by $209

million compared to 2017, primarily driven by lower expected
return on plan assets ($296 million), an increase in other costs
($93 million) related to benefits from pension litigation in the prior
year and an increase in recognized actuarial losses ($70 million);
partially offset by lower interest costs ($235 million).
Earnings Per Share Consistent with accounting standards, the company remeasured
Basic earnings per share is computed on the basis of the the funded status of its retirement and postretirement plans at
weighted-average number of shares of common stock December 31. At December 31, 2018, the overall net underfunded
outstanding during the period. Diluted earnings per share is position was $13,133 million, an increase of $243 million from
computed on the basis of the weighted-average number of December 31, 2017 driven by lower asset returns, partially
shares of common stock outstanding plus the effect of dilutive offset by lower interest cost and an increase in discount rates.
potential common shares outstanding during the period using the At year end, the company’s qualified defined benefit plans were
treasury stock method. Dilutive potential common shares include well funded and the cash requirements related to these plans is
outstanding stock options and stock awards. expected to be approximately $400 million in 2019 and in the
$350 million to $400 million range in 2020. In 2018, the return
on the U.S. Personal Pension Plan assets was (1.8) percent and
Yr.-to-Yr.
the plan was 104 percent funded at December 31. Overall, global
Percent
For the year ended December 31: 2018 2017 Change asset returns were (1.9) percent and the qualified defined benefit
Earnings per share of plans worldwide were 99 percent funded at December 31, 2018.
common stock from
continuing operations During 2018, the company generated $15,247 million in cash
Assuming dilution $ 9.51* $ 6.14* 54.9% from operations, a decrease of $1,477 million compared to
Basic $ 9.56 $ 6.17 54.9% 2017. In addition, the company generated $11,876 million in free
cash flow, a decrease of $1,117 million versus the prior year.
Diluted operating
See page 61 for additional information on free cash flow. The
(non-GAAP) $13.81 $13.66** 1.1%
company returned $10,109 million to shareholders in 2018, with
Weighted-average shares
$5,666 million in dividends and $4,443 million in gross share
outstanding (in millions)
repurchases. In 2018, the company repurchased 32.9 million
shares and had $3.3 billion remaining in share repurchase
Basic 912.0 932.8 (2.2)% authorization at year end. The company’s cash generation
* Includes a charge of $2.0 billion or $2.23 of diluted earnings per share permits the company to invest and deploy capital to areas with
in 2018 and $5.5 billion or $5.84 of diluted earnings per share in 2017 the most attractive long-term opportunities.
**Recast to reflect adoption of the FASB guidance on presentation of net Global Financing Financial Position Key Metrics
benefit cost.
($ in millions)
Actual shares outstanding at December 31, 2018 and 2017 At December 31: 2018 2017
were 892.5 million and 922.2 million, respectively. The average Cash and cash equivalents $ 1,833 $ 2,696
number of common shares outstanding assuming dilution was Net investment in sales-type
21.1 million shares lower in 2018 versus 2017. The decrease was and direct financing leases (1) 6,924 7,253
primarily the result of the common stock repurchase program. Equipment under operating leases—
external clients (2) 444 477
Financial Position Client loans 12,802 12,450
Dynamics
Total client financing assets 20,170 20,180
At December 31, 2018, the company continued to have the
Commercial financing receivables 11,838 11,590
financial flexibility to support the business over the long term.
Cash, restricted cash and marketable securities at year end Intercompany financing receivables (3) (4) 4,873 5,056
were $12,222 million. During the year, the company continued to Total assets $41,320 $41,096
manage the investment portfolio to meet its capital preservation Debt 31,227 31,434
and liquidity objectives. Total equity $ 3,470 $ 3,484
(1)
Includes deferred initial direct costs which are eliminated in IBM’s
Total debt of $45,812 million decreased $1,012 million from prior
consolidated results.
year-end levels. The commercial paper balance at December 31, (2)
Includes intercompany mark-up, priced on an arm’s-length basis, on
2018 was $2,995 million, an increase of $1,499 million from the products purchased from the company’s product divisions which is
prior year end. Within total debt, $31,227 million is in support eliminated in IBM’s consolidated results.
of the Global Financing business which is leveraged at a 9 to 1 Entire amount eliminated for purposes of IBM’s consolidated results
(3)
ratio. The company continues to have substantial flexibility in and therefore does not appear on page 72.
the debt markets. During 2018, the company completed bond (4)
These assets, along with all other financing assets in this table, are
leveraged at the value in the table using Global Financing debt.
issuances totaling $4,000 million, with terms ranging from 2 to
5 years, and interest rates ranging from 2.65 to 3.60 percent
depending on maturity. The company has consistently generated
strong cash flow from operations and continues to have access
to additional sources of liquidity through the capital markets and
its Credit Facilities.
At December 31, 2018, substantially all financing assets were • A decrease in other accrued expenses and liabilities of
IT-related assets, and approximately 55 percent of the total $569 million driven by currency-related decreases of
external portfolio was with investment-grade clients with no $502 million; and
direct exposure to consumers. This investment-grade percentage
• A decrease in deferred income of $387 million ($44 million
is based on the credit ratings of the companies in the portfolio.
adjusted for currency).
Additionally, the company takes actions to transfer exposure to
third parties. On that basis, the investment-grade content would
Receivables and Allowances
increase by 16 points to 71 percent, a slight increase year to year.
Roll Forward of Total IBM Receivables Allowance
for Credit Losses
The company has a long-standing practice of taking mitigation
actions, in certain circumstances, to transfer credit risk to ($ in millions)
third parties, including credit insurance, financial guarantees, January 1, December 31,
2018 Additions* Write-offs** Other+ 2018
nonrecourse borrowings, transfers of receivables recorded as
true sales in accordance with accounting guidance or sales of $668 $66 $(64) $(31) $639
equipment under operating lease. * Additions for Allowance for Credit Losses are charged to expense.
** Refer to note A, “Significant Accounting Policies,” on pages 76 to 88 for
IBM Working Capital additional information regarding Allowance for Credit Loss write-offs.
+ Primarily represents translation adjustments.
($ in millions)
The total IBM receivables provision coverage was 1.6 percent at
Current assets $49,146 $49,735 December 31, 2018, unchanged compared to December 31, 2017.
Current liabilities 38,227 37,363
Working capital $10,918 $12,373 Global Financing Receivables and Allowances
Current ratio 1.29:1 1.33:1 The following table presents external Global Financing receivables
excluding residual values, the allowance for credit losses and
immaterial miscellaneous receivables:
Working capital decreased $1,454 million from the year-end
2017 position. The key changes are described below: ($ in millions)
Current assets decreased $590 million (increased $1,009 million
Recorded investment (1) $31,182 $30,892
adjusted for currency) due to:
Specific allowance for credit losses 220 258
• A decline in receivables of $1,067 million ($261 million Unallocated allowance for credit losses 72 78
adjusted for currency) driven by a decline in trade
Total allowance for credit losses 292 336
receivables of $1,496 million; partially offset by
Net financing receivables $30,890 $30,556
• An increase of $519 million ($598 million adjusted for Allowance for credit losses coverage 0.9% 1.1%
currency) in prepaid expenses and other current assets
Includes deferred initial direct costs which are eliminated in IBM’s
(1)
primarily due to the reclassification of certain trade
consolidated results.
receivables due to the adoption of the new revenue
standard.
The percentage of Global Financing receivables reserved was
0.9 percent at December 31, 2018, compared to 1.1 percent
Current liabilities increased $865 million ($2,076 million adjusted
at December 31, 2017. In 2018, write-offs of $41 million
for currency) as a result of:
of receivables previously reserved resulted in a 14 percent
• An increase in short-term debt of $3,220 million ($3,284 reduction in the specific reserves, from $258 million at
million adjusted for currency) primarily as a result of December 31, 2017, to $220 million at December 31, 2018.
reclassifications of $7,252 million from long-term debt to See note F, “Financing Receivables,” on pages 103 to 106
reflect upcoming maturities and an increase in commercial for additional information. Unallocated reserves decreased
paper of $1,499 million; partially offset by maturities of 10 percent from $78 million at December 31, 2017, to $72 million
$5,586 million. The increase in short-term debt was at December 31, 2018.
partially offset by
• A decrease in taxes payable of $1,173 million ($1,099

million adjusted for currency) principally driven by the
resolution in the first-quarter 2018 of certain matters
related to the ongoing U.S. tax audit of the company’s
2013-2014 tax returns; and
Roll Forward of Global Financing Receivables Allowance Debt

for Credit Losses (included in Total IBM) The company’s funding requirements are continually monitored
and strategies are executed to manage the overall asset and
($ in millions)
liability profile. Additionally, the company maintains sufficient
January 1, December 31,
2018 Additions* Write-offs** Other+ 2018 flexibility to access global funding sources as needed.
$336 $14 $(41) $(17) $292
($ in millions)
* Additions for Allowance for Credit Losses are charged to expense.
** Refer to note A, “Significant Accounting Policies,” on pages 76 to 88 for
additional information regarding Allowance for Credit Loss write-offs.
Total company debt $45,812 $46,824
+ Primarily represents translation adjustments. Total Global Financing segment debt $31,227 $31,434
Debt to support external clients 27,536 27,556
Global Financing’s bad debt expense was $14 million in 2018, Debt to support internal clients 3,690 3,878
compared to $17 million in 2017. The year-to-year decrease in Non-Global Financing debt 14,585 15,390
bad debt expense was primarily due to lower specific reserve
requirements in 2018.
Global Financing provides financing predominantly for the
Noncurrent Assets and Liabilities company’s external client assets, as well as for assets under
contract by other IBM units. These assets, primarily for TS&CP,
($ in millions)
generate long-term, stable revenue streams similar to the Global
Financing asset portfolio. Based on their attributes, these TS&CP
Noncurrent assets $74,236 $75,621 assets are leveraged with the balance of the Global Financing
Long-term debt $35,605 $39,837 asset base.
Noncurrent liabilities (excluding debt) $32,621 $30,432
Non-Global Financing debt of $14,585 million declined $805
million from prior year-end levels.
The decrease in noncurrent assets of $1,385 million (an increase
of $177 million adjusted for currency) was driven by:
• A decrease in net intangibles and goodwill of $1,178 million
resulting from intangibles amortization and currency Global Financing debt-to-equity ratio 9.0x 9.0x
impacts of $553 million.
The debt used to fund Global Financing assets is composed
Long-term debt decreased $4,232 million ($3,994 million of intercompany loans and external debt. Total debt changes
adjusted for currency) primarily driven by: generally correspond with the level of client and commercial
• Reclassifications to short-term debt of $7,252 million to financing receivables, the level of cash and cash equivalents,
reflect upcoming maturities; and the change in intercompany and external payables and the
change in intercompany investment from IBM. The terms of
• Early retirement of long-term debt of $942 million; partially the intercompany loans are set by the company to substantially
offset by match the term, currency and interest rate variability underlying
• Issuances of $4,673 million. the financing receivable and are based on arm’s-length pricing.
Noncurrent liabilities (excluding debt) increased $2,189 million Global Financing provides financing predominantly for the
($3,236 million adjusted for currency) primarily driven by: company’s external client assets, as well as for assets under
contract by other IBM units. As previously stated, the company
• An increase in other liabilities of $2,209 million, primarily measures Global Financing as a stand-alone entity, and
driven by the company’s election to include GILTI in accordingly, interest expense relating to debt supporting Global
measuring deferred taxes ($1,927 million). Financing’s external client and internal business is included in
the “Global Financing Results of Operations” on page 33 and
in note U, “Segment Information,” on pages 141 to 146. In the
company’s Consolidated Statement of Earnings, the external
debt-related interest expense supporting Global Financing’s
internal financing to the company is reclassified from cost of
financing to interest expense.
Equity Net cash provided by operating activities decreased $1,477

Total equity decreased by $795 million from December 31, 2017 million in 2018 driven by the following key factors:
primarily due to decreases from dividends ($5,666 million),
• A decrease in cash provided by financing receivables of
and treasury stock ($4,564 million) primarily due to share
$764 million driven by an increase in client financing
repurchases; partially offset by increases from net income
receivables due to higher volumes;
($8,728 million) and transition adjustments related to the
adoption of the new revenue standard ($580 million). • A decrease in cash sourced from sales cycle working capital
of $240 million; and
Cash Flow
• An increase in cash income tax payments of $148 million.
The company’s cash flows from operating, investing and
financing activities, as reflected in the Consolidated Statement Net cash used in investing activities decreased $2,167 million
of Cash Flows on page 73 are summarized in the table below. driven by:
These amounts include the cash flows associated with the Global
• A decrease from net non-operating financing receivables of
Financing business.
$1,525 million; and
($ in millions) • A decrease in net purchases of marketable securities and
For the year ended December 31: 2018 2017 other investments of $485 million.
Net cash provided by/(used in) Net cash used in financing activities increased $4,051 million
continuing operations
driven by the following factors:
Operating activities $ 15,247 $16,724
• A decrease in net cash sourced from debt transactions of
Investing activities (4,913) (7,081)*
$3,746 million primarily driven by a lower level of issuances
Financing activities (10,469) (6,418)
and a higher level of maturities in the current year.
Effect of exchange rate changes
on cash, cash equivalents and
Global Financing Return on Equity Calculation
restricted cash (495) 937
Net change in cash, cash equivalents ($ in millions)
and restricted cash $ (630) $ 4,161* At December 31: 2018 2017+
* Recast to reflect adoption of the FASB guidance on restricted cash. Numerator

Global Financing after-tax income (1) * $1,065 $1,114
Denominator
Average Global Financing equity (2) ** $3,460 $3,393
Global Financing return on equity (1)/ (2) 30.8% 32.8%
* Calculated based upon an estimated tax rate principally based on

Global Financing’s geographic mix of earnings as IBM’s provision for
income taxes is determined on a consolidated basis.
** Average of the ending equity for Global Financing for the last five
quarters.
+ Recast to reflect the adoption of the FASB guidance on presentation of
net benefit cost.
GAAP Reconciliation
The tables below provide a reconciliation of the company’s income statement results as reported under GAAP to its operating earnings
presentation which is a non-GAAP measure. The company’s calculation of operating (non-GAAP) earnings, as presented, may differ
from similarly titled measures reported by other companies. Please refer to the “Operating (non-GAAP) Earnings” section on pages
18 and 19 for the company’s rationale for presenting operating earnings information.

Acquisition- Retirement-
Related Related Tax Reform Operating
For the year ended December 31, 2018: GAAP Adjustments Adjustments Charges (non-GAAP)
Gross profit $36,936 $ 372 $ — $ — $37,307
Gross profit margin 46.4% 0.5 pts. — pts. — pts. 46.9%
SG&A $19,366 $(451) $ — $ — $18,915
RD&E 5,379 — — — 5,379
Other (income) and expense 1,152 (2) (1,572) — (422)
Total expense and other (income) 25,594 (453) (1,572) — 23,569
Pre-tax income from continuing operations 11,342 824 1,572 — 13,739
Pre-tax margin from continuing operations 14.3% 1.0 pts. 2.0 pts. — pts. 17.3%
Provision for income taxes* $ 2,619 $ 176 $ 324 $(2,037) $ 1,082
Effective tax rate 23.1% (0.1)pts. (0.3)pts. (14.8)pts. 7.9%
Income from continuing operations $ 8,723 $ 649 $ 1,248 $ 2,037 $12,657
Income margin from continuing operations 11.0% 0.8 pts. 1.6 pts. 2.6 pts. 15.9%
Diluted earnings per share from continuing operations $ 9.51 $0.71 $ 1.36 $ 2.23 $ 13.81
* The tax impact on operating (non-GAAP) pre-tax income is calculated under the same accounting principles applied to the GAAP pre-tax income
which employs an annual effective tax rate method to the results.
For the year ended December 31, 2017: GAAP ** Adjustments Adjustments** Charge (non-GAAP)**
Gross profit $36,943 $ 449 $ — $ — $37,392
SG&A $19,680 $(509) $ — $ — $19,170
RD&E 5,590 — — — 5,590
Provision for income taxes* $ 5,642 $ 279 $ 485 $(5,475) $ 931
Effective tax rate 49.5% (1.6) pts. (1.3) pts. (39.9) pts. 6.8%
Income from continuing operations $ 5,758 $ 718 $ 856 $ 5,475 $12,807
** Recast to reflect adoption of the FASB guidance on presentation of net periodic pension and nonpension postretirement benefit costs.
Consolidated Fourth-Quarter Results

Yr.-to-Yr.
Percent/
Margin
For the fourth quarter: 2018 2017 Change
Revenue $21,760 $22,543 (3.5)%*
Gross profit margin 49.1% 49.0%** 0.1 pts.
Total expense and other (income) $ 6,253 $ 6,580** (5.0)%
Total expense and other (income)-to-revenue ratio 28.7% 29.2%** (0.5)pts.
Provision for income taxes from continuing operations $ 2,481+ $ 5,522+ (55.1)
Income/(loss) from continuing operations $ 1,954+ $ (1,053)+ NM
Income/(loss) from continuing operations margin 9.0% (4.7)% 13.6 pts.
Loss from discontinued operations, net of tax $ (2) $ (1) 70.7%
Net income/(loss) $ 1,951+ $ (1,054)+ NM
Earnings/(loss) per share from continuing operations:
Assuming dilution $ 2.15+ $ (1.14)+ NM
Consolidated earnings/(loss) per share—assuming dilution $ 2.15+ $ (1.14)+ NM
* (1.2) percent adjusted for currency.

** Recast to reflect adoption of the FASB guidance on presentation of net benefit cost.
+ Includes a charge of $1.9 billion or $2.15 of diluted earnings per share in 2018 and $5.5 billion or $5.90 of diluted earnings per share in 2017
NM—Not meaningful
The following table provides the company’s operating (non-GAAP) earnings for the fourth quarter of 2018 and 2017.

Yr.-to-Yr.
Percent
For the fourth quarter: 2018 2017 Change
Net income/(loss) as reported $1,951+ $(1,054)+ NM
Loss from discontinued operations, net of tax (2) (1) 70.7%
Income/(loss) from continuing operations 1,954+ (1,053)+ NM
Non-operating retirement-related costs/(income) 348 174** 99.5
U.S. tax reform charge 1,944 5,475 NM
Operating (non-GAAP) earnings* $4,417 $ 4,777** (7.5)%
Diluted operating (non-GAAP) earnings per share $ 4.87 $ 5.14** (5.3)%
**Recast to reflect adoption of the FASB guidance on presentation of net benefit cost.
+ Includes a charge of $1.9 billion in 2018 and $5.5 billion in 2017 associated with U.S. tax reform.
NM—Not meaningful
Snapshot
In the fourth quarter of 2018, the company reported $21.8 billion adjusted for currency. However, there were declines in France
in revenue and net income from continuing operations of $2.0 and other countries. Asia Pacific decreased 2.7 percent as
billion, which included a charge of $1.9 billion associated with U.S. reported (1 percent adjusted for currency). There was growth in
tax reform. Fourth-quarter operating (non-GAAP) earnings were Japan as reported and adjusted for currency. Australia declined
$4.4 billion, which excludes the tax charge. Fourth-quarter diluted as reported, but grew adjusted for currency, and China decreased
earnings per share from continuing operations was $2.15 and year to year as reported and adjusted for currency.
operating (non-GAAP) diluted earnings per share from continuing
operations was $4.87. The company generated $4.1 billion in cash The consolidated gross profit margin of 49.1 percent and
from operations and $6.5 billion in free cash flow in the fourth operating (non-GAAP) gross margin of 49.5 percent both
quarter of 2018 and delivered shareholder returns of $3.5 billion increased 0.1 points compared to the prior year, with margin
through gross common stock repurchases and dividends. expansion in the services businesses, offset by a decline in the
Systems gross margin and an impact from mix.
In the fourth quarter, revenue decreased 3.5 percent as reported
and 1 percent adjusted for currency. Cognitive Solutions was Total expense and other (income) decreased 5.0 percent in the
flat as reported, but grew 2 percent adjusted for currency, fourth quarter compared to the prior year. The year-to-year
with growth in Solutions Software, 1 percent as reported and 3 decrease was driven by the effects of currency (4 points) and
percent adjusted for currency, led by analytics and AI offerings. lower spending (3 points), partially offset by lower intellectual
Transaction Processing Software decreased 1 percent year property income (2 points). The expense dynamics reflect the
to year as reported, but grew 1 percent adjusted for currency company’s focus on driving productivity in the business and new
reflecting strong transactional performance in the quarter. GBS ways of working, including using agile methodologies, leveraging
increased 4.1 percent as reported, and 6 percent adjusted for automation and infusing AI into its processes. Total operating
currency, led by Consulting. There was growth across all GBS (non-GAAP) expense and other (income) decreased 5.2 percent
lines of business as reported and adjusted for currency as the year to year driven primarily by the same factors.
company focuses on clients’ digital transformation. Technology
Services & Cloud Platforms decreased 2.9 percent as reported, Pre-tax income from continuing operations of $4.4 billion in the
but was flat adjusted for currency. Infrastructure Services fourth quarter decreased 0.8 percent year to year, however,
declined year to year as reported, but was flat adjusted for the pre-tax margin of 20.4 percent increased 0.6 points. The
currency. There was strong growth in signings reflecting demand continuing operations effective tax rate for the fourth quarter was
for hybrid cloud implementations and productivity solutions. 55.9 percent, which included a $1.9 billion charge related to U.S.
Within TS&CP, Integration Software grew year to year driven by tax reform. Normalized for this charge, the continuing operations
continued strong adoption of IBM Cloud Private and improved effective tax rate for the quarter would have been 12.9 percent.
transactional volumes. Systems decreased 21.3 percent as Income from continuing operations in the fourth quarter was
reported and 20 percent adjusted for currency, reflecting the $2.0 billion compared to a loss from continuing operations of
impact of the IBM Z product cycle dynamics. Growth in Power $1.1 billion in 2017, which included a $5.5 billion charge related
Systems, as reported and adjusted for currency was more than to U.S. tax reform. Operating (non-GAAP) pre-tax income from
offset by declines in IBM Z and Storage Systems. continuing operations of $5.0 billion decreased 1.1 percent year
to year. Operating (non-GAAP) pre-tax margin from continuing
The company continued to deliver solid strategic imperatives operations increased 0.5 points to 23.1 percent. Operating
revenue growth, generating $11.5 billion of revenue and growing (non-GAAP) income from continuing operations of $4.4 billion
3 percent as reported and 5 percent adjusted for currency. decreased 7.5 percent. The operating (non-GAAP) effective tax
Strategic imperatives revenue growth was impacted by the IBM Z rate from continuing operations in the fourth quarter of 2018 was
cycle. Excluding IBM Z, strategic imperatives growth would have 12.2 percent versus 6.1 percent in the prior year.
been 9 percent as reported and 11 percent adjusted for currency.
There was strong growth across analytics, cloud and security, Diluted earnings per share from continuing operations was $2.15
excluding IBM Z. Total Cloud revenue of $5.7 billion increased 3 in the fourth quarter compared to a loss per share of $(1.14)
percent as reported and 6 percent adjusted for currency, and was in the prior year, with both years including charges associated
also impacted by the IBM Z cycle. Total Cloud revenue growth, with U.S. tax reform. Operating (non-GAAP) diluted earnings per
excluding IBM Z, would have been 15 percent as reported and 19 share of $4.87 decreased 5.3 percent versus the fourth quarter
percent adjusted for currency. Cloud-as-a-Service revenue was of 2017. In the fourth quarter, the company repurchased 17.0
up 18 percent (21 percent adjusted for currency) and the annual million shares of its common stock at a cost of $2.1 billion and
exit run rate for as-a-Service revenue increased to $12.2 billion in had $3.3 billion remaining in the share repurchase authorization
the fourth quarter of 2018 compared to $11.4 billion in the third at December 31, 2018.
quarter of 2018. Analytics revenue of $6.4 billion increased 6
percent as reported (8 percent adjusted for currency).
From a geographic revenue perspective, Americas decreased

5.3 percent (4 percent adjusted for currency) year to year, with
declines in the U.S. and Canada, partially offset by growth in Latin
America. EMEA decreased 1.3 percent as reported, but grew 2
percent adjusted for currency. Germany grew as reported and
adjusted for currency and the UK declined as reported, but grew

Segment Details
The following is an analysis of the fourth quarter of 2018 versus the fourth quarter of 2017 reportable segment external revenue and
gross margin results. Segment pre-tax income includes transactions between the segments that are intended to reflect an arm’s-
length transfer price and excludes certain unallocated corporate items.
($ in millions)
Margin Adjusted for
For the fourth quarter: 2018 2017 Change Currency
Revenue
Cognitive Solutions $ 5,455 $ 5,432 0.4% 2.2%
Global Business Services 4,322 4,152 4.1% 6.5%
Technology Services & Cloud Platforms 8,929 9,198 (2.9)% 0.0%
Systems 2,621 3,332 (21.3)% (20.1)%
Gross margin 50.8% 55.7%* (4.9) pts.
Global Financing 402 450 (10.7)% (8.6)%
Other 32 (20) NM NM
Gross margin (186.2)% 70.2%* (256.5) pts.
Total consolidated revenue $21,760 $22,543 (3.5)% (1.2)%
Total consolidated gross profit $10,687 $11,049* (3.3)%
Total consolidated gross margin 49.1% 49.0%* 0.1 pts.
Retirement-related costs/(income) — —* —%
Operating (non-GAAP) gross profit $10,776 $11,149* (3.3)%
Operating (non-GAAP) gross margin 49.5% 49.5%* 0.1 pts.
NM—Not meaningful
Cognitive Solutions
Cognitive Solutions revenue of $5,455 million grew 0.4 percent demand for IBM Cloud Private for Data has accelerated with over
as reported and 2 percent adjusted for currency in the fourth 100 clients adopting the platform in the first six months since its
quarter of 2018 compared to the prior year, with growth in launch. There was also solid demand for integrated security and
Solutions Software as reported and adjusted for currency. The services solutions, as well as growth in key areas within Watson
company continued to deliver innovation to clients and scale Health and Watson IoT offerings.
platforms and solutions, driving growth in transactional revenue
and SaaS signings. Although Transaction Processing Software Transaction Processing Software revenue of $1,632 million
declined as reported, it grew adjusted for currency as the decreased 0.6 percent as reported, but grew 1 percent adjusted
business capitalized on a strong pipeline of larger transactions for currency compared to the prior year. There was strong
driven by client buying cycles. transactional performance in the quarter reflecting clients’
continued commitment to IBM’s platform for the long-term given
In the fourth quarter, Solutions Software revenue of $3,823 the value the company provides in managing mission-critical
million grew 0.9 percent as reported and 3 percent adjusted for workloads and for predictability in spending.
currency. Within Solutions Software, high-value areas such as
analytics and AI drove growth as clients use IBM solutions to Cognitive Solutions total fourth-quarter strategic imperatives
leverage their data for competitive advantage. Certain analytics revenue of $3.7 billion increased 7 percent as reported and 9
platforms, such as the Db2 portfolio including analytics percent adjusted for currency. Cloud revenue of $0.7 billion grew
appliances, and Data Science offerings had broad-based growth 4 percent as reported and 5 percent adjusted for currency, with
in the fourth quarter as the company continues to innovate and an as-a-Service exit run rate of $2.0 billion.
enhance functionality within these offerings. In addition, client
Cognitive Solutions gross profit margin of 79.4 percent in the Infrastructure Services revenue of $5,819 million declined 2.9
fourth quarter of 2018 was essentially flat compared to the prior percent as reported (flat adjusted for currency) compared to
year. Pre-tax income of $2,437 million increased 7.2 percent the prior year. As the company prioritizes the offerings within its
compared to the prior year. The pre-tax margin grew 2.9 points, portfolio, it is moving away from certain lower-value offerings,
to 40.3 percent driven by operating leverage from growth in which will impact revenue performance in the near term, but will
revenue, operational efficiencies and a mix toward software, improve margin growth in the longer term. Technical Support
with continued investment in key strategic areas. Services revenue of $1,722 million decreased 6.4 percent as
reported (3 percent adjusted for currency), driven primarily by
Global Business Services the dynamics of the Systems hardware product cycle. Integration
Global Business Services revenue of $4,322 million increased Software revenue of $1,387 million increased 1.8 percent as
4.1 percent as reported (6 percent adjusted for currency) in the reported (4 percent adjusted for currency) compared to the prior
fourth quarter of 2018 compared to the prior year with growth year. There was continued strong adoption of IBM Cloud Private,
as reported and adjusted for currency across all three lines of an innovative platform that assists clients in modernizing their
business. GBS’ performance reflects the repositioning of this traditional workloads, and improved transactional performance
business and the value clients recognize when combining the in the quarter. The company continues to enable clients in the
company’s technology and industry expertise as they integrate open hybrid cloud environment through innovative new offerings.
their digital initiatives and internal process transformation.
Technology Services & Cloud Platforms strategic imperatives
Consulting revenue of $2,008 million increased 7.5 percent as revenue of $3.2 billion grew 10 percent year to year as reported
reported (10 percent adjusted for currency). The growth during (13 percent adjusted for currency). Cloud revenue of $2.4 billion
the fourth quarter was led by the company’s digital strategy and grew 19 percent as reported (22 percent adjusted for currency),
next generation Enterprise Applications. GPS revenue of $325 with an as-a-Service exit run rate of $8.0 billion.
million increased 2.4 percent as reported (5 percent adjusted for
currency) driven by Cognitive Process Services offerings, which Technology Services & Cloud Platforms gross profit margin
leverage automation and AI to reinvent industry workflows. increased 1.5 points to 42.3 percent, driven primarily by service
Application Management revenue of $1,989 million increased delivery improvements resulting from infusing AI and automation
1.1 percent as reported (4 percent adjusted for currency). This into business processes and leveraging productivity and talent
return to growth was driven by strong performance in Cloud optimization efforts. Pre-tax income of $1,392 million decreased
Migration Factory and cloud application development, while 3.4 percent. The pre-tax margin of 15.2 percent was flat year to
traditional application management engagements declined as year and improved sequentially compared to the third quarter
clients continue to migrate to the cloud. The growth also reflects of 2018. The company continues to invest in developing new
the achievement of significant milestones across a few accounts. offerings to capture the hybrid market opportunities.
GBS strategic imperatives revenue of $2.9 billion grew 11 Systems

percent as reported (14 percent adjusted for currency) year to Systems revenue of $2,621 million declined 21.3 percent year to
year. Cloud revenue of $1.4 billion grew 30 percent as reported year as reported (20 percent adjusted for currency) in the fourth
(34 percent adjusted for currency), with an as-a-Service exit run quarter of 2018. Systems Hardware revenue of $2,175 million
rate of $2.1 billion. decreased 24.1 percent as reported (23 percent adjusted for
currency). The year-to-year revenue decline was driven primarily
GBS fourth-quarter gross profit margin increased 3.0 points year by IBM Z product cycle dynamics and a decrease in Storage
to year to 27.6 percent. Pre-tax income of $566 million increased Systems (as reported and adjusted for currency), partially
73.4 percent year to year. The pre-tax margin increased 5.2 offset by growth in Power Systems (as reported and adjusted
points to 12.9 percent. The strong growth in margins reflects for currency). Operating Systems Software revenue of $446
operating leverage as a result of revenue growth driven by a mix million decreased 4.4 percent as reported (3 percent adjusted
to higher-value offerings, as well as benefits from currency, given for currency) compared to the prior year.
GBS’ global delivery model, and the yield from productivity and
utilization initiatives. Within Systems Hardware, fourth-quarter IBM Z revenue declined
45.2 percent as reported (44 percent adjusted for currency) year
Technology Services & Cloud Platforms to year as a result of the IBM Z product cycle and strong demand
Technology Services & Cloud Platforms revenue of $8,929 million for z14 in the prior year. Since launching the z14 six quarters ago,
decreased 2.9 percent as reported, but was flat adjusted for this platform continues to track ahead of prior programs, and the
currency in the fourth quarter of 2018 compared to the prior year. install base grew as new clients and new workloads continued
There was continued strong growth in cloud revenue, as new and to be added to the platform. Over 55 percent of installed MIPs
existing clients turn to IBM to manage their critical infrastructure inventory is in emerging workload areas.
and help deliver innovation in an open hybrid cloud environment.
Power Systems revenue grew 8.6 percent as reported (10 percent In the fourth quarter, EMEA revenue performance by country
adjusted for currency) year to year driven by Linux and continued varied. The UK decreased 0.9 percent as reported, but increased
strong performance of the new POWER9-based processors. The 3 percent adjusted for currency. France decreased 14.2 percent
low-end and high-end portfolios had double-digit growth in the as reported and 11 percent adjusted for currency. Italy decreased
quarter. The release of the next generation POWER9 processor 1.2 percent as reported, but increased 2 percent adjusted
was completed during the quarter, with HANA certification for currency. Germany increased 7.9 percent as reported and
extended to high-end processors. Power Systems are designed 12 percent adjusted for currency. Spain increased 12.7 percent
for handling advanced analytics and data-intensive workloads in as reported and 17 percent adjusted for currency. Russia grew
cloud environments within AI, HANA and UNIX markets. 4.0 percent as reported and adjusted for currency.
Storage Systems revenue decreased 8.0 percent as reported Within Asia Pacific, China decreased 25.0 percent as reported
(7 percent adjusted for currency) with declines in midrange, and and 23 percent adjusted for currency primarily due to strong
the market remains very competitive with price pressure. There performance in the financial sector in the prior year. India
was double-digit growth (as reported and adjusted for currency) decreased 10.4 as reported, but was essentially flat adjusted for
in high-end hardware products and in all-flash array offerings. currency. Australia decreased 1.6 percent as reported, but grew
5 percent adjusted for currency. Japan increased 5.6 percent as
Systems strategic imperatives revenue of $1.6 billion declined reported and 5 percent adjusted for currency.
23 percent year to year as reported (22 percent adjusted for
currency). Cloud revenue of $1.1 billion decreased 32 percent Total Expense and Other (Income)
as reported (31 percent adjusted for currency). Both reflected
($ in millions)
IBM Z product cycle dynamics.
Yr.-to-Yr.
Percent/
The Systems gross profit margin decreased 4.9 points to 50.8 Margin
For the fourth quarter: 2018 2017* Change
percent in the fourth quarter of 2018 compared to the prior
year. The overall decrease year to year was driven primarily by Total consolidated expense
product cycle dynamics with a mix away from IBM Z and margin and other (income) $6,253 $6,580 (5.0)%
declines in Power Systems and Storage Systems, partially offset Non-operating adjustments
by Operating Systems Software margin improvement. In the Amortization of acquired
fourth quarter of 2018, pre-tax income of $551 million declined intangible assets (106) (115) (7.1)
39.2 percent and pre-tax margin decreased 6.5 points year to Acquisition-related
year to 19.3 percent driven by the strong fourth-quarter 2017 charges (13) (33) (61.1)
performance in Systems Hardware. The company continues to Non-operating retirement-
develop next-generation technology and deliver new innovative related (costs)/income (387) (371) 4.2
functionality across its Systems portfolio. Operating (non-GAAP)
expense and other
Global Financing (income) $5,746 $6,061 (5.2)%
Global Financing revenue of $402 million decreased 10.7 percent Total consolidated
year to year. Global Financing fourth-quarter pre-tax income expense-to-revenue ratio 28.7% 29.2% (0.5)pts.
decreased 27.9 percent to $319 million and the pre-tax margin of Operating (non-GAAP)
41.3 percent decreased 3.1 points year to year. The decrease in expense-to-revenue ratio 26.4% 26.9% (0.5)pts.
pre-tax income was driven by a decrease in gross profit, partially
offset by a decrease in SG&A expense and financing receivable benefit cost.
provisions.
Total expense and other (income) decreased 5.0 percent in the
Geographic Revenue fourth quarter with an expense-to-revenue ratio of 28.7 percent
Total revenue of $21,760 million decreased 3.5 percent as compared to 29.2 percent in the fourth quarter of 2017. Total
reported and 1 percent adjusted for currency in the fourth operating (non-GAAP) expense and other (income) decreased
quarter of 2018 compared to the prior year. Americas revenue 5.2 percent year to year. The year-to-year decrease in total
of $10,222 million decreased 5.3 percent as reported and 4 expense and other (income) was primarily the result of the effects
percent adjusted for currency. EMEA fourth-quarter revenue of of currency (4 points) and lower spending (3 points), partially offset
$7,081 million decreased 1.3 percent as reported, but increased by lower intellectual property income (2 points). The expense
2 percent adjusted for currency. Asia Pacific revenue of $4,458 dynamics reflected the impacts from currency and the continued
million declined 2.7 percent and 1 percent adjusted for currency. efficiency in the underlying spending, offset by continued
investment to build and reinvent new solutions and platforms.
Within Americas, revenue in the U.S. decreased 7.0 percent year
to year, driven primarily by the strong IBM Z performance in the
prior year. Canada decreased 4.1 percent as reported, but was
flat adjusted for currency. Latin America increased 4.8 percent
as reported and 17 percent adjusted for currency. Within Latin
America, Brazil increased 8.1 percent as reported and 20 percent
adjusted for currency. Mexico increased 12.6 percent as reported
and 16 percent adjusted for currency.
Cash Flow GAAP Reconciliation

The company generated $4.1 billion in cash flow from operating The tables below provide a reconciliation of the company’s
activities in the fourth quarter of 2018, a decrease of $1.6 income statement results as reported under GAAP to its
billion compared to the fourth quarter of 2017, primarily due operating earnings presentation which is a non-GAAP measure.
to a decline from financing receivables. Net cash sourced from The company’s calculation of operating (non-GAAP) earnings, as
investing activities of $0.5 billion was $4.3 billion higher than presented, may differ from similarly titled measures reported by
the prior year’s net use of cash, primarily driven by an increase other companies. Refer to the “Operating (non-GAAP) Earnings”
in cash from net proceeds from disposition of marketable section on pages 18 and 19 for the company’s rationale for
securities and other investments ($2.3 billion) and an increase presenting operating earnings information.
from net non-operating financing receivables ($1.6 billion). Net
cash used in financing activities of $4.6 billion increased $3.7
billion compared to the prior year, primarily driven by higher net
debt maturities ($2.3 billion) and higher gross common stock
repurchases ($1.4 billion).

For the fourth quarter 2018: GAAP Adjustments Adjustments Charges (non-GAAP)
Gross profit $10,687 $ 89 $ — $ — $10,776
Gross profit margin 49.1% 0.4 pts. — pts. —pts. 49.5%
SG&A $ 4,701 $(119) $ — $ — $ 4,582
RD&E 1,358 — — — 1,358
Other (income) and expense 185 (1) (387) — (203)
Total expense and other (income) 6,253 (119) (387) — 5,746
Pre-tax income from continuing operations 4,434 208 387 — 5,030
Pre-tax margin from continuing operations 20.4% 1.0 pts. 1.8 pts. —pts. 23.1%
Effective tax rate 55.9% (1.6)pts. (3.5)pts. (38.7)pts. 12.2%
Income from continuing operations $ 1,954 $ 171 $ 348 $ 1,944 $ 4,417
Income margin from continuing operations 9.0% 0.8 pts. 1.6 pts. 8.9pts. 20.3%
Diluted earnings per share from continuing operations $ 2.15 $0.19 $0.38 $ 2.15 $ 4.87
* The tax impact on operating (non-GAAP) pre-tax income from continuing operations is calculated under the same accounting principles applied
to the GAAP pre-tax income which employs an annual effective tax rate method to the results.

For the fourth quarter 2017: GAAP ** Adjustments Adjustments** Charge (non-GAAP)**
Gross profit $11,049 $ 99 $ — $ — $11,149
SG&A $ 5,013 $(116) $ — $ — $ 4,897
RD&E 1,378 — — — 1,378
Other (income) and expense 374 (32) (371) — (30)
Total expense and other (income) 6,580 (148) (371) — 6,061
Pre-tax income from continuing operations 4,469 247 371 — 5,087
Income/(loss) from continuing operations $ (1,053) $ 181 $ 174 $ 5,475 $ 4,777
Income/(loss) margin from continuing operations (4.7)% 0.8 pts. 0.8 pts. 24.3 pts. 21.2%
Diluted earnings/(loss) per share from
continuing operations $ (1.14) $0.19 $0.19 $ 5.90 $ 5.14
* The tax impact on operating (non-GAAP) pre-tax income from continuing operations is calculated under the same accounting principles applied to
the GAAP pre-tax income which employs an annual effective tax rate method to the results.
** Recast to reflect adoption of the FASB guidance on presentation of net periodic pension and nonpension postretirement benefit costs.
PRIOR YEAR IN REVIEW

This section provides a summary of the company’s financial performance in 2017 as compared to 2016. For additional information,
see the company’s 2017 Annual Report.

Yr.-to-Yr.
Percent/
Margin
Revenue $ 79,139 $ 79,919 (1.0)%*
Gross profit margin 46.7%** 48.2%** (1.5) pts.
Total expense and other (income) $ 25,543** $ 26,186** (2.5)%
Total expense and other (income)-to-revenue ratio 32.3%** 32.8%** (0.5 ) pts.
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)%
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 charge of $5.5 billion associated with 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 operating (non-GAAP) earnings for 2017 and 2016.

Yr.-to-Yr.
Percent
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 retirement-related costs/(income) 856** 265** 223.3
U.S. tax reform charge 5,475 — NM
Operating (non-GAAP) earnings* $12,807** $12,880** (0.6)%
Diluted operating (non-GAAP) earnings per share $ 13.66** $ 13.44** 1.6%
+ Includes a charge of $5.5 billion associated with U.S. tax reform.
NM—Not meaningful
Snapshot
In 2017, the company reported $79.1 billion in revenue and $5.8 The company continued to deliver solid growth in its strategic
billion in income from continuing operations, which included a imperatives which generated $36.5 billion of revenue and grew
charge of $5.5 billion associated with the enactment of U.S. tax 11 percent as reported and adjusted for currency. Total Cloud
reform. Operating (non-GAAP) earnings were $12.8 billion, which revenue of $17.0 billion increased 24 percent as reported and
excluded the tax reform charge. Diluted earnings per share from adjusted for currency, with as-a-Service revenue up 31 percent
continuing operations were $6.14 as reported and $13.66 on as reported and adjusted for currency. The annual exit run rate
an operating (non-GAAP) basis. The company generated $16.7 for as-a-Service revenue increased to $10.3 billion in 2017
billion in cash from operations, $13.0 billion in free cash flow and compared to $8.6 billion in 2016. Analytics revenue of $20.6
delivered shareholder returns of $9.8 billion in gross common billion increased 6 percent as reported and adjusted for currency.
stock repurchases and dividends. Mobile increased 19 percent as reported and adjusted for
currency and Security increased 55 percent (54 percent adjusted
Total consolidated revenue in 2017 decreased 1.0 percent as for currency).
reported and 1 percent year to year adjusted for currency. The
company returned to revenue growth in the fourth quarter with The consolidated gross margin of 46.7 percent decreased 1.5
an increase of 3.6 percent as reported and 1 percent adjusted for points year to year and reflected investments and mix, partially
currency. Year-to-year revenue performance improved sequentially offset by benefits from productivity. The operating (non-GAAP)
in the second half of 2017 compared to first-half performance. gross margin of 47.2 percent decreased 1.6 points versus the
Contributors to the second-half improvement included: prior year primarily driven by the same factors.
momentum in cloud and as-a-Service offerings, strong Systems
growth across IBM Z, Power Systems and Storage Systems, Total expense and other (income) decreased 2.5 percent in
improved software transactional performance and improved 2017 compared to the prior year. The year-to-year decrease
growth in Consulting. was primarily the result of continued focus on efficiency in
spending and reduced expenses for workforce transformation.
Cognitive Solutions increased 1.5 percent as reported and This included a lower level of workforce rebalancing charges
1 percent adjusted for currency with growth in Solutions Software (3 points), lower operational spending (3 points) and a 2016
and Transaction Processing Software as reported and adjusted charge for real estate actions (1 point). The year-to-year decrease
for currency. Solutions Software performance included growth in total expense and other (income) was partially offset by
in annuity revenue, led by as-a-Service solutions. Global Business higher retirement-related costs (3 points), spending related to
Services decreased 2.1 percent as reported and 2 percent acquisitions completed in the prior 12 months (1 point) and a
adjusted for currency with declines across all lines of business. decline in IP income (1 point). Total operating (non-GAAP)
GBS strategic imperatives revenue increased 10 percent as expense and other (income) decreased 6.2 percent year to year,
reported and adjusted for currency year to year as the business driven primarily by the same factors, excluding the impact of
shifted resources and moved into the high-value strategic higher non-operational retirement related costs.
areas of digital, cloud and analytics. Technology Services
& Cloud Platforms decreased 3.0 percent as reported and Pre-tax income from continuing operations of $11.4 billion
3 percent adjusted for currency, primarily driven by a decline in decreased 7.5 percent and the pre-tax margin was 14.4 percent,
Infrastructure Services. Technology Services & Cloud Platforms a decrease of 1.0 points versus 2016. The continuing operations
strategic imperatives revenue was up 19 percent as reported and effective tax rate for 2017 was 49.5 percent, which included a
18 percent adjusted for currency year to year, driven by hybrid charge of $5.5 billion from the enactment of U.S. tax reform in
cloud services, security and mobile. Systems increased 6.2 December 2017, compared to 3.6 percent in 2016. The charge
percent as reported and 5 percent adjusted for currency driven encompassed several elements, including taxes on accumulated
by strong contribution from the z14 mainframe in the second half overseas profits and the revaluation of certain deferred tax
of 2017 and growth in Storage Systems. assets and liabilities. The low tax rate in 2016 was primarily the
result of a refund ($1.0 billion) of previously paid Japan taxes
plus interest. Income from continuing operations of $5.8 billion
decreased 51.5 percent, impacted by the tax reform charge, and
the net income margin was 7.3 percent, a decrease of 7.6 points
versus 2016. Net income of $5.8 billion decreased 51.5 percent
year to year. Operating (non-GAAP) pre-tax income from Total liabilities increased $8.6 billion ($4.0 billion adjusted for
continuing operations of $13.7 billion decreased 0.3 percent currency) from December 31, 2016 driven by:
year to year and the operating (non-GAAP) pre-tax margin from
• Increases in total debt ($4.7 billion) and taxes ($3.5 billion).
continuing operations was 17.4 percent. Operating (non-GAAP)
income from continuing operations of $12.8 billion decreased
Total equity of $17.7 billion decreased $0.7 billion from
0.6 percent with an operating (non-GAAP) income margin from
December 31, 2016 as a result of:
continuing operations of 16.2 percent, essentially flat year to
year. The operating (non-GAAP) effective tax rate from continuing • Decreases from dividends ($5.5 billion) and share
operations in 2017 was 6.8 percent, which included the effect repurchases ($4.3 billion); partially offset by
of discrete tax benefits in the first and second quarters of 2017.
• Increases from net income ($5.8 billion), retirement-related
benefit plans ($2.3 billion) and equity translation
Diluted earnings per share from continuing operations of $6.14
adjustments ($0.8 billion).
in 2017, which included the one-time charge associated with
U.S. tax reform, decreased 50.4 percent year to year. Operating
The company generated $16.7 billion in cash flow provided by
(non-GAAP) diluted earnings per share of $13.66 increased 1.6
operating activities, a decrease of $0.4 billion compared to 2016,
percent versus 2016. In 2017, the company repurchased 27.2
driven primarily by performance-related declines within net
million shares of its common stock at a cost of $4.3 billion.
income and an increase in cash tax payments, partially offset by an
increase in cash provided by receivables. Net cash used in investing
At December 31, 2017, the balance sheet remained strong and
activities of $7.1 billion was $3.8 billion lower than the prior year,
well positioned to support the business over the long term. Cash,
primarily driven by a decrease in cash used for acquisitions
restricted cash and marketable securities at December 31, 2017
($5.2 billion). Net cash used in financing activities of $6.4 billion
were $12.8 billion, an increase of $4.1 billion from December 31,
increased $0.5 billion compared to 2016, driven primarily by
2016. Key drivers in the balance sheet and total cash flows were:
increased gross common share repurchases ($0.8 billion).
Total assets increased $7.9 billion ($3.0 billion adjusted for

currency) from December 31, 2016 driven by:
• Increases in cash, restricted 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).


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)
Margin Adjusted for
Revenue
Cognitive Solutions $18,453 $18,187 1.5% 1.0%
Gross margin 78.6%* 81.8%* (3.2) pts.
Global Business Services 16,348 16,700 (2.1)% (1.8)%
Gross margin 24.9%* 26.7%* (1.8) pts.
Technology Services & Cloud Platforms 34,277 35,337 (3.0)% (3.4)%
Gross margin 40.3%* 41.8%* (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)%
Other 171 289 (40.7)% (41.1)%
Gross margin (173.9)%* (184.7)%* 10.8 pts.
Total consolidated revenue $79,139 $79,919 (1.0)% (1.3)%
Total consolidated gross profit $36,943* $38,516* (4.1)%

Total consolidated gross margin 46.7%* 48.2%* (1.5) pts.
Retirement-related costs/(income) —* —* —%
Operating (non-GAAP) gross profit $37,392* $39,010* (4.1)%
Operating (non-GAAP) gross margin 47.2%* 48.8%* (1.6) pts.
Cognitive Solutions
($ in millions)
Yr.-to-Yr.
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
The growth in Solutions Software revenue was led by key areas for currency. Transaction Processing Software revenue grew as
including security, industry platforms and Watson offerings, reported, but was essentially flat adjusted for currency compared
as the company continued to embed cognitive into its security to the prior year.
offerings and drive vertical solutions. The company continued to
expand the market for Watson Health which had strong double- Cognitive Solutions total strategic imperatives revenue of $12.0
digit revenue growth as reported and adjusted for currency billion grew 2 percent year to year as reported and adjusted
compared to the prior year. There was year-to-year growth in for currency. Cloud revenue of $2.5 billion grew 19 percent as
annuity revenue as reported and at constant currency with strong reported and adjusted for currency, with an as-a-Service exit run
double-digit growth in SaaS revenue as reported and adjusted rate of $2.1 billion.
($ in millions) Gross margin in Cognitive Solutions was impacted by continued

Yr.-to-Yr. investment and an increased mix toward SaaS. There was also a
Percent/ higher level of royalty cost associated with IP licensing
Margin
For the year ended December 31: 2017* 2016* Change agreements compared to the prior year.
Cognitive Solutions
margin 78.6% 81.8% (3.2)pts.
Pre-tax income $ 6,795 $ 6,325 7.4%
Pre-tax margin 32.2% 30.4% 1.8 pts.

benefit cost.
($ in millions)
Yr.-to-Yr.
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 decreased in 2017 compared ($ in millions)

to the prior year, with declines across Consulting, GPS and Yr.-to-Yr.
Application Management. The company continued to transform Percent/
Margin
this business and shift its practices to digital, cognitive and For the year ended December 31: 2017* 2016* Change
cloud. Total strategic imperatives revenue of $9.8 billion grew Global Business Services
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
margin 24.9% 26.7% (1.8) pts.
rate of $1.3 billion. However, this growth was more than offset by
declines in the more traditional areas that the company has been Pre-tax income $1,362 $1,683 (19.0)%
shifting away from such as large ERP and on-premise enterprise Pre-tax margin 8.2% 9.8% (1.7) pts.
application implementation. * Recast to reflect adoption of the FASB guidance on presentation of net
benefit cost.
Profit performance for 2017 was impacted by investments to

drive transformation and reflected pricing and profit pressure in
the more traditional IT services. The company’s continued focus
is on improving productivity with a streamlined practice model
and new project management approaches.
Technology Services & Cloud Platforms
($ in millions)
Yr.-to-Yr.
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 decreased in The TS&CP gross profit margin decline in 2017 was driven
2017 compared to the prior year, with declines across all lines primarily by large contract conclusions, delays in productivity
of business. The revenue decline in Infrastructure Services improvements, mix from Integration Software and investments
reflected the impact of contract conclusions at the end of 2016 in cloud, which were partially offset by savings from prior-year
and the shift away from lower-value work within the business. workforce rebalancing. Pre-tax income performance included
While Technical Support Services also declined year to year, the a lower level of charges related to workforce and real estate
company focused on growing its multi-vendor support services actions in 2017 compared to 2016.
providing clients a single source of expertise across different
vendor solutions. Within Integration Software, although the
annuity base remained relatively stable year to year in 2017,
transactional revenue declined as the portfolio shifted to the
IBM Cloud. Strategic imperatives revenue of $10.4 billion grew
19 percent year to year as reported (18 percent adjusted for
currency). Cloud revenue of $7.1 billion grew 21 percent as
reported (20 percent adjusted for currency), with an as-a-Service
exit run rate of $6.9 billion.
($ in millions)
Yr.-to-Yr.
Percent/
Margin
For the year ended December 31: 2017* 2016* Change
Technology Services &
Cloud Platforms
External Technology
Services gross profit $10,215 $10,927 (6.5)%
External Technology
Services gross profit
margin 34.2% 35.5% (1.3) pts.
External Integration
Software gross profit $ 3,587 $ 3,830 (6.4)%
External Integration
Software gross profit
margin 81.7% 84.7% (3.0) pts.
External total gross profit $13,802 $14,757 (6.5)%
External total gross profit
margin 40.3% 41.8% (1.5) pts.
Pre-tax income $ 4,286 $ 4,643 (7.7)%
Pre-tax margin 12.3% 12.9% (0.6) pts.

benefit cost.
Systems
($ in millions)
Yr.-to-Yr.
Systems external revenue $8,194 $7,714 6.2% 5.4%
Systems Hardware $6,494 $5,926 9.6% 8.6%
IBM Z 24.0 22.3
Power Systems (3.7) (4.3)
Storage Systems 7.7 7.0
Operating Systems Software 1,701 1,788 (4.9) (5.3)
The year-to-year growth in Systems revenue was driven by a The Systems gross profit margin decrease was driven by margin
combination of strong z14 market acceptance following its declines across all product lines, partially offset by product mix
successful launch in the third quarter of 2017 and growth primarily toward higher margin IBM Z, reflecting product cycle
in Storage Systems. In 2017, all-flash array offerings were a dynamics. Pre-tax income growth was driven by the strong
catalyst for Storage Systems growth, with strong double-digit performance in Systems Hardware. Overall 2017 performance
growth throughout the year. Power Systems revenue decreased reflected a successful repositioning of the business through
with declines in the mid-range and low-range products, partially continuous reinvention of core platforms and expansion into
offset by growth in the high-end. This performance reflected the new workloads.
company’s shift to a growing Linux market while continuing to
serve a high-value, but declining UNIX market. Total strategic Global Financing
imperatives revenue of $4.3 billion grew 28 percent year to year
($ in millions)
as reported (26 percent adjusted for currency). Cloud revenue
Yr.-to-Yr.
of $3.4 billion grew 26 percent as reported (25 percent adjusted Percent
for currency). For the year ended December 31: 2017 2016 Change
Results of Operations
($ in millions)
External revenue $1,696 $1,692 0.3%
Yr.-to-Yr.
Percent/ Internal revenue 1,471 1,802 (18.4)
Margin
For the year ended December 31: 2017* 2016* Change Total revenue $3,168 $3,494 (9.3)%
Systems Pre-tax income $1,278* $1,654* (22.8)%
External Systems Hardware * Recast to reflect adoption of the FASB guidance on presentation of net
gross profit $2,893 $2,719 6.4% benefit cost.
External Systems Hardware
gross profit margin 44.6% 45.9% (1.3)pts. The decline in Global Financing total revenue was driven by a
External Operating Systems decline in internal revenue with external revenue essentially flat
Software gross profit $1,469 $1,577 (6.9)% compared to the prior year. External revenue grew 0.3 percent
External Operating Systems due to an increase in external used equipment sales (up 14.9
Software gross profit percent), partially offset by a decline in external financing (down
margin 86.4% 88.2% (1.8)pts. 5.2 percent). The decline in internal revenue of 18.4 percent was
External total gross profit $4,362 $4,296 1.5% driven by a decrease in internal used equipment sales (down 25.2
percent), partially offset by an increase in internal financing (up
profit margin 53.2% 55.7% (2.5)pts. 13.9 percent). The decrease in Global Financing pre-tax income
was primarily driven by a decrease in gross profit, partially offset
Pre-tax income $1,128 $ 925 21.9%
by a decline in financing receivables provisions.
Pre-tax margin 12.6% 10.9% 1.7pts.

benefit cost.
Geographic Revenue
In addition to the revenue presentation by reportable segment, the company also measures revenue performance on a geographic basis.
($ in millions)
Yr.-to-Yr.
For the year ended December 31: 2017* 2016* Change Currency
Total revenue $79,139 $79,919 (1.0)% (1.3)%
Americas $37,641 $37,697 (0.1)% (0.6)%
Europe/Middle East/Africa 24,397 24,805 (1.6) (2.7)
Asia Pacific 17,102 17,417 (1.8) (0.9)
* Recast to conform to 2018 presentation.
Americas revenue was essentially flat year to year as reported, Total Expense and Other (Income)
but decreased 1 percent adjusted for currency with a decline in
($ in millions)
North America partially offset by growth in Latin America, both
Yr.-to-Yr.
as reported and adjusted for currency. Within North America, the Percent/
U.S. decreased 1.4 percent and Canada increased 4.9 percent Margin
(3 percent adjusted for currency). In Latin America, Brazil
increased 7.6 percent (1 percent adjusted for currency) and Total consolidated expense
Mexico increased 9.2 percent (10 percent adjusted for currency). and other (income) $25,543* $26,186* (2.5)%
EMEA revenue decreased 1.6 percent as reported and 3 percent Amortization of acquired
adjusted for currency. The UK decreased 11.2 percent (7 percent intangible assets (496) (503) (1.4)
adjusted for currency) and Germany decreased 3.2 percent Acquisition-related charges (52) (5) NM
(6 percent adjusted for currency). France increased 6.7 percent Non-operating retirement-
(4 percent adjusted for currency), and Spain was up 8.3 percent related (costs)/income (1,341)* (448)* 199.5
(6 percent adjusted for currency). Operating (non-GAAP)
expense and
Asia Pacific revenue decreased 1.8 percent as reported and other (income) $23,654* $25,230* (6.2)%
1 percent adjusted for currency. Japan decreased 1.2 percent Total consolidated
as reported, but increased 2 percent adjusted for currency. expense-to-revenue ratio 32.3%* 32.8%* (0.5 )pts.
India grew 8.6 percent as reported and 5 percent adjusted Operating (non-GAAP)
for currency. China decreased 9.7 percent (9 percent adjusted expense-to-revenue ratio 29.9%* 31.6%* (1.7 )pts.
for currency) and Australia decreased 5.8 percent (9 percent
adjusted for currency). benefit cost.
NM—Not meaningful
Selling, General and Administrative Expense Research, Development and Engineering Expense
($ in millions) ($ in millions)
Percent Percent
For the year ended December 31: 2017 2016 Change For the year ended December 31: 2017* 2016* Change
Selling, general and Total consolidated
administrative expense research, development
Selling, general and and engineering $5,590 $5,726 (2.4)%
administrative—other $17,100* $17,513* (2.4)% Non-operating adjustment
Advertising and promotional Non-operating retirement-
expense 1,445 1,327 8.9 related (costs)/income — — —
Workforce rebalancing Operating (non-GAAP)
charges 199 1,038 (80.9) research, development
Amortization of acquired and engineering $5,590 $5,726 (2.4)%
intangible assets 496 503 (1.4) * Recast to reflect adoption of the FASB guidance on presentation of net
Stock-based compensation 384 401 (4.1) benefit cost.
Bad debt expense 55 87 (36.5)
Total consolidated RD&E expense was 7.1 percent of revenue in 2017 and 7.2 percent
selling, general and of revenue in 2016.
administrative expense $19,680* $20,869* (5.7)%
Non-operating adjustments RD&E expense decreased 2.4 percent in 2017 versus 2016
primarily driven by:
Amortization of acquired
intangible assets (496) (503) (1.4) • Lower spending (4 points); partially offset by
Acquisition-related
• The impact of acquisitions completed in the prior 12-month
charges (13) 2 NM
period (1 point); and
related (costs)/income —* —* — • The effects of currency.
selling, general and Intellectual Property and Custom Development Income
administrative expense $19,170* $20,368* (5.9)%
($ in millions)
* Recast to reflect adoption of the FASB guidance on presentation of net Yr.-to-Yr.
benefit cost. Percent
NM—Not meaningful For the year ended December 31: 2017 2016 Change
Licensing of intellectual
Total SG&A expense decreased 5.7 percent in 2017 versus 2016, property including
driven primarily by the following factors: royalty-based fees $1,193 $1,390 (14.1)%
Custom development income 252 214 17.5
• Lower workforce rebalancing charges (4 points); and
Sales/other transfers of
• Lower spending (3 points); partially offset by intellectual property 21 27 (24.2)
Total $1,466 $1,631 (10.2)%
• Spending related to acquisitions in the prior 12 months
(1 point).
Licensing of intellectual property including royalty-based fees
Operating (non-GAAP) SG&A expense decreased 5.9 percent decreased 14.1 percent in 2017 compared to 2016. The company
year to year driven primarily by the same factors. entered into new partnership agreements in 2017, which included
three transactions with period income greater than $100 million,
Bad debt expense decreased $32 million in 2017 compared compared to four transactions greater than $100 million in 2016.
to 2016. The receivables provision coverage was 1.6 percent
at December 31, 2017, a decrease of 40 basis points from
December 31, 2016.
Other (Income) and Expense Income Taxes

The continuing operations effective tax rate for 2017 was
($ in millions)
49.5 percent, an increase of 45.8 points versus the prior year. The
Yr.-to-Yr.
Percent fourth-quarter 2017 charge of $5.5 billion related to the impact
For the year ended December 31: 2017 2016 Change of the enactment of the U.S. Tax Cuts and Jobs Act resulted in an
Other (income) and expense increase to the effective tax rate of 48.0 points. Without this impact,
Foreign currency transaction the continuing operations tax rate would have been 1.5 percent
losses/(gains) $ 405 $(116) NM compared to a 2016 rate of 3.6 percent, with the remaining change
(Gains)/losses on in the rate year to year driven by the following factors:
derivative instruments (341) 260 NM • An increased benefit year to year in the utilization of
Interest income (144) (108) 33.5% foreign tax credits of 5.4 points;
Net (gains)/losses from
securities and • A benefit related to an intra-entity asset transfer in the
investment assets (20) 23 NM first quarter of 2017 of 5.1 points;
Retirement-related • A benefit due to the tax write down of an investment in the
costs/(income) 1,341* 448* 199.5% fourth quarter of 2017 of 1.7 points; and
Other (116) 85 NM
• A benefit due to the geographic mix of pre-tax earnings in
Total consolidated other
2017 of 1.0 points; partially offset by
(income) and expense $ 1,125* $ 593* 89.8%
Non-operating adjustments • The favorable resolution of the longstanding tax matter in
Acquisition-related Japan in 2016 of 9.5 points; and
charges (39) (7) 444.6 • An increase year to year in tax charges related to
Non-operating retirement- intercompany payments of 1.5 points.
related (costs)/income (1,341)* (448)* 199.5
Operating (non-GAAP) other The continuing operations operating (non-GAAP) effective tax
(income) and expense $ (255) $ 138 NM rate was 6.8 percent, an increase of 0.2 points versus 2016,
* Recast to reflect adoption of the FASB guidance on presentation of net principally driven by the same factors described above. In
benefit cost. 2017, the geographic and product mix of pre-tax earnings were
NM—Not meaningful more favorable than the company expected and there was
increased utilization of foreign tax credits. These impacts drove
Total consolidated other (income) and expense was expense of the underlying continuing operations operating (non-GAAP)
$1,125 million in 2017 compared to $593 million in 2016. The effective tax rate to approximately 12 percent before discrete
increase in expense of $532 million year over year was primarily period benefits.
driven by:
Financial Position
• Higher retirement-related costs ($893 million); and
Cash, restricted cash and marketable securities at December 31,
• Lower gains on divestitures ($61 million); partially offset by 2017 were $12,842 million. During 2017, the company continued
to manage the investment portfolio to meet its capital preservation
• Real estate capacity charges (reflected in Other in the
and liquidity objectives.
table above) in 2016 related to workforce transformation
($328 million); and
Total debt of $46,824 million increased $4,655 million from prior
• Lower net exchange losses ($81 million). year-end levels. The commercial paper balance at December 31,
2017 was $1,496 million, an increase of $597 million from the
Interest Expense prior year end. Within total debt, $31,434 million was in support
of the Global Financing business which was leveraged at a 9.0
($ in millions)
to 1 ratio. During 2017, the company completed bond issuances
Yr.-to-Yr.
Percent totaling $7,986 million, with terms ranging from 2 to 12 years,
For the year ended December 31: 2017 2016 Change and interest rates ranging from 0.95 to 3.30 percent depending
Interest expense on maturity. This included IBM Credit’s first public debt issuance
Total $615 $630 (2.3)% of $3,000 million in September 2017. The company generated
strong cash flow from operations and continued to have access
to additional sources of liquidity through the capital markets and
Interest expense decreased $15 million compared to 2016. its Credit Facilities.
Interest expense is presented in cost of financing in the
Consolidated Statement of Earnings only if the related external Consistent with accounting standards, the company remeasured
borrowings are to support the Global Financing external business. the funded status of its retirement and postretirement plans at
Overall interest expense (excluding capitalized interest) in 2017 December 31. At December 31, 2017, the overall net under-
was $1,273 million, an increase of $67 million year to year, funded position was $12,890 million, a decrease of $1,949
primarily driven by higher average interest rates. million from December 31, 2016 driven by asset returns, partially
offset by interest cost and a decrease in discount rates. The During 2017, the company generated $16,724 million in cash
company’s qualified defined benefit plans were well funded and from operations, a decrease of $360 million compared to 2016. In
the cash requirements related to these plans remain stable going addition, the company generated $12,992 million in free cash flow,
forward at approximately $400 million per year through 2020. In an increase of $1,293 million versus the prior year. The company
2017, the return on the U.S. Personal Pension Plan assets was 9.6 returned $9,847 million to shareholders in 2017, with $5,506
percent and the plan was 104 percent funded at December 31. million in dividends and $4,340 million in gross share repurchases.
Overall, global asset returns were 8.3 percent and the qualified In 2017, the company repurchased 27.2 million shares.
defined benefit plans worldwide were 100 percent funded at
December 31, 2017.
GAAP Reconciliation
The following tables provide a reconciliation of the company’s income statement results as reported under GAAP to its operating
earnings presentation which is a non-GAAP measure. The company’s calculation of operating (non-GAAP) earnings, as presented,
may differ from similarly titled measures reported by other companies. Refer to the “Operating (non-GAAP) Earnings” section on
pages 18 and 19 for the company’s rationale for presenting operating earnings information.

For the year ended December 31, 2017: GAAP** Adjustments Adjustments** Charge (non-GAAP)**
Gross profit $36,943 $ 449 $ — $ — $37,392
SG&A $19,680 $(509) $ — $ — $19,170
RD&E 5,590 — — — 5,590
Income from continuing operations $ 5,758 $ 718 $ 856 $ 5,475 $12,807

Related Related Operating
For the year ended December 31, 2016: GAAP ** Adjustments Adjustments ** (non-GAAP)**
Gross profit $38,516 $ 494 $ — $39,010
Gross profit margin 48.2% 0.6 pts. — pts. 48.8%
SG&A $20,869 $ (501) $ — $20,368
RD&E 5,726 — — 5,726
Other (income) and expense 593 (7) (448) 138
Total expense and other (income) 26,186 (508) (448) 25,230
Pre-tax income from continuing operations 12,330 1,003 448 13,780
Pre-tax margin from continuing operations 15.4% 1.3 pts. 0.6 pts. 17.2%
Provision for income taxes* $ 449 $ 268 $ 183 $ 900
Effective tax rate 3.6% 1.7 pts. 1.2 pts. 6.5%
Income from continuing operations $11,881 $ 735 $ 265 $12,880
Income margin from continuing operations 14.9% 0.9 pts. 0.3 pts. 16.1%
Diluted earnings per share from continuing operations $ 12.39 $ 0.77 $ 0.28 $ 13.44
OTHER INFORMATION
Looking Forward
The company’s strategies, investments and actions are all made quarter of 2019, the company expects GAAP earnings per share
with an objective of optimizing long-term performance. A long- from continuing operations and operating (non-GAAP) earnings
term perspective ensures that the company is well-positioned to per share to be approximately 16 percent of the respective full-
take advantage of the major shifts in technology, business and year expectations. In January 2019, the company announced
the global economy. the intent to divest certain software products and its mortgage-
servicing business during the year. The estimates of the impacts
As part of its long-term strategic model, the company expects from these divestitures are not dependent on timing of closing
to continue to allocate capital efficiently and effectively to and have been included in the full-year earnings per share
investments, and to return value to shareholders through a expectations. However, earnings per share expectations do not
combination of dividends and share repurchases. Over the long include Red Hat, as financial implications for 2019 are heavily
term, in consideration of the opportunities it will continue to dependent on the timing of the closing. Expectations will be
develop, the company continues to expect to have the ability to updated after the transaction closes.
generate low single-digit revenue growth, and with a higher-value
business mix, mid single-digit profit growth, high single-digit The company expects free cash flow to be approximately $12
operating (non-GAAP) earnings per share growth, with free cash billion in 2019. Free cash flow expectations for the year reflect
flow realization of GAAP net income over 90 percent. expected operational profit performance and continued working
capital efficiency, partially offset by a cash tax headwind. Free
Over the last several years, the company has been making cash flow realization, which is defined as free cash flow to
investments and shifting resources, embedding AI and cloud income from continuing operations (GAAP), is expected to be
into its offerings while building new solutions and modernizing approximately 100 percent for the year. These expectations
its existing platforms. These investments not only drive current also take into account the estimated impact of the announced
performance, but will extend the company’s innovation leadership divestitures of the select IBM software products and mortgage
into the future. The company’s key differentiators are built around servicing business and an estimate of pre-closing financing costs
three pillars—innovative technology, industry expertise and trust associated with the Red Hat acquisition.
and security, uniquely delivered through an integrated model.
For full-year 2019, the company expects the GAAP effective tax
IBM’s proposed acquisition of Red Hat will bring together the rate to be approximately 14 percent, excluding discrete items. The
best-in-class hybrid cloud providers and will enable companies company expects its operating (non-GAAP) tax rate for 2019 to be
to securely unlock the full value of cloud for their businesses. approximately 11 to 12 percent (which is a 3 to 4 points headwind
IBM and Red Hat will be strongly positioned to address this year to year), including an estimate of potential discrete items.
opportunity and accelerate hybrid cloud adoption. The company The rates will change year to year based on discrete tax events,
is proceeding through the regulatory process and expects to such as the settlement of income tax audits and changes in tax
close the transaction in the second half of 2019. The acquisition laws, as well as recurring factors including the geographic mix
of Red Hat reinforces IBM’s high-value model. It is expected to of income before taxes, state and local taxes and the effects of
accelerate IBM’s revenue growth, gross margin and be accretive various global income tax strategies. The GAAP effective tax rate
to free cash flow within 12 months of closing. The company will could also be affected by adjustments to the previously recorded
continue with a disciplined financial policy and is committed charges for U.S. tax reform attributable to any changes in law,
to maintaining strong investment-grade credit ratings and new regulations and guidance, audit adjustments, among others.
supporting a solid and growing dividend. The company will target
a leverage profile consistent with a mid to high single A credit Beginning in the second quarter of 2019 and continuing
rating. In order to reduce debt, the company intends to suspend throughout the year, IBM’s Global Financing business will begin
its share repurchase program in 2020 and 2021. winding down the portion of its commercial financing operations
which provides short-term working capital solutions for OEM
At mid-January 2019 spot rates, the company expects a 4 point information technology suppliers, distributors and resellers.
currency headwind to first quarter 2019 revenue growth, which IBM Global Financing will continue to provide differentiated
is approximately two points worse than the year-to-year impact end-to-end financing solutions, including commercial financing
realized in the fourth quarter of 2018. The company expects 1 to in support of IBM partner relationships. The wind down of this
2 point sequential improvement in revenue growth at constant activity is expected to reduce IBM’s revenue, with a nominal
currency from the fourth quarter 2018 to the first quarter 2019. impact to profit, however, it does not change the company’s
For full-year 2019, the company expects to expand gross and earnings per share and free cash flow expectations for 2019.
pre-tax margins.
Beginning in 2019, within the IBM U.S. Qualified Personal
Overall, the company expects GAAP earnings per share from Pension Plan, substantially all the plan participants are now
continuing operations for 2019 to be at least $12.45. Excluding considered inactive, which, as required by U.S. GAAP, results in
acquisition-related charges of $0.91 per share, non-operating a change in the amortization period of unrecognized actuarial
retirement-related items of $0.45 per share and tax reform losses, from the average remaining service period of active plan
enactment impacts of $0.09 per share, operating (non-GAAP) participants to the average remaining life expectancy of inactive
earnings per share is expected to be at least $13.90. For the first plan participants. These periods are approximately 6 years and
18 years, respectively. As a result of this change, there will be The major rating agencies’ ratings on the company’s debt
a reduction to 2019 amortization expense of approximately securities at December 31, 2018 appear in the table below. As a
$900 million. Actuarial loss amortization is reported within result of the proposed Red Hat transaction, in the fourth quarter
non-operating pension costs. There will be no impact to 2019 of 2018, Standard and Poor’s lowered IBM and IBM Credit’s long-
operating (non-GAAP) retirement-related costs, funded status, term debt rating to A from A+, with no change to the short-term
retiree benefit payments or funding requirements of the U.S. debt rating of A-1, and Fitch Ratings has lowered IBM and IBM
Qualified Personal Pension Plan. However, there will be an impact Credit’s long-term debt rating to A from A+, with no change to
to free cash flow realization in 2019. the short-term debt rating of F1. Moody’s placed IBM and IBM
Credit’s long-term debt rating of A1 under review for downgrade,
The company expects 2019 pre-tax retirement-related plan cost with no change to the short-term debt rating of Prime-1. IBM will
to be approximately $2.0 billion, a decrease of approximately continue with a disciplined financial policy and is committed to
$1 billion compared to 2018. This estimate reflects current maintaining strong investment-grade credit ratings.
pension plan assumptions at December 31, 2018. Within total
retirement-related plan cost, operating retirement-related plan The company’s indenture governing its debt securities and its
cost is expected to be approximately $1.5 billion, approximately various credit facilities each contain significant covenants which
flat versus 2018. Non-operating retirement-related plan cost obligate the company to promptly pay principal and interest,
is expected to be approximately $0.6 billion, a decrease of limit the aggregate amount of secured indebtedness and sale
approximately $1 billion compared to 2018, primarily driven and leaseback transactions to 10 percent of the company’s
by lower actuarial loss amortization resulting from the change consolidated net tangible assets, and restrict the company’s
in amortization period for the U.S. plan. Contributions for all ability to merge or consolidate unless certain conditions are met.
retirement-related plans are expected to be approximately The credit facilities also include a covenant on the company’s
$2.4 billion in 2019, an increase of approximately $100 million consolidated net interest expense ratio, which cannot be less
compared to 2018. than 2.20 to 1.0, as well as a cross default provision with respect
to other defaulted indebtedness of at least $500 million.
Liquidity and Capital Resources
The company has consistently generated strong cash flow The company is in compliance with all of its significant debt
from operations, providing a source of funds ranging between covenants and provides periodic certification to its lenders. The
$15.2 billion and $17.1 billion per year over the past three years. failure to comply with its debt covenants could constitute an
The company provides for additional liquidity through several event of default with respect to the debt to which such provisions
sources: maintaining an adequate cash balance, access to apply. If certain events of default were to occur, the principal and
global funding sources, committed global credit facilities and interest on the debt to which such event of default applied would
other committed and uncommitted lines of credit worldwide. become immediately due and payable.
The following table provides a summary of the major sources of
liquidity for the years ended December 31, 2016 through 2018. The company does not have “ratings trigger” provisions in
its debt covenants or documentation, which would allow the
Cash Flow and Liquidity Trends holders to declare an event of default and seek to accelerate
payments thereunder in the event of a change in credit rating.
($ in billions)
The company’s contractual agreements governing derivative
2018 2017 2016
instruments contain standard market clauses which can trigger
Net cash from
the termination of the agreement if the company’s credit rating
operating activities $15.2 $16.7 $17.1
were to fall below investment grade. At December 31, 2018, the
Cash, restricted cash and
fair value of those instruments that were in a liability position was
short-term marketable
$383 million, before any applicable netting, and this position is
securities $12.2 $12.8* $ 8.8*
subject to fluctuations in fair value period to period based on
Committed global
the level of the company’s outstanding instruments and market
credit facilities $15.3 $15.3 $10.3
conditions. The company has no other contractual arrangements
* Recast to reflect adoption of the FASB guidance on restricted cash. that, in the event of a change in credit rating, would result in a
material adverse effect on its financial position or liquidity.
On October 28, 2018, IBM announced its intent to acquire all
the outstanding shares of Red Hat. The transaction is subject to
Moody’s
customary closing conditions, including regulatory clearance. The Standard Investors Fitch
company intends to fund this transaction through a combination IBM and IBM Credit Ratings and Poor’s Service Ratings
of cash and debt. In connection with this acquisition, IBM entered Senior long-term debt A A1 A
into a commitment letter under which certain banks committed Commercial paper A-1 Prime-1 F1
to provide the company with a 364-day unsecured bridge term
loan facility in an aggregate principal amount of up to $20 billion
to fund the acquisition. The company prepares its Consolidated Statement of Cash Flows
in accordance with applicable accounting standards for cash
flow presentation on page 73 and highlights causes and events
underlying sources and uses of cash in that format on page 40.
For the purpose of running its business, the company manages,
monitors and analyzes cash flows in a different format.
Management uses free cash flow as a measure to evaluate $1.1 billion compared to 2017. The decrease was primarily driven
its operating results, plan share repurchase levels, strategic by higher capital expenditures, declines in sales cycle working
investments and assess its ability and need to incur and service capital and an increase in cash income tax payments.
debt. The entire free cash flow amount is not necessarily available
for discretionary expenditures. The company defines free cash In 2018, the company continued to focus its cash utilization
flow as net cash from operating activities less the change in on returning value to shareholders including $5.7 billion in
Global Financing receivables and net capital expenditures, dividends and $4.4 billion in gross common stock repurchases
including the investment in software. A key objective of the (32.9 million shares).
Global Financing business is to generate strong returns on equity,
and increasing receivables is the basis for growth. Accordingly, Over the past three years, the company generated over $36 billion
management considers Global Financing receivables as a in free cash flow. During that period, the company invested over
profit-generating investment, not as working capital that should $6 billion in strategic acquisitions and returned over $28 billion
be minimized for efficiency. Therefore, management includes to shareholders through dividends and gross share repurchases.
presentations of both free cash flow and net cash from operating The company’s performance during this period demonstrates
activities that exclude the effect of Global Financing receivables. that there is fungibility across the elements of share repurchases,
Free cash flow guidance is derived using an estimate of profit, dividends and acquisitions. The amount of prospective returns
working capital and operational cash outflows. As previously to shareholders in the form of dividends and share repurchases
noted, the company views Global Financing receivables as a will vary based upon several factors including each year’s
profit-generating investment which it seeks to maximize and operating results, capital expenditure requirements, research and
therefore it is not considered when formulating guidance for free development investments and acquisitions, as well as the factors
cash flow. As a result, the company does not estimate a GAAP discussed on page 62. As a result of the proposed transaction
Net Cash from Operations expectation metric. to acquire Red Hat, subject to closing, the company intends to
suspend its share repurchase program in 2020 and 2021.
From the perspective of how management views cash flow, in
2018, after investing $3.7 billion in capital investments primarily The company’s Board of Directors considers the dividend
in support of the services and cloud-based businesses, the payment on a quarterly basis. In the second quarter of 2018, the
company generated free cash flow of $11.9 billion, a decrease of Board of Directors increased the company’s quarterly common
stock dividend from $1.50 to $1.57 per share.
The table below represents the way in which management reviews cash flow as described above.
($ in billions)
For the year ended December 31: 2018 2017 2016
Net cash from operating activities per GAAP $15.2 $16.7 $17.1
Less: the change in Global Financing receivables (0.3) 0.4 1.7
Net cash from operating activities,
excluding Global Financing receivables 15.6 16.3 15.4
Capital expenditures, net (3.7) (3.3) (3.7)
Free cash flow (FCF) 11.9 13.0 11.7
Acquisitions (0.1) (0.5) (5.7)
Divestitures — (0.2) (0.5)
Share repurchase (4.4) (4.3) (3.5)
Common stock repurchases for tax withholdings (0.2) (0.2) (0.1)
Dividends (5.7) (5.5) (5.3)
Non-Global Financing debt (0.5) 1.1 1.3
Other (includes Global Financing receivables
and Global Financing debt) (1.6) 0.8* 2.4*
Change in cash, cash equivalents, restricted cash and
short-term marketable securities $ (0.6) $ 4.1* $ 0.4*
FCF as percent of Income from Continuing Operations 136%** 226%** 98%
* Recast to reflect adoption of the FASB guidance on restricted cash.

** 111% in 2018 excluding charges of $2.0 billion and 116% in 2017 excluding the charge of $5.5 billion associated with the enactment of
U.S. tax reform.
Events that could temporarily change the historical cash flow an increase of approximately $100 million compared to 2018.
dynamics discussed previously include significant changes Financial market performance could increase the legally
in operating results, material changes in geographic sources mandated minimum contributions in certain non-U.S. countries
of cash, unexpected adverse impacts from litigation, future that require more frequent remeasurement of the funded status.
pension funding requirements during periods of severe downturn The company is not quantifying any further impact from pension
in the capital markets or the timing of tax payments. Whether funding because it is not possible to predict future movements in
any litigation has such an adverse impact will depend on a the capital markets or pension plan funding regulations.
number of variables, which are more completely described in
note M, “Contingencies and Commitments,” on pages 115 to In 2019, the company is not legally required to make any
117. With respect to pension funding, in 2018, the company contributions to the U.S. defined benefit pension plans.
contributed $363 million to its non-U.S. defined benefit
plans compared to $409 million in 2017. As highlighted in the The company’s cash flows are sufficient to fund its current
Contractual Obligations table, the company expects to make operations and obligations, including investing and financing
legally mandated pension plan contributions to certain non-U.S. activities such as dividends and debt service. When additional
plans of approximately $1.8 billion in the next five years. The requirements arise, the company has several liquidity options
2019 contributions are currently expected to be approximately available. These options may include the ability to borrow
$400 million. Contributions related to all retirement-related additional funds at reasonable interest rates and utilizing its
plans are expected to be approximately $2.4 billion in 2019, committed global credit facilities.
Contractual Obligations
($ in millions)
Payments Due In
Total Contractual
Payment Stream 2019 2020–21 2022–23 After 2023
Long-term debt obligations $43,155 $ 7,048 $13,914 $ 7,736 $14,457
Interest on long-term debt obligations 9,260 1,175 1,784 1,243 5,059
Capital (finance) lease obligations 41 3 5 5 28
Operating lease obligations 5,628 1,581 2,147 1,085 815
Purchase obligations 3,171 1,079 1,114 776 202
Other long-term liabilities:
Minimum defined benefit plan pension funding
(mandated)* 1,800 400 700 700
Excess 401(k) Plus Plan 1,581 201 441 493 446
Long-term termination benefits 991 179 143 114 555
Tax reserves** 4,172 551
Other 1,410 211 363 153 683
Total $71,209 $12,427 $20,611 $12,305 $22,245
* As funded status on plans will vary, obligations for mandated minimum pension payments after 2023 could not be reasonably estimated.
** These amounts represent the liability for unrecognized tax benefits. The company estimates that approximately $551 million of the liability is
expected to be settled within the next 12 months. The settlement period for the noncurrent portion of the income tax liability cannot be reasonably
estimated as the timing of the payments will depend on the progress of tax examinations with the various tax authorities; however, it is not expected
to be due within the next 12 months.
Total contractual obligations are reported in the previous table Critical Accounting Estimates
excluding the effects of time value and therefore, may not equal The application of GAAP requires the company to make estimates
the amounts reported in the Consolidated Statement of Financial and assumptions about certain items and future events that directly
Position. Certain noncurrent liabilities are excluded from the affect its reported financial condition. The accounting estimates and
previous table as their future cash outflows are uncertain. This assumptions discussed in this section are those that the company
includes deferred taxes, derivatives, deferred income, disability considers to be the most critical to its financial statements. An
benefits and other sundry items. Certain obligations related to accounting estimate is considered critical if both (a) the nature of the
the company’s divestitures are included. estimate or assumption is material due to the levels of subjectivity
and judgment involved, and (b) the impact within a reasonable
Purchase obligations include all commitments to purchase goods range of outcomes of the estimate and assumption is material to the
or services of either a fixed or minimum quantity that meet any company’s financial condition. Senior management has discussed
of the following criteria: (1) they are noncancelable, (2) the the development, selection and disclosure of these estimates with
company would incur a penalty if the agreement was canceled, the Audit Committee of the company’s Board of Directors. The
or (3) the company must make specified minimum payments company’s significant accounting policies are described in note A,
even if it does not take delivery of the contracted products or “Significant Accounting Policies,” on pages 76 to 88.
services (take-or-pay). If the obligation to purchase goods or
services is noncancelable, the entire value of the contract is A quantitative sensitivity analysis is provided where that
included in the previous table. If the obligation is cancelable, information is reasonably available, can be reliably estimated and
but the company would incur a penalty if canceled, the dollar provides material information to investors. The amounts used to
amount of the penalty is included as a purchase obligation. assess sensitivity (e.g., 1 percent, 10 percent, etc.) are included to
Contracted minimum amounts specified in take-or-pay contracts allow users of the Annual Report to understand a general direction
are also included in the table as they represent the portion of cause and effect of changes in the estimates and do not represent
each contract that is a firm commitment. management’s predictions of variability. For all of these estimates,
it should be noted that future events rarely develop exactly as
In the ordinary course of business, the company enters into forecasted, and estimates require regular review and adjustment.
contracts that specify that the company will purchase all or a
portion of its requirements of a specific product, commodity or Pension Assumptions
service from a supplier or vendor. These contracts are generally For the company’s defined benefit pension plans, the
entered into in order to secure pricing or other negotiated terms. measurement of the benefit obligation to plan participants and
They do not specify fixed or minimum quantities to be purchased net periodic pension (income)/cost requires the use of certain
and, therefore, the company does not consider them to be assumptions, including, among others, estimates of discount
purchase obligations. rates and expected return on plan assets.
Interest on floating-rate debt obligations is calculated using the Changes in the discount rate assumptions would impact the
effective interest rate at December 31, 2018, plus the interest (gain)/loss amortization and interest cost components of the
rate spread associated with that debt, if any. net periodic pension (income)/cost calculation and the projected
benefit obligation (PBO). The company increased the discount
Off-Balance Sheet Arrangements rate assumption for the IBM Personal Pension Plan (PPP), a U.S.-
From time to time, the company may enter into off-balance sheet based defined benefit plan, by 70 basis points to 4.10 percent on
arrangements as defined by SEC Financial Reporting Release December 31, 2018. This change will decrease pre-tax income
67 (FRR-67), “Disclosure in Management’s Discussion and recognized in 2019 by an estimated $17 million. If the discount
Analysis about Off-Balance Sheet Arrangements and Aggregate rate assumption for the PPP had decreased by 70 basis points on
Contractual Obligations.” December 31, 2018, pre-tax income recognized in 2019 would
have increased by an estimated $50 million. Further changes in
At December 31, 2018, the company had no off-balance sheet the discount rate assumptions would impact the PBO which, in
arrangements that have, or are reasonably likely to have, a material turn, may impact the company’s funding decisions if the PBO
current or future effect on the company’s financial condition, exceeds plan assets. A 25 basis point increase or decrease in the
changes in financial condition, revenues or expenses, results of discount rate would cause a corresponding decrease or increase,
operations, liquidity, capital expenditures or capital resources. See respectively, in the PPP’s PBO of an estimated $1.1 billion based
the table on page 62 for the company’s contractual obligations, and upon December 31, 2018 data.
note M, “Contingencies and Commitments,” on pages 115 to 117,
for detailed information about the company’s guarantees, financial The expected long-term return on plan assets assumption is used
commitments and indemnification arrangements. The company does in calculating the net periodic pension (income)/cost. Expected
not have retained interests in assets transferred to unconsolidated returns on plan assets are calculated based on the market-
entities or other material off-balance sheet interests or instruments. related value of plan assets, which recognizes changes in the
fair value of plan assets systematically over a five-year period in
the expected return on plan assets line in net periodic pension
(income)/cost. The differences between the actual return on
plan assets and the expected long-term return on plan assets
are recognized over five years in the expected return on plan Costs to Complete Service Contracts
assets line in net periodic pension (income)/cost and also as a The company enters into numerous service contracts through
component of actuarial (gains)/losses, which are recognized over its services businesses. During the contractual period,
the service lives or life expectancy of the participants, depending revenue, cost and profits may be impacted by estimates of the
on the plan, provided such amounts exceed thresholds which are ultimate profitability of each contract, especially contracts for
based upon the benefit obligation or the value of plan assets, as which the company uses cost-to-cost measures of progress
provided by accounting standards. (i.e. percentage-of-completion (POC) method of accounting). If
at any time these estimates indicate the POC contract will be
To the extent the outlook for long-term returns changes such unprofitable, the entire estimated loss for the remainder of the
that management changes its expected long-term return on plan contract is recorded immediately in cost. The company performs
assets assumption, each 50 basis point increase or decrease in ongoing profitability analyses of its POC-based services contracts
the expected long-term return on PPP plan assets assumption in order to determine whether the latest estimates require
would have an estimated decrease or increase, respectively, of updating. Key factors reviewed by the company to estimate the
$248 million on the following year’s pre-tax net periodic pension future costs to complete each contract are future labor costs and
(income)/cost (based upon the PPP’s plan assets at December 31, product costs and expected productivity efficiencies. Contract
2018 and assuming no contributions are made in 2019). loss provisions recorded as a component of other accrued
expenses and liabilities were $24 million and $25 million at
The company may voluntarily make contributions or be required, December 31, 2018 and 2017, respectively.
by law, to make contributions to its pension plans. Actual
results that differ from the estimates may result in more or less Income Taxes
future company funding into the pension plans than is planned The company is subject to income taxes in the U.S. and numerous
by management. Impacts of these types of changes on the foreign jurisdictions. Significant judgments are required in
company’s pension plans in other countries worldwide would determining the consolidated provision for income taxes.
vary depending upon the status of each respective plan.
During the ordinary course of business, there are many
In addition to the above, the company evaluates other pension transactions and calculations for which the ultimate tax
assumptions involving demographic factors, such as retirement determination is uncertain. As a result, the company recognizes
age and mortality, and updates these assumptions to reflect tax liabilities based on estimates of whether additional taxes and
experience and expectations for the future. Actual results in interest will be due. These tax liabilities are recognized when,
any given year can differ from actuarial assumptions because of despite the company’s belief that its tax return positions are
economic and other factors. supportable, the company believes that certain positions may not
be fully sustained upon review by tax authorities. The company
For additional information on the company’s pension plans and believes that its accruals for tax liabilities are adequate for all open
the development of these assumptions, see note T, “Retirement- audit years based on its assessment of many factors, including
Related Benefits,” on pages 127 to 141. past experience and interpretations of tax law. This assessment
relies on estimates and assumptions, and may involve a series
Revenue Recognition of complex judgments about future events. To the extent that
Application of GAAP related to the measurement and recognition new information becomes available which causes the company
of revenue requires the company to make judgments and to change its judgment regarding the adequacy of existing tax
estimates. Specifically, complex arrangements with nonstandard liabilities, such changes to tax liabilities will impact income tax
terms and conditions may require significant contract expense in the period in which such determination is made.
interpretation to determine the appropriate accounting, including
whether promised goods and services specified in an arrangement Significant judgment is also required in determining any valuation
are distinct performance obligations. Other significant judgments allowance recorded against deferred tax assets. In assessing
include determining whether IBM or a reseller is acting as the the need for a valuation allowance, management considers all
principal in a transaction and whether separate contracts should available evidence for each jurisdiction including past operating
be combined and considered part of one arrangement. results, estimates of future taxable income and the feasibility of
ongoing tax planning strategies. In the event that the company
Revenue recognition is also impacted by the company’s ability changes its determination as to the amount of deferred tax
to determine when a contract is probable of collection and to assets that can be realized, the company will adjust its valuation
estimate variable consideration, including, for example, rebates, allowance with a corresponding impact to income tax expense in
volume discounts, service-level penalties, and performance the period in which such determination is made.
bonuses. The company considers various factors when making
these judgments, including a review of specific transactions, The consolidated provision for income taxes will change period
historical experience and market and economic conditions. to period based on nonrecurring events, such as the settlement
Evaluations are conducted each quarter to assess the adequacy of income tax audits and changes in tax laws, as well as recurring
of the estimates. If the estimates were changed by 10 percent factors including the geographic mix of income before taxes,
in 2018, the impact on net income would have been immaterial. state and local taxes and the effects of various global income
tax strategies.
To the extent that the provision for income taxes increases/ Loss Contingencies
decreases by 1 percent of income from continuing operations The company is currently involved in various claims and legal
before income taxes, consolidated net income would have proceedings. At least quarterly, the company reviews the status
decreased/improved by $113 million in 2018. of each significant matter and assesses its potential financial
exposure. If the potential loss from any claim or legal proceeding is
Valuation of Assets considered probable and the amount can be reasonably estimated,
The application of business combination and impairment the company accrues a liability for the estimated loss. Significant
accounting requires the use of significant estimates and judgment is required in both the determination of probability
assumptions. The acquisition method of accounting for business and the determination as to whether an exposure is reasonably
combinations requires the company to estimate the fair value estimable. Because of uncertainties related to these matters,
of assets acquired including separately identifiable intangible accruals are based only on the best information available at the
assets, liabilities assumed, and any noncontrolling interest in time. As additional information becomes available, the company
the acquiree to properly allocate purchase price consideration. reassesses the potential liability related to its pending claims and
Impairment testing for assets, other than goodwill and indefinite- litigation, and may revise its estimates. These revisions in the
lived intangible assets, requires the allocation of cash flows to estimates of the potential liabilities could have a material impact
those assets or group of assets and if required, an estimate of fair on the company’s results of operations and financial position.
value for the assets or group of assets. The company’s estimates
are based upon assumptions believed to be reasonable, but which Global Financing Receivables Allowance for Credit Losses
are inherently uncertain and unpredictable. These valuations The Global Financing business reviews its financing receivables
require the use of management’s assumptions, which would not portfolio on a regular basis in order to assess collectibility and
reflect unanticipated events and circumstances that may occur. records adjustments to the allowance for credit losses at least
quarterly. A description of the methods used by management
Valuation of Goodwill to estimate the amount of uncollectible receivables is included
The company reviews goodwill for impairment annually and in note A, “Significant Accounting Policies,” on pages 76 to 88.
whenever events or changes in circumstances indicate the Factors that could result in actual receivable losses that are
carrying value of goodwill may not be recoverable. In 2018, materially different from the estimated reserve include significant
the company assessed the qualitative risk factors to determine changes in the economy, or a sudden change in the economic
whether it is more likely than not that the fair value of a reporting health of a significant client that represents a concentration in
unit is less than its carrying amount. Global Financing’s receivables portfolio.
The company assesses qualitative factors in each of its To the extent that actual collectibility differs from management’s
reporting units that carry goodwill including relevant events estimates currently provided for by 10 percent, Global
and circumstances that affect the fair value of reporting units. Financing’s segment pre-tax income and the company’s income
Examples include, but are not limited to, macroeconomic, from continuing operations before income taxes would be higher
industry and market conditions, as well as other individual factors or lower by an estimated $29 million depending upon whether
such as: the actual collectibility was better or worse, respectively, than
the estimates.
• A loss of key personnel;
• A significant adverse shift in the operating environment of Residual Value

the reporting unit such as unanticipated competition; Residual value represents the estimated fair value of equipment
under lease as of the end of the lease. Residual value estimates
• A significant pending litigation;
impact the determination of whether a lease is classified as
• A more likely than not expectation that a reporting unit or a operating or capital. Global Financing estimates the future fair
significant portion of a reporting unit will be sold or otherwise value of leased equipment by using historical models, analyzing
disposed of; and the current market for new and used equipment, and obtaining
forward-looking product information such as marketing plans
• An adverse action or assessment by a regulator.
and technological innovations. Residual value estimates are
periodically reviewed and “other than temporary” declines
The company assesses these qualitative factors to determine
in estimated future residual values are recognized upon
whether it is necessary to perform the two-step quantitative
identification. Anticipated increases in future residual values
goodwill impairment test. This quantitative test is required only
are not recognized until the equipment is remarketed.
if the company concludes that it is more likely than not that a
reporting unit’s fair value is less than its carrying amount. After
Factors that could cause actual results to materially differ from
performing the annual goodwill impairment qualitative analysis
the estimates include significant changes in the used-equipment
during the fourth quarter of 2018, the company determined it was
market brought on by unforeseen changes in technology innovations
not necessary to perform the two-step goodwill impairment test.
and any resulting changes in the useful lives of used equipment.
To the extent that actual residual value recovery is lower than For non-U.S. subsidiaries and branches that operate in U.S.
management’s estimates by 10 percent, Global Financing’s dollars or whose economic environment is highly inflationary,
segment pre-tax income and the company’s income from translation adjustments are reflected in results of operations.
continuing operations before income taxes for 2018 would have Generally, the company manages currency risk in these entities
been lower by an estimated $70 million. If the actual residual by linking prices and contracts to U.S. dollars.
value recovery is higher than management’s estimates, the
increase in income will be realized at the end of lease when the During 2018 there were reported economic events impacting
equipment is remarketed. the Argentinean economy, such as significant depreciation
of the Argentine peso, increases in interest rates and the
Currency Rate Fluctuations Argentine government requesting financial assistance from the
Changes in the relative values of non-U.S. currencies to the International Monetary Fund. The three-year cumulative inflation
U.S. dollar affect the company’s financial results and financial rates, using a combination of monthly indices, exceeded the 100
position. At December 31, 2018, currency changes resulted percent threshold for hyperinflation. As a result, effective July 1,
in assets and liabilities denominated in local currencies being 2018, the company changed the functional currency from local
translated into fewer dollars than at year-end 2017. The company currency to U.S. dollar functional for Argentina with no material
uses financial hedging instruments to limit specific currency risks impact. The ongoing impact from the change is not expected to
related to financing transactions and other foreign currency- be material given the size of the company’s operations in the
based transactions. country (less than 1 percent of total 2018 revenue).
During periods of sustained movements in currency, the Market Risk

marketplace and competition adjust to the changing rates. For In the normal course of business, the financial position of
example, when pricing offerings in the marketplace, the company the company is routinely subject to a variety of risks. In
may use some of the advantage from a weakening U.S. dollar to addition to the market risk associated with interest rate and
improve its position competitively, and price more aggressively to currency movements on outstanding debt and non-U.S. dollar
win the business, essentially passing on a portion of the currency denominated assets and liabilities, other examples of risk include
advantage to its customers. Competition will frequently take the collectibility of accounts receivable and recoverability of residual
same action. Consequently, the company believes that some of values on leased assets.
the currency-based changes in cost impact the prices charged to
clients. The company also maintains currency hedging programs The company regularly assesses these risks and has established
for cash management purposes which temporarily mitigate, policies and business practices to protect against the adverse
but do not eliminate, the volatility of currency impacts on the effects of these and other potential exposures. As a result, the
company’s financial results. company does not anticipate any material losses from these risks.
The company translates revenue, cost and expense in its non- The company’s debt, in support of the Global Financing business
U.S. operations at current exchange rates in the reported period. and the geographic breadth of the company’s operations,
References to “adjusted for currency” or “constant currency” contains an element of market risk from changes in interest and
reflect adjustments based upon a simple mathematical formula. currency rates. The company manages this risk, in part, through
However, this constant currency methodology that the company the use of a variety of financial instruments including derivatives,
utilizes to disclose this information does not incorporate any as described in note D, “Financial Instruments—Derivative
operational actions that management could take to mitigate Financial Instruments,” on pages 97 to 102.
fluctuating currency rates. Currency movements impacted the
company’s year-to-year revenue and earnings per share growth To meet disclosure requirements, the company performs a
in 2018. Based on the currency rate movements in 2018, total sensitivity analysis to determine the effects that market risk
revenue increased 0.6 percent as reported and was flat at exposures may have on the fair values of the company’s debt
constant currency versus 2017. On an income from continuing and other financial instruments.
operations before income taxes basis, these translation impacts
offset by the net impact of hedging activities resulted in a The financial instruments that are included in the sensitivity
theoretical maximum (assuming no pricing or sourcing actions) analysis are comprised of the company’s cash and cash
increase of approximately $300 million in 2018, on both an equivalents, marketable securities, short-term and long-term
as-reported basis and operating (non-GAAP) basis. The same loans, commercial financing and installment payment receivables,
mathematical exercise resulted in an increase of approximately investments, long-term and short-term debt and derivative
$100 million in 2017 on an as-reported basis and an operating financial instruments. The company’s derivative financial
(non-GAAP) basis. The company views these amounts as instruments generally include interest rate swaps, foreign
a theoretical maximum impact to its as-reported financial currency swaps and forward contracts.
results. Considering the operational responses mentioned
above, movements of exchange rates, and the nature and timing
of hedging instruments, it is difficult to predict future currency
impacts on any particular period, but the company believes it
could be substantially less than the theoretical maximum given
the competitive pressure in the marketplace.
To perform the sensitivity analysis, the company assesses the risk of Financing Risks
loss in fair values from the effect of hypothetical changes in interest See the “Description of Business” on page 25 for a discussion of
rates and foreign currency exchange rates on market-sensitive the financing risks associated with the Global Financing business
instruments. The market values for interest and foreign currency and management’s actions to mitigate such risks.
exchange risk are computed based on the present value of future
cash flows as affected by the changes in rates that are attributable Cybersecurity
to the market risk being measured. The discount rates used for the While cybersecurity risk can never be completely eliminated, the
present value computations were selected based on market interest company’s approach draws on the depth and breadth of its global
and foreign currency exchange rates in effect at December 31, 2018 capabilities, both in terms of its offerings to clients and its internal
and 2017. The differences in this comparison are the hypothetical approaches to risk management. The company offers commercial
gains or losses associated with each type of risk. solutions that deliver capabilities in areas such as identity and
access management, data security, application security, network
Information provided by the sensitivity analysis does not security and endpoint security. IBM’s solutions include pervasive
necessarily represent the actual changes in fair value that the encryption, security intelligence, analytics, cognitive and artificial
company would incur under normal market conditions because, intelligence, and forensic tools that can process information on
due to practical limitations, all variables other than the specific customer IT security events and vulnerabilities and provide
market risk factor are held constant. In addition, the results detailed information to customers about potential threats and
of the model are constrained by the fact that certain items security posture. The company also offers professional consulting
are specifically excluded from the analysis, while the financial and technical services solutions for security from assessment
instruments relating to the financing or hedging of those items and incident response to deployment and resource augmentation.
are included by definition. Excluded items include short-term In addition, the company offers managed and outsourced
and long-term receivables from sales-type and direct financing security solutions from multiple security operations centers
leases, forecasted foreign currency cash flows and the company’s around the world. Finally, security is embedded in a multitude
net investment in foreign operations. As a consequence, reported of IBM products and offerings through secure engineering and
changes in the values of some of the financial instruments operations, and by critical functions (encryption, access control,
impacting the results of the sensitivity analysis are not matched etc.) in servers, storage, software, services and other solutions.
with the offsetting changes in the values of the items that those
instruments are designed to finance or hedge. From an enterprise perspective, IBM implements a multi-faceted
risk-management approach to identify and address cybersecurity
The results of the sensitivity analysis at December 31, 2018 and risks. The company has established policies and procedures that
2017, are as follows: provide the foundation upon which IBM’s infrastructure and data
are managed. IBM performs ongoing assessments regarding its
Interest Rate Risk technical controls and its methods for identifying emerging risks
At December 31, 2018, a 10 percent decrease in the levels related to cybersecurity. The company uses a layered approach
of interest rates with all other variables held constant would with overlapping controls to defend against cybersecurity attacks
result in a decrease in the fair value of the company’s financial and threats on networks, end-user devices, servers, applications,
instruments of $422 million as compared with a decrease of data and cloud solutions. The company also has a security
$201 million at December 31, 2017. A 10 percent increase in monitoring program and a global incident response process to
the levels of interest rates with all other variables held constant respond to cybersecurity threats and attacks. In addition, the
would result in an increase in the fair value of the company’s company utilizes a combination of online training, educational
financial instruments of $408 million as compared to an increase tools, videos and other awareness initiatives to foster a culture
of $232 million at December 31, 2017. Changes in the relative of security awareness and responsibility among its workforce.
sensitivity of the fair value of the company’s financial instrument
portfolio for these theoretical changes in the level of interest Employees and Related Workforce
rates are primarily driven by changes in the company’s debt
(In thousands)
maturities, interest rate profile and amount.
For the year ended December 31: 2018
Foreign Currency Exchange Rate Risk IBM/wholly owned subsidiaries 350.6

At December 31, 2018, a 10 percent weaker U.S. dollar against Less-than-wholly owned subsidiaries 9.4
foreign currencies, with all other variables held constant, would Complementary 21.1
result in an increase in the fair value of the company’s financial
instruments of $697 million as compared with an increase of
$363 million at December 31, 2017. Conversely, a 10 percent As a globally integrated enterprise, the company operates in
stronger U.S. dollar against foreign currencies, with all other more than 175 countries and is continuing to shift its business
variables held constant, would result in a decrease in the fair to the higher value segments of enterprise IT. The company
value of the company’s financial instruments of $697 million continues to remix its skills and people needs to match the best
compared with a decrease of $363 million at December 31, 2017. opportunities in the marketplace.
The complementary workforce is an approximation of equivalent

full-time employees hired under temporary, part-time and
limited-term employment arrangements to meet specific
business needs in a flexible and cost-effective manner.
68 Report of Management
Management Responsibility Management’s Report on Internal Control

for Financial Information Over Financial Reporting
Responsibility for the integrity and objectivity of the financial Management is responsible for establishing and maintaining
information presented in this Annual Report rests with IBM adequate internal control over financial reporting of the company.
management. The accompanying financial statements have been Internal control over financial reporting is a process designed to
prepared in accordance with accounting principles generally provide reasonable assurance regarding the reliability of financial
accepted in the United States of America, applying certain reporting and the preparation of financial statements for external
estimates and judgments as required. purposes in accordance with accounting principles generally
accepted in the United States of America.
IBM maintains an effective internal control structure. It consists,
in part, of organizational arrangements with clearly defined lines The company’s internal control over financial reporting includes
of responsibility and delegation of authority, and comprehensive those policies and procedures that (i) pertain to the maintenance
systems and control procedures. An important element of the of records that, in reasonable detail, accurately and fairly reflect
control environment is an ongoing internal audit program. Our the transactions and dispositions of the assets of the company;
system also contains self-monitoring mechanisms, and actions (ii) provide reasonable assurance that transactions are recorded
are taken to correct deficiencies as they are identified. as necessary to permit preparation of financial statements in
accordance with accounting principles generally accepted in the
To assure the effective administration of internal controls, United States of America, and that receipts and expenditures
we carefully select and train our employees, develop and of the company are being made only in accordance with
disseminate written policies and procedures, provide appropriate authorizations of management and directors of the company;
communication channels and foster an environment conducive to and (iii) provide reasonable assurance regarding prevention or
the effective functioning of controls. We believe that it is essential timely detection of unauthorized acquisition, use, or disposition
for the company to conduct its business affairs in accordance of the company’s assets that could have a material effect on the
with the highest ethical standards, as set forth in the IBM financial statements.
Business Conduct Guidelines. These guidelines, translated into
numerous languages, are distributed to employees throughout Because of its inherent limitations, internal control over
the world, and reemphasized through internal programs to assure financial reporting may not prevent or detect misstatements.
that they are understood and followed. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
The Audit Committee of the Board of Directors is composed inadequate because of changes in conditions, or that the degree
solely of independent, non-management directors, and is of compliance with the policies or procedures may deteriorate.
responsible for recommending to the Board the independent
registered public accounting firm to be retained for the coming Management conducted an evaluation of the effectiveness of
year, subject to stockholder ratification. The Audit Committee internal control over financial reporting based on the criteria
meets regularly and privately with the independent registered established in Internal Control—Integrated Framework (2013)
public accounting firm, with the company’s internal auditors, as issued by the Committee of Sponsoring Organizations of the
well as with IBM management, to review accounting, auditing, Treadway Commission (COSO). Based on this evaluation,
internal control structure and financial reporting matters. management concluded that the company’s internal control
over financial reporting was effective as of December 31, 2018.
PricewaterhouseCoopers LLP, an independent registered public

accounting firm, is retained to audit IBM’s Consolidated Financial
Statements and the effectiveness of the internal control over
financial reporting. Its accompanying report is based on audits
conducted in accordance with the standards of the Public
Company Accounting Oversight Board (United States).
Virginia M. Rometty
Chairman, President and Chief Executive Officer
February 26, 2019
James J. Kavanaugh
Senior Vice President and Chief Financial Officer
February 26, 2019
Report of Independent Registered Public Accounting Firm 69
To the Board of Directors and Stockholders of Our audits of the consolidated financial statements included
International Business Machines Corporation: performing procedures to assess the risks of material
misstatement of the consolidated financial statements, whether
Opinions on the Financial Statements and Internal Control due to error or fraud, and performing procedures that respond
Over Financial Reporting to those risks. Such procedures included examining, on a test
We have audited the accompanying Consolidated Statement of basis, evidence regarding the amounts and disclosures in the
Financial Position of International Business Machines Corporation consolidated financial statements. Our audits also included
and its subsidiaries (the “Company”) as of December 31, 2018 evaluating the accounting principles used and significant
and 2017, and the related Consolidated Statements of Earnings, estimates made by management, as well as evaluating the
Comprehensive Income, Changes in Equity, and Cash Flows overall presentation of the consolidated financial statements.
for each of the three years in the period ended December 31, Our audit of internal control over financial reporting included
2018, including the related notes (collectively referred to as obtaining an understanding of internal control over financial
the “consolidated financial statements”). We also have audited reporting, assessing the risk that a material weakness exists, and
the Company’s internal control over financial reporting as of testing and evaluating the design and operating effectiveness
December 31, 2018, based on criteria established in Internal of internal control based on the assessed risk. Our audits also
Control—Integrated Framework (2013) issued by the Committee included performing such other procedures as we considered
of Sponsoring Organizations of the Treadway Commission (COSO). necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position Definition and Limitations of Internal Control over
of the Company as of December 31, 2018 and 2017, and the Financial Reporting
results of its operations and its cash flows for each of the three A company’s internal control over financial reporting is a process
years in the period ended December 31, 2018 in conformity with designed to provide reasonable assurance regarding the
accounting principles generally accepted in the United States reliability of financial reporting and the preparation of financial
of America. Also in our opinion, the Company maintained, in all statements for external purposes in accordance with generally
material respects, effective internal control over financial reporting accepted accounting principles. A company’s internal control
as of December 31, 2018, based on criteria established in Internal over financial reporting includes those policies and procedures
Control—Integrated Framework (2013) issued by the COSO. that (i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and
Basis for Opinions dispositions of the assets of the company; (ii) provide reasonable
The Company ’s management is responsible for these assurance that transactions are recorded as necessary to
consolidated financial statements, for maintaining effective permit preparation of financial statements in accordance with
internal control over financial reporting, and for its assessment generally accepted accounting principles, and that receipts and
of the effectiveness of internal control over financial reporting, expenditures of the company are being made only in accordance
included in the accompanying Management’s Report on with authorizations of management and directors of the company;
Internal Control over Financial Reporting appearing on page and (iii) provide reasonable assurance regarding prevention or
68. Our responsibility is to express opinions on the Company’s timely detection of unauthorized acquisition, use, or disposition
consolidated financial statements and on the Company’s internal of the company’s assets that could have a material effect on the
control over financial reporting based on our audits. We are a financial statements.
public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (PCAOB) and Because of its inherent limitations, internal control over
are required to be independent with respect to the Company financial reporting may not prevent or detect misstatements.
in accordance with the U.S. federal securities laws and the Also, projections of any evaluation of effectiveness to future
applicable rules and regulations of the Securities and Exchange periods are subject to the risk that controls may become
Commission and the PCAOB. inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
We conducted our audits in accordance with the standards of
the PCAOB. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether
the consolidated financial statements are free of material
misstatement, whether due to error or fraud, and whether PricewaterhouseCoopers LLP
effective internal control over financial reporting was maintained New York, New York
in all material respects. February 26, 2019
We, or firms that we have ultimately acquired, have served as

the Company’s auditor since 1923. For the period from 1923 to
1958, the Company was audited by firms that a predecessor firm
to PricewaterhouseCoopers LLP ultimately acquired.
70 Consolidated Statement of Earnings

For the year ended December 31: Notes 2018 2017 2016
Revenue
Services $51,350 $50,709 $51,268
Sales 26,641 26,715 26,942
Financing 1,599 1,715 1,710
Total revenue O 79,591 79,139 79,919
Cost
Services 34,059 33,811* 33,792*
Sales 7,464 7,175* 6,566*
Financing 1,132 1,210 1,044
Total cost 42,655 42,196* 41,403*
Gross profit 36,936 36,943* 38,516*
Expense and other (income)
Selling, general and administrative 19,366 19,680* 20,869*
Research, development and engineering P 5,379 5,590* 5,726*
Intellectual property and custom development income (1,026) (1,466) (1,631)
Other (income) and expense 1,152 1,125* 593*
Interest expense D&J 723 615 630
Total expense and other (income) 25,594 25,543* 26,186*
Income from continuing operations before income taxes 11,342 11,400 12,330
Provision for income taxes N 2,619 5,642 449
Income from continuing operations 8,723 5,758 11,881
Income/(loss) from discontinued operations, net of tax 5 (5) (9)
Net income $ 8,728 $ 5,753 $11,872
Earnings/(loss) per share of common stock
Assuming dilution
Continuing operations Q $ 9.51 $ 6.14 $ 12.39
Discontinued operations Q 0.01 0.00 (0.01)
Total Q $ 9.52 $ 6.14 $ 12.38
Basic
Continuing operations Q $ 9.56 $ 6.17 $ 12.44
Discontinued operations Q 0.01 0.00 (0.01)
Total Q $ 9.57 $ 6.17 $ 12.43
Weighted-average number of common shares outstanding
Assuming dilution 916,315,714 937,385,625 958,714,097
Basic 912,048,072 932,828,295 955,422,530
* Recast to reflect adoption of the FASB guidance on presentation of net periodic pension and nonpension postretirement benefit costs.
Amounts may not add due to rounding.
The accompanying notes on pages 76 through 146 are an integral part of the financial statements.
Consolidated Statement of Comprehensive Income 71
($ in millions)
For the year ended December 31: Notes 2018 2017 2016
Net income $ 8,728 $5,753 $11,872
Other comprehensive income/(loss), before tax
Foreign currency translation adjustments L (730) 152 (20)
Net changes related to available-for-sale securities L
Unrealized gains/(losses) arising during the period (2) 1 (38)
Reclassification of (gains)/losses to net income — 1 34
Total net changes related to available-for-sale securities (2) 2 (3)
Unrealized gains/(losses) on cash flow hedges L
Unrealized gains/(losses) arising during the period (136) (58) 243
Reclassification of (gains)/losses to net income 449 (363) 102
Total unrealized gains/(losses) on cash flow hedges 313 (421) 345
Retirement-related benefit plans L
Prior service costs/(credits) (182) 0 —
Net (losses)/gains arising during the period (2,517) 682 (2,490)
Curtailments and settlements 11 19 (16)
Amortization of prior service (credits)/costs (73) (88) (107)
Amortization of net (gains)/losses 2,966 2,889 2,764
Total retirement-related benefit plans 204 3,502 150
Other comprehensive income/(loss), before tax L (215) 3,235 472
Income tax (expense)/benefit related to items
of other comprehensive income L (262) (429) (263)
Other comprehensive income/(loss) L (476) 2,806 209
Total comprehensive income $ 8,252 $8,559 $12,081

72 Consolidated Statement of Financial Position

At December 31: Notes 2018 2017
Assets
Current assets
Cash and cash equivalents $ 11,379 $ 11,972
Restricted cash 225 262*
Marketable securities D 618 608
Notes and accounts receivable—trade (net of allowances of
$309 in 2018 and $297 in 2017) 7,432 8,928
Short-term financing receivables (net of allowances of $244 in 2018 and $261 in 2017) F 22,388 21,721
Other accounts receivable (net of allowances of $38 in 2018 and $36 in 2017) 743 981
Inventories E 1,682 1,583
Deferred costs O 2,300 1,820**
Prepaid expenses and other current assets 2,378 1,860* **
Total current assets 49,146 49,735
Property, plant and equipment G 32,460 32,331
Less: Accumulated depreciation G 21,668 21,215
Property, plant and equipment—net G 10,792 11,116
Long-term financing receivables (net of allowances of $48 in 2018 and $74 in 2017) F 9,148 9,550
Prepaid pension assets T 4,666 4,643
Deferred costs O 2,676 2,136**
Deferred taxes N 5,216 4,862
Goodwill I 36,265 36,788
Intangible assets—net I 3,087 3,742
Investments and sundry assets H 2,386 2,783**
Total assets $ 123,382 $ 125,356
Liabilities and equity
Current liabilities
Taxes N $ 3,046 $ 4,219
Short-term debt D&J 10,207 6,987
Accounts payable 6,558 6,451
Compensation and benefits 3,310 3,644
Deferred income 11,165 11,552
Other accrued expenses and liabilities 3,941 4,510
Total current liabilities 38,227 37,363
Long-term debt D&J 35,605 39,837
Retirement and nonpension postretirement benefit obligations T 17,002 16,720
Deferred income 3,445 3,746
Other liabilities K 12,174 9,965
Total liabilities 106,452 107,631
Contingencies and commitments M
Equity L
IBM stockholders’ equity
Common stock, par value $.20 per share, and additional paid-in capital 55,151 54,566
Shares authorized: 4,687,500,000
Shares issued (2018—2,233,427,058; 2017—2,229,428,813)
Retained earnings 159,206 153,126
Treasury stock, at cost (shares: 2018—1,340,947,648; 2017—1,307,249,588) (168,071) (163,507)
Accumulated other comprehensive income/(loss) (29,490) (26,592)
Total IBM stockholders’ equity 16,796 17,594
Noncontrolling interests A 134 131
Total equity 16,929 17,725
Total liabilities and equity $ 123,382 $ 125,356
**Recast to reflect adoption of the FASB guidance on restricted cash.

**Recast to conform to current period presentation.
Consolidated Statement of Cash Flows 73
($ in millions)
Cash flows from operating activities
Net income $ 8,728 $ 5,753 $11,872
Adjustments to reconcile net income to cash provided by operating activities
Depreciation 3,127 3,021 2,837
Amortization of intangibles 1,353 1,520 1,544
Stock-based compensation 510 534 544
Deferred taxes 853 (931) (1,132)
Net (gain)/loss on asset sales and other 123 14 62
Change in operating assets and liabilities, net of acquisitions/divestitures
Receivables (including financing receivables) 1,006 1,297 712
Retirement related 1,368 1,014 54
Inventories (127) 18 (14)
Other assets/other liabilities (1,819) 4,437 408
Accounts payable 126 47 197
Net cash provided by operating activities 15,247 16,724 17,084
Cash flows from investing activities
Payments for property, plant and equipment (3,395) (3,229) (3,567)
Proceeds from disposition of property, plant and equipment 248 460 424
Investment in software (569) (544) (583)
Purchases of marketable securities and other investments (7,041) (4,949)* (5,853)*
Proceeds from disposition of marketable securities and other investments 6,487 3,910 5,692
Non-operating finance receivables—net (503) (2,028) (891)
Acquisition of businesses, net of cash acquired (139) (496) (5,696)*
Divestiture of businesses, net of cash transferred — (205) (454)
Net cash used in investing activities (4,913) (7,081)* (10,928)*
Cash flows from financing activities
Proceeds from new debt 6,891 9,643 9,132
Payments to settle debt (8,533) (6,816) (6,395)
Short-term borrowings/(repayments) less than 90 days—net 1,341 620 26
Common stock repurchases (4,443) (4,340) (3,502)
Common stock repurchases for tax withholdings (171) (193) (126)
Financing—other 111 175 204
Cash dividends paid (5,666) (5,506) (5,256)
Net cash used in financing activities (10,469) (6,418) (5,917)
Effect of exchange rate changes on cash, cash equivalents and restricted cash (495) 937 (51)
Net change in cash, cash equivalents and restricted cash (630) 4,161* 188*
Cash, cash equivalents and restricted cash at January 1 12,234 8,073* 7,885*
Cash, cash equivalents and restricted cash at December 31 $ 11,604 $12,234* $ 8,073*
Supplemental data
Income taxes paid—net of refunds received $ 1,745 $ 1,597 $ 1,078
Interest paid on debt $ 1,423 $ 1,208 $ 1,158

74 Consolidated Statement of Changes in Equity
($ in millions)
Common Accumulated
Stock and Other Total IBM Non-
Additional Retained Treasury Comprehensive Stockholders’ Controlling Total
Paid-In Capital Earnings Stock Income/(Loss) Equity Interests Equity
2016
Equity, January 1, 2016 $53,262 $146,124 $(155,518) $(29,607) $14,262 $162 $14,424
Net income plus other
comprehensive income/(loss)
Net income 11,872 11,872 11,872
Other comprehensive
income/(loss) 209 209 209
Total comprehensive income/(loss) $12,081 $12,081
Cash dividends paid—
common stock ($5.50 per share) (5,256) (5,256) (5,256)
Common stock issued under
employee plans
(3,893,366 shares) 695 695 695
Purchases (854,365 shares)
and sales (383,077 shares)
of treasury stock under
employee plans—net 18 (77) (59) (59)
Other treasury shares purchased,
not retired (23,283,400 shares) (3,455) (3,455) (3,455)
Changes in other equity (22) 0 (22) (22)
Changes in noncontrolling interests (16) (16)
Equity, December 31, 2016 $53,935 $152,759 $(159,050) $(29,398) $18,246 $146 $18,392

($ in millions)
Common Accumulated
2017
Equity, January 1, 2017 $53,935 $152,759 $(159,050) $(29,398) $18,246 $146 $18,392
Cumulative effect of change in
accounting principle* 102 102 102
Net income 5,753 5,753 5,753
Other comprehensive
income/(loss) 2,806 2,806 2,806
Total comprehensive income/(loss) $ 8,559 $ 8,559
employee plans
(4,311,998 shares) 631 631 631
Purchases (1,226,080 shares)
Changes in other equity 0 0 0
Changes in noncontrolling interests (15) (15)
Equity, December 31, 2017 $54,566 $153,126 $(163,507) $(26,592) $17,594 $131 $17,725
* Reflects the adoption of the FASB guidance on intra-entity transfers of assets.

Consolidated Statement of Changes in Equity 75
($ in millions)
Common Accumulated
2018
Equity, January 1, 2018 $54,566 $153,126 $(163,507) $(26,592) $17,594 $131 $17,725
Cumulative effect of changes in
accounting principle
Revenue* 580 580 580
Stranded tax effects/other* 2,422 (2,422)
Net income 8,728 8,728 8,728
Other comprehensive
income/(loss) (476) (476) (476)
Total comprehensive income/(loss) $ 8,252 $ 8,252
employee plans
(3,998,245 shares) 585 585 585
Purchases (1,173,416 shares)
Changes in other equity 0 0 0 0
Changes in noncontrolling interests 3 3
Equity, December 31, 2018 $55,151 $159,206 $(168,071) $(29,490) $16,796 $134 $16,929
* Reflects the adoption of FASB guidance. Refer to note B, “Accounting Changes.”

76 Notes to Consolidated Financial Statements
NOTE A. SIGNIFICANT ACCOUNTING POLICIES (VIEs) are included in the Consolidated Financial Statements, if
Basis of Presentation required. Investments in business entities in which the company
The accompanying Consolidated Financial Statements and does not have control, but has the ability to exercise significant
footnotes of the International Business Machines Corporation influence over operating and financial policies, are accounted for
(IBM or the company) have been prepared in accordance with using the equity method and the company’s proportionate share
accounting principles generally accepted in the United States of of income or loss is recorded in other (income) and expense. The
America (GAAP). accounting policy for other investments in equity securities is
described on pages 86 and 87 within “Marketable Securities.”
Within the financial statements and tables presented, certain Equity investments in non-publicly traded entities lacking
columns and rows may not add due to the use of rounded controlling financial interest or significant influence are primarily
numbers for disclosure purposes. Percentages presented are measured at cost, net of impairment, if any. All intercompany
calculated from the underlying whole-dollar amounts. Certain transactions and accounts have been eliminated in consolidation.
prior year amounts have been reclassified to conform to the
current year presentation. This is annotated where applicable. Use of Estimates
The preparation of financial statements in conformity with GAAP
On December 22, 2017, the Tax Cuts and Jobs Act (U.S. tax requires management to make estimates and assumptions that
reform) was enacted in the U.S. This Act introduced many affect the amounts of assets, liabilities, revenue, costs, expenses
changes, including lowering the U.S. corporate tax rate to 21 and other comprehensive income/(loss) (OCI) that are reported
percent, changes in incentives, provisions to prevent U.S. base in the Consolidated Financial Statements and accompanying
erosion and significant changes in the taxation of international disclosures. These estimates are based on management’s best
income, including provisions which allow for the repatriation of knowledge of current events, historical experience, actions
foreign earnings without U.S. tax. that the company may undertake in the future and on various
other assumptions that are believed to be reasonable under the
The enactment of U.S. tax reform resulted in a provisional charge circumstances. As a result, actual results may be different from
of $5.5 billion to tax expense in the fourth-quarter and year- these estimates. See “Critical Accounting Estimates” on pages 63
ended December 31, 2017. The charge was primarily the result to 66 for a discussion of the company’s critical accounting estimates.
of the one-time U.S. transition tax, and any foreign tax costs on
undistributed foreign earnings, as well as the remeasurement Revenue
of deferred tax balances to the new U.S. federal tax rate. During Effective January 1, 2018, the company adopted the new
the fourth quarter of 2018, the accounting for impacts of U.S. accounting standard related to the recognition of revenue in
tax reform was completed and the effects of measurement contracts with customers under the modified retrospective
period adjustments were recognized as a charge to tax expense transition method. This method was applied to contracts that
of $1.9 billion and $2.0 billion in the fourth quarter and year were not complete as of the date of initial application. The
ended December 31, 2018, respectively. The 2018 charges were impact related to adopting the new standard was not material.
primarily attributable to the election to include Global Intangible Certain changes resulting from adopting the new standard,
Low-Taxed Income (GILTI) in measuring deferred taxes, in such as terminology differences, impacted the company’s
addition to refinements to the one-time U.S. transition tax and description of its significant accounting policies in 2018.
foreign tax costs on undistributed foreign earnings. Refer to note For further information regarding the adoption of the new standard,
N, “Taxes,” on pages 117 to 119 for additional information. see note B, “Accounting Changes,” on pages 89 to 91, and
note O, “Revenue Recognition,” on pages 120 to 122.
Noncontrolling interest amounts of $17 million, $17 million and $16
million, net of tax, for the years ended December 31, 2018, 2017 The company accounts for a contract with a client when it has
and 2016, respectively, are included as a reduction within other written approval, the contract is committed, the rights of the
(income) and expense in the Consolidated Statement of Earnings. parties, including payment terms, are identified, the contract has
commercial substance and consideration is probable of collection.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of Revenue is recognized when, or as, control of a promised product
IBM and its controlled subsidiaries, which are primarily majority or service transfers to a client, in an amount that reflects the
owned. Any noncontrolling interest in the equity of a subsidiary consideration to which the company expects to be entitled
is reported in Equity in the Consolidated Statement of Financial in exchange for transferring those products or services. If
Position. Net income and losses attributable to the noncontrolling the consideration promised in a contract includes a variable
interest is reported as described above in the Consolidated amount, the company estimates the amount to which it expects
Statement of Earnings. The accounts of variable interest entities to be entitled using either the expected value or most likely
amount method. The company’s contracts may include terms
that could cause variability in the transaction price, including,
for example, rebates, volume discounts, service-level penalties,
and performance bonuses or other forms of contingent revenue.
Notes to Consolidated Financial Statements 77
The company only includes estimated amounts in the The company reports revenue net of any revenue-based taxes
transaction price to the extent it is probable that a significant assessed by governmental authorities that are imposed on and
reversal of cumulative revenue recognized will not occur when concurrent with specific revenue-producing transactions.
the uncertainty associated with the variable consideration is
resolved. The company may not be able to reliably estimate In addition to the aforementioned general policies, the following
contingent revenue in certain long-term arrangements due to are the specific revenue recognition policies for arrangements
uncertainties that are not expected to be resolved for a long with multiple performance obligations and for each major
period of time or when the company’s experience with similar category of revenue.
types of contracts is limited. The company’s arrangements
infrequently include contingent revenue. Estimates of variable Arrangements with Multiple Performance Obligations
consideration and the determination of whether to include The company’s global capabilities as a cognitive solutions and
estimated amounts in the transaction price are based on cloud platform company include services, software, hardware
all information (historical, current and forecasted) that is and related financing. The company enters into revenue
reasonably available to the company, taking into consideration arrangements that may consist of any combination of these
the type of client, the type of transaction and the specific facts products and services based on the needs of its clients. For
and circumstances of each arrangement. Changes in estimates example, a client may purchase a server that includes operating
of variable consideration are included in note O, “Revenue system software. In addition, the arrangement may include
Recognition,” on pages 120 to 122. post-contract support for the software and a contract for post-
warranty maintenance service for the hardware. These types
The company’s standard billing terms are that payment is due upon of arrangements may also include financing provided by the
receipt of invoice, payable within 30 days. Invoices are generally company. These arrangements consist of multiple products and
issued as control transfers and/or as services are rendered. services, whereby the hardware and software may be delivered in
Additionally, in determining the transaction price, the company one period and the software support and hardware maintenance
adjusts the promised amount of consideration for the effects of services are delivered over time. In another example, the
the time value of money if the billing terms are not standard and company may assist the client in building and running an
the timing of payments agreed to by the parties to the contract enterprise information technology (IT) environment utilizing a
provide the client or the company with a significant benefit private cloud on a long-term basis and the client periodically
of financing, in which case the contract contains a significant purchases hardware and/or software products from the company
financing component. As a practical expedient, the company to upgrade or expand the facility. The services delivered on
does not account for significant financing components if the period the cloud are provided on a continuous basis across multiple
between when the company transfers the promised product or reporting periods, and the hardware and software products are
service to the client and when the client pays for that product or provided in each period the products are purchased.
service will be one year or less. Most arrangements that contain a
financing component are financed through the company’s Global The company continues to build new products and offerings
Financing business and include explicit financing terms. and continuously reinvent its platforms and delivery methods,
including through the use of cloud and as-a-Service models.
The company may include subcontractor services or third-party These are not separate businesses; they are offerings across
vendor equipment or software in certain integrated services the segments that address market opportunities in analytics,
arrangements. In these types of arrangements, revenue from data, cloud and security. Revenue from these offerings follows
sales of third-party vendor products or services is recorded the specific revenue recognition policies for arrangements with
net of costs when the company is acting as an agent between multiple performance obligations and for each major category of
the client and the vendor, and gross when the company is the revenue, depending on the type of offering, which are comprised
principal for the transaction. To determine whether the company of services, hardware and/or software.
is an agent or principal, the company considers whether it obtains
control of the products or services before they are transferred To the extent that a product or service in multiple performance
to the customer. In making this evaluation, several factors are obligation arrangements is subject to other specific accounting
considered, most notably whether the company has primary guidance, such as leasing guidance, that product or service is
responsibility for fulfillment to the client, as well as inventory accounted for in accordance with such specific guidance. For all
risk and pricing discretion. other products or services in these arrangements, the criteria
below are considered to determine when the products or services
The company recognizes revenue on sales to solution providers, are distinct and how to allocate the arrangement consideration to
resellers and distributors (herein referred to as resellers) when each distinct performance obligation. A performance obligation
the reseller has economic substance apart from the company is a promise in a contract with a client to transfer products or
and the reseller is considered the principal for the transaction services that are distinct. If the company enters into two or
with the end-user client.
more contracts at or near the same time, the contracts may with an alternative use and the company has an enforceable right
be combined and accounted for as one contract, in which case to payment plus a reasonable profit for performance completed
the company determines whether the products or services in to date. In most other services arrangements, the performance
the combined contract are distinct. A product or service that is obligation is satisfied over time because the client simultaneously
promised to a client is distinct if both of the following criteria receives and consumes the benefits provided as the company
are met: performs the services.
• The client can benefit from the product or service either on

In outsourcing , other managed ser vices, application
its own or together with other resources that are readily
management, GPS and other cloud-based services arrangements,
available to the client (that is, the product or service is
the company determines whether the services performed during
capable of being distinct); and
the initial phases of the arrangement, such as setup activities, are
• The company’s promise to transfer the product or service to distinct. In most cases, the arrangement is a single performance
the client is separately identifiable from other promises in obligation comprised of a series of distinct services that are
the contract (that is, the product or service is distinct within substantially the same and that have the same pattern of transfer
the context of the contract). (i.e., distinct days of service). The company applies a measure
of progress (typically time-based) to any fixed consideration and
If these criteria are not met, the company determines an allocates variable consideration to the distinct periods of service
appropriate measure of progress based on the nature of based on usage. As a result, revenue is generally recognized over
its overall promise for the single performance obligation. the period the services are provided on a usage basis. This results
When products and services are distinct, the arrangement in revenue recognition that corresponds with the value to the
consideration is allocated to each performance obligation on a client of the services transferred to date relative to the remaining
relative standalone selling price basis. The revenue policies in services promised.
the Services, Hardware and/or Software sections below are then
applied to each performance obligation, as applicable. Revenue from time-and-material contracts is recognized on an
output basis as labor hours are delivered and/or direct expenses
To the extent the company grants the customer the option are incurred. Revenue from as-a-Service type contracts, such as
to acquire additional products or services in one of these Infrastructure-as-a-Service, is recognized either on a straight-
arrangements, the company accounts for the option as a distinct line basis or on a usage basis, depending on the terms of the
performance obligation in the contract only if the option provides arrangement (such as whether the company is standing ready to
a material right to the customer that it would not receive without perform or whether the contract has usage-based metrics). If the
entering into the contract (e.g., a discount incremental to the as-a-Service contract includes setup activities, those promises in
range of discounts typically given for the product or service), in the arrangement are evaluated to determine if they are distinct.
which case the client in effect pays in advance for the option to
purchase future products or services. The company recognizes Revenue related to maintenance and support services and
revenue when those future products or services are transferred extended warranty is recognized on a straight-line basis over the
or when the option expires. period of performance because the company is standing ready
to provide services.
Services
The company’s primary services offerings include infrastructure In fixed-price design and build contracts, revenue is recognized
services, including outsourcing, and other managed services; based on progress toward completion of the performance
application management services; global process services obligation using a cost-to-cost measure of progress (i.e.,
(GPS); maintenance and support; and consulting, including the percentage-of-completion (POC) method of accounting ).
design and development of complex IT systems to a client’s Revenue is recognized based on the labor costs incurred to
specifications (e.g., design and build). Many of these services can date as a percentage of the total estimated labor costs to fulfill
be delivered entirely or partially through cloud or as-a-Service the contract. Due to the nature of the work performed in these
delivery models. The company’s services are provided on a time- arrangements, the estimation of cost at completion is complex,
and-material basis, as a fixed-price contract or as a fixed-price subject to many variables and requires significant judgment.
per measure of output contract and the contract terms range Key factors reviewed by the company to estimate costs to
from less than one year to over 10 years. complete each contract are future labor and product costs and
expected productivity efficiencies. If circumstances arise that
In services arrangements, the company typically satisfies the change the original estimates of revenues, costs, or extent of
performance obligation and recognizes revenue over time. In progress toward completion, revisions to the estimates are
design and build arrangements, the performance obligation is made. These revisions may result in increases or decreases in
satisfied over time either because the client controls the asset estimated revenues or costs, and such revisions are reflected in
as it is created (e.g., when the asset is built at the customer site) revenue on a cumulative catch-up basis in the period in which the
or because the company’s performance does not create an asset circumstances that gave rise to the revision become known by
the company. Refer to note O, “Revenue Recognition,” on pages
120 to 122 for the amount of revenue recognized in the reporting
period on a cumulative catch-up basis (i.e., from performance
obligations satisfied, or partially satisfied, in previous periods).
The company performs ongoing profitability analyses of its accrued when the corresponding revenue is recognized. Shipping
design and build services contracts accounted for using a cost- and handling activities that occur after the client has obtained
to-cost measure of progress in order to determine whether the control of a product are accounted for as an activity to fulfill
latest estimates of revenues, costs and profits require updating. the promise to transfer the product rather than as an additional
If at any time these estimates indicate that the contract will be promised service and, therefore, no revenue is deferred and
unprofitable, the entire estimated loss for the remainder of the recognized over the shipping period.
contract is recorded immediately. For other types of services
contracts, any losses are recorded as incurred. Software
The company’s software offerings include solutions software,
In some services contracts, the company bills the client prior which contains many of the company’s strategic areas including
to recognizing revenue from performing the services. Deferred analytics, data and security; transaction processing software,
income of $5,424 million and $5,870 million at December 31, which primarily runs mission-critical systems for clients;
2018 and 2017, respectively, is included in the Consolidated integration software, which helps clients to create, connect and
Statement of Financial Position. In other services contracts, the optimize their applications data and infrastructure; and operating
company performs the services prior to billing the client. When systems software, which provides operating systems for IBM Z
the company performs services prior to billing the client in design and Power Systems hardware. Many of these offerings can be
and build contracts, the right to consideration is typically subject delivered entirely or partially through as-a-Service or cloud
to milestone completion or client acceptance and, beginning delivery models, while others are delivered as on-premise
January 1, 2018, the unbilled accounts receivable is classified software licenses.
as a contract asset. At December 31, 2018 and January 1, 2018,
contract assets for services contracts of $421 million and $471 Revenue from perpetual (one-time charge) license software is
million, respectively, are included in prepaid expenses and recognized at a point in time at the inception of the arrangement
other current assets in the Consolidated Statement of Financial when control transfers to the client, if the software license is
Position. The remaining amount of unbilled accounts receivable distinct from the post-contract support offered by the company.
of $1,075 million and $1,756 million at December 31, 2018 and In limited circumstances, when the software requires continuous
2017, respectively, is included in notes and accounts receivable— updates to provide the intended functionality, the software license
trade in the Consolidated Statement of Financial Position. and post-contract support are not distinct and revenue for the
single performance obligation is recognized over time as the post-
Billings usually occur in the month after the company performs contract support is provided. This is only applicable to certain
the services or in accordance with specific contractual provisions. security software perpetual licenses offered by the company.
Prior to the adoption of the new revenue standard, the company
Hardware recognized revenue for these software licenses at a point in time
The company’s hardware offerings include the sale or lease of at the inception of the arrangement. This change did not have a
system servers and storage solutions. These products can also material impact on the company’s financial statements.
be delivered through as-a-Service or cloud delivery models, such
as Storage-as-a-Service. The company also offers installation Revenue from post-contract support is recognized over the
services for its more complex hardware products. Hardware contract term on a straight-line basis because the company is
offerings are often sold with distinct maintenance services, providing a service of standing ready to provide support, when-
described under the Services section above. and-if needed, and is providing unspecified software upgrades
on a when-and-if available basis over the contract term.
Revenue from hardware sales is recognized when control has
transferred to the customer which typically occurs when the Revenue from software hosting or Software-as-a-Service
hardware has been shipped to the client, risk of loss has transferred arrangements is recognized either on a straight-line basis or
to the client and the company has a present right to payment for on a usage basis as described in the Services section above. In
the hardware. In limited circumstances when a hardware sale software hosting arrangements, the rights provided to the client
includes client acceptance provisions, revenue is recognized either (e.g., ownership of a license, contract termination provisions and
when client acceptance has been obtained, client acceptance the feasibility of the client to operate the software) are considered
provisions have lapsed, or the company has objective evidence in determining whether the arrangement includes a license. In
that the criteria specified in the client acceptance provisions arrangements that include a software license, the associated
have been satisfied. Revenue from hardware sales-type leases revenue is recognized in accordance with the software license
is recognized at the beginning of the lease term. Revenue from recognition policy above rather than over time as a service.
rentals and operating leases is recognized on a straight-line basis
over the term of the rental or lease. Revenue from term license software is recognized at a point in
time for the committed term of the contract (which is typically one
Revenue from as-a-Service arrangements is recognized either month due to client termination rights). However, if the amount
on a straight-line basis or on a usage basis as described in the of consideration to be paid in exchange for the license depends
Services section above. Installation services are accounted for on client usage, revenue is recognized when the usage occurs.
as distinct performance obligations with revenue recognized as
the services are performed. Any cost of standard warranties is
Financing includes anticipated contract renewals or extensions, consistent

Financing income attributable to sales-type leases, direct with the transfer to the client of the services to which the asset
financing leases and loans is recognized on the accrual basis relates. Additionally, fixed assets associated with these contracts
using the effective interest method. Operating lease income is are capitalized and depreciated on a straight-line basis over the
recognized on a straight-line basis over the term of the lease. expected useful life of the asset. If an asset is contract specific,
then the depreciation period is the shorter of the useful life
Standalone Selling Price of the asset or the contract term. Amounts paid to clients in
The company allocates the transaction price to each performance excess of the fair value of acquired assets used in outsourcing
obligation on a relative standalone selling price basis. The arrangements are deferred and amortized on a straight-line
standalone selling price (SSP) is the price at which the company basis as a reduction of revenue over the expected period of
would sell a promised product or service separately to a client. benefit. The company performs periodic reviews to assess the
In most cases, the company is able to establish SSP based on recoverability of deferred contract transition and setup costs.
the observable prices of products or services sold separately This review is done by comparing the carrying amount of the asset
in comparable circumstances to similar clients. The company to the remaining amount of consideration the company expects
typically establishes a standalone selling price range for its to receive for the services to which the asset relates, less the
products and services which are reassessed on a periodic basis costs that relate directly to providing those services that have
or when facts and circumstances change. not yet been recognized. If the carrying amount is deemed not
recoverable, an impairment loss is recognized. Refer to note O,
In certain instances, the company may not be able to establish “Revenue Recognition,” on pages 120 to 122 for the amount of
a SSP range based on observable prices and the company deferred costs to fulfill a contract at December 31, 2018.
estimates SSP. The company estimates SSP by considering
multiple factors including, but not limited to, overall market In situations in which an outsourcing contract is terminated,
conditions, including geographic or regional specific factors, the terms of the contract may require the client to reimburse
competitive positioning, competitor actions, internal costs, the company for the recovery of unbilled accounts receivable,
profit objectives and pricing practices. Additionally, in certain unamortized deferred costs incurred to purchase specific assets
circumstances, the company may estimate SSP for a product or utilized in the delivery of services and to pay any additional costs
service by applying the residual approach. This approach has incurred by the company to transition the services.
been most commonly used when certain perpetual software
licenses are only sold bundled with one year of post-contract Software Costs
support and a price has not been established for the software. Costs that are related to the conceptual formulation and design
Estimating SSP is a formal process that includes review and of licensed software programs are expensed as incurred to
approval by the company’s management. research, development and engineering expense; costs that
are incurred to produce the finished product after technological
Services Costs feasibility has been established are capitalized as an intangible
Recurring operating costs for services contracts are recognized asset. Capitalized amounts are amortized on a straight-line
as incurred. For fixed-price design and build contracts, the costs basis over periods ranging up to three years and are recorded
of external hardware and software accounted for under the in software cost within cost of sales. The company performs
cost-to-cost measure of progress are deferred and recognized periodic reviews to ensure that unamortized program costs
based on the labor costs incurred to date (i.e., the measure of remain recoverable from future revenue. Costs to support or
progress), as a percentage of the total estimated labor costs service licensed programs are charged to software cost within
to fulfill the contract as control transfers over time for these cost of sales as incurred.
performance obligations. Certain eligible, nonrecurring costs
incurred in the initial phases of outsourcing contracts and The company capitalizes certain costs that are incurred to
other cloud-based services contracts (i.e., setup costs) are purchase or to create and implement internal-use software
capitalized when the costs relate directly to the contract, the programs, including software coding, installation, testing and
costs generate or enhance resources of the company that will be certain data conversions. Internal-use software programs also
used in satisfying the performance obligation in the future, and include software used by the company to deliver Software-as-a-
the costs are expected to be recovered. These costs consist of Service when the client does not receive a license to the software
transition and setup costs related to the installation of systems and the company has no substantive plans to market the software
and processes and other deferred fulfillment costs, including, externally. Capitalized costs are amortized on a straight-line
prepaid assets used in services contracts (i.e., prepaid software basis over periods ranging up to three years and are recorded
or prepaid maintenance), and other deferred fulfillment costs in selling, general and administrative expense or cost of sales,
eligible for capitalization. Capitalized costs are amortized on a depending on whether the software is used by the company in
straight-line basis over the expected period of benefit, which revenue generating transactions.
Certain eligible, nonrecurring costs incurred in the initial phases Standard Warranty Liability
of arrangements in which IBM provides Software-as-a-Service
($ in millions)
are deferred and amortized over the expected period of benefit,
2018 2017
which includes anticipated contract renewals or extensions,
consistent with the policy described for Services Costs. Recurring Balance at January 1 $ 152 $ 156
operating costs in these contracts are recognized as incurred. Current period accruals 121 172
Accrual adjustments to reflect experience (32) (10)
Incremental Costs of Obtaining a Contract  Charges incurred (123) (165)
Incremental costs of obtaining a contract (e.g., sales Balance at December 31 $ 118 $ 152
commissions) are capitalized and amortized on a straight-
line basis over the expected customer relationship period if
the company expects to recover those costs. The company Extended Warranty Liability (Deferred Income)
previously expensed these costs as incurred. The expected
($ in millions)
customer relationship period is determined based on the average
customer relationship period, including expected renewals, for 2018 2017
each offering type and ranges from three to six years. Expected Balance at January 1 $ 566 $ 531
renewal periods are only included in the expected customer Revenue deferred for new extended
relationship period if commission amounts paid upon renewal warranty contracts 220 267
are not commensurate with amounts paid on the initial contract. Amortization of deferred revenue (240) (260)
Incremental costs of obtaining a contract include only those Other* (13) 28
costs the company incurs to obtain a contract that it would not Balance at December 31 $ 533 $ 566
have incurred if the contract had not been obtained. The company
Current portion $ 271 $ 277
has determined that certain commission programs meet the
Noncurrent portion $ 262 $ 289
requirements to be capitalized. Some commission programs are
not subject to capitalization as the commission expense is paid * Other consists primarily of foreign currency translation adjustments.
and recognized as the related revenue is recognized. Additionally,
as a practical expedient, the company expenses costs to obtain a Shipping and Handling
contract as incurred if the amortization period would have been Costs related to shipping and handling are recognized as incurred
a year or less. These costs are included in selling, general and and included in cost in the Consolidated Statement of Earnings.
administrative expenses.
Expense and Other Income
Product Warranties  Selling, General and Administrative
The company offers warranties for its hardware products that Selling, general and administrative (SG&A) expense is charged
generally range up to three years, with the majority being either to income as incurred, except for certain sales commissions,
one or three years. Estimated costs for standard warranty which are capitalized and amortized as of January 1, 2018. For
terms are recognized when revenue is recorded for the related further information regarding capitalizing sales commissions, see
product. The company estimates its warranty costs standard “Incremental Costs of Obtaining a Contract” above. Expenses
to the product based on historical warranty claim experience of promoting and selling products and services are classified as
and estimates of future spending, and applies this estimate to selling expense and, in addition to sales commissions, include
the revenue stream for products under warranty. Estimated such items as compensation, advertising and travel. General and
future costs for warranties applicable to revenue recognized in administrative expense includes such items as compensation,
the current period are charged to cost of sales. The warranty legal costs, office supplies, non-income taxes, insurance and
liability is reviewed quarterly to verify that it properly reflects the office rental. In addition, general and administrative expense
remaining obligation based on the anticipated expenditures over includes other operating items such as an allowance for credit
the balance of the obligation period. Adjustments are made when losses, workforce rebalancing charges for contractually obligated
actual warranty claim experience differs from estimates. Costs payments to employees terminated in the ongoing course of
from fixed-price support or maintenance contracts, including business, acquisition costs related to business combinations,
extended warranty contracts, are recognized as incurred. amortization of certain intangible assets and environmental
remediation costs.
Revenue from extended warranty contracts is initially recorded
as deferred income and subsequently recognized on a straight-
line basis over the delivery period because the company is
providing a service of standing ready to provide services over
such term. Changes in deferred income for extended warranty
contracts, and in the warranty liability for standard warranties,
which are included in other accrued expenses and liabilities
and other liabilities in the Consolidated Statement of Financial
Position, are presented in the following tables:
Advertising and Promotional Expense Other (Income) and Expense

The company expenses advertising and promotional costs as Other (income) and expense includes interest income (other
incurred. Cooperative advertising reimbursements from vendors than from Global Financing external transactions), gains and
are recorded net of advertising and promotional expense in losses on certain derivative instruments, gains and losses from
the period in which the related advertising and promotional securities and other investments, gains and losses from certain
expense is incurred. Advertising and promotional expense, which real estate transactions, foreign currency transaction gains and
includes media, agency and promotional expense, was $1,466 losses, gains and losses from the sale of businesses, other than
million, $1,445 million and $1,327 million in 2018, 2017 and reported as discontinued operations, and amounts related to
2016, respectively, and is recorded in SG&A expense in the accretion of asset retirement obligations. Other (income) and
Consolidated Statement of Earnings. expense also includes certain components of retirement-related
costs, including interest costs, expected return on plan assets,
Research, Development and Engineering amortization of prior service costs (credits), curtailments and
Research, development and engineering (RD&E) costs are settlements and other net periodic pension/postretirement
expensed as incurred. Software costs that are incurred to benefit costs.
produce the finished product after technological feasibility has
been established are capitalized as an intangible asset. Business Combinations and
Intangible Assets Including Goodwill
Intellectual Property and Custom Development Income The company accounts for business combinations using the
The company licenses and sells the rights to certain of its acquisition method and accordingly, the identifiable assets
intellectual property (IP) including internally developed acquired, the liabilities assumed, and any noncontrolling interest
patents, trade secrets and technological know-how. Certain IP in the acquiree are recorded at their acquisition date fair values.
transactions to third parties are licensing/royalty-based and Goodwill represents the excess of the purchase price over the fair
others are transaction-based sales/other transfers. Income value of net assets, including the amount assigned to identifiable
from licensing arrangements is recognized at the inception of the intangible assets. The primary drivers that generate goodwill
license term if the nature of the company’s promise is to provide a are the value of synergies between the acquired entities and
right to use the company’s intellectual property as it exists at that the company and the acquired assembled workforce, neither
point in time (i.e., the license is functional intellectual property) of which qualifies as a separately identifiable intangible asset.
and control has transferred to the client. If the nature of the Goodwill recorded in an acquisition is assigned to applicable
company’s promise is to provide a right to access the company’s reporting units based on expected revenues. Identifiable
intellectual property throughout the license period (i.e., the intangible assets with finite lives are amortized over their useful
license is symbolic intellectual property), such as a trademark lives. Amortization of completed technology is recorded in cost,
license, income is recognized over time. Licensing arrangements and amortization of all other intangible assets is recorded in
include IP partnerships whereby a business partner licenses SG&A expense. Acquisition-related costs, including advisory,
source code from the company and becomes responsible for legal, accounting, valuation and other costs, are expensed in the
developing, maintaining and enhancing the product. The company periods in which the costs are incurred. The results of operations
retains its customers and go-to-market capability and any royalty of acquired businesses are included in the Consolidated Financial
cost due to the partner is recognized in cost of sales. The IP Statements from the acquisition date.
partner has the rights to market the product and its derivative
works under its own brand and remits royalty to the company on Impairment
those sales, which are recorded as royalty-based fees. Income Long-lived assets, other than goodwill and indefinite-lived
from royalty-based fee arrangements is recognized at the later intangible assets, are tested for impairment whenever events
of when the subsequent sale or usage occurs or the performance or changes in circumstances indicate that the carrying amount
obligation to which some or all of the royalty has been allocated may not be recoverable. The impairment test is based on
has been satisfied (or partially satisfied). Depending on the undiscounted cash flows and, if impaired, the asset is written
nature of the transaction, an IP partnership would be accounted down to fair value based on either discounted cash flows or
for as a divestiture if the company concludes the transaction appraised values. Goodwill and indefinite-lived intangible
meets the definition of a business. The company also enters assets are tested at least annually, in the fourth quarter, for
into cross-licensing arrangements of patents, and income from impairment and whenever changes in circumstances indicate an
these arrangements is recognized when control transfers to the impairment may exist. The goodwill impairment test is performed
customer. In addition, the company earns income from certain by reporting unit, which is an operating segment, a component
custom development projects with strategic technology partners or multiple components of an operating segment. A component
and specific clients. The company records the income from these meets the definition of a reporting unit if it is one level below an
projects over time as the company satisfies the performance operating segment, is considered to be a business with discrete
obligation if the fee is nonrefundable and is not dependent upon financial information available and is regularly reviewed by
the ultimate success of the project. segment management. Components are aggregated as a single
reporting unit if they have similar economic characteristics.
Depreciation and Amortization current market value of assets held in an irrevocable trust fund,
Property, plant and equipment are carried at cost and depreciated held for the sole benefit of participants, which are invested by the
over their estimated useful lives using the straight-line method. trust fund. Overfunded plans, with the fair value of plan assets
The estimated useful lives of certain depreciable assets are as exceeding the benefit obligation, are aggregated and recorded as
follows: buildings, 30 to 50 years; building equipment, 10 to 20 a prepaid pension asset equal to this excess. Underfunded plans,
years; land improvements, 20 years; production, engineering, with the benefit obligation exceeding the fair value of plan assets,
office and other equipment, 2 to 20 years; and information are aggregated and recorded as a retirement and nonpension
technology equipment, 1.5 to 5 years. Leasehold improvements postretirement benefit obligation equal to this excess.
are amortized over the shorter of their estimated useful lives or
the related lease term, rarely exceeding 25 years. The current portion of the retirement and nonpension post-
retirement benefit obligations represents the actuarial present
As noted on page 80 within “Software Costs,” capitalized software value of benefits payable in the next 12 months exceeding the
costs are amortized on a straight-line basis over periods ranging fair value of plan assets, measured on a plan-by-plan basis.
up to 3 years. Other intangible assets are amortized over periods This obligation is recorded in compensation and benefits in the
between 1 and 7 years. Consolidated Statement of Financial Position.
Environmental Net periodic pension and nonpension postretirement benefit

The cost of internal environmental protection programs that are cost/(income) is recorded in the Consolidated Statement of
preventative in nature are expensed as incurred. When a cleanup Earnings and includes service cost, interest cost, expected
program becomes likely, and it is probable that the company will return on plan assets, amortization of prior service costs/(credits)
incur cleanup costs and those costs can be reasonably estimated, and (gains)/losses previously recognized as a component of
the company accrues remediation costs for known environmental OCI and amortization of the net transition asset remaining
liabilities. The company’s maximum exposure for all environmental in accumulated other comprehensive income/(loss) (AOCI).
liabilities cannot be estimated and no amounts are recorded for Service cost represents the actuarial present value of participant
environmental liabilities that are not probable or estimable. benefits earned in the current year. Interest cost represents
the time value of money cost associated with the passage of
Asset Retirement Obligations time. Certain events, such as changes in the employee base,
Asset retirement obligations (ARO) are legal obligations plan amendments and changes in actuarial assumptions, result
associated with the retirement of long-lived assets. These in a change in the benefit obligation and the corresponding
liabilities are initially recorded at fair value and the related change in OCI. The result of these events is amortized as a
asset retirement costs are capitalized by increasing the component of net periodic cost/(income) over the service lives
carrying amount of the related assets by the same amount as or life expectancy of the participants, depending on the plan,
the liability. Asset retirement costs are subsequently depreciated provided such amounts exceed thresholds which are based upon
over the useful lives of the related assets. Subsequent to initial the benefit obligation or the value of plan assets. The service
recognition, the company records period-to-period changes in cost component of net benefit cost is recorded in Cost, SG&A
the ARO liability resulting from the passage of time in interest and RD&E in the Consolidated Statement of Earnings (unless
expense and revisions to either the timing or the amount of the eligible for capitalization) based on the employees’ respective
original expected cash flows to the related assets. functions. The other components of net benefit cost are
presented separately from service cost within other (income)
Defined Benefit Pension and and expense in the Consolidated Statement of Earnings. Refer
Nonpension Postretirement Benefit Plans to note B, “Accounting Changes,” on pages 89 to 91, for additional
The funded status of the company’s defined benefit pension plans information on the presentation change relating to pension costs
and nonpension postretirement benefit plans (retirement-related beginning on January 1, 2018.
benefit plans) is recognized in the Consolidated Statement
of Financial Position. The funded status is measured as the (Gains)/losses and prior service costs/(credits) are not
difference between the fair value of plan assets and the benefit recognized as a component of net periodic cost/(income) in
obligation at December 31, the measurement date. For defined the Consolidated Statement of Earnings as they arise, but
benefit pension plans, the benefit obligation is the projected are recognized as a component of OCI in the Consolidated
benefit obligation (PBO), which represents the actuarial present Statement of Comprehensive Income. Those (gains)/losses
value of benefits expected to be paid upon retirement based and prior service costs/(credits) are subsequently recognized
on employee services already rendered and estimated future as a component of net periodic cost/(income) pursuant to the
compensation levels. For the nonpension postretirement benefit recognition and amortization provisions of applicable accounting
plans, the benefit obligation is the accumulated postretirement guidance. (Gains)/losses arise as a result of differences between
benefit obligation (APBO), which represents the actuarial present actual experience and assumptions or as a result of changes in
value of postretirement benefits attributed to employee services actuarial assumptions. Prior service costs/(credits) represent the
already rendered. The fair value of plan assets represents the cost of benefit changes attributable to prior service granted in
plan amendments.
The measurement of benefit obligations and net periodic cost/ the need for a valuation allowance, management considers all
(income) is based on estimates and assumptions approved available evidence for each jurisdiction including past operating
by the company’s management. These valuations reflect the results, estimates of future taxable income and the feasibility
terms of the plans and use participant-specific information such of ongoing tax planning strategies. When the company changes
as compensation, age and years of service, as well as certain its determination as to the amount of deferred tax assets that
assumptions, including estimates of discount rates, expected can be realized, the valuation allowance is adjusted with a
return on plan assets, rate of compensation increases, interest corresponding impact to income tax expense in the period in
crediting rates and mortality rates. which such determination is made.
Defined Contribution Plans The company recognizes tax liabilities when, despite the
The company’s contribution for defined contribution plans is company’s belief that its tax return positions are supportable,
recorded when the employee renders service to the company. the company believes that certain positions may not be fully
The charge is recorded in Cost, SG&A and RD&E in the sustained upon review by tax authorities. Benefits from tax
Consolidated Statement of Earnings based on the employees’ positions are measured at the largest amount of benefit that is
respective functions. greater than 50 percent likely of being realized upon settlement.
The current portion of tax liabilities is included in taxes and the
Stock-Based Compensation noncurrent portion of tax liabilities is included in other liabilities
Stock-based compensation represents the cost related to stock- in the Consolidated Statement of Financial Position. To the
based awards granted to employees. The company measures extent that new information becomes available which causes
stock-based compensation cost at the grant date, based on the company to change its judgment regarding the adequacy of
the estimated fair value of the award and recognizes the cost existing tax liabilities, such changes to tax liabilities will impact
on a straight-line basis (net of estimated forfeitures) over the income tax expense in the period in which such determination
employee requisite service period. The company grants its is made. Interest and penalties, if any, related to accrued
employees Restricted Stock Units (RSUs), including Retention liabilities for potential tax assessments are included in income
Restricted Stock Units (RRSUs) and Performance Share Units tax expense.
(PSUs) and periodically grants stock options. RSUs are stock
awards granted to employees that entitle the holder to shares The U.S. Tax Cuts and Jobs Act introduced GILTI, which subjects
of common stock as the award vests, typically over a one- to a U.S. shareholder to current tax on income earned by certain
five-year period. The fair value of the awards is determined and foreign subsidiaries. The Financial Accounting Standards Board
fixed on the grant date based on the company’s stock price, (FASB) allows companies to either (1) recognize deferred taxes
adjusted for the exclusion of dividend equivalents. The company for temporary differences that are expected to reverse as GILTI in
estimates the fair value of stock options using a Black-Scholes future years (deferred method) or (2) account for taxes on GILTI
valuation model. Stock-based compensation cost is recorded in as period costs in the year the tax is incurred (period method).
Cost, SG&A, and RD&E in the Consolidated Statement of Earnings The company elected the deferred method and in order to record
based on the employees’ respective functions. the initial deferred taxes for GILTI, the company estimated the
impact of foreign temporary differences on GILTI in future years.
The company records deferred tax assets for awards that result This included consideration of statutory limitation impacts on
in deductions on the company’s income tax returns, based on the GILTI calculation.
the amount of compensation cost recognized and the statutory
tax rate in the jurisdiction in which it will receive a deduction. Translation of Non-U.S. Currency Amounts
The differences between the deferred tax assets recognized Assets and liabilities of non-U.S. subsidiaries that have a local
for financial reporting purposes and the actual tax deduction functional currency are translated to U.S. dollars at year-end
reported on the income tax return are recorded as a benefit or exchange rates. Translation adjustments are recorded in OCI.
expense to the provision for income taxes in the Consolidated Income and expense items are translated at weighted-average
Statement of Earnings. rates of exchange prevailing during the year.
Income Taxes Inventories, property, plant and equipment—net and other

Income tax expense is based on reported income before income non-monetary assets and liabilities of non-U.S. subsidiaries
taxes. Deferred income taxes reflect the tax effect of temporary and branches that operate in U.S. dollars are translated at the
differences between asset and liability amounts that are approximate exchange rates prevailing when the company acquired
recognized for financial reporting purposes and the amounts that the assets or liabilities. All other assets and liabilities denominated
are recognized for income tax purposes. These deferred taxes in a currency other than U.S. dollars are translated at year-end
are measured by applying currently enacted tax laws. Valuation exchange rates with the transaction gain or loss recognized in other
allowances are recognized to reduce deferred tax assets to the (income) and expense. Income and expense items are translated at
amount that will more likely than not be realized. In assessing the weighted-average rates of exchange prevailing during the year.
These translation gains and losses are included in net income for
the period in which exchange rates change.
Derivative Financial Instruments expense or other (income) and expense in the Consolidated
Derivatives are recognized in the Consolidated Statement of Statement of Earnings based on the nature of the underlying
Financial Position at fair value and are reported in prepaid cash flow hedged. Effectiveness for net investment hedging
expenses and other current assets, investments and sundry derivatives is measured on a spot-to-spot basis. Changes in the
assets, other accrued expenses and liabilities or other liabilities. fair value of highly effective net investment hedging derivatives
Classification of each derivative as current or noncurrent is and other non-derivative financial instruments designated as net
based upon whether the maturity of the instrument is less than investment hedges are recorded as foreign currency translation
or greater than 12 months. To qualify for hedge accounting, adjustments in AOCI. Changes in the fair value of the portion of a
the company requires that the instruments be effective in net investment hedging derivative excluded from the assessment
reducing the risk exposure that they are designated to hedge. of effectiveness are recorded in interest expense and cost of
For instruments that hedge cash flows, hedge designation criteria financing. If the underlying hedged item in a fair value hedge
also require that it be probable that the underlying transaction ceases to exist, all changes in the fair value of the derivative are
will occur. Instruments that meet established accounting criteria included in net income each period until the instrument matures.
are formally designated as hedges. These criteria demonstrate When the derivative transaction ceases to exist, a hedged asset
that the derivative is expected to be highly effective at offsetting or liability is no longer adjusted for changes in its fair value except
changes in fair value or cash flows of the underlying exposure as required under other relevant accounting standards.
both at inception of the hedging relationship and on an ongoing
basis. The method of assessing hedge effectiveness and Derivatives that are not designated as hedges are recorded in
measuring hedge results is formally documented at hedge earnings for each period and are primarily reported in other
inception. The company assesses hedge effectiveness and (income) and expense. When a cash flow hedging relationship is
measures hedge results at least quarterly throughout the discontinued, the net gain or loss in AOCI must generally remain
designated hedge period. in AOCI until the item that was hedged affects earnings. However,
when it is probable that a forecasted transaction will not occur
Where the company applies hedge accounting, the company by the end of the originally specified time period or within an
designates each derivative as a hedge of: (1) the fair value of additional two-month period thereafter, the net gain or loss in
a recognized financial asset or liability, or of an unrecognized AOCI must be reclassified into earnings immediately.
firm commitment (fair value hedge attributable to interest rate
or foreign currency risk); (2) the variability of anticipated cash The company reports cash flows arising from derivative financial
flows of a forecasted transaction, or the cash flows to be received instruments designated as fair value or cash flow hedges
or paid related to a recognized financial asset or liability (cash consistent with the classification of cash flows from the underlying
flow hedge attributable to interest rate or foreign currency risk); hedged items that these derivatives are hedging. Accordingly, the
or (3) a hedge of a long-term investment (net investment hedge) cash flows associated with derivatives designated as fair value
in a foreign operation. In addition, the company may enter into or cash flow hedges are classified in cash flows from operating
derivative contracts that economically hedge certain of its risks, activities in the Consolidated Statement of Cash Flows. Cash
even though hedge accounting does not apply or the company flows from derivatives designated as net investment hedges and
elects not to apply hedge accounting. In these cases, there exists derivatives that do not qualify as hedges are reported in cash
a natural hedging relationship in which changes in the fair value flows from investing activities in the Consolidated Statement of
of the derivative, which are recognized currently in net income, Cash Flows. For currency swaps designated as hedges of foreign
act as an economic offset to changes in the fair value of the currency denominated debt (included in the company’s debt
underlying hedged item(s). risk management program as addressed in note D, “Financial
Instruments,” on pages 95 to 102), cash flows directly associated
Changes in the fair value of a derivative that is designated as a with the settlement of the principal element of these swaps are
fair value hedge, along with offsetting changes in the fair value of reported in payments to settle debt in cash flows from financing
the underlying hedged exposure, are recorded in earnings each activities in the Consolidated Statement of Cash Flows.
period. For hedges of interest rate risk, the fair value adjustments
are recorded as adjustments to interest expense and cost of Financial Instruments
financing in the Consolidated Statement of Earnings. For hedges In determining the fair value of its financial instruments, the
of currency risk associated with recorded financial assets or company uses a variety of methods and assumptions that are
liabilities, derivative fair value adjustments are recognized in based on market conditions and risks existing at each balance
other (income) and expense in the Consolidated Statement sheet date. See note D, “Financial Instruments,” on pages 95 to
of Earnings. Changes in the fair value of a derivative that is 102 for further information. All methods of assessing fair value
designated as a cash flow hedge are recorded, net of applicable result in a general approximation of value, and such value may
taxes, in OCI, in the Consolidated Statement of Comprehensive never actually be realized.
Income. When net income is affected by the variability of the
underlying cash flow, the applicable offsetting amount of the gain
or loss from the derivative that is deferred in AOCI is released
to net income and reported in interest expense, cost, SG&A
Fair Value Measurement As an example, the fair value of derivatives is derived utilizing a
Accounting guidance defines fair value as the price that would be discounted cash flow model that uses observable market inputs
received to sell an asset or paid to transfer a liability in an orderly such as known notional value amounts, yield curves, spot and
transaction between market participants at the measurement forward exchange rates as well as discount rates. These inputs
date. Under this guidance, the company is required to classify relate to liquid, heavily traded currencies with active markets
certain assets and liabilities based on the following fair value which are available for the full term of the derivative.
hierarchy:
Certain assets that are measured at fair value on a recurring
• Level 1—Quoted prices (unadjusted) in active markets for
basis can be subject to nonrecurring fair value measurements.
identical assets or liabilities that can be accessed at the
These assets include available-for-sale debt securities that are
measurement date;
deemed to be other-than-temporarily impaired. In the event of
• Level 2—Inputs other than quoted prices included within an other-than-temporary impairment of a debt security, fair value
Level 1 that are observable for the asset or liability, either is measured using a model described above.
directly or indirectly; and
Certain non-financial assets such as property, plant and
• Level 3—Unobservable inputs for the asset or liability.
equipment, land, goodwill and intangible assets are also subject
to nonrecurring fair value measurements if they are deemed to be
The guidance requires the use of observable market data if such
impaired. The impairment models used for non-financial assets
data is available without undue cost and effort.
depend on the type of asset. There were no material impairments
of non-financial assets for the years ended December 31, 2018,
When available, the company uses unadjusted quoted market
2017 and 2016.
prices in active markets to measure the fair value and classifies
such items as Level 1. If quoted market prices are not available, fair
Accounting guidance permits the measurement of eligible
value is based upon internally developed models that use current
financial assets, financial liabilities and firm commitments
market-based or independently sourced market parameters such
at fair value, on an instrument-by-instrument basis, that are
as interest rates and currency rates. Items valued using internally
otherwise not permitted to be accounted for at fair value under
generated models are classified according to the lowest level input
other accounting standards. This election is irrevocable. The
or value driver that is significant to the valuation.
company has not applied the fair value option to any eligible
assets or liabilities.
The determination of fair value considers various factors
including interest rate yield curves and time value underlying
Cash Equivalents
the financial instruments. For derivatives and debt securities,
All highly liquid investments with maturities of three months or
the company uses a discounted cash flow analysis using discount
less at the date of purchase are considered to be cash equivalents.
rates commensurate with the duration of the instrument.
Marketable Securities
In determining the fair value of financial instruments, the
Effective January 1, 2018, with the adoption of the new FASB
company considers certain market valuation adjustments to the
guidance on recognition, measurement, presentation and
“base valuations” calculated using the methodologies described
disclosure of financial instruments, the company measures equity
below for several parameters that market participants would
investments at fair value with changes recognized in net income.
consider in determining fair value:
• Counterparty credit risk adjustments are applied to financial Debt securities included in current assets represent securities
instruments, taking into account the actual credit risk of a that are expected to be realized in cash within one year of the
counterparty as observed in the credit default swap market balance sheet date. Long-term debt securities that are not
to determine the true fair value of such an instrument. expected to be realized in cash within one year and alliance
equity securities are included in investments and sundry assets.
• Credit risk adjustments are applied to reflect the company’s
Debt securities are considered available for sale and are reported
own credit risk when valuing all liabilities measured at fair
at fair value with unrealized gains and losses, net of applicable
value. The methodology is consistent with that applied in
taxes, in OCI. The realized gains and losses for available-for-sale
developing counterparty credit risk adjustments, but
debt securities are included in other (income) and expense in the
incorporates the company’s own credit risk as observed in
Consolidated Statement of Earnings. Realized gains and losses
the credit default swap market.
are calculated based on the specific identification method.
In determining whether an other-than-temporary decline in An allowance for contract assets, if needed, and uncollectible
market value has occurred, the company considers the duration trade receivables is estimated based on a combination of write-off
that, and extent to which, the fair value of the investment is below history, aging analysis and any specific, known troubled accounts.
its cost, the financial condition and near-term prospects of the
issuer or underlying collateral of a security; and the company’s Factored Receivables
intent and ability to retain the security in order to allow for an The company enters into various factoring agreements with
anticipated recovery in fair value. Other-than-temporary declines third-party financial institutions to sell its receivables (includes
in fair value from amortized cost for available-for-sale debt notes and accounts receivable—trade, financing receivables and
securities that the company intends to sell or would more likely other accounts receivables) under nonrecourse agreements.
than not be required to sell before the expected recovery of the Accounts receivable sales arrangements are utilized in the
amortized cost basis are charged to other (income) and expense normal course of business as part of the company’s cash and
in the period in which the loss occurs. For debt securities that liquidity management. Facilities in the U.S., Canada and several
the company has no intent to sell and believes that it more likely countries in Europe enable the company to sell certain accounts
than not will not be required to sell prior to recovery, only the receivable, without recourse, to third parties in order to manage
credit loss component of the impairment is recognized in other credit, collection, concentration and currency risk.
(income) and expense, while the remaining loss is recognized in
OCI. The credit loss component recognized in other (income) and These transactions are accounted for as a reduction in receivables
expense is identified as the amount of the principal cash flows and are considered sold when: (1) they are transferred beyond the
not expected to be received over the remaining term of the debt reach of the company and its creditors; (2) the purchaser has the
security as projected using the company’s cash flow projections. right to pledge or exchange the receivables; and (3) the company
has surrendered control over the transferred receivables.
Inventories The proceeds from these arrangements are reflected as cash
Raw materials, work in process and finished goods are stated provided by operating activities in the Consolidated Statement
at the lower of average cost or net realizable value. Cash flows of Cash Flows.
related to the sale of inventories are reflected in net cash
provided by operating activities in the Consolidated Statement The gross amounts factored (the gross proceeds) under these
of Cash Flows. programs (primarily relating to notes and accounts receivable—
trade) for the year ended December 31, 2018 were $2.2 billion
Allowance for Credit Losses compared to $1.9 billion for the year ended December 31,
Receivables are recorded concurrent with billing and shipment of 2017. Within the accounts receivables sold and derecognized
a product and/or delivery of a service to customers. A reasonable from the Consolidated Statement of Financial Position, $0.9
estimate of probable net losses on the value of customer receivables billion and $0.7 billion remained uncollected from customers at
is recognized by establishing an allowance for credit losses. December 31, 2018 and 2017, respectively. The fees and the net
gains and losses associated with the transfer of receivables were
Contract Assets and Notes and Accounts Receivable—Trade not material for any of the periods presented.
As of January 1, 2018, the company classifies the right to
consideration in exchange for products or services transferred Financing Receivables
to a client as either a receivable or a contract asset. A receivable Financing receivables include sales-type leases, direct financing
is a right to consideration that is unconditional as compared leases and loans. Leases are accounted for in accordance
to a contract asset which is a right to consideration that is with lease accounting standards. Loan receivables, including
conditional upon factors other than the passage of time. The installment payment plans, which are generally unsecured, are
majority of the company’s contract assets represent unbilled primarily for software and services. Loans are financial assets
amounts related to design and build services contracts when which are recorded at amortized cost, which approximates fair
the cost-to-cost method of revenue recognition is utilized, value. Commercial financing receivables are carried at amortized
revenue recognized exceeds the amount billed to the client, and cost, which approximates fair value. These receivables are for
the right to consideration is subject to milestone completion or working capital financing to suppliers, distributors and resellers of
client acceptance. Contract assets are generally classified as IBM and OEM IT products and services. The company determines
current and are recorded on a net basis with deferred income its allowances for credit losses on financing receivables based on
(i.e., contract liabilities) at the contract level. At December 31, two portfolio segments: lease receivables and loan receivables.
2018 and January 1, 2018 contract assets of $470 million and The company further segments the portfolio into three classes:
$557 million, respectively, are included in prepaid expenses and Americas, Europe/Middle East/Africa (EMEA) and Asia Pacific.
other current assets in the Consolidated Statement of Financial
Position. At December 31, 2017, these assets were classified
as notes and accounts receivable—trade in the Consolidated
Statement of Financial Position.
When calculating the allowances, the company considers Impaired Loans—The company evaluates all financing receivables
its ability to mitigate a potential loss by repossessing leased considered at-risk, including loans, for impairment on a quarterly
equipment and by considering the current fair market value basis. The company considers any receivable with an individually
of any other collateral. The value of the equipment is the net evaluated reserve as an impaired loan. Depending on the level of
realizable value. The allowance for credit losses for capital impairment, loans will also be placed on non-accrual status as
leases, installment payment plan receivables and customer loans appropriate. Client loans are primarily for software and services
includes an assessment of the entire balance of the capital lease and are unsecured. These receivables are subjected to credit
or loan, including amounts not yet due. The methodologies that analysis to evaluate the associated risk and, when appropriate,
the company uses to calculate its receivables reserves, which actions are taken to mitigate risks in these agreements which
are applied consistently to its different portfolios, are as follows: include covenants to protect against credit deterioration during
the life of the obligation.
Individually Evaluated—The company reviews all financing
receivables considered at risk on a quarterly basis. The review Write-Off—Receivable losses are charged against the allowance
primarily consists of an analysis based upon current information in the period in which the receivable is deemed uncollectible.
available about the client, such as financial statements, news Subsequent recoveries, if any, are credited to the allowance.
reports, published credit ratings, current market-implied credit Write-offs of receivables and associated reserves occur to
analysis, as well as the current economic environment, collateral the extent that the customer is no longer in operation and/or,
net of repossession cost and prior collection history. For loans there is no reasonable expectation of additional collections
that are collateral dependent, impairment is measured using the or repossession. The company’s assessments factor in the
fair value of the collateral when foreclosure is probable. Using history of collections and write-offs in specific countries and
this information, the company determines the expected cash flow across the portfolio.
for the receivable and calculates an estimate of the potential loss
and the probability of loss. For those accounts in which the loss Estimated Residual Values of Lease Assets
is probable, the company records a specific reserve. The recorded residual values of lease assets are estimated at the
inception of the lease to be the expected fair value of the assets at
Collectively Evaluated—The company records an unallocated the end of the lease term. The company periodically reassesses
reserve that is calculated by applying a reserve rate to its different the realizable value of its lease residual values. Any anticipated
portfolios, excluding accounts that have been individually increases in specific future residual values are not recognized
evaluated and specifically reserved. This reserve rate is based before realization through remarketing efforts. Anticipated
upon credit rating, probability of default, term, characteristics decreases in specific future residual values that are considered
(lease/loan) and loss history. Factors that could result in actual to be other-than-temporary are recognized immediately upon
receivable losses that are materially different from the estimated identification and are recorded as an adjustment to the residual
reserve include significant changes in the economy, or a sudden value estimate. For sales-type and direct financing leases, this
change in the economic health of a significant client in the reduction lowers the recorded net investment and is recognized
company’s receivables portfolio. as a loss charged to financing income in the period in which
the estimate is changed, as well as an adjustment to unearned
Other Credit-Related Policies income to reduce future-period financing income.
Past Due—The company views receivables as past due when
payment has not been received after 90 days, measured from Common Stock
the original billing date. Common stock refers to the $.20 par value per share capital stock
as designated in the company’s Certificate of Incorporation.
Non-Accrual—Non-accrual assets include those receivables Treasury stock is accounted for using the cost method. When
(impaired loans or nonperforming leases) with specific reserves treasury stock is reissued, the value is computed and recorded
and other accounts for which it is likely that the company will using a weighted-average basis.
be unable to collect all amounts due according to original terms
of the lease or loan agreement. Interest income recognition Earnings Per Share of Common Stock
is discontinued on these receivables. Cash collections are Earnings per share (EPS) is computed using the two-class
first applied as a reduction to principal outstanding. Any method. The two-class method determines EPS for each class of
cash received in excess of principal payments outstanding is common stock and participating securities according to dividends
recognized as interest income. Receivables may be removed and dividend equivalents and their respective participation
from non-accrual status, if appropriate, based upon changes in rights in undistributed earnings. Basic EPS of common stock
client circumstances, such as a sustained history of payments. is computed by dividing net income by the weighted-average
number of common shares outstanding for the period. Diluted
EPS of common stock is computed on the basis of the weighted-
average number of shares of common stock plus the effect of
dilutive potential common shares outstanding during the period
using the treasury stock method. Dilutive potential common
shares include outstanding stock awards, convertible notes and
stock options.
NOTE B. ACCOUNTING CHANGES

New Standards to be Implemented
In August 2018, the FASB issued guidance on a customer’s the guidance on the effective date using the transition option
accounting for implementation costs incurred in cloud-computing whereby prior comparative periods will not be retrospectively
arrangements that are hosted by a vendor. Certain types of presented in the consolidated financial statements. The company
implementation costs should be capitalized and amortized over elected the package of practical expedients not to reassess
the term of the hosting arrangement. The guidance is effective prior conclusions related to contracts containing leases, lease
January 1, 2020 and early adoption is permitted. The company classification and initial direct costs and the lessee practical
adopted the guidance on January 1, 2019 on a prospective basis. expedient to combine lease and nonlease components for
The guidance is not expected to have a material impact in the all asset classes. The company made a policy election to not
consolidated financial results. recognize right-of-use assets and lease liabilities for short-term
leases for all asset classes.
In August 2018, the FASB issued guidance which changed the
disclosure requirements for fair value measurements and defined A cross-functional implementation team evaluated the lease
benefit plans. The guidance is effective for each of the topics portfolio and implemented system, process, control and policy
on January 1, 2020 and December 31, 2020, respectively, with changes. The company also gathered lease data in order to
early adoption of certain provisions permitted. As a result, the comply with the requirements in the guidance, including new
company has removed Level 1/Level 2 transfer disclosures disclosures that will be added to the Notes to the Consolidated
in accordance with the fair value guidance. The company is Financial Statements beginning in the first quarter of 2019. The
evaluating the adoption date for the remaining changes. As the guidance had a material impact on the Consolidated Statement
guidance is a change to disclosures only, the company does not of Financial Position as of the effective date. As a lessee, the
expect the guidance to have a material impact in the consolidated company’s undiscounted operating lease commitments were
financial results. $5.6 billion at December 31, 2018, which is expected to
approximate the January 1, 2019 balance of operating lease
In January 2017, the FASB issued guidance that simplifies the liabilities, which will be discounted by the company’s incremental
goodwill impairment test by removing Step 2. The guidance borrowing rate. The transition adjustment recognized in retained
also changes the requirements for reporting units with zero or earnings at the effective date is not expected to be material.
negative carrying amounts and requires additional disclosures
for these reporting units. The guidance is effective January 1, From a lessor perspective, due to changes in lease termination
2020 and early adoption is permitted. The company expects to guidance, when equipment is returned to the company prior
adopt the guidance on a prospective basis on the effective date. to the end of the lease term, the carrying amounts of lease
The company is evaluating the impact of the guidance. receivables, which remain outstanding relating to that equipment
and are still expected to be collected, will be reclassified to loan
In June 2016, with amendments in 2018, the FASB issued receivables. The amount that would have been reclassified
guidance for credit impairment based on an expected loss from lease receivables to loan receivables in 2018, under the
model rather than an incurred loss model. The guidance requires application of this new guidance, would have been approximately
the consideration of all available relevant information when $263 million. Additionally, the company does not expect the
estimating expected credit losses, including past events, current removal of third-party residual value guarantee insurance in
conditions and forecasts and their implications for expected the lease classification test to have a material impact on the
credit losses. A cross-functional team has been established Consolidated Statement of Earnings.
that is evaluating the financial instruments portfolio and the
system, process and policy change requirements. The new Standards Implemented
guidance expands the scope of financial instruments subject In February 2018, the FASB issued guidance that allows entities
to impairment, including off-balance sheet commitments and to elect an option to reclassify the stranded tax effects related
residual value. The guidance is effective January 1, 2020 with to the application of U.S. tax reform from AOCI to retained
one-year early adoption permitted. The company will adopt the earnings. The guidance was effective January 1, 2019 with
guidance as of the effective date and is continuing to evaluate early adoption permitted, and can be applied either in the
the impact. period of adoption or retrospectively to all applicable periods.
The company adopted the guidance effective January 1, 2018,
The FASB issued guidance in February 2016, with amendments and elected not to reclassify prior periods. In accordance with its
in 2018, which changes the accounting for leases. The guidance accounting policy, the company releases income tax effects from
requires lessees to recognize right-of-use assets and lease AOCI once the reason the tax effects were established ceases
liabilities for most leases in the Consolidated Statement of to exist (e.g., when available-for-sale debt securities are sold
Financial Position. The guidance makes some changes to lessor or if a pension plan is liquidated). This guidance allows for the
accounting, including elimination of the use of third-party reclassification of stranded tax effects as a result of the change
residual value guarantee insurance in the lease classification in tax rates from U.S. tax reform to be recorded upon adoption of
test, and overall aligns with the new revenue recognition the guidance rather than at the actual cessation date. At adoption
guidance. The guidance also requires qualitative and quantitative on January 1, 2018, $2,420 million was reclassified from AOCI
disclosures to assess the amount, timing and uncertainty of cash to retained earnings, primarily comprised of amounts relating to
flows arising from leases. The guidance was effective January 1, retirement-related benefit plans.
2019 and early adoption was permitted. The company adopted
In August 2017, the FASB issued guidance to simplify the contract assets. In-scope sales commission costs previously
application of hedge accounting in certain areas, better portray recorded in the Consolidated Statement of Earnings were
the economic results of an entity’s risk management activities capitalized in deferred costs, in accordance with the transition
in its financial statements and make targeted improvements to guidance, in the amount of $737 million. Deferred income of
presentation and disclosure requirements. The guidance was $29 million was recorded for certain software licenses that will
effective January 1, 2019 with early adoption permitted. The be recognized over time versus at point in time under previous
company adopted the guidance as of January 1, 2018, and it did guidance. Additionally, net deferred taxes were reduced by $184
not have a material impact in the consolidated financial results. million in the Consolidated Statement of Financial Position,
resulting in a cumulative-effect net increase to retained earnings
In March 2017, the FASB issued guidance that impacts the of $524 million. In the fourth quarter of 2018, the company
presentation of net periodic pension and postretirement benefit recognized an additional impact to net deferred taxes and
costs (net benefit cost). Under the guidance, the service cost retained earnings of $56 million, resulting in a total net increase
component of net benefit cost continues to be presented within to retained earnings of $580 million. The decrease to net deferred
cost, SG&A expense and RD&E expense in the Consolidated taxes was the result of the company’s election to include GILTI in
Statement of Earnings, unless eligible for capitalization. The measuring deferred taxes. For additional information regarding
other components of net benefit cost are presented separately GILTI, refer to note A, “Significant Accounting Policies.” The
from service cost within other (income) and expense in the revenue guidance did not have a material impact in the company’s
Consolidated Statement of Earnings. The guidance was effective consolidated financial results for the year ended December 31,
January 1, 2018 with early adoption permitted. The company 2018. The company expects revenue recognition for its broad
adopted the guidance as of the effective date. The guidance is portfolio of hardware, software and services offerings to remain
primarily a change in financial statement presentation and did largely unchanged. Refer to note O, “Revenue Recognition,” for
not have a material impact in the consolidated financial results. additional information, including further discussion on the impact
This presentation change was applied retrospectively upon of adoption.
adoption. For the year ended December 31, 2017, $717 million,
$427 million and $197 million was recast from total cost, SG&A In January 2017, the FASB issued guidance which clarified
expense and RD&E expense, respectively, into other (income) and the definition of a business. The guidance provided a more
expense. For the year ended December 31, 2016, $222 million, robust framework to use in determining when a set of assets
$126 million and $25 million was recast from total cost, SG&A and activities acquired or sold is a business. The guidance was
expense and RD&E expense, respectively, into other (income) effective January 1, 2018 and early adoption was permitted.
and expense. Refer to note T, “Retirement-Related Benefits,” for The company adopted the guidance effective January 1,
additional information. 2017, and it did not have a material impact in the consolidated
financial results.
In January 2016, the FASB issued guidance which addresses
aspects of recognition, measurement, presentation and In October 2016, the FASB issued guidance which requires an
disclosure of financial instruments. The guidance was effective entity to recognize the income tax consequences of intra-entity
January 1, 2018 and early adoption was not permitted except transfers of assets, other than inventory, at the time of transfer.
for limited provisions. The company adopted the guidance on the Assets within the scope of the guidance include intellectual
effective date. Certain equity investments are now measured at property and property, plant and equipment. The guidance was
fair value with changes recognized in net income. The amendment effective January 1, 2018 and early adoption was permitted.
also simplified the impairment test of equity investments that The company adopted the guidance on January 1, 2017 using
lack readily determinable fair value. The guidance did not have a the required modified retrospective method. At adoption, $95
material impact in the consolidated financial results. million and $47 million were reclassified from investments and
sundry assets and prepaid expenses and other current assets,
The FASB issued guidance on the recognition of revenue from respectively, into retained earnings. Additionally, net deferred
contracts with customers in May 2014 with amendments in 2015 taxes of $244 million were established in deferred taxes in
and 2016. Revenue recognition depicts the transfer of promised the Consolidated Statement of Financial Position, resulting in
goods or services to customers in an amount that reflects a cumulative-effect net increase to retained earnings of $102
the consideration to which the entity expects to be entitled million. In January 2017, the company had one transaction that
in exchange for those goods or services. The guidance also generated a $582 million benefit to income tax expense, income
requires specific disclosures relating to revenue recognition. The from continuing operations and net income and a benefit to both
company adopted the guidance effective January 1, 2018 using basic and diluted earnings per share of $0.62 per share for the
the modified retrospective transition method. At adoption, $557 year ended December 31, 2017. No transactions impacted the
million was reclassified from notes and accounts receivable— consolidated financial results for the year ended December 31,
trade and deferred income—current to prepaid expenses and 2018. The ongoing impact of this guidance will be dependent on
other current assets to establish the opening balance for net any transaction that is within its scope.
In March 2016, the FASB issued guidance which changed the Each acquisition is expected to enhance the company’s portfolio
accounting for share-based payment transactions, including of product and services capabilities. Armanta is a provider of
the income tax consequences, classification of awards as aggregation and analytics software to financial institutions,
either equity or liabilities and classification in the Consolidated enabling data aggregation across multiple systems in near real-
Statement of Cash Flows. The guidance was effective and time speed, enhancing decision-making and improving regulatory
adopted by the company on January 1, 2017, and it did not have compliance. Oniqua is a global innovator in maintenance-
a material impact in the Consolidated Statement of Financial repair-operate inventory optimization solutions and services for
Position. The ongoing impact of the guidance could result asset-intensive industries.
in increased volatility in the provision for income taxes and
earnings per share in the Consolidated Statement of Earnings, The acquisitions were accounted for as business combinations
depending on the company’s share price at exercise or vesting using the acquisition method, and accordingly, the identifiable
of share-based awards compared to grant date, however these assets acquired, the liabilities assumed, and any noncontrolling
impacts are not expected to be material. These impacts are interest in the acquired entity were recorded at their estimated
recorded on a prospective basis. The company continues to fair values at the date of acquisition. The acquisitions did not
estimate forfeitures in conjunction with measuring stock-based have a material impact in the Consolidated Financial Statements.
compensation cost. The guidance also requires cash payments The primary items that generated the goodwill are the value of
on behalf of employees for shares directly withheld for taxes to be the synergies between the acquired businesses and IBM and the
presented as financing outflows in the Consolidated Statement acquired assembled workforce, neither of which qualify as an
of Cash Flows. The FASB also issued guidance in May 2017 and amortizable intangible asset.
June 2018, which relates to the accounting for modifications of
share-based payment awards and accounting for share-based On October 28, 2018, the company announced its intent to
payments issued to non-employees, respectively. The company acquire all of the outstanding shares of Red Hat, Inc. (Red Hat).
adopted the guidance for modifications in the second quarter of The combination of Red Hat’s vast portfolio of open-source
2017, and guidance for non-employees’ payments in the second technologies, innovative cloud development platform and
quarter of 2018. The guidance had no impact in the consolidated developer community, combined with IBM’s innovative hybrid
financial results. cloud technology, industry expertise, and commitment to data,
trust and security, will deliver the hybrid cloud capabilities
required to address the next chapter of cloud implementations.
NOTE C. ACQUISITIONS/DIVESTITURES
Under the terms of the definitive agreement, Red Hat shareholders
Acquisitions
will receive $190 per share in cash, representing a total enterprise
Purchase price consideration for all acquisitions, as reflected in
value of approximately $34 billion. On January 16, 2019, Red
the tables in this note, was paid primarily in cash. All acquisitions
Hat stockholders voted to approve the merger with IBM. The
are reported in the Consolidated Statement of Cash Flows net of
transaction is subject to customary closing conditions, including
acquired cash and cash equivalents.
regulatory reviews and is expected to close in the second half
of 2019. The company intends to fund the transaction through a
2018
combination of cash and debt. Refer to note J, “Borrowings,” for
In 2018, the company completed two acquisitions at an
additional details on the bridge loan credit facility that IBM has
aggregate cost of $49 million. These acquisitions were for 100
entered into in support of this transaction.
percent of the acquired businesses.
The Cognitive Solutions segment completed the acquisition of

one privately held business in the second quarter, Armanta, Inc.
(Armanta). The GBS segment completed the acquisition of one
privately held business in the second quarter, Oniqua Holdings
Pty Ltd. (Oniqua).
2017 2017 Acquisitions

In 2017, the company completed five acquisitions at an aggregate
($ in millions)
cost of $134 million. All of these acquisitions were for 100
Amortization Total
percent of the acquired businesses. Life (in Years) Acquisitions
Current assets $ 18
The Technology Services & Cloud Platforms segment completed
Fixed assets/noncurrent assets 69
acquisitions of three businesses: in the first quarter, Agile 3
Solutions, LLC (Agile 3 Solutions), a privately held business; Intangible assets
in the third quarter, the cloud and managed hosting services Goodwill N/A 16
business from a large U.S. telecommunications company, and Completed technology 5 9
Cloudigo Ltd. (Cloudigo), a privately held business. The Cognitive Client relationships 5–7 64
Solutions segment completed the acquisition of one privately Patents/trademarks 1–5 1
held business: in the second quarter, XCC Web Content & Custom
Total assets acquired 177
Apps Extension (XCC) from TIMETOACT Software & Consulting
Current liabilities (9)
GmbH. GBS completed the acquisition of one privately held
business: in the fourth quarter, Vivant Digital (Vivant). Noncurrent liabilities (34)
Total liabilities assumed (43)
Agile 3 Solutions is a developer of software used by C-Suite Total purchase price $134
and senior executives to better visualize, understand and
N/A—Not applicable
manage risks associated with the protection of sensitive data
and adds capabilities to the company’s security portfolio. The
The overall weighted-average life of the identified amortizable
acquisition of the cloud and managed hosting services business
intangible assets acquired was 6.6 years. These identified
of a large U.S. telecommunications company strengthens the
intangible assets will be amortized on a straight-line basis over
company’s services portfolio and aligns with its cloud strategy.
their useful lives. Goodwill of $13 million was assigned to the
Cloudigo brings talent and technology that aligns closely with
Technology Services & Cloud Platforms segment and goodwill
the company’s cloud platform investments in advanced network
of $3 million was assigned to the Cognitive Solutions segment.
processing. XCC’s technology enhances IBM’s Connections Cloud
It was expected that approximately 50 percent of the goodwill
platform by providing a single, accessible engagement center for
will be deductible for tax purposes.
sharing content. Vivant extends the strategy and design expertise
of IBM Interactive Experience (IBM iX) and helps accelerate
2016
clients’ digital transformations.
In 2016, the company completed fifteen acquisitions at an
aggregate cost of $5,899 million.
The following table reflects the purchase price related to these
acquisitions and the resulting purchase price allocations as of
The Weather Company (TWC)—On January 29, 2016, the
December 31, 2017.
company completed the acquisition of TWC’s B2B, mobile
and cloud-based Web-properties, weather.com, Weather
Underground, The Weather Company brand and WSI, its global
business-to-business brand, for cash consideration of $2,278
million. The cable television segment was not acquired by IBM,
but is licensing weather forecast data and analytics from IBM
under a long-term contract. TWC was a privately held business.
Goodwill of $1,717 million was assigned to the Cognitive
Solutions segment. It was expected that none of the goodwill
would be deductible for tax purposes. The overall weighted-
average useful life of the identified intangible assets acquired
was 6.9 years.
Truven Health Analytics, Inc. (Truven)—On April 8, 2016, the and cloud infrastructure. Resource/Ammirati is a leading U.S.-
company completed the acquisition of 100 percent of Truven, based digital marketing and creative agency, addressing the
a leading provider of healthcare analytics solutions, for cash rising demand from businesses seeking to reinvent themselves
consideration of $2,612 million, of which $2,412 million was paid for the digital economy. Ecx.io enhances GBS’ IBM iX with new
in April 2016 and $148 million was paid in July 2017. Truven has digital marketing, commerce and platform skills to accelerate
developed proprietary analytic methods and assembled analytic clients’ digital transformations. Optevia is a Software-as-
content assets, creating extensive national healthcare utilization, a-Service systems integrator specializing in CRM solutions
performance, quality and cost data. Truven was a privately for public sector organizations. Aperto also joined IBM iX,
held business. Goodwill of $1,933 million was assigned to the supporting the company’s growth in Europe, with expertise
Cognitive Solutions segment. It was expected that approximately in digital strategy projects, including website and application
15 percent of the goodwill would be deductible for tax purposes. development. Bluewolf extends the company’s analytics,
The overall weighted-average useful life of the identified experience design and industry consulting leadership with one
intangible assets acquired was 6.9 years. of the world’s leading Salesforce consulting practices to deliver
differentiated, consumer-grade experiences via the cloud. Fluid,
Other Acquisitions—The Technology Services & Cloud Platforms Inc.’s Expert Personal Shopper business extends the company’s
segment completed acquisitions of four businesses: in the first portfolio of SaaS offerings and services, helping clients conduct
quarter, Ustream, Inc. (Ustream), a privately held business, commerce and engage with their customers. Resilient, a provider
and AT&T’s application and hosting services business; in the of incident response solutions, automates and orchestrates the
third quarter, G4S’s cash solutions business; and in the fourth many processes needed when dealing with cyber incidents from
quarter, Sanovi Technologies Private Limited (Sanovi), a privately breaches to lost devices. EZSource helps developers quickly
held business. GBS completed acquisitions of six privately and easily understand and change mainframe code based on
held businesses: in the first quarter, Resource/Ammirati, ecx data displayed through dashboards and other visualizations.
International AG (ecx.io) and Optevia Limited (Optevia); in the Promontory, a global market-leading risk management and
second quarter, Aperto AG (Aperto) and Bluewolf Group, LLC regulatory compliance consulting firm, helps address clients’
(Bluewolf); and in the fourth quarter, Fluid, Inc.’s Expert Personal escalating regulations and risk management requirements.
Shopper (XPS) business. The Cognitive Solutions segment
completed acquisitions of three privately held businesses: in the All of these Other Acquisitions were for 100 percent of the
second quarter, Resilient Systems, Inc. (Resilient) and EZ Legacy, acquired businesses.
Ltd. (EZSource); and in the fourth quarter, Promontory Financial
Group, LLC (Promontory).
Ustream provides cloud-based video streaming to enterprises

and broadcasters. The acquisition of AT&T’s application and
hosting services business strengthens the company’s cloud
portfolio. The acquisition of the G4S cash solutions business
brings together the engineering skills of G4S with the company’s
analytics and remote technology capabilities to expand delivery
solutions. Sanovi provides hybrid cloud recovery, cloud migration
and business continuity software for enterprise data centers
The following table reflects the purchase price related to these acquisitions and the resulting purchase price allocations as of
December 31, 2016.
2016 Acquisitions
($ in millions)
Amortization The Weather Truven Health Other
Life (in Years) Company Analytics Acquisitions
Current assets $ 76 $ 171 $ 153
Fixed assets/noncurrent assets 123 127 110
Intangible assets
Goodwill N/A 1,717 1,933 593
Completed technology 1–7 160 338 96
Client relationships 3–7 313 516 226
Patents/trademarks 1–7 349 54 42
Total assets acquired 2,738 3,141 1,220
Current liabilities (88) (148) (96)
Noncurrent liabilities (372) (381) (76)
Total liabilities assumed (460) (529) (171)
Bargain purchase gain — — (40)*
Total purchase price $2,278 $2,612 $1,009
* Bargain purchase gain relating to AT&T’s application and hosting services business was recognized in selling, general and administrative expense in
the Consolidated Statement of Earnings in the three months ended March 31, 2016.
For the Other Acquisitions, the overall weighted-average life Other—On December 2, 2018, IBM entered into a definitive
of the identified amortizable intangible assets acquired was agreement to sell certain commercial financing capabilities and
6.3 years. These identified intangible assets will be amortized assign a number of its commercial financing contracts, excluding
on a straight-line basis over their useful lives. Goodwill of related receivables which will be collected as they become due
$119 million was assigned to the Technology Services & Cloud in the normal course of business. These commercial financing
Platforms segment, goodwill of $303 million was assigned to the capabilities and contracts have been reported within IBM’s
GBS segment and goodwill of $171 million was assigned to the Global Financing segment. The transaction is expected to close in
Cognitive Solutions segment. It was expected that approximately the first quarter of 2019, subject to the satisfaction of applicable
55 percent of the goodwill would be deductible for tax purposes. regulatory requirements and customary closing conditions. The
financial terms related to the transaction were not material.
Divestitures
Select IBM software products—On December 6, 2018, IBM Others
and HCL Technologies Limited (HCL) announced a definitive 2017—In the first quarter of 2017, the company completed one
agreement, in which HCL will acquire select standalone Cognitive research-related divestiture. The Cognitive Solutions segment
Solutions software products for $1,775 million, inclusive of completed four divestitures; two in the second quarter of 2017
contingent consideration. The software products in-scope and one each in the third and fourth quarter of 2017. The financial
include AppScan, BigFix, Unica, Commerce, Portal, Notes, terms related to these transactions were not material. Overall,
Domino and Connections. The transaction is expected to close the company recognized a pre-tax gain of $31 million related to
in mid-2019, subject to the satisfaction of applicable regulatory these transactions in 2017.
requirements and customary closing conditions. IBM will receive
cash consideration, with approximately half at closing and the 2016—In the first quarter of 2016, the company completed four
remainder within 12 to 15 months of closing. The company software product-related divestitures. In the fourth quarter of
expects to recognize a pre-tax gain upon closing, however, the 2016, the company completed the divestiture of one service-
amount of the gain is not yet determinable. At December 31, related offering. The financial terms related to these transactions
2018, the company concluded that the business did not meet were not material. Overall, the company recorded a pre-tax gain
the held for sale classification. of $42 million related to these transactions in 2016.
Seterus—On January 3, 2019, IBM and Mr. Cooper Group

announced a definitive agreement, in which Mr. Cooper Group
will acquire IBM’s Seterus home mortgage servicing platform
business. The Seterus content has been reported in Global
Process Services, within IBM’s GBS segment. The transaction
is expected to close in the first quarter of 2019, subject to the
satisfaction of applicable regulatory requirements and customary
closing conditions. The financial terms related to this transaction
are not material.
NOTE D. FINANCIAL INSTRUMENTS

Fair Value Measurements
Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables present the company’s financial assets and financial liabilities that are measured at fair value on a recurring
basis at December 31, 2018 and 2017.
($ in millions)
At December 31, 2018: Level 1 Level 2 Level 3 Total
Assets
Cash equivalents (1)
Time deposits and certificates of deposit $ — $7,679 $ — $7,679 (6)
Money market funds 25 — — 25
Total 25 7,679 — 7,704
Equity investments (2) 0 — — 0
Debt securities—current (3) — 618 — 618 (6)
Derivative assets (4) 1 731 — 731 (7)
Total assets $26 $9,028 $ — $9,053
Liabilities
Derivative liabilities (5) $40 $ 343 $ — $ 383 (7)
(1)
Included within cash and cash equivalents in the Consolidated Statement of Financial Position.
(2)
Included within investments and sundry assets in the Consolidated Statement of Financial Position.
(3)
Included within marketable securities in the Consolidated Statement of Financial Position.
(4)
The gross balances of derivative assets contained within prepaid expenses and other current assets, and investments and sundry assets in the
Consolidated Statement of Financial Position at December 31, 2018 were $385 million and $347 million, respectively.
(5)
The gross balances of derivative liabilities contained within other accrued expenses and liabilities, and other liabilities in the Consolidated Statement
of Financial Position at December 31, 2018 were $177 million and $206 million, respectively.
Available-for-sale debt securities with carrying values that approximate fair value.
(6)
(7)
If derivative exposures covered by a qualifying master netting agreement had been netted in the Consolidated Statement of Financial Position, the
total derivative asset and liability positions each would have been reduced by $267 million.
($ in millions)
At December 31, 2017: Level 1 Level 2 Level 3 Total
Assets
Cash equivalents (1)
Time deposits and certificates of deposit $ — $ 8,066 $ — $ 8,066
Commercial paper — 96 — 96
Money market funds 26 — — 26
Canadian government securities — 398 — 398
Total 26 8,560 — 8,586 (6)
Equity investments (2)
4 — — 4
Debt securities—current (3) — 608 — 608 (6)
Debt securities—noncurrent (2) 4 7 — 11
Derivative assets (4) — 942 — 942 (7)
Total assets $33 $10,117 $ — $10,151
Liabilities
Derivative liabilities (5) $ — $ 415 $ — $ 415 (7)
(1)
Included within cash and cash equivalents in the Consolidated Statement of Financial Position.
(2)
Included within investments and sundry assets in the Consolidated Statement of Financial Position.
(3)
U.S. Government securities reported as marketable securities in the Consolidated Statement of Financial Position.
(4)
The gross balances of derivative assets contained within prepaid expenses and other current assets, and investments and sundry assets in the
Consolidated Statement of Financial Position at December 31, 2017 were $185 million and $757 million, respectively.
(5)
The gross balances of derivative liabilities contained within other accrued expenses and liabilities, and other liabilities in the Consolidated Statement
of Financial Position at December 31, 2017 were $377 million and $38 million, respectively.
Available-for-sale securities with carrying values that approximate fair value.
(6)
(7)
If derivative exposures covered by a qualifying master netting agreement had been netted in the Consolidated Statement of Financial Position, the
total derivative asset and liability positions each would have been reduced by $255 million.
Financial Assets and Liabilities Not Measured at Fair Value Long-Term Debt
Short-Term Receivables and Payables Fair value of publicly traded long-term debt is based on quoted
Notes and other accounts receivable and other investments market prices for the identical liability when traded as an
are financial assets with carrying values that approximate fair asset in an active market. For other long-term debt for which a
value. Accounts payable, other accrued expenses and short- quoted market price is not available, an expected present value
term debt (excluding the current portion of long-term debt) technique that uses rates currently available to the company
are financial liabilities with carrying values that approximate for debt with similar terms and remaining maturities is used to
fair value. If measured at fair value in the financial statements, estimate fair value. The carrying amount of long-term debt was
these financial instruments would be classified as Level 3 in the $35,605 million and $39,837 million and the estimated fair value
fair value hierarchy, except for short-term debt, which would be was $36,599 million and $42,264 million at December 31, 2018
classified as Level 2. and 2017, respectively. If measured at fair value in the financial
statements, long-term debt (including the current portion) would
Loans and Long-Term Receivables be classified as Level 2 in the fair value hierarchy.
Fair values are based on discounted future cash flows using
current interest rates offered for similar loans to clients with Available-for-Sale Securities
similar credit ratings for the same remaining maturities. At Gross realized gains/losses from the sale of available-for-sale
December 31, 2018 and 2017, the difference between the securities during the years ended December 31, 2018 and 2017
carrying amount and estimated fair value for loans and long- were immaterial. After-tax net unrealized holding gains/losses
term receivables was immaterial. If measured at fair value in on available-for-sale securities that have been included in other
the financial statements, these financial instruments would be comprehensive income/(loss) for the years ended December 31,
classified as Level 3 in the fair value hierarchy. 2018 and 2017 were immaterial.
During the fourth quarter of 2014, the company acquired equity As a result of the use of derivative instruments, the company is
securities in conjunction with the sale of the System x business exposed to the risk that counterparties to derivative contracts
which were classified as available-for-sale securities. Based on will fail to meet their contractual obligations. To mitigate the
an evaluation of available evidence as of December 31, 2015, counterparty credit risk, the company has a policy of only
the company recorded an other-than-temporary impairment entering into contracts with carefully selected major financial
loss of $86 million resulting in an adjusted cost basis of $185 institutions based upon their overall credit profile. The company’s
million as of December 31, 2015. In the first quarter of 2016, the established policies and procedures for mitigating credit risk
company recorded a gross realized loss of $37 million (before on principal transactions include reviewing and establishing
taxes) related to the sale of all the outstanding shares. The loss limits for credit exposure and continually assessing the
on this sale was recorded in other (income) and expense in the creditworthiness of counterparties. The right of setoff that exists
Consolidated Statement of Earnings. under certain of these arrangements enables the legal entities
of the company subject to the arrangement to net amounts due
Sales of debt and available-for-sale equity investments during to and from the counterparty reducing the maximum loss from
the period were as follows: credit risk in the event of counterparty default.
($ in millions) The company is also a party to collateral security arrangements

For the year ended December 31: 2018 2017 2016 with most of its major derivative counterparties. These
Proceeds $0 $7 $151 arrangements require the company to hold or post collateral
Gross realized gains (cash or U.S. Treasury securities) when the derivative fair values
(before taxes) — 3 3 exceed contractually established thresholds. Posting thresholds
can be fixed or can vary based on credit default swap pricing
Gross realized losses
(before taxes) — 2 37 or credit ratings received from the major credit agencies. The
aggregate fair value of all derivative instruments under these
collateralized arrangements that were in a liability position at
The contractual maturities of substantially all available-for-sale December 31, 2018 and 2017 was $74 million and $126 million,
debt securities are less than one year at December 31, 2018. respectively, for which no collateral was posted at either date.
Full collateralization of these agreements would be required in
Derivative Financial Instruments the event that the company’s credit rating falls below investment
The company operates in multiple functional currencies and grade or if its credit default swap spread exceeds 250 basis
is a significant lender and borrower in the global markets. In points, as applicable, pursuant to the terms of the collateral
the normal course of business, the company is exposed to the security arrangements. The aggregate fair value of derivative
impact of interest rate changes and foreign currency fluctuations, instruments in asset positions as of December 31, 2018 and 2017
and to a lesser extent equity and commodity price changes and was $731 million and $942 million, respectively. This amount
client credit risk. The company limits these risks by following represents the maximum exposure to loss at the reporting date if
established risk management policies and procedures, including the counterparties failed to perform as contracted. This exposure
the use of derivatives, and, where cost effective, financing with was reduced by $267 million and $255 million at December 31,
debt in the currencies in which assets are denominated. For 2018 and 2017, respectively, of liabilities included in master
interest rate exposures, derivatives are used to better align netting arrangements with those counterparties. Additionally, at
rate movements between the interest rates associated with the December 31, 2018 and 2017, this exposure was reduced by $70
company’s lease and other financial assets and the interest rates million and $114 million of cash collateral, respectively. There
associated with its financing debt. Derivatives are also used to were no non-cash collateral balances in U.S. Treasury securities
manage the related cost of debt. For foreign currency exposures, at December 31, 2018 and 2017. At December 31, 2018 and
derivatives are used to better manage the cash flow volatility 2017, the net exposure related to derivative assets recorded
arising from foreign exchange rate fluctuations. in the Consolidated Statement of Financial Position was $395
million and $572 million, respectively. At December 31, 2018 and
2017, the net position related to derivative liabilities recorded
in the Consolidated Statement of Financial Position was $116
million and $160 million, respectively.
In the Consolidated Statement of Financial Position, the company Forecasted Debt Issuance
does not offset derivative assets against liabilities in master The company is exposed to interest rate volatility on future
netting arrangements nor does it offset receivables or payables debt issuances. To manage this risk, the company may use
recognized upon payment or receipt of cash collateral against the instruments such as forward starting interest-rate swaps to lock
fair values of the related derivative instruments. No amount was in the rate on the interest payments related to the forecasted
recognized in other receivables at December 31, 2018 and 2017 debt issuances. In connection with this program, in the fourth
for the right to reclaim cash collateral. The amount recognized in quarter of 2018, the company entered into forward starting
accounts payable for the obligation to return cash collateral was interest-rate swaps. These swaps are linked to future interest
$70 million and $114 million at December 31, 2018 and 2017, payments on anticipated U.S. dollar debt issuances forecasted to
respectively. The company restricts the use of cash collateral occur throughout 2019 and 2020. These swaps are accounted for
received to rehypothecation, and therefore reports it in restricted as cash flow hedges. The maximum length of time over which the
cash in the Consolidated Statement of Financial Position. No company has hedged its exposure to the variability in future cash
amount was rehypothecated at December 31, 2018 and 2017. flows is 30 years. As of December 31, 2018, the total notional
amount of forward starting interest-rate swaps outstanding was
The company may employ derivative instruments to hedge $5.5 billion. The company did not have any derivative instruments
the volatility in stockholders’ equity resulting from changes in relating to this program outstanding at December 31, 2017.
currency exchange rates of significant foreign subsidiaries of
the company with respect to the U.S. dollar. These instruments, At December 31, 2018, in connection with cash flow hedges
designated as net investment hedges, expose the company to of forecasted interest payments related to the company’s
liquidity risk as the derivatives have an immediate cash flow borrowings, the company recorded net losses of $35 million
impact upon maturity which is not offset by a cash flow from (before taxes) in AOCI. None of the deferred net losses on
the translation of the underlying hedged equity. The company derivatives in AOCI at December 31, 2018 is expected to be
monitors this cash loss potential on an ongoing basis and reclassified to net income within the next 12 months.
may discontinue some of these hedging relationships by
de-designating or terminating the derivative instrument in Foreign Exchange Risk
order to manage the liquidity risk. Although not designated as Long-Term Investments in Foreign Subsidiaries
accounting hedges, the company may utilize derivatives to offset (Net Investment)
the changes in the fair value of the de-designated instruments A large portion of the company’s foreign currency denominated
from the date of de-designation until maturity. debt portfolio is designated as a hedge of net investment in
foreign subsidiaries to reduce the volatility in stockholders’
In its hedging programs, the company uses forward contracts, equity caused by changes in foreign currency exchange rates in
futures contracts, interest-rate swaps, cross-currency swaps, the functional currency of major foreign subsidiaries with respect
and options depending upon the underlying exposure. The to the U.S. dollar. The company also uses cross-currency swaps
company is not a party to leveraged derivative instruments. and foreign exchange forward contracts for this risk management
purpose. At December 31, 2018 and 2017, the total notional
A brief description of the major hedging programs, categorized amount of derivative instruments designated as net investment
by underlying risk, follows. hedges was $6.4 billion and $7.0 billion, respectively. At
December 31, 2018 and 2017, the weighted-average remaining
Interest Rate Risk maturity of these instruments was approximately 0.2 years at
Fixed and Variable Rate Borrowings both periods.
The company issues debt in the global capital markets to fund
its operations and financing business. Access to cost-effective Anticipated Royalties and Cost Transactions
financing can result in interest rate mismatches with the The company’s operations generate significant nonfunctional
underlying assets. To manage these mismatches and to reduce currency, third-party vendor payments and intercompany
overall interest cost, the company may use interest-rate swaps payments for royalties and goods and services among the
to convert specific fixed-rate debt issuances into variable-rate company’s non-U.S. subsidiaries and with the company. In
debt (i.e., fair value hedges) and to convert specific variable- anticipation of these foreign currency cash flows and in view of
rate debt issuances into fixed-rate debt (i.e., cash flow hedges). the volatility of the currency markets, the company selectively
At December 31, 2018 and 2017, the total notional amount of employs foreign exchange forward contracts to manage its
the company’s interest-rate swaps was $7.6 billion and $9.1 currency risk. These forward contracts are accounted for as
billion, respectively. The weighted-average remaining maturity cash flow hedges. The maximum length of time over which the
of these instruments at December 31, 2018 and 2017 was company has hedged its exposure to the variability in future cash
approximately 3.5 years and 4.8 years, respectively. These flows is four years. At December 31, 2018 and 2017, the total
interest rate contracts were accounted for as fair value hedges. notional amount of forward contracts designated as cash flow
The company did not have any cash flow hedges relating to this hedges of forecasted royalty and cost transactions was $9.8
program outstanding at December 31, 2018 and 2017. billion and $7.8 billion, respectively. The weighted-average
remaining maturity of these instruments at December 31, 2018
and 2017 was 0.8 years and 0.7 years, respectively.
At December 31, 2018 and 2017, in connection with cash Subsidiary Cash and Foreign Currency
flow hedges of anticipated royalties and cost transactions, the Asset/Liability Management
company recorded net gains of $342 million and net gains of The company uses its Global Treasury Centers to manage the
$27 million (before taxes), respectively, in AOCI. The company cash of its subsidiaries. These centers principally use currency
estimates that $266 million (before taxes) of deferred net gains swaps to convert cash flows in a cost-effective manner. In
on derivatives in AOCI at December 31, 2018 will be reclassified addition, the company uses foreign exchange forward contracts
to net income within the next 12 months, providing an offsetting to economically hedge, on a net basis, the foreign currency
economic impact against the underlying anticipated transactions. exposure of a portion of the company’s nonfunctional currency
assets and liabilities. The terms of these forward and swap
Foreign Currency Denominated Borrowings contracts are generally less than one year. The changes in the
The company is exposed to exchange rate volatility on foreign fair values of these contracts and of the underlying hedged
currency denominated debt. To manage this risk, the company exposures are generally offsetting and are recorded in other
employs cross-currency swaps to convert fixed-rate foreign (income) and expense in the Consolidated Statement of Earnings.
currency denominated debt to fixed-rate debt denominated in At December 31, 2018 and 2017, the total notional amount of
the functional currency of the borrowing entity. These swaps derivative instruments in economic hedges of foreign currency
are accounted for as cash flow hedges. The maximum length exposure was $5.2 billion and $11.5 billion, respectively.
of time over which the company has hedged its exposure to
the variability in future cash flows is approximately ten years. Equity Risk Management
At December 31, 2018 and 2017, the total notional amount of The company is exposed to market price changes in certain
cross-currency swaps designated as cash flow hedges of foreign broad market indices and in the company’s own stock primarily
currency denominated debt was $6.5 billion at both periods. related to certain obligations to employees. Changes in the
overall value of these employee compensation obligations
At December 31, 2018 and 2017, in connection with cash are recorded in SG&A expense in the Consolidated Statement
flow hedges of foreign currency denominated borrowings, the of Earnings. Although not designated as accounting hedges,
company recorded net gains of $75 million and net gains of the company utilizes derivatives, including equity swaps and
$42 million (before taxes), respectively, in AOCI. The company futures, to economically hedge the exposures related to its
estimates that $189 million (before taxes) of deferred net gains employee compensation obligations. The derivatives are linked
on derivatives in AOCI at December 31, 2018, will be reclassified to the total return on certain broad market indices or the total
to net income within the next 12 months, providing an offsetting return on the company’s common stock, and are recorded at
economic impact against the underlying exposure. fair value with gains or losses also reported in SG&A expense in
the Consolidated Statement of Earnings. At December 31, 2018
and 2017, the total notional amount of derivative instruments in
economic hedges of these compensation obligations was $1.2
billion and $1.3 billion, respectively.
Other Risks
The company may hold warrants to purchase shares of common any derivative instruments relating to this program outstanding
stock in connection with various investments that are deemed at December 31, 2018 and 2017.
derivatives because they contain net share or net cash settlement
provisions. The company records the changes in the fair value of The company is exposed to market volatility on certain
these warrants in other (income) and expense in the Consolidated investment securities. The company may utilize options or
Statement of Earnings. The company did not have any warrants forwards to economically hedge its market exposure. The
qualifying as derivatives outstanding at December 31, 2018 derivatives are recorded at fair value with gains and losses
and 2017. reported in other (income) and expense in the Consolidated
Statement of Earnings. At December 31, 2018 and 2017, the
The company is exposed to a potential loss if a client fails to company did not have any derivative instruments relating to this
pay amounts due under contractual terms. The company may program outstanding.
utilize credit default swaps to economically hedge its credit
exposures. The swaps are recorded at fair value with gains The following tables provide a quantitative summary of the
and losses reported in other (income) and expense in the derivative and non-derivative instrument-related risk management
Consolidated Statement of Earnings. The company did not have activity at December 31, 2018 and 2017, as well as for the years
ended December 31, 2018, 2017 and 2016, respectively.
Fair Values of Derivative Instruments in the Consolidated Statement of Financial Position
($ in millions)
Fair Value of Derivative Assets Fair Value of Derivative Liabilities
Balance Sheet Balance Sheet
At December 31: Classification 2018 2017 Classification 2018 2017
Designated as hedging
instruments
Prepaid expenses and Other accrued
Interest rate contracts other current assets $ 9 $ 2 expenses and liabilities 4
$ $
—
Investments and
sundry assets 212 459 Other liabilities 76 34
Foreign exchange Prepaid expenses and Other accrued
contracts other current assets 348 111 expenses and liabilities 110 318
Investments and
sundry assets 135 298 Other liabilities 129 3
Fair value of Fair value of
derivative assets $704 $870 derivative liabilities $ 320 $ 355
Not designated as hedging
instruments
Foreign exchange Prepaid expenses and Other accrued
contracts other current assets $ 26 $ 61 expenses and liabilities $ 13 $ 57
Prepaid expenses and Other accrued
Equity contracts other current assets 2 12 expenses and liabilities 51 3
Fair value of Fair value of
derivative assets $ 28 $ 72 derivative liabilities $ 63 $ 60
Total derivatives $731 $942 $ 383 $ 415
Total debt designated as
hedging instruments (1)
Short-term debt N/A N/A $ — $ —
Long-term debt N/A N/A 6,261 6,471
N/A N/A $6,261 $6,471
Total $731 $942 $6,644 $6,886
D ebt designated as hedging instruments are reported at carrying value.

(1)
At December 31, 2018, the following amounts were recorded in the Consolidated Statement of Financial Position related to cumulative
basis adjustments for fair value hedges:
($ in millions)
Cumulative Amount
of Fair Value Hedging
Carrying Amount Adjustment Included
Line Item in the Consolidated Statement of Financial Position of the Hedged Item in the Carrying Amount
in which the Hedged Item is Included Assets/(Liabilities) of Assets/(Liabilities)
Short-term debt $(1,878) $ (4)(1)
Long-term debt $(6,004) $(333)(2)
(1)
Includes ($6) million of hedging adjustments on discontinued hedging relationships.
Includes ($213) million of hedging adjustments on discontinued hedging relationships.
(2)
The Effect of Derivative Instruments

in the Consolidated Statement of Earnings
The total amounts of income and expense line items presented and derivatives not designated as hedging instruments are
in the Consolidated Statement of Earnings in which the effects recorded and the total effect of hedge activity on these income
of fair value hedges, cash flow hedges, net investment hedges and expense line items, are as follows:
($ in millions)
Other
Cost of Cost of Cost of SG&A (Income) and Interest
For the year ended December 31, 2018 Services Sales Financing Expense Expense Expense
Total $34,059 $7,464 $1,132 $19,366 $1,152 $723
Gains/(losses) of total hedge activity 30 8 (6) (116) (434) (6)
($ in millions)
Gain/(Loss) Recognized in Earnings
Attributable to Risk
Consolidated Recognized on Derivatives Being Hedged (2)
Statement of
For the year ended December 31: Earnings Line Item 2018 2017 2016 2018 2017 2016
Derivative instruments in fair value hedges (1)
Interest rate contracts Cost of financing $ (61) $ 1 $ 28 $ 97 $ 74 $ 58
Interest expense (58) 1 31 92 69 63
Derivative instruments not designated
as hedging instruments
Other (income)
Interest rate contracts and expense — — 0 N/A N/A N/A
Other (income)
Foreign exchange contracts and expense (93) 16 (189) N/A N/A N/A
Equity contracts SG&A expense (116) 135 112 N/A N/A N/A
Other (income)
and expense — — (1) N/A N/A N/A
Total $(327) $153 $ (18) $189 $144 $121
($ in millions)
Gain/(Loss) Recognized in Earnings and Other Comprehensive Income
Amounts Excluded from
Recognized in OCI Consolidated Reclassified from AOCI Effectiveness Testing (3)
For the year ended Statement of
December 31: 2018 2017 2016 Earnings Line Item 2018 2017 2016 2018 2017 2016
Derivative instruments
in cash flow hedges
Interest rate
contracts $ (35) $ — $ — Cost of financing $ — $ — $ — $ — $ — $ —
Interest expense — — — — — —
Foreign exchange
contracts (101) (58) 243 Cost of services 30 70 (8) — — —
Cost of sales 8 3 (5) — — —
Cost of financing* (75) (23) (12) — — —
SG&A expense 0 11 4 — — —
Other (income)
and expense (341) 324 (68) — 1 (3)
Interest expense* (71) (22) (13) — — —
Instruments in net
investment hedges (4)
Foreign exchange
contracts 686 (1,607) 311 Cost of financing* — — — 33 23 37
Interest expense* — — — 31 21 40
Total $ 549 $(1,665) $555 $(449) $363 $(102) $64 $45 $74
* Reclassified to conform to 2018 presentation.

Prior period gain or loss amounts and presentation are not conformed to the new hedge accounting guidance that the company adopted in 2018.
Refer to note B, “Accounting Changes,” for further information.
(1)
The amount includes changes in clean fair values of the derivative instruments in fair value hedging relationships and the periodic accrual for
coupon payments required under these derivative contracts.
(2)
The amount includes basis adjustments to the carrying value of the hedged item recorded during the period and amortization of basis adjustments
recorded on de-designated hedging relationships during the period.
The company’s policy is to recognize all fair value changes in amounts excluded from effectiveness testing in net income each period.
(3)
(4)
Instruments in net investment hedges include derivative and non-derivative instruments.
N/A — Not applicable
For the years ended December 31, 2018, 2017 and 2016, there associated with an underlying exposure that did not or was not
were no material gains or losses excluded from the assessment expected to occur (for cash flow hedges); nor are there any
of hedge effectiveness (for fair value or cash flow hedges), or anticipated in the normal course of business.
NOTE E. INVENTORIES (loans). Investment in sales-type and direct financing leases

relates principally to the company’s systems products and are
($ in millions)
for terms ranging generally from two to six years. Commercial
financing receivables relate primarily to inventory and accounts
Finished goods $ 266 $ 333 receivable financing for dealers and remarketers of IBM and OEM
Work in process and raw materials 1,415 1,250 products. Payment terms for inventory and accounts receivable
Total $1,682 $1,583 financing generally range from 30 to 90 days. Client loan and
installment payment receivables (loans) are provided primarily
to clients to finance the purchase of hardware, software and
NOTE F. FINANCING RECEIVABLES services. Payment terms on these financing arrangements are
Financing receivables primarily consist of investment in generally for terms up to seven years. Client loans and installment
sales-type and direct financing leases, commercial financing payment financing contracts are priced independently at
receivables and client loan and installment payment receivables competitive market rates.
A summary of the components of the company’s financing receivables is presented as follows:
($ in millions)
Client Loan and
Investment in Installment
Sales-Type and Commercial Payment
Direct Financing Financing Receivables/
At December 31, 2018: Leases Receivables (Loans) Total
Financing receivables, gross $6,846 $11,889 $13,614 $32,348
Unearned income (526) (37) (632) (1,195)
Recorded investment $6,320 $11,852 $12,981 $31,153
Allowance for credit losses (99) (13) (179) (292)
Unguaranteed residual value 589 — — 589
Guaranteed residual value 85 — — 85
Total financing receivables, net $6,895 $11,838 $12,802 $31,536
Current portion $2,834 $11,838 $ 7,716 $22,388
Noncurrent portion $4,061 $ — $ 5,086 $ 9,148
($ in millions)
Client Loan and
Investment in Installment
Sales-Type and Commercial Payment
Direct Financing Financing Receivables/
At December 31, 2017: Leases Receivables (Loans) Total
Financing receivables, gross $7,128 $11,649 $13,311 $32,087
Unearned income (535) (32) (644) (1,210)
Recorded investment $6,593 $11,617 $12,667 $30,877
Allowance for credit losses (103) (21) (211) (336)
Unguaranteed residual value 630 — — 630
Guaranteed residual value 100 — — 100
Total financing receivables, net $7,220 $11,596 $12,456 $31,272
Current portion $2,900 $11,596 $ 7,226 $21,721
Noncurrent portion $4,320 $ — $ 5,230 $ 9,550
Scheduled maturities of minimum lease payments outstanding Financing Receivables by Portfolio Segment
at December 31, 2018, expressed as a percentage of the total, The following tables present the recorded investment by
are approximately: 2019, 44 percent; 2020, 26 percent; 2021, portfolio segment and by class, excluding commercial financing
18 percent; 2022, 9 percent; and 2023 and beyond, 3 percent. receivables and other miscellaneous financing receivables at
December 31, 2018 and 2017. Commercial financing receivables
The company utilizes certain of its financing receivables as collateral are excluded from the presentation of financing receivables
for nonrecourse borrowings. Financing receivables pledged as by portfolio segment, as they are short term in nature and
collateral for borrowings were $710 million and $773 million at the current estimated risk of loss and resulting impact to the
December 31, 2018 and 2017, respectively. These borrowings are company’s financing results are not material. The company
included in note J, “Borrowings,” on pages 108 to 111. determines its allowance for credit losses based on two portfolio
segments: lease receivables and loan receivables, and further
The company did not have any financing receivables held for sale segments the portfolio into three classes: Americas, Europe/
as of December 31, 2018 and 2017. Middle East/Africa (EMEA) and Asia Pacific.
($ in millions)
At December 31, 2018: Americas EMEA Asia Pacific Total
Recorded investment:
Lease receivables $ 3,827 $1,341 $1,152 $ 6,320
Loan receivables 6,817 3,675 2,489 12,981
Ending balance $10,644 $5,016 $3,641 $19,301
Recorded investment, collectively evaluated for impairment $10,498 $4,964 $3,590 $19,052
Recorded investment, individually evaluated for impairment $ 146 $ 52 $ 51 $ 249
Allowance for credit losses
Beginning balance at January 1, 2018
Lease receivables $ 63 $ 9 $ 31 $ 103
Loan receivables 108 52 51 211
Total $ 172 $ 61 $ 82 $ 314
Write-offs (10) (2) (23) (35)
Recoveries 0 0 2 2
Provision 7 9 0 16
Other* (11) (3) (4) (19)
Ending balance at December 31, 2018 $ 158 $ 65 $ 56 $ 279
Loan receivables $ 105 $ 43 $ 32 $ 179
Related allowance, collectively evaluated for impairment $ 39 $ 16 $ 5 $ 59
Related allowance, individually evaluated for impairment $ 119 $ 49 $ 51 $ 219
* Primarily represents translation adjustments.
Write-offs of lease receivables and loan receivables were The average recorded investment of impaired leases and loans for
$15 million and $20 million, respectively, for the year ended Americas, EMEA and Asia Pacific was $138 million, $55 million
December 31, 2018. Provisions for credit losses recorded for and $73 million, respectively, for the year ended December 31,
lease receivables and loan receivables were $14 million and 2018. Both interest income recognized, and interest income
$2 million, respectively, for the year ended December 31, 2018. recognized on a cash basis on impaired leases and loans were
immaterial for the year ended December 31, 2018.
($ in millions)
At December 31, 2017: Americas EMEA Asia Pacific Total
Recorded investment:
Lease receivables $ 3,911 $1,349 $1,333 $ 6,593
Loan receivables 6,715 3,597 2,354 12,667
Ending balance $10,626 $4,946 $3,687 $19,259
Recorded investment, collectively evaluated for impairment $10,497 $4,889 $3,604 $18,990
Recorded investment, individually evaluated for impairment $ 129 $ 57 $ 83 $ 269
Allowance for credit losses
Beginning balance at January 1, 2017
Loan receivables 169 18 89 276
Total $ 223 $ 22 $ 165 $ 410
Write-offs (51) (1) (85) (137)
Recoveries 1 1 0 2
Provision (8) 29 (4) 16
Other* 7 11 6 24
Ending balance at December 31, 2017 $ 172 $ 61 $ 82 $ 314
Loan receivables $ 108 $ 52 $ 51 $ 211
Related allowance, collectively evaluated for impairment $ 43 $ 15 $ 6 $ 64
Related allowance, individually evaluated for impairment $ 128 $ 46 $ 76 $ 250
* Primarily represents translation adjustments.

Write-offs of lease receivables and loan receivables were When determining the allowances, financing receivables are
$55 million and $82 million, respectively, for the year ended evaluated either on an individual or a collective basis. For
December 31, 2017. Provisions for credit losses recorded for individually evaluated receivables, the company determines the
lease receivables and loan receivables were $9 million and $7 expected cash flow for the receivable and calculates an estimate
million, respectively, for the year ended December 31, 2017. of the potential loss and the probability of loss. For those
accounts in which the loss is probable, the company records a
The average recorded investment of impaired leases and loans for specific reserve. The company considers any receivable with an
Americas, EMEA and Asia Pacific was $158 million, $33 million individually evaluated reserve as an impaired receivable.
and $122 million, respectively, for the year ended December 31,
2017. Both interest income recognized, and interest income In addition, the company records an unallocated reserve that is
recognized on a cash basis on impaired leases and loans were determined by applying a reserve rate to its different portfolios,
immaterial for the year ended December 31, 2017. excluding accounts that have been specifically reserved. This
reserve rate is based upon credit rating, probability of default,
term, characteristics (lease/loan) and loss history.
Past Due Financing Receivables

The company considers a client’s financing receivable balance past due when any installment is aged over 90 days. The following
tables present summary information about the recorded investment in lease and loan financing receivables, including recorded
investments aged over 90 days and still accruing, billed invoices aged over 90 days and recorded investment not accruing.
($ in millions)
Recorded Billed
Total Recorded Investment Invoices >90 Recorded
Recorded Investment >90 Days and Days and Investment Not
At December 31, 2018: Investment >90 Days(1) Accruing(1) Accruing Accruing(2)
Americas $ 3,827 $310 $256 $19 $ 57
EMEA 1,341 25 9 1 16
Asia Pacific 1,152 49 27 3 24
Total lease receivables $ 6,320 $385 $292 $24 $ 97
Americas $ 6,817 $259 $166 $24 $ 99
EMEA 3,675 98 25 3 73
Asia Pacific 2,489 40 11 1 31
Total loan receivables $12,981 $397 $202 $29 $203
Total $19,301 $782 $494 $52 $300
(1)
At a contract level, which includes total billed and unbilled amounts for financing receivables aged greater than 90 days.
(2)
O f the recorded investment not accruing, $249 million is individually evaluated for impairment with a related allowance of $219 million.
($ in millions)
Recorded Billed
Total Recorded Investment Invoices >90 Recorded
Recorded Investment >90 Days and Days and Investment Not
At December 31, 2017: Investment >90 Days(1) Accruing(1) Accruing Accruing(2) (3)
Americas $ 3,911 $239 $197 $29 $ 44
EMEA 1,349 32 5 3 27
Asia Pacific 1,333 57 23 3 36
Total lease receivables $ 6,593 $328 $225 $36 $107
Americas $ 6,715 $345 $254 $38 $ 96
EMEA 3,597 90 17 0 74
Asia Pacific 2,354 63 12 3 54
Total loan receivables $12,667 $498 $283 $41 $224
Total $19,259 $825 $507 $77 $331
(1)
At a contract level, which includes total billed and unbilled amounts for financing receivables aged greater than 90 days.
(2)
O f the recorded investment not accruing, $269 million is individually evaluated for impairment with a related allowance of $250 million.
Recast to conform to current period presentation, which includes billed impaired amounts.
(3)
Credit Quality Indicators Lease Receivables

The company’s credit quality indicators, which are based
($ in millions)
on rating agency data, publicly available information and
At December 31, 2017: Americas EMEA Asia Pacific
information provided by customers, are reviewed periodically
based on the relative level of risk. The resulting indicators are a Credit rating
numerical rating system that maps to Moody’s Investors Service Aaa–Aa3 $ 422 $ 49 $ 68
credit ratings as shown below. The company uses information A1–A3 855 190 544
provided by Moody’s, where available, as one of many inputs in Baa1–Baa3 980 371 337
its determination of customer credit ratings. Ba1–Ba2 730 448 184
Ba3–B1 443 192 89
The following tables present the recorded investment net
B2–B3 367 77 64
of allowance for credit losses for each class of receivables,
by credit quality indicator, at December 31, 2018 and 2017. Caa–D 51 13 18
Receivables with a credit quality indicator ranging from Aaa to Total $3,847 $1,340 $1,302
Baa3 are considered investment grade. All others are considered
non-investment grade. The credit quality indicators do not reflect Loan Receivables
mitigation actions that the company takes to transfer credit risk ($ in millions)
to third parties. At December 31, 2017: Americas EMEA Asia Pacific
Credit rating
Lease Receivables
Aaa–Aa3 $ 724 $ 129 $ 120
($ in millions)
A1–A3 1,469 502 961
At December 31, 2018: Americas EMEA Asia Pacific
Baa1–Baa3 1,683 982 596
Credit rating
Ba1–Ba2 1,253 1,186 325
Aaa–Aa3 $ 593 $ 45 $ 85
Ba3–B1 760 508 157
A1–A3 678 158 413
B2–B3 630 204 113
Baa1–Baa3 892 417 297
Caa–D 88 34 31
Ba1–Ba2 852 426 191
Total $6,607 $3,545 $2,303
Ba3–B1 433 171 84
B2–B3 299 90 50
Caa–D 26 10 7 Troubled Debt Restructurings
Total $3,774 $1,319 $1,128 The company did not have any significant troubled debt
restructurings for the years ended December 31, 2018 and 2017.
Loan Receivables
($ in millions) NOTE G. PROPERTY, PLANT AND EQUIPMENT
At December 31, 2018: Americas EMEA Asia Pacific ($ in millions)
Credit rating At December 31: 2018 2017
Aaa–Aa3 $1,055 $ 125 $ 185 Land and land improvements $ 448 $ 480
A1–A3 1,206 436 901 Buildings and building and
Baa1–Baa3 1,587 1,148 648 leasehold improvements 9,640 10,073
Ba1–Ba2 1,516 1,175 417 Information technology equipment 17,468 16,874
Ba3–B1 770 472 184 Production, engineering,
office and other equipment 4,081 4,060
B2–B3 531 249 109
Plant and other property—gross 31,636 31,487
Caa–D 47 28 15
Less: Accumulated depreciation 21,276 20,832
Total $6,712 $3,633 $2,457
Plant and other property—net 10,359 10,655
Rental machines 824 844
Less: Accumulated depreciation 392 383
Rental machines—net 433 462
Total—net $10,792 $11,116
NOTE H. INVESTMENTS AND SUNDRY ASSETS The net carrying amount of intangible assets decreased $655
million during the year ended December 31, 2018, primarily due
($ in millions)
to intangible asset amortization, partially offset by additions
resulting from capitalized software. There was no impairment
Derivatives—noncurrent $ 347 $ 757 of intangible assets recorded in 2018 and 2017. The aggregate
Alliance investments intangible amortization expense was $1,353 million and $1,520
Equity method 192 90 million for the years ended December 31, 2018 and 2017,
Non-equity method 34 32 respectively. In addition, in 2018 and 2017, respectively, the
Long-term deposits 268 271 company retired $1,469 million and $1,753 million of fully
amortized intangible assets, impacting both the gross carrying
Other receivables 359 455
amount and accumulated amortization by this amount.
Employee benefit-related 263 316
Prepaid income taxes 626 590 The amortization expense for each of the five succeeding
Other assets 296 272* years relating to intangible assets currently recorded in the
Total $2,386 $2,783* Consolidated Statement of Financial Position is estimated to be
the following at December 31, 2018:
* Recast to conform to 2018 presentation.
($ in millions)
NOTE I. INTANGIBLE ASSETS INCLUDING GOODWILL Capitalized Acquired
Intangible Assets Software Intangibles Total
The following table details the company’s intangible asset 2019 $461 $676 $1,137
balances by major asset class. 2020 320 565 886
2021 157 450 608
($ in millions)
2022 — 382 382
Gross Net
Carrying Accumulated Carrying 2023 — 64 64
At December 31, 2018: Amount Amortization Amount
Intangible asset class
Capitalized software $1,568 $ (629) $ 939
Client relationships 2,068 (1,123) 945
Completed technology 2,156 (1,296) 860
Patents/trademarks 641 (330) 311
Other* 56 (23) 32
Total $6,489 $(3,402) $3,087
* Other intangibles are primarily acquired proprietary and nonproprietary

business processes, methodologies and systems.
($ in millions)
Gross Net
Carrying Accumulated Carrying
At December 31, 2017: Amount Amortization Amount
Intangible asset class
Capitalized software $1,600 $ (790) $ 810
Client relationships 2,358 (1,080) 1,278
Completed technology 2,586 (1,376) 1,210
Patents/trademarks 668 (256) 413
Other* 47 (16) 31
Total $7,260 $(3,518) $3,742
* Other intangibles are primarily acquired proprietary and nonproprietary

business processes, methodologies and systems.
Goodwill
The changes in the goodwill balances by reportable segment for the years ended December 31, 2018 and 2017 are as follows:
($ in millions)
Foreign
Currency
Balance Translation Balance
January 1, Goodwill Purchase Price and Other December 31,
Segment 2018 Additions Adjustments Divestitures Adjustments* 2018
Cognitive Solutions $19,665 $10 $0 $(1) $(290) $19,384
Global Business Services 4,813 24 (3) — (92) 4,742
Technology Services & Cloud Platforms 10,447 — 0 — (156) 10,292
Systems 1,862 — 0 — (15) 1,847
Total $36,788 $34 $(3) $(1) $(553) $36,265
* Primarily driven by foreign currency translation.
($ in millions)
Foreign
Currency
Balance Translation Balance
January 1, Goodwill Purchase Price and Other December 31,
Segment 2017 Additions Adjustments Divestitures Adjustments* 2017
Cognitive Solutions $19,484 $ 3 $(38) $(20) $235 $19,665
Global Business Services 4,607 — 2 — 204 4,813
Technology Services & Cloud Platforms 10,258 13 (2) — 179 10,447
Systems 1,850 — 0 — 13 1,862
Total $36,199 $16 $(38) $(20) $631 $36,788
* Primarily driven by foreign currency translation.
There were no goodwill impairment losses recorded during 2018 NOTE J. BORROWINGS
or 2017 and the company has no accumulated impairment losses. Short-Term Debt
($ in millions)
Purchase price adjustments recorded in 2018 and 2017 were
related to acquisitions that were still subject to the measurement
period that ends at the earlier of 12 months from the acquisition Commercial paper $ 2,995 $1,496
date or when information becomes available. Net purchase price Short-term loans 161 276
adjustments recorded during 2018 were not material. Net purchase Long-term debt—current maturities 7,051 5,214
price adjustments of $38 million were recorded during 2017, with Total $10,207 $6,987
the primary drivers being deferred tax assets, other taxes payable
and other current liabilities associated with the Truven Health
Analytics, Inc. and The Weather Company acquisitions. The weighted-average interest rate for commercial paper at
December 31, 2018 and 2017 was 2.5 percent and 1.5 percent,
respectively. The weighted-average interest rates for short-term
loans were 4.3 percent and 8.8 percent at December 31, 2018
and 2017, respectively.
Long-Term Debt
Pre-Swap Borrowing
($ in millions)
At December 31: Maturities 2018 2017
U.S. dollar debt (weighted-average interest rate at December 31, 2018):*
3.5% 2018 $ — $ 4,640
3.0% 2019 5,465 5,540
2.6% 2020 4,344 3,416
2.8% 2021 5,529 4,129
2.4% 2022 3,536 3,481
3.2% 2023 2,428 1,547
3.6% 2024 2,037 2,000
7.0% 2025 600 600
3.5% 2026 1,350 1,350
4.7% 2027 969 969
6.5% 2028 313 313
3.7% 2030 32 —
5.9% 2032 600 600
8.0% 2038 83 83
5.6% 2039 745 745
4.0% 2042 1,107 1,107
7.0% 2045 27 27
4.7% 2046 650 650
7.1% 2096 316 316
$30,131 $31,515
Other currencies (weighted-average interest rate at December 31, 2018, in
parentheses):*
Euros (1.5%) 2019–2029 10,011 10,502
Pound sterling (2.7%) 2020–2022 1,338 1,420
Japanese yen (0.3%) 2022–2026 1,325 1,291
Other (5.6%) 2019–2022 391 717
43,196 45,445
Less: net unamortized discount 802 826
Less: net unamortized debt issuance costs 76 93
Add: fair value adjustment** 337 526
42,656 45,052
Less: current maturities 7,051 5,214
Total $35,605 $39,837
* Includes notes, debentures, bank loans, secured borrowings and capital lease obligations.
** The portion of the company’s fixed-rate debt obligations that is hedged is reflected in the Consolidated Statement of Financial Position as an amount
equal to the sum of the debt’s carrying value and a fair value adjustment representing changes in the fair value of the hedged debt obligations
attributable to movements in benchmark interest rates.
There are no debt securities issued and outstanding by IBM International Group Capital LLC, which is an indirect, 100 percent owned finance
subsidiary of International Business Machines Corporation, the parent. Any debt securities issued by IBM International Group Capital LLC, would be
fully and unconditionally guaranteed by the parent.
During the third quarter of 2017, IBM Credit LLC (IBM Credit), a The company’s indenture governing its debt securities and its
wholly owned subsidiary of the company, filed a shelf registration various credit facilities each contain significant covenants which
statement with the Securities and Exchange Commission (SEC) obligate the company to promptly pay principal and interest,
allowing it to offer for sale public debt securities. IBM Credit limit the aggregate amount of secured indebtedness and sale
issued fixed- and floating-rate debt securities in September and leaseback transactions to 10 percent of the company’s
2017 in the aggregate amount of $3.0 billion with maturity dates consolidated net tangible assets, and restrict the company’s
ranging from 2019 to 2022. During 2018, IBM Credit issued fixed- ability to merge or consolidate unless certain conditions are met.
and floating-rate debt securities in the aggregate amount of $4.0 The credit facilities also include a covenant on the company’s
billion with maturity dates ranging from 2020 to 2023. This debt consolidated net interest expense ratio, which cannot be less
is included in the long-term debt table above.
than 2.20 to 1.0, as well as a cross default provision with respect The failure to comply with its debt covenants could constitute an
to other defaulted indebtedness of at least $500 million. event of default with respect to the debt to which such provisions
apply. If certain events of default were to occur, the principal and
The company is in compliance with all of its significant debt interest on the debt to which such event of default applied would
covenants and provides periodic certifications to its lenders. become immediately due and payable.
Post-Swap Borrowing (Long-Term Debt, Including Current Portion)
($ in millions)
2018 2017
Weighted-average Weighted-average
For the year ended December 31: Amount Interest Rate Amount Interest Rate
Fixed-rate debt $28,770 2.7% $29,007 2.7%
Floating-rate debt* 13,886 3.0% 16,044 2.1%
Total $42,656 $45,052
* Includes $7,563 million in 2018 and $9,138 million in 2017 of notional interest rate swaps that effectively convert fixed-rate long-term debt into
floating-rate debt. See note D, “Financial Instruments,” on pages 95 to 102.
Pre-swap annual contractual obligations of long-term debt connection with the 364-day bridge facility, under which the
outstanding at December 31, 2018, are as follows: company incurred $40 million in upfront fees during the fourth
quarter of 2018. The company expects to incur additional
($ in millions) fees of up to approximately $25 million during the period the
Total agreement remains in place. These upfront fees were capitalized
2019 $ 7,050 and will be amortized to SG&A in the Consolidated Statement
of Earnings over the expected term of the bridge term loan
2020 7,273
facility. For additional information on this transaction, see note
2021 6,647
C, “Acquisitions/Divestitures.”
2022 4,338
2023 3,403 On July 19, 2018, the company amended its existing $10.25
2024 and beyond 14,485 billion Five-Year Credit Agreement. In addition, the company
Total $43,196 and IBM Credit LLC entered into a new $2.5 billion, 364-Day
Credit Agreement, to replace the maturing $2.5 billion, 364-
Day agreement, and also amended the existing $2.5 billion
Interest on Debt Three-Year Credit Agreement. The amended Five-Year and
Three-Year credit agreements included a modification of terms
($ in millions) to account for the potential discontinuation of LIBOR and to
For the year ended December 31: 2018 2017 2016 extend the maturity dates. The new maturity dates for the Five-
Cost of financing $ 757 $ 658 $ 576 Year and Three-Year Credit Agreements are July 20, 2023 and
Interest expense 723 615 630 July 20, 2021, respectively. Each of the facility sizes remained
Interest capitalized 3 5 2 unchanged. The total expense recorded by the company related
to the Five-Year Credit Agreement was $6.7 million in 2018,
Total interest paid
and accrued $1,482 $1,278 $1,208 $6.1 million in 2017 and $5.5 million in 2016. The total expense
recorded by the company related to the 364-Day and Three-Year
Credit Agreements was $2.1 million in 2018 and $2.8 million
Refer to the related discussion on page 143 in note U, “Segment in 2017. The Five-Year Credit Agreement permits the company
Information,” for total interest expense of the Global Financing and its Subsidiary Borrowers to borrow up to $10.25 billion on a
segment. See note D, “Financial Instruments,” on pages 95 to revolving basis. Borrowings of the Subsidiary Borrowers will be
102 for a discussion of the use of foreign currency denominated unconditionally backed by the company. The company may also,
debt designated as a hedge of net investment, as well as a upon the agreement of either existing lenders, or of the additional
discussion of the use of currency and interest rate swaps in the banks not currently party to the Five-Year Credit Agreement,
company’s debt risk management program. increase the commitments under the Credit Agreement up to an
additional $1.75 billion. The 364-Day Credit Agreement and the
Lines of Credit Three-Year Credit Agreement allow the company and IBM Credit,
On October 28, 2018, the company announced its intent (the Borrowers), to borrow up to an aggregate of $5 billion on a
to acquire all of the outstanding shares of Red Hat, Inc. In revolving basis. Neither Borrower is a guarantor or co-obligor
connection with this acquisition, IBM entered into a commitment of the other Borrower under the 364-Day and Three-Year Credit
letter under which certain banks committed to provide the Agreements. Subject to certain conditions stated in the Five-
company with a 364-day unsecured bridge term loan facility Year, 364-Day and Three-Year credit agreements (the “Credit
in an aggregate principal amount of up to $20 billion to fund Agreements”), the Borrowers may borrow, prepay and re-borrow
the acquisition. The company also entered into a fee letter in amounts under the Credit Agreements at any time during the
term of the Credit Agreements. Funds borrowed may be used The company employs extensive internal environmental
for the general corporate purposes of the Borrowers. Interest protection programs that primarily are preventive in nature. The
rates on borrowings under the Credit Agreements will be based company also participates in environmental assessments and
on prevailing market interest rates, as further described in the cleanups at a number of locations, including operating facilities,
Credit Agreements. The Credit Agreements contain customary previously owned facilities and Superfund sites. The company’s
representations and warranties, covenants, events of default, maximum exposure for all environmental liabilities cannot be
and indemnification provisions. The company believes that estimated and no amounts have been recorded for non-ARO
circumstances that might give rise to breach of these covenants environmental liabilities that are not probable or estimable. The
or an event of default, as specified in the Credit Agreements, total amounts accrued for non-ARO environmental liabilities,
are remote. including amounts classified as current in the Consolidated
Statement of Financial Position, that do not reflect actual
The company also has other committed lines of credit in some of or anticipated insurance recoveries, were $255 million and
the geographies which are not significant in the aggregate. Interest $267 million at December 31, 2018 and 2017, respectively.
rates and other terms of borrowing under these lines of credit vary Estimated environmental costs are not expected to materially
from country to country, depending on local market conditions. affect the consolidated financial position or consolidated results
of the company’s operations in future periods. However, estimates
As of December 31, 2018, there were no borrowings by the of future costs are subject to change due to protracted cleanup
company, or its subsidiaries, under the Credit Facilities. periods and changing environmental remediation regulations.
As of December 31, 2018, the company was unable to estimate

NOTE K. OTHER LIABILITIES
the range of settlement dates and the related probabilities for
($ in millions) certain asbestos remediation AROs. These conditional AROs are
At December 31: 2018 2017 primarily related to the encapsulated structural fireproofing that
Income tax reserves $ 4,195 $4,193 is not subject to abatement unless the buildings are demolished
Excess 401(k) Plus Plan 1,380 1,583 and non-encapsulated asbestos that the company would
remediate only if it performed major renovations of certain
Disability benefits 507 504
existing buildings. Because these conditional obligations have
Derivative liabilities 206 38
indeterminate settlement dates, the company could not develop
Workforce reductions 736 804 a reasonable estimate of their fair values. The company will
Deferred taxes* 3,696 545 continue to assess its ability to estimate fair values at each
Other taxes payable 40 948 future reporting date. The related liability will be recognized once
Environmental accruals 244 262 sufficient additional information becomes available. The total
Warranty accruals 76 56 amounts accrued for ARO liabilities, including amounts classified
as current in the Consolidated Statement of Financial Position
Asset retirement obligations 111 115
were $146 million and $152 million at December 31, 2018 and
Acquisition related 13 88
2017, respectively.
Divestiture related** 173 253
Other 796 577
NOTE L. EQUITY ACTIVITY
Total $12,174 $9,965
The authorized capital stock of IBM consists of 4,687,500,000
* The increase in deferred taxes is due to the company’s election on shares of common stock with a $.20 per share par value, of which
GILTI and a reclass from other taxes payable. 892,479,411 shares were outstanding at December 31, 2018 and
** Primarily related to the divestiture of the Microelectronics business. 150,000,000 shares of preferred stock with a $.01 per share par
value, none of which were outstanding at December 31, 2018.
In response to changing business needs, the company
periodically takes workforce reduction actions to improve Stock Repurchases
productivity, cost competitiveness and to rebalance skills. The The Board of Directors authorizes the company to repurchase
noncurrent contractually obligated future payments associated IBM common stock. The company repurchased 32,949,233
with these activities are reflected in the workforce reductions common shares at a cost of $4,447 million, 27,237,179 common
caption in the previous table. The noncurrent liabilities are shares at a cost of $4,323 million, and 23,283,400 common
workforce accruals related to terminated employees who are shares at a cost of $3,455 million in 2018, 2017 and 2016,
no longer working for the company who were granted annual respectively. These amounts reflect transactions executed
payments to supplement their incomes in certain countries. through December 31 of each year. Actual cash disbursements
Depending on the individual country’s legal requirements, these for repurchased shares may differ due to varying settlement
required payments will continue until the former employee dates for these transactions. At December 31, 2018, $3,339
begins receiving pension benefits or passes away. Current million of Board common stock repurchase authorization was
liabilities are included in other accrued expenses and liabilities available. The company plans to purchase shares on the open
in the Consolidated Statement of Financial Position and were market or in private transactions from time to time, depending
immaterial at December 31, 2018. on market conditions. As a result of the proposed transaction
to acquire Red Hat, subject to closing, the company intends to
suspend its share repurchase program in 2020 and 2021.
Other Stock Transactions

The company issued the following shares of common stock as compensation plans, 1,173,416 common shares at a cost of $171
part of its stock-based compensation plans and employees million, 1,226,080 common shares at a cost of $193 million,
stock purchase plan: 3,998,245 shares in 2018, 4,311,998 and 854,365 common shares at a cost of $126 million in 2018,
shares in 2017, and 3,893,366 shares in 2016. The company 2017 and 2016, respectively, were remitted by employees to the
issued 424,589 treasury shares in 2018, 463,083 treasury company in order to satisfy minimum statutory tax withholding
shares in 2017 and 383,077 treasury shares in 2016, as a requirements. These amounts are included in the treasury stock
result of restricted stock unit releases and exercises of stock balance in the Consolidated Statement of Financial Position and
options by employees of certain acquired businesses and by the Consolidated Statement of Changes in Equity.
non-U.S. employees. Also, as part of the company’s stock-based
Reclassifications and Taxes Related to Items of Other Comprehensive Income
($ in millions)
Before Tax Tax (Expense)/ Net of Tax
For the year ended December 31, 2018: Amount Benefit Amount
Other comprehensive income/(loss)
Foreign currency translation adjustments $ (730) $(172) $ (902)
Net changes related to available-for-sale securities
Unrealized gains/(losses) arising during the period $ (2) $ 1 $ (1)
Reclassification of (gains)/losses to other (income) and expense — — —
Total net changes related to available-for-sale securities $ (2) $ 1 $ (1)
Unrealized gains/(losses) on cash flow hedges
Reclassification of (gains)/losses to:
Cost of services (30) 8 (22)
Cost of sales (8) 3 (5)
Cost of financing 75 (19) 56
SG&A expense 0 0 0
Other (income) and expense 341 (86) 255
Interest expense 71 (18) 53
Total unrealized gains/(losses) on cash flow hedges $ 313 $ (69) $ 244
Retirement-related benefit plans (1)
Prior service costs/(credits) $ (182) $ 31 $ (151)
Net (losses)/gains arising during the period (2,517) 576 (1,941)
Curtailments and settlements 11 (2) 9
Amortization of prior service (credits)/costs (73) 5 (68)
Amortization of net (gains)/losses 2,966 (632) 2,334
Total retirement-related benefit plans $ 204 $ (21) $ 184
Other comprehensive income/(loss) $ (215) $(262) $ (476)
These AOCI components are included in the computation of net periodic pension cost. (See note T, “Retirement-Related Benefits,” for
(1)
additional information.)
($ in millions)
Foreign currency translation adjustments $ 152 $ 617 $ 769
Unrealized gains/(losses) arising during the period $ 1 $ (1) $ 0
Reclassification of (gains)/losses to other (income) and expense 1 0 1
Total net changes related to available-for-sale securities $ 2 $ (1) $ 1
Unrealized gains/(losses) arising during the period $ (58 ) $ 0 $ (58)
Cost of services (70) 27 (43)
Cost of sales (3) 1 (3)
Cost of financing* 23 (9) 14
SG&A expense (11) 3 (9)
Other (income) and expense (324) 124 (199)
Interest expense* 22 (8) 13
Total unrealized gains/(losses) on cash flow hedges $ (421) $ 137 $ (284)
Prior service costs/(credits) $ 0 $ 0 $ 0
Net (losses)/gains arising during the period 682 (201) 481
Curtailments and settlements 19 (5) 14
Amortization of net (gains)/losses 2,889 (1,006) 1,883
Total retirement-related benefit plans $3,502 $(1,182) $2,320
Other comprehensive income/(loss) $3,235 $ (429) $2,806

(1)
($ in millions)
Foreign currency translation adjustments $ (20) $(120) $ (140)
Reclassification of (gains)/losses to other (income) and expense 34 (13) 21
Total net changes related to available-for-sale securities $ (3) $ 1 $ (2)
Unrealized gains/(losses) arising during the period $ 243 $ (80) $ 163
Cost of services 8 (3) 5
Cost of sales 5 (5) 1
Cost of financing* 12 (4) 7
SG&A expense (4) (2) (7)
Other (income) and expense 68 (26) 42
Interest expense* 13 (5) 8
Total unrealized gains/(losses) on cash flow hedges $ 345 $(126) $ 219
Net (losses)/gains arising during the period $(2,490) $ 924 $(1,566)
Curtailments and settlements (16) 1 (15)
Amortization of net (gains)/losses 2,764 (976) 1,788
Total retirement-related benefit plans $ 150 $ (19) $ 132
Other comprehensive income/(loss) $ 472 $(263) $ 209

(1)
Accumulated Other Comprehensive Income/(Loss) (net of tax)
($ in millions)
Net Unrealized
Net Unrealized Foreign Net Change Gains/(Losses) Accumulated
Gains/(Losses) Currency Retirement- on Available- Other
on Cash Flow Translation Related For-Sale Comprehensive
Hedges Adjustments* Benefit Plans Securities Income/(Loss)
December 31, 2015 $ 100 $(3,463) $(26,248) $ 5 $(29,607)
Other comprehensive income before reclassifications 163 (140) (1,581) (23) (1,581)
Amount reclassified from accumulated other
comprehensive income 56 0 1,714 21 1,791
Total change for the period 219 (140) 132 (2) 209
December 31, 2016 319 (3,603) (26,116) 2 (29,398)
Other comprehensive income before reclassifications (58) 769 495 0 1,206
comprehensive income (226) 0 1,825 1 1,599
Total change for the period (284) 769 2,320 1 2,806
December 31, 2017 35 (2,834) (23,796) 3 (26,592)
Cumulative effect of a change in accounting principle** 5 46 (2,471) (2) (2,422)
Other comprehensive income before reclassifications (93) (902) (2,092) (1) (3,089)
comprehensive income 337 — 2,276 — 2,612
Total change for the period 244 (902) 184 (1) (476)
December 31, 2018 $ 284 $(3,690) $(26,083) $ 0 $(29,490)
* Foreign currency translation adjustments are presented gross except for any associated hedges which are presented net of tax.
**Reflects the adoption of the FASB guidance on stranded tax effects, hedging and financial instruments. Refer to note B, “Accounting Changes.”
NOTE M. CONTINGENCIES AND COMMITMENTS

Contingencies
As a company with a substantial employee population and with Claims, suits, investigations and proceedings are inherently
clients in more than 175 countries, IBM is involved, either as uncertain, and it is not possible to predict the ultimate outcome
plaintiff or defendant, in a variety of ongoing claims, demands, of these matters. It is the company’s experience that damage
suits, investigations, tax matters and proceedings that arise amounts claimed in litigation against it are unreliable and
from time to time in the ordinary course of its business. The unrelated to possible outcomes, and as such are not meaningful
company is a leader in the information technology industry indicators of the company’s potential liability. Further, the
and, as such, has been and will continue to be subject to claims company is unable to provide such an estimate due to a number
challenging its IP rights and associated products and offerings, of other factors with respect to these claims, suits, investigations
including claims of copyright and patent infringement and and proceedings, including considerations of the procedural
violations of trade secrets and other IP rights. In addition, the status of the matter in question, the presence of complex or novel
company enforces its own IP against infringement, through legal theories, and/or the ongoing discovery and development
license negotiations, lawsuits or otherwise. Also, as is typical of information important to the matters. The company reviews
for companies of IBM’s scope and scale, the company is party to claims, suits, investigations and proceedings at least quarterly,
actions and proceedings in various jurisdictions involving a wide and decisions are made with respect to recording or adjusting
range of labor and employment issues (including matters related provisions and disclosing reasonably possible losses or range
to contested employment decisions, country-specific labor and of losses (individually or in the aggregate), to reflect the impact
employment laws, and the company’s pension, retirement and and status of settlement discussions, discovery, procedural and
other benefit plans), as well as actions with respect to contracts, substantive rulings, reviews by counsel and other information
product liability, securities, foreign operations, competition law pertinent to a particular matter.
and environmental matters. These actions may be commenced
by a number of different parties, including competitors, clients, Whether any losses, damages or remedies finally determined
current or former employees, government and regulatory in any claim, suit, investigation or proceeding could reasonably
agencies, stockholders and representatives of the locations in have a material effect on the company’s business, financial
which the company does business. Some of the actions to which condition, results of operations or cash flows will depend on a
the company is party may involve particularly complex technical number of variables, including: the timing and amount of such
issues, and some actions may raise novel questions under the losses or damages; the structure and type of any such remedies;
laws of the various jurisdictions in which these matters arise. the significance of the impact any such losses, damages or
remedies may have in the Consolidated Financial Statements;
The company records a provision with respect to a claim, suit, and the unique facts and circumstances of the particular matter
investigation or proceeding when it is probable that a liability that may give rise to additional factors. While the company
has been incurred and the amount of the loss can be reasonably will continue to defend itself vigorously, it is possible that the
estimated. Any recorded liabilities, including any changes to such company’s business, financial condition, results of operations
liabilities for the years ended December 31, 2018, 2017 and or cash flows could be affected in any particular period by the
2016 were not material to the Consolidated Financial Statements. resolution of one or more of these matters.
In accordance with the relevant accounting guidance, the The following is a summary of the more significant legal matters
company provides disclosures of matters for which the likelihood involving the company.
of material loss is at least reasonably possible. In addition, the
company also discloses matters based on its consideration of The company is a defendant in an action filed on March 6, 2003 in
other matters and qualitative factors, including the experience state court in Salt Lake City, Utah by the SCO Group (SCO v. IBM).
of other companies in the industry, and investor, customer and The company removed the case to Federal Court in Utah. Plaintiff
employee relations considerations. is an alleged successor in interest to some of AT&T’s UNIX IP
rights, and alleges copyright infringement, unfair competition,
With respect to certain of the claims, suits, investigations and interference with contract and breach of contract with regard to
proceedings discussed herein, the company believes at this the company’s distribution of AIX and Dynix and contribution of
time that the likelihood of any material loss is remote, given, for code to Linux and the company has asserted counterclaims. On
example, the procedural status, court rulings, and/or the strength September 14, 2007, plaintiff filed for bankruptcy protection,
of the company’s defenses in those matters. With respect to the and all proceedings in this case were stayed. The court in another
remaining claims, suits, investigations and proceedings discussed suit, the SCO Group, Inc. v. Novell, Inc., held a trial in March 2010.
in this note, except as specifically discussed herein, the company The jury found that Novell is the owner of UNIX and UnixWare
is unable to provide estimates of reasonably possible losses or copyrights; the judge subsequently ruled that SCO is obligated
range of losses, including losses in excess of amounts accrued, to recognize Novell’s waiver of SCO’s claims against IBM and
if any, for the following reasons. Sequent for breach of UNIX license agreements. On August 30,
2011, the Tenth Circuit Court of Appeals affirmed the district
court’s ruling and denied SCO’s appeal of this matter. In June Following the 2017 final judgment of the Appeal Court in London
2013, the Federal Court in Utah granted SCO’s motion to reopen holding that IBM UK acted lawfully in 2010 in closing its UK
the SCO v. IBM case. In February 2016, the Federal Court ruled in defined benefit plans to future accruals for most participants
favor of IBM on all of SCO’s remaining claims, and SCO appealed. and in implementing a new retirement policy, the Employment
On October 30, 2017, the Tenth Circuit Court of Appeals affirmed Tribunal in Southampton UK is expected to address approximately
the dismissal of all but one of SCO’s remaining claims, which was 290 individual actions alleging constructive dismissal and age
remanded to the Federal Court in Utah. discrimination brought against IBM UK in 2010 by employees
who left the company at that time. The individual actions were
On May 13, 2010, IBM and the State of Indiana (acting on behalf previously stayed.
of the Indiana Family and Social Services Administration) sued
one another in a dispute over a 2006 contract regarding the In May 2015, a putative class action was commenced in the
modernization of social service program processing in Indiana. United States District Court for the Southern District of New York
After six weeks of trial, on July 18, 2012, the Indiana Superior related to the company’s October 2014 announcement that it
Court in Marion County rejected the State’s claims in their was divesting its global commercial semiconductor technology
entirety and awarded IBM $52 million plus interest and costs. business, alleging violations of the Employee Retirement
On February 13, 2014, the Indiana Court of Appeals reversed Income Security Act (ERISA). Management’s Retirement Plans
portions of the trial judge’s findings, found IBM in material breach, Committee and three current or former IBM executives are
and ordered the case remanded to the trial judge to determine named as defendants. On September 29, 2017, the Court granted
the State’s damages, if any. The Indiana Court of Appeals also the defendants’ motion to dismiss the first amended complaint.
affirmed approximately $50 million of the trial court’s award On December 10, 2018, the Second Circuit Court of Appeals
of damages to IBM. On March 22, 2016, the Indiana Supreme reversed the District Court order and the matter remains pending.
Court affirmed the outcome of the Indiana Court of Appeals and
remanded the case to the Indiana Superior Court. On August 7, The company is party to, or otherwise involved in, proceedings
2017, the Indiana Superior Court awarded the State $128 million, brought by U.S. federal or state environmental agencies under
which it then offset against IBM’s previously affirmed award of the Comprehensive Environmental Response, Compensation
$50 million, resulting in a $78 million award to the State, plus and Liability Act (CERCLA), known as “Superfund,” or laws
interest. On September 28, 2018, the Indiana Court of Appeals similar to CERCLA. Such statutes require potentially responsible
affirmed the Superior Court’s $78 million award to the State, parties to participate in remediation activities regardless of
but reversed the Superior Court by awarding IBM prejudgment fault or ownership of sites. The company is also conducting
interest on its previously affirmed $50 million award. In January environmental investigations, assessments or remediations at or
2019, the Indiana Supreme Court agreed to hear both parties’ in the vicinity of several current or former operating sites globally
appeals. The matter remains pending. pursuant to permits, administrative orders or agreements with
country, state or local environmental agencies, and is involved
On March 9, 2017, the Commonwealth of Pennsylvania’s in lawsuits and claims concerning certain current or former
Department of Labor and Industry sued IBM in Pennsylvania operating sites.
state court regarding a 2006 contract for the development of
a custom software system to manage the Commonwealth’s The company is also subject to ongoing tax examinations and
unemployment insurance benefits programs. The matter is governmental assessments in various jurisdictions. Along with
pending in a Pennsylvania court. many other U.S. companies doing business in Brazil, the company
is involved in various challenges with Brazilian tax authorities
regarding non-income tax assessments and non-income tax
litigation matters. The total potential amount related to all these
matters for all applicable years is approximately $900 million.
The company believes it will prevail on these matters and that
this amount is not a meaningful indicator of liability.
Commitments NOTE N. TAXES

The company’s extended lines of credit to third-party entities
($ in millions)
include unused amounts of $7,368 million and $8,111 million at
December 31, 2018 and 2017, respectively. A portion of these
amounts was available to the company’s business partners to Income from continuing
operations before
support their working capital needs. In addition, the company
income taxes
has committed to provide future financing to its clients in
connection with client purchase agreements for approximately U.S. operations $ 627 $ 560 $ 3,650
$4,432 million and $3,569 million at December 31, 2018 and Non-U.S. operations 10,715 10,840 8,680
2017, respectively. Total income from
continuing operations
The company has applied the guidance requiring a guarantor before income taxes $11,342 $11,400 $12,330
to disclose certain types of guarantees, even if the likelihood of
requiring the guarantor’s performance is remote. The following
The income from continuing operations provision for income
is a description of arrangements in which the company is the
taxes by geographic operations is as follows:
guarantor.
($ in millions)
The company is a party to a variety of agreements pursuant
to which it may be obligated to indemnify the other party with
respect to certain matters. Typically, these obligations arise in U.S. operations $1,199 $2,923 $ 38
the context of contracts entered into by the company, under Non-U.S. operations 1,420 2,719 411
which the company customarily agrees to hold the other party Total continuing operations
harmless against losses arising from a breach of representations provision for income taxes $2,619 $5,642 $449
and covenants related to such matters as title to assets sold,
certain IP rights, specified environmental matters, third-party
The components of the income from continuing operations
performance of nonfinancial contractual obligations and certain
provision for income taxes by taxing jurisdiction are as follows:
income taxes. In each of these circumstances, payment by
the company is conditioned on the other party making a claim
($ in millions)
pursuant to the procedures specified in the particular contract,
the procedures of which typically allow the company to challenge
the other party’s claims. While typically indemnification U.S. federal
provisions do not include a contractual maximum on the Current $ (342) $2,388 $ 186
company’s payment, the company’s obligations under these Deferred 1,377 77 (746)
agreements may be limited in terms of time and/or nature of $1,035 $2,465 $ (560)
claim, and in some instances, the company may have recourse U.S. state and local
against third parties for certain payments made by the company.
Current $ 127 $ 55 $ 244
Deferred (292) 28 (44)
It is not possible to predict the maximum potential amount of
future payments under these or similar agreements due to the $ (165) $ 83 $ 200
conditional nature of the company’s obligations and the unique Non-U.S.
facts and circumstances involved in each particular agreement. Current $2,135 $3,891 $ 988
Historically, payments made by the company under these Deferred (386) (797) (179)
agreements have not had a material effect on the company’s $1,749 $3,094 $ 809
business, financial condition or results of operations.
Total continuing operations
provision for income taxes $2,619 $5,642 $ 449
In addition, the company guarantees certain loans and financial
Discontinued operations
commitments. The maximum potential future payment under
provision for/(benefit from)
these financial guarantees was $26 million and $19 million at income taxes 2 (3) (2)
December 31, 2018 and 2017, respectively. The fair value of the
Provision for social security,
guarantees recognized in the Consolidated Statement of Financial
real estate, personal
Position was immaterial. property and other taxes 3,322 3,434 3,417
Total taxes included
in net income $5,943 $9,073 $3,864
A reconciliation of the statutory U.S. federal tax rate to the In January 2019, the U.S. Treasury and Internal Revenue Service
company’s effective tax rate from continuing operations is issued additional U.S. tax reform guidelines. The company is still
as follows: evaluating the impact of these guidelines.
For the year ended December 31: 2018 2017 2016 The 2018 continuing operations effective tax rate decreased 26.4
points from 2017 driven by: a decrease in the tax charges related
Statutory rate 21% 35% 35%
to the impact of U.S. tax reform described above (30.4 points), a
Enactment of U.S. tax reform 18 48 —
benefit related to domestic and foreign audit activity (6.8 points),
Tax differential on a more favorable mix of pre-tax earnings in 2018 (2.1 points) and
foreign income (11) (26) (21)
the re-assessment of valuation allowances (1.2 points). These
Intra-entity transfers 0 (5) — benefits were partially offset by a lower benefit year to year in
Domestic incentives (1) (2) (1) the utilization of foreign tax credits (5.9 points) and benefits in
State and local (1) 1 1 2017 related to an intra-entity asset transfer (5.1 points) and a
Japan resolution — — (10) tax write down of an intercompany investment (1.7 points), as well
Other (3) (2) 0 as a year-to-year increase in tax charges related to intercompany
payments (1.3 points).
Effective rate 23% 49% 4%
Percentages rounded for disclosure purposes. With the exception of the impact of U.S. tax reform, the effect of
tax law changes on deferred tax assets and liabilities did not have
The significant components reflected within the tax rate a material impact on the company’s effective tax rate.
reconciliation labeled “Tax differential on foreign income”
include the effects of foreign subsidiaries’ earnings taxed at rates Deferred Tax Assets
other than the U.S. statutory rate, foreign export incentives, U.S.
($ in millions)
taxes on foreign income and any net impacts of intercompany
transactions. These items also reflect audit settlements,
excluding the 2016 Japan resolution, or changes in the amount Retirement benefits $3,620 $3,477
of unrecognized tax benefits associated with each of these items. Share-based and other compensation 636 646
Domestic tax loss/credit carryforwards 964 718
On December 22, 2017, the U.S. Tax Cuts and Jobs Act was Deferred income 674 605
enacted. U.S. tax reform introduced many changes, including Foreign tax loss/credit carryforwards 903 1,024
lowering the U.S. corporate tax rate to 21 percent, changes in
Bad debt, inventory and warranty reserves 348 395
incentives, provisions to prevent U.S. base erosion and significant
Depreciation 231 293
changes in the taxation of international income, including
provisions which allow for the repatriation of foreign earnings Accruals 336 387
without U.S. tax. The enactment of U.S. tax reform resulted in Intangible assets 620 585
the company recording a provisional tax expense charge of $5.5 Other 1,501 1,396
billion in the fourth quarter and year ended December 31, 2017. Gross deferred tax assets 9,833 9,526
This charge was the result of the one-time U.S. transition tax and Less: valuation allowance 915 1,004
any foreign tax costs on undistributed foreign earnings, as well
Net deferred tax assets $8,918 $8,522
as the remeasurement of deferred tax balances to the new U.S.
federal tax rate. All components of the provisional charge were
based on the company’s estimates as of December 31, 2017.
Deferred Tax Liabilities
During the fourth quarter of 2018, the company completed its
accounting for impacts of U.S. tax reform and the effects of ($ in millions)
measurement period adjustments were recognized as charges At December 31: 2018 2017
of $2.0 billion for the year ended December 31, 2018, including Depreciation $ 719 $ 641
$1.9 billion in the fourth quarter of 2018. The adjustments were Retirement benefits 455 483
primarily attributable to the company’s election to include GILTI
Goodwill and intangible assets 1,200 1,226
in measuring deferred taxes, plus refinements to the one-time
Leases 580 584
U.S. transition tax and foreign tax costs on undistributed foreign
earnings. The net impact of the measurement period adjustments Software development costs 292 360
on the 2018 effective tax rate was 17.7 percent. Deferred transition costs 233 254
GILTI deferred taxes 1,927 —
The U.S. Tax Cuts and Jobs Act introduced GILTI which subjects Undistributed foreign earnings* 981 —
a U.S. shareholder to current tax on income earned by certain Other 1,011 658
foreign subsidiaries. The company elected the deferred method
Gross deferred tax liabilities $7,398 $4,206
which resulted in an increase to tax expense and deferred tax
liabilities of $2.0 billion in the fourth quarter and year ended * Year-to-year increase primarily driven by a reclass from other taxes
payable within other liabilities.
December 31, 2018. Refer to note A, “Significant Accounting
Policies,” on pages 76 to 88 for additional information.
For financial reporting purposes, the company has foreign and recognized $174 million in interest expense and penalties; and,
domestic loss carryforwards, the tax effect of which is $584 in 2016, the company recognized $62 million in interest expense
million, as well as foreign and domestic credit carryforwards and penalties. The company has $680 million for the payment of
of $1,283 million. Substantially all of these carryforwards are interest and penalties accrued at December 31, 2018, and had
available for at least two years and the majority are available for $799 million accrued at December 31, 2017.
10 years or more.
Within the next 12 months, the company believes it is reasonably
The valuation allowances as of December 31, 2018, 2017 and possible that the total amount of unrecognized tax benefits
2016 were $915 million, $1,004 million and $916 million, associated with certain positions may be reduced. The potential
respectively. The amounts principally apply to certain foreign decrease in the amount of unrecognized tax benefits is associated
and domestic loss carryforwards and credits. In the opinion of with the anticipated resolution of various U.S. state and non-
management, it is more likely than not that these assets will not U.S. audits. The company estimates that the unrecognized tax
be realized. However, to the extent that tax benefits related to benefits at December 31, 2018 could be reduced by $551 million.
these carryforwards are realized in the future, the reduction in
the valuation allowance will reduce income tax expense. The company’s U.S. income tax returns for 2013 and 2014
continue to be examined by the IRS with specific focus on certain
The amount of unrecognized tax benefits at December 31, cross-border transactions in 2013. Although the IRS could
2018 decreased by $272 million in 2018 to $6,759 million. propose additional adjustments related to these transactions,
A reconciliation of the beginning and ending amount of the company believes it is adequately reserved on these matters.
unrecognized tax benefits is as follows: In the third quarter of 2018, the U.S. Internal Revenue Service
commenced its audit of the company’s U.S. tax returns for
($ in millions) 2015 and 2016. The company anticipates that this audit will be
2018 2017 2016 completed in 2020. With respect to major U.S. state and foreign
Balance at January 1 $ 7,031 $3,740 $ 4,574 taxing jurisdictions, the company is generally no longer subject
to tax examinations for years prior to 2014. The company is no
Additions based on tax
positions related to the longer subject to income tax examination of its U.S. federal tax
current year 394 3,029 560 return for years prior to 2013. The open years contain matters
Additions for tax positions that could be subject to differing interpretations of applicable tax
of prior years 1,201 803 334 laws and regulations as it relates to the amount and/or timing of
income, deductions and tax credits. Although the outcome of tax
Reductions for tax positions
of prior years (including audits is always uncertain, the company believes that adequate
impacts due to a lapse of amounts of tax, interest and penalties have been provided for any
statute) (1,686) (367) (1,443) adjustments that are expected to result for these years.
Settlements (181) (174) (285)
The company is involved in a number of income tax-related
Balance at December 31 $ 6,759 $7,031 $ 3,740
matters in India challenging tax assessments issued by the
India Tax Authorities. As of December 31, 2018, the company
The additions to unrecognized tax benefits related to the current has recorded $660 million as prepaid income taxes in India. A
and prior years are primarily attributable to U.S. federal and state significant portion of this balance represents cash tax deposits
tax matters, as well as non-U.S. tax matters, including transfer paid over time to protect the company’s right to appeal various
pricing, credits and incentives. The settlements and reductions income tax assessments made by the India Tax Authorities. The
to unrecognized tax benefits for tax positions of prior years are company believes it will prevail on these matters.
primarily attributable to the resolution of certain U.S. federal
audit activity, non-U.S. audits and impacts due to lapse of statute Within consolidated retained earnings at December 31, 2018
of limitations. are undistributed after-tax earnings from certain non-U.S.
subsidiaries that are not indefinitely reinvested. At December 31,
The unrecognized tax benefits at December 31, 2018 of 2018, the company has a deferred tax liability of $981 million
$6,759 million can be reduced by $718 million associated with for the estimated taxes associated with the repatriation of these
timing adjustments, U.S. tax credits, potential transfer pricing earnings. Undistributed earnings of approximately $300 million
adjustments, and state income taxes. The net amount of $6,041 and other outside basis differences in foreign subsidiaries are
million, if recognized, would favorably affect the company’s indefinitely reinvested in foreign operations. Quantification of the
effective tax rate. The net amounts at December 31, 2017 and deferred tax liability, if any, associated with indefinitely reinvested
2016 were $6,064 million and $2,965 million, respectively. earnings and outside basis differences is not practicable.
Interest and penalties related to income tax liabilities are

included in income tax expense. During the year ended
December 31, 2018, the company recognized a net benefit of $14
million in interest expense and penalties; in 2017, the company
NOTE O. REVENUE RECOGNITION

Disaggregation of Revenue
The following tables provide details of revenue by major products/services offerings and by geography.
Revenue by Major Products/Service Offerings
($ in millions)
Technology
Global Services
Cognitive Business & Cloud Global Total
For the year ended December 31, 2018: Solutions Services Platforms Systems Financing Other Revenue
Solutions Software $12,903 $ — $ — $ — $ — $ — $12,903
Transaction Processing Software 5,578 — — — — — 5,578
Consulting — 7,705 — — — — 7,705

Global Process Services — 1,259 — — — — 1,259
Application Management — 7,852 — — — — 7,852
Infrastructure Services — — 23,007 — — — 23,007

Technical Support Services — — 6,961 — — — 6,961
Integration Software — — 4,493 — — — 4,493
Systems Hardware — — — 6,363 — — 6,363

Operating Systems Software — — — 1,671 — — 1,671
Global Financing* — — — — 1,590 — 1,590
Other Revenue — — — — — 207 207

Total $18,481 $16,817 $34,462 $8,034 $1,590 $207 $79,591
* Contains lease and loan/working capital financing arrangements which are not subject to the guidance on revenue from contracts with customers.
Revenue by Geography
Additionally, as a practical expedient, the company does not
($ in millions)
include contracts that have an original duration of one year or
Total
For the year ended December 31, 2018: Revenue less. Remaining performance obligation estimates are subject
to change and are affected by several factors, including
Americas $36,994
terminations, changes in the scope of contracts, periodic
Europe/Middle East/Africa 25,491
revalidations, adjustments for revenue that has not materialized
Asia Pacific 17,106 and adjustments for currency.
Total $79,591
At December 31, 2018, the aggregate amount of the transaction
price allocated to RPO related to customer contracts that are
Remaining Performance Obligations unsatisfied or partially unsatisfied was $124 billion. Given the
The remaining performance obligation (RPO) disclosure profile of contract terms, approximately 60 percent of this
provides the aggregate amount of the transaction price yet amount is expected to be recognized as revenue over the next
to be recognized as of the end of the reporting period and an two years, approximately 35 percent between three and five
explanation as to when the company expects to recognize these years and the balance (mostly Infrastructure Services) thereafter.
amounts in revenue. It is intended to be a statement of overall
work under contract that has not yet been performed and does Revenue Recognized for Performance Obligations
not include contracts in which the customer is not committed, Satisfied (or Partially Satisfied) in Prior Periods
such as certain as-a-Service, governmental, term software For the year ended December 31, 2018, revenue was reduced
license and services offerings. The customer is not considered by $51 million for performance obligations satisfied (or partially
committed when they are able to terminate for convenience satisfied) in previous periods mainly due to changes in estimates
without payment of a substantive penalty. The disclosure on percentage-of-completion based contracts. Refer to note A,
includes estimates of variable consideration, except when the “Significant Accounting Policies,” for additional information on
variable consideration is a sales-based or usage-based royalty percentage-of-completion contracts and estimates of costs
promised in exchange for a license of intellectual property. to complete.
Reconciliation of Contract Balances

The following table provides information about notes and accounts receivables—trade, contract assets and deferred income balances:
($ in millions)
At December 31, At January 1,
2018 2018(2)
Notes and accounts receivable—trade (net of allowances of $309 and $297
at December 31, 2018 and January 1, 2018, respectively) $ 7,432 $ 8,295
Contract assets (1) 470 557
Deferred income (current) 11,165 11,493
Deferred income (noncurrent) 3,445 3,758
(1)
Included within prepaid expenses and other current assets in the Consolidated Statement of Financial Position.
A s adjusted, upon adoption of the revenue standard on January 1, 2018.
(2)
The amount of revenue recognized during the year ended On January 1, 2018, in accordance with the transition guidance,
December 31, 2018 that was included within the deferred income $737 million of in-scope sales commissions that were previously
balance at January 1, 2018 was $10.2 billion and primarily recorded in the Consolidated Statement of Earnings were
related to services and software. capitalized as costs to obtain a contract. The amount of total
deferred costs amortized during the year ended December 31,
Deferred Costs 2018 was $3,690 million. There were no material impairment
losses incurred during the period. Refer to note A, “Significant
($ in millions)
Accounting Policies,” for additional information on deferred costs
At December 31,
2018 to fulfill a contract and capitalized costs of obtaining a contract.
Capitalized costs to obtain a contract $ 717
Transition Disclosures
Deferred costs to fulfill a contract:
In accordance with the modified retrospective method transition
Deferred setup costs 2,085 requirements, the company has presented the financial statement
Other deferred fulfillment costs 2,173 line items impacted and adjusted to compare to presentation
Total deferred costs (1) $4,975 under the prior GAAP for each of the annual periods during the
first year of adoption of the new revenue standard. The following
(1)
O f the total, $2,300 million is current and $2,676 million is noncurrent.
Prior to January 1, 2018, the current and noncurrent balance of tables summarize the impacts as of and for the year ended
deferred costs were included within prepaid expenses and other December 31, 2018. The adjustments to prior GAAP include
current assets and investments and sundry assets, respectively. results of the transition adjustments recorded at adoption and
current period impacts. Refer to note B, “Accounting Changes,”
for additional information on the transition adjustments.
Consolidated Statement of Earnings Impacts

As Reported Adjusted
under New Adjustments Amounts
Revenue to Convert under Prior
For the year ended December 31, 2018: Standard to Prior GAAP GAAP
Revenue $79,591 $ (63) $79,528
Cost 42,655 (40) 42,615
Gross profit 36,936 (23) 36,912
Selling, general and administrative expense 19,366 7 19,373
Income from continuing operations before income taxes 11,342 (30) 11,312
Provision for/(benefit from) income taxes 2,619 (6) 2,613
Net income $ 8,728 $ (24) $ 8,704
Earnings/(loss) per share of common stock—continuing operations:
Assuming dilution $ 9.51 $(0.03) $ 9.49
Basic $ 9.56 $(0.03) $ 9.54
Consolidated Statement of Financial Position Impacts
($ in millions)
At December 31, 2018: Standard to Prior GAAP GAAP
Assets:
Notes and accounts receivable—trade (net of allowances) $ 7,432 $ 533 $ 7,965
Deferred costs (current) 2,300 (273) 2,027
Prepaid expenses and other current assets 2,378 (430) 1,948
Deferred taxes 5,216 190 5,406
Deferred costs (noncurrent) 2,676 (444) 2,231
Investments and sundry assets 2,386 — 2,386
Total assets $123,382 $(425) $122,957
Liabilities:
Taxes $ 3,046 $ 56 $ 3,102
Deferred income (current) 11,165 67 11,232
Deferred income (noncurrent) 3,445 31 3,476
Total liabilities $106,452 $ 154 $106,606
Equity:
Retained earnings $159,206 $(604) $158,601
Accumulated other comprehensive income/(loss) (29,490) 26 (29,464)
Total stockholders’ equity $ 16,929 $(578) $ 16,351
Total liabilities and stockholders’ equity $123,382 $(425) $122,957
Consolidated Statement of Cash Flows Impacts
($ in millions)
For the year ended December 31, 2018: Standard to Prior GAAP GAAP
Cash flows from operating activities:
Net income $ 8,728 $(24) $ 8,704
Adjustments to reconcile net income to cash provided by operating activities:
Changes in operating assets and liabilities, net of acquisitions/divestitures 554 24 578
Net cash provided by operating activities $15,247 $ — $15,247
NOTE P. RESEARCH, DEVELOPMENT AND ENGINEERING

RD&E expense was $5,379 million in 2018, $5,590 million in to the development of new and improved products and their uses,
2017 and $5,726 million in 2016. Amounts for 2017 and 2016 as well as services and their application. Within these amounts,
have been recast to reflect the adoption of the FASB guidance software-related expense was $3,050 million, $3,145 million and
on presentation of net benefit cost. $3,441 million in 2018, 2017 and 2016, respectively.
The company incurred total expense of $5,027 million, $5,170 Expense for product-related engineering was $352 million,
million and $5,394 million in 2018, 2017 and 2016, respectively, $420 million and $332 million in 2018, 2017 and 2016,
for scientific research and the application of scientific advances respectively.
NOTE Q. EARNINGS PER SHARE OF COMMON STOCK

The following table presents the computation of basic and diluted earnings per share of common stock.

Weighted-average number of shares on which earnings per share
calculations are based
Basic 912,048,072 932,828,295 955,422,530
Add—incremental shares under stock-based compensation plans 2,786,316 3,094,373 2,416,940
Add—incremental shares associated with contingently issuable shares 1,481,326 1,462,957 874,626
Assuming dilution 916,315,714 937,385,625 958,714,097
Income from continuing operations $8,723 $5,758 $11,881
Income/(loss) from discontinued operations, net of tax 5 (5) (9)
Net income on which basic earnings per share is calculated $8,728 $5,753 $11,872
Income from continuing operations $8,723 $5,758 $11,881
Net income applicable to contingently issuable shares (6) (2) 0
Income from continuing operations on which diluted earnings
per share is calculated $8,718 $5,756 $11,881
Income/(loss) from discontinued operations, net of tax, on which basic
and diluted earnings per share is calculated 5 (5) (9)
Net income on which diluted earnings per share is calculated $8,722 $5,752 $11,872
Earnings/(loss) per share of common stock
Assuming dilution
Continuing operations $ 9.51 $ 6.14 $ 12.39
Discontinued operations 0.01 0.00 (0.01)
Total $ 9.52 $ 6.14 $ 12.38
Basic
Continuing operations $ 9.56 $ 6.17 $ 12.44
Discontinued operations 0.01 0.00 (0.01)
Total $ 9.57 $ 6.17 $ 12.43
Weighted-average stock options to purchase 576,776 common exercise price of the options was greater than the average market
shares in 2018, 209,294 common shares in 2017 and 405,552 price of the common shares for the full year, and therefore, the
common shares in 2016 were outstanding, but were not included effect would have been antidilutive.
in the computation of diluted earnings per share because the
NOTE R. RENTAL EXPENSE AND LEASE COMMITMENTS

Rental expense, including amounts charged to inventories The table below depicts gross minimum rental commitments
and fixed assets, and excluding amounts previously reserved, under noncancelable leases, amounts related to vacant space
was $1,944 million in 2018, $1,821 million in 2017 and associated with workforce transformation, sublease income
$1,508 million in 2016. Rental expense in agreements with commitments and capital lease commitments. These amounts
rent holidays and scheduled rent increases is recorded on a reflect activities primarily related to office space, data centers,
straight-line basis over the lease term. Contingent rentals are equipment and vehicles.
included in the determination of rental expense as accruable.
($ in millions)
2019 2020 2021 2022 2023 Beyond 2023
Operating lease commitments
Gross minimum rental commitments
(including vacant space below) $1,581 $1,233 $914 $640 $445 $815
Vacant space $ 29 $ 23 $ 14 $ 9 $ 5 $ 8
Sublease income commitments $ 11 $ 7 $ 5 $ 4 $ 4 $ 2
Capital lease commitments $ 3 $ 3 $ 3 $ 3 $ 2 $ 28
NOTE S. STOCK-BASED COMPENSATION

The following table presents total stock-based compensation The amount of shares originally authorized to be issued under
cost included in income from continuing operations. the company’s existing Plans was 273 million at December 31,
2018. In addition, certain incentive awards granted under
($ in millions) previous plans, if and when those awards were canceled, could
For the year ended December 31: 2018 2017 2016 be reissued under the company’s existing Plans. As such, 66.2
Cost $ 82 $ 91 $ 88 million additional shares were considered authorized to be issued
under the company’s existing Plans as of December 31, 2018.
Selling, general and
administrative 361 384 401 There were 100.0 million unused shares available to be granted
under the Plans as of December 31, 2018.
Research, development
and engineering 67 59 55
Under the company’s long-standing practices and policies, all
Pre-tax stock-based
awards are approved prior to or on the date of grant. The awards
compensation cost 510 534 544
approval process specifies the individual receiving the grant,
Income tax benefits (116) (131) (179)
the number of options or the value of the award, the exercise
Net stock-based price or formula for determining the exercise price and the
compensation cost $ 393 $ 403 $ 364
date of grant. All awards for senior management are approved
by the Committee. All awards for employees other than senior
Total unrecognized compensation cost related to non-vested management are approved by senior management pursuant to
awards at December 31, 2018 and 2017 was $821 million and a series of delegations that were approved by the Committee,
$851 million, respectively. The amount at December 31, 2018 and the grants made pursuant to these delegations are reviewed
is expected to be recognized over a weighted-average period of periodically with the Committee. Awards that are given as part
approximately 2.6 years. of annual total compensation for senior management and
other employees are made on specific cycle dates scheduled
Capitalized stock-based compensation cost was not material at in advance. With respect to awards given in connection with
December 31, 2018, 2017 and 2016. promotions or new hires, the company’s policy requires approval
of such awards prior to the grant date, which is typically the date
Incentive Awards of the promotion or the date of hire.
Stock-based incentive awards are provided to employees under
the terms of the company’s long-term performance plans Stock Awards
(the “Plans”). The Plans are administered by the Executive Stock awards are made in the form of Restricted Stock Units
Compensation and Management Resources Committee of the (RSUs), including Retention Restricted Stock Units (RRSUs), or
Board of Directors (the “Committee”). Awards available under Performance Share Units (PSUs).
the Plans principally include restricted stock units, performance
share units, stock options or any combination thereof.
The tables below summarize RSU and PSU activity under the Plans during the years ended December 31, 2018, 2017 and 2016.
RSUs
2018 2017 2016

Weighted- Weighted- Weighted-
Average Number Average Number Average Number
Grant Price of Units Grant Price of Units Grant Price of Units
Balance at January 1 $141 8,555,263 $147 8,899,092 $159 7,527,341
RSUs granted 121 4,806,790 137 3,540,949 140 3,985,870
RSUs released 148 (2,579,962) 153 (3,032,531) 174 (1,860,660)
RSUs canceled/forfeited 139 (979,387) 147 (852,247) 158 (753,459)
Balance at December 31 $130 9,802,704 $141 8,555,263 $147 8,899,092
PSUs
2018 2017 2016

Weighted- Weighted- Weighted-
Average Number Average Number Average Number
Grant Price of Units Grant Price of Units Grant Price of Units
Balance at January 1 $144 2,649,313 $155 2,874,758 $173 2,928,932
PSUs granted at target 130 909,140 137 824,875 140 990,336
Performance adjustments* 152 (328,120) 175 (623,245) 194 (387,457)
PSUs released 152 (666,244) 175 (293,236) 194 (419,759)
PSUs canceled/forfeited 135 (144,394) 144 (133,839) 174 (237,294)
Balance at December 31** $136 2,419,695 $144 2,649,313 $155 2,874,758
* Represents the change in shares issued to employees after vesting of PSUs because final performance metrics were above or below specified targets.
** Represents the number of shares expected to be issued based on achievement of grant date performance targets. The actual number of shares
issued will depend on final performance against specified targets over the vesting period.
RSUs are stock awards granted to employees that entitle the PSUs are stock awards where the number of shares ultimately
holder to shares of common stock as the award vests, typically received by the employee depends on the company’s
over a one- to five-year period. For RSUs, dividend equivalents performance against specified targets and typically vest over
are not paid. The fair value of such RSUs is determined and fixed a three-year period. For PSUs, dividend equivalents are not
on the grant date based on the company’s stock price adjusted paid. The fair value of each PSU is determined on the grant date,
for the exclusion of dividend equivalents. based on the company’s stock price, adjusted for the exclusion of
dividend equivalents, and assumes that performance targets will
The remaining weighted-average contractual term of RSUs at be achieved. Over the performance period, the number of shares
December 31, 2018, 2017 and 2016 is the same as the period of stock that will be issued is adjusted upward or downward
over which the remaining cost of the awards will be recognized, based upon the probability of achievement of performance
which is approximately three years. The fair value of RSUs granted targets. The ultimate number of shares issued and the related
during the years ended December 31, 2018, 2017 and 2016 was compensation cost recognized as expense will be based on a
$583 million, $484 million and $557 million, respectively. The comparison of the final performance metrics to the specified
total fair value of RSUs vested and released during the years targets. The fair value of PSUs granted at target during the years
ended December 31, 2018, 2017 and 2016 was $381 million, ended December 31, 2018, 2017 and 2016 was $118 million,
$463 million and $323 million, respectively. As of December 31, $113 million and $138 million, respectively. Total fair value of
2018, 2017 and 2016, there was $715 million, $763 million and PSUs vested and released during the years ended December 31,
$814 million, respectively, of unrecognized compensation cost 2018, 2017 and 2016 was $101 million, $51 million and $81
related to non-vested RSUs. The company received no cash from million, respectively.
employees as a result of employee vesting and release of RSUs
for the years ended December 31, 2018, 2017 and 2016. In connection with vesting and release of RSUs and PSUs,
the tax benefits realized by the company for the years ended
December 31, 2018, 2017 and 2016 were $117 million, $180
million and $118 million, respectively.
Stock Options
For the years ended December 31, 2018 and 2017, the company The company estimates the fair value of stock options at the
did not grant stock options. For the year ended December 31, date of grant using the Black-Scholes valuation model. Key
2016, the company made one grant of 1.5 million premium- inputs and assumptions used to estimate the fair value of stock
priced stock options. The option award was granted with a options include the grant price of the award, the expected option
three-year cliff vesting period and a 10-year contractual term. term, volatility of the company’s stock, the risk-free rate and the
The award’s cost of $12 million is recognized ratably over the company’s dividend yield. Estimates of fair value are not intended
three-year vesting period. to predict actual future events or the value ultimately realized by
employees who receive equity awards, and subsequent events
are not indicative of the reasonableness of the original estimates
of fair value made by the company.
The following table summarizes option activity under the Plans during the years ended December 31, 2018, 2017 and 2016.
2018 2017 2016

Weighted- Number of Weighted- Number of Weighted- Number of
Average Shares Average Shares Average Shares
Exercise Price Under Option Exercise Price Under Option Exercise Price Under Option
Balance at January 1 $140 1,500,000 $137 1,613,923 $ 94 479,774
Options granted — — — — 140 1,500,000
Options exercised — — 103 (106,132) 91 (361,088)
Options canceled/expired — — 103 (7,791) 86 (4,763)
Balance at December 31 $140 1,500,000 $140 1,500,000 $137 1,613,923
Exercisable at December 31 $ — — $ — — $103 113,923
The shares under option at December 31, 2018 were in the following exercise price ranges:
Options Outstanding
Weighted-Average
Weighted- Number of Aggregate Remaining
Average Shares Intrinsic Contractual Life
Exercise Price Range Exercise Price Under Option Value (in Years)
$129–$154 $140 1,500,000 $0 7.1
Exercises of Employee Stock Options

For the year ended December 31, 2018, no stock options were The company settles employee stock option exercises primarily
exercised. The total intrinsic value of options exercised during with newly issued common shares and, occasionally, with
the years ended December 31, 2017 and 2016 was $7 million treasury shares. Total treasury shares held at December 31, 2018
and $20 million, respectively. The total cash received from and 2017 were approximately 1,341 million and 1,307 million
employees as a result of employee stock option exercises for the shares, respectively.
years ended December 31, 2017 and 2016 was approximately
$11 million and $33 million, respectively. In connection with
these exercises, the tax benefits realized by the company for
the years ended December 31, 2017 and 2016 were $2 million
and $7 million, respectively.
Acquisitions U.S. Plans

In connection with various acquisition transactions, there was an Defined Benefit Pension Plans
additional 0.2 million options outstanding at December 31, 2018, IBM Personal Pension Plan
as a result of the company’s conversion of stock-based awards IBM provides U.S. regular, full-time and part-time employees
previously granted by the acquired entities. The weighted- hired prior to January 1, 2005 with noncontributory defined
average exercise price of these awards was $39 per share. benefit pension benefits via the IBM Personal Pension Plan (PPP).
The PPP has two plans, a tax qualified plan (Qualified PPP) and a
IBM Employees Stock Purchase Plan non-tax qualified plan (Excess PPP). The Qualified PPP is funded
The company maintains a non-compensatory Employees Stock by company contributions to an irrevocable trust fund, which is
Purchase Plan (ESPP). The ESPP enables eligible participants held for the sole benefit of participants and beneficiaries. The
to purchase full or fractional shares of IBM common stock at Excess PPP, which is unfunded, provides benefits in excess of
a 5 percent discount off the average market price on the day IRS limitations for qualified plans.
of purchase through payroll deductions of up to 10 percent of
eligible compensation. Eligible compensation includes any Benefits provided to the PPP participants are calculated using
compensation received by the employee during the year. The benefit formulas that vary based on the participant. The first
ESPP provides for offering periods during which shares may be method uses a five-year, final pay formula that determines
purchased and continues as long as shares remain available benefits based on salary, years of service, mortality and other
under the ESPP, unless terminated earlier at the discretion of the participant-specific factors. The second method is a cash
Board of Directors. Individual ESPP participants are restricted balance formula that calculates benefits using a percentage of
from purchasing more than $25,000 of common stock in one employees’ annual salary, as well as an interest crediting rate.
calendar year or 1,000 shares in an offering period.
Benefit accruals under the IBM PPP ceased December 31, 2007
Employees purchased 1.0 million, 1.0 million and 1.2 million for all participants.
shares under the ESPP during the years ended December 31,
2018, 2017 and 2016, respectively. Cash dividends declared Beginning in 2019, substantially all the plan participants in the
and paid by the company on its common stock also include cash U.S. Qualified PPP are considered inactive. As required by U.S.
dividends on the company stock purchased through the ESPP. GAAP, this will change the amortization period of unrecognized
Dividends are paid on full and fractional shares and can be actuarial losses to the average remaining life expectancy of
reinvested. The company stock purchased through the ESPP is inactive plan participants, which is 18 years as of December 31,
considered outstanding and is included in the weighted-average 2018. As a result of this change, there will be a reduction to 2019
outstanding shares for purposes of computing basic and diluted amortization expense of approximately $900 million. There will
earnings per share. be no impact to funded status, retiree benefit payments or funding
requirements of the U.S. Qualified PPP due to this change.
In July 2014, the “2014 ESPP Reserve” became effective and
25 million additional shares of authorized common stock were U.S. Supplemental Executive Retention Plan
reserved and approved for issuance. The 2014 ESPP provides for The company also sponsors a nonqualified U.S. Supplemental
semi-annual offerings commencing July 1, 2014, and continuing Executive Retention Plan (Retention Plan). The Retention Plan,
as long as shares remain available under the ESPP, unless which is unfunded, provides benefits to eligible U.S. executives
terminated earlier at the discretion of the Board of Directors. based on average earnings, years of service and age at
termination of employment.
Approximately 19.8 million, 20.8 million and 21.8 million shares
were available for purchase under the ESPP at December 31, Benefit accruals under the Retention Plan ceased December 31,
2018, 2017 and 2016, respectively. 2007 for all participants.
Defined Contribution Plans

NOTE T. RETIREMENT-RELATED BENEFITS
IBM 401(k) Plus Plan
Description of Plans
U.S. regular, full-time and part-time employees are eligible to
IBM sponsors defined benefit pension plans and defined
participate in the IBM 401(k) Plus Plan, which is a qualified
contribution plans that cover eligible regular employees, a
defined contribution plan under section 401(k) of the Internal
supplemental retention plan that covers certain U.S. executives
Revenue Code. Under the IBM 401(k) Plus Plan, eligible
and nonpension postretirement benefit plans primarily
employees receive a dollar-for-dollar match of their contributions
consisting of retiree medical and dental benefits for eligible
generally up to 6 percent of eligible compensation for those
retirees and dependents.
hired prior to January 1, 2005, and generally up to 5 percent
of eligible compensation for those hired on or after January 1,
2005. In addition, eligible employees generally receive automatic
contributions from the company equal to 1, 2 or 4 percent of
eligible compensation based on their eligibility to participate in
the PPP as of December 31, 2007. Employees generally receive
automatic contributions and matching contributions after the
completion of one year of service.
All contributions, including the company match, are made in Nonpension Postretirement Benefit Plan
cash and invested in accordance with participants’ investment U.S. Nonpension Postretirement Plan
elections. There are no minimum amounts that must be invested The company sponsors a defined benefit nonpension
in company stock, and there are no restrictions on transferring postretirement benefit plan that provides medical and dental
amounts out of company stock to another investment choice, benefits to eligible U.S. retirees and eligible dependents, as
other than excessive trading rules applicable to such investments. well as life insurance for eligible U.S. retirees. Benefits provided
Matching and automatic contributions are made once annually at vary based on plan design formulas and eligibility requirements.
the end of the year. In order to receive such contributions each Under all the plan arrangements, there is a maximum cost to the
year, a participant must be employed on December 15 of the plan company for these benefits.
year. However, matching and auto contributions may be made for
certain types of separations that occur prior to December 15, Since January 1, 2004, new hires, as of that date or later, are
including for example, if the participant has completed certain not eligible for company-subsidized nonpension postretirement
service and/or age requirements at separation. The company’s benefits.
matching contributions vest immediately and participants are
always fully vested in their own contributions. Non-U.S. Plans
Certain subsidiaries and branches outside the United States
IBM Excess 401(k) Plus Plan sponsor defined benefit and/or defined contribution plans that
The IBM Excess 401(k) Plus Plan (Excess 401(k)) is an unfunded, cover eligible regular employees. The company deposits funds
nonqualified defined contribution plan. Employees whose eligible under various fiduciary-type arrangements, purchases annuities
compensation is expected to exceed the IRS compensation limit under group contracts or provides reserves for these plans.
for qualified plans are eligible to participate in the Excess 401(k). Benefits under the defined benefit plans are typically based
The purpose of the Excess 401(k) is to provide benefits that either on years of service and the employee’s compensation
would be provided under the qualified IBM 401(k) Plus Plan if (generally during a fixed number of years immediately before
the compensation limits did not apply. retirement) or on annual credits. The range of assumptions
that are used for the non-U.S. defined benefit plans reflect the
Amounts deferred into the Excess 401(k) are record-keeping different economic environments within the various countries.
(notional) accounts and are not held in trust for the participants.
Participants in the Excess 401(k) may invest their notional In addition, certain of the company’s non-U.S. subsidiaries
accounts in investments which mirror the primary investment sponsor nonpension postretirement benefit plans that provide
options available under the 401(k) Plus Plan. Participants in medical and dental benefits to eligible non-U.S. retirees and
the Excess 401(k) are also eligible to receive company match eligible dependents, as well as life insurance for certain eligible
and automatic contributions (at the same rate as under the non-U.S. retirees. However, most non-U.S. retirees are covered
401(k) Plus Plan) on eligible compensation deferred into the by local government sponsored and administered programs.
Excess 401(k) and on compensation earned in excess of the
Internal Revenue Code pay limit once they have completed
one year of service. Amounts deferred into the Excess 401(k),
including company contributions are recorded as liabilities
in the Consolidated Statement of Financial Position. Matching
and automatic contributions are made once annually at the end
of the year. In order to receive such contributions each year, a
participant must be employed on December 15 of the plan year.
However, matching and auto contributions may be made for
certain types of separations that occur prior to December 15,
including for example, if the participant has completed certain
service and/or age requirements at separation.
Plan Financial Information

Summary of Financial Information
The following table presents a summary of the total retirement-related benefits net periodic (income)/cost recorded in the
Consolidated Statement of Earnings.
($ in millions)
U.S. Plans Non-U.S. Plans Total
For the year ended December 31: 2018 2017 2016 2018 2017 2016 2018 2017 2016
Defined benefit pension plans $ 542 $ 237 $(334) $1,284 $1,315 $1,039 $1,827 $1,552 $ 705
Retention Plan 17 16 17 — — — 17 16 17
Total defined benefit pension
plans (income)/cost $ 559 $ 253 $(317) $1,284 $1,315 $1,039 $1,843 $1,568 $ 722
IBM 401(k) Plus Plan and
non-U.S. plans $ 588 $ 616 $ 626 $ 412 $ 404 $ 420 $1,000 $1,020 $1,046
Excess 401(k) 24 26 24 — — — 24 26 24
Total defined contribution
plans cost $ 612 $ 643 $ 650 $ 412 $ 404 $ 420 $1,024 $1,046 $1,070
Nonpension postretirement
benefit plans cost $ 147 $ 180 $ 195 $ 51 $ 62 $ 16 $ 198 $ 242 $ 211
Total retirement-related
benefits net periodic cost $1,319 $1,076 $ 527 $1,747 $1,781 $1,475 $3,066 $2,857 $2,003
The following table presents a summary of the total PBO for defined benefit pension plans, APBO for nonpension postretirement
benefit plans, fair value of plan assets and the associated funded status recorded in the Consolidated Statement of Financial Position.
($ in millions)
Benefit Obligations Fair Value of Plan Assets Funded Status*
At December 31: 2018 2017 2018 2017 2018 2017
U.S. Plans
Overfunded plans
Qualified PPP $46,145 $50,602 $48,213 $52,694 $ 2,069 $ 2,092
Underfunded plans
Excess PPP $ 1,395 $ 1,532 $ — $ — $ (1,395) $ (1,532)
Retention Plan 273 310 — — (273) (310)
Nonpension postretirement benefit plan 3,912 4,184 29 18 (3,882) (4,165)
Total underfunded U.S. plans $ 5,579 $ 6,026 $ 29 $ 18 $ (5,550) $ (6,007)
Non-U.S. Plans
Overfunded plans
Qualified defined benefit pension plans** $17,379 $19,537 $19,975 $22,088 $ 2,597 $ 2,551
Nonpension postretirement benefit plans 0 0 0 0 0 0
Total overfunded non-U.S. plans $17,379 $19,537 $19,975 $22,088 $ 2,597 $ 2,551
Underfunded plans
Qualified defined benefit pension plans** $22,139 $23,046 $16,783 $18,711 $ (5,356) $ (4,336)
Nonqualified defined benefit pension plans 6,252 6,527 — — (6,252) (6,527)
Nonpension postretirement benefit plans 704 732 65 70 (640) (663)
Total underfunded non-U.S. plans $29,095 $30,306 $16,848 $18,780 $(12,248) $(11,526)
Total overfunded plans $63,524 $70,139 $68,190 $74,782 $ 4,666 $ 4,643
Total underfunded plans $34,675 $36,332 $16,877 $18,799 $(17,798) $(17,533)
* Funded status is recognized in the Consolidated Statement of Financial Position as follows: asset amounts as prepaid pension assets; (liability)
amounts as compensation and benefits (current liability) and retirement and nonpension postretirement benefit obligations (noncurrent liability).
** Non-U.S. qualified plans represent plans funded outside of the U.S. Non-U.S. non-qualified plans are unfunded.
At December 31, 2018, the company’s qualified defined benefit PPP and the Retention Plan. The defined benefit pension plans
pension plans worldwide were 99 percent funded compared to and the nonpension postretirement benefit plans under non-
the benefit obligations, with the U.S. Qualified PPP 104 percent U.S. Plans consists of all plans sponsored by the company’s
funded. Overall, including nonqualified plans, the company’s subsidiaries. The nonpension postretirement benefit plan under
defined benefit pension plans worldwide were 91 percent funded. U.S. Plan consists of only the U.S. Nonpension Postretirement
Benefit Plan.
Defined Benefit Pension and Nonpension
Postretirement Benefit Plan Financial Information The tables below present the components of net periodic
The following tables through page 133 represent financial (income)/cost of the retirement-related benefit plans recognized
information for the company’s retirement-related benefit plans, in the Consolidated Statement of Earnings, excluding defined
excluding defined contribution plans. The defined benefit pension contribution plans.
plans under U.S. Plans consists of the Qualified PPP, the Excess
($ in millions)
Defined Benefit Pension Plans
U.S. Plans Non-U.S. Plans
For the year ended December 31: 2018 2017 2016 2018 2017 2016
Service cost $ — $ — $ — $ 413 $ 410 $ 420
Interest cost (1) 1,719 1,913 2,048 830 837 1,035
Expected return on plan assets (1) (2,701) (3,014) (3,689) (1,342) (1,325) (1,867)
Amortization of transition assets (1) — — — 0 0 0
Amortization of prior service costs/(credits) (1) 16 16 10 (83) (97) (106)
Recognized actuarial losses (1) 1,525 1,337 1,314 1,401 1,507 1,408
Curtailments and settlements (1) — — — 11 19 22
Multi-employer plans — — — 38 40 43
Other costs/(credits)* — — — 16 (76) 84
Total net periodic (income)/cost $ 559 $ 253 $ (317) $ 1,284 $ 1,315 $ 1,039
($ in millions)
Nonpension Postretirement Benefit Plans
U.S. Plan Non-U.S. Plans
For the year ended December 31: 2018 2017 2016 2018 2017 2016
Service cost $ 13 $ 14 $ 17 $ 5 $ 6 $ 5
Interest cost (1) 132 154 165 45 57 51
Expected return on plan assets (1) 0 0 0 (6) (7) (6)
Amortization of transition assets (1) — — — 0 0 0
Amortization of prior service costs/(credits) (1) (7) (7) (7) 0 0 (5)
Recognized actuarial losses (1) 10 20 20 6 7 9
Curtailments and settlements (1) — — — 0 0 (38)
Total net periodic cost $147 $180 $195 $51 $ 62 $ 16
These components of net periodic pension costs are included in other (income) and expense in the Consolidated Statement of Earnings.
(1)
* The non-U.S. plans amounts include a gain of $91 million in 2017 related to the IBM UK litigation and a retirement-related charge of $56 million
related to the IBM Spain pension litigation for 2016.
The following table presents the changes in benefit obligations and plan assets of the company’s retirement-related benefit plans,
excluding defined contribution plans.
($ in millions)
Defined Benefit Pension Plans Nonpension Postretirement Benefit Plans
U.S. Plans Non-U.S. Plans U.S. Plan Non-U.S. Plans
2018 2017 2018 2017 2018 2017 2018 2017
Change in benefit obligation
Benefit obligation at January 1 $52,444 $52,218 $49,111 $44,981 $ 4,184 $ 4,470 $ 732 $ 692
Service cost — — 413 410 13 14 5 6
Interest cost 1,719 1,913 830 837 132 154 45 57
Plan participants’ contributions — — 25 28 59 54 — —
Acquisitions/divestitures, net — — (27) 24 0 0 0 0
Actuarial losses/(gains) (2,743) 1,895 (240) 520 (71) (98) 43 (3)
Benefits paid from trust (3,484) (3,460) (1,976) (1,865) (383) (385) (7) (6)
Direct benefit payments (124) (123) (390) (384) (22) (24) (31) (30)
Foreign exchange impact — — (2,012) 4,657 — — (86) 18
Amendments/curtailments/
settlements/other — — 34 (96) — — 3 (1)
Benefit obligation at December 31 $47,812 $52,444 $45,770 $49,111 $ 3,912 $ 4,184 $ 705 $ 732
Change in plan assets
Fair value of plan assets at January 1 $52,694 $51,405 $40,798 $36,020 $ 18 $ 26 $ 70 $ 71
Actual return on plan assets (997) 4,749 (610) 2,583 1 0 12 6
Employer contributions — — 325 368 335 394 0 0
Acquisitions/divestitures, net — — (22) (28) 0 0 0 0
Plan participants’ contributions — — 25 28 59 54 0 —
Benefits paid from trust (3,484) (3,460) (1,976) (1,865) (383) (385) (7) (6)
Foreign exchange impact — — (1,754) 3,694 — — (10) (1)
Amendments/curtailments/
settlements/other — — (28) (2) 0 (70) 0 (1)
Fair value of plan assets
at December 31 $48,213 $52,694 $36,758 $40,798 $ 29 $ 18 $ 65 $ 70
Funded status at December 31 $ 401 $ 250 $ (9,012) $ (8,312) $(3,882) $(4,165) $(640) $(663)
Accumulated benefit obligation* $47,812 $52,444 $45,161 $47,974 N/A N/A N/A N/A
* Represents the benefit obligation assuming no future participant compensation increases.

The following table presents the net funded status recognized in the Consolidated Statement of Financial Position.
($ in millions)
At December 31: 2018 2017 2018 2017 2018 2017 2018 2017
Prepaid pension assets $ 2,069 $ 2,092 $ 2,597 $ 2,551 $ 0 $ 0 $ 0 $ 0
Current liabilities—
compensation and benefits (120) (120) (302) (323) (340) (353) (36) (17)
Noncurrent liabilities—retirement
and nonpension postretirement
benefit obligations (1,548) (1,722) (11,306) (10,541) (3,542) (3,812) (605) (646)
Funded status—net $ 401 $ 250 $ (9,012) $ (8,312) $(3,882) $(4,165) $(640) $(663)
The following table presents the pre-tax net loss and prior service costs/(credits) and transition (assets)/liabilities recognized in
OCI and the changes in the pre-tax net loss, prior service costs/(credits) and transition (assets)/liabilities recognized in AOCI for the
retirement-related benefit plans.
($ in millions)
2018 2017 2018 2017 2018 2017 2018 2017
Net loss at January 1 $18,045 $19,222 $18,275 $20,544 $486 $605 $145 $154
Current period loss/(gain) 956 159 1,590 (740) (72) (99) 33 (2)
Curtailments and settlements — — (11) (22) — — 0 0
Amortization of net loss included in
net periodic (income)/cost (1,525) (1,337) (1,401) (1,507) (10) (20) (6) (7)
Net loss at December 31 $17,476 $18,045 $18,452 $18,275 $405 $486 $172 $145
Prior service costs/(credits)
at January 1 $ 74 $ 90 $ (90) $ (188) $ 45 $ 37 $ 3 $ 1
Current period prior service
costs/(credits) — — 181 — — — 1 —
Curtailments, settlements
and other — — 0 1 — — 0 2
Amortization of prior service
(costs)/credits included in net
periodic (income)/cost (16) (16) 83 97 7 7 0 0
Prior service costs/(credits)
at December 31 $ 57 $ 74 $ 172 $ (90) $ 52 $ 45 $ 4 $ 3
Transition (assets)/liabilities
at January 1 $ — $ — $ 0 $ 0 $ — $ — $ 0 $ 0
Amortization of transition
assets/(liabilities) included in
net periodic (income)/cost — — — 0 — — 0 0
Transition (assets)/liabilities
at December 31 $ — $ — $ 0 $ 0 $ — $ — $ 0 $ 0
Total loss recognized in
accumulated other
comprehensive income/(loss)* $17,533 $18,119 $18,624 $18,184 $457 $531 $176 $147
* See note L, “Equity Activity,” for the total change in AOCI, and the Consolidated Statement of Comprehensive Income for the components of net
periodic (income)/cost, including the related tax effects, recognized in OCI for the retirement-related benefit plans.
The following table presents the pre-tax estimated net loss, estimated prior service costs/(credits) and estimated transition (assets)/
liabilities of the retirement-related benefit plans that will be amortized from AOCI into net periodic (income)/cost in 2019.
($ in millions)
Defined Benefit Nonpension Postretirement
Pension Plans Benefit Plans
Net loss $560 $1,261 $2 $11
Prior service costs/(credits) 16 (26) (2) 0
Transition (assets)/liabilities — — — —
On October 26, 2018, the High Court in London in the case of On October 12, 2012, the High Court in London issued a ruling
Lloyds Pension Group Trustees Limited v Lloyds Bank PLC, against IBM United Kingdom Limited and IBM United Kingdom
confirmed that the UK defined benefit pension plans are required Holdings Limited, both wholly owned subsidiaries of the company,
to equalize pension benefits to take into account unequal in litigation involving one of IBM UK’s defined benefit plans. As a
guaranteed minimum pension benefits accrued during the period result of the ruling, the company recorded a pre-tax retirement-
1990-1997. As a result of this court decision, IBM recorded an related obligation of $162 million in the fourth quarter of 2012 in
increase of $125 million to the PBO for the IBM UK defined selling, general and administrative expense in the Consolidated
benefit plan, which represents approximately 1 percent of the Statement of Earnings. As a result of the final Court of Appeal
UK PBO. This amount was recorded as prior service cost in OCI ruling received in August 2017, the company adjusted its obligation
for the year ended December 31, 2018. under the plan. This adjustment resulted in a gain of $91 million for
the year ended December 31, 2017, which was recorded in selling,
On March 24, 2014, the Supreme Court of Spain issued a ruling general and administrative expense in the Consolidated Statement
against IBM Spain in litigation involving its defined benefit and of Earnings. This gain is reflected in “Non-U.S. Plans—Other costs/
defined contribution plans. During the fourth quarter of 2016, (credits)” in the table on page 130. See note M, “Contingencies
an arbitration ruling related to the defined contribution plan and Commitments” for additional information.
resulted in an additional charge of $56 million. For the year
ended December 31, 2016, the company recorded pre-tax Assumptions Used to Determine Plan Financial Information
retirement-related obligations of $56 million in selling, general Underlying both the measurement of benefit obligations and net
and administrative expense in the Consolidated Statement of periodic (income)/cost are actuarial valuations. These valuations
Earnings. There were no pre-tax retirement-related obligations use participant-specific information such as salary, age and years
for the years ended December 31, 2018 and 2017. These of service, as well as certain assumptions, the most significant of
obligations are reflected in “Non-U.S. Plans—Other costs/ which include estimates of discount rates, expected return on plan
(credits)” in the table on page 130. assets, rate of compensation increases, interest crediting rates
and mortality rates. The company evaluates these assumptions,
at a minimum, annually, and makes changes as necessary.
The table below presents the assumptions used to measure the net periodic (income)/cost and the year-end benefit obligations for
retirement-related benefit plans.
Defined Benefit Pension Plans

U.S. Plans Non-U.S. Plans
2018 2017 2016 2018 2017 2016
Weighted-average assumptions used
to measure net periodic (income)/cost
for the year ended December 31
Discount rate 3.40% 3.80% 4.00% 1.76% 1.80% 2.40%
Expected long-term returns on plan assets 5.25% 5.75% 7.00% 3.62% 3.77% 5.53%
Rate of compensation increase N/A N/A N/A 2.41% 2.45% 2.40%
Weighted-average assumptions used to measure
benefit obligations at December 31
Discount rate 4.10% 3.40% 3.80% 1.85% 1.76% 1.80%
Rate of compensation increase N/A N/A N/A 2.18% 2.41% 2.45%
Nonpension Postretirement Benefit Plans

2018 2017 2016 2018 2017 2016
Weighted-average assumptions used
to measure net periodic cost for the
year ended December 31
Discount rate 3.30% 3.60% 3.70% 7.28% 8.26% 7.06%
Expected long-term returns on plan assets N/A N/A N/A 8.91% 10.47% 9.95%
Weighted-average assumptions used to
measure benefit obligations at December 31
Discount rate 3.90% 3.30% 3.60% 7.48% 7.28% 8.26%
Discount Rate Expected Long-Term Returns on Plan Assets

The discount rate assumptions used for retirement-related Expected returns on plan assets, a component of net periodic
benefit plans accounting reflect the yields available on high- (income)/cost, represent the expected long-term returns on
quality, fixed-income debt instruments at the measurement plan assets based on the calculated market-related value of
date. For the U.S. and certain non-U.S. countries, a portfolio of plan assets. Expected long-term returns on plan assets take
high-quality corporate bonds is used to construct a yield curve. into account long-term expectations for future returns and the
The cash flows from the company’s expected benefit obligation investment policies and strategies as described on pages 135
payments are then matched to the yield curve to derive the and 136. These rates of return are developed by the company
discount rates. In other non-U.S. countries, where the markets and are tested for reasonableness against historical returns.
for high-quality long-term bonds are not generally as well The use of expected long-term returns on plan assets may
developed, a portfolio of long-term government bonds is used result in recognized pension income that is greater or less than
as a base, to which a credit spread is added to simulate corporate the actual returns of those plan assets in any given year. Over
bond yields at these maturities in the jurisdiction of each plan, time, however, the expected long-term returns are designed to
as the benchmark for developing the respective discount rates. approximate the actual long-term returns, and therefore result
in a pattern of income and cost recognition that more closely
For the U.S. defined benefit pension plans, the changes in the matches the pattern of the services provided by the employees.
discount rate assumptions impacted the net periodic (income)/ Differences between actual and expected returns are recognized
cost and the PBO. The changes in the discount rate assumptions as a component of net loss or gain in AOCI, which is amortized as
resulted in a decrease in 2018 net periodic income of $124 million, a component of net periodic (income)/cost over the service lives
a decrease in 2017 net periodic income of $64 million and an or life expectancy of the plan participants, depending on the plan,
increase in 2016 net periodic income of $103 million. The changes provided such amounts exceed certain thresholds provided by
in the discount rate assumptions resulted in a decrease in the PBO accounting standards. The market-related value of plan assets
of $3,239 million and an increase of $1,962 million for the years recognizes changes in the fair value of plan assets systematically
ended December 31, 2018 and 2017, respectively. over a five-year period in the expected return on plan assets line
in net periodic (income)/cost.
For the U.S. nonpension postretirement benefit plans, the
changes in the discount rate assumptions had no material impact For the U.S. defined benefit pension plan, the expected long-term
on net periodic cost for the years ended December 31, 2018, rate of return on plan assets for the years ended December 31,
2017 and 2016 and resulted in a decrease in the APBO of $153 2018, 2017 and 2016 was 5.25 percent, 5.75 percent and
million and an increase of $88 million at December 31, 2018 and 7.0 percent, respectively. The change in the rate in 2018 resulted
2017, respectively. in a decrease in 2018 net periodic income of $256 million. For the
year ended December 31, 2017, the change in the rate resulted
For all of the company’s retirement-related benefit plans, the in a decrease in net periodic income of $656 million. For the year
change in the discount rate assumptions resulted in a decrease ended December 31, 2016, the change in the rate resulted in a
in the benefit obligation of approximately $4.0 billion at decrease in net periodic income of $268 million. For 2019, the
December 31, 2018 and an increase of approximately $2.5 billion projected long-term rate of return on plan assets is 5.25 percent.
at December 31, 2017.
For the U.S. nonpension postretirement benefit plans, the Plan Assets
company maintains a highly liquid trust fund balance to ensure Retirement-related benefit plan assets are recognized and
timely payments are made. As a result, for the years ended measured at fair value. Because of the inherent uncertainty of
December 31, 2018, 2017 and 2016, the expected long-term valuations, these fair value measurements may not necessarily
return on plan assets and the actual return on those assets were reflect the amounts the company could realize in current market
not material. transactions.
Rate of Compensation Increases and Mortality Rate Investment Policies and Strategies
The rate of compensation increases is determined by the The investment objectives of the Qualified PPP portfolio are
company, based upon its long-term plans for such increases. The designed to generate returns that will enable the plan to meet
rate of compensation increase is not applicable to the U.S. defined its future obligations. The precise amount for which these
benefit pension plans as benefit accruals ceased December 31, obligations will be settled depends on future events, including the
2007 for all participants. Mortality rate assumptions are retirement dates and life expectancy of the plans’ participants.
based on life expectancy and death rates for different types of The obligations are estimated using actuarial assumptions, based
participants. Mortality rates are periodically updated based on on the current economic environment and other pertinent factors
actual experience. In the U.S., the Society of Actuaries released described previously on pages 134 and 135. The Qualified PPP
new mortality tables in 2014 and updated them in each of the portfolio’s investment strategy balances the requirement to
years 2015 to 2018. The company utilized these tables in its plan generate returns, using potentially higher yielding assets such
remeasurements at December 31, 2018 and 2017. For the U.S. as equity securities, with the need to control risk in the portfolio
retirement-related plans, the change in mortality assumptions with less volatile assets, such as fixed-income securities. Risks
resulted in a decrease to the plan benefit obligations of $27 million include, among others, inflation, volatility in equity values and
and $345 million at December 31, 2018 and 2017, respectively. changes in interest rates that could cause the plan to become
underfunded, thereby increasing its dependence on contributions
Interest Crediting Rate from the company. To mitigate any potential concentration risk,
Benefits for certain participants in the PPP are calculated using careful consideration is given to balancing the portfolio among
a cash balance formula. An assumption underlying this formula industry sectors, companies and geographies, taking into account
is an interest crediting rate, which impacts both net periodic interest rate sensitivity, dependence on economic growth,
(income)/cost and the PBO. This assumption provides a basis for currency and other factors that affect investment returns. During
projecting the expected interest rate that participants will earn 2016 and 2017, the company changed its investment strategy,
on the benefits that they are expected to receive in the following modifying the target allocation primarily by reducing equity
year and is based on the average from August to October of the securities and increasing debt securities. These changes were
one-year U.S. Treasury Constant Maturity yield plus one percent. designed to reduce the potential negative impact that equity
markets might have on the funded status of the plan. There were
For the PPP, the change in the interest crediting rate to 2.3 percent no significant changes to investment strategy made in 2018 or
for the year ended December 31, 2018 from 1.6 percent for the planned for 2019. The Qualified PPP portfolio’s target allocation
year ended December 31, 2017 resulted in a decrease in 2018 is 12 percent equity securities, 80 percent fixed-income
net periodic income of $25 million. The change in the interest securities, 4 percent real estate and 4 percent other investments.
crediting rate to 1.6 percent for the year ended December 31,
2017 from 1.3 percent for the year ended December 31, 2016 The assets are managed by professional investment firms and
resulted in a decrease in 2017 net periodic income of $14 million. investment professionals who are employees of the company.
The change in the interest crediting rate to 1.3 percent for the They are bound by investment mandates determined by the
year ended December 31, 2016 from 1.1 percent for the year company’s management and are measured against specific
ended December 31, 2015 resulted in a decrease in 2016 net benchmarks. Among these managers, consideration is given,
periodic income of $7 million. but not limited to, balancing security concentration, issuer
concentration, investment style and reliance on particular active
Healthcare Cost Trend Rate and passive investment strategies.
For nonpension postretirement benefit plan accounting, the
company reviews external data and its own historical trends for Market liquidity risks are tightly controlled, with $4,295 million
healthcare costs to determine the healthcare cost trend rates. of the Qualified PPP portfolio as of December 31, 2018 invested
However, the healthcare cost trend rate has an insignificant in private market assets consisting of private equities and private
effect on plan costs and obligations as a result of the terms of real estate investments, which are less liquid than publicly traded
the plan which limit the company’s obligation to the participants. securities. In addition, the Qualified PPP portfolio had $1,500
The company assumes that the healthcare cost trend rate for million in commitments for future investments in private markets
2019 will be 6.25 percent. In addition, the company assumes to be made over a number of years. These commitments are
that the same trend rate will decrease to 5 percent over the expected to be funded from plan assets.
next five years. A one percentage point increase or decrease in
the assumed healthcare cost trend rate would not have had a
material effect on 2018, 2017 and 2016 net periodic cost or the
benefit obligations as of December 31, 2018 and 2017.
Derivatives are used as an effective means to achieve investment to fixed income is required to manage solvency and funding
objectives and/or as a component of the plan’s risk management risks. In others, the responsibility for managing the investments
strategy. The primary reasons for the use of derivatives are typically lies with a board that may include up to 50 percent of
fixed income management, including duration, interest rate members elected by employees and retirees. This can result
management and credit exposure, cash equitization and to in slight differences compared with the strategies previously
manage currency strategies. described. Generally, these non-U.S. plans do not invest in illiquid
assets and their use of derivatives is consistent with the U.S. plan
Outside the U.S., the investment objectives are similar to and mainly for currency hedging, interest rate risk management,
those described previously, subject to local regulations. The credit exposure and alternative investment strategies.
weighted-average target allocation for the non-U.S. plans is
24 percent equity securities, 60 percent fixed-income securities, The company’s nonpension postretirement benefit plans
4 percent real estate and 12 percent other investments, which is are underfunded or unfunded. For some plans, the company
consistent with the allocation decisions made by the company’s maintains a nominal, highly liquid trust fund balance to ensure
management. In some countries, a higher percentage allocation timely benefit payments.
Defined Benefit Pension Plan Assets

The following table presents the company’s defined benefit pension plans’ asset classes and their associated fair value at December 31,
2018. The U.S. Plan consists of the Qualified PPP and the non-U.S. Plans consist of all plans sponsored by the company’s subsidiaries.
($ in millions)
Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
Equity
Equity securities (1) $1,538 $ — $ — $ 1,538 $2,333 $ 0 $ 0 $ 2,333
Equity mutual funds (2) 65 — — 65 18 5 — 23
Fixed income
Government and related (3) — 19,661 — 19,661 20 8,951 2 8,973
Corporate bonds (4) — 15,849 359 16,208 — 1,865 0 1,865
Mortgage and asset-backed
securities — 635 4 640 — 6 — 6
Fixed income mutual funds (5) 421 — — 421 11 — — 11
Insurance contracts — — — — — 1,308 — 1,308
Cash and short-term investments (6) 55 1,020 — 1,075 322 431 — 753
Real estate — — — — — — 339 339
Derivatives (7) 3 (1) — 2 24 606 — 630
Other mutual funds (8) — — — — 24 — — 24
Subtotal 2,081 37,164 363 39,608 2,753 13,172 341 16,266
Investments measured at net
asset value using the NAV
practical expedient (9) — — — 8,835 — — — 20,525
Other (10) — — — (230) — — — (32)
Fair value of plan assets $2,081 $37,164 $363 $48,213 $2,753 $13,172 $341 $36,758
(1)
Represents U.S. and international securities. The U.S. Plan includes IBM common stock of $2 million, representing 0.004 percent of the U.S. Plan
assets. Non-U.S. Plans include IBM common stock of $10 million, representing 0.03 percent of the non-U.S. Plans assets.
(2)
Invests in predominantly equity securities.
(3)
Includes debt issued by national, state and local governments and agencies.
(4)
The U.S. Plan does not include any IBM corporate bonds. Non-U.S. plans include IBM corporate bonds of $3 million representing 0.007 percent of
the non-U.S. Plan assets.
(5)
Invests predominantly in fixed-income securities.
(6)
Includes cash, cash equivalents and short-term marketable securities.
(7)
Includes interest rate derivatives, forwards, exchange traded and other over-the-counter derivatives.
(8)
Invests in both equity and fixed-income securities.
(9)
Investments measured at fair value using the net asset value (NAV) per share (or its equivalent) as a practical expedient, including commingled
funds, hedge funds, private equity and real estate p
artnerships.
(10)
Represents net unsettled transactions, relating primarily to purchases and sales of plan assets.
The U.S. nonpension postretirement benefit plan assets of $29 The following table presents the company’s defined benefit
million were invested primarily in cash equivalents, categorized pension plans’ asset classes and their associated fair value at
as Level 1 in the fair value hierarchy. The non-U.S. nonpension December 31, 2017. The U.S. Plan consists of the Qualified PPP
postretirement benefit plan assets of $65 million, primarily in and the non-U.S. Plans consist of all plans sponsored by the
Brazil, and, to a lesser extent, in Mexico and South Africa, were company’s subsidiaries.
invested primarily in government and related fixed-income
securities and corporate bonds, categorized as Level 2 in the
fair value hierarchy.
($ in millions)
Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
Equity
Equity securities (1) $2,215 $ 0 $ — $ 2,215 $3,508 $ 0 $ — $ 3,508
Equity mutual funds (2) 108 — — 108 24 — — 24
Fixed income
Government and related (3) — 19,762 — 19,762 — 10,103 8 10,111
Corporate bonds (4) — 17,864 372 18,236 — 2,000 — 2,000
Mortgage and asset-backed
securities — 619 4 623 — 5 — 5
Fixed income mutual funds (5) 338 — — 338 86 — — 86
Insurance contracts — — — — — 1,366 — 1,366
Cash and short-term investments (6) 100 1,903 — 2,004 221 606 — 827
Real estate — — — — — — 356 356
Derivatives (7) 21 (4) — 17 20 744 — 764
Other mutual funds (8) — — — — 60 — — 60
Subtotal 2,782 40,144 376 43,302 3,918 14,824 365 19,107
Investments measured at net
asset value using the NAV
practical expedient (9) — — — 9,537 — — — 21,744
Other (10) — — — (145) — — — (52)
Fair value of plan assets $2,782 $40,144 $376 $52,694 $3,918 $14,824 $365 $40,798
(1)
Represents U.S. and international securities. The U.S. Plan includes IBM common stock of $14 million, representing 0.03 percent of the U.S. Plan
assets. Non-U.S. Plans include IBM common stock of $7 million, representing 0.02 percent of the non-U.S. Plans assets.
(2)
Invests in predominantly equity securities.
(3)
Includes debt issued by national, state and local governments and agencies.
(4)
The U.S. Plan includes IBM corporate bonds of $1 million, representing 0.002 percent of the U.S. Plan assets. Non-U.S. plans include IBM corporate
bonds of $1 million representing 0.002 percent of the non-U.S. Plan assets.
(5)
Invests in predominantly fixed-income securities.
(6)
Includes cash and cash equivalents and short-term marketable securities.
(7)
Includes interest rate derivatives, forwards, exchange traded and other over-the-counter derivatives.
(8)
Invests in both equity and fixed-income securities.
(9)
Investments measured at fair value using the net asset value (NAV) per share (or its equivalent) as a practical expedient, including commingled
funds, hedge funds, private equity and real estate p
artnerships.
(10)
Represents net unsettled transactions, relating primarily to purchases and sales of plan assets.
The U.S. nonpension postretirement benefit plan assets of Brazil, and, to a lesser extent, in Mexico and South Africa, were
$18 million were invested in cash equivalents, categorized as invested primarily in government and related fixed-income
Level 1 in the fair value hierarchy. The non-U.S. nonpension securities and corporate bonds, categorized as Level 2 in the
postretirement benefit plan assets of $70 million, primarily in fair value hierarchy.
The following tables present the reconciliation of the beginning and ending balances of Level 3 assets for the years ended December 31,
2018 and 2017 for the U.S. Plan.
($ in millions)
Mortgage and
Corporate Asset-Backed
Bonds Securities Total
Balance at January 1, 2018 $372 $4 $376
Return on assets held at end of year (23) 0 (23)
Return on assets sold during the year 0 0 0
Purchases, sales and settlements, net 10 0 10
Transfers, net — 0 0
Balance at December 31, 2018 $359 $4 $363
($ in millions)
Mortgage and
Corporate Asset-Backed
Bonds Securities Total
Return on assets held at end of year 12 0 11
Return on assets sold during the year 1 0 1
Purchases, sales and settlements, net 259 (1) 258
The following tables present the reconciliation of the beginning and ending balances of Level 3 assets for the years ended December 31,
2018 and 2017 for the non-U.S. Plans.
($ in millions)
Government and Private Real
Related Estate Total
Return on assets held at end of year 0 8 8
Return on assets sold during the year (1) (2) (2)
Purchases, sales and settlements, net (3) (3) (6)
Transfers, net (2) — (2)
Foreign exchange impact 0 (21) (21)
($ in millions)
Government Corporate Private Real
and Related Bonds Estate Total
Balance at January 1, 2017 $16 $ 1 $294 $310
Return on assets held at end of year 2 0 24 26
Return on assets sold during the year (3) 0 (1) (4)
Purchases, sales and settlements, net (2) 0 9 7
Transfers, net (6) 0 — (6)
Foreign exchange impact 2 0 30 31
Balance at December 31, 2017 $ 8 $— $356 $365
Valuation Techniques typically valued using the NAV provided by the administrator of
The following is a description of the valuation techniques used the fund and reviewed by the company. The NAV is based on the
to measure plan assets at fair value. There were no changes in value of the underlying assets owned by the fund, minus liabilities
valuation techniques during 2018 and 2017. and divided by the number of shares or units outstanding.
Equity securities are valued at the closing price reported on the Contributions
stock exchange on which the individual securities are traded. IBM Defined Benefit Pension Plans
common stock is valued at the closing price reported on the New It is the company’s general practice to fund amounts for
York Stock Exchange. Mutual funds are typically valued based pensions sufficient to meet the minimum requirements set forth
on quoted market prices. These assets are generally classified in applicable employee benefits laws and local tax laws. From
as Level 1. time to time, the company contributes additional amounts as it
deems appropriate.
The fair value of fixed-income securities is typically estimated
using pricing models, quoted prices of securities with similar The company contributed $111 million in cash and $213 million in
characteristics or discounted cash flows and are generally U.S. Treasury securities to non-U.S. defined benefit pension plans
classified as Level 2. If available, they are valued using the closing as well as $38 million in cash to multi-employer plans for the year
price reported on the major market on which the individual ended December 31, 2018. For the year ended December 31,
securities are traded. 2017, the company contributed $192 million in cash and $176
million in U.S. Treasury securities to non-U.S. defined benefit
Cash includes money market accounts that are valued at their pension plans as well as $40 million in cash to multi-employer
cost plus interest on a daily basis, which approximates fair plans. The contribution of U.S. Treasury securities is considered
value. Short-term investments represent securities with original a non-cash transaction in the Consolidated Statement of Cash
maturities of one year or less. These assets are classified as Flows. The cash contributions to multi-employer plans represent
Level 1 or Level 2. the annual cost included in net periodic (income)/cost recognized
in the Consolidated Statement of Earnings. The company’s
Real estate valuations require significant judgment due to the participation in multi-employer plans has no material impact on
absence of quoted market prices, the inherent lack of liquidity the company’s financial statements.
and the long-term nature of such assets. These assets are initially
valued at cost and are reviewed periodically utilizing available In 2019, the company is not legally required to make any
and relevant market data, including appraisals, to determine contributions to the U.S. defined benefit pension plans. However,
if the carrying value of these assets should be adjusted. These depending on market conditions, or other factors, the company
assets are classified as Level 3. may elect to make discretionary contributions to the Qualified
PPP during the year.
Exchange traded derivatives are valued at the closing price
reported on the exchange on which the individual securities are In 2019, the company estimates contributions to its non-U.S.
traded, while forward contracts are valued using a mid-close defined benefit and multi-employer plans to be approximately
price. Over-the-counter derivatives are typically valued using $400 million, the largest of which will be contributed to defined
pricing models. The models require a variety of inputs, including, benefit pension plans in Japan, Spain and Belgium. This amount
for example, yield curves, credit curves, measures of volatility generally represents legally mandated minimum contributions.
and foreign exchange rates. These assets are classified as Level 1
or Level 2 depending on availability of quoted market prices.
Certain investments are measured at fair value using the net

asset value (NAV) per share (or its equivalent) as a practical
expedient. These investments, which include commingled funds,
hedge funds, private equity and real estate partnerships, are
Financial market performance in 2019 could increase the legally trusts for the year ended December 31, 2018 compared to $394
mandated minimum contribution in certain countries which million during the year ended December 31, 2017. In 2017, excess
require monthly or daily remeasurement of the funded status. cash in the postretirement plan of $70 million was transferred
The company could also elect to contribute more than the legally to the active employee medical trust. The contribution of U.S.
mandated amount based on market conditions or other factors. Treasury securities is considered a non-cash transaction in the
Consolidated Statement of Cash Flows.
Defined Contribution Plans
The company contributed $1.0 billion in cash to the defined Expected Benefit Payments
contribution plans during each of the years ended December 31, Defined Benefit Pension Plan Expected Payments
2018 and 2017. In 2019, the company estimates cash The following table presents the total expected benefit payments
contributions to the defined contribution plans to be approximately to defined benefit pension plan participants. These payments
$1.0 billion. have been estimated based on the same assumptions used to
measure the plans’ PBO at December 31, 2018 and include
Nonpension Postretirement Benefit Plans benefits attributable to estimated future compensation
The company contributed $385 million in U.S. Treasury securities increases, where applicable.
to the nonpension postretirement and active employee medical
($ in millions)
Qualified Nonqualified Qualified Nonqualified Total Expected
U.S. Plan U.S. Plans Non-U.S. Plans Non-U.S. Plans Benefit
Payments Payments Payments Payments Payments
2019 $ 3,521 $122 $1,862 $ 336 $ 5,841
2020 3,537 123 1,874 343 5,877
2021 3,529 123 1,876 397 5,924
2022 3,489 122 1,911 414 5,937
2023 3,440 121 1,922 432 5,915
2024–2028 16,237 574 9,514 2,293 28,619
The 2019 expected benefit payments to defined benefit pension Nonpension Postretirement Benefit Plan Expected Payments
plan participants not covered by the respective plan assets The following table reflects the total expected benefit payments
(underfunded plans) represent a component of compensation to nonpension postretirement benefit plan participants. These
and benefits, within current liabilities, in the Consolidated payments have been estimated based on the same assumptions
Statement of Financial Position. used to measure the plans’ APBO at December 31, 2018.
($ in millions)
Qualified Nonqualified Total Expected
U.S. Plan Non-U.S. Plans Non-U.S. Plans Benefit
Payments Payments Payments Payments
2019 $ 377 $ 7 $ 33 $ 416
2020 388 7 34 429
2021 397 7 36 440
2022 394 7 37 439
2023 377 7 39 423
2024–2028 1,587 41 218 1,846
The 2019 expected benefit payments to nonpension Other Plan Information

postretirement benefit plan participants not covered by the The following table presents information for defined benefit
respective plan assets represent a component of compensation pension plans with accumulated benefit obligations (ABO) in
and benefits, within current liabilities, in the Consolidated excess of plan assets. For a more detailed presentation of the
Statement of Financial Position. funded status of the company’s defined benefit pension plans,
see the table on page 131.
($ in millions)
2018 2017
Benefit Plan Benefit Plan
At December 31: Obligation Assets Obligation Assets
Plans with PBO in excess of plan assets $30,059 $16,783 $31,416 $18,711
Plans with ABO in excess of plan assets 29,312 16,522 27,751 15,607
Plans with assets in excess of PBO 63,524 68,190 70,139 74,782
NOTE U. SEGMENT INFORMATION

The company’s major operations consist of five business The company utilizes globally integrated support organizations
segments: Cognitive Solutions, Global Business Services, to realize economies of scale and efficient use of resources. As
Technology Services & Cloud Platforms, Systems and Global a result, a considerable amount of expense is shared by all of
Financing. The segments represent components of the company the segments. This shared expense includes sales coverage,
for which separate financial information is available that is utilized certain marketing functions and support functions such as
on a regular basis by the chief operating decision maker (the chief Accounting, Treasury, Procurement, Legal, Human Resources
executive officer) in determining how to allocate resources and and Billing and Collections. Where practical, shared expenses
evaluate performance. The segments are determined based are allocated based on measurable drivers of expense, e.g.,
on several factors, including client base, homogeneity of headcount. When a clear and measurable driver cannot be
products, technology, delivery channels and similar economic identified, shared expenses are allocated on a financial basis
characteristics. that is consistent with the company’s management system, e.g.,
advertising expense is allocated based on the gross profits of the
Segment revenue and pre-tax income include transactions segments. A portion of the shared expenses, which are recorded
between the segments that are intended to reflect an arm’s- in net income, are not allocated to the segments. These expenses
length, market-based transfer price. Systems that are used are associated with the elimination of internal transactions and
by Technology Services & Cloud Platforms in outsourcing other miscellaneous items.
engagements are primarily sourced internally from the Systems
segment and software is sourced from various segments. The following tables reflect the results of continuing operations
Software used by Technology Services & Cloud Platforms on of the company’s segments consistent with the management and
external engagements is sourced internally through Cognitive measurement system utilized within the company. Performance
Solutions and the Systems segments. For providing IT measurement is based on pre-tax income from continuing
services that are used internally, Technology Services & Cloud operations. These results are used, in part, by the chief operating
Platforms and Global Business Services recover cost, as well decision maker, both in evaluating the performance of, and in
as a reasonable fee, that is intended to reflect the arm’s-length allocating resources to, each of the segments.
value of providing the services. They enter into arm’s-length
loans at prices equivalent to market rates with Global Financing
to facilitate the acquisition of equipment and software used
in services engagements. All internal transaction prices are
reviewed annually, and reset if appropriate.
Management System Segment View
($ in millions)
Technology
Global Services &
Cognitive Business Cloud Global Total
For the year ended December 31: Solutions Services Platforms Systems Financing Segments
2018
External revenue $18,481 $16,817 $34,462 $8,034 $1,590 $79,383
Internal revenue 2,715 326 795 815 1,610 6,261
Total revenue $21,197 $17,143 $35,257 $8,848 $3,200 $85,644
Pre-tax income from continuing operations $ 7,154 $ 1,676 $ 3,786 $ 904 $1,361 $14,881
Revenue year-to-year change 0.5% 2.6% 0.9% (1.1)% 1.0% 0.9%
Pre-tax income year-to-year change 5.3% 23.0% (11.7)% (19.9)% 6.5% 0.2%
Pre-tax income margin 33.8% 9.8% 10.7% 10.2% 42.5% 17.4%
2017
Total revenue $21,100 $16,711 $34,934 $8,945 $3,168 $84,857
Pre-tax income from continuing operations* $ 6,795 $ 1,362 $ 4,286 $1,128 $1,278 $14,849
Revenue year-to-year change 1.4% (2.3)% (3.1)% 5.7% (9.3)% (1.3)%
Pre-tax income year-to-year change* 7.4% (19.0)% (7.7)% 21.9% (22.8)% (2.5)%
Pre-tax income margin* 32.2% 8.2% 12.3% 12.6% 40.3% 17.5%
2016
Total revenue $20,817 $17,109 $36,052 $8,464 $3,494 $85,936
Pre-tax income from continuing operations* $ 6,325 $ 1,683 $ 4,643 $ 925 $1,654 $15,230
Revenue year-to-year change 3.8% (3.1)% 0.6% (18.0)% (22.0)% (2.7)%
Pre-tax income year-to-year change* (12.5)% (34.4)% (17.4)% (46.1)% (30.0)% (21.9)%
Pre-tax income margin* 30.4% 9.8% 12.9% 10.9% 47.3% 17.7%
Reconciliations of IBM as Reported Segment Assets and Other Items

Cognitive Solutions assets are mainly goodwill, acquired intangible
($ in millions)
assets and accounts receivable. Global Business Services assets
are primarily goodwill and accounts receivable. Technology
Revenue Services & Cloud Platforms assets are primarily goodwill, plant,
Total reportable segments $85,644 $84,857 $85,936 property and equipment including the assets associated with the
Other revenue 207 171 289 outsourcing business, deferred costs and accounts receivable.
Elimination of internal Systems assets are primarily goodwill, manufacturing inventory,
transactions (6,261) (5,889) (6,307) and plant, property and equipment. Global Financing assets are
Total IBM consolidated primarily financing receivables, cash and marketable securities,
revenue $79,591 $79,139 $79,919 and fixed assets under operating leases.
To ensure the efficient use of the company’s space and

equipment, several segments may share plant, property and
($ in millions)
equipment assets. Where assets are shared, landlord ownership
of the assets is assigned to one segment and is not allocated
Pre-tax income from to each user segment. This is consistent with the company’s
continuing operations management system and is reflected accordingly in the table on
Total reportable segments $14,881 $14,849* $15,230* page 144. In those cases, there will not be a precise correlation
Amortization of acquired between segment pre-tax income and segment assets.
intangible assets (809) (945) (998)
Acquisition-related charges (16) (52) Similarly, the depreciation amounts reported by each segment
(5)
Non-operating retirement- are based on the assigned landlord ownership and may not be
related (costs)/income (1,572) (1,341)* (448)* consistent with the amounts that are included in the segments’
Elimination of internal pre-tax income. The amounts that are included in pre-tax
transactions (758) (726) (1,160) income reflect occupancy charges from the landlord segment
Unallocated corporate and are not specifically identified by the management reporting
amounts (385) (385) (290) system. Capital expenditures that are reported by each segment
Total pre-tax income from also are consistent with the landlord ownership basis of
continuing operations $11,342 $11,400 $12,330 asset assignment.

Global Financing amounts for interest income and interest
benefit cost.
expense reflect the interest income and interest expense
associated with the Global Financing business, including the
Immaterial Items
intercompany financing activities discussed on pages 25 and 26,
Investment in Equity Alliances and
as well as the income from investment in cash and marketable
Equity Alliances Gains/(Losses)
securities. The explanation of the difference between cost of
The investments in equity alliances and the resulting gains and
financing and interest expense for segment presentation versus
(losses) from these investments that are attributable to the
presentation in the Consolidated Statement of Earnings is
segments did not have a material effect on the financial position
included on page 39 of the Management Discussion.
or the financial results of the segments.
Management System Segment View
($ in millions)
Technology
Global Services &
Cognitive Business Cloud Global Total
For the year ended December 31: Solutions Services Platforms Systems Financing Segments
2018
Assets $24,244 $8,404 $24,624 $4,030 $41,320 $102,622
Depreciation/amortization of intangibles* 987 102 2,501 315 229 4,135
Capital expenditures/investments
in intangibles 363 57 2,678 241 274 3,612
Interest income — — — — 1,647 1,647
Interest expense — — — — 515 515
2017
Assets** $24,828 $8,713 $24,619 $3,898 $41,096 $103,153
Depreciation/amortization of intangibles* 1,121 101 2,359 341 267 4,190
in intangibles 373 50 2,290 189 364 3,265
2016
Assets** $25,514 $8,627 $24,085 $3,812 $36,492 $ 98,530
Depreciation/amortization of intangibles* 1,228 104 2,224 375 317 4,248
in intangibles 495 55 2,382 453 380 3,764
* Segment pre-tax income from continuing operations does not include the amortization of intangible assets.
** Recast to reflect adoption of the FASB guidance on restricted cash.
Reconciliations of IBM as Reported Geographic Information

The following provides information for those countries that are
($ in millions)
10 percent or more of the specific category.
At December 31: 2018 2017 2016
Assets Revenue*
Total reportable segments $102,622 $103,153* $ 98,530*
($ in millions)
Elimination of internal
transactions (7,143) (6,272) (5,670)
Unallocated amounts United States $29,078 $29,759 $30,194
Cash and marketable Japan 8,489 8,239 8,339

securities 10,393 10,162* 6,999* Other countries 42,024 41,141 41,386
Notes and accounts Total IBM consolidated
receivable 1,597 2,554 2,660 revenue $79,591 $79,139 $79,919
Deferred tax assets 5,089 4,746 5,078 * Revenues are attributed to countries based on the location of the client.
Plant, other property
and equipment 2,463 2,659 2,656 Plant and Other Property—Net
Pension assets 4,666 4,643 3,034
($ in millions)
Other 3,695 3,712* 4,183*
At December 31: 2018 2017 2016
Total IBM consolidated
United States $ 4,585 $ 4,670 $ 4,701
assets $123,382 $125,356 $117,470
Other countries 5,774 5,985 5,607
Total $10,359 $10,655 $10,308
Major Clients
No single client represented 10 percent or more of the company’s
total revenue in 2018, 2017 or 2016.
Revenue by Classes of Similar Products or Services NOTE V. SUBSEQUENT EVENTS

The following table presents external revenue for similar On January 29, 2019, the company announced that the Board of
classes of products or services within the company’s reportable Directors approved a quarterly dividend of $1.57 per common
segments. Client solutions often include IBM software and share. The dividend is payable March 9, 2019 to shareholders of
systems and other suppliers’ products if the client solution record on February 8, 2019.
requires it. For each of the segments that include services,
Software-as-a-Service, consulting, education, training and other On January 31, 2019, the company issued $5.7 billion of Euro
product-related services are included as Services. For each of bonds as follows: $2.0 billion of 4-year fixed-rate bonds with a
these segments, Software includes product license charges and 0.375 coupon, $1.1 billion of 6-year fixed-rate bonds with a 0.875
ongoing subscriptions. coupon, $1.1 billion of 8-year fixed-rate bonds with a 1.25 coupon
and $1.4 billion of 12-year fixed-rate bonds with a 1.75 coupon.
($ in millions)
Cognitive Solutions
Software $13,667 $13,598 $13,969
Services 4,708 4,752 4,111
Systems 106 103 107
Services $16,460 $16,004 $16,399
Software 151 179 179
Systems 206 165 121
Technology Services &
Cloud Platforms
Services $24,145 $23,629 $24,311
Maintenance 5,484 5,783 5,862
Software 3,713 3,610 3,818
Systems 1,119 1,254 1,346
Systems
Servers $ 3,996 $ 3,993 $ 3,567
Storage 2,114 2,243 2,083
Software 1,498 1,520 1,586
Services 425 439 478
Global Financing
Financing $ 1,223 $ 1,167 $ 1,231
Used equipment sales 366 530 461
Five-Year Comparison of Selected Financial Data 147

For the year ended December 31: 2018 2017 2016 2015 2014
Revenue $ 79,591 $ 79,139 $ 79,919 $ 81,741 $ 92,793
Income from continuing operations $ 8,723 $ 5,758 $ 11,881 $ 13,364 $ 15,751
Income/(loss) from discontinued operations, net of tax $ 5 $ (5) $ (9) $ (174) $ (3,729)
Net income $ 8,728 $ 5,753 $ 11,872 $ 13,190 $ 12,022
Operating (non-GAAP) earnings* $ 12,657 $ 12,807** $ 12,880** $ 14,519** $ 16,534**
Earnings/(loss) per share of common stock:
Assuming dilution:
Continuing operations $ 9.51 $ 6.14 $ 12.39 $ 13.60 $ 15.59
Discontinued operations $ 0.01 $ 0.00 $ (0.01) $ (0.18) $ (3.69)
Total $ 9.52 $ 6.14 $ 12.38 $ 13.42 $ 11.90
Basic:
Continuing operations $ 9.56 $ 6.17 $ 12.44 $ 13.66 $ 15.68
Discontinued operations $ 0.01 $ 0.00 $ (0.01) $ (0.18) $ (3.71)
Total $ 9.57 $ 6.17 $ 12.43 $ 13.48 $ 11.97
Diluted operating (non-GAAP)* $ 13.81 $ 13.66** $ 13.44** $ 14.77** $ 16.37**
Cash dividends paid on common stock $ 5,666 $ 5,506 $ 5,256 $ 4,897 $ 4,265
Investment in property, plant and equipment $ 3,395 $ 3,229 $ 3,567 $ 3,579 $ 3,740
Return on IBM stockholders’ equity 48.0% 31.1% 74.0% 101.1% 72.5%
At December 31: 2018 2017 2016 2015 2014

Total assets $123,382 $125,356 $117,470 $110,495 $117,271
Net investment in property, plant and equipment $ 10,792 $ 11,116 $ 10,830 $ 10,727 $ 10,771
Working capital $ 10,918 $ 12,373 $ 7,613 $ 8,235 $ 7,797
Total debt $ 45,812 $ 46,824 $ 42,169 $ 39,890 $ 40,722
Total equity $ 16,929 $ 17,725 $ 18,392 $ 14,424 $ 12,014
* Refer to the table below for the reconciliation of non-GAAP financial information for 2015 and 2014. Also see “GAAP Reconciliation,” on pages 41 and
58 for the reconciliation of non-GAAP financial information for 2018, 2017 and 2016.
GAAP Reconciliation
The table below provides a reconciliation of the company’s income and diluted earnings per share from continuing operations as
reported under GAAP to its operating earnings presentation which is a non-GAAP measure. The company’s calculation of operating
(non-GAAP) earnings, as presented, may differ from similarly titled measures reported by other companies. Please refer to the
“Operating (non-GAAP) Earnings” section on pages 18 and 19 for the company’s rationale for presenting operating earnings information.

Related Related Operating
For the year ended December 31: GAAP Adjustments Adjustments* (non-GAAP)*
2015
Diluted earnings per share from continuing operations $ 13.60 $0.57 $0.60 $ 14.77
2014
Diluted earnings per share from continuing operations $ 15.59 $0.67 $0.11 $ 16.37
148 Selected Quarterly Data
($ in millions except per share amounts and stock prices)

First Second Third Fourth
2018 Quarter Quarter Quarter Quarter Full Year
Revenue $19,072 $20,003 $18,756 $21,760 $79,591
Gross profit $ 8,247 $ 9,199 $ 8,803 $10,687 $36,936
Income from continuing operations $ 1,675 $ 2,402 $ 2,692 $ 1,954 $ 8,723
Income/(loss) from discontinued operations, net of tax $ 4 $ 1 $ 2 $ (2) $ 5
Net income $ 1,679 $ 2,404 $ 2,694 $ 1,951 $ 8,728
Operating (non-GAAP) earnings* $ 2,272 $ 2,834 $ 3,134 $ 4,417 $12,657
Earnings per share of common stock—
continuing operations**
Assuming dilution $ 1.81 $ 2.61 $ 2.94 $ 2.15 $ 9.51
Basic $ 1.82 $ 2.63 $ 2.95 $ 2.17 $ 9.56
Earnings per share of common stock—total**
Assuming dilution $ 1.81 $ 2.61 $ 2.94 $ 2.15 $ 9.52
Basic $ 1.82 $ 2.63 $ 2.95 $ 2.17 $ 9.57
Diluted operating (non-GAAP)* $ 2.45 $ 3.08 $ 3.42 $ 4.87 $ 13.81
($ in millions except per share amounts and stock prices)

First Second Third Fourth
2017 Quarter Quarter Quarter Quarter Full Year
Revenue $18,155 $19,289 $19,153 $22,543 $79,139
Gross profit $ 7,944+ $ 8,968+ $ 8,981+ $11,049+ $36,943+
Income/(loss) from continuing operations $ 1,753 $ 2,332 $ 2,726 $ (1,053) $ 5,758
Income/(loss) from discontinued operations, net of tax $ (3) $ (1) $ 0 $ (1) $ (5)
Net income/(loss) $ 1,750 $ 2,331 $ 2,726 $ (1,054) $ 5,753
Operating (non-GAAP) earnings* $ 2,224+ $ 2,760+ $ 3,045+ $ 4,777+ $12,807+
Earnings/(loss) per share of common stock—
continuing operations**
Assuming dilution $ 1.85 $ 2.48 $ 2.92 $ (1.14) $ 6.14
Basic $ 1.86 $ 2.49 $ 2.93 $ (1.14) $ 6.17
Earnings/(loss) per share of common stock—total**
Assuming dilution $ 1.85 $ 2.48 $ 2.92 $ (1.14) $ 6.14
Basic $ 1.86 $ 2.49 $ 2.93 $ (1.14) $ 6.17
Diluted operating (non-GAAP)* $ 2.35+ $ 2.94+ $ 3.26+ $ 5.14+ $ 13.66+
* Refer to page 73 of the company’s first-quarter 2018 Form 10-Q filed on April 24, 2018, page 89 of the company’s second-quarter 2018 Form 10-Q
filed on July 31, 2018, page 91 of the company’s third-quarter 2018 Form 10-Q filed on October 30, 2018, and page 47 under the heading “GAAP
Reconciliation” for the reconciliation of non-GAAP financial information for the quarterly periods of 2018 and 2017. Also see “GAAP Reconciliation,”
on page 41 for the reconciliation of non-GAAP financial information for full-year 2018 and 2017.
** Earnings Per Share (EPS) in each quarter is computed using the weighted-average number of shares outstanding during that quarter while EPS for
the full year is computed using the weighted-average number of shares outstanding during the year. Thus, the sum of the four quarters’ EPS does not
equal the full-year EPS.
+ Recast to reflect adoption of the FASB guidance on presentation of net benefit cost.
Performance Graphs 149
COMPARISON OF FIVE- AND TEN-YEAR CUMULATIVE TOTAL RETURN FOR IBM,

S&P 500 STOCK INDEX AND S&P INFORMATION TECHNOLOGY INDEX
The following graphs compare the five- and ten-year cumulative line-of-business index. The S&P Information Technology Index
total returns for IBM common stock with the comparable is such an index. IBM is also included in this index.
cumulative returns of certain Standard & Poor’s (S&P) indices.
Due to the fact that IBM is a company included in the S&P 500 Each graph assumes $100 invested on December 31 (of the initial
Stock Index, the SEC’s rules require the use of that index for year shown in the graph) in IBM common stock and $100 invested
the required five-year graph. Under those rules, the second on the same date in each of the S&P indices. The comparisons
index used for comparison may be a published industry or assume that all dividends are reinvested.
Five-Year Ten-Year
240 600
540
210
480
180
420
150
360
120 300
240
90
180
60
120
30
60
0 0
13 14 15 16 17 18 08 09 10 11 12 13 14 15 16 17 18
Five-Year
(U.S. Dollar) 2013 2014 2015 2016 2017 2018

IBM Common Stock $100.00 $ 87.61 $ 77.61 $ 97.16 $ 93.29 $ 72.26
S & P 500 Index 100.00 113.69 115.26 129.05 157.22 150.33
S & P Information Technology Index 100.00 120.12 127.23 144.85 201.10 200.52
Ten-Year
(U.S. Dollar) 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
IBM Common Stock $100.00 $158.61 $181.26 $230.96 $244.67 $244.22 $213.95 $189.54 $237.28 $227.83 $176.48
S & P 500 Index 100.00 126.46 145.51 148.59 172.37 228.19 259.43 263.02 294.47 358.76 343.03
S & P Information
Technology Index 100.00 161.72 178.20 182.50 209.55 269.13 323.26 342.41 389.84 541.22 539.66
150 Stockholder Information
IBM Stockholder Services IBM Stock

Stockholders with questions about their accounts IBM common stock is listed on the New York Stock Exchange
should contact: and the Chicago Stock Exchange under the symbol “IBM”.
Computershare Trust Company, N.A., P.O. Box 505005,

Stockholder Communications
Louisville, Kentucky 40233-5005, (888) IBM-6700.
Stockholders can get quarterly financial results, a summary of
Investors residing outside the United States, Canada the Annual Meeting remarks, and voting results from the
and Puerto Rico should call (781) 575-2727. meeting by calling (914) 499-7777, by sending an e-mail to
[email protected], or by writing to IBM Stockholder Relations,
Stockholders can also reach Computershare Trust Company,
New Orchard Road, M/D 325, Armonk, New York 10504.
N.A. via e-mail at: [email protected]
Hearing-impaired stockholders with access to a Annual Meeting

telecommunications device (TDD) can communicate directly The IBM Annual Meeting of Stockholders will be held on
with Computershare Trust Company, N.A., by calling (800) Tuesday, April 30, 2019, at 10 a.m. at the Charleston Area
490-1493. Stockholders residing outside the United States, Convention Center, North Charleston, South Carolina.
Canada and Puerto Rico should call (781) 575-2694.
Literature for IBM Stockholders
IBM on the Internet The literature mentioned below on IBM is available without
Topics featured in this Annual Report can be found online at charge from:
www.ibm.com. Financial results, news on IBM products,
Computershare Trust Company, N.A., P.O. Box 505005,
services and other activities can also be found at that website.
Louisville, Kentucky 40233-5005 (888) IBM-6700.
IBM files reports with the Securities and Exchange Commission
Investors residing outside the United States, Canada and
(SEC), including the annual report on Form 10-K, quarterly
Puerto Rico should call (781) 575-2727.
reports on Form 10-Q, current reports on Form 8-K and any
other filings required by the SEC. The company’s annual report on Form 10-K and the quarterly
reports on Form 10-Q provide additional information on IBM’s
IBM’s website (www.ibm.com/investor) contains a significant
business. The 10-K report is released by the end of February;
amount of information about IBM, including the company’s
10-Q reports are released by early May, August and November.
annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and all amendments to those An audio recording of the 2018 Annual Report will be available
reports filed or furnished pursuant to Section 13(a) or 15(d) for sight-impaired stockholders in June 2019.
of the Securities Exchange Act of 1934 as soon as reasonably
The IBM Corporate Responsibility Report highlights IBM’s
practicable after such material is electronically filed with or
values and its integrated approach to corporate responsibility,
furnished to the SEC. These materials are available free of
including its innovative strategies to transform communities
charge on or through IBM’s website.
through global citizenship. Highlights from the Corporate
The SEC maintains a website (www.sec.gov) that contains Responsibility Report are available online at www.ibm.com/
reports, proxy and information statements, and other information responsibility/report. The full Corporate Responsibility Report
regarding issuers that file electronically with the SEC. is available in printed form by downloading the report at
www.ibm.com/responsibility/report.
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(formerly IBM Investor Services Program) General Information
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Relations, New Orchard Road, M/D 325, Armonk,
New York 10504.
Board of Directors and Senior Leadership 151
BOARD OF DIRECTORS
Michael L. Eskew Andrew N. Liveris Joseph R. Swedish

Retired Chairman and Retired Executive Chairman Senior Advisor and
Chief Executive Officer DowDuPont Inc. Retired Chairman, President
United Parcel Service, Inc. and Chief Executive Officer
Retired Chairman and
Anthem, Inc.
Chief Executive Officer
David N. Farr
The Dow Chemical Company
Chairman and Chief Executive Officer Sidney Taurel
Emerson Electric Co. Chairman Emeritus
Hutham S. Olayan*
Eli Lilly and Company
Chairman
Alex Gorsky
The Olayan Group Chairman
Chairman and Chief Executive Officer
Pearson plc
Johnson & Johnson
James W. Owens*
Retired Chairman and Peter R. Voser
Michelle J. Howard
Chief Executive Officer Retired Chief Executive Officer
Retired Admiral
Caterpillar Inc. Royal Dutch Shell plc
United States Navy
Chairman
Martha E. Pollack
Shirley Ann Jackson ABB Ltd.
President
President
Cornell University
Rensselaer Polytechnic Institute Frederick H. Waddell
Retired Chairman and
Virginia M. Rometty
Chairman, President and
Northern Trust Corporation
IBM
SENIOR LEADERSHIP
Simon J. Beaumont Martin Jetter Michelle Peluso

Vice President Senior Vice President Senior Vice President and
Tax and Treasurer Europe Chief Marketing Officer
Digital Sales and Marketing
Michelle H. Browdy James J. Kavanaugh
Senior Vice President Senior Vice President and Robert J. Picciano
Legal and Regulatory Affairs, Chief Financial Officer Senior Vice President
and General Counsel Finance and Operations Cognitive Systems
Erich Clementi** John E. Kelly III Virginia M. Rometty

Senior Vice President Executive Vice President Chairman, President and
Robert F. Del Bene Kenneth M. Keverian
Vice President and Controller Senior Vice President Thomas W. Rosamilia
Corporate Strategy Senior Vice President
Mark Foster Systems
Senior Vice President Arvind Krishna
Global Business Services Senior Vice President Martin J. Schroeter
Cloud and Cognitive Software Senior Vice President
Diane J. Gherson Global Markets, Global Financing,
Senior Vice President and Robert W. Lord Marketing and Communications
Chief Human Resources Officer Senior Vice President
Cognitive Applications Bridget A. van Kralingen
John Granger Senior Vice President
Senior Vice President Christina M. Montgomery Industry Platforms and
Cloud Application Innovation Vice President Global Industries
Assistant General Counsel
and Secretary Juan A. Zufiria Zatarain
Senior Vice President
Global Technology Services
* Term on the Board ends on April 30, 2019
** Retiring from the Company on March 31, 2019
International Business Machines Corporation
New Orchard Road, Armonk, New York 10504
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2018

Moving Mission-Critical Work to Hybrid Cloud

#1 in blockchain Chapter 2 of Trust and Responsible Stewardship

In an effort to provide additional and useful information regarding the company’s

specifically, did the tainted lettuce come from? The work of

Stronger medicine patterns or gaps. Watson Health’s data-driven tools allow

on quantum, as do Samsung and Daimler. Working as part of the

KPMG is using IBM Watson to

More clients contracts, breaks them into their

are partnering part with a high degree of accuracy.

with IBM to write

KMD, Denmark’s largest technology

Responsible Data Responsibility

trust have been

• Advocating for public policies to protect the privacy and

for more than

• Launching AI Fairness 360, an open source software toolkit to

• Releasing Diversity in Faces, a first-of-its-kind dataset,

1 million annotated human facial images

Jobs and Skills Diversity and Inclusion

• Being named a 2018 Diversity Best Practices Leading

• Scoring a perfect 100 percent for the 15th consecutive year

• Launching Skills Build, an IBM volunteer initiative that helps

• Continuing to transform education via P-TECH—Pathways

200 P-TECH schools serving a pipeline of

IBMers at the Pride March in New York

P-TECH students at a graduation ceremony

($ in millions except per share amounts)

Earnings per share of common stock—continuing operations

Net cash provided by operating activities $ 15,247 $ 16,724

At December 31: 2018 2017

MANAGEMENT DISCUSSION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Forward-Looking and Cautionary Statements 19 B Accounting Changes 89

Management Discussion Snapshot 19 C Acquisitions/Divestitures 91

Description of Business 22 D Financial Instruments 95

Year in Review 27 E Inventories 103

Prior Year in Review 48 F Financing Receivables 103

Other Information  59 G Property, Plant and Equipment  106

Looking Forward 59 H Investments and Sundry Assets 107

Liquidity and Capital Resources 60 I Intangible Assets Including Goodwill 107

Critical Accounting Estimates 63 J Borrowings 108

Currency Rate Fluctuations 66 K Other Liabilities 111

Market Risk 66 L Equity Activity 111

Cybersecurity 67 M Contingencies and Commitments 115

Employees and Related Workforce 67 N Taxes 117

O Revenue Recognition 120

Report of Management68 P Research, Development and Engineering 122

Report of Independent Registered  Q Earnings Per Share of Common Stock 123

S Stock-Based Compensation 124

CONSOLIDATED FINANCIAL STATEMENTS T Retirement-Related Benefits 127

Performance Graphs 149

Stockholder Information 150

Board of Directors and Senior Leadership 151

OVERVIEW • The references to “adjusted for currency” or “at constant

MANAGEMENT DISCUSSION SNAPSHOT

($ and shares in millions except per share amounts)

* 0.0 percent adjusted for currency.

The following table provides the company’s operating (non-

($ in millions except per share amounts)

Forward-Looking and Cautionary Statements 19 B Accounting Changes 89

Management Discussion Snapshot 19 C Acquisitions/Divestitures 91

Description of Business 22 D Financial Instruments 95

Year in Review 27 E Inventories 103

Prior Year in Review 48 F Financing Receivables 103

Other Information 59 G Property, Plant and Equipment 106

Looking Forward 59 H Investments and Sundry Assets 107

Liquidity and Capital Resources 60 I Intangible Assets Including Goodwill 107

Critical Accounting Estimates 63 J Borrowings 108

Currency Rate Fluctuations 66 K Other Liabilities 111

Market Risk 66 L Equity Activity 111

Cybersecurity 67 M Contingencies and Commitments 115

Employees and Related Workforce 67 N Taxes 117

O Revenue Recognition 120

Report of Management68 P Research, Development and Engineering 122

Report of Independent Registered Q Earnings Per Share of Common Stock 123

S Stock-Based Compensation 124

CONSOLIDATED FINANCIAL STATEMENTS T Retirement-Related Benefits 127

Performance Graphs 149

Stockholder Information 150

Board of Directors and Senior Leadership 151

OVERVIEW • The references to “adjusted for currency” or “at constant

• A decline in receivables of $1.6 billion ($0.6 billion adjusted

• A decrease in net intangibles and goodwill of $1.2 billion

• An increase in deferred costs of $1.0 billion ($1.2 billion

* Recast to reflect adoption of the FASB guidance on presentation of net

• A decrease in taxes payable of $1,173 million ($1,099

* Recast to reflect adoption of the FASB guidance on restricted cash. Numerator

* Calculated based upon an estimated tax rate principally based on

* (1.3) percent adjusted for currency.

• Increases in cash, restricted cash and marketable securities

• Decreases in intangible assets ($0.9 billion).

* Recast to reflect adoption of the FASB guidance on presentation of net

* Recast to reflect adoption of the FASB guidance on presentation of net

* Recast to reflect adoption of the FASB guidance on presentation of net

* Recast to conform to 2018 presentation.

* Recast to reflect adoption of the FASB guidance on restricted cash.

• A significant adverse shift in the operating environment of Residual Value

* Recast to reflect adoption of the FASB guidance on restricted cash.