PROF WASHINGTON WATSON 6/1/2020

Zichun Gao Professor Karen Accounting 1A

IBM FInancial Statement Analysis

Financial Ratios 2019 2018 Formula

Current Ratio 1.02 1.29 CA/CL

Profit Margin 12.22% 12.35% Net Income/Total Revenue

Receiveables Turnover 9.80 10.71 Revenue/Average AR

Average Collection Period 36.72 33.62 365/Receiveables Turnover

Inventory Turnover 25.11 25.36 COST/Average Inventory

Days in Inventory 14.53 14.39 365/Inventory Turnover

Debts to Asset Ratio 0.86 0.86 Total Debts/Total Assets

IBM's days in inventory is around two weeks and this means that goods in the inventory

as efficnetly distributed and that there is a consitantly good inventory control for the

company.

The company's debts to assets ratio is the same for two years and this means that the

company has less debt than asset. However, it is still a relatively poor ratio because this

might show that there are potential problems for the company to generate sufficient

revenue.

The current ratio of the company has decreased over the year, and this means that the

company has less liquid assets to cover its short term liabilities. Since the ratio is

currently approaching 1, the company might be having liquidation problem.

The profit margin for IBM is very stable and it has been about 12% for two years. The

company is performing the profit-generating ability at an average level and it is having

an average profit margin in the industry.

The receiveables turnover is good for the company while between these two years, there

is a decline. As the company is collecting its accounts receiveables around 10 times per

year, the collection is frequent.

The company has been collecting money from customers on credit sales approximately

once every month, and the company usually has fast credit collection, which means that

the risk for credit sales is relatively low.

Inventory turnover measures how many times a company sells and replaces inventory

during a year and for IBM, the number of times is stable and it is constantly around 25.

This means that the company has an efficient control of its goods in the inventory.

Free Cash Flow 11.90 11.90 CF_Operation-Capital Expenditures

Return on Assets 0.06 0.08 Net Income/Total Assets

Asset Turnover 0.51 0.65 Revenue/Assets

Figures From Financial Statement

From Income Statement pg.68

Net Income 9431 9828

Total Revenue 77147 79591

Cost 40657 42655

From Consolidated Balance Sheet pg.70

Current Assets 38420 49146

Current Liabilities 37701 38227

Accounts Receiveables 7870 7432

Inventory 1619 1682

Total Assets 152186 123382

Total Liabilities 131202 106452

From Cash Flow Overview pg.59

Net Cash From Op 14.3 15.6

Capital expenditures 2.4 3.7

The company currently has 11.9 billion dollars free cash flow for two years and this is a

relatively high level of free cash flow. With the high free cash flow, the company can

have more oportunity to expand, invest in new projects, pay dividends, or invest the

money into Research and Development costs. However, as the free cash flow is not

growing, the comppany might be having some problem in developing during the year.

The return on assets of the company has been declining and this means that the ability of

the company's assets to generate revenue is declining. Mroeover, the return on assets

ratio is relatively low, indicating that the company does not have a good ability in

generating revenue with what it has, and this means that the company might not be

profitable and that its profitability is declining.

For the company, each dollar of assets can generate 51 cents of sales, and this is a low

asset turnover. This means that the company is not generating enough sales and that it

does not have the ability to generate sales given its asset. In the technology industry. The

more significant trend is that the company's asset turnover has been declining and it is

another sign of the decline in the performance of the company.

14 2019 2018 Change

EPS 10.56 9.52 1.04

Revenues 77147 79591 -2444

Expenses 26322 25594 728

Treasury Stock 169413 168071 1342

a)

b)

15

Price on 5-27-2020

125.54

Price on 2-18-2020

151.1

Loss

-16.91595% ((May27Price/Feb18Price)-1)*100%

If I had purchased 100 shares, I would be losing:

(2,556.00)$ (100*May27Price-100*Feb18Price)

The company has purchased more treasury stock and the value of its treasury stock has

increased by $1342 million.

I will not be willing to invest in this company. this company's performance has been

declining and its financial reports have shown that the profitability has declined.

Moreover, the stock price has been declining over the past quarter and the outlook of

this company is not good in the near future. Therefore, either by the return on investment

or the company's ability to make profit itself, investing in the company is not a good

choice for now.

EPS has increases between the current year and prior year and the change is not

attributed to the change in net income. Instead, it is likely to be an increase due to the

decrease of shares oustanding. Also, there might be other revenues that have contributed

to the income.

59Management Discussion International Business Machines Corporation and Subsidiary Companies

From the perspective of how management views cash flow, in 2019, after investing $2.4 billion in capital investments primarily in support of the services and cloud-based businesses, we generated free cash flow of $11.9 billion which was essentially flat compared to 2018. Year to year, there were lower capital expenditures, offset by higher cash income tax and interest payments and lower operating cash flows from businesses divested in 2019. In 2019, we continued to return value to shareholders including $5.7 billion in dividends and $1.4 billion in gross common stock repurchases.

Over the past three years, we generated over $36  billion in free cash flow. During that period, we invested over $33 billion in strategic acquisitions and returned over $27  billion to

shareholders through dividends and gross share repurchases. The amount of prospective returns to shareholders in the form of dividends and share repurchases will var y based upon several factors including each year’s operating results, capital expenditure requirements, research and development investments and acquisitions, as well as the factors discussed below. In order to continue to deleverage, we suspended our share repurchase program at the time of closing the Red Hat acquisition.

IBM’s Board of Directors considers the dividend payment on a quarterly basis. In the second quarter of 2019, the Board of Directors increased the company’s quarterly common stock dividend from $1.57 to $1.62 per share.

Events that could temporarily change the historical cash flow dynamics discussed previously include significant changes in operating results, material changes in geographic sources of cash, unexpected adverse impacts from litigation, future pension funding requirements during periods of severe downturn in the capital markets or the timing of tax payments. Whether any litigation has such an adverse impact will depend on a number of variables, which are more completely described in note R, “Commitments & Contingencies.” With respect to pension funding, in 2019, we contributed $274 million to our non-U.S. defined benefit plans compared to $363 million in 2018. As highlighted in the Contractual Obligations table, we expect to make legally mandated pension plan contributions to certain non-U.S. plans of approximately $1.5 billion in the next five years. The 2020 contributions are currently expected to be approximately $300 million. Contributions related to all retirement-related plans are expected to be approximately $2.3 billion in 2020, an increase

of approximately $100 million compared to 2019. Financial market performance could increase the legally mandated minimum contributions in certain non-U.S. countries that require more frequent remeasurement of the funded status. We are not quantifying any further impact from pension funding because it is not possible to predict future movements in the capital markets or pension plan funding regulations.

In 2020, we are not legally required to make any contributions to the U.S. defined benefit pension plans.

Our cash flows are sufficient to fund our current operations and obligations, including investing and financing activities such as dividends and debt service. When additional requirements arise, we have several liquidity options available. These options may include the ability to borrow additional funds at reasonable interest rates and utilizing our committed global credit facilities.

The table below represents the way in which management reviews cash flow as described above.

($ in billions)

For the year ended December 31: 2019 2018 2017

Net cash from operating activities per GAAP $ 14.8 $15.2 $16.7 Less: the change in Global Financing receivables 0.5 (0.3) 0.4 Net cash from operating activities,

excluding Global Financing receivables 14.3 15.6 16.3 Capital expenditures, net (2.4) (3.7) (3.3)

Free cash flow (FCF) 11.9 11.9 13.0 Acquisitions (32.6) (0.1) (0.5) Divestitures 1.1 — (0.2) Share repurchase (1.4) (4.4) (4.3) Common stock repurchases for tax withholdings (0.3) (0.2) (0.2) Dividends (5.7) (5.7) (5.5) Non-Global Financing debt 22.8 (0.5) 1.1 Other (includes Global Financing receivables

and Global Financing debt) 1.0 (1.6) 0.8 Change in cash, cash equivalents, restricted cash and

short-term marketable securities $ (3.2) $ (0.6) $ 4.1 FCF as percent of Income from Continuing Operations 126% 136%* 226%*

* 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.

68 Consolidated Income Statement International Business Machines Corporation and Subsidiary Companies

($ in millions except per share amounts)

For the year ended December 31: Notes 2019 2018 2017

Revenue Services $47,493 $49,257 * $48,652 * Sales 28,252 28,735* 28,772* Financing 1,402 1,599 1,715

Total revenue C 77,147 79,591 79,139 Cost

Services 32,491 33,687* 33,399* Sales 7,263 7,835* 7,587* Financing 904 1,132 1,210

Total cost 40,659 42,655 42,196 Gross profit 36,488 36,936 36,943 Expense and other (income)

Selling, general and administrative 20,604 19,366 19,680 Research, development and engineering F 5,989 5,379 5,590 Intellectual property and custom development income (648) (1,026) (1,466) Other (income) and expense (968) 1,152 1,125 Interest expense P&T 1,344 723 615

Total expense and other (income) 26,322 25,594 25,543 Income from continuing operations before income taxes 10,166 11,342 11,400 Provision for income taxes G 731 2,619 5,642 Income from continuing operations 9,435 8,723 5,758 Income/(loss) from discontinued operations, net of tax (4) 5 (5) Net income $ 9,431 $ 8,728 $ 5,753 Earnings/(loss) per share of common stock

Assuming dilution Continuing operations H $ 10.57 $ 9.51 $ 6.14 Discontinued operations H (0.01) 0.01 0.00

Total H $ 10.56 $ 9.52 $ 6.14 Basic

Continuing operations H $ 10.63 $ 9.56 $ 6.17 Discontinued operations H 0.00 0.01 0.00

Total H $ 10.63 $ 9.57 $ 6.17 Weighted-average number of common shares outstanding

Assuming dilution 892,813,376 916,315,714 937,385,625 Basic 887,235,105 912,048,072 932,828,295

* Reclassified to conform to 2019 presentation. Refer to “Basis of Presentation” in note A, “Significant Accounting Policies.” Amounts may not add due to rounding. The accompanying notes are an integral part of the financial statements.

70 Consolidated Balance Sheet International Business Machines Corporation and Subsidiary Companies

($ in millions except per share amounts)

At December 31: Notes 2019 2018

Assets Current assets

Cash and cash equivalents $ 8,172 $ 11,379 Restricted cash 141 225 Marketable securities I 696 618 Notes and accounts receivable—trade (net of allowances of

$299 in 2019 and $309 in 2018) 7,870 7,432 Short-term financing receivables (net of allowances of $188 in 2019 and $244 in 2018) K 14,192 22,388 Other accounts receivable (net of allowances of $33 in 2019 and $38 in 2018) 1,733 743 Inventory J 1,619 1,682 Deferred costs C 1,896 2,300 Prepaid expenses and other current assets 2,101 2,378

Total current assets 38,420 49,146 Property, plant and equipment L 32,028 32,460

Less: Accumulated depreciation L 22,018 21,668 Property, plant and equipment—net L 10,010 10,792 Operating right-of-use assets—net* M 4,996 — Long-term financing receivables (net of allowances of $33 in 2019 and $48 in 2018) K 8,712 9,148 Prepaid pension assets V 6,865 4,666 Deferred costs C 2,472 2,676 Deferred taxes G 5,182 5,216 Goodwill N 58,222 36,265 Intangible assets—net N 15,235 3,087 Investments and sundry assets O 2,074 2,386 Total assets $ 152,186 $ 123,382 Liabilities and equity Current liabilities

Taxes G $ 2,839 $ 3,046 Short-term debt I&P 8,797 10,207 Accounts payable 4,896 6,558 Compensation and benefits 3,406 3,310 Deferred income 12,026 11,165 Operating lease liabilities* M 1,380 — Other accrued expenses and liabilities 4,357 3,941

Total current liabilities 37,701 38,227 Long-term debt I&P 54,102 35,605 Retirement and nonpension postretirement benefit obligations V 17,142 17,002 Deferred income 3,851 3,445 Operating lease liabilities* M 3,879 — Other liabilities Q 14,526 12,174 Total liabilities 131,202 106,452 Commitments and Contingencies R Equity S IBM stockholders’ equity

Common stock, par value $.20 per share, and additional paid-in capital 55,895 55,151 Shares authorized: 4,687,500,000 Shares issued (2019—2,237,996,975; 2018—2,233,427,058)

Retained earnings 162,954 159,206 Treasury stock, at cost (shares: 2019—1,350,886,521; 2018—1,340,947,648) (169,413) (168,071) Accumulated other comprehensive income/(loss) (28,597) (29,490) Total IBM stockholders’ equity 20,841 16,796

Noncontrolling interests A 144 134 Total equity 20,985 16,929 Total liabilities and equity $ 152,186 $ 123,382

* Reflects the adoption of the FASB guidance on leases. Amounts may not add due to rounding. The accompanying notes are an integral part of the financial statements.

71Consolidated Statement of Cash Flows International Business Machines Corporation and Subsidiary Companies

($ in millions)

For the year ended December 31: 2019 2018 2017

Cash flows from operating activities Net income $ 9,431 $ 8,728 $ 5,753 Adjustments to reconcile net income to cash provided by operating activities

Depreciation 4,209 3,127 3,021 Amortization of intangibles 1,850 1,353 1,520 Stock-based compensation 679 510 534 Deferred taxes (1,527) 853 (931) Net (gain)/loss on asset sales and other (1,096) 123 14

Change in operating assets and liabilities, net of acquisitions/divestitures Receivables (including financing receivables) 502 1,006 1,297 Retirement related 301 1,368 1,014 Inventory 67 (127) 18 Other assets/other liabilities 858 (1,819) 4,437 Accounts payable (503) 126 47

Net cash provided by operating activities 14,770 15,247 16,724 Cash flows from investing activities Payments for property, plant and equipment (2,286) (3,395) (3,229) Proceeds from disposition of property, plant and equipment 537 248 460 Investment in software (621) (569) (544) Purchases of marketable securities and other investments (3,693) (7,041) (4,949) Proceeds from disposition of marketable securities and other investments 3,961 6,487 3,910 Non-operating finance receivables—net 6,720 (503) (2,028) Acquisition of businesses, net of cash acquired (32,630) (139) (496) Divestiture of businesses, net of cash transferred 1,076 — (205) Net cash provided by/(used in) investing activities (26,936) (4,913) (7,081) Cash flows from financing activities Proceeds from new debt 31,825 6,891 9,643 Payments to settle debt (12,944) (8,533) (6,816) Short-term borrowings/(repayments) less than 90 days—net (2,597) 1,341 620 Common stock repurchases (1,361) (4,443) (4,340) Common stock repurchases for tax withholdings (272) (171) (193) Financing—other 99 111 175 Cash dividends paid (5,707) (5,666) (5,506) Net cash provided by/(used in) financing activities 9,042 (10,469) (6,418) Effect of exchange rate changes on cash, cash equivalents and restricted cash (167) (495) 937 Net change in cash, cash equivalents and restricted cash (3,290) (630) 4,161 Cash, cash equivalents and restricted cash at January 1 11,604 12,234 8,073 Cash, cash equivalents and restricted cash at December 31 $ 8,314 $ 11,604 $12,234 Supplemental data Income taxes paid—net of refunds received $ 2,091 $ 1,745 $ 1,597 Interest paid on debt $ 1,685 $ 1,423 $ 1,208

Amounts may not add due to rounding. The accompanying notes are an integral part of the financial statements.