Form 8-K/A International Business Machines Corp

[Amend] Current report, item 9.01

Published: 2019-09-20 16:39:03
Submitted: 2019-09-20
Period Ending In: 2019-07-09
ibm-20190709x8ka.htm 8-K/A


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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 8-K/A

CURRENT REPORT PURSUANT TO SECTION 13 OR 15 (d)

OF THE SECURITIES EXCHANGE ACT OF 1934

Date of Report: July 9, 2019

(Date of earliest event reported)

INTERNATIONAL BUSINESS MACHINES CORPORATION

(Exact name of registrant as specified in its charter)

New York

1-2360

13-0871985

(State of Incorporation)

(Commission File Number)

(IRS employer Identification No.)

One New Orchard Road
Armonk, New York

10504

(Address of principal executive offices)

(Zip Code)

914-499-1900

(Registrant’s telephone number)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

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

Title of each class

Trading symbol(s)

Name of each exchange
on which registered

Capital stock, par value $.20 per share

IBM

New York Stock Exchange

Chicago Stock Exchange

1.375% Notes due 2019

IBM 19B

New York Stock Exchange

2.750% Notes due 2020

IBM 20B

New York Stock Exchange

1.875% Notes due 2020

IBM 20A

New York Stock Exchange

0.500% Notes due 2021

IBM 21B

New York Stock Exchange

2.625% Notes due 2022

IBM 22A

New York Stock Exchange

1.25% Notes due 2023

IBM 23A

New York Stock Exchange

0.375% Notes due 2023

IBM 23B

New York Stock Exchange

1.125% Notes due 2024

IBM 24A

New York Stock Exchange

2.875% Notes due 2025

IBM 25A

New York Stock Exchange

0.950% Notes due 2025

IBM 25B

New York Stock Exchange

0.875% Notes due 2025

IBM 25C

New York Stock Exchange

0.300% Notes due 2026

IBM 26B

New York Stock Exchange

1.250% Notes due 2027

IBM 27B

New York Stock Exchange

1.750% Notes due 2028

IBM 28A

New York Stock Exchange

1.500% Notes due 2029

IBM 29

New York Stock Exchange

1.750% Notes due 2031

IBM 31

New York Stock Exchange

8.375% Debentures due 2019

IBM 19

New York Stock Exchange

7.00% Debentures due 2025

IBM 25

New York Stock Exchange

6.22% Debentures due 2027

IBM 27

New York Stock Exchange

6.50% Debentures due 2028

IBM 28

New York Stock Exchange

7.00% Debentures due 2045

IBM 45

New York Stock Exchange

7.125% Debentures due 2096

IBM 96

New York Stock Exchange

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

Emerging growth company  

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

Explanatory Note

On July 9, 2019, IBM filed with the Securities and Exchange Commission (SEC) a Current Report on Form 8- K (Initial 8-K) to disclose that it had completed its previously announced acquisition of Red Hat, Inc. (Red Hat). This Form 8-K/A amends the Initial 8-K to include the historical audited and unaudited financial statements of Red Hat and the pro forma combined financial information required by Items 9.01(a) and 9.01(b) of Form 8-K and should be read in conjunction with the Initial 8-K.

The pro forma financial information included as Exhibit 99.3 to this Current Report on Form 8-K has been presented for informational purposes only, as required by Form 8-K, and does not purport to represent the actual results of operations that IBM and Red Hat would have achieved had the companies been combined at and during the periods presented in the pro forma financial information, and is not intended to project the future results of operations that the combined company may achieve following the acquisition.

Except as described above, all other information in the Initial 8-K remains unchanged.

Item 9.01. Financial Statements and Exhibits.

(a) Financial Statements of Businesses Acquired

The audited consolidated financial statements of Red Hat at and for the year ended February 28, 2019, the notes related thereto and each of the Report of Management on Internal Control Over Financial Reporting and the Report of Independent Registered Public Accounting Firm contained therein, and the unaudited consolidated financial statements of Red Hat at and for the three months ended May 31, 2019, and the notes related thereto, are filed as Exhibits 99.1 and 99.2, respectively, to this Current Report on Form 8-K and incorporated by reference herein.

(b) Pro Forma Financial Information

The unaudited pro forma condensed combined financial information of IBM and Red Hat at and for the six months ended June 30, 2019 and for the year ended December 31, 2018, and the notes related thereto, is filed as Exhibit 99.3 to this Current Report on Form 8-K and incorporated by reference herein.

(d) Exhibits

The following exhibits are being filed as part of this report:

Exhibit No.

Description of Exhibit

23.1

Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm for Red Hat, Inc.

99.1

Audited Consolidated Financial Statements of Red Hat, Inc. at and for the year ended February 28, 2019, the notes related thereto and each of the Report of Management on Internal Control Over Financial Reporting and the Report of Independent Registered Public Accounting Firm contained therein (incorporated by reference to Part II, Item 8 of the Annual Report on Form 10-K of Red Hat, Inc. (File No. 001-33162), filed on April 24, 2019).

99.2

Unaudited Consolidated Financial Statements of Red Hat, Inc. at and for the three months ended May 31, 2019, and the notes related thereto (incorporated by reference to Part I, Item 1 of the Quarterly Report on Form 10-Q of Red Hat, Inc. (File No. 001-33162), filed on June 28, 2019).

99.3

Unaudited Pro Forma Condensed Combined Financial Information of IBM and Red Hat, Inc. at and for the six months ended June 30, 2019 and for the year ended December 31, 2018, and the notes related thereto.

104

Cover Page Interactive Data File – the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the inline XBRL document.

IBM’s web site (www.ibm.com) contains a significant amount of information about IBM, including financial and other information for investors (www.ibm.com/investor/). IBM encourages investors to visit its various web sites from time to time, as information is updated and new information is posted.

2

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.

Date: September 20, 2019

By:

/s/ Robert F. Del Bene

Robert F. Del Bene

Vice President and Controller

3

ibm-20190709ex2316b8a63.htm EX-23.1


ibm_Ex23_1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 002-77235, 033-29022, 033-33458, 033-34406, 033-53777, 033-60225, 033-60227, 033-60237, 033-60815, 333-01411, 033-52931, 033-33590, 333-76914, 333-87708, 333-09055, 333-23315, 333-31305, 333-41813, 333-44981, 333-48435, 333-81157, 333-87751, 333-87859, 333-87925, 333-30424, 333-33692, 333-36510, 333-102872, 333-102870, 333-103471, 333-104806, 333-114190, 333-131934, 333-138326, 333-138327, 333-148964, 333-170559, 333-171968, 333-196722 and 333-232585) and Form S-3 (Nos. 033-49475(1), 033-31732, 333-03763, 333-27669, 333-32690, 333-101034, 333-230099 and 333-230099-01) of International Business Machines Corporation of our report dated April 24, 2019 relating to the financial statements and the effectiveness of internal control over financial reporting of Red Hat, Inc., which is incorporated by reference in this Current Report on Form 8-K.

/s/ PricewaterhouseCoopers LLP
Raleigh, North Carolina
September 20, 2019

 

ibm-20190709ex993aae2c3.htm EX-99.3


ibm_Ex99_3

Exhibit 99.3

 

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

 

On July 9, 2019 (the Acquisition Date), International Business Machines Corporation (IBM or the company), a New York corporation, completed its acquisition of Red Hat, Inc. (Red Hat), a Delaware corporation. Pursuant to the terms of the Agreement and Plan of Merger (the Merger Agreement), dated October 28, 2018, among Socrates Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of IBM (Merger Sub), and Red Hat, Merger Sub merged with and into Red Hat, with Red Hat continuing as the surviving corporation (the Merger). As a result of the Merger, Red Hat became a wholly owned subsidiary of IBM.

 

The following unaudited pro forma condensed combined financial information is presented to illustrate the estimated effects of the Merger based on the historical financial statements of IBM and Red Hat after giving effect to the Merger and the Merger-related pro forma adjustments as described in the notes included below.

 

The unaudited Pro Forma Condensed Combined Statements of Earnings for the six months ended June 30, 2019 and the year ended December 31, 2018 combine the historical IBM Consolidated Statements of Earnings and the historical Red Hat Consolidated Statements of Operations, giving effect to the Merger as if it had occurred on January 1, 2018. The unaudited Pro Forma Condensed Combined Statement of Financial Position at June 30, 2019, combines the historical IBM Consolidated Statement of Financial Position and the historical Red Hat Consolidated Balance Sheet, giving effect to the Merger as if it had occurred on June 30, 2019.

 

The historical consolidated financial information has been adjusted in the unaudited Pro Forma Condensed Combined Financial Statements (the Financial Statements) to give effect to pro forma events that are (i) directly attributable to the Merger, (ii) factually supportable and (iii) with respect to the unaudited Pro Forma Condensed Combined Statements of Earnings, expected to have a continuing impact on the combined company’s results. The Financial Statements should be read in conjunction with the accompanying notes.

 

In addition, the unaudited pro forma condensed combined financial information is based on, and should be read in conjunction with, the following historical consolidated financial statements and accompanying notes:

 

·

the audited IBM consolidated financial statements at and for the year ended December 31, 2018, and the related notes included in IBM’s Annual Report on Form 10-K for the year ended December 31, 2018;

 

·

the unaudited IBM consolidated financial statements at and for the six months ended June 30, 2019, and the related notes included in IBM’s Form 10-Q for the six months ended June 30, 2019;

 

·

the audited Red Hat consolidated financial statements at and for the year ended February 28, 2019, and the related notes included in Red Hat’s Annual Report on Form 10-K for the year ended February 28, 2019; and

 

·

the unaudited Red Hat consolidated financial statements at and for the three months ended May 31, 2019, and the related notes included in Red Hat’s Form 10-Q for the three months ended May 31, 2019.

 

The unaudited pro forma condensed combined financial information has been prepared by IBM using the acquisition method of accounting in accordance with generally accepted accounting principles in the United States of America (GAAP). IBM is the acquirer in the Merger for accounting purposes. Accordingly, consideration transferred by IBM to complete the Merger has been allocated, on a preliminary basis, to identifiable assets and liabilities of Red Hat based on estimated fair values as of the Acquisition Date. The company made an allocation of the consideration transferred to the assets acquired and liabilities assumed based on management’s preliminary valuation of the fair value of tangible and intangible assets acquired and liabilities assumed. Accordingly, the pro forma adjustments related to the allocation of consideration transferred are preliminary and have been presented solely for the purpose of providing the Financial Statements in this Current Report on Form 8-K/A. IBM expects to finalize the acquisition accounting as soon as practicable within the required measurement period, but in no event later than one year from July 9, 2019.

 

The unaudited pro forma condensed combined financial information has been presented for informational purposes only. The unaudited pro forma condensed combined financial information does not purport to represent the actual results of operations that IBM and Red Hat would have achieved had the companies been combined during the periods presented in the Financial Statements and is not intended to project the future results of operations that the combined company may achieve after the Merger. Historical fiscal periods are not aligned under this presentation. The unaudited pro forma condensed combined financial information does not reflect any potential cost savings, operating efficiencies, long-term debt pay down estimates, suspension of IBM’s share repurchase program, financial synergies or other strategic benefits that may be realized as a result of the Merger and also does not reflect any restructuring costs to achieve those benefits. Material intercompany transactions between IBM and Red Hat during the periods presented in the Financial Statements have been
eliminated (see note 7, “Statement of Earnings Pro Forma Adjustments,” and note 8, “Statement of Financial Position Pro Forma Adjustments”).

 

1

Unaudited Pro Forma Condensed Combined Statement of Earnings

For the Year Ended December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Note 6

 

Note 7

 

 

 

 

 

 

Historical

 

 

 

 

 

 

 

 

 

 

 

 

IBM

 

Red Hat

 

Pro Forma

 

Pro Forma

 

 

 

 

 

 

Year Ended

 

Year Ended

 

Acquisition

 

Financing

 

Pro Forma

 

($ in millions, except per share amounts)

    

December 31, 2018

    

February 28, 2019

    

Adjustments

    

Adjustments

    

Combined

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Services

 

$

51,350

 

$

413

 

$

(37)

(a)  

$

 —

 

$

51,726

 

Sales

 

 

26,641

 

 

2,949

 

 

(1,556)

(a)
  

 

 —

 

 

28,034

 

Financing

 

 

1,599

 

 

 —

 

 

 —

 

 

 —

 

 

1,599

 

Total revenue

 

 

79,591

 

 

3,362

 

 

(1,593)

 

 

 —

 

 

81,360

 

Cost

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Services

 

 

34,059

 

 

284

 

 

(8)

(b)  

 

 —

 

 

34,335

 

Sales

 

 

7,464

 

 

214

 

 

363

(b)  

 

 —

 

 

8,041

 

Financing

 

 

1,132

 

 

 —

 

 

 —

 

 

 —

 

 

1,132

 

Total cost

 

 

42,655

 

 

498

 

 

355

 

 

 —

 

 

43,508

 

Gross profit

 

 

36,936

 

 

2,864

 

 

(1,948)

 

 

 —

 

 

37,852

 

Expense and other (income)

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Selling, general and administrative

 

 

19,366

 

 

1,683

 

 

842

(c)  

 

(7)

(f)  

 

21,885

 

Research, development and engineering

 

 

5,379

 

 

669

 

 

85

(d)  

 

 —

 

 

6,132

 

Intellectual property and custom development income

 

 

(1,026)

 

 

 —

 

 

 —

 

 

 —

 

 

(1,026)

 

Other (income) and expense

 

 

1,152

 

 

(26)

 

 

 —

 

 

50

(g)  

 

1,177

 

Interest expense

 

 

723

 

 

20

 

 

 —

 

 

918

(h)  

 

1,660

 

Total expense and other (income)

 

 

25,594

 

 

2,346

 

 

927

 

 

961

 

 

29,828

 

Income from continuing operations before income taxes

 

 

11,342

 

 

518

 

 

(2,875)

 

 

(961)

 

 

8,024

 

Provision for/(benefit from) income taxes

 

 

2,619

 

 

84

 

 

(607)

(e)  

 

(242)

(i)  

 

1,854

 

Income from continuing operations

 

$

8,723

 

$

434

 

$

(2,268)

 

$

(719)

 

$

6,169

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings from continuing operations per share of common stock

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Assuming dilution

 

$

9.51

 

 

  

 

 

  

 

 

  

 

$

6.71

(k)

Basic

 

$

9.56

 

 

  

 

 

  

 

 

  

 

$

6.76

(k)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average number of common shares outstanding

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Assuming dilution

 

 

916,315,714

 

 

  

 

 

  

 

 

  

 

 

918,331,219

(j)

Basic

 

 

912,048,072

 

 

  

 

 

  

 

 

  

 

 

912,225,189

(j)

 


For notes (a) through (k), please refer to pages 10 through 14 for the accompanying notes to the Financial Statements, which are an integral part of these statements.

 

2

Unaudited Pro Forma Condensed Combined Statement of Earnings

For the Six Months Ended June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Note 6

 

Note 7

 

 

 

 

 

 

Historical

 

 

 

 

 

 

 

 

 

 

 

 

IBM

 

Red Hat

 

Pro Forma

 

Pro Forma

 

 

 

 

 

 

Six Months Ended

 

Six Months Ended

 

Acquisition

 

Financing

 

Pro Forma

 

($ in millions, except per share amounts)

    

June 30, 2019

    

May 31, 2019

    

Adjustments

    

Adjustments

    

Combined

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Services

 

$

24,775

 

$

224

 

$

(5)

(a)  

$

 —

 

$

24,994

 

Sales

 

 

11,812

 

 

1,589

 

 

(294)

(a)  

 

 —

 

 

13,107

 

Financing

 

 

756

 

 

 —

 

 

 —

 

 

 —

 

 

756

 

Total revenue

 

 

37,342

 

 

1,813

 

 

(299)

 

 

 —

 

 

38,857

 

Cost

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Services

 

 

16,631

 

 

159

 

 

(16)

(b)  

 

 —

 

 

16,773

 

Sales

 

 

3,167

 

 

118

 

 

174

(b)  

 

 —

 

 

3,459

 

Financing

 

 

492

 

 

 —

 

 

 —

 

 

 —

 

 

492

 

Total cost

 

 

20,290

 

 

277

 

 

158

 

 

 —

 

 

20,724

 

Gross profit

 

 

17,053

 

 

1,536

 

 

(457)

 

 

 —

 

 

18,132

 

Expense and other (income)

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Selling, general and administrative

 

 

10,147

 

 

893

 

 

389

(c)  

 

(55)

(f)  

 

11,374

 

Research, development and engineering

 

 

2,840

 

 

354

 

 

24

(d)  

 

 —

 

 

3,218

 

Intellectual property and custom development income

 

 

(323)

 

 

 —

 

 

 —

 

 

 —

 

 

(323)

 

Other (income) and expense

 

 

(820)

 

 

(16)

 

 

 —

 

 

170

(g)  

 

(666)

 

Interest expense

 

 

558

 

 

 6

 

 

 —

 

 

255

(h)  

 

819

 

Total expense and other (income)

 

 

12,402

 

 

1,238

 

 

413

 

 

369

 

 

14,421

 

Income from continuing operations before income taxes

 

 

4,651

 

 

299

 

 

(869)

 

 

(369)

 

 

3,711

 

Provision for/(benefit from) income taxes

 

 

558

 

 

18

 

 

(192)

(e)  

 

(93)

(i)  

 

291

 

Income from continuing operations

 

$

4,093

 

$

281

 

$

(677)

 

$

(276)

 

$

3,420

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings from continuing operations per share of common stock

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Assuming dilution

 

$

4.58

 

 

  

 

 

  

 

 

  

 

$

3.82

(k)

Basic

 

$

4.61

 

 

  

 

 

  

 

 

  

 

$

3.85

(k)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average number of common shares outstanding

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Assuming dilution

 

 

892,371,164

 

 

  

 

 

  

 

 

  

 

 

894,123,171

(j)

Basic

 

 

887,927,612

 

 

  

 

 

  

 

 

  

 

 

888,104,729

(j)

 


For notes (a) through (k), please refer to pages 10 through 14 for the accompanying notes to the Financial Statements, which are an integral part of these statements.

 

3

Unaudited Pro Forma Condensed Combined Statement of Financial Position at June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Note 6

 

Note 8

 

 

 

 

 

Historical

 

 

 

 

 

 

 

 

IBM

 

Red Hat

 

 

 

 

 

 

 

 

At

 

At

 

Pro Forma

 

Pro Forma

($ in millions)

    

June 30, 2019

    

May 31, 2019

    

Adjustments

    

Combined

Assets:

 

 

  

 

 

  

 

 

  

 

 

  

Cash and cash equivalents

 

$

45,399

 

$

2,295

 

$

(34,801)

(aa) 

$

12,894

Restricted cash

 

 

135

 

 

 —

 

 

 —

 

 

135

Marketable securities

 

 

874

 

 

178

 

 

 —

 

 

1,052

Notes and accounts receivable – trade, net

 

 

7,414

 

 

529

 

 

(24)

(bb) 

 

7,918

Short-term financing receivables – net

 

 

15,543

 

 

 —

 

 

 —

 

 

15,543

Other accounts receivable – net

 

 

1,781

 

 

36

 

 

298

(cc) 

 

2,114

Inventories

 

 

1,745

 

 

 —

 

 

 —

 

 

1,745

Deferred costs

 

 

2,217

 

 

185

 

 

(245)

(dd) 

 

2,157

Prepaid expenses and other current assets

 

 

2,409

 

 

67

 

 

 —

 

 

2,477

Total current assets

 

 

77,517

 

 

3,289

 

 

(34,772)

 

 

46,035

Property, plant and equipment – net

 

 

10,202

 

 

200

 

 

 —

 

 

10,402

Operating right-of-use-assets – net

 

 

4,998

 

 

224

 

 

 —

 

 

5,223

Long-term financing receivables – net

 

 

8,441

 

 

 —

 

 

 —

 

 

8,441

Prepaid pension assets

 

 

5,319

 

 

 —

 

 

 —

 

 

5,319

Deferred costs

 

 

2,662

 

 

46

 

 

(60)

(dd) 

 

2,648

Deferred taxes

 

 

5,274

 

 

119

 

 

 —

 

 

5,393

Goodwill

 

 

35,284

 

 

1,273

 

 

21,604

(ee) 

 

58,161

Intangible assets – net

 

 

2,728

 

 

199

 

 

13,273

(ff) 

 

16,200

Investments and sundry assets

 

 

2,228

 

 

223

 

 

 —

 

 

2,451

Total assets

 

$

154,652

 

$

5,574

 

$

46

 

$

160,272

 

 

 

  

 

 

  

 

 

  

 

 

  

Liabilities and equity:

 

 

  

 

 

  

 

 

  

 

 

  

Taxes

 

$

2,439

 

$

85

 

$

(74)

(gg) 

$

2,451

Short-term debt

 

 

14,594

 

 

189

 

 

296

(hh) 

 

15,079

Accounts payable

 

 

4,724

 

 

63

 

 

(15)

(ii)  

 

4,772

Compensation and benefits

 

 

3,556

 

 

183

 

 

146

(jj)  

 

3,885

Deferred income

 

 

11,261

 

 

2,016

 

 

(1,645)

(kk) 

 

11,633

Operating lease liabilities

 

 

1,319

 

 

47

 

 

 —

 

 

1,366

Other accrued expenses and liabilities

 

 

4,458

 

 

80

 

 

233

(ll) 

 

4,771

Total current liabilities

 

 

42,351

 

 

2,664

 

 

(1,057)

 

 

43,957

Long-term debt

 

 

58,445

 

 

 —

 

 

 —

 

 

58,445

Retirement and nonpension postretirement benefit obligations

 

 

16,471

 

 

 —

 

 

 —

 

 

16,471

Deferred income

 

 

3,474

 

 

781

 

 

(656)

(kk) 

 

3,598

Operating lease liabilities

 

 

3,946

 

 

188

 

 

 —

 

 

4,134

Other liabilities

 

 

12,190

 

 

183

 

 

3,614

(mm) 

 

15,987

Total liabilities

 

 

136,876

 

 

3,816

 

 

1,900

 

 

142,592

 

 

 

  

 

 

  

 

 

  

 

 

  

Equity:

 

 

  

 

 

  

 

 

  

 

 

  

Common stock and additional paid-in capital

 

 

55,404

 

 

2,853

 

 

(2,679)

(nn) 

 

55,578

Retained earnings

 

 

160,467

 

 

2,195

 

 

(2,487)

(oo) 

 

160,176

Treasury stock, at cost

 

 

(169,385)

 

 

(3,243)

 

 

3,264

(pp) 

 

(169,364)

Accumulated other comprehensive income/(loss)

 

 

(28,841)

 

 

(48)

 

 

48

(qq) 

 

(28,841)

Total shareholders’ equity

 

 

17,645

 

 

1,758

 

 

(1,854)

 

 

17,548

Noncontrolling interests

 

 

131

 

 

 —

 

 

 —

 

 

131

Total equity

 

 

17,776

 

 

1,758

 

 

(1,854)

 

 

17,680

Total liabilities and equity

 

$

154,652

 

$

5,574

 

$

46

 

$

160,272


For notes (aa) through (qq), please refer to pages 14 through 16 for the accompanying notes to the Financial Statements, which are an integral part of these statements.

 

4

1.  Description of Transaction

 

On October 28, 2018, IBM, Merger Sub and Red Hat entered into the Merger Agreement. On July 9, 2019, IBM completed the acquisition of Red Hat pursuant to the Merger Agreement whereby Red Hat became a wholly owned subsidiary of IBM. At the completion of the Merger, each Red Hat common share issued and outstanding immediately prior to the effective time of the Merger was converted into the right to receive $190 per share in cash, without interest (the Merger Consideration), representing a total equity value of approximately $34 billion.

 

The company funded the acquisition with $3.0 billion of cash on hand,
the net proceeds from $6.4 billion i
n commercial paper and
the net proceeds from the following debt issuances: 
(i) On May 15, 2019, the company issued an aggregate of $20 billion of indebtedness in the following eight tranches: $1.5 billion of 2-year floating rate notes priced at 3 month LIBOR plus 40 basis points, $1.5 billion of 2-year fixed rate notes with a 2.8 percent coupon, $2.75 billion of 3-year fixed rate notes with a 2.85 percent coupon, $3.0 billion of 5-year fixed rate notes with a 3.0 percent coupon, $3.0 billion of 7-year fixed rate notes with a 3.3 percent coupon, $3.25 billion of 10-year fixed rate notes with a 3.5 percent coupon, $2.0 billion of 20-year fixed rate notes with a 4.15 percent coupon and $3.0 billion of 30-year fixed rate notes with a 4.25 percent coupon and (ii) On January 31, 2019, the company issued $5.7 billion of Euro bonds as follows: $2.0 billion of 4-year fixed rate bonds with a 0.375 percent coupon, $1.1 billion of 6-year fixed rate bonds with a 0.875 percent coupon, $1.1 billion of 8-year fixed rate bonds with a 1.25 percent coupon and $1.4 billion of 12-year fixed rate bonds with a 1.75 percent coupon.

 

Each outstanding Red Hat equity award (including each stock option, restricted share, restricted stock unit (RSU) and deferred stock unit (DSU)) that was vested as of the Acquisition Date, that became vested pursuant to its terms as of the Acquisition Date or that was held by a non-employee director, consultant or independent contractor of Red Hat was converted into the right to receive an amount in cash equal to the Merger Consideration less any exercise price, as applicable.  

 

Each outstanding Red Hat equity award that was not vested as of the Acquisition Date or was a performance stock unit (PSU) that became vested pursuant to its terms as of the Acquisition Date and that was not held by a non-employee director, consultant or independent contractor of Red Hat was converted into an IBM equity award, subject to substantially the same terms and conditions as were applicable under the corresponding Red Hat equity award immediately prior to the Acquisition Date (other than the performance-based vesting schedule, which was converted into a service-based vesting schedule in accordance with the applicable award agreement), except that the number of shares of IBM common stock subject to each converted IBM equity award equaled the number of Red Hat common shares underlying each such award immediately prior to the Acquisition Date multiplied by the “Exchange Ratio,” which was $190, the Merger Consideration, divided
by $140.57, the closing price per share of IBM common stock on the trading day immediately preceding the Acquisition Date.  
The exercise price, if applicable, of any converted Red Hat equity award was also adjusted to consider the Exchange Ratio.

 

2.  Basis of Presentation

 

The unaudited pro forma condensed combined financial information was prepared in accordance with Article 11 of Regulation S-X using the acquisition method of accounting.

 

The unaudited Pro Forma Condensed Combined Statement of Earnings for the year ended December 31, 2018 assumes that the Merger was consummated on January 1, 2018 and reflects pro forma adjustments that are expected to have a continuing impact on the combined company’s results. Red Hat’s historical financial information used to prepare the unaudited Pro Forma Condensed Combined Statement of Earnings for the year ended December 31, 2018 consists of Red Hat’s audited Consolidated Statement of Operations for the fiscal year ended February 28, 2019. Red Hat’s historical financial information used to prepare the unaudited Pro Forma Condensed Combined Statement of Earnings for the six months ended June 30, 2019 consists of Red Hat’s six month period ended May 31, 2019, which was derived as follows: a) the financial information from Red Hat’s audited Consolidated Statement of Operations for the fiscal year ended February 28, 2019 plus b) Red Hat’s unaudited Consolidated Statement of Operations for the three
months ended May 31, 2019
less c) Red Hat’s unaudited Consolidated Statement of Operations for the nine months ended November 30, 2018.

 

The unaudited Pro Forma Condensed Combined Statement of Financial Position at June 30, 2019 was prepared using the historical unaudited IBM Consolidated Statement of Financial Position at June 30, 2019 and the historical unaudited Red Hat Consolidated Balance Sheet at May 31, 2019 and presents the combined financial position of IBM and Red Hat as if the Merger occurred on June 30, 2019.

 

Under the acquisition method of accounting, the assets acquired and liabilities assumed are recorded, as of the completion of the Merger, primarily at their respective fair values and are combined with those of IBM. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement

5

date. This is an exit price concept for the valuation of the asset or liability. In addition, market participants are assumed to be buyers and sellers in the principal (or the most advantageous) market for the asset or liability. Fair value measurements for an asset assume the highest and best use by these market participants.

 

Under the acquisition method of accounting, IBM may be required to record the fair value of assets which are not intended to be used or sold and/or to value assets at fair value measures that do not reflect IBM’s intended use of those assets. Fair value measurements can be highly subjective, and it is possible that other professionals, applying reasonable judgment to the same facts and circumstances, could develop and support a range of alternative estimated amounts.

 

Acquisition-related transaction costs are not included as a component of consideration transferred but are accounted for as selling, general and administrative expenses. Acquisition-related transaction costs
incurred by IBM include fees related to a bridge term loan facility that was terminated on May 15, 2019, and legal, advisory and other professional fees.
Total acquisition-related transaction costs expected to be incurred by IBM and Red Hat are estimated
to be $360 million, of which $127 million was 
incurred through June 30, 2019. Acquisition-related transaction costs incurred in both 2018 and the six months ended June 30, 2019 are reflected as pro forma adjustments to the unaudited Pro Forma Condensed Combined Statements of Earnings for those same periods as a reduction of expense if those costs are not expected to have a continuing impact on the combined company’s results.

 

The unaudited Pro Forma Condensed Combined Statement of Financial Position at June 30, 2019 is required to include adjustments which give effect to events that are directly attributable to the Merger regardless of whether they are expected to have a continuing impact on the combined company’s results or are non-recurring. Therefore, acquisition-related transaction costs expected to be incurred by IBM and Red Hat subsequent to June 30, 2019
of $233 million are presented as an increase to other accrued expenses and liabilities and
the after-tax impact is presented as a decrease to retained earnings reflected in the pro forma adjustments to the unaudited Pro Forma Condensed Combined Statement of Financial Position at June 30, 2019.

 

Within the Financial Statements and tables presented, certain columns and rows may not add due to the use of rounded numbers for disclosure purposes. Percentages presented are calculated from the underlying whole-dollar amounts.

 

3.  Accounting Policies

 

IBM completed a preliminary review of Red Hat’s accounting policies to determine if differences in the policies would require restatement or reclassification of results of operations or reclassification of assets or liabilities to conform to IBM’s policies and classifications. A difference related to a practical expedient that IBM elected in conjunction with the adoption of the new revenue recognition accounting standard, which may have a material impact on the company’s combined financial statements, was identified, and the Financial Statements have been adjusted to conform to IBM’s accounting policy. Upon adoption of the revenue recognition standard on January 1, 2018, IBM elected the practical expedient to expense costs to obtain a contract as incurred if the amortization period would have been one year or less. Red Hat did not historically apply this practical expedient, but will do so effective with the Acquisition Date, which will result in an increased amortization period for capitalized sales commissions on a go-forward basis that is expected to be within IBM’s amortization period range of three to six years. Refer
to note 7(c) and 8(dd) for
additional information.

 

The U.S. Tax Cuts and Jobs Act introduced Global Intangible Low-Taxed Income (GILTI), which subjects a U.S. shareholder to current tax on income earned by certain foreign subsidiaries. The Financial Accounting Standards Board (FASB) allows companies to either (1) recognize deferred taxes for temporary differences that are expected to reverse as GILTI in future years (deferred method) or (2) account for taxes on GILTI as period costs in the year the tax is incurred (period method). In 2018, IBM elected to account for GILTI under the deferred method which required including GILTI in measuring deferred taxes. Red Hat accounted for GILTI under the period method but will apply the deferred method effective with the Acquisition Date. Refer to notes 5, 7(e) and 8(mm) for additional information.

 

The Financial Statements have been adjusted to conform Red Hat’s results to IBM’s policies. Therefore, the Financial Statements assume there are no other differences in accounting policies other than the items described herein
.

 

6

4.  Consideration Transferred

 

The preliminary estimated fair value of consideration transferred on the Acquisition Date to effect the acquisition of Red Hat is comprised of the following:

 

 

 

 

 

 

    

($ in millions)

Cash paid for outstanding Red Hat common stock (a)

 

$

33,769

Cash paid for Red Hat equity awards (b)

 

 

24

Cash paid to settle Red Hat warrants (c)

 

 

1,008

Total cash consideration

 

$

34,801

Stock issued to holders of Red Hat vested performance share units (d)

 

 

45

Fair value of Red Hat equity awards assumed by IBM for pre-combination service (e)

 

 

174

Settlement of pre-existing relationships (f)

 

 

51

Total preliminary consideration transferred

 

$

35,071


(a)          Represents cash consideration based on $190 per share paid to Red Hat shareholders for
approximately 178
million shares of outstanding Red Hat common stock.

 

(b)          Represents cash consideration for the settlement of vested Red Hat equity awards comprised of 16,889 vested stock options and 95,927 vested DSUs and cash consideration for the pre-combination service period for the settlement of unvested Red Hat non-employee equity awards comprised of 5,130 unvested DSUs, 7,149 unvested RSUs and 9,856 unvested RSAs.

 

(c)          Represents cash consideration for the settlement of Red Hat warrants.

 

(d)          Represents consideration for the settlement of vested Red Hat equity awards comprised of 237,323 vested PSUs that were converted to IBM RSAs per the Merger Agreement and then released as IBM common stock.

 

(e)          Represents the fair value of Red Hat’s stock-based compensation awards attributable to pre-combination services.

 

(f)           Represents the effective settlement of a pre-existing vendor-customer relationship between IBM and Red Hat as of July 9, 2019, in which IBM had historically paid in advance for purchases of Red Hat products. Because the terms of the arrangements were determined to represent fair value at the Acquisition Date, IBM did not record any gain or loss as part of the fair value of consideration transferred on the Acquisition Date.

 

5.  Estimate of Assets Acquired and Liabilities Assumed

 

Under the acquisition method of accounting, the identifiable assets acquired and liabilities assumed of Red Hat are presented at their estimated Acquisition Date fair values. The pro forma adjustments are preliminary and based on estimates of the fair value and useful lives of the assets acquired and liabilities assumed and have been prepared to illustrate the estimated effect of the acquisition. The allocation is dependent upon the valuation of certain assets and liabilities which is preliminary and subject to revision as more detailed analyses are completed. As additional information about the fair value of assets acquired and liabilities assumed becomes available, IBM may revise the preliminary purchase price allocation as soon as practical but no later than one year from the Acquisition Date. Any such revisions or changes may be material.

 

7

The following table represents a preliminary allocation of the purchase consideration to the identifiable assets acquired and liabilities assumed of Red Hat based on the historical unaudited Red Hat Consolidated Balance Sheet at May 31, 2019, with the excess recorded as goodwill:

 

 

 

 

 

 

 

At

 

 

May 31, 2019

 

    

($ in millions)

Assets acquired and liabilities assumed:

 

 

  

Current assets

 

$

3,380

Fixed assets/noncurrent assets

 

 

766

Intangible assets

 

 

13,472

Total assets acquired

 

 

17,618

Current liabilities

 

 

1,315

Noncurrent liabilities

 

 

4,110

Total liabilities assumed

 

 

5,425

Net assets acquired (a)

 

$

12,193

Preliminary purchase consideration (b)

 

$

35,071

Preliminary Goodwill (b) – (a)

 

$

22,878

 

Preliminary identifiable intangible assets consist of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months

 

Annual

 

 

 

 

 

 

 

Amortization

 

Amortization

 

 

Estimated

 

Estimated

 

Based on Estimated

 

Based on Estimated

 

 

Fair Value

 

Useful Life

 

Fair Value

 

Fair Value

 

    

($ in millions)

    

(Years)

    

($ in millions)

    

($ in millions)

Client relationships

 

$

7,215

 

10

 

$

361

 

$

721

Completed technology

 

 

4,571

 

9

 

 

254

 

 

508

Trademarks

 

 

1,686

 

20

 

 

42

 

 

84

Total identifiable intangible assets

 

$

13,472

 

 

 

 

 

 

 

 

 

IBM utilized the income approach to estimate the preliminary fair value of the acquired intangible assets. The with and without method was utilized for client relationships, the excess earnings method was utilized for completed technology and the relief from royalty method was utilized for trademarks. Certain assumptions inherent in the development of intangible asset values, from the perspective of a market participant, were based on but not necessarily limited to: interviews with IBM and Red Hat management, analysis of market research and analysis of Red Hat’s historical and prospective financial data, competitors and industry.

 

The preliminary estimates of fair value and useful lives may be different from the amounts included in the final acquisition accounting, and the difference could have a material impact on the Financial Statements. Each additional $100 million in fair value of client relationships, completed technology and trademarks would result in additional annual amortization of approximately $10 million, $11 million and $5 million respectively.

 

Included in noncurrent liabilities above is approximately $3 billion of deferred tax liabilities, which represent the deferred tax impact associated with the incremental differences in book and tax bases created from the preliminary purchase price allocation. This determination is preliminary and subject to change based upon the final determination of the fair value of the identifiable intangible assets and liabilities. Deferred taxes were estimated based on a blended tax rate of the various jurisdictions where the intangible assets reside and include the impact of GILTI deferred taxes. The pro forma adjustment related to deferred tax liabilities is included in other liabilities.

 

The effective tax rate of the combined company could be significantly different depending on post-acquisition activities, including discrete tax events, such as the settlement of income tax audits and changes in tax laws, as well as recurring factors including the geographical mix of income, state and local taxes and the effects of various global income tax strategies.

 

Any difference between the fair value of the consideration transferred and the fair value of the identifiable assets acquired and liabilities assumed is recorded as goodwill. The primary items that generated the goodwill are the value of the expected synergies between Red Hat and IBM and the acquired assembled workforce, neither of which qualify as an amortizable intangible asset. Goodwill is reviewed for impairment at least annually and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.

8

6.  Reclassification Adjustments

 

Statements of Earnings Reclassifications: The following table summarizes certain reclassifications made to the historical Red Hat Consolidated Statements of Operations to conform to IBM’s presentation for the unaudited Pro Forma Condensed Combined Statements of Earnings:

 

 

 

 

 

 

 

 

 

 

 

 

  

 

Red Hat

 

Red Hat

 

 

 

 

Six Months

 

    

Historical

    

Pro Forma

    

Year Ended

    

Ended

($ in millions)

 

Presentation

 

Presentation

 

February 28, 2019

 

May 31, 2019

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

Subscriptions

 

Sales

 

$

2,949

 

$

1,589

 

 

Training and services

 

Services

 

 

413

 

 

224

Total revenue

 

 

 

 

 

$

3,362

 

$

1,813

 

 

 

 

 

 

 

 

 

 

 

Cost

 

 

 

 

 

 

 

 

 

 

 

 

Subscriptions

 

Sales

 

$

214

 

$

118

 

 

Training and services

 

Services

 

 

284

 

 

159

Total cost

 

 

 

 

 

$

498

 

$

277

 

 

 

 

 

 

 

 

 

 

 

Expense and other (income)

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

Selling, general and administrative

 

$

1,378

 

$

736

 

 

Research and development

 

Research, development and engineering

 

 

669

 

 

354

 

 

General and administrative

 

Selling, general and administrative

 

 

305

 

 

158

 

 

Interest income

 

Other (income) and expense

 

 

(31)

 

 

(17)

 

 

Interest expense

 

Interest expense

 

 

20

 

 

 6

 

 

Other (expense) income

 

Other (income) and expense

 

 

 5

 

 

 1

Total expense and other (income)

 

 

 

 

 

$

2,346

 

$

1,238

 

9

Statement of Financial Position Reclassifications: The following table summarizes certain reclassifications made to the historical Red Hat Consolidated Balance Sheet to conform to IBM’s presentation for the unaudited Pro Forma Condensed Combined Statement of Financial Position:

 

 

 

 

 

 

 

 

 

 

Reclassification Adjustments

 

 

At May 31, 2019

 

 

Red Hat

 

Red Hat

 

 

Historical

 

Pro Forma

($ in millions)

    

Presentation

    

Presentation

Prepaid expenses

 

$

251

 

 

 

Deferred costs 

 

 

  

 

$

183

Prepaid expenses and other current assets 

 

 

  

 

 

67

Total

 

$

251

 

$

251

 

 

 

 

 

 

 

Other current assets

 

$

37

 

 

  

Other accounts receivable 

 

 

  

 

$

36

Deferred costs

 

 

  

 

 

 1

Total

 

$

37

 

$

37

 

 

 

 

 

 

 

Other assets

 

$

80

 

 

  

Deferred costs

 

 

  

 

$

46

Investments and sundry assets

 

 

  

 

 

35

Total

 

$

80

 

$

80

 

 

 

 

 

 

 

Investments in debt securities, long-term

 

$

188

 

 

 

Investments and sundry assets

 

 

 

 

$

188

Total

 

$

188

 

$

188