International Business Machines Corp 8-K, filed Oct 8, 2020
International Business Machines Corp (IBM)
About this 8-K
International Business Machines Corp filed this 8-K on October 8, 2020.
Items reported
- Item 2.02: Financial results
- Item 7.01: Regulation FD disclosure
- Item 9.01: Financial statements and exhibits
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
CURRENT REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date
of Report:
(Date of earliest event reported)
(Exact name of registrant as specified in its charter)
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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) | |
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Securities registered pursuant to Section 12(b) of the Act:
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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. ¨
Item 2.02. Results of Operations
and Financial Condition.
Item 7.01. Regulation FD Disclosure.
On October 8, 2020, IBM issued a press release announcing its intention to separate its Managed Infrastructure Services unit of its Global Technology Services division into a new public company. The Company is hosting an investor webcast at 8:00 a.m. Eastern Time on October 8, 2020 relating to the separation.
The press release also included preliminary financial results for the quarter ended September 30, 2020. As the Company is currently in its normal financial closing process, these are approximate figures and are subject to revision until the Company reports its full third-quarter results as planned later this month.
Copies of the press release and the presentation materials are attached hereto as Exhibits 99.1 and 99.2, respectively, and incorporated by reference herein.
In an effort to provide investors with additional information regarding the Company’s results as determined by generally accepted accounting principles (GAAP), the Company has disclosed in the attached press release and presentation materials certain non-GAAP information which management believes provides useful information to investors. Reconciliations of these non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP are included in the press release, presentation materials and non-GAAP financial information, which are Exhibits 99.1, 99.2 and 99.3, respectively, to this Form 8-K. The rationale for management’s use of non-GAAP measures is included in Exhibit 99.3 to this Form 8-K.
The information in Items 2.02 and 7.01 of this Form 8-K, including the corresponding Exhibits 99.1, 99.2 and 99.3, is being furnished with the Commission and shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934.
Item 9.01. Financial Statements and Exhibits.
(d) Exhibits
The following exhibits are being furnished as part of this report:
| Exhibit No. | Description of Exhibit | |
| 99.1 | Press Release of the Registrant, dated October 8, 2020 | |
| 99.2 | Webcast Presentation Materials, dated October 8, 2020 | |
| 99.3 | Non-GAAP Financial Information |
The following exhibit is being filed as part of this report:
| Exhibit No. | Description of Exhibit | |
| 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.
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: October 8, 2020 | ||
| By: | /s/ Robert F. Del Bene | |
| Robert F. Del Bene | ||
| Vice President and Controller | ||
Exhibit 99.1
IBM TO ACCELERATE HYBRID CLOUD GROWTH STRATEGY AND EXECUTE SPIN-OFF OF MARKET-LEADING MANAGED INFRASTRUCTURE SERVICES UNIT
| · | IBM to focus on hybrid cloud growth, a $1 trillion market opportunity |
| · | New public company to launch as world’s #1 Managed Infrastructure Services provider |
| · | IBM also announces preliminary 2020 third-quarter results |
ARMONK, N.Y., October 8, 2020 -- IBM (NYSE: IBM) announced today it will accelerate its hybrid cloud growth strategy to drive digital transformations for its clients. Additionally, IBM will separate its Managed Infrastructure Services unit of its Global Technology Services division into a new public company (“NewCo”). This creates two industry-leading companies, each with strategic focus and flexibility to drive client and shareholder value.
The separation is expected to be achieved as a tax-free spin-off to IBM shareholders, and completed by the end of 2021.
“IBM is laser-focused on the $1 trillion hybrid cloud opportunity,” said Arvind Krishna, IBM Chief Executive Officer. “Client buying needs for application and infrastructure services are diverging, while adoption of our hybrid cloud platform is accelerating. Now is the right time to create two market-leading companies focused on what they do best. IBM will focus on its open hybrid cloud platform and AI capabilities. NewCo will have greater agility to design, run and modernize the infrastructure of the world’s most important organizations. Both companies will be on an improved growth trajectory with greater ability to partner and capture new opportunities – creating value for clients and shareholders.”
"We have positioned IBM for the new era of hybrid cloud," said Ginni Rometty, IBM Executive Chairman. "Our multi-year transformation created the foundation for the open hybrid cloud platform, which we then accelerated with the acquisition of Red Hat. At the same time, our managed infrastructure services business has established itself as the industry leader, with unrivaled expertise in complex and mission-critical infrastructure work. As two independent companies, IBM and NewCo will capitalize on their respective strengths. IBM will accelerate clients’ digital transformation journeys, and NewCo will accelerate clients’ infrastructure modernization efforts. This focus will result in greater value, increased innovation, and faster execution for our clients.”
IBM, a Leading Hybrid Cloud and AI Company
IBM will focus on its open hybrid cloud platform, which represents a $1 trillion market opportunity. Building on IBM’s hybrid cloud foundation, the company acquired Red Hat to unlock the full value of the cloud for clients, further accelerating adoption of the platform. This platform facilitates the deployment of powerful AI capabilities to enable the power of data, application modernization services, and systems. These are all underpinned by the security, unmatched expertise in industry verticals, and deep commitment to open source innovation that clients expect from IBM.
With tighter integration and focus on its open hybrid cloud and AI solutions, IBM will move from a company with more than half of its revenues in services to one with a majority in high-value cloud software and solutions. IBM will also have more than 50% of its portfolio in recurring revenues.
IBM's open hybrid cloud platform architecture, based on RedHat OpenShift, works with the entire range of clients’ existing IT infrastructures, regardless of vendor. This platform allows clients to “write-once/run-anywhere,” and enables a hybrid cloud approach that drives up to 2.5 times more value for clients than a public cloud-only solution.
IBM's unique full-stack capabilities and large ecosystem of partners and ISV's deliver innovation and enable clients to unlock the full value of the hybrid cloud and their data.
IBM’s software portfolio, focused on data and AI, automation, and security, enables the widest access to innovation through open source.
IBM's business, strategy and technology consultants help clients transform by modernizing their existing applications, and by building new AI-infused data analysis capabilities on the leading open hybrid cloud platform.
IBM’s secure, mission-critical public cloud is designed to provide all required regulatory controls, and offers clients a foundation of open source software, security leadership, and enterprise-grade infrastructure.
IBM’s Systems business, integrated with the hybrid cloud platform, allows cloud-native developers to capitalize on the unique capabilities of IBM’s hardware. Leveraging its long-term relationships with clients, IBM will continue to drive the innovation in hardware that enterprises rely on for their most mission-critical computing needs.
As part of this strategic acceleration, IBM is taking action to simplify and optimize its operating model for speed and growth. This includes streamlining its geographic model and transforming its go-to-market structure to better engage with and support clients. IBM is also continuing to consolidate its shared services. This simplified and focused operating model will support accelerated innovation for the hybrid cloud, and provide more flexibility to increase investment in growth areas. The result will be an enhanced financial profile with a clear trajectory for improved revenue and profit growth.
NewCo, the Leading Managed Infrastructure Services Company
The new company (to be named at a subsequent date) will immediately be the world’s leading managed infrastructure services provider. It has relationships with more than 4,600 technology-intensive, highly regulated clients in 115 countries, including more than 75% of the Fortune 100, a backlog of $60 billion, and more than twice the scale of its nearest competitor.
The new company will be entirely focused on managing and modernizing client-owned infrastructures, a $500 billion market opportunity. It will leverage its unrivaled expertise to offer hosting and network services, services management, infrastructure modernization, and migrating and managing multi-cloud environments. These are critical services that are core to client operations.
With a streamlined business model, NewCo will create value by helping enterprises optimize their performance through AI and automation. NewCo’s services will enable enterprises to build agility and efficiency into their infrastructure and datacenters. NewCo will be able to better modernize infrastructures for an unparalleled roster of clients in all industries, with relationships that have been built over decades.
NewCo will extend its leadership through increased investment in the next generation of transformational managed infrastructure services, with more opportunity for margin expansion, profit growth and cash generation.
NewCo will also be able to partner fully across all cloud vendors, opening new avenues for growth, while maintaining a strong strategic partnership with IBM and continuing to serve existing and new clients.
Separation Transaction Details
The proposed separation is expected to be effected through a pro-rata spin-off to IBM shareowners that will be tax-free for U.S. federal income tax purposes. The transaction is subject to customary closing conditions, including Form 10 registration with the U.S. Securities and Exchange Commission, receipt of a tax opinion from counsel, and final approval by IBM’s Board of Directors. The separation is currently expected to be completed by the end of 2021.
Following separation, the companies together are initially expected to pay a combined quarterly dividend that is no less than IBM’s pre-spin dividend per share. Following the completion of the separation, each company’s dividend policy will be determined by its respective Board of Directors.
One-time transaction costs are expected to include tax charges, operational separation activities, and other customary items.
J.P. Morgan Securities LLC and Lazard are serving as financial advisors for the transaction, with Paul, Weiss, Rifkind, Wharton & Garrison LLP acting as legal advisor.
Preliminary Third-Quarter Results
In connection with today’s announcement, IBM is providing preliminary financial results for the third quarter ended September 30, 2020. IBM expects to report revenue of $17.6 billion, GAAP diluted earnings per share from continuing operations of $1.89, and operating (non-GAAP) earnings per share of $2.58. As IBM is currently in its normal financial closing process, these are approximate figures and are subject to revision until IBM reports its full third-quarter results as planned later this month.
Investor webcast details
IBM will host an investor webcast beginning at 8 a.m. EDT, Thursday, October 8, 2020. The Webcast may be accessed via a link at https://www.ibm.com/investor/events/ibm-strategic-update-2020
About IBM
For more information about IBM, visit ibm.com/news.
Contacts
Media:
Jonathan Adashek
+1 202-528-7479
jonathan.adashek@ibm.com
Sarah Meron
+1 347-891-1770
Sarah.meron@ibm.com
Edward Barbini
+1 914-499-6565
barbini@us.ibm.com
Investor Relations:
Patricia Murphy
+1 914-499-5800
pamurphy@us.ibm.com
Forward-Looking and Cautionary Statements
Except for the historical information and discussions contained herein, statements contained in this release may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on the company’s current assumptions regarding future business and financial performance. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, including, but not limited to, the following: a downturn in economic environment and client spending budgets; the company’s failure to meet growth and productivity objectives; a failure of the company’s innovation initiatives; damage to the company’s reputation; risks from investing in growth opportunities; failure of the company’s intellectual property portfolio to prevent competitive offerings and the failure of the company to obtain necessary licenses; cybersecurity and data privacy considerations; fluctuations in financial results; the possibility that the proposed separation of the Managed Infrastructure Services unit of the company’s Global Technology Services will not be completed within the anticipated time period or at all, the possibility of disruption or unanticipated costs in connection with the proposed separation or the possibility that the separation will not achieve its intended benefits; impact of local legal, economic, political, health and other conditions; adverse effects from environmental matters, tax matters and the company’s pension plans; ineffective internal controls; the company’s use of accounting estimates; impairment of the company’s goodwill or amortizable intangible assets; the company’s ability to attract and retain key employees and its reliance on critical skills; impacts of relationships with critical suppliers; product quality issues; impacts of business with government clients; currency fluctuations and customer financing risks; impact of changes in market liquidity conditions and customer credit risk on receivables; reliance on third party distribution channels and ecosystems; the company’s ability to successfully manage acquisitions, alliances and dispositions, including integration challenges,
failure to achieve objectives, the assumption of liabilities, and higher debt levels; legal proceedings and investigatory risks; risk factors related to IBM securities; and other risks, uncertainties and factors discussed in the company’s Form 10-Qs, Form 10-K and in the company’s other filings with the U.S. Securities and Exchange Commission (SEC) or in materials incorporated therein by reference. Any forward-looking statement in this release speaks only as of the date on which it is made. Except as required by law, the company assumes no obligation to update or revise any forward-looking statements. The financial information for the quarter ended September 30, 2020 is based on the company’s internal management accounts and reporting as of and for the 2020 third quarter. The company has not yet completed its financial statement review procedures for the 2020 third quarter. The preliminary results of operations are subject to revision as the company prepares its financial statements and disclosure for the 2020 third quarter, and such revisions may be significant. As a result, the final results and other disclosures for the 2020 third quarter may differ materially from this preliminary data. This preliminary financial data should not be viewed as a substitute for all financial statements prepared in accordance with U.S. GAAP.
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Exhibit 99.2
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IBM Strategic Update October 8, 2020 ibm.com/investor |
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Forward Looking Statements and Non-GAAP Information Certain comments made in this presentation may be characterized as forward looking under the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on the company’s current assumptions regarding future business and financial performance. Those statements by their nature address matters that are uncertain to different degrees. Those statements involve a number of factors that could cause actual results to differ materially. Additional information concerning these factors is contained in the Company’s filings with the SEC. Copies are available from the SEC, from the IBM website, or from IBM Investor Relations. Any forward-looking statement made during this presentation speaks only as of the date on which it is made. The company assumes no obligation to update or revise any forward-looking statements except as required by law; these charts and the associated remarks and comments are integrally related and are intended to be presented and understood together. 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), the company also discusses, in its press release and investor presentation materials, certain non-GAAP information including trailing twelve month revenue for Red Hat normalized for historical comparability and adjusted for for currency. The rationale for management’s use of this non-GAAP information is included as Exhibit 99.3 to the company’s Form 8-K filed with the SEC on October 8, 2020. The reconciliation of non-GAAP information to GAAP is included on the slides entitled “Non-GAAP Supplemental Materials” in this presentation, as well as in Exhibit 99.3 to the company’s Form 8-K submitted to the SEC on October 8, 2020. For other related information please visit the Company’s investor relations website at: https://www.ibm.com/investor/events/ibm-strategic-update-2020 |
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Arvind Krishna Chief Executive Officer James Kavanaugh SVP, Finance & Operations, Chief Financial Officer |
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Multi-year transformation, accelerated by strong Red Hat adoption, has positioned IBM for success in the hybrid cloud and AI market Foundation now in place to further capitalize on the $1 trillion hybrid cloud market opportunity and bolster IBM’s leadership position IBM will accelerate its growth through increased focus on its hybrid cloud platform strategy, a higher level of investment and a simplified operating model With client needs for application and infrastructure services diverging, IBM will also execute a tax-free spin-off of the Managed Infrastructure Services business of its Global Technology Services segment (“NewCo”) •IBM will be focused on its open hybrid cloud platform and AI solutions, underpinning its growth strategy and ability to drive digital transformations for clients •NewCo will immediately be the world’s leading managed infrastructure services provider, with increased agility to focus on evolving client needs and delivery excellence •Both companies will be on a trajectory for improved growth, with greater financial flexibility and ability to partner and capture new opportunities |
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Creating value through focus Establishing the #1 Managed Infrastructure Services Company Improving growth trajectory of both businesses |
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Establishing Two Market-Leading Companies with Focused Strategies Technology & platform innovation Digital transformations Significant growth opportunities IBM #1 Hybrid Cloud Platform and AI Company $59B Revenue* NewCo #1 Managed Infrastructure Services Company $19B Revenue* IT infrastructure modernization Service delivery excellence Operational efficiency and cash flow generation IBM and NewCo will have a strong strategic relationship |
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Creating Value Through Focus Establishes two industry-leading enterprise technology companies with mission-critical portfolios Increased clarity and agility to focus on respective operating and financial models Freedom to partner and invest for enhanced customer outcomes and drive better growth opportunities Opportunity for improved financial performance for both companies 7 |
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Hybrid Cloud Delivers a Generational Leap in Client Value 2.5X More client value through hybrid cloud approach* Business acceleration Developer productivity Infrastructure cost efficiency Regulatory, Compliance & Security Strategic optionality Hybrid cloud platform Greenfield cloud applications Lift & shift applications Containerize applications & change operating model Fully replatform applications onto integrated hybrid platform * Relative to public-only cloud structures8 |
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Hybrid Cloud is a Significant Market Opportunity 1 Trillion >90% of enterprises have hybrid environments ~75% of workloads not in public cloud ~60% of hybrid cloud opportunity is in highly-regulated industries Hybrid Cloud Market Opportunity 9 |
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IBM Has Created the Foundation to Capitalize on this Opportunity $1T Adressable Opportunity Application Modernization OpenShift Everywhere $300B Cloud Transformational Services Red Hat Acquisition & Marketplace Cloud Paks $450B Cloud Software & Platforms Linux One with OpenShift on Z Regulated Industry Clouds $230B Cloud Infrastructure 10 |
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IBM’s Core Strengths and Enhanced Focus Drive Success Core Strengths Financial Profile üMost broadly adopted open hybrid cloud platform architecture enabling “build once, run anywhere” üFull stack capabilities leverage incumbency to accelerate hybrid cloud adoption and realize value of data üTrusted innovation and modernization partner with deep vertical expertise to drive digital transformations üBroadest access to innovation üTighter integration and focus on hybrid cloud platform and AI solutions üGreater financial flexibility to increase investments in technology innovation and skills üClear trajectory for accelerated revenue and profit growth 11 |
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Strong Track Record in Hybrid Cloud Leading Companies Leverage IBM’s Platform to Drive Digital Transformations… …Accelerating IBM’s Cloud Performance >2,400 Hybrid Cloud platform clients >2x increase in # of large Red Hat deals, contributes to >20% Red Hat revenue growth* >200 Global Business Services engagements leveraging Red Hat technology >300 new partners added to IBM’s and/or Red Hat’s hybrid cloud ecosystem >20% IBM Cloud revenue growth** *TTM through June 30, 2020. Large Red Hat deals defined as >$10m. Yr/yr Red Hat revenue growth @cc, normalized for historical comparability **TTM through June 30, 2020. Yr/yr revenue growth @cc12 |
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IBM’s Integrated Capabilities Drive Adoption of our Hybrid Cloud Platform… Cloud Transformation Services IBM Services Global System Integrators Deep expertise drives digital transformations and adoption of IBM's open hybrid cloud platform Software IBM Applications IBM Middleware 3rd Party Ecosystem AI-powered software and solutions (Cloud Paks) integrated with hybrid cloud platform Extensive portfolio of middleware solutions provides data gravity Dev Sec Ops Open Hybrid Cloud Platform Industry-leading OpenShift container platform built on RHEL Infrastructure IBM Systems IBM Public Cloud Public Clouds AWS | Azure | Others Enterprise Infrastructure Infrastructure for most critical transactional and regulated workloads with highest degree of security and reliability |
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Platform Economics (Revenue per $1 Platform Spend) Cloud Transformation Services IBM Services Application Modernization | Intelligent Workflows Multi-cloud Management | Security and Compliance … Global System Integrators $6 – $8 Software IBM Applications Data and AI , Supply Chain and Asset Management … IBM Middleware Application Servers Integration Management Security … 3rd Party Ecosystem $3 – $5 Dev Sec Ops Open Hybrid Cloud Platform $1 spent on platform drives incremental portfolio spend Infrastructure IBM Systems IBM Public Cloud Public Clouds AWS | Azure | Others Enterprise Infrastructure $1 – $2 |
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Key Initiatives Increased Investments Organic/Inorganic Accelerated Growth Growth Mindset Separate NewCo Streamline Operations Technology Skills Ecosystem Sustainable mid single-digit revenue growth over medium term Expect a $2.3 billion charge by the end of 2020 for structural actions Savings to be reinvested to accelerate future growth |
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End-to-end Capabilities to Manage and Modernize Client-owned Infrastructures …with Unparalleled Scale and Expertise $19B revenue*, 2x size of next largest provider Hosting & Network Services Infrastructure Modernization Services Management Hybrid Multi-cloud Management $60B services backlog, of which ~45% is cloud** ~4,600 clients, including >75% of the Fortune 100 ~115 countries ~90,000 employees including deep technical skills *TTM revenue through June 30, 2020, adjusted to reflect estimated historical sales between IBM and NewCo **As of June 30, 2020 |
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Core Strengths Financial Profile üUnrivaled expertise in managing complex and mission-critical infrastructure üDifferentiated capabilities to help clients in their transformation journeys üUnique operational footprint with highest level of service, performance and reliability üMost comprehensive base of technology intensive and highly-regulated clients üLean, efficient and customer responsive operating model üGreater ability to leverage broader ecosystem of partners for enhanced customer outcomes üIncreased agility to invest in transformational services and capitalize on growth opportunities üImproved margin, profit and cash generation profile 18 |
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Two Market-Leading Companies IBM NewCo Strategic Focus •Technology & platform innovation •Digital transformations •Significant growth opportunities •IT infrastructure modernization •Service delivery excellence •Operational efficiency and cash flow generation Scope •Cloud & Cognitive Software, Global Business Services, Systems and Global Financing segments •IBM Public Cloud and TSS businesses of Global Technology Services segment •Managed Infrastructure Services business of Global Technology Services segment Revenue*$59 billion $19 billion Capital Structure Expected to maintain a single A credit rating Targeting investment grade credit rating Dividend Policy Initial combined dividend level expected to be no less than IBM’s pre-spin dividend per share Ongoing Relationship Strong strategic relationship between IBM and NewCo *TTM revenue through June 30, 2020, adjusted to reflect estimated historical sales between IBM and NewCo |
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Structure •Spin off of Managed Infrastructure Services (“NewCo”) to IBM shareholders •Expected to be tax free for U.S. federal tax purposes Timing and Conditions •Expected to close by end of 2021 •Subject to customary conditions including Form 10 registration, tax opinion from counsel and final IBM Board approval Transaction Charges •Estimate cash charges of ~$1.5 billion and non-cash charges of ~$1 billion – Includes tax charges, separation activities and other customary items |
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Accelerating IBM’s hybrid cloud platform growth strategy Driving sustainable mid-single digit revenue growth for IBM over the medium term Establishing the #1 Managed Infrastructure Services Company |
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ibm.com/investor |
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Reconciliation of Revenue for Red Hat, Normalized – TTM June 30, 2020 (Dollars in billions) Red Hat Revenue, Normalized for Trailing Twelve Months EndedChange YTY Historical Comparability June 30, 2020 June 30, 2019 YTY @constant currency $ 2.5 $ - 0.1 3.5 1.6 - $ 4.2 $ 3.5 19 % 20 % consolidated results Add: Red Hat revenue prior to acquisition Add: Purchase accounting deferred revenue and intercompany adjustments Red Hat revenue, normalized for historical comparability (non-GAAP) The above reconciles the Non-GAAP financial information contained in the “IBM Strategic Highlights” discussions in the company’s investor presentation on October 8, 2020. See Exhibit 99.3 included in the company’s Form 8-K dated October 8, 2020 for additional information on the use of these Non-GAAP financial measures. Refer to IBM’s Form 8-K, dated July 20, 2020 for additional information. |
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ibm.com/investor |
Exhibit 99.3
Non-GAAP Financial Information
Operating (non-GAAP) Earnings Per Share and Related Income Statement Items
In an effort to provide better transparency into the operational results of the business, supplementally, the company separates business results into operating and non-operating categories. Operating earnings from continuing operations is a non-GAAP measure that excludes the effects of certain acquisition-related charges, intangible asset amortization, expense resulting from basis differences on equity method investments, retirement-related costs and discontinued operations and their related tax impacts. Due to the unique, non-recurring nature of the enactment of the U.S. Tax Cuts and Jobs Act (U.S. tax reform), the company characterizes the one-time provisional charge recorded in the fourth quarter of 2017 and adjustments to that charge as non-operating. Adjustments include true-ups, accounting elections, any changes to regulations, laws, audit adjustments, etc. that affect the recorded one-time charge. For acquisitions, operating (non-GAAP) earnings exclude the amortization of purchased intangible assets and acquisition-related charges such as in-process research and development, transaction costs, applicable retention, restructuring and related expenses, tax charges related to acquisition integration and pre-closing charges, such as financing costs. These charges are excluded as they may be inconsistent in amount and timing from period to period and are significantly impacted by the size, type and frequency of the company’s acquisitions. All other spending for acquired companies is included in both earnings from continuing operations and in operating (non-GAAP) earnings. For retirement-related costs, the company characterizes certain items as operating and others as non-operating, consistent with GAAP. The company includes defined benefit plan and nonpension postretirement benefit plan service costs, multi-employer plan costs and the cost of defined contribution plans in operating earnings. Non-operating retirement-related costs include defined benefit plan and nonpension postretirement benefit plan amortization of prior service costs, interest cost, expected return on plan assets, amortized actuarial gains/losses, the impacts of any plan curtailments/settlements and pension insolvency costs and other costs. Non-operating retirement-related costs are primarily related to changes in pension plan assets and liabilities which are tied to financial market performance, and the company considers these costs to be outside of the operational performance of the business.
Overall, the company believes that supplementally providing investors with a view of operating earnings as described above provides increased transparency and clarity into both the operational results of the business and the performance of the company’s pension plans; improves visibility to management decisions and their impacts on operational performance; enables better comparison to peer companies; and allows the company to provide a long-term strategic view of the business going forward. The company’s reportable segment financial results reflect pre-tax operating earnings from continuing operations, consistent with the company’s management and measurement system. In addition, these non-GAAP measures provide a perspective consistent with areas of interest the company routinely receives from investors and analysts.
On October 8, 2020, in connection with the company's announcement of its intention to separate its Managed Infrastructure Services unit of its Global Technology Services division into a new public company, it also announced preliminary third-quarter 2020 GAAP diluted earnings per share from continuing operations of $1.89 and operating (non-GAAP) diluted earnings per share of $2.58. Operating (non-GAAP) diluted earnings per share excludes $0.40 per share of charges for acquisition-related adjustments, $0.26 of retirement-related adjustments and $0.03 from U.S. Tax Reform impacts. As the company is currently in its normal financial closing process, these are approximate figures and are subject to revision until the company reports its full third-quarter results later this month.
Constant Currency
When the company refers to growth rates at constant currency or adjusts such growth rates for currency, it is done so that certain financial results can be viewed without the impact of fluctuations in foreign currency exchange rates, thereby facilitating period-to-period comparisons of its business performance. Financial results adjusted for currency are calculated by translating current period activity in local currency using the comparable prior year period’s currency conversion rate. This approach is used for countries where the functional currency is the local currency. Generally, when the dollar either strengthens or weakens against other currencies, the growth at constant currency rates or adjusting for currency will be higher or lower than growth reported at actual exchange rates.
Revenue for Red Hat, normalized for historical comparability
On July 9, 2019, the company completed the acquisition of Red Hat, Inc. (Red Hat) and began including Red Hat’s financial results in the company’s consolidated results. As part of the accounting for this acquisition, the company
recorded certain adjustments, including a purchase accounting deferred revenue fair value adjustment and intercompany eliminations, each of which impact IBM’s post-acquisition revenue. To help investors better understand the underlying performance of Red Hat, management presents a non-GAAP growth rate of Red Hat’s revenue performance year to year, normalized for historical comparability. The normalized (non-GAAP) Red Hat revenue for the trailing twelve months ended June 30, 2020 includes adjustments to reverse the purchase accounting deferred revenue fair value adjustment and adjustments to add back revenue which was eliminated for post-acquisition sales between Red Hat and IBM. The deferred revenue adjustment represents revenue that would have been recognized by Red Hat under GAAP if the acquisition had not occurred, but was not recognized by IBM due to purchase accounting. The sales between Red Hat and IBM, which were eliminated post-acquisition, are added back in this presentation to provide a comparative view of Red Hat on a pre-acquisition basis. This information is included to provide additional transparency and for comparative purposes only.