UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10 - Q10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBERJUNE 30, 20172022
1-2360
(Commission file number)
INTERNATIONAL BUSINESS MACHINES CORPORATION
(Exact name of registrant as specified in its charter)
| | |
Armonk, New York | 10504 | |
(Address of principal executive offices) | (Zip Code) |
914-499-1900914-499-1900
(Registrant’s telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading symbol(s) | Name of each exchange | ||
Capital stock, par value $.20 per share | IBM | New York Stock Exchange | ||
NYSE Chicago | ||||
2.625% Notes due 2022 | IBM 22A | New York Stock Exchange | ||
1.250% 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 | ||
0.300% Notes due 2028 | | IBM 28B | | 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 | ||
0.875% Notes due 2030 | | IBM 30 | | New York Stock Exchange |
1.750% Notes due 2031 | IBM 31 | New York Stock Exchange | ||
0.650% Notes due 2032 | | IBM 32A | | New York Stock Exchange |
1.250% Notes due 2034 | | IBM 34 | | New York Stock Exchange |
1.200% Notes due 2040 | | IBM 40 | | 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 (1) has filed all reports required to be filed by Section l3 or l5(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x☒ No o☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x☒ No o☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | Accelerated filer | |
Non-accelerated filer ☐ | Smaller reporting company ☐ | |
|
| |
| ||
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). o☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o☐ No x☒
The registrant had 925,791,378903,180,353 shares of common stock outstanding at SeptemberJune 30, 2017.2022.
Index
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8 | |
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Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition |
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2
Part I - Financial Information
Item 1. Consolidated Financial Statements:
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED INCOME STATEMENT
CONSOLIDATED STATEMENT OF EARNINGS(UNAUDITED)
(UNAUDITED)
| | | | | | | | | | | | | |
| | Three Months Ended June 30, |
| Six Months Ended June 30, | | ||||||||
(Dollars in millions except per share amounts) |
| 2022 |
| 2021* |
| 2022 |
| 2021* | | ||||
Revenue: |
| |
|
| |
| | |
|
| |
| |
Services | | $ | 7,640 | | $ | 7,201 | | $ | 15,343 | | $ | 14,297 | |
Sales | |
| 7,748 | |
| 6,808 | ** |
| 14,087 | |
| 12,687 | ** |
Financing | |
| 147 | |
| 209 | ** |
| 303 | |
| 420 | ** |
Total revenue | |
| 15,535 | |
| 14,218 | |
| 29,732 | |
| 27,405 | |
Cost: | |
|
| |
|
| |
|
| |
|
| |
Services | |
| 5,399 | |
| 4,720 | |
| 10,747 | |
| 9,364 | |
Sales | |
| 1,750 | |
| 1,499 | ** |
| 3,165 | |
| 2,878 | ** |
Financing | |
| 96 | |
| 146 | ** |
| 194 | |
| 283 | ** |
Total cost | |
| 7,246 | |
| 6,366 | |
| 14,107 | |
| 12,526 | |
Gross profit | |
| 8,290 | |
| 7,852 | |
| 15,625 | |
| 14,879 | |
Expense and other (income): | |
|
| |
|
| |
|
| |
|
| |
Selling, general and administrative | |
| 4,855 | |
| 4,849 | |
| 9,452 | |
| 9,536 | |
Research, development and engineering | |
| 1,673 | |
| 1,641 | |
| 3,352 | |
| 3,257 | |
Intellectual property and custom development income | |
| (176) | |
| (133) | |
| (297) | |
| (278) | |
Other (income) and expense | |
| (81) | |
| 302 | |
| 166 | |
| 647 | |
Interest expense | |
| 297 | |
| 281 | |
| 607 | |
| 561 | |
Total expense and other (income) | |
| 6,568 | |
| 6,940 | |
| 13,280 | |
| 13,724 | |
Income from continuing operations before income taxes | |
| 1,722 | |
| 912 | |
| 2,345 | |
| 1,155 | |
Provision for/(benefit from) income taxes | |
| 257 | |
| 101 | |
| 218 | |
| (58) | |
Income from continuing operations | | $ | 1,465 | | $ | 810 | | $ | 2,127 | | $ | 1,213 | |
Income/(loss) from discontinued operations, net of tax | |
| (73) | |
| 515 | |
| (2) | |
| 1,067 | |
Net income | | $ | 1,392 | | $ | 1,325 | | $ | 2,125 | | $ | 2,280 | |
| | | | | | | | | | | | | |
Earnings/(loss) per share of common stock: | |
|
| |
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| |
|
| |
|
| |
Assuming dilution: | |
|
| |
|
| |
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| |
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Continuing operations | | $ | 1.61 | | $ | 0.90 | | $ | 2.34 | | $ | 1.34 | |
Discontinued operations | |
| (0.08) | |
| 0.57 | |
| 0.00 | |
| 1.18 | |
Total | | $ | 1.53 | | $ | 1.47 | | $ | 2.34 | | $ | 2.52 | |
Basic: | |
|
| |
|
| |
|
| |
|
| |
Continuing operations | | $ | 1.62 | | $ | 0.91 | | $ | 2.36 | | $ | 1.36 | |
Discontinued operations | |
| (0.08) | |
| 0.57 | |
| 0.00 | |
| 1.19 | |
Total | | $ | 1.54 | | $ | 1.48 | | $ | 2.36 | | $ | 2.55 | |
| | | | | | | | | | | | | |
Weighted-average number of common shares outstanding: (millions) | |
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| |
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Assuming dilution | |
| 910.7 | |
| 904.2 | |
| 910.0 | |
| 903.0 | |
Basic | |
| 901.5 | |
| 895.0 | |
| 900.4 | |
| 894.3 | |
* | Reclassified to reflect discontinued operations presentation. |
** | Reclassified to conform to current year presentation. |
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| ||||||||
(Dollars in millions except per share amounts) |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
Revenue: |
|
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| ||||
Services |
| $ | 12,703 |
| $ | 12,938 |
| $ | 37,592 |
| $ | 38,347 |
|
Sales |
| 6,017 |
| 5,872 |
| 17,744 |
| 18,542 |
| ||||
Financing |
| 433 |
| 417 |
| 1,260 |
| 1,260 |
| ||||
Total revenue |
| 19,153 |
| 19,226 |
| 56,597 |
| 58,149 |
| ||||
Cost: |
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|
|
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|
| ||||
Services |
| 8,426 |
| 8,418 |
| 25,502 |
| 25,492 |
| ||||
Sales |
| 1,605 |
| 1,536 |
| 4,839 |
| 4,496 |
| ||||
Financing |
| 322 |
| 259 |
| 890 |
| 760 |
| ||||
Total cost |
| 10,353 |
| 10,213 |
| 31,232 |
| 30,748 |
| ||||
Gross profit |
| 8,800 |
| 9,013 |
| 25,365 |
| 27,401 |
| ||||
Expense and other (income): |
|
|
|
|
|
|
|
|
| ||||
Selling, general and administrative |
| 4,648 |
| 4,732 |
| 14,959 |
| 16,093 |
| ||||
Research, development and engineering |
| 1,342 |
| 1,397 |
| 4,360 |
| 4,320 |
| ||||
Intellectual property and custom development income |
| (308 | ) | (528 | ) | (1,118 | ) | (1,110 | ) | ||||
Other (income) and expense |
| (114 | ) | (8 | ) | (218 | ) | 281 |
| ||||
Interest expense |
| 168 |
| 158 |
| 451 |
| 473 |
| ||||
Total expense and other (income) |
| 5,735 |
| 5,751 |
| 18,434 |
| 20,056 |
| ||||
Income from continuing operations before income taxes |
| 3,065 |
| 3,263 |
| 6,931 |
| 7,345 |
| ||||
Provision for/(benefit from) income taxes |
| 339 |
| 409 |
| 120 |
| (31 | ) | ||||
Income from continuing operations |
| $ | 2,726 |
| $ | 2,854 |
| $ | 6,811 |
| $ | 7,375 |
|
Loss from discontinued operations, net of tax |
| 0 |
| (1 | ) | (3 | ) | (4 | ) | ||||
Net income |
| $ | 2,726 |
| $ | 2,853 |
| $ | 6,807 |
| $ | 7,371 |
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Earnings/(loss) per share of common stock: |
|
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| ||||
Assuming dilution: |
|
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Continuing operations |
| $ | 2.92 |
| $ | 2.98 |
| $ | 7.24 |
| $ | 7.67 |
|
Discontinued operations |
| 0.00 |
| 0.00 |
| 0.00 |
| 0.00 |
| ||||
Total |
| $ | 2.92 |
| $ | 2.98 |
| $ | 7.24 |
| $ | 7.67 |
|
Basic: |
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Continuing operations |
| $ | 2.93 |
| $ | 2.99 |
| $ | 7.28 |
| $ | 7.70 |
|
Discontinued operations |
| 0.00 |
| 0.00 |
| 0.00 |
| 0.00 |
| ||||
Total |
| $ | 2.93 |
| $ | 2.99 |
| $ | 7.28 |
| $ | 7.70 |
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Weighted-average number of common shares outstanding: (millions) |
|
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| ||||
Assuming dilution |
| 933.2 |
| 957.3 |
| 940.2 |
| 960.7 |
| ||||
Basic |
| 929.4 |
| 954.0 |
| 935.6 |
| 957.7 |
| ||||
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| ||||
Cash dividend per common share |
| $ | 1.50 |
| $ | 1.40 |
| $ | 4.40 |
| $ | 4.10 |
|
(Amounts may not add due to rounding.)
(The accompanying notes are an integral part of the financial statements.)
3
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| ||||||||
(Dollars in millions) |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
Net income |
| $ | 2,726 |
| $ | 2,853 |
| $ | 6,807 |
| $ | 7,371 |
|
Other comprehensive income/(loss), before tax: |
|
|
|
|
|
|
|
|
| ||||
Foreign currency translation adjustments |
| 89 |
| (99 | ) | 213 |
| (109 | ) | ||||
Net changes related to available-for-sale securities: |
|
|
|
|
|
|
|
|
| ||||
Unrealized gains/(losses) arising during the period |
| (1 | ) | (1 | ) | 2 |
| (36 | ) | ||||
Reclassification of (gains)/losses to net income |
| 0 |
| (1 | ) | 1 |
| 36 |
| ||||
Total net changes related to available-for-sale securities |
| (2 | ) | (2 | ) | 2 |
| 0 |
| ||||
Unrealized gains/(losses) on cash flow hedges: |
|
|
|
|
|
|
|
|
| ||||
Unrealized gains/(losses) arising during the period |
| (70 | ) | 35 |
| (198 | ) | (221 | ) | ||||
Reclassification of (gains)/losses to net income |
| (73 | ) | 15 |
| (347 | ) | 26 |
| ||||
Total unrealized gains/(losses) on cash flow hedges |
| (143 | ) | 50 |
| (545 | ) | (195 | ) | ||||
Retirement-related benefit plans: |
|
|
|
|
|
|
|
|
| ||||
Prior service costs/(credits) |
| 0 |
| — |
| 0 |
| — |
| ||||
Net (losses)/gains arising during the period |
| 1 |
| 11 |
| 106 |
| (57 | ) | ||||
Curtailments and settlements |
| 2 |
| 4 |
| 3 |
| 19 |
| ||||
Amortization of prior service (credits)/costs |
| (22 | ) | (28 | ) | (66 | ) | (81 | ) | ||||
Amortization of net (gains)/losses |
| 733 |
| 696 |
| 2,156 |
| 2,079 |
| ||||
Total retirement-related benefit plans |
| 713 |
| 683 |
| 2,200 |
| 1,960 |
| ||||
Other comprehensive income/(loss), before tax |
| 658 |
| 632 |
| 1,869 |
| 1,656 |
| ||||
Income tax (expense)/benefit related to items of other comprehensive income |
| 11 |
| (192 | ) | 7 |
| (213 | ) | ||||
Other comprehensive income/(loss) |
| 669 |
| 440 |
| 1,877 |
| 1,442 |
| ||||
Total comprehensive income/(loss) |
| $ | 3,394 |
| $ | 3,293 |
| $ | 8,684 |
| $ | 8,813 |
|
| | | | | | | | | | | | |
| | Three Months Ended June 30, |
| Six Months Ended June 30, | ||||||||
(Dollars in millions) |
| 2022 |
| 2021* |
| 2022 |
| 2021* | ||||
Net income | | $ | 1,392 | | $ | 1,325 | | $ | 2,125 | | $ | 2,280 |
Other comprehensive income/(loss), before tax: | |
|
| |
|
| |
|
| |
|
|
Foreign currency translation adjustments | |
| 213 | |
| 28 | |
| 655 | |
| 577 |
Net changes related to available-for-sale securities: | |
|
| |
|
| |
|
| |
|
|
Unrealized gains/(losses) arising during the period | |
| 0 | |
| 0 | |
| (1) | |
| 0 |
Reclassification of (gains)/losses to net income | |
| — | |
| — | |
| — | |
| — |
Total net changes related to available-for-sale securities | |
| 0 | |
| 0 | |
| (1) | |
| 0 |
Unrealized gains/(losses) on cash flow hedges: | |
|
| |
|
| |
|
| |
|
|
Unrealized gains/(losses) arising during the period | |
| 200 | |
| (34) | |
| 260 | |
| 153 |
Reclassification of (gains)/losses to net income | |
| 16 | |
| 90 | |
| 16 | |
| 251 |
Total unrealized gains/(losses) on cash flow hedges | |
| 217 | |
| 56 | |
| 276 | |
| 404 |
Retirement-related benefit plans: | |
|
| |
|
| |
|
| |
|
|
Prior service costs/(credits) | |
| — | |
| 0 | |
| (5) | |
| 0 |
Net (losses)/gains arising during the period | |
| 1 | |
| 2 | |
| 10 | |
| 22 |
Curtailments and settlements | |
| 11 | |
| 16 | |
| 19 | |
| 34 |
Amortization of prior service (credits)/costs | |
| 6 | |
| 1 | |
| 13 | |
| 4 |
Amortization of net (gains)/losses | | | 450 | | | 643 | | | 917 | | | 1,291 |
Total retirement-related benefit plans | |
| 468 | |
| 661 | |
| 954 | |
| 1,350 |
Other comprehensive income/(loss), before tax | |
| 897 | |
| 745 | |
| 1,885 | |
| 2,330 |
Income tax (expense)/benefit related to items of other comprehensive income | |
| (534) | |
| (140) | |
| (819) | |
| (645) |
Other comprehensive income/(loss), net of tax | |
| 363 | |
| 605 | |
| 1,066 | |
| 1,685 |
Total comprehensive income | | $ | 1,755 | | $ | 1,930 | | $ | 3,191 | | $ | 3,965 |
* Amounts presented have not been recast to exclude discontinued operations.
(Amounts may not add due to rounding.)
(The accompanying notes are an integral part of the financial statements.)
4
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET
CONSOLIDATED STATEMENT OF FINANCIAL POSITION(UNAUDITED)
ASSETS
| | | | | | | |
|
| At June 30, |
| At December 31, |
| ||
(Dollars in millions) | | 2022 |
| 2021 |
| ||
Assets: |
| |
|
| |
| |
Current assets: |
| |
|
| |
| |
Cash and cash equivalents | | $ | 7,034 | | $ | 6,650 | |
Restricted cash | |
| 220 | |
| 307 | |
Marketable securities | |
| 524 | |
| 600 | |
Notes and accounts receivable — trade (net of allowances of $213 in 2022 and $218 in 2021) | |
| 5,867 | |
| 6,754 | |
Short-term financing receivables: | |
| | |
| | |
Held for investment (net of allowances of $150 in 2022 and $176 in 2021) | |
| 6,619 | |
| 7,221 | |
Held for sale | |
| 614 | |
| 793 | |
Other accounts receivable (net of allowances of $35 in 2022 and $24 in 2021) | |
| 909 | |
| 1,002 | |
Inventory, at lower of average cost or net realizable value: | |
| | |
| | |
Finished goods | |
| 184 | |
| 208 | |
Work in process and raw materials | |
| 1,499 | |
| 1,442 | |
Total inventory | |
| 1,684 | |
| 1,649 | |
Deferred costs | |
| 1,010 | |
| 1,097 | |
Prepaid expenses and other current assets | |
| 3,414 | |
| 3,466 | |
Total current assets | |
| 27,896 | |
| 29,539 | |
Property, plant and equipment | |
| 19,079 | |
| 20,085 | |
Less: Accumulated depreciation | |
| 13,804 | |
| 14,390 | |
Property, plant and equipment — net | |
| 5,275 | |
| 5,694 | |
Operating right-of-use assets — net | |
| 2,848 | |
| 3,222 | |
Long-term financing receivables (net of allowances of $22 in 2022 and $25 in 2021) | |
| 5,316 | |
| 5,425 | |
Prepaid pension assets | |
| 9,930 | |
| 9,850 | |
Deferred costs | |
| 865 | |
| 924 | |
Deferred taxes | |
| 7,073 | |
| 7,370 | |
Goodwill | |
| 55,039 | |
| 55,643 | |
Intangible assets — net | |
| 11,571 | |
| 12,511 | |
Investments and sundry assets | |
| 1,689 | |
| 1,823 | |
Total assets | | $ | 127,503 | | $ | 132,001 | |
(Amounts may not add due to rounding.)
(The accompanying notes are an integral part of the financialstatements.)
5
INTERNATIONAL BUSINESS MACHINES CORPORATION
(UNAUDITED)AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET – (CONTINUED)
ASSETS(UNAUDITED)
|
| At September 30, |
| At December 31, |
| ||
(Dollars in millions) |
| 2017 |
| 2016 |
| ||
Assets: |
|
|
|
|
| ||
Current assets: |
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 10,915 |
| $ | 7,826 |
|
Marketable securities |
| 600 |
| 701 |
| ||
Notes and accounts receivable - trade (net of allowances of $296 in 2017 and $290 in 2016) |
| 8,150 |
| 9,182 |
| ||
Short-term financing receivables (net of allowances of $270 in 2017 and $337 in 2016) |
| 18,050 |
| 19,006 |
| ||
Other accounts receivable (net of allowances of $39 in 2017 and $48 in 2016) |
| 926 |
| 1,057 |
| ||
Inventories, at lower of average cost or market: |
|
|
|
|
| ||
Finished goods |
| 430 |
| 358 |
| ||
Work in process and raw materials |
| 1,281 |
| 1,195 |
| ||
Total inventories |
| 1,711 |
| 1,553 |
| ||
Prepaid expenses and other current assets |
| 4,389 |
| 4,564 |
| ||
Total current assets |
| 44,742 |
| 43,888 |
| ||
Property, plant and equipment |
| 31,937 |
| 30,133 |
| ||
Less: Accumulated depreciation |
| 20,880 |
| 19,303 |
| ||
Property, plant and equipment — net |
| 11,057 |
| 10,830 |
| ||
Long-term financing receivables (net of allowances of $84 in 2017 and $101 in 2016) |
| 8,459 |
| 9,021 |
| ||
Prepaid pension assets |
| 4,521 |
| 3,034 |
| ||
Deferred taxes |
| 7,289 |
| 5,224 |
| ||
Goodwill |
| 36,782 |
| 36,199 |
| ||
Intangible assets — net |
| 3,981 |
| 4,688 |
| ||
Investments and sundry assets |
| 4,806 |
| 4,585 |
| ||
Total assets |
| $ | 121,636 |
| $ | 117,470 |
|
LIABILITIES AND EQUITY
| | | | | | |
|
| At June 30, |
| At December 31, | ||
(Dollars in millions except per share amounts) | | 2022 |
| 2021 | ||
Liabilities: | | | | | | |
Current liabilities: |
| |
|
| |
|
Taxes | | $ | 1,742 | | $ | 2,289 |
Short-term debt | |
| 5,981 | |
| 6,787 |
Accounts payable | |
| 3,707 | |
| 3,955 |
Compensation and benefits | |
| 3,327 | |
| 3,204 |
Deferred income | |
| 12,522 | |
| 12,518 |
Operating lease liabilities | |
| 884 | |
| 974 |
Other accrued expenses and liabilities | |
| 3,682 | |
| 3,892 |
Total current liabilities | |
| 31,844 | |
| 33,619 |
Long-term debt | |
| 44,328 | |
| 44,917 |
Retirement and nonpension postretirement benefit obligations | |
| 13,118 | |
| 14,435 |
Deferred income | |
| 3,069 | |
| 3,577 |
Operating lease liabilities | |
| 2,182 | |
| 2,462 |
Other liabilities | |
| 13,486 | |
| 13,996 |
Total liabilities | |
| 108,026 | |
| 113,005 |
Equity: | |
| | |
| |
IBM stockholders’ equity: | |
| | |
| |
Common stock, par value $0.20 per share, and additional paid-in capital | |
| 57,802 | |
| 57,319 |
Shares authorized: 4,687,500,000 | |
| | |
| |
Shares issued: 2022 - 2,254,538,572 | |
| | |
| |
2021 - 2,248,577,848 | |
| | |
| |
Retained earnings | |
| 153,298 | |
| 154,209 |
Treasury stock - at cost | |
| (169,522) | |
| (169,392) |
Shares: 2022 - 1,351,358,219 | |
| | |
| |
2021 - 1,350,509,249 | |
| | |
| |
Accumulated other comprehensive income/(loss) | |
| (22,169) | |
| (23,234) |
Total IBM stockholders’ equity | |
| 19,409 | |
| 18,901 |
Noncontrolling interests | |
| 67 | |
| 95 |
Total equity | |
| 19,476 | |
| 18,996 |
Total liabilities and equity | | $ | 127,503 | | $ | 132,001 |
(Amounts may not add due to rounding.)
(The accompanying notes are an integral part of the financial statements.)
6
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION — (CONTINUED)(UNAUDITED)CASH FLOWS
(UNAUDITED)
| | | | | | |
| | Six Months Ended June 30, | ||||
(Dollars in millions) |
| 2022 |
| 2021 | ||
Cash flows from operating activities: |
| |
|
| |
|
Net income | | $ | 2,125 | | $ | 2,280 |
Adjustments to reconcile net income to cash provided by operating activities | |
|
| |
|
|
Depreciation | |
| 1,251 | |
| 2,102 |
Amortization of intangibles | |
| 1,251 | |
| 1,250 |
Stock-based compensation | |
| 488 | |
| 457 |
Net (gain)/loss on asset sales and other | |
| (100) | |
| (144) |
Changes in operating assets and liabilities, net of acquisitions/divestitures | |
| (446) | |
| 1,594 |
Net cash provided by operating activities | |
| 4,569 | |
| 7,539 |
| | | | | | |
Cash flows from investing activities: | |
|
| |
|
|
Payments for property, plant and equipment | |
| (620) | |
| (1,054) |
Proceeds from disposition of property, plant and equipment | |
| 90 | |
| 215 |
Investment in software | |
| (341) | |
| (379) |
Acquisition of businesses, net of cash acquired | |
| (958) | |
| (2,866) |
Divestitures of businesses, net of cash transferred | |
| 1,268 | |
| (25) |
Non-operating finance receivables — net | |
| 0 | |
| 16 |
Purchases of marketable securities and other investments | |
| (2,336) | |
| (1,890) |
Proceeds from disposition of marketable securities and other investments | |
| 1,711 | |
| 1,312 |
Net cash provided by/(used in) investing activities | |
| (1,186) | |
| (4,671) |
| | | | | | |
Cash flows from financing activities: | |
|
| |
|
|
Proceeds from new debt | |
| 4,402 | |
| 243 |
Payments to settle debt | |
| (3,959) | |
| (5,974) |
Short-term borrowings/(repayments) less than 90 days — net | |
| (9) | |
| (68) |
Common stock repurchases for tax withholdings | |
| (315) | |
| (234) |
Financing — other | |
| 25 | |
| 44 |
Cash dividends paid | |
| (2,963) | |
| (2,924) |
Net cash provided by/(used in) financing activities | |
| (2,819) | |
| (8,914) |
| | | | | | |
Effect of exchange rate changes on cash, cash equivalents and restricted cash | |
| (267) | |
| (65) |
Net change in cash, cash equivalents and restricted cash | |
| 297 | |
| (6,110) |
| | | | | | |
Cash, cash equivalents and restricted cash at January 1 | |
| 6,957 | |
| 13,675 |
Cash, cash equivalents and restricted cash at June 30 | | $ | 7,254 | | $ | 7,565 |
Cash flows are presented on an IBM consolidated basis. Refer to note 3, “Separation of Kyndryl,” for additional information related to cash flows from Kyndryl discontinued operations.
(Amounts may not add due to rounding.)
(The accompanying notes are an integral part of the financialstatements.)
7
INTERNATIONAL BUSINESS MACHINES CORPORATION
LIABILITIES AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF EQUITY
(UNAUDITED)
|
| At September 30, |
| At December 31, |
| ||
(Dollars in millions) |
| 2017 |
| 2016 |
| ||
Liabilities: |
|
|
|
|
| ||
Current liabilities: |
|
|
|
|
| ||
Taxes |
| $ | 3,038 |
| $ | 3,235 |
|
Short-term debt |
| 4,299 |
| 7,513 |
| ||
Accounts payable |
| 5,442 |
| 6,209 |
| ||
Compensation and benefits |
| 3,918 |
| 3,577 |
| ||
Deferred income |
| 10,649 |
| 11,035 |
| ||
Other accrued expenses and liabilities |
| 4,352 |
| 4,705 |
| ||
Total current liabilities |
| 31,697 |
| 36,275 |
| ||
Long-term debt |
| 41,327 |
| 34,655 |
| ||
Retirement and nonpension postretirement benefit obligations |
| 17,554 |
| 17,070 |
| ||
Deferred income |
| 3,579 |
| 3,600 |
| ||
Other liabilities |
| 7,723 |
| 7,477 |
| ||
Total liabilities |
| 101,879 |
| 99,078 |
| ||
Equity: |
|
|
|
|
| ||
IBM stockholders’ equity: |
|
|
|
|
| ||
Common stock, par value $0.20 per share, and additional paid-in capital |
| 54,395 |
| 53,935 |
| ||
Shares authorized: 4,687,500,000 |
|
|
|
|
| ||
Shares issued: 2017 - 2,228,489,401 |
|
|
|
|
| ||
2016 - 2,225,116,815 |
|
|
|
|
| ||
Retained earnings |
| 155,565 |
| 152,759 |
| ||
Treasury stock - at cost |
| (162,812 | ) | (159,050 | ) | ||
Shares: 2017 - 1,302,698,023 |
|
|
|
|
| ||
2016 - 1,279,249,412 |
|
|
|
|
| ||
Accumulated other comprehensive income/(loss) |
| (27,521 | ) | (29,398 | ) | ||
Total IBM stockholders’ equity |
| 19,627 |
| 18,246 |
| ||
Noncontrolling interests |
| 130 |
| 146 |
| ||
Total equity |
| 19,757 |
| 18,392 |
| ||
Total liabilities and equity |
| $ | 121,636 |
| $ | 117,470 |
|
| | | | | | | | | | | | | | | | | | | | | |
|
| Common | | | | | | | | | | | | | | | | | | ||
| | Stock and | | | | | | | | Accumulated | | | | | | | | | | ||
| | Additional | | | | | | | | Other | | Total IBM | | Non- | | | | ||||
| | Paid-in | | Retained | | Treasury | | Comprehensive | | Stockholders’ | | Controlling | | Total | |||||||
(Dollars in millions except per share amounts) |
| Capital |
| Earnings |
| Stock |
| Income/(Loss) |
| Equity |
| Interests |
| Equity | |||||||
Equity - April 1, 2022 | | $ | 57,603 | | $ | 153,401 | | $ | (169,422) | | $ | (22,532) | | $ | 19,050 | | $ | 62 | | $ | 19,112 |
Net income plus other comprehensive income/(loss): | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Net income | |
|
| |
| 1,392 | |
|
| |
|
| |
| 1,392 | |
|
| |
| 1,392 |
Other comprehensive income/(loss) | |
|
| |
|
| |
|
| |
| 363 | |
| 363 | |
|
| |
| 363 |
Total comprehensive income/(loss) | |
|
| |
|
| |
|
| |
|
| | $ | 1,755 | |
|
| | $ | 1,755 |
Cash dividends paid — common stock ($1.65 per share) | |
|
| |
| (1,488) | |
|
| |
|
| |
| (1,488) | |
|
| |
| (1,488) |
Common stock issued under employee plans (4,398,589 shares) | |
| 199 | |
|
| |
|
| |
|
| |
| 199 | |
|
| |
| 199 |
Purchases (1,723,774 shares) and sales (1,070,214 shares) of treasury stock under employee plans — net | |
|
| |
| (7) | |
| (100) | |
|
| |
| (107) | |
|
| |
| (107) |
Changes in noncontrolling interests | |
|
| |
|
| |
|
| |
|
| |
|
| |
| 6 | |
| 6 |
Equity – June 30, 2022 | | $ | 57,802 | | $ | 153,298 | | $ | (169,522) | | $ | (22,169) | | $ | 19,409 | | $ | 67 | | $ | 19,476 |
| | | | | | | | | | | | | | | | | | | | | |
|
| Common |
| | |
| | |
| |
| | |
| | |
| | | ||
| | Stock and | | | | | | | | Accumulated | | | | | | | | | | ||
| | Additional | | | | | | | | Other | | Total IBM | | Non- | | | | ||||
| | Paid-in | | Retained | | Treasury | | Comprehensive | | Stockholders’ | | Controlling | | Total | |||||||
(Dollars in millions except per share amounts) | | Capital | | Earnings | | Stock | | Income/(Loss) | | Equity | | Interests | | Equity | |||||||
Equity - April 1, 2021 | | $ | 56,788 | | $ | 162,218 | | $ | (169,360) | | $ | (28,257) | | $ | 21,389 | | $ | 124 | | $ | 21,513 |
Net income plus other comprehensive income/(loss): | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Net income | |
|
| |
| 1,325 | |
|
| |
|
| |
| 1,325 | |
|
| |
| 1,325 |
Other comprehensive income/(loss) | |
|
| |
|
| |
|
| |
| 605 | |
| 605 | |
|
| |
| 605 |
Total comprehensive income/(loss) | |
|
| |
|
| |
|
| |
|
| | $ | 1,930 | |
|
| | $ | 1,930 |
Cash dividends paid — common stock ($1.64 per share) | |
|
| |
| (1,467) | |
|
| |
|
| |
| (1,467) | |
|
| |
| (1,467) |
Common stock issued under employee plans (2,967,655 shares) | |
| 124 | |
|
| |
|
| |
|
| |
| 124 | |
|
| |
| 124 |
Purchases (1,334,081 shares) and sales (1,163,671 shares) of treasury stock under employee plans — net | |
|
| |
| 11 | |
| (44) | |
|
| |
| (33) | |
|
| |
| (33) |
Changes in noncontrolling interests | |
|
| |
|
| |
|
| |
|
| |
|
| |
| 1 | |
| 1 |
Equity - June 30, 2021 | | $ | 56,912 | | $ | 162,086 | | $ | (169,404) | | $ | (27,652) | | $ | 21,942 | | $ | 125 | | $ | 22,067 |
(Amounts may not add due to rounding.)
(The accompanying notes are an integral part of the financial statements.)
8
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CASH FLOWSEQUITY – (CONTINUED)
(UNAUDITED)
|
| Nine Months Ended September 30, |
| ||||
(Dollars in millions) |
| 2017 |
| 2016 |
| ||
Cash flows from operating activities: |
|
|
|
|
| ||
Net income |
| $ | 6,807 |
| $ | 7,371 |
|
Adjustments to reconcile net income to cash provided by operating activities |
|
|
|
|
| ||
Depreciation |
| 2,231 |
| 2,106 |
| ||
Amortization of intangibles |
| 1,161 |
| 1,148 |
| ||
Stock-based compensation |
| 388 |
| 403 |
| ||
Net (gain)/loss on asset sales and other |
| 92 |
| 100 |
| ||
Changes in operating assets and liabilities, net of acquisitions/divestitures |
| 312 |
| 1,978 | * ** | ||
Net cash provided by operating activities |
| 10,991 |
| 13,105 | * ** | ||
|
|
|
|
|
| ||
Cash flows from investing activities: |
|
|
|
|
| ||
Payments for property, plant and equipment |
| (2,273 | ) | (2,594 | ) | ||
Proceeds from disposition of property, plant and equipment |
| 337 |
| 234 |
| ||
Investment in software |
| (411 | ) | (441 | ) | ||
Acquisition of businesses, net of cash acquired |
| (442 | ) | (5,445 | ) | ||
Divestitures of businesses, net of cash transferred |
| 35 |
| 35 |
| ||
Non-operating finance receivables — net |
| 469 |
| 1,441 | * | ||
Purchases of marketable securities and other investments |
| (3,770 | ) | (4,021 | ) | ||
Proceeds from disposition of marketable securities and other investments |
| 2,778 |
| 3,501 |
| ||
Net cash used in investing activities |
| (3,278 | ) | (7,289 | )* | ||
|
|
|
|
|
| ||
Cash flows from financing activities: |
|
|
|
|
| ||
Proceeds from new debt |
| 9,355 |
| 8,368 |
| ||
Payments to settle debt |
| (6,252 | ) | (5,616 | ) | ||
Short-term borrowings/(repayments) less than 90 days — net |
| (794 | ) | (864 | ) | ||
Common stock repurchases |
| (3,674 | ) | (2,632 | ) | ||
Common stock repurchases for tax withholdings |
| (153 | ) | (115 | )** | ||
Common stock transactions — other |
| 137 |
| 166 |
| ||
Cash dividends paid |
| (4,119 | ) | (3,927 | ) | ||
Net cash used in financing activities |
| (5,499 | ) | (4,619 | )** | ||
|
|
|
|
|
| ||
Effect of exchange rate changes on cash and cash equivalents |
| 875 |
| 155 |
| ||
Net change in cash and cash equivalents |
| 3,089 |
| 1,352 |
| ||
|
|
|
|
|
| ||
Cash and cash equivalents at January 1 |
| 7,826 |
| 7,686 |
| ||
Cash and cash equivalents at September 30 |
| $ | 10,915 |
| $ | 9,039 |
|
| | | | | | | | | | | | | | | | | | | | | |
| | Common | | | | | | | | | | | | | | | | | | ||
| | Stock and | | | | | | | | Accumulated | | | | | | | | | | ||
| | Additional | | | | | | | | Other | | Total IBM | | Non- | | | | ||||
| | Paid-in | | Retained | | Treasury | | Comprehensive | | Stockholders’ | | Controlling | | Total | |||||||
(Dollars in millions except per share amounts) |
| Capital |
| Earnings |
| Stock |
| Income/(Loss) |
| Equity |
| Interests |
| Equity | |||||||
Equity - January 1, 2022 | | $ | 57,319 | | $ | 154,209 | | $ | (169,392) | | $ | (23,234) | | $ | 18,901 | | $ | 95 | | $ | 18,996 |
Net income plus other comprehensive income/(loss): | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Net income | |
|
| |
| 2,125 | |
|
| |
|
| |
| 2,125 | |
|
| |
| 2,125 |
Other comprehensive income/(loss) | |
|
| |
|
| |
|
| |
| 1,066 | |
| 1,066 | |
|
| |
| 1,066 |
Total comprehensive income/(loss) | |
|
| |
|
| |
|
| |
|
| | $ | 3,191 | |
|
| | $ | 3,191 |
Cash dividends paid — common stock ($3.29 per share) | |
|
| |
| (2,963) | |
|
| |
|
| |
| (2,963) | |
|
| |
| (2,963) |
Common stock issued under employee plans (5,960,724 shares) | |
| 420 | |
|
| |
|
| |
|
| |
| 420 | |
|
| |
| 420 |
Purchases (2,319,484 shares) and sales (1,470,514 shares) of treasury stock under employee plans — net | |
|
| |
| (11) | |
| (130) | |
|
| |
| (141) | |
|
| |
| (141) |
Other equity | |
| 63 | |
| (63) | |
|
| |
|
| |
| 0 | |
|
| |
| 0 |
Changes in noncontrolling interests | |
|
| |
|
| |
|
| |
|
| |
|
| |
| (27) | |
| (27) |
Equity - June 30, 2022 | | $ | 57,802 | | $ | 153,298 | | $ | (169,522) | | $ | (22,169) | | $ | 19,409 | | $ | 67 | | $ | 19,476 |
* Revised classification of certain financing receivables.
** Reclassified to reflect adoption of the FASB guidance on share-based compensation.
| | | | | | | | | | | | | | | | | | | | | |
|
| Common |
| | |
| | |
| |
| | |
| | |
| | | ||
| | Stock and | | | | | | | | Accumulated | | | | | | | | | | ||
| | Additional | | | | | | | | Other | | Total IBM | | Non- | | | | ||||
| | Paid-in | | Retained | | Treasury | | Comprehensive | | Stockholders’ | | Controlling | | Total | |||||||
(Dollars in millions except per share amounts) | | Capital | | Earnings | | Stock | | Income/(Loss) | | Equity | | Interests | | Equity | |||||||
Equity - January 1, 2021 | | $ | 56,556 | | $ | 162,717 | | $ | (169,339) | | $ | (29,337) | | $ | 20,597 | | $ | 129 | | $ | 20,727 |
Net income plus other comprehensive income/(loss): | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Net income | |
|
| |
| 2,280 | |
|
| |
|
| |
| 2,280 | |
|
| |
| 2,280 |
Other comprehensive income/(loss) | |
|
| |
|
| |
|
| |
| 1,685 | |
| 1,685 | |
|
| |
| 1,685 |
Total comprehensive income/(loss) | |
|
| |
|
| |
|
| |
|
| | $ | 3,965 | |
|
| | $ | 3,965 |
Cash dividends paid — common stock ($3.27 per share) | |
|
| |
| (2,924) | |
|
| |
|
| |
| (2,924) | |
|
| |
| (2,924) |
Common stock issued under employee plans (4,013,839 shares) | |
| 355 | |
|
| |
|
| |
|
| |
| 355 | |
|
| |
| 355 |
Purchases (1,673,587 shares) and sales (1,326,397 shares) of treasury stock under employee plans — net | |
|
| |
| 13 | |
| (65) | |
|
| |
| (51) | |
|
| |
| (51) |
Changes in noncontrolling interests | |
|
| |
|
| |
|
| |
|
| |
|
| |
| (4) | |
| (4) |
Equity - June 30, 2021 | | $ | 56,912 | | $ | 162,086 | | $ | (169,404) | | $ | (27,652) | | $ | 21,942 | | $ | 125 | | $ | 22,067 |
(Amounts may not add due to rounding.)
(The accompanying notes are an integral part of the financial statements.)
9
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIESCONSOLIDATED STATEMENT OF CHANGES IN EQUITY(UNAUDITED)
|
| Common |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
|
| Stock and |
|
|
|
|
| Accumulated |
|
|
|
|
|
|
| |||||||
|
| Additional |
|
|
|
|
| Other |
| Total IBM |
| Non- |
|
|
| |||||||
|
| Paid-in |
| Retained |
| Treasury |
| Comprehensive |
| Stockholders’ |
| Controlling |
| Total |
| |||||||
(Dollars in millions) |
| Capital |
| Earnings |
| Stock |
| Income/(Loss) |
| Equity |
| Interests |
| Equity |
| |||||||
Equity - January 1, 2017 |
| $ | 53,935 |
| $ | 152,759 |
| $ | (159,050 | ) | $ | (29,398 | ) | $ | 18,246 |
| $ | 146 |
| $ | 18,392 |
|
Cumulative effect of change in accounting principle * |
|
|
| 102 |
|
|
|
|
| 102 |
|
|
| 102 |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Net income |
|
|
| 6,807 |
|
|
|
|
| 6,807 |
|
|
| 6,807 |
| |||||||
Other comprehensive income/(loss) |
|
|
|
|
|
|
| 1,877 |
| 1,877 |
|
|
| 1,877 |
| |||||||
Total comprehensive income/(loss) |
|
|
|
|
|
|
|
|
| $ | 8,684 |
|
|
| $ | 8,684 |
| |||||
Cash dividends paid — common stock |
|
|
| (4,119 | ) |
|
|
|
| (4,119 | ) |
|
| (4,119 | ) | |||||||
Common stock issued under employee plans (3,372,586 shares) |
| 460 |
|
|
|
|
|
|
| 460 |
|
|
| 460 |
| |||||||
Purchases (960,186 shares) and sales (363,335 shares) of treasury stock under employee plans — net |
|
|
| 15 |
| (106 | ) |
|
| (91 | ) |
|
| (91 | ) | |||||||
Other treasury shares purchased, not retired (22,851,760 shares) |
|
|
|
|
| (3,655 | ) |
|
| (3,655 | ) |
|
| (3,655 | ) | |||||||
Changes in noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
| (16 | ) | (16 | ) | |||||||
Equity - September 30, 2017 |
| $ | 54,395 |
| $ | 155,565 |
| $ | (162,812 | ) | $ | (27,521 | ) | $ | 19,627 |
| $ | 130 |
| $ | 19,757 |
|
|
| Common |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
|
| Stock and |
|
|
|
|
| Accumulated |
|
|
|
|
|
|
| |||||||
|
| Additional |
|
|
|
|
| Other |
| Total IBM |
| Non- |
|
|
| |||||||
|
| Paid-in |
| Retained |
| Treasury |
| Comprehensive |
| Stockholders’ |
| Controlling |
| Total |
| |||||||
(Dollars in millions) |
| Capital |
| Earnings |
| Stock |
| Income/(Loss) |
| Equity |
| Interests |
| Equity |
| |||||||
Equity - January 1, 2016 |
| $ | 53,262 |
| $ | 146,124 |
| $ | (155,518 | ) | $ | (29,607 | ) | $ | 14,262 |
| $ | 162 |
| $ | 14,424 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Net income |
|
|
| 7,371 |
|
|
|
|
| 7,371 |
|
|
| 7,371 |
| |||||||
Other comprehensive income/(loss) |
|
|
|
|
|
|
| 1,442 |
| 1,442 |
|
|
| 1,442 |
| |||||||
Total comprehensive income/(loss) |
|
|
|
|
|
|
|
|
| $ | 8,813 |
|
|
| $ | 8,813 |
| |||||
Cash dividends paid — common stock |
|
|
| (3,927 | ) |
|
|
|
| (3,927 | ) |
|
| (3,927 | ) | |||||||
Common stock issued under employee plans (3,370,992 shares) |
| 513 |
|
|
|
|
|
|
| 513 |
|
|
| 513 |
| |||||||
Purchases (787,805 shares) and sales (336,480 shares) of treasury stock under employee plans — net |
|
|
| 16 |
| (72 | ) |
|
| (56 | ) |
|
| (56 | ) | |||||||
Other treasury shares purchased, not retired (17,793,841 shares) |
|
|
|
|
| (2,579 | ) |
|
| (2,579 | ) |
|
| (2,579 | ) | |||||||
Changes in other equity |
| (16 | ) | 0 |
|
|
|
|
| (17 | ) |
|
| (17 | ) | |||||||
Changes in noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
| (12 | ) | (12 | ) | |||||||
Equity - September 30, 2016 |
| $ | 53,759 |
| $ | 149,585 |
| $ | (158,170 | ) | $ | (28,164 | ) | $ | 17,010 |
| $ | 149 |
| $ | 17,159 |
|
* Reflects the adoption of the FASB guidance on intra-entity transfers of assets in the first-quarter 2017.
(Amounts may not add due to rounding.)
(The accompanying notes are an integral part of the financial statements.)
Notes to Consolidated Financial Statements:Statements
1. Basis of Presentation:
1. Basis of Presentation:The accompanying Consolidated Financial Statements and footnotes of the International Business Machines Corporation (IBM or the company) have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The financial statements and footnotes are unaudited. In the opinion of the company’s management, these statements include all adjustments, which are only of a normal recurring nature, necessary to present a fair statement of the company’s results of operations, financial position and cash flows.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amount of assets, liabilities, revenue, costs, expenses and other comprehensive income/(loss) that are reported in the Consolidated Financial Statements and accompanying disclosures. These estimates are based on management’s best knowledge of current events, historical experience, actions that the company may undertake in the future and on various other assumptions that are believed to be reasonable under the circumstances. As a result, actual results may be different from these estimates. Refer
On November 3, 2021, the company completed the separation of its managed infrastructure services unit into a new public company with the distribution of 80.1 percent of the outstanding common stock of Kyndryl Holdings, Inc. (Kyndryl) to IBM stockholders on a pro rata basis. To effect the company’s 2016 Annual Reportseparation, IBM stockholders received one share of Kyndryl common stock for every five shares of IBM common stock held at the close of business on pages 71October 25, 2021, the record date for the distribution. The company retained 19.9 percent of the shares of Kyndryl common stock immediately following the separation with the intent to 74,dispose of such shares within twelve months after the distribution. The company accounts for the retained Kyndryl common stock as a discussionfair value equity investment included within prepaid expenses and other current assets in the Consolidated Balance Sheet with subsequent fair value changes included in other (income) and expense in the Consolidated Income Statement. On May 23, 2022, the company transferred 22,301,536 (22.3 million) shares of Kyndryl common stock, equal to 9.95 percent or half of the company’s critical accounting estimates.
19.9 percent retained interest, to a third-party financial institution pursuant to an exchange agreement. Refer to note 8, “Financial Assets & Liabilities,” for additional information.
The company revisedaccounting requirements for reporting the classificationseparation of certain financing receivablesKyndryl as a discontinued operation were met when the separation wascompleted. Accordingly, the historical results of Kyndryl are presented as discontinued operations and, as such, have been excludedfrom continuing operations and segment results for the three and nine months ended September 30, 2016, decreasing net cash provided by operating activities and net cash used in investing activities in the amount of $99 million and $311 million, respectively, which the company concluded to be immaterial to theall periods presented. The twelve-month revisionRefer to note 3, “Separation of Kyndryl,” for the period ended December 31, 2016 was provided in the company’s 2016 Annual Report on page 26. There was no impact to total GAAP cash flows or free cash flow.
additional information.
In the first quarter of 2017,2022, the company realigned its management structure to reflect the planned divestiture of its healthcare software assets which was completed in the second quarter of 2022. This change impacted the company’s Software segment and Other–divested businesses category. In the fourth quarter of 2021, immediately prior to the separation of Kyndryl, the company made a number of changes to its organizational structure and management system. These changes impacted the company’s reportable segments but did not impact the Consolidated Financial Statements. Refer to note 5, “Segments,” for additional information on the company’s reportable segments. The segments are reported on a benefit from income taxes of $329 million, and its effective tax rate was (23.1) percent. This was primarily driven by a discrete tax benefit of $582 million from a first-quarter 2017 transaction accountedcomparable basis for under the new Financial Accounting Standards Board (FASB) guidance related to intra-entity transfers of assets. This benefit was partially offset by a discrete tax charge related to foreign audit activity of $99 million. The company had additional discrete tax benefits of $170 million in second-quarter 2017. all periods.
For the ninethree and six months ended SeptemberJune 30, 2017,2022, the company reported a provision for income taxes of $120$257 million and $218 million, respectively, and its effective tax rate was 1.714.9 percent primarily asand 9.3 percent, respectively. The company reported a result oftax benefit in the first quarter of 2022 primarily due to the impacts of foreign tax credit regulations, geographical mix of income, incentives and second quarter discrete items.changes in unrecognized tax benefits. For the ninethree and six months ended SeptemberJune 30, 2016,2021, the company reported a provision for income taxes of $101 million and a benefit from income taxes of $31$58 million, respectively, and its effective tax rate was (0.4) percent.11.1 percent and (5.0) percent, respectively. The negative effectivecompany reported a tax ratebenefit in the comparable periodfirst quarter of 20162021 which was due toprimarily driven by the resolution of a long-standing Japancertain tax matter in February 2016. Refer to note 2, “Accounting Changes,” and the Taxes section of the Management Discussion for additional information.audits.
Noncontrolling interest amounts of $4.4$5.5 million and $3.1$4.2 million, net of tax, for the three months ended SeptemberJune 30, 20172022 and 2016,2021, respectively, and $11.5$10.5 million and $7.5$9.1 million, net of tax, for the ninesix months ended SeptemberJune 30, 20172022 and 2016,2021, respectively, are included as a reduction within other (income) and expense in the Consolidated StatementIncome Statement.
10
Notes to Consolidated Financial Statements — (continued)
Interim results are not necessarily indicative of financial results for a full year. The information included in this
Form 10-Q should be read in conjunction with the company’s 20162021 Annual Report.
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. Certain prior yearprior-period amounts have been reclassified to conform to the current yearcurrent-period presentation. This is annotated where applicable.
In addition, in the first quarter of 2022, an adjustment of $63 million was recorded between common stock and retained earnings related to the issuance of treasury stock in connection with certain previously issued stock-based compensation awards and is reflected in the Consolidated Balance Sheet and Consolidated Statement of Equity at June 30, 2022.
2. Accounting Changes:
New Standards to be Implemented
In August 2017, the FASB issuedDisclosures about Government Assistance
Standard/Description–Issuance date: November 2021. This guidance requires an entity to simplify the application of current hedgeprovide certain annual disclosures about government assistance received and accounted for by applying a grant or contribution accounting in certain areas, better portray the economic results of an entity’s risk management activities in its financial statementsmodel by analogy.
Effective Date and make targeted improvements to presentation and disclosure requirements. Adoption Considerations–The guidance is effective January 1, 2019 withfor annual disclosures beginning in 2022 and early adoption was permitted. The company plans towill adopt the guidance as of the effective date.
Effect on Financial Statements or Other Significant Matters–As the guidance is a change to disclosures only, the company does not expect it to have a material impact in the consolidated financial results.
Troubled Debt Restructurings and Vintage Disclosures
Standard/Description–Issuance date: March 2022. This eliminates the accounting guidance for troubled debt restructurings and requires an entity to apply the general loan modification guidance to all loan modifications, including those made to customers experiencing financial difficulty, to determine whether the modification results in a new loan or a continuation of an existing loan. The guidance also requires presenting current period gross write-offs by year of origination for financing receivables and net investment in leases.
Effective Date and Adoption Considerations–The amendment is effective January 1, 2018. 2023 and early adoption is permitted. The company will adopt the guidance as of the effective date.
Effect on Financial Statements or Other Significant Matters–The guidance is not expected to have a material impact in the consolidated financial results.
In March 2017,Standards Implemented
Lessors–Certain Leases with Variable Lease Payments
Standard/Description–Issuance date: July 2021. This guidance modifies a lessor’s accounting for certain leases with variable lease payments that resulted in the FASB issued guidance that impactsrecognition of a day-one loss even if the presentation of net periodic pension and postretirement benefit costs. Underlessor expected the guidance, the service cost component of net benefit cost will continuearrangement to be presented in the same line itemsprofitable overall. The amendment requires these types of lease contracts to be classified as other employee compensation costs, unless eligible for capitalization in the Consolidated Statementoperating leases which eliminates any recognition of Financial Position. a day-one loss.
Effective Date and Adoption Considerations–The other components of net benefit costs will be presented separately from service cost as non-operating costs in the Consolidated Statement of Earnings or Notes to the Consolidated Financial Statements. The guidance is effective
Notes to Consolidated Financial Statements — (continued)
January 1, 2018 with early adoption permitted. The company will adopt the guidance as of the effective date. The guidance is primarily a change in financial statement presentation and is not expected to have a material impact in the consolidated financial results.
In June 2016, the FASB issued guidance for credit impairment based on an expected loss model rather than an incurred loss model. The guidance requires the consideration of all available relevant information when estimating expected credit losses, including past events, current conditions and forecasts and their implications for expected credit losses. The guidance isamendment was effective January 1, 2020 with a one year early adoption permitted. The company is evaluating the impact of the new guidance.
In February 2016, the FASB issued guidance which changes the accounting for leases. The guidance requires lessees to recognize right-of-use assets and lease liabilities for most leases in the Consolidated Statement of Financial Position. The guidance makes some changes to lessor accounting, including the elimination of the use of third-party residual value guarantee insurance in the capital lease test, and overall aligns with the new revenue recognition guidance. The guidance also requires qualitative and quantitative disclosures to assess the amount, timing and uncertainty of cash flows arising from leases. The guidance is effective January 1, 20192022 and early adoption is permitted. The company will adopt the guidance as of the effective date. A cross-functional implementation team has been established which is evaluating the lease portfolio, system, process and policy change requirements. The company is currently evaluating the impact of the new guidance on its consolidated financial results and expects it will have a material impact on the Consolidated Statement of Financial Position. The company’s operating lease commitments were $6.9 billion at December 31, 2016. In 2016, the use of third-party residual value guarantee insurance resulted in the company recognizing $220 million of sales-type lease revenue that would otherwise have been recognized over the lease period as operating lease revenue.
In January 2016, the FASB issued guidance which addresses aspects of recognition, measurement, presentation and disclosure of financial instruments. Certain equity investments will be measured at fair value with changes recognized in net income. The amendment also simplifies the impairment test of equity investments that lack readily determinable fair value. The guidance is effective January 1, 2018 and early adoption is not permitted except for limited provisions. The guidance is not expected to have a material impact in the consolidated financial results.
The FASB issued guidance on the recognition of revenue from contracts with customers in May 2014 with amendments in 2015 and 2016. Revenue recognition will depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented, or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). The company will adopt the guidance on January 1, 2018 and apply the cumulative catch-up transition method. The transition adjustment to be recorded to stockholders’ equity upon adoption of the new standard is not expected to be material.
Given the scope of work required to implement the recognition and disclosure requirements under the new standard, the company began its assessment process in 2014 and has identified changes to policy, processes, systems and controls. This also includes the assessment of data availability and presentation necessary to meet the additional disclosure requirements of the guidance in the Notes to the Consolidated Financial Statements.
The company expects revenue recognition for its broad portfolio of hardware, software and services offerings to remain largely unchanged. However, the guidance is expected to change the timing of revenue recognition in certain areas, including accounting for certain software licenses. These impacts are not expected to be material. The company expects to continue to recognize revenue for term license (recurring license charge) software arrangements on a monthly basis over the period that the client is entitled to use the license due to the contractual terms in these arrangements.
Since the company currently expenses sales commissions as incurred, the requirement in the new standard to capitalize certain in-scope sales commissions will result in an accounting change for the company. However, the impact to the consolidated financial statements is not expected to be material, with no impact to cash flows.
The company continues to assess all potential impacts of the guidance and given normal ongoing business dynamics, preliminary conclusions are subject to change.
Notes to Consolidated Financial Statements — (continued)
Standards Implemented
In January 2017, the FASB issued guidance which clarifies the definition of a business. The guidance provides a more robust framework to use in determining when a set of assets and activities acquired or sold is a business. The guidance is effective January 1, 2018 and early adoption is permitted. The company adopted the guidance effective January 1, 2017, and it did not have a material impact in the consolidated financial results.
In October 2016, the FASB issued guidance which requires an entity to recognize the income tax consequences of intra-entity transfers of assets, other than inventory, at the time of transfer. Assets within the scope of the guidance include intellectual property and property, plant and equipment. The guidance is effective January 1, 2018 and early adoption iswas permitted. The company adopted the guidance on January 1, 2017 using the required modified retrospective method. At adoption, $95 million and $47 million were reclassified from investments and sundry assets and prepaid expenses and other current assets, respectively into retained earnings. Additionally, net deferred taxes of $244 million were established in deferred taxes in the Consolidated Statement of Financial Position, resulting in a cumulative-effect net credit to retained earnings of $102 million. In January 2017, the company had one transaction that generated a $582 million benefit to income tax expense, income from continuing operations and net income and a benefit to both basic and diluted earnings per share of $0.62 per share for the nine months ended September 30, 2017. There was no impact in the consolidated financial results for the three months ended September 30, 2017. The ongoing impact of this guidance will be dependent on any transaction that is within its scope.
In March 2016, the FASB issued guidance which changes the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification in the Consolidated Statement of Cash Flows. The guidance was effective and adopted by the company on January 1, 2017, and it did not have a material impact in the Consolidated Statement of Financial Position. The ongoing impact of the guidance could result in increased volatility in the provision for income taxes and earnings per share in the Consolidated Statement of Earnings, depending on the company’s share price at exercise or vesting of share-based awards compared to grant date, however these impacts are not expected to be material. These impacts are recorded on a prospective basis. See note 5, “Stock-Based Compensation,” for additional information. The company continues to estimate forfeitures in conjunction with measuring stock-based compensation cost. The guidance also requires cash payments on behalf of employees for shares directly withheld for taxes to be presented as financing outflows in the Consolidated Statement of Cash Flows. Prior to adoption, the company reported this activity as an operating cash outflow and as a result, prior periods have been reclassified as required. The FASB also issued guidance in May 2017, which relates to the accounting for modifications of share-based payment awards. The company adopted the guidance in the second quarter of 2017. The guidance had no impact in the consolidated financial results.
In September 2015, the FASB issued guidance eliminating the requirement that an acquirer in a business combination account for a measurement-period adjustment retrospectively. Instead, an acquirer will recognize a measurement-period adjustment during the period in which the amount of the adjustment is determined. In addition, the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognizedbasis as of the acquisition date should be presented separatelyeffective date.
Effect on the face of the income statementFinancial Statements or disclosed in the notes. The guidance was effective January 1, 2016 on a prospective basis. Other Significant Matters–The guidance did not have a material impact in the consolidated financial results.
11
In May 2015,Notes to Consolidated Financial Statements — (continued)
Revenue Contracts with Customers Acquired in a Business Combination
Standard/Description–Issuance date: October 2021. This guidance requires that an acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with revenue guidance, as if it had originated the FASB issued guidance which removed the requirement to categorize within the fair value hierarchy all investments for which fair valuecontracts. Deferred revenue acquired in a business combination is measured using the net asset value per share practical expedient. The amendments also removed the requirement to make certain disclosures for all investments that are eligibleno longer required to be measured at its fair value, but rather will generally be recognized at the same basis as the acquiree.
Effective Date and Adoption Considerations–The amendment is effective January 1, 2023 and early adoption is permitted including adoption in an interim period. The company adopted the guidance as of October 1, 2021 using the net asset value per share practical expedient. Rather, those disclosures are limitedretrospective transition method whereby the new guidance was applied to investmentsall business combinations that occurred on or after January 1, 2021.
Effect on Financial Statements or Other Significant Matters–The guidance did not have a material impact in the consolidated financial results. The impact of the guidance in IBM’s future financial results will be dependent on the nature and size of its acquisitions.
Simplifying the Accounting for whichIncome Taxes
Standard/Description–Issuance date: December 2019. This guidance simplifies various aspects of income tax accounting by removing certain exceptions to the entity has electedgeneral principle of the guidance and also clarifies and amends existing guidance to measure the fair value using that practical expedient. improve consistency in application.
Effective Date and Adoption Considerations–The guidance was effective January 1, 2016.2021 and early adoption was permitted. The guidance was a change in disclosure only and did not have an impact in the consolidated financial results.
In April 2015, the FASB issued guidance about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a services contract. All software licenses recognized under this guidance will be accounted for consistent with other licenses of intangible assets. The guidance was effective January 1, 2016 and the company adopted itthe guidance on a prospective basis. basis as of the effective date.
Effect on Financial Statements or Other Significant Matters–The guidance did not have a material impact in the consolidated financial results.
3. Separation of Kyndryl:
On November 3, 2021, the company completed the separation of its managed infrastructure services unit into a new public company with the distribution of 80.1 percent of the outstanding shares of Kyndryl to IBM stockholders on a pro rata basis. The company retained 19.9 percent of the shares of Kyndryl common stock. On May 23, 2022, the company transferred 22.3 million shares, equal to 9.95 percent or half of the company’s 19.9 percent retained interest, to a third-party financial institution pursuant to an exchange agreement. Refer to note 8, “Financial Assets & Liabilities,” for additional information.
The historical results of Kyndryl have been presented as discontinued operations and, as such, have been excluded from continuing operations and segment results for all periods presented. The company’s presentation of discontinued operations excludes general corporate overhead costs which were historically allocated to Kyndryl, consistent with the company’s management system, that did not meet the requirements to be presented in discontinued operations in 2021. Such allocations include labor and non-labor expenses related to IBM’s corporate support functions (e.g., finance, accounting, tax, treasury, IT, HR, legal, among others) that historically provided support to Kyndryl and transferred to Kyndryl at separation. In addition, discontinued operations excludes the historical intercompany purchases and sales between IBM and Kyndryl that were eliminated in consolidation.
IBM will provide transition services to Kyndryl predominantly consisting of information technology services for a period no longer than two years after the separation. The impact of these transition services on the company’s Consolidated Financial Statements for the three and six months ended June 30, 2022 was not material.
IBM and Kyndryl entered into various commercial agreements pursuant to which Kyndryl will purchase hardware, software and services from IBM and under which IBM will receive hosting and information infrastructure services from Kyndryl. As part of the separation, IBM has also committed to provide upgraded hardware at no cost to Kyndryl over a two-year period after the separation. IBM recorded an estimate of its obligation under the agreement in other accrued expenses and liabilities in the Consolidated Balance Sheet.
12
Notes to Consolidated Financial Statements — (continued)
The following table presents the major categories of income/(loss) from discontinued operations, net of tax:
| | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | ||||||||
(Dollars in millions) |
| 2022 |
| 2021* | | 2022 |
| 2021* | ||||
Revenue | | $ | (11) | | $ | 4,527 | | $ | 7 | | $ | 9,070 |
Cost of sales | | | (4) | | | 3,375 | | | 17 | | | 6,741 |
Selling, general and administrative expense | | | 73 | | | 485 | | | 66 | | | 972 |
RD&E and Other (income) and expense | | | 0 | | | 26 | | | (69) | | | 55 |
Income/(loss) from discontinued operations before income taxes | | $ | (80) | | $ | 641 | | $ | (7) | | $ | 1,302 |
Provision for/(benefit from) income taxes | | | (7) | | | 126 | | | (5) | | | 235 |
Income/(loss) from discontinued operations, net of tax | | $ | (73) | | $ | 515 | | $ | (2) | | $ | 1,067 |
* | Excludes intercompany transactions between IBM and Kyndryl and general corporate overhead costs transferred to Kyndryl as discussed above. |
Loss from discontinued operations, net of tax, for the three months ended June 30, 2022 primarily reflects the net impact of changes in separation-related estimates and the settlement of assets and liabilities in accordance with the separation and distribution agreement. Loss from discontinued operations, net of tax, for the six months ended June 30, 2022 reflects the same drivers as above and also includes a joint venture historically managed by Kyndryl, which did not transfer at separation due to the transfer being subject to regulatory approval. Upon receiving regulatory approval in the first quarter of 2022, the company sold its majority shares in the joint venture to Kyndryl, resulting in a pre-tax gain on sale of $68 million.
Separation costs of $2 million and $146 million incurred during the three months ended June 30, 2022 and 2021, respectively, and $5 million and $196 million incurred during the six months ended June 30, 2022 and 2021, respectively, are included in income/(loss) from discontinued operations, net of tax, in the Consolidated Income Statement. These charges primarily relate to transaction and third-party support costs, business separation and applicable employee retention fees, pension settlement charges and related tax charges.
The following table presents selected financial information related to cash flows from discontinued operations:
| | | | | | | |
|
| Six Months Ended June 30, |
| ||||
(Dollars in millions) | | 2022 | | 2021 | | ||
Net cash provided by/(used in) operating activities | | $ | — | | $ | 1,465 | * |
Net cash provided by/(used in) investing activities | | | 48 | | | (321) | |
* | Excludes intercompany transactions between IBM and Kyndryl and general corporate overhead costs transferred to Kyndryl as discussed above. |
13
Notes to Consolidated Financial Statements — (continued)
4. Revenue Recognition:
Disaggregation of Revenue
The following tables provide details of revenue by major products/service offerings, hybrid cloud revenue, and revenue by geography.
3. Financial Instruments:Revenue by Major Products/Service Offerings
| | | | | | | | | | | | | |
|
| | | |
| | | |
| ||||
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| ||||||||
(Dollars in millions) | | 2022 | | 2021* | | 2022 | | 2021* | | ||||
Hybrid Platform & Solutions | | $ | 4,390 | | $ | 4,208 | | $ | 8,470 | | $ | 8,008 | |
Transaction Processing | | | 1,776 | | | 1,587 | | | 3,468 | | | 2,925 | |
Total Software | | $ | 6,166 | | $ | 5,795 | | $ | 11,938 | | $ | 10,933 | |
Business Transformation | |
| 2,227 | |
| 2,049 | |
| 4,482 | |
| 4,002 | |
Application Operations | |
| 1,653 | |
| 1,514 | |
| 3,272 | |
| 2,989 | |
Technology Consulting | |
| 928 | |
| 814 | |
| 1,884 | |
| 1,649 | |
Total Consulting | | $ | 4,809 | | $ | 4,378 | | $ | 9,637 | | $ | 8,641 | |
Hybrid Infrastructure | |
| 2,760 | |
| 2,059 | |
| 4,461 | |
| 3,841 | |
Infrastructure Support | |
| 1,474 | |
| 1,501 | |
| 2,993 | |
| 3,012 | |
Total Infrastructure | | $ | 4,235 | | $ | 3,560 | | $ | 7,453 | | $ | 6,853 | |
Financing** | |
| 146 | |
| 209 | |
| 300 | |
| 417 | |
Other | |
| 180 | |
| 277 | |
| 404 | |
| 561 | |
Total revenue | | $ | 15,535 | | $ | 14,218 | | $ | 29,732 | | $ | 27,405 | |
* | Recast to reflect segment changes. |
** Contains lease and loan/working capital financing arrangements which are not subject to the guidance on revenue from contracts with customers.
Hybrid Cloud Revenue by Segment
| | | | | | | | | | | | |
|
| Three Months Ended June 30, |
| Six Months Ended June 30, | ||||||||
(Dollars in millions) | | 2022 | | 2021* |
| 2022 | | 2021* | ||||
Software | | $ | 2,288 | | $ | 2,015 | | $ | 4,418 | | $ | 3,760 |
Consulting | |
| 2,286 | |
| 1,901 | |
| 4,421 | |
| 3,623 |
Infrastructure | | | 1,220 | | | 981 | | | 1,892 | | | 1,818 |
Other | |
| 69 | |
| 82 | |
| 141 | |
| 169 |
Total | | $ | 5,863 | | $ | 4,979 | | $ | 10,872 | | $ | 9,369 |
* Recast to reflect segment changes.
Revenue by Geography
| | | | | | | | | | | | |
|
| Three Months Ended June 30, |
| Six Months Ended June 30, | ||||||||
(Dollars in millions) | | 2022 | | 2021 |
| 2022 | | 2021 | ||||
Americas | | $ | 8,142 | | $ | 7,122 | | $ | 15,198 | | $ | 13,599 |
Europe/Middle East/Africa | |
| 4,526 | |
| 4,314 | |
| 8,757 | |
| 8,242 |
Asia Pacific | |
| 2,868 | |
| 2,782 | |
| 5,778 | |
| 5,563 |
Total | | $ | 15,535 | | $ | 14,218 | | $ | 29,732 | | $ | 27,405 |
Remaining Performance Obligations
The remaining performance obligation (RPO) disclosure provides the aggregate amount of the transaction price yet to be recognized as of the end of the reporting period and an explanation as to when the company expects to recognize
14
Notes to Consolidated Financial Statements — (continued)
these amounts in revenue. It is intended to be a statement of overall work under contract that has not yet been performed and does not include contracts in which the customer is not committed, such as certain as-a-Service, governmental, term software license and services offerings. The customer is not considered committed when they are able to terminate for convenience without payment of a substantive penalty. The disclosure includes estimates of variable consideration, except when the variable consideration is a sales-based or usage-based royalty promised in exchange for a license of intellectual property. Additionally, as a practical expedient, the company does not include contracts that have an original duration of one year or less. RPO estimates are subject to change and are affected by several factors, including terminations, changes in the scope of contracts, periodic revalidations, adjustment for revenue that has not materialized and adjustments for currency.
At June 30, 2022, the aggregate amount of the transaction price allocated to RPO related to customer contracts that are unsatisfied or partially unsatisfied was $55 billion. Approximately 71 percent of the amount is expected to be recognized as revenue in the subsequent two years, approximately 26 percent in the subsequent three to five years and the balance thereafter.
Revenue Recognized for Performance Obligations Satisfied (or Partially Satisfied) in Prior Periods
For the three and six months ended June 30, 2022, revenue was reduced by $24 million and $28 million, respectively, for performance obligations satisfied (or partially satisfied) in previous periods mainly due to changes in estimates on contracts with cost-to-cost measures of progress.
Reconciliation of Contract Balances
The following table provides information about notes and accounts receivable–trade, contract assets and deferred income balances:
| | | | | | |
|
| At June 30, |
| At December 31, | ||
(Dollars in millions) | | 2022 | | 2021 | ||
Notes and accounts receivable — trade (net of allowances of $213 in 2022 and $218 in 2021) | | $ | 5,867 | | $ | 6,754 |
Contract assets* | |
| 531 | |
| 471 |
Deferred income (current) | |
| 12,522 | |
| 12,518 |
Deferred income (noncurrent) | |
| 3,069 | |
| 3,577 |
* Included within prepaid expenses and other current assets in the Consolidated Balance Sheet.
The amount of revenue recognized during the three and six months ended June 30, 2022 that was included within the deferred income balance at March 31, 2022 and December 31, 2021 was $4.4 billion and $6.8 billion, respectively, and was primarily related to services and software.
The following table provides roll forwards of the notes and accounts receivable–trade allowance for expected credit losses for the six months ended June 30, 2022 and the year ended December 31, 2021:
| | | | | | | | | | | | | |
(Dollars in millions) |
|
| |
|
| |
|
| |
|
| | |
January 1, 2022 | | Additions / (Releases) | | Write-offs | | Foreign currency and other | | June 30, 2022 | |||||
$ | 218 | | $ | 30 | | $ | (22) | | $ | (13) | | $ | 213 |
| | | | | | | | | | | | | |
January 1, 2021 | | Additions / (Releases) | | Write-offs | | Foreign currency and other | | December 31, 2021 | |||||
$ | 260 | | $ | (15) | | $ | (28) | | $ | 1 | | $ | 218 |
The contract assets allowance for expected credit losses was not material in any of the periods presented.
15
Notes to Consolidated Financial Statements — (continued)
5.Segments:
In January 2022, IBM announced the divestiture of its healthcare software assets which closed in the second quarter of 2022. Refer to note 6, “Acquisitions & Divestitures,” for additional information. The company re-aligned its management structure to manage these assets outside of the Software segment prior to the divestiture. Beginning in the first quarter of 2022, the financial results of these assets are presented in Other–divested businesses. In the fourth quarter of 2021, immediately prior to the separation of Kyndryl, the company made a number of changes to its organizational structure and management system to align the company’s operating model to its platform-centric approach to hybrid cloud and AI. With these changes, the company revised its reportable segments, but did not impact its Consolidated Financial Statements.
The following tables reflect the results of continuing operations of the company’s segments consistent with the management and measurement system utilized within the company, and the prior-year periods have been recast to reflect the company’s segment changes in the first quarter of 2022 and the fourth quarter of 2021 described above. Performance measurement is based on pre-tax income from continuing operations. These results are used by the chief operating decision maker, both in evaluating the performance of, and in allocating resources to, each of the segments.
16
Notes to Consolidated Financial Statements — (continued)
SEGMENT INFORMATION
| | | | | | | | | | | | | | | | |
| | | | | | | | | | Total |
| |||||
(Dollars in millions) | | Software | | Consulting | | Infrastructure | | Financing | | Segments |
| |||||
For the three months ended June 30, 2022: |
| |
|
| |
|
| |
|
| |
|
| |
| |
Revenue | | $ | 6,166 | | $ | 4,809 | | $ | 4,235 | | $ | 146 | | $ | 15,355 | |
Pre-tax income from continuing operations | | $ | 1,375 | | $ | 343 | | $ | 757 | | $ | 102 | | $ | 2,577 | |
Revenue year-to-year change | |
| 6.4 | % |
| 9.8 | % |
| 19.0 | % |
| (29.9) | % |
| 10.1 | % |
Pre-tax income year-to-year change | |
| 29.9 | % |
| 26.9 | % |
| 54.8 | % |
| (22.4) | % |
| 32.2 | % |
Pre-tax income margin | |
| 22.3 | % |
| 7.1 | % |
| 17.9 | % |
| 69.7 | % |
| 16.8 | % |
| | | | | | | | | | | | | | | | |
For the three months ended June 30, 2021*: | |
|
| |
|
| |
|
| |
|
| |
|
| |
Revenue | | $ | 5,795 | | $ | 4,378 | | $ | 3,560 | | $ | 209 | | $ | 13,941 | |
Pre-tax income from continuing operations | | $ | 1,059 | | $ | 270 | | $ | 489 | | $ | 131 | | $ | 1,949 | |
Pre-tax income margin | |
| 18.3 | % |
| 6.2 | % |
| 13.7 | % |
| 63.0 | % |
| 14.0 | % |
Reconciliations to IBM as Reported:
| | | | | | | |
(Dollars in millions) |
|
| |
|
| |
|
For the three months ended June 30: | | 2022 | | 2021* |
| ||
Revenue: |
| |
|
| |
| |
Total reportable segments | | $ | 15,355 | | $ | 13,941 | |
Other‒divested businesses | |
| 162 | |
| 197 | |
Other revenue | |
| 18 | |
| 80 | |
Total consolidated revenue | | $ | 15,535 | | $ | 14,218 | |
| | | | | | | |
Pre-tax income from continuing operations: | |
|
| |
|
| |
Total reportable segments | | $ | 2,577 | | $ | 1,949 | |
Amortization of acquired intangible assets | |
| (458) | |
| (456) | |
Acquisition-related (charges)/income | |
| (2) | |
| (18) | |
Non-operating retirement-related (costs)/income | |
| (192) | |
| (317) | |
Kyndryl-related impacts** | | | (145) | |
| — | |
Eliminations of internal transactions | |
| (4) | |
| 5 | |
Other‒divested businesses | |
| 160 | + |
| (50) | |
Unallocated corporate amounts and other | |
| (215) | |
| (202) | |
Total pre-tax income from continuing operations | | $ | 1,722 | | $ | 912 | |
* | Recast to conform to current year presentation. |
** Refer to note 8, “Financial Assets & Liabilities,” for additional information.
+ Includes a gain from the sale of the company’s healthcare software assets. Refer to note 6, “Acquisitions & Divestitures.”
17
Notes to Consolidated Financial Statements — (continued)
SEGMENT INFORMATION
| | | | | | | | | | | | | | | | |
| | | | | | | | | | Total |
| |||||
(Dollars in millions) | | Software | | Consulting | | Infrastructure | | Financing | | Segments |
| |||||
For the six months ended June 30, 2022: |
| |
|
| |
|
| |
|
| |
|
| |
| |
Revenue | | $ | 11,938 | | $ | 9,637 | | $ | 7,453 | | $ | 300 | | $ | 29,328 | |
Pre-tax income from continuing operations | | $ | 2,509 | | $ | 691 | | $ | 956 | | $ | 186 | | $ | 4,342 | |
Revenue year-to-year change | |
| 9.2 | % |
| 11.5 | % |
| 8.8 | % |
| (28.0) | % |
| 9.3 | % |
Pre-tax income year-to-year change | |
| 46.2 | % |
| 26.3 | % |
| 22.5 | % |
| (18.9) | % |
| 32.6 | % |
Pre-tax income margin | |
| 21.0 | % |
| 7.2 | % |
| 12.8 | % |
| 62.0 | % |
| 14.8 | % |
| | | | | | | | | | | | | | | | |
For the six months ended June 30, 2021*: | |
|
| |
|
| |
|
| |
|
| |
|
| |
Revenue | | $ | 10,933 | | $ | 8,641 | | $ | 6,853 | | $ | 417 | | $ | 26,843 | |
Pre-tax income from continuing operations | | $ | 1,717 | | $ | 547 | | $ | 780 | | $ | 229 | | $ | 3,274 | |
Pre-tax income margin | |
| 15.7 | % |
| 6.3 | % |
| 11.4 | % |
| 55.0 | % |
| 12.2 | % |
Reconciliations to IBM as Reported:
| | | | | | | |
(Dollars in millions) |
|
| |
|
| |
|
For the six months ended June 30: | | 2022 | | 2021* |
| ||
Revenue: |
| |
|
| |
| |
Total reportable segments | | $ | 29,328 | | $ | 26,843 | |
Other‒divested businesses | |
| 316 | |
| 394 | |
Other revenue | |
| 88 | |
| 167 | |
Total consolidated revenue | | $ | 29,732 | | $ | 27,405 | |
| | | | | | | |
Pre-tax income from continuing operations: | |
|
| |
|
| |
Total reportable segments | | $ | 4,342 | | $ | 3,274 | |
Amortization of acquired intangible assets | |
| (919) | |
| (903) | |
Acquisition-related charges | |
| (9) | |
| (34) | |
Non-operating retirement-related (costs)/income | |
| (394) | |
| (649) | |
Kyndryl-related impacts** | | | (367) | | | — | |
Eliminations of internal transactions | |
| (15) | |
| (4) | |
Other‒divested businesses | |
| 109 | + |
| (65) | |
Unallocated corporate amounts | |
| (403) | |
| (464) | |
Total pre-tax income from continuing operations | | $ | 2,345 | | $ | 1,155 | |
* | Recast to conform to current year presentation. |
** | Refer to note 8, “Financial Assets & Liabilities,” for additional information. |
+ Includes a gain from the sale of the company’s healthcare software assets. Refer to note 6, “Acquisitions & Divestitures.”
18
Notes to Consolidated Financial Statements — (continued)
6. Acquisitions & Divestitures:
Acquisitions
Purchase price consideration for all acquisitions was paid primarily in cash. All acquisitions, except as otherwise stated, were for 100 percent of the acquired business and are reported in the Consolidated Statement of Cash Flows, net of acquired cash and cash equivalents.
During the six months ended June 30, 2022, the company completed 5 acquisitions at an aggregate cost of $1,101 million. Each acquisition is expected to enhance the company’s portfolio of products and services capabilities and further advance IBM’s hybrid cloud and AI strategy.
Acquisition | Segment | Description of Acquired Business |
First Quarter | ||
Envizi | Software | Data and analytics software provider for environmental performance management |
| | |
Sentaca | Consulting | Telco consulting services and solutions provider specializing in automation, cloud migration, and future networks for telecommunication providers |
| | |
Neudesic | Consulting | Application development and cloud computing services company |
Second Quarter | | |
| | |
Randori | Software | Leading attack surface management (ASM) and cybersecurity provider |
| | |
Databand.ai | Software | Proactive data observability platform that isolates data errors and issues to alert relevant stakeholders |
At June 30, 2022, the remaining cash to be remitted by the company related to certain first and second quarter acquisitions was $147 million, most of which is expected to be paid by the second quarter of 2023.
The following table reflects the purchase price related to these acquisitions and the resulting purchase price allocations as of June 30, 2022.
19
Notes to Consolidated Financial Statements — (continued)
| | | | | |
| | Amortization | | Total | |
(Dollars in millions) |
| Life (in years) | | Acquisitions | |
Current assets | | | | $ | 60 |
Property, plant and equipment/noncurrent assets | | | |
| 3 |
Intangible assets: | | | | | |
Goodwill |
| N/A | |
| 903 |
Client relationships |
| 7 | |
| 151 |
Completed technology |
| 4-7 | |
| 87 |
Trademarks |
| 2-3 | |
| 8 |
Total assets acquired | | | | $ | 1,210 |
Current liabilities | | | |
| 59 |
Noncurrent liabilities | | | |
| 50 |
Total liabilities assumed | | | | $ | 110 |
Total purchase price | | | | $ | 1,101 |
N/A – not applicable
The goodwill generated is primarily attributable to the assembled workforce of the acquired businesses and the increased synergies expected to be achieved from the integration of the acquired businesses into the company’s various integrated solutions and services, neither of which qualifies as an amortizable intangible asset.
The overall weighted-average useful life of the identified amortizable intangible assets acquired was 6.7 years. Goodwill of $461 million and $442 million was assigned to the Consulting and Software segments, respectively. It is expected that NaN of the goodwill will be deductible for tax purposes.
The identified intangible assets will be amortized on a straight-line basis over their useful lives, which approximates the pattern that the assets’ economic benefits are expected to be consumed over time.
The valuation of the assets acquired and liabilities assumed is subject to revision. If additional information becomes available, the company may further revise the purchase price allocation as soon as practical, but no later than one year from the acquisition date; however, material changes are not expected.
Divestitures
Healthcare Software Assets — In January 2022, IBM and Francisco Partners (Francisco) signed a definitive agreement in which Francisco would acquire IBM’s healthcare software assets reported within Other–divested businesses (Other) for $1,065 million. Refer to note 5, “Segments,” for additional information. The assets include Health Insights, MarketScan, Clinical Development, Social Program Management, Micromedex, and imaging software offerings. In addition, IBM is providing Francisco with transition services including IT and other services. The closing completed for the U.S. and Canada on June 30, 2022. The company expects subsequent closings for the remaining countries to be completed by the first quarter of 2023.
On June 30, 2022, the company received a cash payment of $1,065 million and recognized a $232 million pre-tax gain on sale in other (income) and expense in the Consolidated Income Statement. The cash proceeds from the sale were included primarily in cash from investing activities in the Consolidated Statement of Cash Flows. Any pre-tax gains related to the subsequent wave closings are not expected to be material. The total gain on sale may change in the future due to changes in transaction estimates, however, such changes are not expected to be material.
Other Divestitures — In the first quarter of 2022, the Infrastructure segment completed 1 divestiture. The financial terms related to this transaction were not material.
20
Notes to Consolidated Financial Statements — (continued)
7. Earnings Per Share of Common Stock:
The following tables provide the computation of basic and diluted earnings per share of common stock for the three and six months ended June 30, 2022 and 2021.
| | | | | | |
(Dollars in millions except per share amounts) | | | | | | |
For the three months ended June 30: |
| 2022 |
| 2021 | ||
Number of shares on which basic earnings per share is calculated: |
| |
|
| |
|
Weighted-average shares outstanding during period |
| | 901,470,793 |
| | 895,043,024 |
Add — Incremental shares under stock-based compensation plans |
| | 7,518,749 |
| | 7,431,661 |
Add — Incremental shares associated with contingently issuable shares |
| | 1,760,192 |
| | 1,758,754 |
Number of shares on which diluted earnings per share is calculated |
| | 910,749,734 |
| | 904,233,439 |
| | | | | | |
Income from continuing operations | | $ | 1,465 | | $ | 810 |
Income/(loss) from discontinued operations, net of tax | |
| (73) | |
| 515 |
Net income on which basic earnings per share is calculated | | $ | 1,392 | | $ | 1,325 |
| | | | | | |
Income from continuing operations | | $ | 1,465 | | $ | 810 |
Net income applicable to contingently issuable shares | |
| — | |
| — |
Income from continuing operations on which diluted earnings per share is calculated | | $ | 1,465 | | $ | 810 |
Income/(loss) from discontinued operations, net of tax, on which diluted earnings per share is calculated | |
| (73) | |
| 515 |
Net income on which diluted earnings per share is calculated | | $ | 1,392 | | $ | 1,325 |
| | | | | | |
Earnings/(loss) per share of common stock: | |
|
| |
|
|
Assuming dilution | |
| | |
|
|
Continuing operations | | $ | 1.61 | | $ | 0.90 |
Discontinued operations | |
| (0.08) | |
| 0.57 |
Total | | $ | 1.53 | | $ | 1.47 |
Basic | |
|
| |
|
|
Continuing operations | | $ | 1.62 | | $ | 0.91 |
Discontinued operations | |
| (0.08) | |
| 0.57 |
Total | | $ | 1.54 | | $ | 1.48 |
Stock options to purchase 788,500 shares and 375,990 shares were outstanding as of June 30, 2022 and 2021, respectively, but were not included in the computation of diluted earnings per share because the exercise price of the options during the respective period was greater than the average market price of the common shares, and therefore, the effect would have been antidilutive.
21
Notes to Consolidated Financial Statements — (continued)
| | | | | | |
(Dollars in millions except per share amounts) | | | ||||
For the six months ended June 30: |
| 2022 |
| 2021 | ||
Number of shares on which basic earnings per share is calculated: |
| |
|
| |
|
Weighted-average shares outstanding during period |
| | 900,393,410 |
| | 894,336,970 |
Add — Incremental shares under stock-based compensation plans |
| | 7,946,998 |
| | 7,027,051 |
Add — Incremental shares associated with contingently issuable shares |
| | 1,647,528 |
| | 1,625,732 |
Number of shares on which diluted earnings per share is calculated |
| | 909,987,935 |
| | 902,989,752 |
| | | | | | |
Income from continuing operations | | $ | 2,127 | | $ | 1,213 |
Income/(loss) from discontinued operations, net of tax | |
| (2) | |
| 1,067 |
Net income on which basic earnings per share is calculated | | $ | 2,125 | | $ | 2,280 |
| | | | | | |
Income from continuing operations | | $ | 2,127 | | $ | 1,213 |
Net income applicable to contingently issuable shares | |
| — | |
| — |
Income from continuing operations on which diluted earnings per share is calculated | | $ | 2,127 | | $ | 1,213 |
Income/(loss) from discontinued operations, net of tax, on which diluted earnings per share is calculated | |
| (2) | |
| 1,067 |
Net income on which diluted earnings per share is calculated | | $ | 2,125 | | $ | 2,280 |
| | | | | | |
Earnings/(loss) per share of common stock: | |
|
| |
|
|
Assuming dilution | |
|
| |
|
|
Continuing operations | | $ | 2.34 | | $ | 1.34 |
Discontinued operations | |
| 0.00 | |
| 1.18 |
Total | | $ | 2.34 | | $ | 2.52 |
Basic | |
|
| |
|
|
Continuing operations | | $ | 2.36 | | $ | 1.36 |
Discontinued operations | |
| 0.00 | |
| 1.19 |
Total | | $ | 2.36 | | $ | 2.55 |
Stock options to purchase 975,911 shares and 943,438 shares (average of first and second quarter share amounts) were outstanding as of June 30, 2022 and 2021, respectively, but were not included in the computation of diluted earnings per share because the exercise price of the options during the respective period was greater than the average market price of the common shares, and therefore, the effect would have been antidilutive.
8. Financial Assets & Liabilities:
Fair Value Measurements
Accounting guidance defines fairFair 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 date. Under this guidance, theThe company is required to classifyclassifies certain assets and liabilities based on the following fair value hierarchy:
| ● | Level 1–Quoted prices (unadjusted) in active markets for identical assets or liabilities that can be accessed at the measurement date; |
| ● | Level 2–Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and |
| ● | Level 3–Unobservable inputs for the asset or liability. |
22
· Level 1—Quoted prices (unadjusted) in active markets for identical assets or liabilities that can be accessed at the measurement date;Notes to Consolidated Financial Statements — (continued)
· Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and
· Level 3—Unobservable inputs for the asset or liability.
The guidance requires the use of observable market data if such data is available without undue cost and effort.
When available, the company uses unadjusted quoted market prices in active markets to measure the fair value and classifies such items as Level 1. If quoted market prices are not available, fair value is based upon internally developed models that use current market-based or independently sourced market parameters such as interest rates and currency rates. Items valued using internally generated models are classified according to the lowest level input or value driver that is significant to the valuation.
The determination of fair value considers various factors including interest rate yield curves and time value underlying the financial instruments. For derivatives and debt securities, the company uses a discounted cash flow analysis using discount rates commensurate with the duration of the instrument.
In determining the fair value of financial instruments, the company considers certain market valuation adjustments to the “base valuations” calculated using the methodologies described below for several parameters that market participants would consider in determining fair value:
· Counterparty credit risk adjustments are applied to financial instruments, taking into account the actual credit risk of a counterparty as observed in the credit default swap market to determine the true fair value of such an instrument.
·
| ● | Counterparty credit risk adjustments are applied to financial instruments, taking into account the actual credit risk of a counterparty as observed in the credit default swap market to determine the true fair value of such an instrument. |
| ● | Credit risk adjustments are applied to reflect the company’s own credit risk when valuing all liabilities measured at fair value. The methodology is consistent with that applied in developing counterparty credit risk adjustments, but incorporates the company’s own credit risk as observed in the credit default swap market. |
The company holds investments primarily in time deposits, certificates of deposit, and U.S. government debt that are designated as available-for-sale. The primary objective of the company’s owncash and debt investment portfolio is to maintain principal by investing in very liquid and highly rated investment grade securities.
The company’s standard practice is to hold all of its debt security investments classified as available-for-sale until maturity. NaN impairments for credit risk when valuing all liabilities measured at fair value. The methodology is consistent with that applied in developing counterparty credit risk adjustments, but incorporates the company’s own credit risk as observed in the credit default swap market.
As an example, the fair value of derivatives is derived utilizing a discounted cash flow model that uses observable market inputs such as known notional value amounts, yield curves, spotlosses and forward exchange rates as well as discount rates. These inputs relate to liquid, heavily traded currencies with active markets which are availableno material non-credit impairments were recorded for the full term of the derivative.
three and six months ended June 30, 2022 and 2021, respectively.
Certain financial assets are measured at fair value on a nonrecurring basis. These assets include equity method investments that are recognized at fair value at the measurement date to the extent that they are deemed to be other-than-temporarily impaired. Certain assets that are measured at fair value on a recurring basis can be subject to nonrecurring fair value measurements. These assets include available-for-sale equity investments that are deemed to be other-than-temporarily impaired. In the event of an other-than-temporary impairment of a financial investment, fair value is measured using a model described above.
Non-financialnon-financial assets such as property, plant and equipment, operating right-of-use assets, land, goodwill and intangible assets are also subject to nonrecurring fair value measurements if they are deemed to be impaired. The impairment models used for nonfinancialnon-financial assets depend on the type of asset. During the nine months ended September 30, 2016, a pre-tax impairment charge related to certain property, plant and equipment of $218 million was recorded. There were no material impairments of non-financial assets for the ninethree and six months ended SeptemberJune 30, 2017.2022 and 2021, respectively.
23
Accounting guidance permits the measurement of eligible financial assets, financial liabilities and firm commitments at fair value, on an instrument-by-instrument basis, that are otherwise not permittedNotes to be accounted for at fair value under other accounting standards. This election is irrevocable. The company has not applied the fair value option to any eligible assets or liabilities.Consolidated Financial Statements — (continued)
The following tables presenttable presents the company’s financial assets and financial liabilities that are measured at fair value on a recurring basis at SeptemberJune 30, 20172022 and December 31, 2016.2021.
| | | | | | | | | | | | | | |
| | Fair Value | | | | | ||||||||
| | Hierarchy | | At June 30, 2022 | | At December 31, 2021 | ||||||||
(Dollars in millions) |
| Level |
| Assets (8) |
| Liabilities (9) |
| Assets (8) |
| Liabilities (9) | ||||
Cash equivalents: (1) | | | | | | | | | | | | | | |
Time deposits and certificates of deposit (2) | | 2 | | $ | 2,602 | | $ | N/A | | $ | 1,903 | | $ | N/A |
Money market funds | | 1 | | | 933 | | | N/A | | | 263 | | | N/A |
U.S. government securities (2) | | 2 | | | — | | | N/A | | | 599 | | | N/A |
Total cash equivalents | | | | $ | 3,535 | | $ | N/A | | $ | 2,766 | | $ | N/A |
Equity investments (3) | | 1 | | | — | | | N/A | | | 0 | | | N/A |
Kyndryl common stock (4) | | 1 | | | 436 | | | N/A | | | 807 | | | N/A |
Secured borrowing (4) | | 2 | | | N/A | | | 218 | | | N/A | | | — |
Debt securities-current (2)(5) | | 2 | | | 524 | | | N/A | | | 600 | | | N/A |
Debt securities-noncurrent (2)(6) | | 2,3 | | | 31 | | | N/A | | | 37 | | | N/A |
Derivatives designated as hedging instruments: | | | | | | | | | | | | | | |
Interest rate contracts | | 2 | | | 2 | | | 82 | | | 12 | | | — |
Foreign exchange contracts | | 2 | | | 717 | | | 348 | | | 359 | | | 117 |
Derivatives not designated as hedging instruments: | | | | | | | | | | | | | | |
Foreign exchange contracts | | 2 | | | 11 | | | 26 | | | 21 | | | 42 |
Equity contracts (7) | | 1,2 | | | 5 | | | 95 | | | 6 | | | 4 |
Total | | | | $ | 5,261 | | $ | 769 | | $ | 4,608 | | $ | 162 |
| (1) | Included within cash and cash equivalents in the Consolidated Balance Sheet. |
| (2) | Available-for-sale debt securities with carrying values that approximate fair value. |
| (3) | Included within investments and sundry assets in the Consolidated Balance Sheet. |
| (4) | Refer to “Kyndryl Common Stock” below for additional information. |
| (5) | U.S. treasury bills that are reported within marketable securities in the Consolidated Balance Sheet. |
| (6) | Includes corporate and government debt securities that are reported within investments and sundry assets in the Consolidated Balance Sheet. |
| (7) | Level 1 includes immaterial amounts related to equity futures contracts. |
| (8) | The gross balances of derivative assets contained within prepaid expenses and other current assets, and investments and sundry assets in the Consolidated Balance Sheet at June 30, 2022 were $723 million and $11 million, respectively, and at December 31, 2021 were $358 million and $40 million, respectively. |
| (9) | The gross balances of derivative liabilities contained within other accrued expenses and liabilities, and other liabilities in the Consolidated Balance Sheet at June 30, 2022 were $266 million and $285 million, respectively, and at December 31, 2021 were $60 million and $103 million, respectively. |
N/A – not applicable
Kyndryl Common Stock
On November 3, 2021, IBM completed the separation of Kyndryl and retained 19.9 percent of the shares of Kyndryl common stock with the intent to dispose of the shares within twelve months of the separation.
On May 18, 2022, the company borrowed an aggregate principal amount of $357 million under a short-term credit facility with a third-party financial institution, the proceeds of which will be used to repay certain of the company’s existing indebtedness. On May 23, 2022, the company completed a debt-for-equity exchange where 22.3 million shares of Kyndryl common stock, equal to 9.95 percent or half of the company’s 19.9 percent retained interest (the Shares), were exchanged at a strike price of $13.95 per share to extinguish $311 million of the company’s indebtedness under the short-term credit facility (the Exchange). The remaining portion of the short-term credit facility was repaid with $46 million of cash.
In connection with the Exchange, the company entered into a cash-settled swap with the lender of the short-term credit facility as the counterparty that maintained IBM’s continued economic exposure in the Shares. Upon settlement of
24
Notes to Consolidated Financial Statements — (continued)
(Dollars in millions) |
|
|
|
|
|
|
|
|
| ||||
At September 30, 2017 |
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| ||||
Assets: |
|
|
|
|
|
|
|
|
| ||||
Cash equivalents (1) |
|
|
|
|
|
|
|
|
| ||||
Time deposits and certificates of deposit |
| $ | — |
| $ | 5,553 |
| $ | — |
| $ | 5,553 |
|
Money market funds |
| 1,375 |
| — |
| — |
| 1,375 |
| ||||
U.S. government securities |
| — |
| 200 |
| — |
| 200 |
| ||||
Canadian government securities |
| — |
| 460 |
| — |
| 460 |
| ||||
Total |
| 1,375 |
| 6,214 |
| — |
| 7,589 | (6) | ||||
Debt securities - current (2) |
| — |
| 599 |
| — |
| 599 | (6) | ||||
Debt securities - noncurrent (3) |
| 4 |
| 7 |
| — |
| 11 |
| ||||
Available-for-sale equity investments (3) |
| 5 |
| — |
| — |
| 5 |
| ||||
Derivative assets (4) |
|
|
|
|
|
|
|
|
| ||||
Interest rate contracts |
| — |
| 517 |
| — |
| 517 |
| ||||
Foreign exchange contracts |
| — |
| 416 |
| — |
| 416 |
| ||||
Equity contracts |
| — |
| 23 |
| — |
| 23 |
| ||||
Total |
| — |
| 957 |
| — |
| 957 | (7) | ||||
Total assets |
| $ | 1,384 |
| $ | 7,775 |
| $ | — |
| $ | 9,159 | (7) |
Liabilities: |
|
|
|
|
|
|
|
|
| ||||
Derivative liabilities (5) |
|
|
|
|
|
|
|
|
| ||||
Foreign exchange contracts |
| $ | — |
| $ | 333 |
| $ | — |
| $ | 333 |
|
Equity contracts |
| — |
| 4 |
| — |
| 4 |
| ||||
Interest rate contracts |
| — |
| 15 |
| — |
| 15 |
| ||||
Total liabilities |
| $ | — |
| $ | 352 |
| $ | — |
| $ | 352 | (7) |
(1) Includedthe swap, which will occur no later than November 2, 2022, IBM will either receive or pay an amount derived from the difference between the volume-weighted average price (VWAP) of the Kyndryl shares over the outstanding term of the swap and the strike price of $13.95 per share. As a result, the most significant input into the valuation of the swap is the price of Kyndryl shares.The fair value of the swap at June 30, 2022 was $88 million and is included within cashother accrued expenses and cash equivalentsliabilities in the Consolidated StatementBalance Sheet. For the three and six months ended June 30, 2022, an unrealized loss of Financial Position.
(2) U.S. government securities reported as marketable securities$88 million was recorded in other (income) and expense in the Consolidated StatementIncome Statement.
As a result of Financial Position.
(3) Includedthe swap, the transfer of the Shares pursuant to the Exchange does not qualify as a true sale, and therefore the Shares remain on the company’s Consolidated Balance Sheet at June 30, 2022. Relatedly, the portion of the company’s indebtedness under the short-term credit facility that was extinguished pursuant to the Exchange has been classified as a secured borrowing within investments and sundry assetsshort-term debt in the Consolidated StatementBalance Sheet. The company has elected to record the debt at fair value based on changes in the value of Financial Position.the Shares underlying the debt. The fair value of the debt was $218 million at June 30, 2022. In electing the fair value option, the company recognizes changes in fair value of the debt in other (income) and expense, which amounted to $93 million for the three and six months ended June 30, 2022. The contractual principal balance of the debt was $311 million at June 30, 2022. Both the Shares and the debt are expected to be entirely derecognized from the company’s Consolidated Balance Sheet upon settlement of the swap, which will occur no later than November 2, 2022.
(4) The gross balances of derivative assets contained19.9 percent retained interest in the Kyndryl shares is accounted for at fair value which amounted to $436 million and $807 million at June 30, 2022 and December 31, 2021, respectively, and is included within prepaid expenses and other current assets and investments and sundry assets in the Consolidated StatementBalance Sheet. An unrealized loss of Financial Position at September 30, 2017 were $269$56 million and $687$278 million, respectively.
(5) The gross balancesnet of derivative liabilities contained withinadjustment for the mark-to-market on the related debt as described above was recorded in other accrued expenses(income) and liabilities, and other liabilitiesexpense in the Consolidated Income Statement of Financial Position at September 30, 2017 were $332 million and $20 million, respectively.
(6) Available-for-sale securities with carrying values that approximate fair value.
(7) If derivative exposures covered by a qualifying master netting agreement had been netted in the Consolidated Statement of Financial Position, the total derivative asset and liability positions each would have been reduced by $274 million.
Notes to Consolidated Financial Statements — (continued)
(Dollars in millions) |
|
|
|
|
|
|
|
|
| ||||
At December 31, 2016 |
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| ||||
Assets: |
|
|
|
|
|
|
|
|
| ||||
Cash equivalents (1) |
|
|
|
|
|
|
|
|
| ||||
Time deposits and certificates of deposit |
| $ | — |
| $ | 3,629 |
| $ | — |
| $ | 3,629 |
|
Money market funds |
| 1,204 |
| — |
| — |
| 1,204 |
| ||||
Total |
| 1,204 |
| 3,629 |
| — |
| 4,832 | (6) | ||||
Debt securities - current (2) |
| — |
| 699 |
| — |
| 699 | (6) | ||||
Debt securities - noncurrent (3) |
| 1 |
| 6 |
| — |
| 8 |
| ||||
Available-for-sale equity investments (3) |
| 7 |
| — |
| — |
| 7 |
| ||||
Derivative assets (4) |
|
|
|
|
|
|
|
|
| ||||
Interest rate contracts |
| — |
| 555 |
| — |
| 555 |
| ||||
Foreign exchange contracts |
| — |
| 560 |
| — |
| 560 |
| ||||
Equity contracts |
| — |
| 11 |
| — |
| 11 |
| ||||
Total |
| — |
| 1,126 |
| — |
| 1,126 | (7) | ||||
Total assets |
| $ | 1,212 |
| $ | 5,460 |
| $ | — |
| $ | 6,672 | (7) |
Liabilities: |
|
|
|
|
|
|
|
|
| ||||
Derivative liabilities (5) |
|
|
|
|
|
|
|
|
| ||||
Foreign exchange contracts |
| $ | — |
| $ | 188 |
| $ | — |
| $ | 188 |
|
Equity contracts |
| — |
| 10 |
| — |
| 10 |
| ||||
Interest rate contracts |
| — |
| 8 |
| — |
| 8 |
| ||||
Total liabilities |
| $ | — |
| $ | 206 |
| $ | — |
| $ | 206 | (7) |
(1) Included within cash and cash equivalents in the Consolidated Statement of Financial Position.
(2) U.S government securities reported as marketable securities in the Consolidated Statement of Financial Position.
(3) Included within investments and sundry assets in the Consolidated Statement of Financial Position.
(4) The gross balances of derivative assets contained within prepaid expenses and other current assets, and investments and sundry assets in the Consolidated Statement of Financial Position at December 31, 2016 were $532 million and $594 million, respectively.
(5) The gross balances of derivative liabilities contained within other accrued expenses and liabilities, and other liabilities in the Consolidated Statement of Financial Position at December 31, 2016 were $145 million and $61 million, respectively.
(6) Available-for-sale securities with carrying values that approximate fair value.
(7) If derivative exposures covered by a qualifying master netting agreement had been netted in the Consolidated Statement of Financial Position, the total derivative asset and liability positions each would have been reduced by $116 million.
There were no transfers between Levels 1 and 2 for the ninethree and six months ended SeptemberJune 30, 2017 and the year ended December 31, 2016.
2022, respectively.
Financial Assets and Liabilities Not Measured at Fair Value
Short-Term Receivables and Payables
Notes and other accounts receivable and other investments are financial assets with carrying values that approximate fair value. Accounts payable, other accrued expenses and short-term debt (excluding the current portion of long-term debt)debt and including short-term finance lease liabilities) are financial liabilities with carrying values that approximate fair value. If measured at fair value in the financial statements, these financial instruments would be classified as Level 3 in the fair value hierarchy, except for short-term debt which would be classified as Level 2.
Loans and Long-termLong-Term Receivables
Fair values are based on discounted future cash flows using current interest rates offered for similar loans to clients with similar credit ratings for the same remaining maturities. At SeptemberJune 30, 20172022 and December 31, 2016,2021, the difference between the carrying amount and estimated fair value for loans and long-term receivables was immaterial. If measured at fair value in the financial statements, these financial instruments would be classified as Level 3 in the fair value hierarchy.
Notes to Consolidated Financial Statements — (continued)
Long-Term Debt
Fair value of publicly-tradedpublicly traded long-term debt is based on quoted market prices for the identical liability when traded as an asset in an active market. For other long-term debt (including long-term finance lease liabilities) for which a quoted market price is not available, an expected present value technique that uses rates currently available to the company for debt with similar terms and remaining maturities is used to estimate fair value. The carrying amount of long-term debt was $41,327$44,328 million and $34,655$44,917 million, and the estimated fair value was $43,623$42,143 million and $36,838$49,465 million at SeptemberJune 30, 20172022 and December 31, 2016,2021, respectively. If measured at fair value in the financial statements, long-term debt (including the current portion) would be classified as Level 2 in the fair value hierarchy.
25
Debt and Marketable Equity Securities
The company’s cash equivalents and current debt securities are considered available-for-sale and recorded at fair value, which is not materially different from carrying value, in the Consolidated Statement of Financial Position.
The following tables summarize the company’s noncurrent debt and marketable equity securities which are considered available-for-sale and recorded at fair value in the Consolidated Statement of Financial Position.
|
|
|
| Gross |
| Gross |
|
|
| ||||
(Dollars in millions) |
| Adjusted |
| Unrealized |
| Unrealized |
| Fair |
| ||||
At September 30, 2017: |
| Cost |
| Gains |
| Losses |
| Value |
| ||||
Debt securities — noncurrent(1) |
| $ | 7 |
| $ | 3 |
| $ | — |
| $ | 11 |
|
Available-for-sale equity investments(1) |
| $ | 1 |
| $ | 4 |
| $ | 0 |
| $ | 5 |
|
(1) Included within investments and sundry assets in the Consolidated Statement of Financial Position.
|
|
|
| Gross |
| Gross |
|
|
| ||||
(Dollars in millions) |
| Adjusted |
| Unrealized |
| Unrealized |
| Fair |
| ||||
At December 31, 2016: |
| Cost |
| Gains |
| Losses |
| Value |
| ||||
Debt securities — noncurrent(1) |
| $ | 5 |
| $ | 3 |
| $ | — |
| $ | 8 |
|
Available-for-sale equity investments(1) |
| $ | 3 |
| $ | 5 |
| $ | 0 |
| $ | 7 |
|
(1) Included within investments and sundry assets in the Consolidated Statement of Financial Position.
Sales of debt and available-for-sale equity investments during the period were as follows:
(Dollars in millions) |
|
|
|
|
| ||
For the three months ended September 30: |
| 2017 |
| 2016 |
| ||
Proceeds |
| $ | 0 |
| $ | 1 |
|
Gross realized gains (before taxes) |
| 0 |
| 1 |
| ||
Gross realized losses (before taxes) |
| — |
| — |
| ||
(Dollars in millions) |
|
|
|
|
| ||
For the nine months ended September 30: |
| 2017 |
| 2016 |
| ||
Proceeds |
| $ | 5 |
| $ | 150 |
|
Gross realized gains (before taxes) |
| 1 |
| 1 |
| ||
Gross realized losses (before taxes) |
| 2 |
| 37 |
| ||
The after-tax net unrealized holding gains/(losses) on available-for-sale debt and equity securities that have been included in other comprehensive income/(loss) for the period and after-tax net (gains)/losses reclassified from accumulated other comprehensive income/(loss) to net income were as follows:
Notes to Consolidated Financial Statements — (continued)
9. Financing Receivables:
Financing receivables primarily consist of client loan and installment payment receivables (loans) and investment in sales-type and direct financing leases (collectively referred to as client financing receivables) and commercial financing receivables. Loans are provided primarily to clients to finance the purchase of hardware, software and services. Payment terms on these financing arrangements are generally for terms up to seven years. Investment in sales-type and direct financing leases relate principally to the company’s Infrastructure products and are for terms ranging generally from two to six years. Commercial financing receivables, which consist of both held-for-investment and held-for-sale receivables, relate primarily to working capital financing for dealers and remarketers of IBM products. Payment terms for working capital financing generally range from 30 to 90 days.
(Dollars in millions) |
|
|
|
|
| ||
For the three months ended September 30: |
| 2017 |
| 2016 |
| ||
Net unrealized gains/(losses) arising during the period |
| $ | 1 |
| $ | (1 | ) |
Net unrealized (gains)/losses reclassified to net income* |
| 0 |
| (1 | ) | ||
A summary of the components of the company’s financing receivables is presented as follows:
| | | | | | | | | | | | | | | |
|
| Client Financing Receivables |
| | | | | | | | | ||||
| | Client Loan and |
| Investment in | |
| |
|
|
| | ||||
| | Installment Payment | | Sales-Type and | | Commercial Financing Receivables | | | | ||||||
(Dollars in millions) | | Receivables | | Direct Financing | | Held for | | Held for | | | | ||||
At June 30, 2022: | | (Loans) | | Leases | | Investment | | Sale* | | Total | |||||
Financing receivables, gross | | $ | 8,343 | | $ | 3,851 | | $ | 177 | | $ | 614 | | $ | 12,985 |
Unearned income | | | (341) | |
| (305) | | | — | | | — | | | (646) |
Unguaranteed residual value | | | — | |
| 383 | | | — | | | — | | | 383 |
Amortized cost | | $ | 8,002 | | $ | 3,929 | | $ | 177 | | $ | 614 | | $ | 12,721 |
Allowance for credit losses | | | (110) | |
| (56) | | | (6) | | | — | | | (172) |
Total financing receivables, net | | $ | 7,891 | | $ | 3,872 | | $ | 171 | | $ | 614 | | $ | 12,549 |
Current portion | | $ | 5,010 | | $ | 1,438 | | $ | 171 | | $ | 614 | | $ | 7,233 |
Noncurrent portion | | $ | 2,881 | | $ | 2,435 | | $ | — | | $ | — | | $ | 5,316 |
| | | | | | | | | | | | | | | |
| | Client Financing Receivables | | | | | | | | | | ||||
|
| Client Loan and |
| Investment in |
|
| |
|
|
| | ||||
| | Installment Payment | | Sales-Type and | | Commercial Financing Receivables | | | | ||||||
(Dollars in millions) | | Receivables | | Direct Financing | | Held for | | Held for | | | | ||||
At December 31, 2021: | | (Loans) | | Leases | | Investment | | Sale* | | Total | |||||
Financing receivables, gross | | $ | 9,303 | | $ | 3,336 | | $ | 450 | | $ | 793 | | $ | 13,881 |
Unearned income | | | (353) | | | (223) | | | — | | | — | | | (576) |
Unguaranteed residual value | | | — | |
| 335 | | | — | | | — | | | 335 |
Amortized cost | | $ | 8,949 | | $ | 3,448 | | $ | 450 | | $ | 793 | | $ | 13,640 |
Allowance for credit losses | | | (131) | |
| (64) | | | (6) | | | — | | | (201) |
Total financing receivables, net | | $ | 8,818 | | $ | 3,384 | | $ | 444 | | $ | 793 | | $ | 13,439 |
Current portion | | $ | 5,371 | | $ | 1,406 | | $ | 444 | | $ | 793 | | $ | 8,014 |
Noncurrent portion | | $ | 3,447 | | $ | 1,978 | | $ | — | | $ | — | | $ | 5,425 |
*There The carrying value of the receivables classified as held for sale approximates fair value.
The company has a long-standing practice of taking mitigation actions, in certain circumstances, to transfer credit risk to third parties. These actions may include credit insurance, financial guarantees, nonrecourse borrowings, transfers of receivables recorded as true sales in accordance with accounting guidance or sales of equipment under operating lease. Sale of receivables arrangements are also utilized in the normal course of business as part of the company’s cash and liquidity management.
Financing receivables pledged as collateral for nonrecourse borrowings were no writedowns$313 million and $408 million at June 30, 2022 and December 31, 2021, respectively. These borrowings are included in note 12, “Borrowings.”
26
Notes to Consolidated Financial Statements — (continued)
Transfer of Financial Assets
The company enters into agreements with third-party financial institutions to sell certain of its client financing receivables, including both loan and lease receivables, for cash proceeds. Throughout 2021, sales of client financing receivables were utilized as part of the company’s cash and liquidity management as well as for credit mitigation. In the first half of 2022, sales of client financing receivables were largely focused on credit mitigation. In addition, the company has an existing agreement with a third-party investor to sell IBM short-term commercial financing receivables on a revolving basis. The company has expanded this agreement to other countries and geographies since commencement in the U.S. and Canada in 2020.
The following table presents the total amount of client and commercial financing receivables transferred:
| | | | | | |
(Dollars in millions) |
| | ||||
For the six months ended June 30: | | 2022 | | 2021 | ||
Client financing receivables | | | | | | |
Lease receivables | | $ | 15 | | $ | 732 |
Loan receivables | |
| 2 | |
| 1,359 |
Total client financing receivables transferred | | $ | 17 | | $ | 2,091 |
Commercial financing receivables | | | | | | |
Receivables transferred during the period | | $ | 3,914 | | $ | 2,621 |
Receivables uncollected at end of period* | | $ | 815 | | $ | 821 |
* | Of the total amount of commercial financing receivables sold and derecognized from the Consolidated Balance Sheet, the amounts presented remained uncollected from business partners as of June 30, 2022 and 2021. |
The transfer of these receivables qualified as true sales and therefore reduced financing receivables. The cash proceeds from the sales are included in cash flows from operating activities and the impacts to the Consolidated Income Statement, including fees and net gain or loss associated with the transfers of these receivables for the six months ended June 30, 2022 and 2021 were not material.
Financing Receivables by Portfolio Segment
The following tables present the amortized cost basis for client financing receivables at June 30, 2022 and December 31, 2021, further segmented by 3 classes: Americas, Europe/Middle East/Africa (EMEA) and Asia Pacific. The commercial financing receivables portfolio segment is excluded from the tables in the sections below as the receivables are short term in nature and the current estimated risk of loss and resulting impact to the company’s financial results are not material.
27
Notes to Consolidated Financial Statements — (continued)
| | | | | | | | | | | | |
(Dollars in millions) |
|
| |
|
| |
|
| |
|
| |
At June 30, 2022: | | Americas | | EMEA | | Asia Pacific | | Total | ||||
Amortized cost |
| $ | 7,092 | | $ | 3,173 | | $ | 1,666 | | $ | 11,930 |
Allowance for credit losses: | |
|
| |
|
| |
|
| |
| |
Beginning balance at January 1, 2022 | | $ | 111 | | $ | 61 | | $ | 23 | | $ | 195 |
Write-offs | | $ | (16) | | $ | (1) | | $ | (2) | | $ | (18) |
Recoveries | |
| 1 | |
| 0 | | | 4 | | | 5 |
Additions/(releases) | |
| (2) | |
| (3) | | | (5) | | | (10) |
Other* | |
| 2 | |
| (5) | | | (1) | | | (5) |
Ending balance at June 30, 2022 | | $ | 96 | | $ | 51 | | $ | 19 | | $ | 166 |
| | | | | | | | | | | | |
(Dollars in millions) |
|
| |
|
| |
|
| |
|
| |
At December 31, 2021: | | Americas | | EMEA | | Asia Pacific | | Total | ||||
Amortized cost |
| $ | 6,573 | | $ | 3,793 | | $ | 2,031 | | $ | 12,397 |
Allowance for credit losses: | |
|
| |
|
| |
|
| |
|
|
Beginning balance at January 1, 2021 | | $ | 141 | | $ | 77 | | $ | 37 | | $ | 255 |
Write-offs | | $ | (8) | | $ | (2) | | $ | (7) | | $ | (17) |
Recoveries | |
| 0 | |
| 0 | | | 1 | | | 1 |
Additions/(releases) | |
| (19) | |
| (11) | | | (7) | | | (38) |
Other* | |
| (3) | |
| (3) | | | 0 | | | (7) |
Ending balance at December 31, 2021 | | $ | 111 | | $ | 61 | | $ | 23 | | $ | 195 |
* Primarily represents translation adjustments.
When determining the allowances, financing receivables are evaluated either on an individual or a collective basis. For the company’s policy on determining allowances for credit losses, refer to note A, “Significant Accounting Policies,” in the company’s 2021 Annual Report. Any changes to economic models that occurred after the balance sheet date will be reflected in future periods.
28
Notes to Consolidated Financial Statements — (continued)
Past Due Financing Receivables
The company summarizes information about the amortized cost basis for client financing receivables, including amortized cost aged over 90 days and still accruing, billed invoices aged over 90 days and still accruing, and amortized cost not accruing.
| | | | | | | | | | | | | | | |
|
|
| |
|
| |
| Amortized |
| Billed |
| Amortized | |||
| | Total | | Amortized | | Cost | | Invoices | | Cost | |||||
(Dollars in millions) | | Amortized | | Cost | | > 90 Days and | | > 90 Days and | | Not | |||||
At June 30, 2022: | | Cost | | > 90 Days* | | Accruing* | | Accruing | | Accruing** | |||||
Americas | | $ | 7,092 | | $ | 216 | | $ | 141 | | $ | 11 | | $ | 76 |
EMEA | |
| 3,173 | | | 85 | | | 4 | | | 1 | | | 83 |
Asia Pacific | |
| 1,666 | | | 23 | | | 5 | | | 2 | | | 18 |
Total client financing receivables | | $ | 11,930 | | $ | 324 | | $ | 150 | | $ | 15 | | $ | 177 |
| | | | | | | | | | | | | | | |
|
|
| |
|
| |
| Amortized |
| Billed |
| Amortized | |||
| | Total | | Amortized | | Cost | | Invoices | | Cost | |||||
(Dollars in millions) | | Amortized | | Cost | | > 90 Days and | | > 90 Days and | | Not | |||||
At December 31, 2021: | | Cost | | > 90 Days* | | Accruing* | | Accruing | | Accruing** | |||||
Americas | | $ | 6,573 | | $ | 188 | | $ | 100 | | $ | 6 | | $ | 90 |
EMEA | |
| 3,793 | | | 99 | | | 7 | | | 2 | | | 95 |
Asia Pacific | |
| 2,031 | | | 25 | | | 5 | | | 2 | | | 20 |
Total client financing receivables | | $ | 12,397 | | $ | 312 | | $ | 112 | | $ | 10 | | $ | 205 |
* | At a contract level, which includes total billed and unbilled amounts for financing receivables aged greater than 90 days. |
** | Of the amortized cost not accruing, there was a related allowance of $129 million and $153 million at June 30, 2022 and December 31, 2021, respectively. Financing income recognized on these receivables was immaterial for the three and six months ended June 30, 2022, respectively. |
Credit Quality Indicators
The company’s credit quality indicators, which are based on rating agency data, publicly available information and information provided by customers, are reviewed periodically based on the relative level of risk. The resulting indicators are a numerical rating system that maps to Moody’s Investors Service credit ratings as shown below. The company uses information provided by Moody’s, where available, as one of many inputs in its determination of customer credit ratings. The credit quality of the customer is evaluated based on these indicators and is assigned the same risk rating whether the receivable is a lease or a loan.
The following tables present the amortized cost basis for client financing receivables by credit quality indicator at June 30, 2022 and December 31, 2021, respectively. Receivables with a credit quality indicator ranging from Aaa to Baa3 are considered investment grade. All others are considered non-investment grade. The credit quality indicators reflect mitigating credit enhancement actions taken by customers which reduce the risk to IBM.
| | | | | | | | | | | | | | | | | | |
(Dollars in millions) | | Americas |
| EMEA |
| Asia Pacific | ||||||||||||
At June 30, 2022: |
| Aaa – Baa3 |
| Ba1 – D |
| Aaa – Baa3 |
| Ba1 – D |
| Aaa – Baa3 |
| Ba1 – D | ||||||
Vintage year: |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
2022 | | $ | 1,987 | | $ | 799 | | $ | 614 | | $ | 431 | | $ | 393 | | $ | 86 |
2021 | | | 1,750 | | | 584 | | | 645 | | | 349 | | | 290 | | | 108 |
2020 | |
| 761 | | | 306 | | | 337 | | | 221 | | | 268 | | | 60 |
2019 | |
| 382 | | | 151 | | | 190 | | | 166 | | | 190 | | | 30 |
2018 | |
| 186 | | | 72 | | | 86 | | | 51 | | | 141 | | | 35 |
2017 and prior | |
| 61 | | | 52 | | | 19 | | | 65 | | | 44 | | | 22 |
Total | | $ | 5,128 | | $ | 1,964 | | $ | 1,891 | | $ | 1,282 | | $ | 1,326 | | $ | 340 |
29
Notes to Consolidated Financial Statements — (continued)
| | | | | | | | | | | | | | | | | | |
(Dollars in millions) | | Americas | | EMEA | | Asia Pacific | ||||||||||||
At December 31, 2021: |
| Aaa – Baa3 |
| Ba1 – D |
| Aaa – Baa3 |
| Ba1 – D |
| Aaa – Baa3 |
| Ba1 – D | ||||||
Vintage year: |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
2021 | | $ | 2,556 | | $ | 1,147 | | $ | 1,181 | | $ | 778 | | $ | 565 | | $ | 226 |
2020 | |
| 1,013 | | | 392 | | | 506 | | | 342 | | | 381 | | | 86 |
2019 | |
| 544 | | | 236 | | | 287 | | | 291 | | | 297 | | | 51 |
2018 | |
| 338 | | | 117 | | | 189 | | | 85 | | | 211 | | | 64 |
2017 | |
| 108 | | | 50 | | | 15 | | | 52 | | | 74 | | | 17 |
2016 and prior | |
| 20 | | | 53 | | | 21 | | | 46 | | | 38 | | | 20 |
Total | | $ | 4,579 | | $ | 1,994 | | $ | 2,198 | | $ | 1,595 | | $ | 1,567 | | $ | 464 |
Troubled Debt Restructurings
The company did not have any significant troubled debt restructurings during the six months ended June 30, 2022 or for the year ended December 31, 2021.
10. Leases:
Accounting for Leases as a Lessor
The following table presents amounts included in the Consolidated Income Statement related to lessor activity:
| | | | | | | | | | | | |
|
| Three Months Ended June 30, | | Six Months Ended June 30, | ||||||||
(Dollars in millions) | | 2022 |
| 2021 | | 2022 |
| 2021 | ||||
Lease income — sales-type and direct financing leases: |
| |
| | |
| | |
| | |
|
Sales-type lease selling price | | $ | 735 | | $ | 390 | | $ | 789 | | $ | 751 |
Less: Carrying value of underlying assets* | |
| (120) | |
| (100) | |
| (139) | |
| (157) |
Gross profit | | $ | 615 | | $ | 290 | | $ | 651 | | $ | 594 |
Interest income on lease receivables | |
| 45 | |
| 47 | |
| 90 | |
| 98 |
Total sales-type and direct financing lease income | | $ | 660 | | $ | 337 | | $ | 741 | | $ | 692 |
Lease income — operating leases | |
| 27 | |
| 47 | |
| 56 | |
| 98 |
Variable lease income | |
| 28 | |
| 22 | |
| 56 | |
| 79 |
Total lease income | | $ | 715 | | $ | 406 | | $ | 853 | | $ | 869 |
* Excludes unguaranteed residual value.
Sales-type lease revenue was $735 million and $789 million for the three and six months ended SeptemberJune 30, 20172022, respectively, compared to $390 million and 2016,$751 million for the three and six months ended June 30, 2021, respectively. The increases in both the three and six month periods were predominantly due to the zSystems product cycle dynamics.
30
Notes to Consolidated Financial Statements — (continued)
11. Intangible Assets Including Goodwill:
Intangible Assets
The following tables present the company's intangible asset balances by major asset class:
| | | | | | | | | |
| | At June 30, 2022 | |||||||
|
| Gross Carrying |
| Accumulated |
| Net Carrying | |||
(Dollars in millions) | | Amount | | Amortization | | Amount* | |||
Intangible asset class: | | | | | | | | | |
Capitalized software | | $ | 1,705 | | $ | (692) | | $ | 1,013 |
Client relationships | |
| 8,187 | |
| (2,591) | |
| 5,596 |
Completed technology | |
| 5,562 | |
| (2,113) | |
| 3,449 |
Patents/trademarks | |
| 2,117 | |
| (610) | |
| 1,507 |
Other** | |
| 32 | |
| (25) | |
| 6 |
Total | | $ | 17,604 | | $ | (6,032) | | $ | 11,571 |
| | | | | | | | | |
| | At December 31, 2021 | |||||||
|
| Gross Carrying |
| Accumulated |
| Net Carrying | |||
(Dollars in millions) | | Amount | | Amortization | | Amount* | |||
Intangible asset class: | | | | | | | | | |
Capitalized software | | $ | 1,696 | | $ | (751) | | $ | 945 |
Client relationships | |
| 9,021 | |
| (2,889) | |
| 6,132 |
Completed technology | |
| 6,074 | |
| (2,259) | |
| 3,815 |
Patents/trademarks | |
| 2,196 | |
| (586) | |
| 1,610 |
Other** | |
| 44 | |
| (35) | |
| 9 |
Total | | $ | 19,031 | | $ | (6,520) | | $ | 12,511 |
* Amounts as of June 30, 2022 and December 31, 2021 included a decrease in net intangible asset balances of $235 million and $221 million, respectively, due to foreign currency translation.
** | Other intangibles are primarily acquired proprietary and non-proprietary business processes, methodologies and systems. |
The net carrying amount of intangible assets decreased $940 million during the first six months of 2022, primarily due to intangible asset amortization, partially offset by additions of acquired intangibles and capitalized software. The aggregate intangible asset amortization expense was $625 million and $1,251 million for the second quarter and first six months of 2022, respectively, compared to $625 million and $1,239 million for the second quarter and first six months of 2021, respectively. In the first six months of 2022, the company retired $501 million of fully amortized intangible assets, impacting both the gross carrying amount and accumulated amortization by this amount. The company also derecognized intangible assets with a gross carrying amount of $1,312 million and $1,149 million of accumulated amortization as part of the divestiture of its healthcare software assets on June 30, 2022.
31
Notes to Consolidated Financial Statements — (continued)
The future amortization expense relating to intangible assets currently recorded in the Consolidated Balance Sheet was estimated to be the following at June 30, 2022:
| | | | | | | | | |
|
| Capitalized |
| Acquired |
|
| | ||
(Dollars in millions) | | Software | | Intangibles | | Total | |||
Remainder of 2022 | | $ | 304 | | $ | 832 | | $ | 1,136 |
2023 | |
| 431 | |
| 1,490 | |
| 1,922 |
2024 | |
| 245 | |
| 1,473 | |
| 1,718 |
2025 | |
| 32 | |
| 1,455 | |
| 1,487 |
2026 | |
| 0 | |
| 1,438 | |
| 1,438 |
Thereafter | | | 0 | | | 3,871 | |
| 3,871 |
Goodwill
The changes in the goodwill balances by segment for the six months ended June 30, 2022 and for the year ended December 31, 2021 were as follows:
| | | | | | | | | | | | | | | | | | |
|
|
|
|
| |
|
| | | | Foreign |
|
| |||||
| | | | | | | | | | Currency | | | ||||||
| | | | | | Purchase | | | | Translation | | | ||||||
(Dollars in millions) | | Balance | | Goodwill | | Price | | | | and Other | | Balance | ||||||
Segment | | 1/1/2022 | | Additions | | Adjustments | | Divestitures | | Adjustments* | | 6/30/2022 | ||||||
Software | | $ | 43,966 | | $ | 442 | | $ | (108) | | $ | — | | $ | (674) | | $ | 43,626 |
Consulting | |
| 6,797 | |
| 461 | |
| (13) | |
| — | |
| (200) | |
| 7,044 |
Infrastructure | | | 4,396 | | | — | | | — | | | (1) | | | (27) | | | 4,368 |
Other** | |
| 484 | |
| — | |
| — | |
| (484) | |
| — | |
| — |
Total | | $ | 55,643 | | $ | 903 | | $ | (121) | | $ | (485) | | $ | (901) | | $ | 55,039 |
* | Primarily driven by foreign currency translation. |
** | The company derecognized $484 million of goodwill related to the divestiture of its healthcare software assets. Refer to note 6, “Acquisitions & Divestitures,” for additional information. |
| | | | | | | | | | | | | | | | | | |
|
|
|
|
|
|
| | | | Foreign |
|
| | |||||
| | | | | | | | | | Currency | | | ||||||
| | | | | | Purchase | | | | Translation | | | ||||||
(Dollars in millions) | | Balance | | Goodwill | | Price | | | | and Other | | Balance | ||||||
Segment | | 1/1/2021 | | Additions | | Adjustments | | Divestitures | | Adjustments* | | 12/31/2021 | ||||||
Software** | | $ | 42,665 | | $ | 1,836 | | $ | 23 | | $ | (13) | | $ | (545) | | $ | 43,966 |
Consulting | |
| 6,145 | |
| 713 | |
| (21) | |
| — | |
| (40) | |
| 6,797 |
Infrastructure | |
| 4,436 | |
| — | |
| 0 | |
| — | |
| (39) | |
| 4,396 |
Other** | |
| 520 | |
| — | |
| — | |
| (37) | |
| 1 | |
| 484 |
Total | | $ | 53,765 | | $ | 2,549 | | $ | 2 | | $ | (50) | | $ | (623) | | $ | 55,643 |
* | Primarily driven by foreign currency translation. |
** | Recast to conform to current year presentation. |
There were 0 goodwill impairment losses recorded during the first six months of 2022 or full-year 2021 and the company has 0 accumulated impairment losses. Purchase price adjustments recorded in the first six months of 2022 and full-year 2021 were related to acquisitions that were still subject to the measurement period that ends at the earlier of 12 months from the acquisition date or when information becomes available. Net purchase price adjustments recorded in the first six months of 2022 primarily relate to deferred tax assets and liabilities associated with the Turbonomic acquisition.
32
Notes to Consolidated Financial Statements — (continued)
12. Borrowings:
Short-Term Debt
| | | | | | |
|
| At June 30, |
| At December 31, | ||
(Dollars in millions) | | 2022 | | 2021 | ||
Short-term loans | | $ | 230 | | $ | 22 |
Long-term debt — current maturities | |
| 5,752 | |
| 6,764 |
Total | | $ | 5,981 | | $ | 6,787 |
Included within short-term debt in the company’s Consolidated Balance Sheet at June 30, 2022 is $218 million of secured borrowings recorded at fair value from the short-term credit facility and the Exchange as described in note 8, “Financial Assets & Liabilities.”
The weighted-average interest rate for short-term loans excluding the aforementioned secured borrowings was 1.9 percent and 6.7 percent at June 30, 2022 and December 31, 2021, respectively.
(Dollars in millions) |
|
|
|
|
| ||
For the nine months ended September 30: |
| 2017 |
| 2016 |
| ||
Net unrealized gains/(losses) arising during the period |
| $ | 1 |
| $ | (22 | ) |
Net unrealized (gains)/losses reclassified to net income* |
| 0 |
| 22 |
| ||
33
Notes to Consolidated Financial Statements — (continued)
Long-Term Debt
Pre-Swap Borrowing
| | | | | | | | |
|
|
|
| Balance |
| Balance | ||
(Dollars in millions) | | Maturities | | 6/30/2022 | | 12/31/2021 | ||
U.S. dollar debt (weighted-average interest rate at June 30, 2022):* |
|
|
| |
|
| |
|
2.4% |
| 2022 | | $ | 1,904 | | $ | 5,673 |
3.4% |
| 2023 | |
| 1,552 | |
| 1,573 |
3.3% |
| 2024 | |
| 5,013 | |
| 5,016 |
7.0% |
| 2025 | |
| 605 | |
| 608 |
3.3% |
| 2026 | |
| 4,352 | |
| 4,356 |
2.8% |
| 2027 | |
| 2,871 | |
| 2,221 |
6.5% |
| 2028 | | | 313 | |
| 313 |
3.5% | | 2029 | | | 3,250 | | | 3,250 |
2.0% | | 2030 | | | 1,350 | | | 1,350 |
4.4% |
| 2032 | |
| 1,100 | |
| 600 |
8.0% |
| 2038 | |
| 83 | |
| 83 |
4.5% |
| 2039 | |
| 2,745 | |
| 2,745 |
2.9% | | 2040 | | | 650 | |
| 650 |
4.0% |
| 2042 | |
| 1,107 | | | 1,107 |
7.0% |
| 2045 | |
| 27 | |
| 27 |
4.7% |
| 2046 | |
| 650 | |
| 650 |
4.3% | | 2049 | | | 3,000 | |
| 3,000 |
3.0% | | 2050 | | | 750 | | | 750 |
3.4% | | 2052 | | | 650 | | | — |
7.1% |
| 2096 | |
| 316 | |
| 316 |
| | | | $ | 32,288 | | $ | 34,290 |
Other currencies (weighted-average interest rate at June 30, 2022, in parentheses):* |
|
| |
|
| |
|
|
Euro (1.1%) |
| 2023–2040 | | $ | 16,718 | | $ | 15,903 |
Pound sterling (2.6%) |
| 2022 | |
| 364 | |
| 406 |
Japanese yen (0.3%) |
| 2022–2026 | |
| 1,070 | |
| 1,263 |
Other (15.7%) |
| 2022–2025 | |
| 315 | |
| 378 |
| | | | $ | 50,755 | | $ | 52,240 |
Finance lease obligations (2.0%) | | 2022–2030 | | | 108 | | | 99 |
| | | | $ | 50,863 | | $ | 52,339 |
Less: net unamortized discount |
|
| |
| 837 | |
| 839 |
Less: net unamortized debt issuance costs |
|
| |
| 134 | |
| 130 |
Add: fair value adjustment** |
|
| |
| 187 | |
| 311 |
| | | | $ | 50,079 | | $ | 51,681 |
Less: current maturities |
|
| |
| 5,752 | |
| 6,764 |
Total |
|
| | $ | 44,328 | | $ | 44,917 |
* ThereIncludes notes, debentures, bank loans and secured borrowings.
** | The portion of the company’s fixed-rate debt obligations that is hedged is reflected in the Consolidated Balance Sheet as an amount equal to the sum of the debt’s carrying value and a fair value adjustment representing changes in the fair value of the hedged debt obligations attributable to movements in benchmark interest rates. |
The company’s indenture governing its debt securities and its various credit facilities each contain significant covenants which obligate the company to promptly pay principal and interest, limit the aggregate amount of secured indebtedness and sale and leaseback transactions to 10 percent of the company’s consolidated net tangible assets, and restrict the company’s ability to merge or consolidate unless certain conditions are met. The credit facilities also include
34
Notes to Consolidated Financial Statements — (continued)
a covenant on the company’s consolidated net interest expense ratio, which cannot be less than 2.20 to 1.0, as well as a cross default provision with respect to other defaulted indebtedness of at least $500 million.
The company is in compliance with its debt covenants and provides periodic certifications to its lenders. The failure to comply with its debt covenants could constitute an event of default with respect to the debt to which such provisions apply. If certain events of default were no writedownsto occur, the principal and interest on the debt to which such event of default applied would become immediately due and payable.
In the first quarter of 2022, the company issued $2.3 billion of Euro fixed-rate notes in tranches with maturities ranging from 8 to 12 years and coupons ranging from 0.875 to 1.25 percent, and $1.8 billion of U.S. dollar fixed-rate notes with maturities ranging from 5 to 30 years and coupons ranging from 2.20 to 3.43 percent.
Pre-swap annual contractual obligations of long-term debt outstanding at June 30, 2022, were as follows:
| | | |
(Dollars in millions) |
| Total | |
Remainder of 2022 | | $ | 2,778 |
2023 | |
| 4,607 |
2024 | |
| 6,262 |
2025 | |
| 3,745 |
2026 | |
| 4,664 |
Thereafter | |
| 28,807 |
Total | | $ | 50,863 |
Interest on Debt
| | | | | | |
(Dollars in millions) |
|
| |
|
| |
For the six months ended June 30: | | 2022 | | 2021 | ||
Cost of financing | | $ | 165 | | $ | 210 |
Interest expense | |
| 607 | |
| 561 |
Interest capitalized | |
| 2 | |
| 2 |
Total interest paid and accrued | | $ | 775 | | $ | 774 |
Lines of Credit
On June 30, 2022, the company amended its existing $2.5 billion Three-Year Credit Agreement and $7.5 billion Five-Year Credit Agreement (the Credit Agreements) to extend the maturity dates to June 20, 2025 and June 22, 2027, respectively, and to replace the London Interbank Offered Rate (LIBOR) interest rate provisions with customary provisions based on the Secured Overnight Financing Rate (SOFR). The Credit Agreements permit the company and its subsidiary borrowers to borrow up to $10 billion on a revolving basis. At June 30, 2022, there were 0 borrowings by the company, or its subsidiaries, under these credit facilities.
13. Commitments:
The company’s extended lines of credit to third-party entities include unused amounts of $1.3 billion and $1.7 billion at June 30, 2022 and December 31, 2021, respectively. A portion of these amounts was available to the company’s business partners to support their working capital needs. In addition, the company has committed to provide future financing to its clients in connection with client purchase agreements for $2.7 billion and $3.2 billion at June 30, 2022 and December 31, 2021, respectively. The company collectively evaluates the allowance for these arrangements using a provision methodology consistent with the portfolio of the commitments. Refer to note A, “Significant Accounting Policies,” in the company’s 2021 Annual Report for additional information. The allowance for these commitments is recorded in other liabilities in the Consolidated Balance Sheet and was not material at June 30, 2022.
35
Notes to Consolidated Financial Statements — (continued)
The company has applied the guidance requiring a guarantor to disclose certain types of guarantees, even if the likelihood of requiring the guarantor’s performance is remote. The following is a description of arrangements in which the company is the guarantor.
The company is a party to a variety of agreements pursuant to which it may be obligated to indemnify the other party with respect to certain matters. Typically, these obligations arise in the context of contracts entered into by the company, under which the company customarily agrees to hold the party harmless against losses arising from a breach of representations and covenants related to such matters as title to the assets sold, certain intellectual property rights, specified environmental matters, third-party performance of nonfinancial contractual obligations and certain income taxes. In each of these circumstances, payment by the company is conditioned on the other party making a claim pursuant to the procedures specified in the particular contract, the procedures of which typically allow the company to challenge the other party’s claims. While indemnification provisions typically do not include a contractual maximum on the company’s payment, the company’s obligations under these agreements may be limited in terms of time and/or nature of claim, and in some instances, the company may have recourse against third parties for certain payments made by the company.
It is not possible to predict the maximum potential amount of future payments under these or similar agreements due to the conditional nature of the company’s obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made by the company under these agreements have not had a material effect on the company’s business, financial condition or results of operations.
In addition, the company guarantees certain loans and financial commitments. The maximum potential future payment under these financial guarantees and the fair value of these guarantees recognized in the Consolidated Balance Sheet at June 30, 2022 and December 31, 2021 was not material.
Changes in the company’s warranty liability for standard warranties, which are included in other accrued expenses and liabilities and other liabilities in the Consolidated Balance Sheet, and for extended warranty contracts, which are included in deferred income in the Consolidated Balance Sheet, are presented in the following tables.
Standard Warranty Liability
| | | | | | |
(Dollars in millions) |
| 2022 |
| 2021 | ||
Balance at January 1 | | $ | 77 | | $ | 83 |
Current period accruals | |
| 39 | |
| 36 |
Accrual adjustments to reflect actual experience | |
| (1) | |
| (2) |
Charges incurred | |
| (41) | |
| (45) |
Balance at June 30 | | $ | 74 | | $ | 73 |
Extended Warranty Liability
| | | | | | |
(Dollars in millions) |
| 2022 |
| 2021 | ||
Balance at January 1 | | $ | 350 | | $ | 425 |
Revenue deferred for new extended warranty contracts | |
| 84 | |
| 50 |
Amortization of deferred revenue | |
| (83) | |
| (104) |
Other* | |
| (12) | |
| (5) |
Balance at June 30 | | $ | 339 | | $ | 367 |
Current portion | | $ | 172 | | $ | 184 |
Noncurrent portion | | $ | 167 | | $ | 183 |
* Other primarily consists of foreign currency translation adjustments.
36
Notes to Consolidated Financial Statements — (continued)
14.Contingencies:
As a company with a substantial employee population and with clients in more than 175 countries, IBM is involved, either as plaintiff or defendant, in a variety of ongoing claims, demands, suits, investigations, tax matters and proceedings that arise from time to time in the ordinary course of its business. The company is a leader in the information technology industry and, as such, has been and will continue to be subject to claims challenging its IP rights and associated products and offerings, including claims of copyright and patent infringement and violations of trade secrets and other IP rights. In addition, the company enforces its own IP against infringement, through license negotiations, lawsuits or otherwise. Further, given the rapidly evolving external landscape of cybersecurity, privacy and data protection laws, regulations and threat actors, the company and its clients have been and will continue to be subject to actions or proceedings in various jurisdictions. Also, as is typical for companies of IBM’s scope and scale, the company is party to actions and proceedings in various jurisdictions involving a wide range of labor and employment issues (including matters related to contested employment decisions, country-specific labor and employment laws, and the company’s pension, retirement and other benefit plans), as well as actions with respect to contracts, product liability, securities, foreign operations, competition law and environmental matters. These actions may be commenced by a number of different parties, including competitors, clients, current or former employees, government and regulatory agencies, stockholders and representatives of the locations in which the company does business. Some of the actions to which the company is party may involve particularly complex technical issues, and some actions may raise novel questions under the laws of the various jurisdictions in which these matters arise.
The company records a provision with respect to a claim, suit, investigation or proceeding when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Any recorded liabilities, including any changes to such liabilities for the nine monthsquarter ended SeptemberJune 30, 20172022 were not material to the Consolidated Financial Statements.
In accordance with the relevant accounting guidance, the company provides disclosures of matters for which the likelihood of material loss is at least reasonably possible. In addition, the company also discloses matters based on its consideration of other matters and 2016, respectively.qualitative factors, including the experience of other companies in the industry, and investor, customer and employee relations considerations.
With respect to certain of the claims, suits, investigations and proceedings discussed herein, the company believes at this time that the likelihood of any material loss is remote, given, for example, the procedural status, court rulings, and/or the strength of the company’s defenses in those matters. With respect to the remaining claims, suits, investigations and proceedings discussed in this note, except as specifically discussed herein, the company is unable to provide estimates of reasonably possible losses or range of losses, including losses in excess of amounts accrued, if any, for the following reasons. Claims, suits, investigations and proceedings are inherently uncertain, and it is not possible to predict the ultimate outcome of these matters. It is the company’s experience that damage amounts claimed in litigation against it are unreliable and unrelated to possible outcomes, and as such are not meaningful indicators of the company’s potential liability. Further, the company is unable to provide such an estimate due to a number of other factors with respect to these claims, suits, investigations and proceedings, including considerations of the procedural status of the matter in question, the presence of complex or novel legal theories, and/or the ongoing discovery and development of information important to the matters. The company reviews claims, suits, investigations and proceedings at least quarterly, and decisions are made with respect to recording or adjusting provisions and disclosing reasonably possible losses or range of losses (individually or in the aggregate), to reflect the impact and status of settlement discussions, discovery, procedural and substantive rulings, reviews by counsel and other information pertinent to a particular matter.
Whether any losses, damages or remedies finally determined in any claim, suit, investigation or proceeding could reasonably have a material effect on the company’s business, financial condition, results of operations or cash flows will depend on a number of variables, including: the timing and amount of such losses or damages; the structure and type of any such remedies; the significance of the impact any such losses, damages or remedies may have in the Consolidated Financial Statements; and the unique facts and circumstances of the particular matter that may give rise to additional factors. While the company will continue to defend itself vigorously, it is possible that the company’s business, financial
37
Notes to Consolidated Financial Statements — (continued)
condition, results of operations or cash flows could be affected in any particular period by the resolution of one or more of these matters.
The contractual maturitiesfollowing is a summary of substantiallythe more significant legal matters involving the company.
In December 2017, CIS General Insurance Limited (CISGIL) sued IBM UK regarding a contract entered into by IBM UK and CISGIL in 2015 to implement and operate an IT insurance platform. The contract was terminated by IBM UK in July 2017 for non-payment by CISGIL. CISGIL alleges wrongful termination, breach of contract and breach of warranty. In February 2021, the Technology & Construction Court in London rejected the majority of CISGIL’s claims and ruled in IBM’s favor on its counterclaim. The court’s decision required IBM to pay approximately $20 million in damages, plus interest and litigation costs. In April 2022, the Court of Appeal awarded CISGIL additional damages of approximately $89 million, plus interest and litigation costs. IBM filed an application for permission to appeal with the UK Supreme Court.
On June 8, 2021, IBM sued GlobalFoundries U.S. Inc. (GF) in New York State Supreme Court for claims including fraud and breach of contract relating to a long-term strategic relationship between IBM and GF for researching, developing, and manufacturing advanced semiconductor chips for IBM. GF walked away from its obligations and IBM is now suing to recover amounts paid to GF, and other compensatory and punitive damages, totaling more than $1.5 billion. On September 14, 2021, the court ruled on GF’s motion to dismiss. On April 7, 2022, the Appellate Division unanimously reversed the lower court’s dismissal of IBM’s fraud claim. IBM’s claims for breaches of contract, promissory estoppel, and fraud are proceeding.
On April 5, 2022, a putative securities law class action was commenced in the United States District Court for the Southern District of New York alleging that during the period from April 4, 2017 through October 20, 2021, certain strategic imperatives revenues were misclassified. The company, 2 current IBM senior executives, and 2 former IBM senior executives are named as defendants. On June 23, 2022, the court entered an order appointing Iron Workers Local 580 Joint Funds as lead plaintiff. On March 25, 2022, the Board of Directors received a shareholder demand letter making similar allegations and demanding that the company’s Board of Directors take action to assert the company’s rights. A special committee of independent directors has been formed to investigate the issues raised in the letter.
On June 2, 2022, a putative class action lawsuit was filed in the United States District Court for the Southern District of New York alleging that the IBM Pension Plan miscalculated certain joint and survivor annuity pension benefits by using outdated actuarial tables in violation of the Employee Retirement Income Security Act of 1974. IBM, the Plan Administrator Committee, and the IBM Pension Plan are named as defendants.
As disclosed in the Kyndryl Form 10 and subsequent Kyndryl public filings, in 2017 BMC Software, Inc. (BMC) filed suit against IBM in the United States District Court for the Southern District of Texas in a dispute involving IBM’s former managed infrastructure services business. On May 30, 2022, the trial court awarded BMC $718 million in direct damages and $718 million in punitive damages, plus interest and fees. The judgment will be appealed. IBM does not believe it has any material exposure relating to this litigation. No material liability or related indemnification asset has been recorded by IBM.
The company is party to, or otherwise involved in, proceedings brought by U.S. federal or state environmental agencies under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), known as “Superfund,” or laws similar to CERCLA. Such statutes require potentially responsible parties to participate in remediation activities regardless of fault or ownership of sites. The company is also conducting environmental investigations, assessments or remediations at or in the vicinity of several current or former operating sites globally pursuant to permits, administrative orders or agreements with country, state or local environmental agencies, and is involved in lawsuits and claims concerning certain current or former operating sites.
The company is also subject to ongoing tax examinations and governmental assessments in various jurisdictions. Along with many other U.S. companies doing business in Brazil, the company is involved in various challenges with
38
Notes to Consolidated Financial Statements — (continued)
Brazilian tax authorities regarding non-income tax assessments and non-income tax litigation matters. The total potential amount related to all available-for-sale debt securitiesthese matters for all applicable years is approximately $400 million. The company believes it will prevail on these matters and that this amount is not a meaningful indicator of liability.
15. Equity Activity:
Reclassifications and Taxes Related to Items of Other Comprehensive Income
| | | | | | | | | |
(Dollars in millions) |
| Before Tax |
| Tax (Expense)/ |
| Net of Tax | |||
For the three months ended June 30, 2022: | | Amount | | Benefit | | Amount | |||
Other comprehensive income/(loss): |
| |
|
| |
|
| |
|
Foreign currency translation adjustments | | $ | 213 | | $ | (347) | | $ | (134) |
Net changes related to available-for-sale securities: | |
|
| |
|
| |
|
|
Unrealized gains/(losses) arising during the period | | $ | 0 | | $ | 0 | | $ | 0 |
Reclassification of (gains)/losses to other (income) and expense | |
| — | | | — | | | — |
Total net changes related to available-for-sale securities | | $ | 0 | | $ | 0 | | $ | 0 |
Unrealized gains/(losses) on cash flow hedges: | |
|
| |
|
| |
|
|
Unrealized gains/(losses) arising during the period | | $ | 200 | | $ | (53) | | $ | 147 |
Reclassification of (gains)/losses to: | |
|
| |
|
| |
|
|
Cost of services | |
| (13) | |
| 3 | |
| (10) |
Cost of sales | |
| (23) | |
| 7 | |
| (17) |
Cost of financing | |
| 6 | |
| (2) | |
| 5 |
SG&A expense | |
| (14) | |
| 4 | |
| (10) |
Other (income) and expense | |
| 38 | |
| (10) | |
| 29 |
Interest expense | |
| 22 | |
| (6) | |
| 16 |
Total unrealized gains/(losses) on cash flow hedges | | $ | 217 | | $ | (56) | | $ | 161 |
Retirement-related benefit plans*: | |
|
| |
|
| |
|
|
Prior service costs/(credits) | | $ | — | | $ | 0 | | $ | 0 |
Net (losses)/gains arising during the period | | | 1 | | | (3) | | | (2) |
Curtailments and settlements | |
| 11 | | | (3) | | | 8 |
Amortization of prior service (credits)/costs | |
| 6 | | | (2) | | | 5 |
Amortization of net (gains)/losses | |
| 450 | | | (125) | | | 325 |
Total retirement-related benefit plans | | $ | 468 | | $ | (132) | | $ | 336 |
Other comprehensive income/(loss) | | $ | 897 | | $ | (534) | | $ | 363 |
* | These accumulated other comprehensive income (AOCI) components are included in the computation of net periodic pension cost. Refer to note 18, “Retirement-Related Benefits,” for additional information. |
39
Notes to Consolidated Financial Statements — (continued)
Reclassifications and Taxes Related to Items of Other Comprehensive Income
| | | | | | | | | |
(Dollars in millions) |
| Before Tax |
| Tax (Expense)/ |
| Net of Tax | |||
For the three months ended June 30, 2021: | | Amount | | Benefit | | Amount | |||
Other comprehensive income/(loss): |
| |
|
| |
|
| |
|
Foreign currency translation adjustments | | $ | 28 | | $ | 44 | | $ | 72 |
Net changes related to available-for-sale securities: | |
|
| |
|
| |
|
|
Unrealized gains/(losses) arising during the period | | $ | 0 | | $ | 0 | | $ | 0 |
Reclassification of (gains)/losses to other (income) and expense | |
| — | | | — | | | — |
Total net changes related to available-for-sale securities | | $ | 0 | | $ | 0 | | $ | 0 |
Unrealized gains/(losses) on cash flow hedges: | |
|
| |
|
| |
|
|
Unrealized gains/(losses) arising during the period | | $ | (34) | | $ | 9 | | $ | (26) |
Reclassification of (gains)/losses to: | |
| | |
| | |
| |
Cost of services | |
| (7) | |
| 2 | |
| (5) |
Cost of sales | |
| 10 | |
| (3) | |
| 8 |
Cost of financing | |
| 6 | |
| (1) | |
| 4 |
SG&A expense | |
| 16 | |
| (4) | |
| 12 |
Other (income) and expense | |
| 49 | |
| (12) | |
| 37 |
Interest expense | |
| 16 | |
| (4) | |
| 12 |
Total unrealized gains/(losses) on cash flow hedges | | $ | 56 | | $ | (14) | | $ | 42 |
Retirement-related benefit plans*: | |
|
| |
|
| |
|
|
Prior service costs/(credits) | | $ | 0 | | $ | 0 | | $ | 0 |
Net (losses)/gains arising during the period | | | 2 | | | 10 | | | 11 |
Curtailments and settlements | |
| 16 | | | (5) | | | 11 |
Amortization of prior service (credits)/costs | |
| 1 | | | 1 | | | 1 |
Amortization of net (gains)/losses | |
| 643 | | | (175) | | | 467 |
Total retirement-related benefit plans | | $ | 661 | | $ | (170) | | $ | 491 |
Other comprehensive income/(loss) | | $ | 745 | | $ | (140) | | $ | 605 |
* | These AOCI components are included in the computation of net periodic pension cost. Refer to note 18, “Retirement-Related Benefits,” for additional information. |
40
Notes to Consolidated Financial Statements — (continued)
Reclassifications and Taxes Related to Items of Other Comprehensive Income
| | | | | | | | | |
(Dollars in millions) |
| Before Tax |
| Tax (Expense)/ |
| Net of Tax | |||
For the six months ended June 30, 2022: | | Amount | | Benefit | | Amount | |||
Other comprehensive income/(loss): |
| |
|
| |
|
| |
|
Foreign currency translation adjustments | | $ | 655 | | $ | (483) | | $ | 172 |
Net changes related to available-for-sale securities: | |
|
| |
|
| |
|
|
Unrealized gains/(losses) arising during the period | | $ | (1) | | $ | 0 | | $ | 0 |
Reclassification of (gains)/losses to other (income) and expense | |
| — | |
| — | |
| — |
Total net changes related to available-for-sale securities | | $ | (1) | | $ | 0 | | $ | 0 |
Unrealized gains/(losses) on cash flow hedges: | |
|
| |
|
| |
|
|
Unrealized gains/(losses) arising during the period | | $ | 260 | | $ | (69) | | $ | 191 |
Reclassification of (gains)/losses to: | |
|
| |
|
| |
|
|
Cost of services | |
| (28) | |
| 7 | |
| (21) |
Cost of sales | |
| (35) | |
| 10 | |
| (25) |
Cost of financing | |
| 12 | |
| (3) | |
| 9 |
SG&A expense | |
| (20) | |
| 5 | |
| (14) |
Other (income) and expense | |
| 45 | |
| (11) | |
| 34 |
Interest expense | |
| 43 | |
| (11) | |
| 32 |
Total unrealized gains/(losses) on cash flow hedges | | $ | 276 | | $ | (71) | | $ | 205 |
Retirement-related benefit plans*: | |
|
| |
|
| |
|
|
Prior service costs/(credits) | | $ | (5) | | $ | 5 | | $ | 0 |
Net (losses)/gains arising during the period | | | 10 | | | (7) | | | 3 |
Curtailments and settlements | |
| 19 | |
| (5) | |
| 14 |
Amortization of prior service (credits)/costs | |
| 13 | |
| (3) | |
| 10 |
Amortization of net (gains)/losses | |
| 917 | |
| (256) | |
| 662 |
Total retirement-related benefit plans | | $ | 954 | | $ | (266) | | $ | 689 |
Other comprehensive income/(loss) | | $ | 1,885 | | $ | (819) | | $ | 1,066 |
* | These AOCI components are included in the computation of net periodic pension cost. Refer to note 18, “Retirement-Related Benefits,” for additional information. |
41
Notes to Consolidated Financial Statements — (continued)
Reclassifications and Taxes Related to Items of Other Comprehensive Income
| | | | | | | | | |
(Dollars in millions) |
| Before Tax |
| Tax (Expense)/ |
| Net of Tax | |||
For the six months ended June 30, 2021: | | Amount | | Benefit | | Amount | |||
Other comprehensive income/(loss): |
| |
|
| |
|
| |
|
Foreign currency translation adjustments | | $ | 577 | | $ | (184) | | $ | 393 |
Net changes related to available-for-sale securities: | |
|
| |
| | |
|
|
Unrealized gains/(losses) arising during the period | | $ | 0 | | $ | 0 | | $ | 0 |
Reclassification of (gains)/losses to other (income) and expense | |
| — | |
| — | |
| — |
Total net changes related to available-for-sale securities | | $ | 0 | | $ | 0 | | $ | 0 |
Unrealized gains/(losses) on cash flow hedges: | |
|
| |
|
| |
|
|
Unrealized gains/(losses) arising during the period | | $ | 153 | | $ | (39) | | $ | 114 |
Reclassification of (gains)/losses to: | |
| | |
| | |
| |
Cost of services | |
| (21) | |
| 5 | |
| (16) |
Cost of sales | |
| 32 | |
| (8) | |
| 24 |
Cost of financing | |
| 12 | |
| (3) | |
| 9 |
SG&A expense | |
| 31 | |
| (8) | |
| 23 |
Other (income) and expense | |
| 165 | |
| (41) | |
| 123 |
Interest expense | |
| 31 | |
| (8) | |
| 24 |
Total unrealized gains/(losses) on cash flow hedges | | $ | 404 | | $ | (102) | | $ | 301 |
Retirement-related benefit plans*: | |
|
| |
|
| |
|
|
Prior service costs/(credits) | | $ | 0 | | $ | 0 | | $ | 0 |
Net (losses)/gains arising during the period | | | 22 | | | 4 | | | 25 |
Curtailments and settlements | |
| 34 | |
| (10) | |
| 23 |
Amortization of prior service (credits)/costs | |
| 4 | |
| 0 | |
| 4 |
Amortization of net (gains)/losses | |
| 1,291 | |
| (352) | |
| 938 |
Total retirement-related benefit plans | | $ | 1,350 | | $ | (359) | | $ | 991 |
Other comprehensive income/(loss) | | $ | 2,330 | | $ | (645) | | $ | 1,685 |
* | These AOCI components are included in the computation of net periodic pension cost. Refer to note 18, “Retirement-Related Benefits,” for additional information. |
Accumulated Other Comprehensive Income/(Loss) (net of tax)
| | | | | | | | | | | | | | | |
|
|
| |
|
| |
| Net Change |
| Net Unrealized |
|
| | ||
| | Net Unrealized | | Foreign | | Retirement- | | Gains/(Losses) | | Accumulated | |||||
| | Gains/(Losses) | | Currency | | Related | | on Available- | | Other | |||||
| | on Cash Flow | | Translation | | Benefit | | For-Sale | | Comprehensive | |||||
(Dollars in millions) | | Hedges | | Adjustments* | | Plans | | Securities | | Income/(Loss) | |||||
January 1, 2022 | | $ | (18) | | $ | (3,362) | | $ | (19,854) | | $ | (1) | | $ | (23,234) |
Other comprehensive income before reclassifications | |
| 191 | |
| 172 | |
| 3 | |
| 0 | |
| 366 |
Amount reclassified from accumulated other comprehensive income | |
| 14 | |
| — | |
| 686 | |
| — | |
| 699 |
Total change for the period | | $ | 205 | | $ | 172 | | $ | 689 | | $ | 0 | | $ | 1,066 |
June 30, 2022 | | $ | 187 | | $ | (3,189) | | $ | (19,165) | | $ | (1) | | $ | (22,169) |
* | Foreign currency translation adjustments are presented gross except for any associated hedges which are presented net of tax. |
42
Notes to Consolidated Financial Statements — (continued)
| | | | | | | | | | | | | | | |
|
|
| |
|
| |
| Net Change |
| Net Unrealized |
|
| | ||
| | Net Unrealized | | Foreign | | Retirement- | | Gains/(Losses) | | Accumulated | |||||
| | Gains/(Losses) | | Currency | | Related | | on Available- | | Other | |||||
| | on Cash Flow | | Translation | | Benefit | | For-Sale | | Comprehensive | |||||
(Dollars in millions) | | Hedges | | Adjustments* | | Plans | | Securities | | Income/(Loss) | |||||
January 1, 2021 | | $ | (456) | | $ | (4,665) | | $ | (24,216) | | $ | 0 | | $ | (29,337) |
Other comprehensive income before reclassifications | |
| 114 | |
| 393 | |
| 25 | |
| 0 | |
| 532 |
Amount reclassified from accumulated other comprehensive income | |
| 187 | |
| — | |
| 966 | |
| — | |
| 1,153 |
Total change for the period | | $ | 301 | | $ | 393 | | $ | 991 | | $ | 0 | | $ | 1,685 |
June 30, 2021 | | $ | (155) | | $ | (4,271) | | $ | (23,225) | | $ | (1) | | $ | (27,652) |
* Foreign currency translation adjustments are less than one year at September 30, 2017.presented gross except for any associated hedges which are presented net of tax.
16. Derivative Financial InstrumentsInstruments:
The company operates in multiple functional currencies and is a significant lender and borrower in the global markets. In the normal course of business, the company is exposed to the impact of interest rate changes and foreign currency fluctuations, and to a lesser extent equity and commodity price changes and client credit risk. The company limits these risks by following established risk management policies and procedures, including the use of derivatives, and, where cost effective, financing with debt in the currencies in which assets are denominated. For interest rate exposures, derivatives are used to better align rate movements between the interest rates associated with the company’s lease and other financial assets and the interest rates associated with its financing debt. Derivatives are also used to manage the related cost of debt. For foreign currency exposures, derivatives are used to better manage the cash flow volatility arising from foreign exchange rate fluctuations.
As a result of the use of derivative instruments, the company is exposed to the risk that counterparties to derivative contracts will fail to meet their contractual obligations. To mitigate the counterparty credit risk, the company has a policy of only entering into contracts with carefully selected major financial institutions based upon their overall credit profile. The company’s established policies and procedures for mitigating credit risk on principal transactions include reviewing and establishing limits for credit exposure and continually assessing the creditworthiness of counterparties. The right of set-off that exists under certain of these arrangements enables the legal entities of the company subject to the arrangement to net amounts due to and from the counterparty reducing the maximum loss from credit risk in the event of counterparty default.
The company is also a party to collateral security arrangements with most of its major derivative counterparties. These arrangements require the company to hold or post collateral (cash or U.S. Treasury securities) when the derivative fair values exceed contractually established thresholds. Posting thresholds can be fixed or can vary based on credit default swap pricing or credit ratings received from the major credit agencies. The aggregate fair value of all derivative instruments under these collateralized arrangements that were in a liability position at September 30, 2017 and December 31, 2016 was $45 million and $11 million, respectively, for which no collateral was posted at either date. Full collateralization of these agreements would be required in the event that the company’s credit rating falls below investment grade or if its credit default swap spread exceeds 250 basis points, as applicable, pursuant to the terms of the collateral security arrangements. The aggregate fair value of derivative instruments in asset positions as of September 30, 2017 and December 31, 2016 was $957 million and $1,126 million, respectively. This amount represents the maximum exposure to loss at the reporting date if the counterparties failed to perform as contracted. This exposure was reduced by $274 million and $116 million at September 30, 2017 and December 31, 2016, respectively, of liabilities included in master netting arrangements with those counterparties. Additionally, at September 30, 2017 and December 31, 2016, this exposure was reduced by $123 million and $141 million of cash collateral, respectively, and $35 million of non-cash collateral in U.S. Treasury securities at December 31, 2016. There were no non-cash collateral balances in U.S. Treasury securities at September 30, 2017. At September 30, 2017 and December 31, 2016, the net exposure related to derivative assets recorded in the Consolidated Statement of Financial Position was $559 million and $834 million, respectively. At September 30, 2017 and December 31, 2016, the net position related to derivative liabilities recorded in the Consolidated Statement of Financial Position was $78 million and $90 million, respectively.
In the Consolidated Statement of Financial Position,Balance Sheet, the company does not offset derivative assets against liabilities in master netting arrangements nor does it offset receivables or payables recognized upon payment or receipt of cash collateral
Notes to Consolidated Financial Statements — (continued)
against the fair values of the related derivative instruments. NoAt June 30, 2022 and December 31, 2021, the amount was recognized in other accounts receivables at September 30, 2017 or December 31, 2016 for the right to reclaim cash collateral. Thecollateral was $52 million and $2 million, respectively. At June 30, 2022 and December 31, 2021, the amount recognized in accounts payable for the obligation to return cash collateral was $123$14 million and $141$38 million, at September 30, 2017 and December 31, 2016, respectively. The company restricts the use of cash collateral received to rehypothecation, and therefore reports it in prepaid expenses and other current assetsrestricted cash in the Consolidated Statement of Financial Position. No amount was rehypothecated at SeptemberBalance Sheet. At June 30, 20172022 and December 31, 2016.2021, the amount rehypothecated was $12 million and $2 million, respectively. Additionally, if derivative exposures covered by a qualifying master netting agreement had been netted in the Consolidated Balance Sheet at June 30, 2022 and December 31, 2021, the total derivative asset and liability positions each would have been reduced by $187 million and $60 million, respectively.
TheOn May 19, 2022, in connection with the disposition of 22.3 million shares of Kyndryl common stock, the company may employ derivative instruments to hedgeentered into a cash-settled swap with the volatility in stockholders’ equity resulting from changes in currency exchange rates of significant foreign subsidiarieslender of the company with respectshort-term credit facility as the counterparty that maintained IBM’s continued economic exposure in those shares pursuant to the U.S. dollar. These instruments, designated as net investment hedges, exposeExchange. Refer to note 8, “Financial Assets & Liabilities,” for additional information. The notional value of the company to liquidity risk asswap is $311 million. Upon settlement of the derivatives haveswap, no later than November 2, 2022, IBM will receive or pay an immediate cash flow impact upon maturity which is not offset by a cash flowamount derived from the translationdifference between the VWAP of the underlying hedged equity.Kyndryl shares over the outstanding term of the swap and the strike price as of May 19, 2022. The company monitors this cash loss potential on an ongoing basis and may discontinue some of these hedging relationships by de-designating or terminating the derivative instrument in order to manage the liquidity risk. Although not designated as accounting hedges, the company may utilize derivatives to offset the changes in the fair value of the de-designated instruments fromswap at June 30, 2022 was $88 million and is included within other accrued expenses and liabilities in the dateConsolidated Balance Sheet. For the three and six months ended June 30, 2022, an unrealized loss of de-designation until maturity.$88 million was recorded in other (income) and expense in the Consolidated Income Statement.
In its hedging programs, the company usesmay use forward contracts, futures contracts, interest-rate swaps, cross-currency swaps, equity swaps, and options depending upon the underlying exposure. The company is not a party to leveraged derivative instruments.
43
Notes to Consolidated Financial Statements — (continued)
A brief description of the major hedging programs, categorized by underlying risk, follows.
Interest Rate Risk
Fixed and Variable Rate Borrowings
The company issues debt in the global capital markets to fund its operations and financing business. Access to cost-effective financing can result in interest rate mismatches with the underlying assets. To manage these mismatches and to reduce overall interest cost, the company usesmay use interest-rate swaps to convert specific fixed-rate debt issuances into variable-rate debt (i.e., fair value hedges) and to convert specific variable-rate debt issuances into fixed-rate debt (i.e., cash flow hedges). At SeptemberJune 30, 20172022 and December 31, 2016,2021, the total notional amount of the company’s interest rateinterest-rate swaps was $9.1$4.4 billion and $7.3$0.4 billion, respectively. The weighted-average remaining maturity of these instruments at SeptemberJune 30, 20172022 and December 31, 20162021 was approximately 5.05.4 years and 6.21.2 years, respectively.
These interest-rate contracts were accounted for as fair value hedges. The company did 0t have any cash flow hedges relating to this program outstanding at June 30, 2022 and December 31, 2021.
Forecasted Debt Issuance
The company is exposed to interest rate volatility on future debt issuances. To manage this risk, the company may use instruments such as forward starting interest-rate swaps to lock in the rate on the interest payments related to the forecasted debt issuance. These swaps are accounted for as cash flow hedges. The company did not have any derivativeissuances. There were 0 instruments relating to this program outstanding at SeptemberJune 30, 20172022 and December 31, 2016.2021.
At December 31, 2016, net gains of less than $1 million (before taxes) were recorded in accumulated other comprehensive income/(loss) inIn connection with cash flow hedges of forecasted interest payments related to the company’s borrowings. During 2017, all gainscompany's borrowings, the company recorded net losses (before taxes) of $148 million and $157 million at June 30, 2022 and December 31, 2021, respectively, in AOCI. The company estimates that $18 million of the deferred net losses associated with this program that were recorded(before taxes) on derivatives in other comprehensive income/(loss) wereAOCI at June 30, 2022 will be reclassified to net income and there are no gains and losses remaining in accumulated other comprehensive income/(loss) at September 30, 2017.
within the next 12 months, providing an offsetting economic impact against the underlying interest payments.
Foreign Exchange Risk
Long-Term Investments in Foreign Subsidiaries (Net Investment)
A large portion of the company’s foreign currency denominated debt portfolio is designated as a hedge of net investment in foreign subsidiaries to reduce the volatility in stockholders’ equity caused by changes in foreign currency exchange rates in the functional currency of major foreign subsidiaries with respect to the U.S. dollar. At June 30, 2022 and December 31, 2021, the carrying value of debt designated as hedging instruments was $14.0 billion and $14.1 billion, respectively. The company also uses cross-currency swaps and foreign exchange forward contracts for this risk management purpose. At SeptemberJune 30, 20172022 and December 31, 2016,2021, the total notional amount of derivative instruments designated as net investment hedges was $8.8$4.7 billion and $6.7$6.8 billion, respectively. At Septemberboth June 30, 20172022 and December 31, 2016,2021, the weighted-average remaining maturity of these instruments was approximately 0.1 years and 0.2 years, respectively.
Notes to Consolidated Financial Statements — (continued)
year.
Anticipated Royalties and Cost Transactions
The company’s operations generate significant nonfunctional currency, third-party vendor payments and intercompany payments for royalties and goods and services among the company’s non-U.S. subsidiaries and with the company. In anticipation of these foreign currency cash flows and in view of the volatility of the currency markets, the company selectively employs foreign exchange forward contracts to manage its currency risk. These forward contracts are accounted for as cash flow hedges. TheAt June 30, 2022, the maximum remaining length of time over which the company has hedged its exposure to the variability in future cash flows is fourapproximately two years. At SeptemberJune 30, 20172022 and December 31, 2016,2021, the total notional amount of forward contracts designated as cash flow hedges of forecasted royalty and cost transactions was $7.9$8.2 billion and $8.3$7.2 billion, respectively. TheAt both June 30, 2022 and December 31, 2021, the weighted-average remaining maturity of these instruments at Septemberwas approximately 0.6 years.
44
Notes to Consolidated Financial Statements — (continued)
At June 30, 20172022 and December 31, 2016 was 0.7 years at both periods.
At September 30, 2017 and December 31, 2016,2021, in connection with cash flow hedges of anticipated royalties and cost transactions, the company recorded net lossesgains (before taxes) of $70$537 million and $315 million, respectively, in AOCI. The company estimates that $471 million of deferred net gains of $462 million (before taxes), respectively, on derivatives in accumulated other comprehensive income/(loss). Within these amounts, $161 million of losses and $397 million of gains, respectively, are expected toAOCI at June 30, 2022 will be reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying anticipated transactions.
Foreign Currency Denominated Borrowings
The company is exposed to exchange rate volatility on foreign currency denominated debt. To manage this risk, the company employs cross-currency swaps to convert fixed-rate foreign currency denominated debt to fixed-rate debt denominated in the functional currency of the borrowing entity. These swaps are accounted for as cash flow hedges. TheAt June 30, 2022, the maximum length of time remaining over which the company has hedged its exposure to the variability in future cash flows is approximately ninesix years. At SeptemberJune 30, 20172022 and December 31, 2016,2021, the total notional amount of cross-currency swaps designated as cash flow hedges of foreign currency denominated debt was $1.4$3.0 billion at both periods.
and $2.0 billion, respectively.
At SeptemberJune 30, 20172022 and December 31, 2016,2021, in connection with cash flow hedges of foreign currency denominated borrowings, the company recorded net gainslosses (before taxes) of $16$128 million and $174 million, respectively, in AOCI. The company estimates that $31 million of deferred net gains of $29 million (before taxes), respectively, on derivatives in accumulated other comprehensive income/(loss). Within these amounts, $34 million of gains and $27 million of gains, respectively, are expected toAOCI at June 30, 2022 will be reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying exposure.
Subsidiary Cash and Foreign Currency Asset/Liability Management
The company uses its Global Treasury Centers to manage the cash of its subsidiaries. These centers principally use currency swaps to convert cash flows in a cost-effective manner. In addition, the company uses foreign exchange forward contracts to economically hedge, on a net basis, the foreign currency exposure of a portion of the company’s nonfunctional currency assets and liabilities. The terms of these forward and swap contracts are generally less than one year. The changes in the fair values of these contracts and of the underlying hedged exposures are generally offsetting and are recorded in other (income) and expense in the Consolidated Statement of Earnings.Income Statement. At SeptemberJune 30, 20172022 and December 31, 2016,2021, the total notional amount of derivative instruments in economic hedges of foreign currency exposure was $10.8$5.6 billion and $12.7$6.8 billion, respectively.
Equity Risk Management
The company is exposed to market price changes in certain broad market indices and in the company’s own stock primarily related to certain obligations to employees. Changes in the overall value of these employee compensation obligations are recorded in selling, general and administrative (SG&A)SG&A expense in the Consolidated Statement of Earnings.Income Statement. Although not designated as accounting hedges, the company utilizes derivatives, including equity swaps and futures, to economically hedge the exposures related to its employee compensation obligations. The derivatives are linked to the total return on certain broad market indices or the total return on the company’s common stock, and are recorded at fair value with gains or losses also reported in SG&A expense in the Consolidated Statement of Earnings.Income Statement. At SeptemberJune 30, 20172022 and December 31, 2016,2021, the total notional amount of derivative instruments in economic hedges of these compensation obligations was $1.2$1.1 billion at both periods.and $1.4 billion, respectively.
45
Notes to Consolidated Financial Statements — (continued)
Cumulative Basis Adjustments for Fair Value Hedges
Other Risks
The company may hold warrants to purchase shares of common stock in connection with various investments that are deemed derivatives because they contain net share or net cash settlement provisions. The company recordsAt June 30, 2022 and December 31, 2021, the changes in the fair value of these warrants in other (income) and expensefollowing amounts were recorded in the Consolidated StatementBalance Sheet related to cumulative basis adjustments for fair value hedges:
| | | | | | | |
|
| June 30, |
| December 31, |
| ||
(Dollars in millions) | | 2022 | | 2021 |
| ||
Short-term debt: |
| |
|
| |
| |
Carrying amount of the hedged item | | $ | (224) | | $ | (227) | |
Cumulative hedging adjustments included in the carrying amount — assets/(liabilities)* | |
| 1 | |
| (2) | |
Long-term debt: | |
|
| |
|
| |
Carrying amount of the hedged item | | $ | (4,366) | | $ | (508) | |
Cumulative hedging adjustments included in the carrying amount — assets/(liabilities)* | |
| (188) | |
| (309) | |
* Includes ($276) million and ($302) million of Earnings. The company did not have any warrants qualifying as derivatives outstandinghedging adjustments on discontinued hedging relationships at SeptemberJune 30, 20172022 and December 31, 2016.
The company is exposed to a potential loss if a client fails to pay amounts due under contractual terms. The company may utilize credit default swaps to economically hedge its credit exposures. The swaps are recorded at fair value with gains and losses reported in other (income) and expense in the Consolidated Statement of Earnings. The company did not have any derivative instruments relating to this program outstanding at September 30, 2017 and December 31, 2016.
The company is exposed to market volatility on certain investment securities. The company may utilize options or forwards to economically hedge its market exposure. The derivatives are recorded at fair value with gains and losses reported in other (income) and expense in the Consolidated Statement of Earnings. At September 30, 2017 and December 31, 2016, the company did not have any derivative instruments relating to this program outstanding.
The following tables provide a quantitative summary of the derivative and non-derivative instrument-related risk management activity as of September 30, 2017 and December 31, 2016, as well as for the three and nine months ended September 30, 2017 and 2016,2021, respectively.
Notes to Consolidated Financial Statements — (continued)
Fair Values of Derivative Instruments in the Consolidated Statement of Financial Position
As of September 30, 2017 and December 31, 2016
|
| Fair Value of Derivative Assets |
| Fair Value of Derivative Liabilities |
| ||||||||||||
|
| Balance Sheet |
|
|
|
|
| Balance Sheet |
|
|
|
|
| ||||
(Dollars in millions) |
| Classification |
| 9/30/2017 |
| 12/31/2016 |
| Classification |
| 9/30/2017 |
| 12/31/2016 |
| ||||
Designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest rate contracts: |
| Prepaid expenses and other current assets |
| $ | — |
| $ | — |
| Other accrued expenses and liabilities |
| $ | 1 |
| $ | — |
|
|
| Investments and sundry assets |
| 517 |
| 555 |
| Other liabilities |
| 15 |
| 8 |
| ||||
Foreign exchange contracts: |
| Prepaid expenses and other current assets |
| 208 |
| 421 |
| Other accrued expenses and liabilities |
| 272 |
| 46 |
| ||||
|
| Investments and sundry assets |
| 170 |
| 17 |
| Other liabilities |
| 5 |
| 35 |
| ||||
|
| Fair value of derivative assets |
| $ | 896 |
| $ | 993 |
| Fair value of derivative liabilities |
| $ | 292 |
| $ | 89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Not designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Foreign exchange contracts: |
| Prepaid expenses and other current assets |
| $ | 38 |
| $ | 100 |
| Other accrued expenses and liabilities |
| $ | 56 |
| $ | 89 |
|
|
| Investments and sundry assets |
| — |
| 22 |
| Other liabilities |
| — |
| 18 |
| ||||
Equity contracts: |
| Prepaid expenses and other current assets |
| 23 |
| 11 |
| Other accrued expenses and liabilities |
| 4 |
| 10 |
| ||||
|
| Investments and sundry assets |
| — |
| — |
| Other liabilities |
| — |
| — |
| ||||
|
| Fair value of derivative assets |
| $ | 61 |
| $ | 133 |
| Fair value of derivative liabilities |
| $ | 60 |
| $ | 117 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total Derivatives |
|
|
| $ | 957 |
| $ | 1,126 |
|
|
| $ | 352 |
| $ | 206 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total debt designated as hedging instruments(1): |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Short-term debt |
|
|
| N/A |
| N/A |
|
|
| $ | 377 |
| $ | 1,125 |
| ||
Long-term debt |
|
|
| N/A |
| N/A |
|
|
| 11,469 |
| 7,844 |
| ||||
|
|
|
| N/A |
| N/A |
|
|
| $ | 11,846 |
| $ | 8,969 |
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total |
|
|
| $ | 957 |
| $ | 1,126 |
|
|
| $ | 12,198 |
| $ | 9,175 |
|
N/A - not applicable
(1) Debt designated as hedging instruments are reported at carrying value.
Notes to Consolidated Financial Statements — (continued)
The Effect of Derivative Instruments in the Consolidated Income Statement of Earnings
ForThe total amounts of income and expense line items presented in the three months ended September 30, 2017Consolidated Income Statement in which the effects of fair value hedges, cash flow hedges, net investment hedges and 2016derivatives not designated as hedging instruments are recorded and the total effect of hedge activity on these income and expense line items are as follows:
|
| Gain (Loss) Recognized in Earnings |
| ||||||||||||
|
| Consolidated |
| Recognized on |
| Attributable to Risk |
| ||||||||
(Dollars in millions) |
| Statement of |
| Derivatives |
| Being Hedged(2) |
| ||||||||
For the three months ended September 30: |
| Earnings Line Item |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
Derivative instruments in fair value hedges(1)(5): |
|
|
|
|
|
|
|
|
|
|
| ||||
Interest rate contracts |
| Cost of financing |
| $ | (3 | ) | $ | (20 | ) | $ | 20 |
| $ | 40 |
|
|
| Interest expense |
| (3 | ) | (21 | ) | 20 |
| 43 |
| ||||
Derivative instruments not designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
| ||||
Foreign exchange contracts |
| Other (income) and expense |
| (35 | ) | 30 |
| N/A |
| N/A |
| ||||
Interest rate contracts |
| Other (income) and expense |
| — |
| 0 |
| N/A |
| N/A |
| ||||
Equity contracts |
| SG&A expense |
| 31 |
| 45 |
| N/A |
| N/A |
| ||||
|
| Other (income) and expense |
| — |
| 0 |
| N/A |
| N/A |
| ||||
Total |
|
|
| $ | (10 | ) | $ | 34 |
| $ | 41 |
| $ | 83 |
|
|
| Gain (Loss) Recognized in Earnings and Other Comprehensive Income |
| ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| Ineffectiveness and |
| ||||||||
(Dollars in millions) |
| Effective Portion |
| Consolidated |
| Effective Portion Reclassified |
| Amounts Excluded from |
| ||||||||||||
For the three months |
| Recognized in OCI |
| Statement of |
| from AOCI |
| Effectiveness Testing(3) |
| ||||||||||||
ended September 30: |
| 2017 |
| 2016 |
| Earnings Line Item |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||||
Derivative instruments in cash flow hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Interest rate contracts |
| $ | — |
| $ | — |
| Interest expense |
| $ | (7 | ) | $ | (7 | ) | $ | — |
| $ | — |
|
Foreign exchange contracts |
| (70 | ) | 35 |
| Other (income) and expense |
| 64 |
| (6 | ) | (1 | ) | (1 | ) | ||||||
|
|
|
|
|
| Cost of sales* |
| 1 |
| (7 | ) | — |
| — |
| ||||||
|
|
|
|
|
| Cost of services* |
| 20 |
| 3 |
| — |
| — |
| ||||||
|
|
|
|
|
| SG&A expense |
| (6 | ) | 2 |
| — |
| — |
| ||||||
Instruments in net investment hedges(4): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Foreign exchange contracts |
| (507 | ) | (131 | ) | Cost of financing |
| — |
| — |
| 0 |
| — |
| ||||||
|
|
|
|
|
| Interest expense |
| — |
| — |
| 8 |
| 25 |
| ||||||
Total |
| $ | (577 | ) | $ | (96 | ) |
|
| $ | 73 |
| $ | (15 | ) | $ | 7 |
| $ | 24 |
|
| | | | | | | | | | | | | |
| | | | | | | | Gains/(Losses) of |
| ||||
(Dollars in millions) | | Total | | Total Hedge Activity |
| ||||||||
For the three months ended June 30: |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||||
Cost of services | | $ | 5,399 | | $ | 4,720 | | $ | 13 | | $ | 7 | |
Cost of sales | |
| 1,750 | |
| 1,499 | * |
| 23 | |
| (10) | |
Cost of financing | |
| 96 | |
| 146 | * |
| 1 | |
| 0 | |
SG&A expense | |
| 4,855 | |
| 4,849 | |
| (152) | |
| 67 | |
Other (income) and expense | |
| (81) | |
| 302 | |
| (439) | |
| (79) | |
Interest expense | |
| 297 | |
| 281 | |
| 3 | |
| (1) | |
* Reclassified to conform to 2017 presentationcurrent year presentation.
46
N/A - not applicable
Note: OCI represents other comprehensive income/(loss) in the Consolidated Statement of Comprehensive Income and AOCI represents accumulated other comprehensive income/(loss) in the Consolidated Statement of Changes in Equity.
(1) The amount includes changes in clean fair values of the derivative instruments in fair value hedging relationships and the periodic accrual for coupon payments required under these derivative contracts.
(2) The amount includes basis adjustments to the carrying value of the hedged item recorded during the period and amortization of basis adjustments recorded on de-designated hedging relationships during the period.
(3) The amount of gain/(loss) recognized in income represents ineffectiveness on hedge relationships.
(4) Instruments in net investment hedges include derivative and non-derivative instruments.
(5) For the three month periods ended September 30, 2017 and 2016, fair value hedges resulted in a loss of less than $1 million and a loss of $3 million in ineffectiveness, respectively.
Notes to Consolidated Financial Statements — (continued)
| | | | | | | | | | | | | | |
| | Gain (Loss) Recognized in Consolidated Income Statement | ||||||||||||
| | Consolidated | | Recognized on | | Attributable to Risk | ||||||||
(Dollars in millions) | | Income Statement | | Derivatives | | Being Hedged (2) | ||||||||
For the three months ended June 30: |
| Line Item |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Derivative instruments in fair value hedges (1): |
|
|
| |
|
| |
|
| |
|
| |
|
Interest rate contracts |
| Cost of financing | | $ | (17) | | $ | 0 | | $ | 23 | | $ | 4 |
|
| Interest expense | |
| (61) | |
| 0 | |
| 81 | |
| 11 |
Derivative instruments not designated as hedging instruments: |
|
| |
|
| |
|
| |
|
| |
|
|
Foreign exchange contracts |
| Other (income) and expense | |
| (313) | |
| (30) | |
| N/A | |
| N/A |
Equity contracts |
| SG&A expense | |
| (166) | |
| 83 | |
| N/A | |
| N/A |
| | Other (income) and expense | | | (88) | | | — | | | N/A | | | N/A |
Total |
|
| | $ | (645) | | $ | 54 | | $ | 104 | | $ | 15 |
The Effect of Derivative Instruments in the Consolidated Statement of Earnings
For the nine months ended September 30, 2017 and 2016
|
| Gain (Loss) Recognized in Earnings |
| ||||||||||||
|
| Consolidated |
| Recognized on |
| Attributable to Risk |
| ||||||||
(Dollars in millions) |
| Statement of |
| Derivatives |
| Being Hedged(2) |
| ||||||||
For the nine months ended September 30: |
| Earnings Line Item |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
Derivative instruments in fair value hedges(1)(5): |
|
|
|
|
|
|
|
|
|
|
| ||||
Interest rate contracts |
| Cost of financing |
| $ | 37 |
| $ | 195 |
| $ | 22 |
| $ | (127 | ) |
|
| Interest expense |
| 34 |
| 214 |
| 20 |
| (140 | ) | ||||
Derivative instruments not designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
| ||||
Foreign exchange contracts |
| Other (income) and expense |
| 74 |
| 335 |
| N/A |
| N/A |
| ||||
Interest rate contracts |
| Other (income) and expense |
| — |
| 0 |
| N/A |
| N/A |
| ||||
Equity contracts |
| SG&A expense |
| 88 |
| 87 |
| N/A |
| N/A |
| ||||
|
| Other (income) and expense |
| — |
| (1 | ) | N/A |
| N/A |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total |
|
|
| $ | 233 |
| $ | 830 |
| $ | 42 |
| $ | (267 | ) |
|
| Gain (Loss) Recognized in Earnings and Other Comprehensive Income |
| ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| Ineffectiveness and |
| ||||||||
(Dollars in millions) |
| Effective Portion |
| Consolidated |
| Effective Portion Reclassified |
| Amounts Excluded from |
| ||||||||||||
For the nine months |
| Recognized in OCI |
| Statement of |
| from AOCI |
| Effectiveness Testing(3) |
| ||||||||||||
ended September 30: |
| 2017 |
| 2016 |
| Earnings Line Item |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||||
Derivative instruments in cash flow hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Interest rate contracts |
| $ | — |
| $ | — |
| Interest expense |
| $ | (21 | ) | $ | (17 | ) | $ | — |
| $ | — |
|
Foreign exchange contracts |
| (198 | ) | (221 | ) | Other (income) and expense |
| 275 |
| 6 |
| 2 |
| (1 | ) | ||||||
|
|
|
|
|
| Cost of sales* |
| 23 |
| (5 | ) | — |
| — |
| ||||||
|
|
|
|
|
| Cost of services* |
| 47 |
| (9 | ) | — |
| — |
| ||||||
|
|
|
|
|
| SG&A expense |
| 23 |
| (1 | ) | — |
| — |
| ||||||
Instruments in net investment hedges(4): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Foreign exchange contracts |
| (1,513 | ) | (1,071 | ) | Cost of financing |
| — |
| — |
| 0 |
| — |
| ||||||
|
|
|
|
|
| Interest expense |
| — |
| — |
| 34 |
| 51 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total |
| $ | (1,712 | ) | $ | (1,292 | ) |
|
| $ | 347 |
| $ | (26 | ) | $ | 37 |
| $ | 49 |
|
| | | | | | | | | | | | | | | | | | | | | |
| | Gain (Loss) Recognized in Consolidated Income Statement and Other Comprehensive Income |
| ||||||||||||||||||
(Dollars in millions) | | | | | | | | Consolidated | | Reclassified | | Amounts Excluded from |
| ||||||||
For the three months | | Recognized in OCI | | Income Statement | | from AOCI | | Effectiveness Testing (3) |
| ||||||||||||
ended June 30: |
| 2022 |
| 2021 |
| Line Item |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||||||
Derivative instruments in cash flow hedges: |
| |
|
| |
|
|
|
| |
|
| |
| | |
|
| |
| |
Interest rate contracts | | $ | — | | $ | — |
| Cost of financing | | $ | (1) | | $ | (1) | | $ | — | | $ | — | |
| | | | | | |
| Interest expense | |
| (3) | |
| (3) | |
| — | |
| — | |
Foreign exchange contracts | |
| 200 | |
| (34) |
| Cost of services | |
| 13 | |
| 7 | |
| — | |
| — | |
| | | | | | |
| Cost of sales | |
| 23 | |
| (10) | |
| — | |
| — | |
| | | | | | |
| Cost of financing | |
| (5) | |
| (5) | | | — | | | — | |
| | | | | | |
| SG&A expense | |
| 14 | |
| (16) | |
| — | |
| — | |
| | | | | | |
| Other (income) and expense | |
| (38) | |
| (49) | |
| — | |
| — | |
| | | | | | |
| Interest expense | |
| (19) | |
| (12) | | | — | | | — | |
Instruments in net investment hedges (4): | |
| | |
|
|
|
| |
|
| |
|
| |
|
| |
|
| |
Foreign exchange contracts | |
| 1,379 | |
| (177) |
| Cost of financing | |
| — | |
| — | |
| 1 | |
| 1 | |
| |
| | |
| |
| Interest expense | |
| — | |
| — | |
| 5 | |
| 4 | |
Total | | $ | 1,579 | | $ | (211) |
|
| | $ | (16) | | $ | (90) | | $ | 6 | | $ | 5 | |
| (1) | The amount includes changes in clean fair values of the derivative instruments in fair value hedging relationships and the periodic accrual for coupon payments required under these derivative contracts. |
| (2) | The amount includes basis adjustments to the carrying value of the hedged item recorded during the period and amortization of basis adjustments recorded on de-designated hedging relationships during the period. |
| (3) | The company’s policy is to recognize all fair value changes in amounts excluded from effectiveness testing in net income each period. |
| (4) | Instruments in net investment hedges include derivative and non-derivative instruments with the amounts recognized in OCI providing an offset to the translation of foreign subsidiaries. |
N/A - not applicable
| | | | | | | | | | | | | |
| | | | | | | | Gains/(Losses) of |
| ||||
(Dollars in millions) | | Total | | Total Hedge Activity |
| ||||||||
For the six months ended June 30: |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||||
Cost of services | | $ | 10,747 | | $ | 9,364 | | $ | 28 | | $ | 21 | |
Cost of sales | |
| 3,165 | |
| 2,878 | * |
| 35 | |
| (32) | |
Cost of financing | |
| 194 | |
| 283 | * |
| (1) | |
| 2 | |
SG&A expense | |
| 9,452 | |
| 9,536 | |
| (223) | |
| 101 | |
Other (income) and expense | |
| 166 | |
| 647 | |
| (541) | |
| (239) | |
Interest expense | |
| 607 | |
| 561 | |
| (3) | |
| 4 | |
* Reclassified to conform to 2017current year presentation.
47
Notes to Consolidated Financial Statements — (continued)
| | | | | | | | | | | | | | |
| | Gain (Loss) Recognized in Consolidated Income Statement | ||||||||||||
| | Consolidated | | Recognized on | | Attributable to Risk | ||||||||
(Dollars in millions) | | Income Statement | | Derivatives | | Being Hedged (2) | ||||||||
For the six months ended June 30: | | Line Item | | 2022 |
| 2021 | | 2022 |
| 2021 | ||||
Derivative instruments in fair value hedges (1): |
|
|
| |
|
| |
|
| |
|
| |
|
Interest rate contracts |
| Cost of financing | | $ | (18) | | $ | 0 | | $ | 26 | | $ | 11 |
|
| Interest expense | |
| (65) | |
| (1) | |
| 97 | |
| 29 |
Derivative instruments not designated as hedging instruments: |
|
| |
|
| |
|
| |
|
| |
|
|
Foreign exchange contracts |
| Other (income) and expense | |
| (409) | |
| (74) | |
| N/A | |
| N/A |
Equity contracts |
| SG&A expense | |
| (243) | |
| 133 | |
| N/A | |
| N/A |
| | Other (income) and expense | | | (88) | | | — | | | N/A | | | N/A |
Total |
|
| | $ | (821) | | $ | 57 | | $ | 123 | | $ | 40 |
| | | | | | | | | | | | | | | | | | | | | |
| | Gain (Loss) Recognized in Consolidated Income Statement and Other Comprehensive Income |
| ||||||||||||||||||
(Dollars in millions) | | | | | | | | Consolidated | | Reclassified | | Amounts Excluded from |
| ||||||||
For the six months | | Recognized in OCI | | Income Statement | | from AOCI | | Effectiveness Testing (3) |
| ||||||||||||
ended June 30: |
| 2022 |
| 2021 |
| Line Item |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||||||
Derivative instruments in cash flow hedges: |
| |
|
| |
|
|
|
| |
|
| |
| | |
|
| |
| |
Interest rate contracts | | $ | — | | $ | — |
| Cost of financing | | $ | (2) | | $ | (2) | | $ | — | | $ | — | |
| | | | | | |
| Interest expense | |
| (7) | |
| (6) | |
| — | |
| — | |
Foreign exchange contracts | |
| 260 | |
| 153 |
| Cost of services | |
| 28 | |
| 21 | |
| — | |
| — | |
| | | | | | |
| Cost of sales | |
| 35 | |
| (32) | |
| — | |
| — | |
| | | | | | |
| Cost of financing | |
| (10) | |
| (9) | | | — | | | — | |
| | | | | | |
| SG&A expense | |
| 20 | |
| (31) | |
| — | |
| — | |
| | | | | | |
| Other (income) and expense | |
| (45) | |
| (165) | |
| — | |
| — | |
| | | | | | |
| Interest expense | |
| (36) | |
| (25) | | | — | | | — | |
Instruments in net investment hedges (4): | |
| | |
|
|
|
| |
|
| |
|
| |
|
| |
|
| |
Foreign exchange contracts | |
| 1,920 | |
| 730 |
| Cost of financing | |
| — | |
| — | |
| 2 | |
| 3 | |
| |
| | |
| |
| Interest expense | |
| — | |
| — | |
| 7 | |
| 8 | |
Total | | $ | 2,180 | | $ | 883 |
|
| | $ | (16) | | $ | (251) | | $ | 9 | | $ | 11 | |
| (1) | The amount includes changes in clean fair values of the derivative instruments in fair value hedging relationships and the periodic accrual for coupon payments required under these derivative contracts. |
| (2) | The amount includes basis adjustments to the carrying value of the hedged item recorded during the period and amortization of basis adjustments recorded on de-designated hedging relationships during the period. |
| (3) | The company’s policy is to recognize all fair value changes in amounts excluded from effectiveness testing in net income each period. |
| (4) | Instruments in net investment hedges include derivative and non-derivative instruments with the amounts recognized in OCI providing an offset to the translation of foreign subsidiaries. |
N/A-notA - not applicable
Note: OCI represents other comprehensive income/(loss) in the Consolidated Statement of Comprehensive Income and AOCI represents accumulated other comprehensive income/(loss) in the Consolidated Statement of Changes in Equity.
(1) The amount includes changes in clean fair values of the derivative instruments in fair value hedging relationships and the periodic accrual for coupon payments required under these derivative contracts.
(2) The amount includes basis adjustments to the carrying value of the hedged item recorded during the period and amortization of basis adjustments recorded on de-designated hedging relationships during the period.
(3) The amount of gain/(loss) recognized in income represents ineffectiveness on hedge relationships.
(4) Instruments in net investment hedges include derivative and non-derivative instruments.
(5) For the nine month periods ended September 30, 2017 and 2016, fair value hedges resulted in a loss of less than $1 million and a gain of less than $1 million in ineffectiveness, respectively.
For the three and ninesix months ending Septemberended June 30, 20172022 and 2016,2021, there were no significantmaterial gains or losses excluded from the assessment of hedge effectiveness (for fair value or cash flow hedges), or associated with an underlying exposure that did not or was not expected to occur (for cash flow hedges); nor are there any anticipated in the normal course of business.
48
Notes to Consolidated Financial Statements — (continued)
4. Financing Receivables: The following table presents financing receivables, net of allowances for credit losses, including residual values.
|
| At September 30, |
| At December 31, |
| ||
(Dollars in millions) |
| 2017 |
| 2016 |
| ||
Current: |
|
|
|
|
| ||
Net investment in sales-type and direct financing leases |
| $ | 3,092 |
| $ | 2,909 |
|
Commercial financing receivables |
| 8,563 |
| 9,706 |
| ||
Client loan and installment payment receivables (loans) |
| 6,395 |
| 6,390 |
| ||
Total |
| $ | 18,050 |
| $ | 19,006 |
|
Noncurrent: |
|
|
|
|
| ||
Net investment in sales-type and direct financing leases |
| $ | 3,579 |
| $ | 3,950 |
|
Client loan and installment payment receivables (loans) |
| 4,879 |
| 5,071 |
| ||
Total |
| $ | 8,459 |
| $ | 9,021 |
|
Net investment in sales-type and direct financing leases relates principally to the company’s Systems products and are for terms ranging generally from two to six years. Net investment in sales-type and direct financing leases includes unguaranteed residual values of $567 million and $585 million at September 30, 2017 and December 31, 2016, respectively, and is reflected net of unearned income of $459 million and $513 million, and net of allowance for credit losses of $118 million and $133 million at those dates, respectively.
Commercial financing receivables, net of allowance for credit losses of $21 million and $28 million at September 30, 2017 and December 31, 2016, respectively, relate primarily to inventory and accounts receivable financing for dealers and remarketers of IBM and OEM products. Payment terms for inventory and accounts receivable financing generally range from 30 to 90 days.
Client loan and installment payment receivables (loans), net of allowance for credit losses of $215 million and $276 million at September 30, 2017 and December 31, 2016, respectively, are loans that are provided primarily to clients to finance the purchase of hardware, software and services. Payment terms on these financing arrangements are generally for terms up to seven years.
Client loan and installment payment financing contracts are priced independently at competitive market rates. The company has a history of enforcing the terms of these financing agreements.
The company utilizes certain of its financing receivables as collateral for nonrecourse borrowings. Financing receivables pledged as collateral for borrowings were $640 million and $689 million at September 30, 2017 and December 31, 2016, respectively.
The company did not have any financing receivables held for sale as of September 30, 2017 and December 31, 2016.
Financing Receivables by Portfolio Segment
The following tables present financing receivables on a gross basis, excluding the allowance for credit losses and residual value, by portfolio segment and by class, excluding commercial financing receivables and other miscellaneous financing receivables at September 30, 2017 and December 31, 2016. The company determines its allowance for credit losses based on two portfolio segments: lease receivables and loan receivables, and further segments the portfolio into three classes: Americas, Europe/Middle East/Africa (EMEA), and Asia Pacific. This portfolio segmentation was changed from growth markets and major markets in 2017 as the company no longer manages the business under those market delineations. There was no impact to segment reporting or the company’s Consolidated Financial Statements.
Notes to Consolidated Financial Statements — (continued)17. Stock-Based Compensation:
(Dollars in millions) |
|
|
|
|
|
|
|
|
| ||||
At September 30, 2017 |
| Americas |
| EMEA |
| Asia Pacific |
| Total |
| ||||
Financing receivables |
|
|
|
|
|
|
|
|
| ||||
Lease receivables |
| $ | 3,541 |
| $ | 1,297 |
| $ | 1,304 |
| $ | 6,142 |
|
Loan receivables |
| 6,180 |
| 3,120 |
| 2,189 |
| 11,489 |
| ||||
Ending balance |
| $ | 9,721 |
| $ | 4,417 |
| $ | 3,493 |
| $ | 17,631 |
|
Collectively evaluated for impairment |
| $ | 9,581 |
| $ | 4,386 |
| $ | 3,391 |
| $ | 17,358 |
|
Individually evaluated for impairment |
| $ | 140 |
| $ | 31 |
| $ | 102 |
| $ | 273 |
|
Allowance for credit losses |
|
|
|
|
|
|
|
|
| ||||
Beginning balance at January 1, 2017 |
|
|
|
|
|
|
|
|
| ||||
Lease receivables |
| $ | 54 |
| $ | 4 |
| $ | 76 |
| $ | 133 |
|
Loan receivables |
| 169 |
| 18 |
| 89 |
| 276 |
| ||||
Total |
| $ | 223 |
| $ | 22 |
| $ | 165 |
| $ | 410 |
|
Write-offs |
| $ | (49 | ) | $ | 0 |
| $ | (63 | ) | $ | (112 | ) |
Recoveries |
| 0 |
| 0 |
| 0 |
| 0 |
| ||||
Provision |
| 11 |
| 9 |
| (4 | ) | 16 |
| ||||
Other |
| 12 |
| 5 |
| 2 |
| 19 |
| ||||
Ending balance at September 30, 2017 |
| $ | 197 |
| $ | 36 |
| $ | 100 |
| $ | 333 |
|
Lease receivables |
| $ | 77 |
| $ | 6 |
| $ | 35 |
| $ | 118 |
|
Loan receivables |
| $ | 120 |
| $ | 29 |
| $ | 65 |
| $ | 215 |
|
|
|
|
|
|
|
|
|
|
| ||||
Collectively evaluated for impairment |
| $ | 66 |
| $ | 12 |
| $ | 6 |
| $ | 85 |
|
Individually evaluated for impairment |
| $ | 131 |
| $ | 23 |
| $ | 94 |
| $ | 248 |
|
(Dollars in millions) |
|
|
|
|
|
|
|
|
| ||||
At December 31, 2016:* |
| Americas |
| EMEA |
| Asia Pacific |
| Total |
| ||||
Financing receivables: |
|
|
|
|
|
|
|
|
| ||||
Lease receivables |
| $ | 3,830 |
| $ | 1,171 |
| $ | 1,335 |
| $ | 6,336 |
|
Loan receivables |
| 6,185 |
| 3,309 |
| 2,243 |
| 11,737 |
| ||||
Ending balance |
| $ | 10,015 |
| $ | 4,480 |
| $ | 3,578 |
| $ | 18,073 |
|
Collectively evaluated for impairment |
| $ | 9,847 |
| $ | 4,460 |
| $ | 3,419 |
| $ | 17,726 |
|
Individually evaluated for impairment |
| $ | 168 |
| $ | 20 |
| $ | 159 |
| $ | 347 |
|
Allowance for credit losses |
|
|
|
|
|
|
|
|
| ||||
Beginning balance at January 1, 2016 |
|
|
|
|
|
|
|
|
| ||||
Lease receivables |
| $ | 52 |
| $ | 17 |
| $ | 143 |
| $ | 213 |
|
Loan receivables |
| 122 |
| 55 |
| 200 |
| 377 |
| ||||
Total |
| $ | 175 |
| $ | 72 |
| $ | 343 |
| $ | 590 |
|
Write-offs |
| $ | (36 | ) | $ | (48 | ) | $ | (154 | ) | $ | (237 | ) |
Recoveries |
| 2 |
| 0 |
| 0 |
| 2 |
| ||||
Provision |
| 65 |
| (1 | ) | (6 | ) | 58 |
| ||||
Other |
| 17 |
| (1 | ) | (18 | ) | (3 | ) | ||||
Ending balance at December 31, 2016 |
| $ | 223 |
| $ | 22 |
| $ | 165 |
| $ | 410 |
|
Lease receivables |
| $ | 54 |
| $ | 4 |
| $ | 76 |
| $ | 133 |
|
Loan receivables |
| $ | 169 |
| $ | 18 |
| $ | 89 |
| $ | 276 |
|
|
|
|
|
|
|
|
|
|
| ||||
Collectively evaluated for impairment |
| $ | 62 |
| $ | 13 |
| $ | 15 |
| $ | 90 |
|
Individually evaluated for impairment |
| $ | 161 |
| $ | 9 |
| $ | 150 |
| $ | 320 |
|
* Reclassified to conform to 2017 presentation.
When determining the allowances, financing receivables are evaluated either on an individual or a collective basis. For individually evaluated receivables, the company determines the expected cash flow for the receivable and calculates an estimate of the potential loss and the probability of loss. For those accounts in which the loss is probable, the company records a specific reserve. In addition, the company records an unallocated reserve that is determined by applying a reserve rate to its different portfolios, excluding accounts that have been specifically reserved. This reserve rate is based upon credit rating, probability of default, term, characteristics (lease/loan) and loss history.
Notes to Consolidated Financial Statements — (continued)
Financing Receivables on Non-Accrual Status
The following table presents the recorded investment in financing receivables which were on non-accrual status at September 30, 2017 and December 31, 2016.
|
| At September 30, |
| At December 31, |
| ||
(Dollars in millions) |
| 2017 |
| 2016* |
| ||
Americas |
| $ | 25 |
| $ | 23 |
|
EMEA |
| 0 |
| 2 |
| ||
Asia Pacific |
| 4 |
| 14 |
| ||
Total lease receivables |
| $ | 30 |
| $ | 40 |
|
|
|
|
|
|
| ||
Americas |
| $ | 79 |
| $ | 128 |
|
EMEA |
| 53 |
| 5 |
| ||
Asia Pacific |
| 10 |
| 12 |
| ||
Total loan receivables |
| $ | 142 |
| $ | 145 |
|
|
|
|
|
|
| ||
Total receivables |
| $ | 172 |
| $ | 185 |
|
* Reclassified to conform to 2017 presentation.
Impaired Receivables
The company considers any receivable with an individually evaluated reserve as an impaired receivable. Depending on the level of impairment, receivables will also be placed on non-accrual status.
The following tables present impaired receivables. This presentation includes both loan and lease receivables.
|
| At September 30, 2017 |
| At December 31, 2016* |
| ||||||||
|
| Recorded |
| Related |
| Recorded |
| Related |
| ||||
(Dollars in millions) |
| Investment |
| Allowance |
| Investment |
| Allowance |
| ||||
Americas |
| $ | 140 |
| $ | 131 |
| $ | 168 |
| $ | 161 |
|
EMEA |
| 31 |
| 23 |
| 20 |
| 9 |
| ||||
Asia Pacific |
| 102 |
| 94 |
| 159 |
| 150 |
| ||||
Total |
| $ | 273 |
| $ | 248 |
| $ | 347 |
| $ | 320 |
|
* Reclassified to conform to 2017 presentation.
|
|
|
|
|
| Interest |
| |||
|
| Average |
| Interest |
| Income |
| |||
(Dollars in millions) |
| Recorded |
| Income |
| Recognized on |
| |||
For the three months ended September 30, 2017: |
| Investment |
| Recognized |
| Cash Basis |
| |||
Americas |
| $ | 156 |
| $ | 0 |
| $ | — |
|
EMEA |
| 31 |
| 0 |
| — |
| |||
Asia Pacific |
| 101 |
| 0 |
| — |
| |||
Total |
| $ | 288 |
| $ | 0 |
| $ | — |
|
|
|
|
|
|
| Interest |
| |||
|
| Average |
| Interest |
| Income |
| |||
(Dollars in millions) |
| Recorded |
| Income |
| Recognized on |
| |||
For the three months ended September 30, 2016:* |
| Investment |
| Recognized |
| Cash Basis |
| |||
Americas |
| $ | 182 |
| $ | 0 |
| $ | — |
|
EMEA |
| 61 |
| 0 |
| — |
| |||
Asia Pacific |
| 302 |
| 0 |
| — |
| |||
Total |
| $ | 545 |
| $ | 0 |
| $ | — |
|
* Reclassified to conform to 2017 presentation.
Notes to Consolidated Financial Statements — (continued)
|
|
|
|
|
| Interest |
| |||
|
| Average |
| Interest |
| Income |
| |||
(Dollars in millions) |
| Recorded |
| Income |
| Recognized on |
| |||
For the nine months ended September 30, 2017: |
| Investment |
| Recognized |
| Cash Basis |
| |||
Americas |
| $ | 165 |
| $ | 0 |
| $ | — |
|
EMEA |
| 27 |
| 0 |
| — |
| |||
Asia Pacific |
| 131 |
| 0 |
| — |
| |||
Total |
| $ | 323 |
| $ | 0 |
| $ | — |
|
|
|
|
|
|
| Interest |
| |||
|
| Average |
| Interest |
| Income |
| |||
(Dollars in millions) |
| Recorded |
| Income |
| Recognized on |
| |||
For the nine months ended September 30, 2016:* |
| Investment |
| Recognized |
| Cash Basis |
| |||
Americas |
| $ | 158 |
| $ | 0 |
| $ | — |
|
EMEA |
| 65 |
| 0 |
| — |
| |||
Asia Pacific |
| 322 |
| 0 |
| — |
| |||
Total |
| $ | 545 |
| $ | 0 |
| $ | — |
|
* Reclassified to conform to 2017 presentation.
Credit Quality Indicators
The company’s credit quality indicators, which are based on rating agency data, publicly available information and information provided by customers, are reviewed periodically based on the relative level of risk. The resulting indicators are a numerical rating system that maps to Moody’s Investors Service credit ratings as shown below. The company uses information provided by Moody’s, where available, as one of many inputs in its determination of customer credit ratings.
The following tables present the net recorded investment for each class of receivables, by credit quality indicator, at September 30, 2017 and December 31, 2016. Receivables with a credit quality indicator ranging from Aaa to Baa3 are considered investment grade. All others are considered non-investment grade. The credit quality indicators do not reflect mitigation actions that the company takes to transfer credit risk to third parties.
|
| Lease Receivables |
| Loan Receivables |
| ||||||||||||||
(Dollars in millions) |
|
|
|
|
| Asia |
|
|
|
|
| Asia |
| ||||||
At September 30, 2017: |
| Americas |
| EMEA |
| Pacific |
| Americas |
| EMEA |
| Pacific |
| ||||||
Credit Ratings: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Aaa – Aa3 |
| $ | 358 |
| $ | 52 |
| $ | 56 |
| $ | 626 |
| $ | 124 |
| $ | 94 |
|
A1 – A3 |
| 715 |
| 126 |
| 543 |
| 1,251 |
| 302 |
| 908 |
| ||||||
Baa1 – Baa3 |
| 807 |
| 404 |
| 329 |
| 1,412 |
| 968 |
| 550 |
| ||||||
Ba1 – Ba2 |
| 762 |
| 415 |
| 172 |
| 1,333 |
| 993 |
| 289 |
| ||||||
Ba3 – B1 |
| 421 |
| 197 |
| 86 |
| 736 |
| 473 |
| 143 |
| ||||||
B2 – B3 |
| 345 |
| 83 |
| 69 |
| 604 |
| 200 |
| 116 |
| ||||||
Caa – D |
| 56 |
| 13 |
| 15 |
| 98 |
| 31 |
| 25 |
| ||||||
Total |
| $ | 3,465 |
| $ | 1,290 |
| $ | 1,269 |
| $ | 6,059 |
| $ | 3,091 |
| $ | 2,124 |
|
At September 30, 2017, the industries which made up Global Financing’s receivables portfolio consisted of: Financial (33 percent), Government (14 percent), Manufacturing (14 percent), Services (13 percent), Retail (8 percent), Communications (7 percent), Healthcare (6 percent) and Other (5 percent).
Notes to Consolidated Financial Statements — (continued)
|
| Lease Receivables |
| Loan Receivables |
| ||||||||||||||
(Dollars in millions) |
|
|
|
|
| Asia |
|
|
|
|
| Asia |
| ||||||
At December 31, 2016:* |
| Americas |
| EMEA |
| Pacific |
| Americas |
| EMEA |
| Pacific |
| ||||||
Credit Ratings: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Aaa – Aa3 |
| $ | 447 |
| $ | 51 |
| $ | 53 |
| $ | 712 |
| $ | 143 |
| $ | 90 |
|
A1 – A3 |
| 782 |
| 113 |
| 486 |
| 1,246 |
| 318 |
| 832 |
| ||||||
Baa1 – Baa3 |
| 772 |
| 366 |
| 330 |
| 1,230 |
| 1,032 |
| 565 |
| ||||||
Ba1 – Ba2 |
| 822 |
| 350 |
| 185 |
| 1,309 |
| 987 |
| 316 |
| ||||||
Ba3 – B1 |
| 574 |
| 208 |
| 106 |
| 914 |
| 585 |
| 182 |
| ||||||
B2 – B3 |
| 297 |
| 71 |
| 84 |
| 472 |
| 201 |
| 143 |
| ||||||
Caa – D |
| 83 |
| 9 |
| 15 |
| 133 |
| 25 |
| 25 |
| ||||||
Total |
| $ | 3,776 |
| $ | 1,167 |
| $ | 1,259 |
| $ | 6,016 |
| $ | 3,291 |
| $ | 2,154 |
|
* Reclassified to conform to 2017 presentation.
At December 31, 2016, the industries which made up Global Financing’s receivables portfolio consisted of: Financial (34 percent), Government (14 percent), Manufacturing (13 percent), Services (12 percent), Retail (8 percent), Communications (7 percent), Healthcare (6 percent) and Other (6 percent).
Past Due Financing Receivables
|
|
|
| Fully |
| <90 Days |
|
|
| Recorded |
| |||||
|
| Total |
| Reserved |
| or Unbilled |
| Total |
| Investment |
| |||||
(Dollars in millions) |
| Past Due |
| Financing |
| Financing |
| Financing |
| > 90 Days and |
| |||||
At September 30, 2017: |
| > 90 days (1) |
| Receivables |
| Receivables |
| Receivables |
| Accruing (2) |
| |||||
Americas |
| $ | 28 |
| $ | 51 |
| $ | 3,463 |
| $ | 3,541 |
| $ | 255 |
|
EMEA |
| 9 |
| 4 |
| 1,283 |
| 1,297 |
| 15 |
| |||||
Asia Pacific |
| 5 |
| 32 |
| 1,266 |
| 1,304 |
| 19 |
| |||||
Total lease receivables |
| $ | 42 |
| $ | 87 |
| $ | 6,012 |
| $ | 6,142 |
| $ | 290 |
|
Americas |
| $ | 43 |
| $ | 80 |
| $ | 6,057 |
| $ | 6,180 |
| $ | 401 |
|
EMEA |
| 26 |
| 19 |
| 3,076 |
| 3,120 |
| 46 |
| |||||
Asia Pacific |
| 6 |
| 61 |
| 2,122 |
| 2,189 |
| 9 |
| |||||
Total loan receivables |
| $ | 75 |
| $ | 160 |
| $ | 11,255 |
| $ | 11,489 |
| $ | 456 |
|
Total |
| $ | 117 |
| $ | 247 |
| $ | 17,267 |
| $ | 17,631 |
| $ | 746 |
|
(1) Only the portion of a financing receivable which is greater than 90 days past due, excluding amounts that are fully reserved.
(2) At a contract level, which includes total billed and unbilled amounts for aged financing receivables greater than 90 days.
|
|
|
| Fully |
| <90 Days |
|
|
| Recorded |
| |||||
|
| Total |
| Reserved |
| or Unbilled |
| Total |
| Investment |
| |||||
(Dollars in millions) |
| Past Due |
| Financing |
| Financing |
| Financing |
| > 90 Days and |
| |||||
At December 31, 2016:* |
| > 90 days (1) |
| Receivables |
| Receivables |
| Receivables |
| Accruing (2) |
| |||||
Americas |
| $ | 17 |
| $ | 20 |
| $ | 3,793 |
| $ | 3,830 |
| $ | 66 |
|
EMEA |
| 2 |
| 10 |
| 1,159 |
| 1,171 |
| 6 |
| |||||
Asia Pacific |
| 12 |
| 59 |
| 1,264 |
| 1,335 |
| 40 |
| |||||
Total lease receivables |
| $ | 31 |
| $ | 89 |
| $ | 6,216 |
| $ | 6,336 |
| $ | 111 |
|
Americas |
| $ | 19 |
| $ | 90 |
| $ | 6,075 |
| $ | 6,185 |
| $ | 80 |
|
EMEA |
| 5 |
| 5 |
| 3,299 |
| 3,309 |
| 15 |
| |||||
Asia Pacific |
| 6 |
| 87 |
| 2,150 |
| 2,243 |
| 46 |
| |||||
Total loan receivables |
| $ | 31 |
| $ | 182 |
| $ | 11,524 |
| $ | 11,737 |
| $ | 141 |
|
Total |
| $ | 62 |
| $ | 271 |
| $ | 17,740 |
| $ | 18,073 |
| $ | 253 |
|
(1) Only the portion of a financing receivable which is greater than 90 days past due, excluding amounts that are fully reserved.
(2) At a contract level, which includes total billed and unbilled amounts for aged financing receivables greater than 90 days.
* Reclassified to conform to 2017 presentation.
Notes to Consolidated Financial Statements — (continued)
Troubled Debt Restructurings
The company did not have any significant troubled debt restructurings during the nine months ended September 30, 2017 or for the year ended December 31, 2016.
5. Stock-Based Compensation:Stock-based compensation cost for stock awards and stock options is measured at grant date, based on the fair value of the award, and is recognized over the employee requisite service period. The following table presents total stock-based compensation cost included in income from continuing operations.
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| ||||||||||||||||||||
| | | | | | | | | | | |||||||||||||||
| | Three Months Ended June 30, | | Six Months Ended June 30, | |||||||||||||||||||||
(Dollars in millions) |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| | 2022 | | 2021 | | 2022 | | 2021 | ||||||||
Cost |
| $ | 22 |
| $ | 23 |
| $ | 68 |
| $ | 67 |
| | $ | 43 | | $ | 35 | | $ | 84 | | $ | 68 |
Selling, general and administrative |
| 88 |
| 105 |
| 277 |
| 295 |
| |
| 153 | |
| 141 | |
| 289 | |
| 256 | ||||
Research, development and engineering |
| 13 |
| 14 |
| 43 |
| 41 |
| |
| 58 | |
| 50 | |
| 115 | |
| 99 | ||||
Pre-tax stock-based compensation cost |
| 123 |
| 142 |
| 388 |
| 403 |
| | $ | 254 | | $ | 225 | | $ | 488 | | $ | 423 | ||||
Income tax benefits |
| (41 | ) | (47 | ) | (128 | ) | (131 | ) | |
| (82) | |
| (64) | |
| (139) | |
| (112) | ||||
Total net stock-based compensation cost |
| $ | 82 |
| $ | 95 |
| $ | 260 |
| $ | 272 |
| | $ | 172 | | $ | 162 | | $ | 348 | | $ | 311 |
Effective April 1, 2022, the company increased the discount for eligible participants under its Employees Stock Purchase Plan (ESPP) from 5 percent to 15 percent off the average market price on the date of purchase. With this change, the ESPP is considered compensatory under the accounting requirements for stock-based compensation.
Pre-tax stock-based compensation cost for the three months ended SeptemberJune 30, 2017 decreased $192022 increased $29 million compared to the corresponding period in the prior year. This was due to decreases related toyear, including increases in ESPP ($14 million), performance share units ($118 million), the conversion of stock-based awards previously issued by acquired entitiesstock options ($75 million) and restricted stock units ($2 million).
The increases primarily relate to the ESPP being considered compensatory and a change in the timing of the company’s executive grant cycle in 2022.
Pre-tax stock-based compensation cost for the ninesix months ended SeptemberJune 30, 2017 decreased $152022 increased $64 million compared to the corresponding period in the prior year. This was due to decreases related to the conversion of stock-based awards previously issued by acquired entities ($20 million) and performance share units ($17 million), partially offset by an increaseyear, including increases in restricted stock units ($2229 million), ESPP ($14 million), performance share units ($10 million) and stock options ($10 million). The increases are driven by the same factors described above.
The implementation of the new FASB guidance for share-based payment transactions resulted in an immaterial impact to income tax benefits as of the three months and nine months ended September 30, 2017. Refer to note 2, “Accounting Changes,” for additional information.
As of September 30, 2017, the totalTotal unrecognized compensation cost of $905 million related to non-vested awards at June 30, 2022 was $1.4 billion and is expected to be recognized over a weighted-average period of approximately 2.62.5 years.
There was no significant capitalizedCapitalized stock-based compensation cost was not material at SeptemberJune 30, 20172022 and 2016.2021.
6. Segments: The tables on pages 29 and 30 reflect the results of continuing operations of the company’s segments consistent with the management and measurement system utilized within the company. Performance measurement is based on operating pre-tax income from continuing operations. The segments represent components of the company for which separate financial information is available that is utilized on a regular basis by the chief operating decision maker (the chief executive officer) in determining how to allocate resources and evaluate performance.
Notes to Consolidated Financial Statements — (continued)18. Retirement-Related Benefits:
SEGMENT INFORMATION
|
| Cognitive Solutions & |
|
|
|
|
|
|
|
|
| ||||||||
|
|
|
|
|
| Technology |
|
|
|
|
|
|
| ||||||
|
|
|
| Global |
| Services & |
|
|
|
|
|
|
| ||||||
|
| Cognitive |
| Business |
| Cloud |
|
|
| Global |
| Total |
| ||||||
(Dollars in millions) |
| Solutions |
| Services |
| Platforms |
| Systems |
| Financing |
| Segments |
| ||||||
For the three months ended September 30, 2017: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
External revenue |
| $ | 4,400 |
| $ | 4,093 |
| $ | 8,457 |
| $ | 1,721 |
| $ | 427 |
| $ | 19,098 |
|
Internal revenue |
| 629 |
| 92 |
| 164 |
| 227 |
| 272 |
| 1,384 |
| ||||||
Total revenue |
| $ | 5,030 |
| $ | 4,185 |
| $ | 8,621 |
| $ | 1,948 |
| $ | 698 |
| $ | 20,482 |
|
Pre-tax income from continuing operations |
| $ | 1,649 |
| $ | 453 |
| $ | 1,192 |
| $ | 339 |
| $ | 244 |
| $ | 3,876 |
|
Revenue year-to-year change |
| 2.6 | % | (2.3 | )% | (3.4 | )% | 12.3 | % | (8.5 | )% | (0.6 | )% | ||||||
Pre-tax income year-to-year change |
| 4.8 | % | (16.8 | )% | (7.5 | )% | 149.7 | % | (31.4 | )% | (0.5 | )% | ||||||
Pre-tax income margin |
| 32.8 | % | 10.8 | % | 13.8 | % | 17.4 | % | 34.9 | % | 18.9 | % | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
For the three months ended September 30, 2016: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
External revenue |
| $ | 4,235 |
| $ | 4,191 |
| $ | 8,748 |
| $ | 1,558 |
| $ | 412 |
| $ | 19,145 |
|
Internal revenue |
| 667 |
| 93 |
| 180 |
| 176 |
| 352 |
| 1,468 |
| ||||||
Total revenue |
| $ | 4,902 |
| $ | 4,284 |
| $ | 8,929 |
| $ | 1,734 |
| $ | 763 |
| $ | 20,613 |
|
Pre-tax income from continuing operations |
| $ | 1,574 |
| $ | 544 |
| $ | 1,288 |
| $ | 136 |
| $ | 355 |
| $ | 3,897 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Pre-tax income margin |
| 32.1 | % | 12.7 | % | 14.4 | % | 7.8 | % | 46.5 | % | 18.9 | % | ||||||
Reconciliations to IBM as Reported:
(Dollars in millions) |
|
|
|
|
| ||
For the three months ended September 30: |
| 2017 |
| 2016 |
| ||
Revenue: |
|
|
|
|
| ||
Total reportable segments |
| $ | 20,482 |
| $ | 20,613 |
|
Eliminations of internal transactions |
| (1,384 | ) | (1,468 | ) | ||
Other revenue |
| 56 |
| 81 |
| ||
Total consolidated revenue |
| $ | 19,153 |
| $ | 19,226 |
|
|
|
|
|
|
| ||
Pre-tax income from continuing operations: |
|
|
|
|
| ||
Total reportable segments |
| $ | 3,876 |
| $ | 3,897 |
|
Amortization of acquired intangible assets |
| (238 | ) | (265 | ) | ||
Acquisition-related (charges)/income |
| 0 |
| (4 | ) | ||
Non-operating retirement-related (costs)/income |
| (306 | ) | (139 | ) | ||
Eliminations of internal transactions |
| (126 | ) | (185 | ) | ||
Unallocated corporate amounts |
| (141 | ) | (42 | ) | ||
Total pre-tax income from continuing operations |
| $ | 3,065 |
| $ | 3,263 |
|
Notes to Consolidated Financial Statements — (continued)
SEGMENT INFORMATION
|
| Cognitive Solutions & |
|
|
|
|
|
|
|
|
| ||||||||
|
|
|
|
|
| Technology |
|
|
|
|
|
|
| ||||||
|
|
|
| Global |
| Services & |
|
|
|
|
|
|
| ||||||
|
| Cognitive |
| Business |
| Cloud |
|
|
| Global |
| Total |
| ||||||
(Dollars in millions) |
| Solutions |
| Services |
| Platforms |
| Systems |
| Financing |
| Segments |
| ||||||
For the nine months ended September 30, 2017: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
External revenue |
| $ | 13,021 |
| $ | 12,196 |
| $ | 25,079 |
| $ | 4,863 |
| $ | 1,246 |
| $ | 56,405 |
|
Internal revenue |
| 2,001 |
| 271 |
| 497 |
| 571 |
| 925 |
| 4,265 |
| ||||||
Total revenue |
| $ | 15,022 |
| $ | 12,467 |
| $ | 25,576 |
| $ | 5,434 |
| $ | 2,171 |
| $ | 60,670 |
|
Pre-tax income from continuing operations |
| $ | 4,539 |
| $ | 1,065 |
| $ | 2,888 |
| $ | 227 |
| $ | 836 |
| $ | 9,555 |
|
Revenue year-to-year change |
| 1.4 | % | (3.3 | )% | (3.6 | )% | (6.0 | )% | (16.0 | )% | (3.1 | )% | ||||||
Pre-tax income year-to-year change |
| 12.4 | % | (12.0 | )% | 2.2 | % | (35.9 | )% | (30.7 | )% | (0.8 | )% | ||||||
Pre-tax income margin |
| 30.2 | % | 8.5 | % | 11.3 | % | 4.2 | % | 38.5 | % | 15.7 | % | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
For the nine months ended September 30, 2016: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
External revenue |
| $ | 12,889 |
| $ | 12,578 |
| $ | 26,029 |
| $ | 5,184 |
| $ | 1,245 |
| $ | 57,926 |
|
Internal revenue |
| 1,929 |
| 310 |
| 501 |
| 594 |
| 1,340 |
| 4,673 |
| ||||||
Total revenue |
| $ | 14,818 |
| $ | 12,888 |
| $ | 26,530 |
| $ | 5,778 |
| $ | 2,585 |
| $ | 62,599 |
|
Pre-tax income from continuing operations |
| $ | 4,039 |
| $ | 1,210 |
| $ | 2,825 |
| $ | 354 |
| $ | 1,208 |
| $ | 9,636 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Pre-tax income margin |
| 27.3 | % | 9.4 | % | 10.6 | % | 6.1 | % | 46.7 | % | 15.4 | % | ||||||
Reconciliations to IBM as Reported:
(Dollars in millions) |
|
|
|
|
| ||
For the nine months ended September 30: |
| 2017 |
| 2016 |
| ||
Revenue: |
|
|
|
|
| ||
Total reportable segments |
| $ | 60,670 |
| $ | 62,599 |
|
Eliminations of internal transactions |
| (4,265 | ) | (4,673 | ) | ||
Other revenue |
| 192 |
| 223 |
| ||
Total consolidated revenue |
| $ | 56,597 |
| $ | 58,149 |
|
|
|
|
|
|
| ||
Pre-tax income from continuing operations: |
|
|
|
|
| ||
Total reportable segments |
| $ | 9,555 |
| $ | 9,636 |
|
Amortization of acquired intangible assets |
| (731 | ) | (742 | ) | ||
Acquisition-related (charges)/income |
| (19 | ) | (1 | ) | ||
Non-operating retirement-related (costs)/income |
| (1,065 | ) | (444 | ) | ||
Eliminations of internal transactions |
| (515 | ) | (873 | ) | ||
Unallocated corporate amounts |
| (294 | ) | (230 | ) | ||
Total pre-tax income from continuing operations |
| $ | 6,931 |
| $ | 7,345 |
|
Notes to Consolidated Financial Statements — (continued)
7. Equity Activity:
Reclassifications and Taxes Related to Items of Other Comprehensive Income
(Dollars in millions) |
| Before Tax |
| Tax (Expense)/ |
| Net of Tax |
| |||
For the three months ended September 30, 2017: |
| Amount |
| Benefit |
| Amount |
| |||
Other comprehensive income/(loss): |
|
|
|
|
|
|
| |||
Foreign currency translation adjustments |
| $ | 89 |
| $ | 195 |
| $ | 284 |
|
Net changes related to available-for-sale securities: |
|
|
|
|
|
|
| |||
Unrealized gains/(losses) arising during the period |
| $ | (1 | ) | $ | 1 |
| $ | 0 |
|
Reclassification of (gains)/losses to other (income) and expense |
| 0 |
| 0 |
| 0 |
| |||
Total net changes related to available-for-sale securities |
| $ | (2 | ) | $ | 1 |
| $ | (1 | ) |
Unrealized gains/(losses) on cash flow hedges: |
|
|
|
|
|
|
| |||
Unrealized gains/(losses) arising during the period |
| $ | (70 | ) | $ | 20 |
| $ | (50 | ) |
Reclassification of (gains)/losses to: |
|
|
|
|
|
|
| |||
Cost of sales |
| (1 | ) | 1 |
| (1 | ) | |||
Cost of services |
| (20 | ) | 8 |
| (12 | ) | |||
SG&A expense |
| 6 |
| (1 | ) | 4 |
| |||
Other (income) and expense |
| (64 | ) | 25 |
| (39 | ) | |||
Interest expense |
| 7 |
| (3 | ) | 4 |
| |||
Total unrealized gains/(losses) on cash flow hedges |
| $ | (143 | ) | $ | 49 |
| $ | (94 | ) |
Retirement-related benefit plans(1): |
|
|
|
|
|
|
| |||
Prior service costs/(credits) |
| $ | 0 |
| $ | 0 |
| $ | 0 |
|
Net (losses)/gains arising during the period |
| 1 |
| 0 |
| 1 |
| |||
Curtailments and settlements |
| 2 |
| (1 | ) | 1 |
| |||
Amortization of prior service (credits)/costs |
| (22 | ) | 7 |
| (15 | ) | |||
Amortization of net (gains)/losses |
| 733 |
| (242 | ) | 491 |
| |||
Total retirement-related benefit plans |
| $ | 713 |
| $ | (235 | ) | $ | 479 |
|
Other comprehensive income/(loss) |
| $ | 658 |
| $ | 11 |
| $ | 669 |
|
(1) These AOCI components are included in the computation of net periodic pension cost. (See note 8, “Retirement-Related Benefits,” for additional information.)
Notes to Consolidated Financial Statements — (continued)
Reclassifications and Taxes Related to Items of Other Comprehensive Income
(Dollars in millions) |
| Before Tax |
| Tax (Expense)/ |
| Net of Tax |
| |||
For the three months ended September 30, 2016: |
| Amount |
| Benefit |
| Amount |
| |||
Other comprehensive income/(loss): |
|
|
|
|
|
|
| |||
Foreign currency translation adjustments |
| $ | (99 | ) | $ | 50 |
| $ | (49 | ) |
Net changes related to available-for-sale securities: |
|
|
|
|
|
|
| |||
Unrealized gains/(losses) arising during the period |
| $ | (1 | ) | $ | 0 |
| $ | (1 | ) |
Reclassification of (gains)/losses to other (income) and expense |
| (1 | ) | 0 |
| (1 | ) | |||
Total net changes related to available-for-sale securities |
| $ | (2 | ) | $ | 1 |
| $ | (1 | ) |
Unrealized gains/(losses) on cash flow hedges: |
|
|
|
|
|
|
| |||
Unrealized gains/(losses) arising during the period |
| $ | 35 |
| $ | (14 | ) | $ | 21 |
|
Reclassification of (gains)/losses to: |
|
|
|
|
|
|
| |||
Cost of sales* |
| 7 |
| (3 | ) | 4 |
| |||
Cost of services* |
| (3 | ) | 1 |
| (2 | ) | |||
SG&A expense |
| (2 | ) | (1 | ) | (3 | ) | |||
Other (income) and expense |
| 6 |
| (2 | ) | 4 |
| |||
Interest expense |
| 7 |
| (3 | ) | 4 |
| |||
Total unrealized gains/(losses) on cash flow hedges |
| $ | 50 |
| $ | (22 | ) | $ | 29 |
|
Retirement-related benefit plans(1): |
|
|
|
|
|
|
| |||
Net (losses)/gains arising during the period |
| $ | 11 |
| $ | (5 | ) | $ | 6 |
|
Curtailments and settlements |
| 4 |
| (1 | ) | 3 |
| |||
Amortization of prior service (credits)/costs |
| (28 | ) | 9 |
| (19 | ) | |||
Amortization of net (gains)/losses |
| 696 |
| (225 | ) | 471 |
| |||
Total retirement-related benefit plans |
| $ | 683 |
| $ | (222 | ) | $ | 461 |
|
Other comprehensive income/(loss) |
| $ | 632 |
| $ | (192 | ) | $ | 440 |
|
* Reclassified to conform to 2017 presentation.
(1) These AOCI components are included in the computation of net periodic pension cost. (See note 8, “Retirement-Related Benefits,” for additional information.)
Notes to Consolidated Financial Statements — (continued)
Reclassifications and Taxes Related to Items of Other Comprehensive Income
(Dollars in millions) |
| Before Tax |
| Tax (Expense)/ |
| Net of Tax |
| |||
For the nine months ended September 30, 2017: |
| Amount |
| Benefit |
| Amount |
| |||
Other comprehensive income/(loss): |
|
|
|
|
|
|
| |||
Foreign currency translation adjustments |
| $ | 213 |
| $ | 581 |
| $ | 794 |
|
Net changes related to available-for-sale securities: |
|
|
|
|
|
|
| |||
Unrealized gains/(losses) arising during the period |
| $ | 2 |
| $ | 0 |
| $ | 1 |
|
Reclassification of (gains)/losses to other (income) and expense |
| 1 |
| 0 |
| 0 |
| |||
Total net changes related to available-for-sale securities |
| $ | 2 |
| $ | 0 |
| $ | 2 |
|
Unrealized gains/(losses) on cash flow hedges: |
|
|
|
|
|
|
| |||
Unrealized gains/(losses) arising during the period |
| $ | (198 | ) | $ | 53 |
| $ | (146 | ) |
Reclassification of (gains)/losses to: |
|
|
|
|
|
|
| |||
Cost of sales |
| (23 | ) | 6 |
| (17 | ) | |||
Cost of services |
| (47 | ) | 18 |
| (29 | ) | |||
SG&A expense |
| (23 | ) | 6 |
| (17 | ) | |||
Other (income) and expense |
| (275 | ) | 106 |
| (169 | ) | |||
Interest expense |
| 21 |
| (8 | ) | 13 |
| |||
Total unrealized gains/(losses) on cash flow hedges |
| $ | (545 | ) | $ | 180 |
| $ | (365 | ) |
Retirement-related benefit plans(1): |
|
|
|
|
|
|
| |||
Prior service costs/(credits) |
| $ | 0 |
| $ | 0 |
| $ | 0 |
|
Net (losses)/gains arising during the period |
| 106 |
| (36 | ) | 70 |
| |||
Curtailments and settlements |
| 3 |
| (1 | ) | 2 |
| |||
Amortization of prior service (credits)/costs |
| (66 | ) | 23 |
| (43 | ) | |||
Amortization of net (gains)/losses |
| 2,156 |
| (739 | ) | 1,417 |
| |||
Total retirement-related benefit plans |
| $ | 2,200 |
| $ | (754 | ) | $ | 1,446 |
|
Other comprehensive income/(loss) |
| $ | 1,869 |
| $ | 7 |
| $ | 1,877 |
|
(1) These AOCI components are included in the computation of net periodic pension cost. (See note 8, “Retirement-Related Benefits,” for additional information.)
Notes to Consolidated Financial Statements — (continued)
Reclassifications and Taxes Related to Items of Other Comprehensive Income
(Dollars in millions) |
| Before Tax |
| Tax (Expense)/ |
| Net of Tax |
| |||
For the nine months ended September 30, 2016: |
| Amount |
| Benefit |
| Amount |
| |||
Other comprehensive income/(loss): |
|
|
|
|
|
|
| |||
Foreign currency translation adjustments |
| $ | (109 | ) | $ | 411 |
| $ | 303 |
|
Net changes related to available-for-sale securities: |
|
|
|
|
|
|
| |||
Unrealized gains/(losses) arising during the period |
| $ | (36 | ) | $ | 14 |
| $ | (22 | ) |
Reclassification of (gains)/losses to other (income) and expense |
| 36 |
| (14 | ) | 22 |
| |||
Total net changes related to available-for-sale securities |
| $ | 0 |
| $ | 0 |
| $ | 0 |
|
Unrealized gains/(losses) on cash flow hedges: |
|
|
|
|
|
|
| |||
Unrealized gains/(losses) arising during the period |
| $ | (221 | ) | $ | 82 |
| $ | (139 | ) |
Reclassification of (gains)/losses to: |
|
|
|
|
|
|
| |||
Cost of sales* |
| 5 |
| (4 | ) | 2 |
| |||
Cost of services* |
| 9 |
| (3 | ) | 5 |
| |||
SG&A expense |
| 1 |
| (3 | ) | (1 | ) | |||
Other (income) and expense |
| (6 | ) | 2 |
| (4 | ) | |||
Interest expense |
| 17 |
| (6 | ) | 10 |
| |||
Total unrealized gains/(losses) on cash flow hedges |
| $ | (195 | ) | $ | 68 |
| $ | (127 | ) |
Retirement-related benefit plans(1): |
|
|
|
|
|
|
| |||
Net (losses)/gains arising during the period |
| $ | (57 | ) | $ | 20 |
| $ | (37 | ) |
Curtailments and settlements |
| 19 |
| (7 | ) | 12 |
| |||
Amortization of prior service (credits)/costs |
| (81 | ) | 29 |
| (52 | ) | |||
Amortization of net (gains)/losses |
| 2,079 |
| (735 | ) | 1,344 |
| |||
Total retirement-related benefit plans |
| $ | 1,960 |
| $ | (693 | ) | $ | 1,267 |
|
Other comprehensive income/(loss) |
| $ | 1,656 |
| $ | (213 | ) | $ | 1,442 |
|
* Reclassified to conform to 2017 presentation.
(1) These AOCI components are included in the computation of net periodic pension cost. (See note 8, “Retirement-Related Benefits,” for additional information.)
Notes to Consolidated Financial Statements — (continued)
Accumulated Other Comprehensive Income/(Loss) (net of tax)
|
|
|
|
|
| Net Change |
| Net Unrealized |
|
|
| |||||
|
| Net Unrealized |
| Foreign |
| Retirement- |
| Gains/(Losses) |
| Accumulated |
| |||||
|
| Gains/(Losses) |
| Currency |
| Related |
| on Available- |
| Other |
| |||||
|
| on Cash Flow |
| Translation |
| Benefit |
| For-Sale |
| Comprehensive |
| |||||
(Dollars in millions) |
| Hedges |
| Adjustments* |
| Plans |
| Securities |
| Income/(Loss) |
| |||||
January 1, 2017 |
| $ | 319 |
| $ | (3,603 | ) | $ | (26,116 | ) | $ | 2 |
| $ | (29,398 | ) |
Other comprehensive income before reclassifications |
| (146 | ) | 794 |
| 72 |
| 1 |
| 721 |
| |||||
Amount reclassified from accumulated other comprehensive income |
| (219 | ) | 0 |
| 1,374 |
| 0 |
| 1,155 |
| |||||
Total change for the period |
| (365 | ) | 794 |
| 1,446 |
| 2 |
| 1,877 |
| |||||
September 30, 2017 |
| $ | (46 | ) | $ | (2,809 | ) | $ | (24,670 | ) | $ | 4 |
| $ | (27,521 | ) |
* Foreign currency translation adjustments are presented gross except for any associated hedges which are presented net of tax.
|
|
|
|
|
| Net Change |
| Net Unrealized |
|
|
| |||||
|
| Net Unrealized |
| Foreign |
| Retirement- |
| Gains/(Losses) |
| Accumulated |
| |||||
|
| Gains/(Losses) |
| Currency |
| Related |
| on Available- |
| Other |
| |||||
|
| on Cash Flow |
| Translation |
| Benefit |
| For-Sale |
| Comprehensive |
| |||||
(Dollars in millions) |
| Hedges |
| Adjustments* |
| Plans |
| Securities |
| Income/(Loss) |
| |||||
January 1, 2016 |
| $ | 100 |
| $ | (3,463 | ) | $ | (26,248 | ) | $ | 5 |
| $ | (29,607 | ) |
Other comprehensive income before reclassifications |
| (139 | ) | 303 |
| (25 | ) | (22 | ) | 117 |
| |||||
Amount reclassified from accumulated other comprehensive income |
| 12 |
| 0 |
| 1,292 |
| 22 |
| 1,326 |
| |||||
Total change for the period |
| (127 | ) | 303 |
| 1,267 |
| 0 |
| 1,442 |
| |||||
September 30, 2016 |
| $ | (28 | ) | $ | (3,161 | ) | $ | (24,981 | ) | $ | 4 |
| $ | (28,164 | ) |
* Foreign currency translation adjustments are presented gross except for any associated hedges which are presented net of tax.
8. Retirement-Related Benefits:The company offers defined benefit (DB) pension plans, defined contribution pension plans, as well as nonpension postretirement plans primarily consisting of retiree medical benefits. The following tables provide the pre-tax cost for all retirement-related plans.
|
|
|
|
|
| Yr. to Yr. |
| |||||||||||
| | | | | | | | | | |||||||||
|
| | |
|
| |
| Yr. to Yr. |
| |||||||||
(Dollars in millions) |
|
|
|
|
| Percent |
| | | | | | | | Percent |
| ||
For the three months ended September 30: |
| 2017 |
| 2016 |
| Change |
| |||||||||||
Retirement-related plans — cost |
|
|
|
|
|
|
| |||||||||||
For the three months ended June 30: | | 2022 | | 2021 | | Change |
| |||||||||||
Retirement-related plans — cost: |
| |
|
| |
|
|
| | |||||||||
Defined benefit and contribution pension plans — cost |
| $ | 592 |
| $ | 421 |
| 40.6 | % | | $ | 456 | | $ | 600 |
| (24.0) | % |
Nonpension postretirement plans — cost |
| 61 |
| 64 |
| (5.9 | ) | |
| 33 | |
| 44 |
| (25.0) | | ||
Total |
| $ | 653 |
| $ | 486 |
| 34.4 | % | | $ | 489 | | $ | 644 |
| (24.1) | % |
|
|
|
|
|
| Yr. to Yr. |
| ||
(Dollars in millions) |
|
|
|
|
| Percent |
| ||
For the nine months ended September 30: |
| 2017 |
| 2016 |
| Change |
| ||
Retirement-related plans — cost |
|
|
|
|
|
|
| ||
Defined benefit and contribution pension plans — cost |
| $ | 1,915 |
| $ | 1,315 |
| 45.6 | % |
Nonpension postretirement plans — cost |
| 182 |
| 185 |
| (1.6 | ) | ||
Total |
| $ | 2,097 |
| $ | 1,500 |
| 39.8 | % |
49
Notes to Consolidated Financial Statements — (continued)
| | | | | | | | | |
|
| | |
|
| |
| Yr. to Yr. |
|
(Dollars in millions) | | | | | | | | Percent |
|
For the six months ended June 30: | | 2022 | | 2021 | | Change |
| ||
Retirement-related plans — cost: |
| |
|
| |
|
|
| |
Defined benefit and contribution pension plans — cost | | $ | 934 | | $ | 1,219 |
| (23.4) | % |
Nonpension postretirement plans — cost | |
| 66 | |
| 88 |
| (25.0) | |
Total | | $ | 1,000 | | $ | 1,307 |
| (23.5) | % |
The following tables provide the components of the cost/(income) for the company’s pension plans.
Cost/(Income) of Pension Plans
(Dollars in millions) |
| U.S. Plans |
| Non-U.S. Plans |
| ||||||||
For the three months ended September 30: |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
Service cost |
| $ | — |
| $ | — |
| $ | 106 |
| $ | 108 |
|
Interest cost |
| 478 |
| 512 |
| 215 |
| 257 |
| ||||
Expected return on plan assets |
| (753 | ) | (922 | ) | (340 | ) | (468 | ) | ||||
Amortization of prior service costs/(credits) |
| 4 |
| 3 |
| (25 | ) | (28 | ) | ||||
Recognized actuarial losses |
| 334 |
| 328 |
| 387 |
| 357 |
| ||||
Curtailments and settlements |
| — |
| — |
| 2 |
| 4 |
| ||||
Multi-employer plans/other |
| — |
| — |
| (74 | ) | 8 |
| ||||
Total net periodic pension (income)/cost of defined benefit plans |
| 63 |
| (79 | ) | 271 |
| 239 |
| ||||
Cost of defined contribution plans |
| 156 |
| 159 |
| 102 |
| 103 |
| ||||
Total defined benefit and contribution plans cost recognized in the Consolidated Statement of Earnings |
| $ | 219 |
| $ | 79 |
| $ | 373 |
| $ | 342 |
|
| | | | | | | | | | | | |
(Dollars in millions) | | U.S. Plans | | Non-U.S. Plans | ||||||||
For the three months ended June 30: |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Service cost | | $ | — | | $ | — | | $ | 59 | | $ | 68 |
Interest cost* | |
| 302 | |
| 277 | |
| 131 | |
| 108 |
Expected return on plan assets* | |
| (475) | |
| (451) | |
| (259) | |
| (279) |
Amortization of prior service costs/(credits)* | |
| 2 | |
| 4 | |
| 3 | |
| (5) |
Recognized actuarial losses* | |
| 179 | |
| 249 | |
| 260 | |
| 352 |
Curtailments and settlements* | |
| — | |
| — | |
| 11 | |
| 16 |
Multi-employer plans | |
| — | |
| — | |
| 3 | |
| 5 |
Other costs/(credits)* | |
| — | |
| — | |
| 6 | |
| 3 |
Total net periodic pension (income)/cost of defined benefit plans | | $ | 8 | | $ | 80 | | $ | 215 | | $ | 268 |
Cost of defined contribution plans | |
| 141 | |
| 151 | |
| 92 | |
| 101 |
Total defined benefit and contribution pension plans cost recognized in the Consolidated Income Statement | | $ | 149 | | $ | 231 | | $ | 307 | | $ | 369 |
(Dollars in millions) |
| U.S. Plans |
| Non-U.S. Plans |
| ||||||||
For the nine months ended September 30: |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
Service cost |
| $ | — |
| $ | — |
| $ | 308 |
| $ | 318 |
|
Interest cost |
| 1,435 |
| 1,536 |
| 622 |
| 787 |
| ||||
Expected return on plan assets |
| (2,260 | ) | (2,767 | ) | (985 | ) | (1,419 | ) | ||||
Amortization of prior service costs/(credits) |
| 12 |
| 8 |
| (73 | ) | (79 | ) | ||||
Recognized actuarial losses |
| 1,003 |
| 985 |
| 1,120 |
| 1,062 |
| ||||
Curtailments and settlements |
| — |
| — |
| 3 |
| 19 |
| ||||
Multi-employer plan/other |
| — |
| — |
| (46 | ) | 64 |
| ||||
Total net periodic pension (income)/cost of defined benefit plans |
| 190 |
| (238 | ) | 950 |
| 751 |
| ||||
Cost of defined contribution plans |
| 475 |
| 484 |
| 301 |
| 318 |
| ||||
Total defined benefit and contribution plans cost recognized in the Consolidated Statement of Earnings |
| $ | 665 |
| $ | 246 |
| $ | 1,250 |
| $ | 1,069 |
|
On October 12, 2012, the High Court
| | | | | | | | | | | | |
(Dollars in millions) | | U.S. Plans | | Non-U.S. Plans | ||||||||
For the six months ended June 30: |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Service cost | | $ | — | | $ | — | | $ | 123 | | $ | 133 |
Interest cost* | |
| 603 | |
| 555 | |
| 270 | |
| 216 |
Expected return on plan assets* | |
| (950) | |
| (901) | |
| (532) | |
| (559) |
Amortization of prior service costs/(credits)* | |
| 4 | |
| 8 | |
| 7 | |
| (7) |
Recognized actuarial losses* | |
| 359 | |
| 498 | |
| 537 | |
| 708 |
Curtailments and settlements* | |
| — | |
| — | |
| 19 | |
| 34 |
Multi-employer plans | |
| — | |
| — | |
| 7 | |
| 11 |
Other costs/(credits)* | |
| — | |
| — | |
| 15 | |
| 15 |
Total net periodic pension (income)/cost of defined benefit plans | | $ | 15 | | $ | 160 | | $ | 446 | | $ | 551 |
Cost of defined contribution plans | |
| 282 | |
| 302 | |
| 190 | |
| 206 |
Total defined benefit and contribution pension plans cost recognized in the Consolidated Income Statement | | $ | 298 | | $ | 462 | | $ | 636 | | $ | 757 |
* These components of net periodic pension cost are included in London issued a ruling against IBM United Kingdom Limitedother (income) and IBM United Kingdom Holdings Limited, both wholly-owned subsidiaries of the company, in litigation involving one of IBM UK’s defined benefit plans. As a result of the ruling, the company recorded a pre-tax retirement-related obligation of $162 million in the fourth quarter of 2012 in selling, general and administrative expense in the Consolidated StatementIncome Statement.
50
In March 2017, the company initiated a change to the investment strategy of its U.S. defined benefit plan. The 2017 target asset allocation was modified by reducing equity securities from 20 percent to 12 percent, increasing debt securities from 70 percent to 79 percent and other investments largely remained unchanged at 10 percent of total plan assets. This change was designed to reduce the risk associated with the potential negative impact that equity markets might have on the funded status of the U.S. defined benefit plan. The change is expected to reduce the 2018 expected long-term rate of return on assets from 5.75 percent to approximately 5.25 percent. See note S, “Retirement-Related Benefits,” on page 144 in the company’s 2016 Annual Report for additional information regarding the company’s investment strategy.
Notes to Consolidated Financial Statements — (continued)
In 2017, the company expects to contribute approximately $400 million to its non-U.S. defined benefit and multi-employer plans, the largest of which will be contributed to the defined benefit pension plans in Japan, Spain and the UK. This amount generally represents the legally mandated minimum contribution. Total contributions to the non-U.S. plans in the first nine months of 2017 were $301 million, of which $124 million was in cash and $176 million in U.S. Treasury securities. Total net contributions to the non-U.S. plans in the first nine months of 2016 were $261 million, of which $97 million was in cash and $164 million in U.S. Treasury securities. The contribution of U.S. Treasury securities is considered a non-cash transaction in the Consolidated Statement of Cash Flows.
The following tables provide the components of the cost/(income)cost for the company’s nonpension postretirement plans.
Cost of Nonpension Postretirement PlansPre-Swap Borrowing
(Dollars in millions) |
| U.S. Plan |
| Non-U.S. Plans |
| ||||||||
For the three months ended September 30: |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
Service cost |
| $ | 4 |
| $ | 4 |
| $ | 1 |
| $ | 1 |
|
Interest cost |
| 38 |
| 41 |
| 14 |
| 15 |
| ||||
Expected return on plan assets |
| — |
| — |
| (2 | ) | (2 | ) | ||||
Amortization of prior service costs/(credits) |
| (2 | ) | (2 | ) | 0 |
| (1 | ) | ||||
Recognized actuarial losses |
| 5 |
| 5 |
| 2 |
| 2 |
| ||||
Curtailments and settlements |
| — |
| — |
| 0 |
| 0 |
| ||||
Total nonpension postretirement plan cost recognized in Consolidated Statement of Earnings |
| $ | 45 |
| $ | 49 |
| $ | 16 |
| $ | 16 |
|
|
|
|
|
|
|
|
|
|
| ||||
(Dollars in millions) |
| U.S. Plan |
| Non-U.S. Plans |
| ||||||||
For the nine months ended September 30: |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
Service cost |
| $ | 11 |
| $ | 13 |
| $ | 4 |
| $ | 4 |
|
Interest cost |
| 115 |
| 124 |
| 43 |
| 37 |
| ||||
Expected return on plan assets |
| — |
| — |
| (6 | ) | (5 | ) | ||||
Amortization of prior service costs/(credits) |
| (6 | ) | (6 | ) | 0 |
| (4 | ) | ||||
Recognized actuarial losses |
| 15 |
| 15 |
| 5 |
| 7 |
| ||||
Curtailments and settlements |
| — |
| — |
| 0 |
| 0 |
| ||||
Total nonpension postretirement plan cost recognized in Consolidated Statement of Earnings |
| $ | 135 |
| $ | 146 |
| $ | 47 |
| $ | 39 |
|
| | | | | | | | |
|
|
|
| Balance |
| Balance | ||
(Dollars in millions) | | Maturities | | 6/30/2022 | | 12/31/2021 | ||
U.S. dollar debt (weighted-average interest rate at June 30, 2022):* |
|
|
| |
|
| |
|
2.4% |
| 2022 | | $ | 1,904 | | $ | 5,673 |
3.4% |
| 2023 | |
| 1,552 | |
| 1,573 |
3.3% |
| 2024 | |
| 5,013 | |
| 5,016 |
7.0% |
| 2025 | |
| 605 | |
| 608 |
3.3% |
| 2026 | |
| 4,352 | |
| 4,356 |
2.8% |
| 2027 | |
| 2,871 | |
| 2,221 |
6.5% |
| 2028 | | | 313 | |
| 313 |
3.5% | | 2029 | | | 3,250 | | | 3,250 |
2.0% | | 2030 | | | 1,350 | | | 1,350 |
4.4% |
| 2032 | |
| 1,100 | |
| 600 |
8.0% |
| 2038 | |
| 83 | |
| 83 |
4.5% |
| 2039 | |
| 2,745 | |
| 2,745 |
2.9% | | 2040 | | | 650 | |
| 650 |
4.0% |
| 2042 | |
| 1,107 | | | 1,107 |
7.0% |
| 2045 | |
| 27 | |
| 27 |
4.7% |
| 2046 | |
| 650 | |
| 650 |
4.3% | | 2049 | | | 3,000 | |
| 3,000 |
3.0% | | 2050 | | | 750 | | | 750 |
3.4% | | 2052 | | | 650 | | | — |
7.1% |
| 2096 | |
| 316 | |
| 316 |
| | | | $ | 32,288 | | $ | 34,290 |
Other currencies (weighted-average interest rate at June 30, 2022, in parentheses):* |
|
| |
|
| |
|
|
Euro (1.1%) |
| 2023–2040 | | $ | 16,718 | | $ | 15,903 |
Pound sterling (2.6%) |
| 2022 | |
| 364 | |
| 406 |
Japanese yen (0.3%) |
| 2022–2026 | |
| 1,070 | |
| 1,263 |
Other (15.7%) |
| 2022–2025 | |
| 315 | |
| 378 |
| | | | $ | 50,755 | | $ | 52,240 |
Finance lease obligations (2.0%) | | 2022–2030 | | | 108 | | | 99 |
| | | | $ | 50,863 | | $ | 52,339 |
Less: net unamortized discount |
|
| |
| 837 | |
| 839 |
Less: net unamortized debt issuance costs |
|
| |
| 134 | |
| 130 |
Add: fair value adjustment** |
|
| |
| 187 | |
| 311 |
| | | | $ | 50,079 | | $ | 51,681 |
Less: current maturities |
|
| |
| 5,752 | |
| 6,764 |
Total |
|
| | $ | 44,328 | | $ | 44,917 |
* Includes notes, debentures, bank loans and secured borrowings.
** | The portion of the company’s fixed-rate debt obligations that is hedged is reflected in the Consolidated Balance Sheet as an amount equal to the sum of the debt’s carrying value and a fair value adjustment representing changes in the fair value of the hedged debt obligations attributable to movements in benchmark interest rates. |
The company contributed $259 million in U.S. Treasury securities to the U.S. nonpension postretirement benefit plan during the nine months ended September 30, 2017, and $200 million in U.S. Treasurycompany’s indenture governing its debt securities and $40 million in cash during the nine months ended September 30, 2016. The contribution of U.S. Treasury securities is considered a non-cash transaction in the Consolidated Statement of Cash Flows.
9. Acquisitions/Divestitures:
Acquisitions: During the nine months ended September 30, 2017,its various credit facilities each contain significant covenants which obligate the company completed four acquisitions at anto promptly pay principal and interest, limit the aggregate costamount of $128 million.
The Technology Services & Cloud Platforms segment completed acquisitionssecured indebtedness and sale and leaseback transactions to 10 percent of three businesses: in the first quarter, Agile 3 Solutions, LLC (Agile 3 Solutions), a privately held business; in the third quarter, the cloud and managed hosting services business from a large U.S. telecommunications company, and Cloudigo Ltd. (Cloudigo), a privately held business. The Cognitive Solutions segment completed the acquisition of one privately held business: in the second quarter, XCC Web Content & Custom Apps Extension (XCC) from TIMETOACT Software & Consulting GmbH.
Each acquisition is expected to enhance the company’s portfolio of productconsolidated net tangible assets, and services capabilities. Agile 3 Solutions is a developer of software used by C-Suite and senior executives to better visualize, understand and manage risks associated with the protection of sensitive data and adds capabilities torestrict the company’s security portfolio.ability to merge or consolidate unless certain conditions are met. The acquisitioncredit facilities also include
34
a covenant on the company’s consolidated net interest expense ratio, which cannot be less than 2.20 to 1.0, as well as a cross default provision with respect to other defaulted indebtedness of at least $500 million.
The company is in compliance with its debt covenants and provides periodic certifications to its lenders. The failure to comply with its debt covenants could constitute an event of default with respect to the debt to which such provisions apply. If certain events of default were to occur, the principal and interest on the debt to which such event of default applied would become immediately due and payable.
In the first quarter of 2022, the company issued $2.3 billion of Euro fixed-rate notes in tranches with maturities ranging from 8 to 12 years and coupons ranging from 0.875 to 1.25 percent, and $1.8 billion of U.S. dollar fixed-rate notes with maturities ranging from 5 to 30 years and coupons ranging from 2.20 to 3.43 percent.
Pre-swap annual contractual obligations of long-term debt outstanding at June 30, 2022, were as follows:
| | | |
(Dollars in millions) |
| Total | |
Remainder of 2022 | | $ | 2,778 |
2023 | |
| 4,607 |
2024 | |
| 6,262 |
2025 | |
| 3,745 |
2026 | |
| 4,664 |
Thereafter | |
| 28,807 |
Total | | $ | 50,863 |
Interest on Debt
| | | | | | |
(Dollars in millions) |
|
| |
|
| |
For the six months ended June 30: | | 2022 | | 2021 | ||
Cost of financing | | $ | 165 | | $ | 210 |
Interest expense | |
| 607 | |
| 561 |
Interest capitalized | |
| 2 | |
| 2 |
Total interest paid and accrued | | $ | 775 | | $ | 774 |
network processing. XCC’s technology enhances IBM’s Connections Cloud platformLines of Credit
On June 30, 2022, the company amended its existing $2.5 billion Three-Year Credit Agreement and $7.5 billion Five-Year Credit Agreement (the Credit Agreements) to extend the maturity dates to June 20, 2025 and June 22, 2027, respectively, and to replace the London Interbank Offered Rate (LIBOR) interest rate provisions with customary provisions based on the Secured Overnight Financing Rate (SOFR). The Credit Agreements permit the company and its subsidiary borrowers to borrow up to $10 billion on a revolving basis. At June 30, 2022, there were 0 borrowings by providingthe company, or its subsidiaries, under these credit facilities.
13. Commitments:
The company’s extended lines of credit to third-party entities include unused amounts of $1.3 billion and $1.7 billion at June 30, 2022 and December 31, 2021, respectively. A portion of these amounts was available to the company’s business partners to support their working capital needs. In addition, the company has committed to provide future financing to its clients in connection with client purchase agreements for $2.7 billion and $3.2 billion at June 30, 2022 and December 31, 2021, respectively. The company collectively evaluates the allowance for these arrangements using a single, accessible engagement center for sharing content.
Purchase price consideration for all acquisitions as reflectedprovision methodology consistent with the portfolio of the commitments. Refer to note A, “Significant Accounting Policies,” in the following table, was paidcompany’s 2021 Annual Report for additional information. The allowance for these commitments is recorded in cash. All acquisitions are reportedother liabilities in the Consolidated StatementBalance Sheet and was not material at June 30, 2022.
35
Table of Cash Flows net of acquired cash and cash equivalents.
The following table reflects the purchase price related to these acquisitions and the resulting purchase price allocations as of September 30, 2017.
|
| Amortization |
| Total |
| |
(Dollars in millions) |
| Life (in yrs.) |
| Acquisitions |
| |
Current assets |
|
|
| $ | 18 |
|
Fixed assets/noncurrent assets |
|
|
| 69 |
| |
Intangible assets: |
|
|
|
|
| |
Goodwill |
| N/A |
| 16 |
| |
Completed technology |
| 5 |
| 9 |
| |
Client relationships |
| 7 |
| 62 |
| |
Patents/trademarks |
| 1-5 |
| 1 |
| |
Total assets acquired |
|
|
| 175 |
| |
Current liabilities |
|
|
| (47 | ) | |
Total liabilities assumed |
|
|
| (47 | ) | |
Total purchase price |
|
|
| $ | 128 |
|
N/A - not applicable
The acquisitions were accounted for as business combinations using the acquisition method, and accordingly, the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquired entity were recorded at their estimated fair values at the date of acquisition. The primary items that generated the goodwill are the value of the synergies between the acquired businesses and IBM and the acquired assembled workforce, neither of which qualify as an amortizable intangible asset.
The overall weighted-average life of the identified amortizable intangible assets acquired is 6.6 years. These identified intangible assets will be amortized on a straight-line basis over their useful lives. Goodwill of $13 million has been assigned to the Technology Services & Cloud Platforms segment and goodwill of $3 million has been assigned to the Cognitive Solutions segment. It is expected that approximately 50 percent of the goodwill will be deductible for tax purposes. Each of the acquisitions was for 100 percent of the acquired businesses.
On October 4, 2017, the company announced its intent to acquire Vivant Digital (Vivant), a boutique digital and innovation agency. The acquisition extends the strategy and design expertise of IBM Interactive Experience (IBM iX) and will help accelerate clients’ digital transformations. The transaction is expected to close in the fourth quarter of 2017 and the business will be integrated within the GBS segment.
Contents
Divestitures:
Microelectronics — On October 20, 2014, IBM and GLOBALFOUNDRIES announced a definitive agreement in which GLOBALFOUNDRIES would acquire the company’s Microelectronics business, including existing semiconductor manufacturing assets and operations in East Fishkill, NY and Essex Junction, VT. The commercial OEM business acquired by GLOBALFOUNDRIES includes custom logic and specialty foundry, manufacturing and related operations. The transaction closed on July 1, 2015.
At September 30, 2014, the company concluded that the Microelectronics business met the criteria for discontinued operations reporting. The disposal group constituted a component under accounting guidance. The continuing cash inflows and outflows with the discontinued component are related to the manufacturing sourcing arrangement and the transition, packaging and test services. These cash flows are not direct cash flows as they are not significant and the company has no significant continuing involvement.
Notes to Consolidated Financial Statements — (continued)
The company has applied the guidance requiring a guarantor to disclose certain types of guarantees, even if the likelihood of requiring the guarantor’s performance is remote. The following is a description of arrangements in which the company is the guarantor.
AllThe company is a party to a variety of agreements pursuant to which it may be obligated to indemnify the other party with respect to certain matters. Typically, these obligations arise in the context of contracts entered into by the company, under which the company customarily agrees to hold the party harmless against losses arising from a breach of representations and covenants related to such matters as title to the assets sold, certain intellectual property rights, specified environmental matters, third-party performance of nonfinancial contractual obligations and liabilitiescertain income taxes. In each of these circumstances, payment by the company is conditioned on the other party making a claim pursuant to the procedures specified in the particular contract, the procedures of which typically allow the company to challenge the other party’s claims. While indemnification provisions typically do not include a contractual maximum on the company’s payment, the company’s obligations under these agreements may be limited in terms of time and/or nature of claim, and in some instances, the company may have recourse against third parties for certain payments made by the company.
It is not possible to predict the maximum potential amount of future payments under these or similar agreements due to the conditional nature of the company’s obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made by the company under these agreements have not had a material effect on the company’s business, classified as held for salefinancial condition or results of operations.
In addition, the company guarantees certain loans and financial commitments. The maximum potential future payment under these financial guarantees and the fair value of these guarantees recognized in the Consolidated Balance Sheet at June 30, 2015, were transferred at closing. The company transferred $515 million of net cash to GLOBALFOUNDRIES2022 and December 31, 2021 was not material.
Changes in the third quarter of 2015. This amountcompany’s warranty liability for standard warranties, which are included $750 million of cash consideration, adjusted by the amount of working capital due from GLOBALFOUNDRIESin other accrued expenses and liabilities and other miscellaneous items. A second cash paymentliabilities in the amount of $500 million was transferredConsolidated Balance Sheet, and for extended warranty contracts, which are included in December 2016. The remaining cash consideration of $250 million is expected to be transferred in December 2017.
Summarized financial information for discontinued operations is immaterial.
Industry Standard Server — On January 23, 2014, IBM and Lenovo Group Limited (Lenovo) announced a definitive agreement in which Lenovo would acquire the company’s industry standard server portfolio (System x) for an adjusted purchase price of $2.1 billion, consisting of approximately $1.8 billion in cash, with the balance in Lenovo common stock. The stock represented less than 5 percent equity ownership in Lenovo. The company sold to Lenovo its System x, BladeCenter and Flex System blade servers and switches, x86-based Flex integrated systems, NeXtScale and iDataPlex servers and associated software, blade networking and maintenance operations. As of March 31, 2016, all Lenovo common stock was sold.
The initial closing was completed on October 1, 2014. A subsequent closing occurred in most other countries in which there was a large business footprint on December 31, 2014. The remaining countries closed on March 31, 2015. An assessment of the ongoing contractual terms of the transaction resulteddeferred income in the recognition of pre-tax gains of $63 million, $57 million and $13 million in 2015, 2016 and the first nine months of 2017, respectively.
Overall, the company expects to recognize a total pre-tax gain on the sale of approximately $1.6 billion, which does not include associated costs related to transition and performance-based costs. Net of these charges, the pre-tax gain was approximately $1.3 billion, of which the cumulative gain recorded as of September 30, 2017 is $1.2 billion. The balance of the gain is expected to be recognized in 2019 upon conclusion of the maintenance agreement.
Others – In the first quarter of 2017, the company completed one research-related divestiture. The company completed two Cognitive Solutions divestituresConsolidated Balance Sheet, are presented in the second quarterfollowing tables.
Standard Warranty Liability
| | | | | | |
(Dollars in millions) |
| 2022 |
| 2021 | ||
Balance at January 1 | | $ | 77 | | $ | 83 |
Current period accruals | |
| 39 | |
| 36 |
Accrual adjustments to reflect actual experience | |
| (1) | |
| (2) |
Charges incurred | |
| (41) | |
| (45) |
Balance at June 30 | | $ | 74 | | $ | 73 |
Extended Warranty Liability
| | | | | | |
(Dollars in millions) |
| 2022 |
| 2021 | ||
Balance at January 1 | | $ | 350 | | $ | 425 |
Revenue deferred for new extended warranty contracts | |
| 84 | |
| 50 |
Amortization of deferred revenue | |
| (83) | |
| (104) |
Other* | |
| (12) | |
| (5) |
Balance at June 30 | | $ | 339 | | $ | 367 |
Current portion | | $ | 172 | | $ | 184 |
Noncurrent portion | | $ | 167 | | $ | 183 |
* Other primarily consists of 2017 and one Cognitive Solutions divestiture in the third quarterforeign currency translation adjustments.
36
14.Contingencies:
10. Intangible Assets Including Goodwill:As a company with a substantial employee population and with clients in more than 175 countries, IBM is involved, either as plaintiff or defendant, in a variety of ongoing claims, demands, suits, investigations, tax matters and proceedings that arise from time to time in the ordinary course of its business. The following table detailscompany is a leader in the information technology industry and, as such, has been and will continue to be subject to claims challenging its IP rights and associated products and offerings, including claims of copyright and patent infringement and violations of trade secrets and other IP rights. In addition, the company enforces its own IP against infringement, through license negotiations, lawsuits or otherwise. Further, given the rapidly evolving external landscape of cybersecurity, privacy and data protection laws, regulations and threat actors, the company and its clients have been and will continue to be subject to actions or proceedings in various jurisdictions. Also, as is typical for companies of IBM’s scope and scale, the company is party to actions and proceedings in various jurisdictions involving a wide range of labor and employment issues (including matters related to contested employment decisions, country-specific labor and employment laws, and the company’s intangible asset balancespension, retirement and other benefit plans), as well as actions with respect to contracts, product liability, securities, foreign operations, competition law and environmental matters. These actions may be commenced by major asset class:
|
| At September 30, 2017 |
| |||||||
(Dollars in millions) |
| Gross Carrying |
| Accumulated |
| Net Carrying |
| |||
Intangible asset class |
| Amount |
| Amortization |
| Amount |
| |||
Capitalized software |
| $ | 1,586 |
| $ | (750 | ) | $ | 835 |
|
Client relationships |
| 2,416 |
| (1,054 | ) | 1,363 |
| |||
Completed technology |
| 2,872 |
| (1,562 | ) | 1,310 |
| |||
Patents/trademarks |
| 707 |
| (267 | ) | 440 |
| |||
Other* |
| 52 |
| (19 | ) | 32 |
| |||
Total |
| $ | 7,633 |
| $ | (3,652 | ) | $ | 3,981 |
|
* Other intangibles are primarily acquired proprietarya number of different parties, including competitors, clients, current or former employees, government and non-proprietary business processes, methodologiesregulatory agencies, stockholders and systems.
|
| At December 31, 2016 |
| |||||||
(Dollars in millions) |
| Gross Carrying |
| Accumulated |
| Net Carrying |
| |||
Intangible asset class |
| Amount |
| Amortization |
| Amount |
| |||
Capitalized software |
| $ | 1,537 |
| $ | (661 | ) | $ | 876 |
|
Client relationships |
| 2,831 |
| (1,228 | ) | 1,602 |
| |||
Completed technology |
| 3,322 |
| (1,668 | ) | 1,654 |
| |||
Patents/trademarks |
| 730 |
| (205 | ) | 525 |
| |||
Other* |
| 46 |
| (15 | ) | 31 |
| |||
Total |
| $ | 8,466 |
| $ | (3,778 | ) | $ | 4,688 |
|
* Other intangibles are primarily acquired proprietaryrepresentatives of the locations in which the company does business. Some of the actions to which the company is party may involve particularly complex technical issues, and non-proprietary business processes, methodologies and systems.
some actions may raise novel questions under the laws of the various jurisdictions in which these matters arise.
The net carryingcompany records a provision with respect to a claim, suit, investigation or proceeding when it is probable that a liability has been incurred and the amount of intangible assets decreased $707 million during the first nine monthsloss can be reasonably estimated. Any recorded liabilities, including any changes to such liabilities for the quarter ended June 30, 2022 were not material to the Consolidated Financial Statements.
In accordance with the relevant accounting guidance, the company provides disclosures of 2017, primarilymatters for which the likelihood of material loss is at least reasonably possible. In addition, the company also discloses matters based on its consideration of other matters and qualitative factors, including the experience of other companies in the industry, and investor, customer and employee relations considerations.
With respect to certain of the claims, suits, investigations and proceedings discussed herein, the company believes at this time that the likelihood of any material loss is remote, given, for example, the procedural status, court rulings, and/or the strength of the company’s defenses in those matters. With respect to the remaining claims, suits, investigations and proceedings discussed in this note, except as specifically discussed herein, the company is unable to provide estimates of reasonably possible losses or range of losses, including losses in excess of amounts accrued, if any, for the following reasons. Claims, suits, investigations and proceedings are inherently uncertain, and it is not possible to predict the ultimate outcome of these matters. It is the company’s experience that damage amounts claimed in litigation against it are unreliable and unrelated to possible outcomes, and as such are not meaningful indicators of the company’s potential liability. Further, the company is unable to provide such an estimate due to intangible asset amortization, partially offset by additions resulting from capitalized software.a number of other factors with respect to these claims, suits, investigations and proceedings, including considerations of the procedural status of the matter in question, the presence of complex or novel legal theories, and/or the ongoing discovery and development of information important to the matters. The aggregate intangible amortization expense was $383 millioncompany reviews claims, suits, investigations and $1,161 million for the third quarterproceedings at least quarterly, and first nine monthsdecisions are made with respect to recording or adjusting provisions and disclosing reasonably possible losses or range of 2017, respectively, versus $403 million and $1,148 million for the third quarter and first nine months of 2016, respectively. In addition,losses (individually or in the first nine monthsaggregate), to reflect the impact and status of 2017,settlement discussions, discovery, procedural and substantive rulings, reviews by counsel and other information pertinent to a particular matter.
Whether any losses, damages or remedies finally determined in any claim, suit, investigation or proceeding could reasonably have a material effect on the company retired $1,255 millioncompany’s business, financial condition, results of fully amortized intangible assets, impacting bothoperations or cash flows will depend on a number of variables, including: the gross carryingtiming and amount of such losses or damages; the structure and accumulated amortization by this amount.
The amortization expense for eachtype of any such remedies; the significance of the five succeeding years relating to intangible assets currently recordedimpact any such losses, damages or remedies may have in the Consolidated StatementFinancial Statements; and the unique facts and circumstances of Financial Positionthe particular matter that may give rise to additional factors. While the company will continue to defend itself vigorously, it is estimated to bepossible that the following at September 30, 2017:company’s business, financial
37
|
| Capitalized |
| Acquired |
|
|
| |||
(Dollars in millions) |
| Software |
| Intangibles |
| Total |
| |||
2017 (for Q4) |
| $ | 144 |
| $ | 216 |
| $ | 359 |
|
2018 |
| 441 |
| 811 |
| 1,252 |
| |||
2019 |
| 202 |
| 671 |
| 873 |
| |||
2020 |
| 48 |
| 559 |
| 607 |
| |||
2021 |
| — |
| 446 |
| 446 |
| |||
The change in the goodwill balances by reportable segment, for the nine months ended September 30, 2017 and for the year ended December 31, 2016 are as follows:
Notes to Consolidated Financial Statements — (continued)
|
|
|
|
|
|
|
|
|
| Foreign |
|
|
| ||||||
|
|
|
|
|
|
|
|
|
| Currency |
|
|
| ||||||
|
|
|
|
|
| Purchase |
|
|
| Translation |
|
|
| ||||||
(Dollars in millions) |
| Balance |
| Goodwill |
| Price |
|
|
| And Other |
| Balance |
| ||||||
Segment |
| 01/01/17 |
| Additions |
| Adjustments |
| Divestitures |
| Adjustments* |
| 9/30/17 |
| ||||||
Cognitive Solutions |
| $ | 19,484 |
| $ | 3 |
| $ | (36 | ) | $ | (15 | ) | $ | 243 |
| $ | 19,679 |
|
Global Business Services |
| 4,607 |
| — |
| 4 |
| — |
| 186 |
| 4,797 |
| ||||||
Technology Services & Cloud Platforms |
| 10,258 |
| 13 |
| (3 | ) | — |
| 175 |
| 10,444 |
| ||||||
Systems |
| 1,850 |
| — |
| — |
| — |
| 13 |
| 1,863 |
| ||||||
Total |
| $ | 36,199 |
| $ | 16 |
| $ | (36 | ) | $ | (15 | ) | $ | 618 |
| $ | 36,782 |
|
* Primarily drivencondition, results of operations or cash flows could be affected in any particular period by foreign currency translation.the resolution of one or more of these matters.
The following is a summary of the more significant legal matters involving the company.
|
|
|
|
|
|
|
|
|
| Foreign |
|
|
| ||||||
|
|
|
|
|
|
|
|
|
| Currency |
|
|
| ||||||
|
|
|
|
|
| Purchase |
|
|
| Translation |
|
|
| ||||||
(Dollars in millions) |
| Balance |
| Goodwill |
| Price |
|
|
| And Other |
| Balance |
| ||||||
Segment |
| 01/01/16 |
| Additions |
| Adjustments |
| Divestitures |
| Adjustments* |
| 12/31/16 |
| ||||||
Cognitive Solutions |
| $ | 15,621 |
| $ | 3,821 |
| $ | 5 |
| $ | (12 | ) | $ | 48 |
| $ | 19,484 |
|
Global Business Services |
| 4,396 |
| 303 |
| 4 |
| (1 | ) | (95 | ) | 4,607 |
| ||||||
Technology Services & Cloud Platforms |
| 10,156 |
| 119 |
| (12 | ) | (5 | ) | (1 | ) | 10,258 |
| ||||||
Systems |
| 1,848 |
| — |
| (4 | ) | — |
| 5 |
| 1,850 |
| ||||||
Total |
| $ | 32,021 |
| $ | 4,244 |
| $ | (7 | ) | $ | (18 | ) | $ | (42 | ) | $ | 36,199 |
|
* Primarily drivenIn December 2017, CIS General Insurance Limited (CISGIL) sued IBM UK regarding a contract entered into by foreign currency translation.IBM UK and CISGIL in 2015 to implement and operate an IT insurance platform. The contract was terminated by IBM UK in July 2017 for non-payment by CISGIL. CISGIL alleges wrongful termination, breach of contract and breach of warranty. In February 2021, the Technology & Construction Court in London rejected the majority of CISGIL’s claims and ruled in IBM’s favor on its counterclaim. The court’s decision required IBM to pay approximately $20 million in damages, plus interest and litigation costs. In April 2022, the Court of Appeal awarded CISGIL additional damages of approximately $89 million, plus interest and litigation costs. IBM filed an application for permission to appeal with the UK Supreme Court.
On June 8, 2021, IBM sued GlobalFoundries U.S. Inc. (GF) in New York State Supreme Court for claims including fraud and breach of contract relating to a long-term strategic relationship between IBM and GF for researching, developing, and manufacturing advanced semiconductor chips for IBM. GF walked away from its obligations and IBM is now suing to recover amounts paid to GF, and other compensatory and punitive damages, totaling more than $1.5 billion. On September 14, 2021, the court ruled on GF’s motion to dismiss. On April 7, 2022, the Appellate Division unanimously reversed the lower court’s dismissal of IBM’s fraud claim. IBM’s claims for breaches of contract, promissory estoppel, and fraud are proceeding.
There were no goodwill impairment losses recordedOn April 5, 2022, a putative securities law class action was commenced in the United States District Court for the Southern District of New York alleging that during the first nine monthsperiod from April 4, 2017 through October 20, 2021, certain strategic imperatives revenues were misclassified. The company, 2 current IBM senior executives, and 2 former IBM senior executives are named as defendants. On June 23, 2022, the court entered an order appointing Iron Workers Local 580 Joint Funds as lead plaintiff. On March 25, 2022, the Board of 2017 orDirectors received a shareholder demand letter making similar allegations and demanding that the full yearcompany’s Board of 2016Directors take action to assert the company’s rights. A special committee of independent directors has been formed to investigate the issues raised in the letter.
On June 2, 2022, a putative class action lawsuit was filed in the United States District Court for the Southern District of New York alleging that the IBM Pension Plan miscalculated certain joint and survivor annuity pension benefits by using outdated actuarial tables in violation of the Employee Retirement Income Security Act of 1974. IBM, the Plan Administrator Committee, and the company has no accumulated impairment losses.IBM Pension Plan are named as defendants.
Purchase price adjustments recordedAs disclosed in the first nine monthsKyndryl Form 10 and subsequent Kyndryl public filings, in 2017 BMC Software, Inc. (BMC) filed suit against IBM in the United States District Court for the Southern District of 2017Texas in a dispute involving IBM’s former managed infrastructure services business. On May 30, 2022, the trial court awarded BMC $718 million in direct damages and full year 2016 were$718 million in punitive damages, plus interest and fees. The judgment will be appealed. IBM does not believe it has any material exposure relating to this litigation. No material liability or related indemnification asset has been recorded by IBM.
The company is party to, acquisitions completed on or priorotherwise involved in, proceedings brought by U.S. federal or state environmental agencies under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), known as “Superfund,” or laws similar to June 30, 2017CERCLA. Such statutes require potentially responsible parties to participate in remediation activities regardless of fault or September 30, 2016, respectively,ownership of sites. The company is also conducting environmental investigations, assessments or remediations at or in the vicinity of several current or former operating sites globally pursuant to permits, administrative orders or agreements with country, state or local environmental agencies, and were stillis involved in lawsuits and claims concerning certain current or former operating sites.
The company is also subject to ongoing tax examinations and governmental assessments in various jurisdictions. Along with many other U.S. companies doing business in Brazil, the measurement period that ends at the earliercompany is involved in various challenges with
38
Contents
11. Borrowings:
Short-Term Debt
|
| At September 30, |
| At December 31, |
| ||
(Dollars in millions) |
| 2017 |
| 2016 |
| ||
Commercial paper |
| $ | — |
| $ | 899 |
|
Short-term loans |
| 407 |
| 375 |
| ||
Long-term debt — current maturities |
| 3,892 |
| 6,239 |
| ||
Total |
| $ | 4,299 |
| $ | 7,513 |
|
The weighted-average interest rate for commercial paper at December 31, 2016 was 0.7 percent. The weighted-average interest rate for short-term loans was 5.4 percent and 9.5 percent at September 30, 2017 and December 31, 2016, respectively.
Notes to Consolidated Financial Statements — (continued)
Brazilian tax authorities regarding non-income tax assessments and non-income tax litigation matters. The total potential amount related to all these matters for all applicable years is approximately $400 million. The company believes it will prevail on these matters and that this amount is not a meaningful indicator of liability.
15. Equity Activity:
Reclassifications and Taxes Related to Items of Other Comprehensive Income
| | | | | | | | | |
(Dollars in millions) |
| Before Tax |
| Tax (Expense)/ |
| Net of Tax | |||
For the three months ended June 30, 2022: | | Amount | | Benefit | | Amount | |||
Other comprehensive income/(loss): |
| |
|
| |
|
| |
|
Foreign currency translation adjustments | | $ | 213 | | $ | (347) | | $ | (134) |
Net changes related to available-for-sale securities: | |
|
| |
|
| |
|
|
Unrealized gains/(losses) arising during the period | | $ | 0 | | $ | 0 | | $ | 0 |
Reclassification of (gains)/losses to other (income) and expense | |
| — | | | — | | | — |
Total net changes related to available-for-sale securities | | $ | 0 | | $ | 0 | | $ | 0 |
Unrealized gains/(losses) on cash flow hedges: | |
|
| |
|
| |
|
|
Unrealized gains/(losses) arising during the period | | $ | 200 | | $ | (53) | | $ | 147 |
Reclassification of (gains)/losses to: | |
|
| |
|
| |
|
|
Cost of services | |
| (13) | |
| 3 | |
| (10) |
Cost of sales | |
| (23) | |
| 7 | |
| (17) |
Cost of financing | |
| 6 | |
| (2) | |
| 5 |
SG&A expense | |
| (14) | |
| 4 | |
| (10) |
Other (income) and expense | |
| 38 | |
| (10) | |
| 29 |
Interest expense | |
| 22 | |
| (6) | |
| 16 |
Total unrealized gains/(losses) on cash flow hedges | | $ | 217 | | $ | (56) | | $ | 161 |
Retirement-related benefit plans*: | |
|
| |
|
| |
|
|
Prior service costs/(credits) | | $ | — | | $ | 0 | | $ | 0 |
Net (losses)/gains arising during the period | | | 1 | | | (3) | | | (2) |
Curtailments and settlements | |
| 11 | | | (3) | | | 8 |
Amortization of prior service (credits)/costs | |
| 6 | | | (2) | | | 5 |
Amortization of net (gains)/losses | |
| 450 | | | (125) | | | 325 |
Total retirement-related benefit plans | | $ | 468 | | $ | (132) | | $ | 336 |
Other comprehensive income/(loss) | | $ | 897 | | $ | (534) | | $ | 363 |
* | These accumulated other comprehensive income (AOCI) components are included in the computation of net periodic pension cost. Refer to note 18, “Retirement-Related Benefits,” for additional information. |
39
Long-Term DebtNotes to Consolidated Financial Statements — (continued)
Reclassifications and Taxes Related to Items of Other Comprehensive Income
| | | | | | | | | |
(Dollars in millions) |
| Before Tax |
| Tax (Expense)/ |
| Net of Tax | |||
For the three months ended June 30, 2021: | | Amount | | Benefit | | Amount | |||
Other comprehensive income/(loss): |
| |
|
| |
|
| |
|
Foreign currency translation adjustments | | $ | 28 | | $ | 44 | | $ | 72 |
Net changes related to available-for-sale securities: | |
|
| |
|
| |
|
|
Unrealized gains/(losses) arising during the period | | $ | 0 | | $ | 0 | | $ | 0 |
Reclassification of (gains)/losses to other (income) and expense | |
| — | | | — | | | — |
Total net changes related to available-for-sale securities | | $ | 0 | | $ | 0 | | $ | 0 |
Unrealized gains/(losses) on cash flow hedges: | |
|
| |
|
| |
|
|
Unrealized gains/(losses) arising during the period | | $ | (34) | | $ | 9 | | $ | (26) |
Reclassification of (gains)/losses to: | |
| | |
| | |
| |
Cost of services | |
| (7) | |
| 2 | |
| (5) |
Cost of sales | |
| 10 | |
| (3) | |
| 8 |
Cost of financing | |
| 6 | |
| (1) | |
| 4 |
SG&A expense | |
| 16 | |
| (4) | |
| 12 |
Other (income) and expense | |
| 49 | |
| (12) | |
| 37 |
Interest expense | |
| 16 | |
| (4) | |
| 12 |
Total unrealized gains/(losses) on cash flow hedges | | $ | 56 | | $ | (14) | | $ | 42 |
Retirement-related benefit plans*: | |
|
| |
|
| |
|
|
Prior service costs/(credits) | | $ | 0 | | $ | 0 | | $ | 0 |
Net (losses)/gains arising during the period | | | 2 | | | 10 | | | 11 |
Curtailments and settlements | |
| 16 | | | (5) | | | 11 |
Amortization of prior service (credits)/costs | |
| 1 | | | 1 | | | 1 |
Amortization of net (gains)/losses | |
| 643 | | | (175) | | | 467 |
Total retirement-related benefit plans | | $ | 661 | | $ | (170) | | $ | 491 |
Other comprehensive income/(loss) | | $ | 745 | | $ | (140) | | $ | 605 |
* | These AOCI components are included in the computation of net periodic pension cost. Refer to note 18, “Retirement-Related Benefits,” for additional information. |
40
Notes to Consolidated Financial Statements — (continued)
Reclassifications and Taxes Related to Items of Other Comprehensive Income
| | | | | | | | | |
(Dollars in millions) |
| Before Tax |
| Tax (Expense)/ |
| Net of Tax | |||
For the six months ended June 30, 2022: | | Amount | | Benefit | | Amount | |||
Other comprehensive income/(loss): |
| |
|
| |
|
| |
|
Foreign currency translation adjustments | | $ | 655 | | $ | (483) | | $ | 172 |
Net changes related to available-for-sale securities: | |
|
| |
|
| |
|
|
Unrealized gains/(losses) arising during the period | | $ | (1) | | $ | 0 | | $ | 0 |
Reclassification of (gains)/losses to other (income) and expense | |
| — | |
| — | |
| — |
Total net changes related to available-for-sale securities | | $ | (1) | | $ | 0 | | $ | 0 |
Unrealized gains/(losses) on cash flow hedges: | |
|
| |
|
| |
|
|
Unrealized gains/(losses) arising during the period | | $ | 260 | | $ | (69) | | $ | 191 |
Reclassification of (gains)/losses to: | |
|
| |
|
| |
|
|
Cost of services | |
| (28) | |
| 7 | |
| (21) |
Cost of sales | |
| (35) | |
| 10 | |
| (25) |
Cost of financing | |
| 12 | |
| (3) | |
| 9 |
SG&A expense | |
| (20) | |
| 5 | |
| (14) |
Other (income) and expense | |
| 45 | |
| (11) | |
| 34 |
Interest expense | |
| 43 | |
| (11) | |
| 32 |
Total unrealized gains/(losses) on cash flow hedges | | $ | 276 | | $ | (71) | | $ | 205 |
Retirement-related benefit plans*: | |
|
| |
|
| |
|
|
Prior service costs/(credits) | | $ | (5) | | $ | 5 | | $ | 0 |
Net (losses)/gains arising during the period | | | 10 | | | (7) | | | 3 |
Curtailments and settlements | |
| 19 | |
| (5) | |
| 14 |
Amortization of prior service (credits)/costs | |
| 13 | |
| (3) | |
| 10 |
Amortization of net (gains)/losses | |
| 917 | |
| (256) | |
| 662 |
Total retirement-related benefit plans | | $ | 954 | | $ | (266) | | $ | 689 |
Other comprehensive income/(loss) | | $ | 1,885 | | $ | (819) | | $ | 1,066 |
* | These AOCI components are included in the computation of net periodic pension cost. Refer to note 18, “Retirement-Related Benefits,” for additional information. |
41
Notes to Consolidated Financial Statements — (continued)
Reclassifications and Taxes Related to Items of Other Comprehensive Income
| | | | | | | | | |
(Dollars in millions) |
| Before Tax |
| Tax (Expense)/ |
| Net of Tax | |||
For the six months ended June 30, 2021: | | Amount | | Benefit | | Amount | |||
Other comprehensive income/(loss): |
| |
|
| |
|
| |
|
Foreign currency translation adjustments | | $ | 577 | | $ | (184) | | $ | 393 |
Net changes related to available-for-sale securities: | |
|
| |
| | |
|
|
Unrealized gains/(losses) arising during the period | | $ | 0 | | $ | 0 | | $ | 0 |
Reclassification of (gains)/losses to other (income) and expense | |
| — | |
| — | |
| — |
Total net changes related to available-for-sale securities | | $ | 0 | | $ | 0 | | $ | 0 |
Unrealized gains/(losses) on cash flow hedges: | |
|
| |
|
| |
|
|
Unrealized gains/(losses) arising during the period | | $ | 153 | | $ | (39) | | $ | 114 |
Reclassification of (gains)/losses to: | |
| | |
| | |
| |
Cost of services | |
| (21) | |
| 5 | |
| (16) |
Cost of sales | |
| 32 | |
| (8) | |
| 24 |
Cost of financing | |
| 12 | |
| (3) | |
| 9 |
SG&A expense | |
| 31 | |
| (8) | |
| 23 |
Other (income) and expense | |
| 165 | |
| (41) | |
| 123 |
Interest expense | |
| 31 | |
| (8) | |
| 24 |
Total unrealized gains/(losses) on cash flow hedges | | $ | 404 | | $ | (102) | | $ | 301 |
Retirement-related benefit plans*: | |
|
| |
|
| |
|
|
Prior service costs/(credits) | | $ | 0 | | $ | 0 | | $ | 0 |
Net (losses)/gains arising during the period | | | 22 | | | 4 | | | 25 |
Curtailments and settlements | |
| 34 | |
| (10) | |
| 23 |
Amortization of prior service (credits)/costs | |
| 4 | |
| 0 | |
| 4 |
Amortization of net (gains)/losses | |
| 1,291 | |
| (352) | |
| 938 |
Total retirement-related benefit plans | | $ | 1,350 | | $ | (359) | | $ | 991 |
Other comprehensive income/(loss) | | $ | 2,330 | | $ | (645) | | $ | 1,685 |
* | These AOCI components are included in the computation of net periodic pension cost. Refer to note 18, “Retirement-Related Benefits,” for additional information. |
Accumulated Other Comprehensive Income/(Loss) (net of tax)
| | | | | | | | | | | | | | | |
|
|
| |
|
| |
| Net Change |
| Net Unrealized |
|
| | ||
| | Net Unrealized | | Foreign | | Retirement- | | Gains/(Losses) | | Accumulated | |||||
| | Gains/(Losses) | | Currency | | Related | | on Available- | | Other | |||||
| | on Cash Flow | | Translation | | Benefit | | For-Sale | | Comprehensive | |||||
(Dollars in millions) | | Hedges | | Adjustments* | | Plans | | Securities | | Income/(Loss) | |||||
January 1, 2022 | | $ | (18) | | $ | (3,362) | | $ | (19,854) | | $ | (1) | | $ | (23,234) |
Other comprehensive income before reclassifications | |
| 191 | |
| 172 | |
| 3 | |
| 0 | |
| 366 |
Amount reclassified from accumulated other comprehensive income | |
| 14 | |
| — | |
| 686 | |
| — | |
| 699 |
Total change for the period | | $ | 205 | | $ | 172 | | $ | 689 | | $ | 0 | | $ | 1,066 |
June 30, 2022 | | $ | 187 | | $ | (3,189) | | $ | (19,165) | | $ | (1) | | $ | (22,169) |
* | Foreign currency translation adjustments are presented gross except for any associated hedges which are presented net of tax. |
42
Notes to Consolidated Financial Statements — (continued)
| | | | | | | | | | | | | | | |
|
|
| |
|
| |
| Net Change |
| Net Unrealized |
|
| | ||
| | Net Unrealized | | Foreign | | Retirement- | | Gains/(Losses) | | Accumulated | |||||
| | Gains/(Losses) | | Currency | | Related | | on Available- | | Other | |||||
| | on Cash Flow | | Translation | | Benefit | | For-Sale | | Comprehensive | |||||
(Dollars in millions) | | Hedges | | Adjustments* | | Plans | | Securities | | Income/(Loss) | |||||
January 1, 2021 | | $ | (456) | | $ | (4,665) | | $ | (24,216) | | $ | 0 | | $ | (29,337) |
Other comprehensive income before reclassifications | |
| 114 | |
| 393 | |
| 25 | |
| 0 | |
| 532 |
Amount reclassified from accumulated other comprehensive income | |
| 187 | |
| — | |
| 966 | |
| — | |
| 1,153 |
Total change for the period | | $ | 301 | | $ | 393 | | $ | 991 | | $ | 0 | | $ | 1,685 |
June 30, 2021 | | $ | (155) | | $ | (4,271) | | $ | (23,225) | | $ | (1) | | $ | (27,652) |
* Foreign currency translation adjustments are presented gross except for any associated hedges which are presented net of tax.
16. Derivative Financial Instruments:
The company operates in multiple functional currencies and is a significant lender and borrower in the global markets. In the normal course of business, the company is exposed to the impact of interest rate changes and foreign currency fluctuations, and to a lesser extent equity and commodity price changes and client credit risk. The company limits these risks by following established risk management policies and procedures, including the use of derivatives, and, where cost effective, financing with debt in the currencies in which assets are denominated. For interest rate exposures, derivatives are used to better align rate movements between the interest rates associated with the company’s lease and other financial assets and the interest rates associated with its financing debt. Derivatives are also used to manage the related cost of debt. For foreign currency exposures, derivatives are used to better manage the cash flow volatility arising from foreign exchange rate fluctuations.
In the Consolidated Balance Sheet, the company does not offset derivative assets against liabilities in master netting arrangements nor does it offset receivables or payables recognized upon payment or receipt of cash collateral against the fair values of the related derivative instruments. At June 30, 2022 and December 31, 2021, the amount recognized in other accounts receivables for the right to reclaim cash collateral was $52 million and $2 million, respectively. At June 30, 2022 and December 31, 2021, the amount recognized in accounts payable for the obligation to return cash collateral was $14 million and $38 million, respectively. The company restricts the use of cash collateral received to rehypothecation, and therefore reports it in restricted cash in the Consolidated Balance Sheet. At June 30, 2022 and December 31, 2021, the amount rehypothecated was $12 million and $2 million, respectively. Additionally, if derivative exposures covered by a qualifying master netting agreement had been netted in the Consolidated Balance Sheet at June 30, 2022 and December 31, 2021, the total derivative asset and liability positions each would have been reduced by $187 million and $60 million, respectively.
On May 19, 2022, in connection with the disposition of 22.3 million shares of Kyndryl common stock, the company entered into a cash-settled swap with the lender of the short-term credit facility as the counterparty that maintained IBM’s continued economic exposure in those shares pursuant to the Exchange. Refer to note 8, “Financial Assets & Liabilities,” for additional information. The notional value of the swap is $311 million. Upon settlement of the swap, no later than November 2, 2022, IBM will receive or pay an amount derived from the difference between the VWAP of the Kyndryl shares over the outstanding term of the swap and the strike price as of May 19, 2022. The fair value of the swap at June 30, 2022 was $88 million and is included within other accrued expenses and liabilities in the Consolidated Balance Sheet. For the three and six months ended June 30, 2022, an unrealized loss of $88 million was recorded in other (income) and expense in the Consolidated Income Statement.
In its hedging programs, the company may use forward contracts, futures contracts, interest-rate swaps, cross-currency swaps, equity swaps, and options depending upon the underlying exposure. The company is not a party to leveraged derivative instruments.
43
Notes to Consolidated Financial Statements — (continued)
A brief description of the major hedging programs, categorized by underlying risk, follows.
Interest Rate Risk
Fixed and Variable Rate Borrowings
The company issues debt in the global capital markets to fund its operations and financing business. Access to cost-effective financing can result in interest rate mismatches with the underlying assets. To manage these mismatches and to reduce overall interest cost, the company may use interest-rate swaps to convert specific fixed-rate debt issuances into variable-rate debt (i.e., fair value hedges) and to convert specific variable-rate debt issuances into fixed-rate debt (i.e., cash flow hedges). At June 30, 2022 and December 31, 2021, the total notional amount of the company’s interest-rate swaps was $4.4 billion and $0.4 billion, respectively. The weighted-average remaining maturity of these instruments at June 30, 2022 and December 31, 2021 was approximately 5.4 years and 1.2 years, respectively. These interest-rate contracts were accounted for as fair value hedges. The company did 0t have any cash flow hedges relating to this program outstanding at June 30, 2022 and December 31, 2021.
Forecasted Debt Issuance
The company is exposed to interest rate volatility on future debt issuances. To manage this risk, the company may use instruments such as forward starting interest-rate swaps to lock in the rate on the interest payments related to the forecasted debt issuances. There were 0 instruments outstanding at June 30, 2022 and December 31, 2021.
In connection with cash flow hedges of forecasted interest payments related to the company's borrowings, the company recorded net losses (before taxes) of $148 million and $157 million at June 30, 2022 and December 31, 2021, respectively, in AOCI. The company estimates that $18 million of the deferred net losses (before taxes) on derivatives in AOCI at June 30, 2022 will be reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying interest payments.
Foreign Exchange Risk
Long-Term Investments in Foreign Subsidiaries (Net Investment)
A large portion of the company’s foreign currency denominated debt portfolio is designated as a hedge of net investment in foreign subsidiaries to reduce the volatility in stockholders’ equity caused by changes in foreign currency exchange rates in the functional currency of major foreign subsidiaries with respect to the U.S. dollar. At June 30, 2022 and December 31, 2021, the carrying value of debt designated as hedging instruments was $14.0 billion and $14.1 billion, respectively. The company also uses cross-currency swaps and foreign exchange forward contracts for this risk management purpose. At June 30, 2022 and December 31, 2021, the total notional amount of derivative instruments designated as net investment hedges was $4.7 billion and $6.8 billion, respectively. At both June 30, 2022 and December 31, 2021, the weighted-average remaining maturity of these instruments was approximately 0.1 year.
Anticipated Royalties and Cost Transactions
The company’s operations generate significant nonfunctional currency, third-party vendor payments and intercompany payments for royalties and goods and services among the company’s non-U.S. subsidiaries and with the company. In anticipation of these foreign currency cash flows and in view of the volatility of the currency markets, the company selectively employs foreign exchange forward contracts to manage its currency risk. These forward contracts are accounted for as cash flow hedges. At June 30, 2022, the maximum remaining length of time over which the company hedged its exposure is approximately two years. At June 30, 2022 and December 31, 2021, the total notional amount of forward contracts designated as cash flow hedges of forecasted royalty and cost transactions was $8.2 billion and $7.2 billion, respectively. At both June 30, 2022 and December 31, 2021, the weighted-average remaining maturity of these instruments was approximately 0.6 years.
44
Notes to Consolidated Financial Statements — (continued)
At June 30, 2022 and December 31, 2021, in connection with cash flow hedges of anticipated royalties and cost transactions, the company recorded net gains (before taxes) of $537 million and $315 million, respectively, in AOCI. The company estimates that $471 million of deferred net gains (before taxes) on derivatives in AOCI at June 30, 2022 will be reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying anticipated transactions.
Foreign Currency Denominated Borrowings
The company is exposed to exchange rate volatility on foreign currency denominated debt. To manage this risk, the company employs cross-currency swaps to convert fixed-rate foreign currency denominated debt to fixed-rate debt denominated in the functional currency of the borrowing entity. These swaps are accounted for as cash flow hedges. At June 30, 2022, the maximum length of time remaining over which the company hedged its exposure is approximately six years. At June 30, 2022 and December 31, 2021, the total notional amount of cross-currency swaps designated as cash flow hedges of foreign currency denominated debt was $3.0 billion and $2.0 billion, respectively.
At June 30, 2022 and December 31, 2021, in connection with cash flow hedges of foreign currency denominated borrowings, the company recorded net losses (before taxes) of $128 million and $174 million, respectively, in AOCI. The company estimates that $31 million of deferred net gains (before taxes) on derivatives in AOCI at June 30, 2022 will be reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying exposure.
Subsidiary Cash and Foreign Currency Asset/Liability Management
The company uses its Global Treasury Centers to manage the cash of its subsidiaries. These centers principally use currency swaps to convert cash flows in a cost-effective manner. In addition, the company uses foreign exchange forward contracts to economically hedge, on a net basis, the foreign currency exposure of a portion of the company’s nonfunctional currency assets and liabilities. The terms of these forward and swap contracts are generally less than one year. The changes in the fair values of these contracts and of the underlying hedged exposures are generally offsetting and are recorded in other (income) and expense in the Consolidated Income Statement. At June 30, 2022 and December 31, 2021, the total notional amount of derivative instruments in economic hedges of foreign currency exposure was $5.6 billion and $6.8 billion, respectively.
Equity Risk Management
The company is exposed to market price changes in certain broad market indices and in the company’s own stock primarily related to certain obligations to employees. Changes in the overall value of these employee compensation obligations are recorded in SG&A expense in the Consolidated Income Statement. Although not designated as accounting hedges, the company utilizes derivatives, including equity swaps and futures, to economically hedge the exposures related to its employee compensation obligations. The derivatives are linked to the total return on certain broad market indices or the total return on the company’s common stock, and are recorded at fair value with gains or losses also reported in SG&A expense in the Consolidated Income Statement. At June 30, 2022 and December 31, 2021, the total notional amount of derivative instruments in economic hedges of these compensation obligations was $1.1 billion and $1.4 billion, respectively.
45
Notes to Consolidated Financial Statements — (continued)
Cumulative Basis Adjustments for Fair Value Hedges
At June 30, 2022 and December 31, 2021, the following amounts were recorded in the Consolidated Balance Sheet related to cumulative basis adjustments for fair value hedges:
| | | | | | | |
|
| June 30, |
| December 31, |
| ||
(Dollars in millions) | | 2022 | | 2021 |
| ||
Short-term debt: |
| |
|
| |
| |
Carrying amount of the hedged item | | $ | (224) | | $ | (227) | |
Cumulative hedging adjustments included in the carrying amount — assets/(liabilities)* | |
| 1 | |
| (2) | |
Long-term debt: | |
|
| |
|
| |
Carrying amount of the hedged item | | $ | (4,366) | | $ | (508) | |
Cumulative hedging adjustments included in the carrying amount — assets/(liabilities)* | |
| (188) | |
| (309) | |
* Includes ($276) million and ($302) million of hedging adjustments on discontinued hedging relationships at June 30, 2022 and December 31, 2021, respectively.
The Effect of Derivative Instruments in the Consolidated Income Statement
The total amounts of income and expense line items presented in the Consolidated Income Statement in which the effects of fair value hedges, cash flow hedges, net investment hedges and derivatives not designated as hedging instruments are recorded and the total effect of hedge activity on these income and expense line items are as follows:
| | | | | | | | | | | | | |
| | | | | | | | Gains/(Losses) of |
| ||||
(Dollars in millions) | | Total | | Total Hedge Activity |
| ||||||||
For the three months ended June 30: |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||||
Cost of services | | $ | 5,399 | | $ | 4,720 | | $ | 13 | | $ | 7 | |
Cost of sales | |
| 1,750 | |
| 1,499 | * |
| 23 | |
| (10) | |
Cost of financing | |
| 96 | |
| 146 | * |
| 1 | |
| 0 | |
SG&A expense | |
| 4,855 | |
| 4,849 | |
| (152) | |
| 67 | |
Other (income) and expense | |
| (81) | |
| 302 | |
| (439) | |
| (79) | |
Interest expense | |
| 297 | |
| 281 | |
| 3 | |
| (1) | |
* Reclassified to conform to current year presentation.
46
Notes to Consolidated Financial Statements — (continued)
| | | | | | | | | | | | | | |
| | Gain (Loss) Recognized in Consolidated Income Statement | ||||||||||||
| | Consolidated | | Recognized on | | Attributable to Risk | ||||||||
(Dollars in millions) | | Income Statement | | Derivatives | | Being Hedged (2) | ||||||||
For the three months ended June 30: |
| Line Item |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Derivative instruments in fair value hedges (1): |
|
|
| |
|
| |
|
| |
|
| |
|
Interest rate contracts |
| Cost of financing | | $ | (17) | | $ | 0 | | $ | 23 | | $ | 4 |
|
| Interest expense | |
| (61) | |
| 0 | |
| 81 | |
| 11 |
Derivative instruments not designated as hedging instruments: |
|
| |
|
| |
|
| |
|
| |
|
|
Foreign exchange contracts |
| Other (income) and expense | |
| (313) | |
| (30) | |
| N/A | |
| N/A |
Equity contracts |
| SG&A expense | |
| (166) | |
| 83 | |
| N/A | |
| N/A |
| | Other (income) and expense | | | (88) | | | — | | | N/A | | | N/A |
Total |
|
| | $ | (645) | | $ | 54 | | $ | 104 | | $ | 15 |
| | | | | | | | | | | | | | | | | | | | | |
| | Gain (Loss) Recognized in Consolidated Income Statement and Other Comprehensive Income |
| ||||||||||||||||||
(Dollars in millions) | | | | | | | | Consolidated | | Reclassified | | Amounts Excluded from |
| ||||||||
For the three months | | Recognized in OCI | | Income Statement | | from AOCI | | Effectiveness Testing (3) |
| ||||||||||||
ended June 30: |
| 2022 |
| 2021 |
| Line Item |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||||||
Derivative instruments in cash flow hedges: |
| |
|
| |
|
|
|
| |
|
| |
| | |
|
| |
| |
Interest rate contracts | | $ | — | | $ | — |
| Cost of financing | | $ | (1) | | $ | (1) | | $ | — | | $ | — | |
| | | | | | |
| Interest expense | |
| (3) | |
| (3) | |
| — | |
| — | |
Foreign exchange contracts | |
| 200 | |
| (34) |
| Cost of services | |
| 13 | |
| 7 | |
| — | |
| — | |
| | | | | | |
| Cost of sales | |
| 23 | |
| (10) | |
| — | |
| — | |
| | | | | | |
| Cost of financing | |
| (5) | |
| (5) | | | — | | | — | |
| | | | | | |
| SG&A expense | |
| 14 | |
| (16) | |
| — | |
| — | |
| | | | | | |
| Other (income) and expense | |
| (38) | |
| (49) | |
| — | |
| — | |
| | | | | | |
| Interest expense | |
| (19) | |
| (12) | | | — | | | — | |
Instruments in net investment hedges (4): | |
| | |
|
|
|
| |
|
| |
|
| |
|
| |
|
| |
Foreign exchange contracts | |
| 1,379 | |
| (177) |
| Cost of financing | |
| — | |
| — | |
| 1 | |
| 1 | |
| |
| | |
| |
| Interest expense | |
| — | |
| — | |
| 5 | |
| 4 | |
Total | | $ | 1,579 | | $ | (211) |
|
| | $ | (16) | | $ | (90) | | $ | 6 | | $ | 5 | |
| (1) | The amount includes changes in clean fair values of the derivative instruments in fair value hedging relationships and the periodic accrual for coupon payments required under these derivative contracts. |
| (2) | The amount includes basis adjustments to the carrying value of the hedged item recorded during the period and amortization of basis adjustments recorded on de-designated hedging relationships during the period. |
| (3) | The company’s policy is to recognize all fair value changes in amounts excluded from effectiveness testing in net income each period. |
| (4) | Instruments in net investment hedges include derivative and non-derivative instruments with the amounts recognized in OCI providing an offset to the translation of foreign subsidiaries. |
N/A - not applicable
| | | | | | | | | | | | | |
| | | | | | | | Gains/(Losses) of |
| ||||
(Dollars in millions) | | Total | | Total Hedge Activity |
| ||||||||
For the six months ended June 30: |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||||
Cost of services | | $ | 10,747 | | $ | 9,364 | | $ | 28 | | $ | 21 | |
Cost of sales | |
| 3,165 | |
| 2,878 | * |
| 35 | |
| (32) | |
Cost of financing | |
| 194 | |
| 283 | * |
| (1) | |
| 2 | |
SG&A expense | |
| 9,452 | |
| 9,536 | |
| (223) | |
| 101 | |
Other (income) and expense | |
| 166 | |
| 647 | |
| (541) | |
| (239) | |
Interest expense | |
| 607 | |
| 561 | |
| (3) | |
| 4 | |
* Reclassified to conform to current year presentation.
47
Notes to Consolidated Financial Statements — (continued)
| | | | | | | | | | | | | | |
| | Gain (Loss) Recognized in Consolidated Income Statement | ||||||||||||
| | Consolidated | | Recognized on | | Attributable to Risk | ||||||||
(Dollars in millions) | | Income Statement | | Derivatives | | Being Hedged (2) | ||||||||
For the six months ended June 30: | | Line Item | | 2022 |
| 2021 | | 2022 |
| 2021 | ||||
Derivative instruments in fair value hedges (1): |
|
|
| |
|
| |
|
| |
|
| |
|
Interest rate contracts |
| Cost of financing | | $ | (18) | | $ | 0 | | $ | 26 | | $ | 11 |
|
| Interest expense | |
| (65) | |
| (1) | |
| 97 | |
| 29 |
Derivative instruments not designated as hedging instruments: |
|
| |
|
| |
|
| |
|
| |
|
|
Foreign exchange contracts |
| Other (income) and expense | |
| (409) | |
| (74) | |
| N/A | |
| N/A |
Equity contracts |
| SG&A expense | |
| (243) | |
| 133 | |
| N/A | |
| N/A |
| | Other (income) and expense | | | (88) | | | — | | | N/A | | | N/A |
Total |
|
| | $ | (821) | | $ | 57 | | $ | 123 | | $ | 40 |
| | | | | | | | | | | | | | | | | | | | | |
| | Gain (Loss) Recognized in Consolidated Income Statement and Other Comprehensive Income |
| ||||||||||||||||||
(Dollars in millions) | | | | | | | | Consolidated | | Reclassified | | Amounts Excluded from |
| ||||||||
For the six months | | Recognized in OCI | | Income Statement | | from AOCI | | Effectiveness Testing (3) |
| ||||||||||||
ended June 30: |
| 2022 |
| 2021 |
| Line Item |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||||||
Derivative instruments in cash flow hedges: |
| |
|
| |
|
|
|
| |
|
| |
| | |
|
| |
| |
Interest rate contracts | | $ | — | | $ | — |
| Cost of financing | | $ | (2) | | $ | (2) | | $ | — | | $ | — | |
| | | | | | |
| Interest expense | |
| (7) | |
| (6) | |
| — | |
| — | |
Foreign exchange contracts | |
| 260 | |
| 153 |
| Cost of services | |
| 28 | |
| 21 | |
| — | |
| — | |
| | | | | | |
| Cost of sales | |
| 35 | |
| (32) | |
| — | |
| — | |
| | | | | | |
| Cost of financing | |
| (10) | |
| (9) | | | — | | | — | |
| | | | | | |
| SG&A expense | |
| 20 | |
| (31) | |
| — | |
| — | |
| | | | | | |
| Other (income) and expense | |
| (45) | |
| (165) | |
| — | |
| — | |
| | | | | | |
| Interest expense | |
| (36) | |
| (25) | | | — | | | — | |
Instruments in net investment hedges (4): | |
| | |
|
|
|
| |
|
| |
|
| |
|
| |
|
| |
Foreign exchange contracts | |
| 1,920 | |
| 730 |
| Cost of financing | |
| — | |
| — | |
| 2 | |
| 3 | |
| |
| | |
| |
| Interest expense | |
| — | |
| — | |
| 7 | |
| 8 | |
Total | | $ | 2,180 | | $ | 883 |
|
| | $ | (16) | | $ | (251) | | $ | 9 | | $ | 11 | |
| (1) | The amount includes changes in clean fair values of the derivative instruments in fair value hedging relationships and the periodic accrual for coupon payments required under these derivative contracts. |
| (2) | The amount includes basis adjustments to the carrying value of the hedged item recorded during the period and amortization of basis adjustments recorded on de-designated hedging relationships during the period. |
| (3) | The company’s policy is to recognize all fair value changes in amounts excluded from effectiveness testing in net income each period. |
| (4) | Instruments in net investment hedges include derivative and non-derivative instruments with the amounts recognized in OCI providing an offset to the translation of foreign subsidiaries. |
N/A - not applicable
For the three and six months ended June 30, 2022 and 2021, there were no material gains or losses excluded from the assessment of hedge effectiveness (for fair value or cash flow hedges), or associated with an underlying exposure that did not or was not expected to occur (for cash flow hedges); nor are there any anticipated in the normal course of business.
48
Notes to Consolidated Financial Statements — (continued)
17. Stock-Based Compensation:
Stock-based compensation cost for stock awards and stock options is measured at grant date, based on the fair value of the award, and is recognized over the employee requisite service period. The following table presents total stock-based compensation cost included in income from continuing operations.
| | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | ||||||||
(Dollars in millions) | | 2022 | | 2021 | | 2022 | | 2021 | ||||
Cost | | $ | 43 | | $ | 35 | | $ | 84 | | $ | 68 |
Selling, general and administrative | |
| 153 | |
| 141 | |
| 289 | |
| 256 |
Research, development and engineering | |
| 58 | |
| 50 | |
| 115 | |
| 99 |
Pre-tax stock-based compensation cost | | $ | 254 | | $ | 225 | | $ | 488 | | $ | 423 |
Income tax benefits | |
| (82) | |
| (64) | |
| (139) | |
| (112) |
Total net stock-based compensation cost | | $ | 172 | | $ | 162 | | $ | 348 | | $ | 311 |
Effective April 1, 2022, the company increased the discount for eligible participants under its Employees Stock Purchase Plan (ESPP) from 5 percent to 15 percent off the average market price on the date of purchase. With this change, the ESPP is considered compensatory under the accounting requirements for stock-based compensation.
Pre-tax stock-based compensation cost for the three months ended June 30, 2022 increased $29 million compared to the corresponding period in the prior year, including increases in ESPP ($14 million), performance share units ($8 million), stock options ($5 million) and restricted stock units ($2 million). The increases primarily relate to the ESPP being considered compensatory and a change in the timing of the company’s executive grant cycle in 2022.
Pre-tax stock-based compensation cost for the six months ended June 30, 2022 increased $64 million compared to the corresponding period in the prior year, including increases in restricted stock units ($29 million), ESPP ($14 million), performance share units ($10 million) and stock options ($10 million). The increases are driven by the same factors described above.
Total unrecognized compensation cost related to non-vested awards at June 30, 2022 was $1.4 billion and is expected to be recognized over a weighted-average period of approximately 2.5 years.
Capitalized stock-based compensation cost was not material at June 30, 2022 and 2021.
18. Retirement-Related Benefits:
The company offers defined benefit (DB) pension plans, defined contribution pension plans, as well as nonpension postretirement plans primarily consisting of retiree medical benefits. The following tables provide the pre-tax cost for all retirement-related plans.
| | | | | | | | | |
|
| | |
|
| |
| Yr. to Yr. |
|
(Dollars in millions) | | | | | | | | Percent |
|
For the three months ended June 30: | | 2022 | | 2021 | | Change |
| ||
Retirement-related plans — cost: |
| |
|
| |
|
|
| |
Defined benefit and contribution pension plans — cost | | $ | 456 | | $ | 600 |
| (24.0) | % |
Nonpension postretirement plans — cost | |
| 33 | |
| 44 |
| (25.0) | |
Total | | $ | 489 | | $ | 644 |
| (24.1) | % |
49
Notes to Consolidated Financial Statements — (continued)
| | | | | | | | | |
|
| | |
|
| |
| Yr. to Yr. |
|
(Dollars in millions) | | | | | | | | Percent |
|
For the six months ended June 30: | | 2022 | | 2021 | | Change |
| ||
Retirement-related plans — cost: |
| |
|
| |
|
|
| |
Defined benefit and contribution pension plans — cost | | $ | 934 | | $ | 1,219 |
| (23.4) | % |
Nonpension postretirement plans — cost | |
| 66 | |
| 88 |
| (25.0) | |
Total | | $ | 1,000 | | $ | 1,307 |
| (23.5) | % |
The following tables provide the components of the cost/(income) for the company’s pension plans.
Cost/(Income) of Pension Plans
| | | | | | | | | | | | |
(Dollars in millions) | | U.S. Plans | | Non-U.S. Plans | ||||||||
For the three months ended June 30: |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Service cost | | $ | — | | $ | — | | $ | 59 | | $ | 68 |
Interest cost* | |
| 302 | |
| 277 | |
| 131 | |
| 108 |
Expected return on plan assets* | |
| (475) | |
| (451) | |
| (259) | |
| (279) |
Amortization of prior service costs/(credits)* | |
| 2 | |
| 4 | |
| 3 | |
| (5) |
Recognized actuarial losses* | |
| 179 | |
| 249 | |
| 260 | |
| 352 |
Curtailments and settlements* | |
| — | |
| — | |
| 11 | |
| 16 |
Multi-employer plans | |
| — | |
| — | |
| 3 | |
| 5 |
Other costs/(credits)* | |
| — | |
| — | |
| 6 | |
| 3 |
Total net periodic pension (income)/cost of defined benefit plans | | $ | 8 | | $ | 80 | | $ | 215 | | $ | 268 |
Cost of defined contribution plans | |
| 141 | |
| 151 | |
| 92 | |
| 101 |
Total defined benefit and contribution pension plans cost recognized in the Consolidated Income Statement | | $ | 149 | | $ | 231 | | $ | 307 | | $ | 369 |
| | | | | | | | | | | | |
(Dollars in millions) | | U.S. Plans | | Non-U.S. Plans | ||||||||
For the six months ended June 30: |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Service cost | | $ | — | | $ | — | | $ | 123 | | $ | 133 |
Interest cost* | |
| 603 | |
| 555 | |
| 270 | |
| 216 |
Expected return on plan assets* | |
| (950) | |
| (901) | |
| (532) | |
| (559) |
Amortization of prior service costs/(credits)* | |
| 4 | |
| 8 | |
| 7 | |
| (7) |
Recognized actuarial losses* | |
| 359 | |
| 498 | |
| 537 | |
| 708 |
Curtailments and settlements* | |
| — | |
| — | |
| 19 | |
| 34 |
Multi-employer plans | |
| — | |
| — | |
| 7 | |
| 11 |
Other costs/(credits)* | |
| — | |
| — | |
| 15 | |
| 15 |
Total net periodic pension (income)/cost of defined benefit plans | | $ | 15 | | $ | 160 | | $ | 446 | | $ | 551 |
Cost of defined contribution plans | |
| 282 | |
| 302 | |
| 190 | |
| 206 |
Total defined benefit and contribution pension plans cost recognized in the Consolidated Income Statement | | $ | 298 | | $ | 462 | | $ | 636 | | $ | 757 |
* These components of net periodic pension cost are included in other (income) and expense in the Consolidated Income Statement.
50
Notes to Consolidated Financial Statements — (continued)
The following tables provide the components of the cost for the company’s nonpension postretirement plans.
Pre-Swap Borrowing
|
|
|
| Balance |
| Balance |
| ||
(Dollars in millions) |
| Maturities |
| 9/30/2017 |
| 12/31/2016 |
| ||
U.S. dollar debt (average interest rate at September 30, 2017):* |
|
|
|
|
|
|
| ||
2.7% |
| 2017 |
| $ | 2 |
| $ | 5,104 |
|
3.0% |
| 2018–2019 |
| 10,208 |
| 8,856 |
| ||
2.0% |
| 2020–2021 |
| 7,416 |
| 4,941 |
| ||
2.4% |
| 2022 |
| 3,492 |
| 1,901 |
| ||
3.4% |
| 2023 |
| 1,529 |
| 1,500 |
| ||
3.6% |
| 2024 |
| 2,000 |
| 2,000 |
| ||
7.0% |
| 2025 |
| 600 |
| 600 |
| ||
3.5% |
| 2026 |
| 1,350 |
| 1,350 |
| ||
4.7% |
| 2027 |
| 969 |
| 469 |
| ||
6.5% |
| 2028 |
| 313 |
| 313 |
| ||
5.9% |
| 2032 |
| 600 |
| 600 |
| ||
8.0% |
| 2038 |
| 83 |
| 83 |
| ||
5.6% |
| 2039 |
| 745 |
| 745 |
| ||
4.0% |
| 2042 |
| 1,107 |
| 1,107 |
| ||
7.0% |
| 2045 |
| 27 |
| 27 |
| ||
4.7% |
| 2046 |
| 650 |
| 650 |
| ||
7.1% |
| 2096 |
| 316 |
| 316 |
| ||
|
|
|
| $ | 31,408 |
| $ | 30,563 |
|
Other currencies (average interest rate at September 30, 2017, in parentheses):* |
|
|
|
|
|
|
| ||
Euros (1.5%) |
| 2019–2029 |
| $ | 10,342 |
| $ | 7,122 |
|
Pound sterling (2.7%) |
| 2020–2022 |
| 1,409 |
| 1,296 |
| ||
Japanese yen (0.9%) |
| 2017–2026 |
| 1,669 |
| 1,576 |
| ||
Canadian (2.2%) |
| 2017 |
| — |
| 373 |
| ||
Other (7.4%) |
| 2018–2020 |
| 694 |
| 215 |
| ||
|
|
|
| $ | 45,522 |
| $ | 41,145 |
|
Less: net unamortized discount |
|
|
| 833 |
| 839 |
| ||
Less: net unamortized debt issuance costs |
|
|
| 99 |
| 82 |
| ||
Add: fair value adjustment** |
|
|
| 627 |
| 669 |
| ||
|
|
|
| $ | 45,218 |
| $ | 40,893 |
|
Less: current maturities |
|
|
| 3,892 |
| 6,239 |
| ||
Total |
|
|
| $ | 41,327 |
| $ | 34,655 |
|
| | | | | | | | |
|
|
|
| Balance |
| Balance | ||
(Dollars in millions) | | Maturities | | 6/30/2022 | | 12/31/2021 | ||
U.S. dollar debt (weighted-average interest rate at June 30, 2022):* |
|
|
| |
|
| |
|
2.4% |
| 2022 | | $ | 1,904 | | $ | 5,673 |
3.4% |
| 2023 | |
| 1,552 | |
| 1,573 |
3.3% |
| 2024 | |
| 5,013 | |
| 5,016 |
7.0% |
| 2025 | |
| 605 | |
| 608 |
3.3% |
| 2026 | |
| 4,352 | |
| 4,356 |
2.8% |
| 2027 | |
| 2,871 | |
| 2,221 |
6.5% |
| 2028 | | | 313 | |
| 313 |
3.5% | | 2029 | | | 3,250 | | | 3,250 |
2.0% | | 2030 | | | 1,350 | | | 1,350 |
4.4% |
| 2032 | |
| 1,100 | |
| 600 |
8.0% |
| 2038 | |
| 83 | |
| 83 |
4.5% |
| 2039 | |
| 2,745 | |
| 2,745 |
2.9% | | 2040 | | | 650 | |
| 650 |
4.0% |
| 2042 | |
| 1,107 | | | 1,107 |
7.0% |
| 2045 | |
| 27 | |
| 27 |
4.7% |
| 2046 | |
| 650 | |
| 650 |
4.3% | | 2049 | | | 3,000 | |
| 3,000 |
3.0% | | 2050 | | | 750 | | | 750 |
3.4% | | 2052 | | | 650 | | | — |
7.1% |
| 2096 | |
| 316 | |
| 316 |
| | | | $ | 32,288 | | $ | 34,290 |
Other currencies (weighted-average interest rate at June 30, 2022, in parentheses):* |
|
| |
|
| |
|
|
Euro (1.1%) |
| 2023–2040 | | $ | 16,718 | | $ | 15,903 |
Pound sterling (2.6%) |
| 2022 | |
| 364 | |
| 406 |
Japanese yen (0.3%) |
| 2022–2026 | |
| 1,070 | |
| 1,263 |
Other (15.7%) |
| 2022–2025 | |
| 315 | |
| 378 |
| | | | $ | 50,755 | | $ | 52,240 |
Finance lease obligations (2.0%) | | 2022–2030 | | | 108 | | | 99 |
| | | | $ | 50,863 | | $ | 52,339 |
Less: net unamortized discount |
|
| |
| 837 | |
| 839 |
Less: net unamortized debt issuance costs |
|
| |
| 134 | |
| 130 |
Add: fair value adjustment** |
|
| |
| 187 | |
| 311 |
| | | | $ | 50,079 | | $ | 51,681 |
Less: current maturities |
|
| |
| 5,752 | |
| 6,764 |
Total |
|
| | $ | 44,328 | | $ | 44,917 |
*Includes notes, debentures, bank loans and secured borrowings and capital lease obligations.borrowings.
**The portion of the company’s fixed-rate debt obligations that is hedged is reflected in the Consolidated Statement of Financial Position as an amount equal to the sum of the debt’s carrying value and a fair value adjustment representing changes in the fair value of the hedged debt obligations attributable to movements in benchmark interest rates.
There are no debt securities issued and outstanding by IBM International Group Capital LLC, which is an indirect, 100 percent owned finance subsidiary of International Business Machines Corporation, the parent. Any debt securities issued by IBM International Group Capital LLC, would be fully and unconditionally guaranteed by the parent.
During the third quarter of 2017, IBM Credit LLC, a wholly owned subsidiary of the company, filed a shelf registration statement with the Securities and Exchange Commission (SEC) allowing it to offer for sale public debt securities. IBM Credit LLC issued fixed and floating rate debt securities in the aggregate amount of $3.0 billion with maturity dates ranging from 2019 to 2022. This debt is included in the long-term debt table above.
** | The portion of the company’s fixed-rate debt obligations that is hedged is reflected in the Consolidated Balance Sheet as an amount equal to the sum of the debt’s carrying value and a fair value adjustment representing changes in the fair value of the hedged debt obligations attributable to movements in benchmark interest rates. |
The company’s indenture governing its debt securities and its various credit facilities each contain significant covenants which obligate the company to promptly pay principal and interest, limit the aggregate amount of secured indebtedness and sale and leaseback transactions to 10 percent of the company’s consolidated net tangible assets, and restrict the company’s ability to merge or consolidate unless certain conditions are met. The credit facilities also include
34
Notes to Consolidated Financial Statements — (continued)
a covenant on the company’s consolidated net interest expense ratio, which cannot be less than 2.20 to 1.0, as well as a cross default provision with respect to other defaulted indebtedness of at least $500 million.
Notes to Consolidated Financial Statements — (continued)
The company is in compliance with all of its significant debt covenants and provides periodic certifications to its lenders. The failure to comply with its debt covenants could constitute an event of default with respect to the debt to which such provisions apply. If certain events of default were to occur, the principal and interest on the debt to which such event of default applied would become immediately due and payable.
In the first quarter of 2022, the company issued $2.3 billion of Euro fixed-rate notes in tranches with maturities ranging from 8 to 12 years and coupons ranging from 0.875 to 1.25 percent, and $1.8 billion of U.S. dollar fixed-rate notes with maturities ranging from 5 to 30 years and coupons ranging from 2.20 to 3.43 percent.
Pre-swap annual contractual maturitiesobligations of long-term debt outstanding at SeptemberJune 30, 2017, are2022, were as follows:
(Dollars in millions) |
| Total |
| |
2017 (for Q4) |
| $ | 468 |
|
2018 |
| 5,140 |
| |
2019 |
| 7,034 |
| |
2020 |
| 6,155 |
| |
2021 |
| 5,155 |
| |
2022 and beyond |
| 21,569 |
| |
Total |
| $ | 45,522 |
|
| | | |
(Dollars in millions) |
| Total | |
Remainder of 2022 | | $ | 2,778 |
2023 | |
| 4,607 |
2024 | |
| 6,262 |
2025 | |
| 3,745 |
2026 | |
| 4,664 |
Thereafter | |
| 28,807 |
Total | | $ | 50,863 |
Interest on Debt
| | | | | | | |||||||
(Dollars in millions) |
|
|
|
|
|
|
| |
|
| | ||
For the nine months ended September 30: |
| 2017 |
| 2016 |
| ||||||||
For the six months ended June 30: | | 2022 | | 2021 | |||||||||
Cost of financing |
| $ | 496 |
| $ | 432 |
| | $ | 165 | | $ | 210 |
Interest expense |
| 485 |
| 523 |
| |
| 607 | |
| 561 | ||
Net investment derivative activity |
| (34 | ) | (51 | ) | ||||||||
Interest capitalized |
| (1 | ) | 3 |
| |
| 2 | |
| 2 | ||
Total interest paid and accrued |
| $ | 947 |
| $ | 907 |
| | $ | 775 | | $ | 774 |
Lines of Credit
In 2016,On June 30, 2022, the company increased the size ofamended its five-yearexisting $2.5 billion Three-Year Credit Agreement and $7.5 billion Five-Year Credit Agreement (the “Credit Agreement”) from $10 billionCredit Agreements) to $10.25 billionextend the maturity dates to June 20, 2025 and extendedJune 22, 2027, respectively, and to replace the term by one year to November 10, 2021. London Interbank Offered Rate (LIBOR) interest rate provisions with customary provisions based on the Secured Overnight Financing Rate (SOFR). The Credit Agreement permitsAgreements permit the company and its Subsidiary Borrowerssubsidiary borrowers to borrow up to $10.25$10 billion on a revolving basis. Borrowings of the Subsidiary Borrowers will be unconditionally backed by the company. The company may also, upon the agreement of either existing lenders, or of the additional banks not currently party to the Credit Agreement, increase the commitments under the Credit Agreement up to an additional $1.75 billion. Subject to certain terms of the Credit Agreement, the company and Subsidiary Borrowers may borrow, prepay and reborrow amounts under the Credit Agreement at any time during the Credit Agreement term. Interest rates on borrowings under the Credit Agreement will be based on prevailing market interest rates, as further described in the Credit Agreement. The Credit Agreement contains customary representations and warranties, covenants, events of default, and indemnification provisions. The company believes that circumstances that might give rise to breach of these covenants or an event of default, as specified in the Credit Agreement, are remote. As of SeptemberAt June 30, 2017,2022, there were no0 borrowings by the company, or its subsidiaries, under the Credit Agreement.these credit facilities.
13. Commitments:
The company also has other committedcompany’s extended lines of credit to third-party entities include unused amounts of $1.3 billion and $1.7 billion at June 30, 2022 and December 31, 2021, respectively. A portion of these amounts was available to the company’s business partners to support their working capital needs. In addition, the company has committed to provide future financing to its clients in someconnection with client purchase agreements for $2.7 billion and $3.2 billion at June 30, 2022 and December 31, 2021, respectively. The company collectively evaluates the allowance for these arrangements using a provision methodology consistent with the portfolio of the geographies which are not significantcommitments. Refer to note A, “Significant Accounting Policies,” in the aggregate. Interest rates andcompany’s 2021 Annual Report for additional information. The allowance for these commitments is recorded in other terms of borrowing under these lines of credit vary from country to country, depending on local market conditions.
On July 20, 2017, the company and IBM Credit LLC, (the Borrowers), entered into a $2.5 billion 364-Day Credit Agreement, and a $2.5 billion Three-Year Credit Agreement (the New Credit Agreements, and together with the Credit Agreement, the Credit Facilities). IBM also entered into the Third Amendment to its Credit Agreement. The New Credit Agreements permit the Borrowers to borrow up to an aggregate of $5 billion on a revolving basis. Neither Borrower is a guarantor or co-obligor of the other Borrower under the New Credit Agreements. Subject to certain conditions statedliabilities in the New Credit Agreements, the Borrowers may borrow, prepayConsolidated Balance Sheet and re-borrow amounts under the New Credit Agreementswas not material at any time during the termJune 30, 2022.
35
The company has applied the guidance requiring a guarantor to disclose certain types of guarantees, even if the likelihood of requiring the guarantor’s performance is remote. The following is a description of arrangements in which the company is the guarantor.
The company is a party to a variety of agreements pursuant to which it may be obligated to indemnify the other party with respect to certain matters. Typically, these obligations arise in the context of contracts entered into by the company, under which the company customarily agrees to hold the party harmless against losses arising from a breach of representations and covenants related to such matters as title to the assets sold, certain intellectual property rights, specified environmental matters, third-party performance of nonfinancial contractual obligations and certain income taxes. In each of these circumstances, payment by the company is conditioned on the other party making a claim pursuant to the procedures specified in the particular contract, the procedures of which typically allow the company to challenge the other party’s claims. While indemnification provisions typically do not include a contractual maximum on the company’s payment, the company’s obligations under these agreements may be limited in terms of time and/or nature of claim, and in some instances, the company may have recourse against third parties for certain payments made by the company.
It is not possible to predict the maximum potential amount of future payments under these or similar agreements due to the conditional nature of the company’s obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made by the company under these agreements have not had a material effect on the company’s business, financial condition or results of operations.
In addition, the company guarantees certain loans and financial commitments. The maximum potential future payment under these financial guarantees and the fair value of these guarantees recognized in the Consolidated Balance Sheet at June 30, 2022 and December 31, 2021 was not material.
Changes in the company’s warranty liability for standard warranties, which are included in other accrued expenses and liabilities and other liabilities in the Consolidated Balance Sheet, and for extended warranty contracts, which are included in deferred income in the Consolidated Balance Sheet, are presented in the following tables.
Standard Warranty Liability
| | | | | | |
(Dollars in millions) |
| 2022 |
| 2021 | ||
Balance at January 1 | | $ | 77 | | $ | 83 |
Current period accruals | |
| 39 | |
| 36 |
Accrual adjustments to reflect actual experience | |
| (1) | |
| (2) |
Charges incurred | |
| (41) | |
| (45) |
Balance at June 30 | | $ | 74 | | $ | 73 |
Extended Warranty Liability
| | | | | | |
(Dollars in millions) |
| 2022 |
| 2021 | ||
Balance at January 1 | | $ | 350 | | $ | 425 |
Revenue deferred for new extended warranty contracts | |
| 84 | |
| 50 |
Amortization of deferred revenue | |
| (83) | |
| (104) |
Other* | |
| (12) | |
| (5) |
Balance at June 30 | | $ | 339 | | $ | 367 |
Current portion | | $ | 172 | | $ | 184 |
Noncurrent portion | | $ | 167 | | $ | 183 |
* Other primarily consists of foreign currency translation adjustments.
36
Notes to Consolidated Financial Statements — (continued)
14.Contingencies:
12. Contingencies:As a company with a substantial employee population and with clients in more than 175 countries, IBM is involved, either as plaintiff or defendant, in a variety of ongoing claims, demands, suits, investigations, tax matters and proceedings that arise from time to time in the ordinary course of its business. The company is a leader in the information technology industry and, as such, has been and will continue to be subject to claims challenging its IP rights and associated products and offerings, including claims of copyright and patent infringement and violations of trade secrets and other IP rights. In addition, the company enforces its own IP against infringement, through license negotiations, lawsuits or otherwise. Further, given the rapidly evolving external landscape of cybersecurity, privacy and data protection laws, regulations and threat actors, the company and its clients have been and will continue to be subject to actions or proceedings in various jurisdictions. Also, as is typical for companies of IBM’s scope and scale, the company is party to actions and proceedings in various jurisdictions involving a wide range of labor and employment issues (including matters related to contested employment decisions, country-specific labor and employment laws, and the company’s pension, retirement and other benefit plans), as well as actions with respect to contracts, product liability, securities, foreign operations, competition law and environmental matters. These actions may be commenced by a number of different parties, including competitors, clients, current or former employees, government and regulatory agencies, stockholders and representatives of the locations in which the company does business. Some of the actions to which the company is party may involve particularly complex technical issues, and some actions may raise novel questions under the laws of the various jurisdictions in which these matters arise.
The company records a provision with respect to a claim, suit, investigation or proceeding when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Any recorded liabilities, including any changes to such liabilities for the quarter ended SeptemberJune 30, 20172022 were not material to the Consolidated Financial Statements.
In accordance with the relevant accounting guidance, the company provides disclosures of matters for which the likelihood of material loss is at least reasonably possible. In addition, the company also discloses matters based on its consideration of other matters and qualitative factors, including the experience of other companies in the industry, and investor, customer and employee relations considerations.
With respect to certain of the claims, suits, investigations and proceedings discussed herein, the company believes at this time that the likelihood of any material loss is remote, given, for example, the procedural status, court rulings, and/or the strength of the company’s defenses in those matters. With respect to the remaining claims, suits, investigations and proceedings discussed in this note, except as specifically discussed herein, the company is unable to provide estimates of reasonably possible losses or range of losses, including losses in excess of amounts accrued, if any, for the following reasons. Claims, suits, investigations and proceedings are inherently uncertain, and it is not possible to predict the ultimate outcome of these matters. It is the company’s experience that damage amounts claimed in litigation against it are unreliable and unrelated to possible outcomes, and as such are not meaningful indicators of the company’s potential liability. Further, the company is unable to provide such an estimate due to a number of other factors with respect to these claims, suits, investigations and proceedings, including considerations of the procedural status of the matter in question, the presence of complex or novel legal theories, and/or the ongoing discovery and development of information important to the matters. The company reviews claims, suits, investigations and proceedings at least quarterly, and decisions are made with respect to recording or adjusting provisions and disclosing reasonably possible losses or range of losses (individually or in the aggregate), to reflect the impact and status of settlement discussions, discovery, procedural and substantive rulings, reviews by counsel and other information pertinent to a particular matter.
Whether any losses, damages or remedies finally determined in any claim, suit, investigation or proceeding could reasonably have a material effect on the company’s business, financial condition, results of operations or cash flows will depend on a number of variables, including: the timing and amount of such losses or damages; the structure and type of any such remedies; the significance of the impact any such losses, damages or remedies may have in the Consolidated Financial Statements; and the unique facts and circumstances of the particular matter that may give rise to additional factors. While the company will continue to defend itself vigorously, it is possible that the company’s business, financial
37
Notes to Consolidated Financial Statements — (continued)
condition, results of operations or cash flows could be affected in any particular period by the resolution of one or more of these matters.
The following is a summary of the more significant legal matters involving the company.
In December 2017, CIS General Insurance Limited (CISGIL) sued IBM UK regarding a contract entered into by IBM UK and CISGIL in 2015 to implement and operate an IT insurance platform. The company is a defendantcontract was terminated by IBM UK in an action filed on March 6, 2003 in state court in Salt Lake City, UtahJuly 2017 for non-payment by the SCO Group (SCO v. IBM). The company removed the case to Federal Court in Utah. Plaintiff is an alleged successor in interest to someCISGIL. CISGIL alleges wrongful termination, breach of AT&T’s UNIX IP rights, and alleges copyright infringement, unfair competition, interference with contract and breach of contract with regardwarranty. In February 2021, the Technology & Construction Court in London rejected the majority of CISGIL’s claims and ruled in IBM’s favor on its counterclaim. The court’s decision required IBM to the company’s distribution of AIXpay approximately $20 million in damages, plus interest and Dynix and contribution of code to Linux andlitigation costs. In April 2022, the company has asserted counterclaims. On September 14, 2007, plaintiff filed for bankruptcy protection, and all proceedings in this case were stayed. The court in another suit, the SCO Group, Inc. v. Novell, Inc., held a trial in March 2010. The jury found that Novell is the owner of UNIX and UnixWare copyrights; the judge subsequently ruled that SCO is obligated to recognize
Notes to Consolidated Financial Statements — (continued)
Novell’s waiver of SCO’s claims against IBM and Sequent for breach of UNIX license agreements. On August 30, 2011, the Tenth Circuit Court of Appeals affirmed the district court’s ruling and denied SCO’s appealAppeal awarded CISGIL additional damages of this matter. In June 2013, the Federal Court in Utah granted SCO’s motion to reopen the SCO v. IBM case. In February 2016, the Federal Court ruled in favor of IBM on all of SCO’s remaining claims, and SCO appealed. On October 30, 2017, the Tenth Circuit Court of Appeals affirmed the dismissal of all but one of SCO’s remaining claims, which was remanded to the Federal Court in Utah.
On May 13, 2010, IBM and the State of Indiana (acting on behalf of the Indiana Family and Social Services Administration) sued one another in a dispute over a 2006 contract regarding the modernization of social service program processing in Indiana. After six weeks of trial, on July 18, 2012, the Indiana Superior Court in Marion County rejected the State’s claims in their entirety and awarded IBM $52approximately $89 million, plus interest and litigation costs. IBM filed an application for permission to appeal with the UK Supreme Court.
On February 13, 2014, the Indiana Court of Appeals reversed portions of the trial judge’s findings, foundJune 8, 2021, IBM sued GlobalFoundries U.S. Inc. (GF) in material breach, and ordered the case remanded to the trial judge to determine the State’s damages, if any. The Indiana Court of Appeals also affirmed approximately $50 million of the trial court’s award of damages to IBM. On March 22, 2016, the IndianaNew York State Supreme Court affirmedfor claims including fraud and breach of contract relating to a long-term strategic relationship between IBM and GF for researching, developing, and manufacturing advanced semiconductor chips for IBM. GF walked away from its obligations and IBM is now suing to recover amounts paid to GF, and other compensatory and punitive damages, totaling more than $1.5 billion. On September 14, 2021, the outcomecourt ruled on GF’s motion to dismiss. On April 7, 2022, the Appellate Division unanimously reversed the lower court’s dismissal of the Indiana CourtIBM’s fraud claim. IBM’s claims for breaches of Appealscontract, promissory estoppel, and remanded the case to the Indiana Superior Court. On August 7, 2017, the Indiana Superior Court awarded the State $128 million, which it then offset against IBM’s previously affirmed award of $50 million, resulting in a $78 million award to the State, plus interest. IBM appealed to the Indiana Court of Appeals and the matter remains pending.
On March 9, 2017, the Commonwealth of Pennsylvania’s Department of Labor and Industry sued IBM in Pennsylvania state court regarding a 2006 contract for the development of a custom software system to manage the Commonwealth’s unemployment insurance benefits programs. The matter is pending in a Pennsylvania court.
On October 29, 2013, Bridgestone Americas, Inc. (Bridgestone) sued IBM regarding a 2009 contract for the implementation of an SAP-based, enterprise-wide order management system. IBM counterclaimed against Bridgestone and its parent, Bridgestone Corp. The case is pending in the Middle District of Tennessee.
fraud are proceeding.
On April 16, 2014, Iusacell SA de C.V. (Iusacell) sued IBM, claiming that IBM made fraudulent misrepresentations that induced Iusacell to enter into an agreement with IBM Mexico. Iusacell claimed damages for lost profits. Iusacell’s complaint related to5, 2022, a contractual dispute in Mexico, which was the subject of a pending arbitration proceeding in Mexico initiated by IBM Mexico against Iusacell for breach of the underlying agreement. On August 31, 2017, the parties entered into an agreement releasing all claims against each other, resolving both the lawsuit and the arbitration proceeding.
IBM United Kingdom Limited (IBM UK) initiated legal proceedings in May 2010 before the High Court in London against the IBM UK Pensions Trust (the UK Trust) and two representative beneficiaries of the UK Trust membership. IBM UK sought a declaration that it acted lawfully both in notifying the Trustee of the UK Trust that it was closing its UK defined benefit plans to future accruals for most participants and in implementing the company’s new retirement policy. In April 2014, the High Court acknowledged that the changes made to its UK defined benefit plans were within IBM’s discretion, but ruled that IBM breached its implied duty of good faith both in implementing these changes and in the manner in which it consulted with employees. Proceedings to determine remedies were held in July 2014, and in February 2015 the High Court held that for IBM to make changes to accruals under the plan would require a new consultation of the participants, but other changes (including to early retirement policy) would not require such consultation. IBM UK appealed both the breach and remedies judgments. In August 2017, the Appeal Court reversed the High Court, holding that IBM UK was not in breach of its implied duties of good faith and that the changes made to the plans were lawful. The time to appeal has expired and the Appeal Court judgment is final. In addition, IBM UK is a defendant in approximately 290 individual actions brought since early 2010 by participants of the defined benefits plans who left IBM UK. These actions, which allege constructive dismissal and age discrimination, are pending before the Employment Tribunal in Southampton UK.
In early 2012, IBM notified the SEC of an investigation by the Polish Central Anti-Corruption Bureau involving allegations of illegal activity by a former IBM Poland employee in connection with sales to the Polish government. IBM cooperated with the SEC and Polish authorities in this matter. In April 2013, IBM learned that the U.S. Department of Justice (DOJ) was also investigating allegations related to the Poland matter, as well as allegations relating to transactions in Argentina, Bangladesh and Ukraine. The DOJ was seeking information regarding the company’s global FCPA compliance program and its public sector business. The company cooperated with the DOJ in this matter. In June 2017, the DOJ and the SEC each informed IBM that based on the information to date, they closed their respective investigations into these matters without pursuing any enforcement action against the company.
In May 2015, a putative securities law class action was commenced in the United States District Court for the Southern District of New York related toalleging that during the period from April 4, 2017 through October 20, 2021, certain strategic imperatives revenues were misclassified. The company, 2 current IBM senior executives, and 2 former IBM senior executives are named as defendants. On June 23, 2022, the court entered an order appointing Iron Workers Local 580 Joint Funds as lead plaintiff. On March 25, 2022, the Board of Directors received a shareholder demand letter making similar allegations and demanding that the company’s October 2014 announcementBoard of Directors take action to assert the company’s rights. A special committee of independent directors has been formed to investigate the issues raised in the letter.
On June 2, 2022, a putative class action lawsuit was filed in the United States District Court for the Southern District of New York alleging that it was divesting its global commercial semiconductor technology business, alleging violationsthe IBM Pension Plan miscalculated certain joint and survivor annuity pension benefits by using outdated actuarial tables in violation of the Employee Retirement Income Security Act (“ERISA”). The company,
Notes to Consolidated Financial Statements — (continued)
management’s Retirement Plansof 1974. IBM, the Plan Administrator Committee, and three current or formerthe IBM executives werePension Plan are named as defendants.
As disclosed in the Kyndryl Form 10 and subsequent Kyndryl public filings, in 2017 BMC Software, Inc. (BMC) filed suit against IBM in the United States District Court for the Southern District of Texas in a dispute involving IBM’s former managed infrastructure services business. On September 7, 2016,May 30, 2022, the Court granted the company’s motion to dismiss the plaintiffs’ claims. On October 21, 2016, the plaintiffs filed an amended complaint, dropping the company as a defendant. On September 29, 2017, the Court granted the defendants’ motion to dismiss. Plaintiffs have filed a notice of appeal to the Second Circuit Court of Appealstrial court awarded BMC $718 million in direct damages and the matter remains pending.
In August 2015,$718 million in punitive damages, plus interest and fees. The judgment will be appealed. IBM learned that the SEC is conducting an investigationdoes not believe it has any material exposure relating to revenue recognition with respect to the accounting treatment of certain transactions in the U.S., UK and Ireland. The company is cooperating with the SEC in this matter.
litigation. No material liability or related indemnification asset has been recorded by IBM.
The company is party to, or otherwise involved in, proceedings brought by U.S. federal or state environmental agencies under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), known as “Superfund,” or laws similar to CERCLA. Such statutes require potentially responsible parties to participate in remediation activities regardless of fault or ownership of sites. The company is also conducting environmental investigations, assessments or remediations at or in the vicinity of several current or former operating sites globally pursuant to permits, administrative orders or agreements with country, state or local environmental agencies, and is involved in lawsuits and claims concerning certain current or former operating sites.
The company is also subject to ongoing tax examinations and governmental assessments in various jurisdictions. Along with many other U.S. companies doing business in Brazil, the company is involved in various challenges with
38
Notes to Consolidated Financial Statements — (continued)
Brazilian tax authorities regarding non-income tax assessments and non-income tax litigation matters. The total potential amount related to all these matters for all applicable years is approximately $1.1 billion.$400 million. The company believes it will prevail on these matters and that this amount is not a meaningful indicator of liability.
13. Commitments: The company’s extended lines of credit to third-party entities include unused amounts of $8,016 million and $6,542 million at September 30, 2017 and December 31, 2016, respectively. A portion of these amounts was available to the company’s business partners to support their working capital needs. In addition, the company has committed to provide future financing to its clients in connection with client purchase agreements for approximately $3,063 million and $2,463 million at September 30, 2017 and December 31, 2016, respectively.
The company has applied the guidance requiring a guarantor to disclose certain types of guarantees, even if the likelihood of requiring the guarantor’s performance is remote. The following is a description of arrangements in which the company is the guarantor.
The company is a party to a variety of agreements pursuant to which it may be obligated to indemnify the other party with respect to certain matters. Typically, these obligations arise in the context of contracts entered into by the company, under which the company customarily agrees to hold the party harmless against losses arising from a breach of representations and covenants related to such matters as title to the assets sold, certain intellectual property (IP) rights, specified environmental matters, third-party performance of nonfinancial contractual obligations and certain income taxes. In each of these circumstances, payment by the company is conditioned on the other party making a claim pursuant to the procedures specified in the particular contract, the procedures of which typically allow the company to challenge the other party’s claims. While typically indemnification provisions do not include a contractual maximum on the company’s payment, the company’s obligations under these agreements may be limited in terms of time and/or nature of claim, and in some instances, the company may have recourse against third parties for certain payments made by the company.
It is not possible to predict the maximum potential amount of future payments under these or similar agreements due to the conditional nature of the company’s obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made by the company under these agreements have not had a material effect on the company’s business, financial condition or results of operations.
In addition, the company guarantees certain loans and financial commitments. The maximum potential future payment under these financial guarantees was $21 million and $34 million at September 30, 2017 and December 31, 2016, respectively. The fair value of the guarantees recognized in the Consolidated Statement of Financial Position is not material.
15. Equity Activity:
Reclassifications and Taxes Related to Items of Other Comprehensive Income
| | | | | | | | | |
(Dollars in millions) |
| Before Tax |
| Tax (Expense)/ |
| Net of Tax | |||
For the three months ended June 30, 2022: | | Amount | | Benefit | | Amount | |||
Other comprehensive income/(loss): |
| |
|
| |
|
| |
|
Foreign currency translation adjustments | | $ | 213 | | $ | (347) | | $ | (134) |
Net changes related to available-for-sale securities: | |
|
| |
|
| |
|
|
Unrealized gains/(losses) arising during the period | | $ | 0 | | $ | 0 | | $ | 0 |
Reclassification of (gains)/losses to other (income) and expense | |
| — | | | — | | | — |
Total net changes related to available-for-sale securities | | $ | 0 | | $ | 0 | | $ | 0 |
Unrealized gains/(losses) on cash flow hedges: | |
|
| |
|
| |
|
|
Unrealized gains/(losses) arising during the period | | $ | 200 | | $ | (53) | | $ | 147 |
Reclassification of (gains)/losses to: | |
|
| |
|
| |
|
|
Cost of services | |
| (13) | |
| 3 | |
| (10) |
Cost of sales | |
| (23) | |
| 7 | |
| (17) |
Cost of financing | |
| 6 | |
| (2) | |
| 5 |
SG&A expense | |
| (14) | |
| 4 | |
| (10) |
Other (income) and expense | |
| 38 | |
| (10) | |
| 29 |
Interest expense | |
| 22 | |
| (6) | |
| 16 |
Total unrealized gains/(losses) on cash flow hedges | | $ | 217 | | $ | (56) | | $ | 161 |
Retirement-related benefit plans*: | |
|
| |
|
| |
|
|
Prior service costs/(credits) | | $ | — | | $ | 0 | | $ | 0 |
Net (losses)/gains arising during the period | | | 1 | | | (3) | | | (2) |
Curtailments and settlements | |
| 11 | | | (3) | | | 8 |
Amortization of prior service (credits)/costs | |
| 6 | | | (2) | | | 5 |
Amortization of net (gains)/losses | |
| 450 | | | (125) | | | 325 |
Total retirement-related benefit plans | | $ | 468 | | $ | (132) | | $ | 336 |
Other comprehensive income/(loss) | | $ | 897 | | $ | (534) | | $ | 363 |
* | These accumulated other comprehensive income (AOCI) components are included in the computation of net periodic pension cost. Refer to note 18, “Retirement-Related Benefits,” for additional information. |
39
Notes to Consolidated Financial Statements — (continued)
Changes in the company’s warranty liability for standard warranties and deferred income for extended warranty are presented in the following tables.
Standard Warranty Liability
(Dollars in millions) |
| 2017 |
| 2016 |
| ||
Balance at January 1 |
| $ | 156 |
| $ | 181 |
|
Current period accruals |
| 107 |
| 107 |
| ||
Accrual adjustments to reflect actual experience |
| (3 | ) | 4 |
| ||
Charges incurred |
| (126 | ) | (132 | ) | ||
Balance at September 30 |
| $ | 134 |
| $ | 160 |
|
Extended Warranty Liability
(Dollars in millions) |
| 2017 |
| 2016 |
| ||
Aggregate deferred revenue at January 1 |
| $ | 531 |
| $ | 538 |
|
Revenue deferred for new extended warranty contracts |
| 175 |
| 176 |
| ||
Amortization of deferred revenue |
| (198 | ) | (198 | ) | ||
Other* |
| 24 |
| 12 |
| ||
Aggregate deferred revenue at September 30 |
| $ | 533 |
| $ | 528 |
|
Current portion |
| $ | 258 |
| $ | 287 |
|
Noncurrent portion |
| $ | 275 |
| $ | 241 |
|
* Other primarily consists of foreign currency translation adjustments.
Reclassifications and Taxes Related to Items of Other Comprehensive Income
| | | | | | | | | |
(Dollars in millions) |
| Before Tax |
| Tax (Expense)/ |
| Net of Tax | |||
For the three months ended June 30, 2021: | | Amount | | Benefit | | Amount | |||
Other comprehensive income/(loss): |
| |
|
| |
|
| |
|
Foreign currency translation adjustments | | $ | 28 | | $ | 44 | | $ | 72 |
Net changes related to available-for-sale securities: | |
|
| |
|
| |
|
|
Unrealized gains/(losses) arising during the period | | $ | 0 | | $ | 0 | | $ | 0 |
Reclassification of (gains)/losses to other (income) and expense | |
| — | | | — | | | — |
Total net changes related to available-for-sale securities | | $ | 0 | | $ | 0 | | $ | 0 |
Unrealized gains/(losses) on cash flow hedges: | |
|
| |
|
| |
|
|
Unrealized gains/(losses) arising during the period | | $ | (34) | | $ | 9 | | $ | (26) |
Reclassification of (gains)/losses to: | |
| | |
| | |
| |
Cost of services | |
| (7) | |
| 2 | |
| (5) |
Cost of sales | |
| 10 | |
| (3) | |
| 8 |
Cost of financing | |
| 6 | |
| (1) | |
| 4 |
SG&A expense | |
| 16 | |
| (4) | |
| 12 |
Other (income) and expense | |
| 49 | |
| (12) | |
| 37 |
Interest expense | |
| 16 | |
| (4) | |
| 12 |
Total unrealized gains/(losses) on cash flow hedges | | $ | 56 | | $ | (14) | | $ | 42 |
Retirement-related benefit plans*: | |
|
| |
|
| |
|
|
Prior service costs/(credits) | | $ | 0 | | $ | 0 | | $ | 0 |
Net (losses)/gains arising during the period | | | 2 | | | 10 | | | 11 |
Curtailments and settlements | |
| 16 | | | (5) | | | 11 |
Amortization of prior service (credits)/costs | |
| 1 | | | 1 | | | 1 |
Amortization of net (gains)/losses | |
| 643 | | | (175) | | | 467 |
Total retirement-related benefit plans | | $ | 661 | | $ | (170) | | $ | 491 |
Other comprehensive income/(loss) | | $ | 745 | | $ | (140) | | $ | 605 |
* | These AOCI components are included in the computation of net periodic pension cost. Refer to note 18, “Retirement-Related Benefits,” for additional information. |
40
|
| For the Three Months Ended |
| ||||
|
| September 30, 2017 |
| September 30, 2016 |
| ||
Number of shares on which basic earnings per share is calculated: |
|
|
|
|
| ||
Weighted-average shares outstanding during period |
| 929,437,441 |
| 953,995,828 |
| ||
Add — Incremental shares under stock-based compensation plans |
| 2,236,234 |
| 2,357,365 |
| ||
Add — Incremental shares associated with contingently issuable shares |
| 1,553,754 |
| 964,091 |
| ||
Number of shares on which diluted earnings per share is calculated |
| 933,227,429 |
| 957,317,284 |
| ||
|
|
|
|
|
| ||
Income from continuing operations (millions) |
| $ | 2,726 |
| $ | 2,854 |
|
Loss from discontinued operations, net of tax (millions) |
| 0 |
| (1 | ) | ||
Net income on which basic earnings per share is calculated (millions) |
| $ | 2,726 |
| $ | 2,853 |
|
Income from continuing operations (millions) |
| $ | 2,726 |
| $ | 2,854 |
|
Net income applicable to contingently issuable shares (millions) |
| 0 |
| — |
| ||
Income from continuing operations on which diluted earnings per share is calculated (millions) |
| $ | 2,726 |
| $ | 2,854 |
|
Loss from discontinued operations, net of tax, on which basic and diluted earnings per share is calculated (millions) |
| 0 |
| (1 | ) | ||
Net income on which diluted earnings per share is calculated (millions) |
| $ | 2,726 |
| $ | 2,853 |
|
|
|
|
|
|
| ||
Earnings/(loss) per share of common stock: |
|
|
|
|
| ||
Assuming dilution |
|
|
|
|
| ||
Continuing operations |
| $ | 2.92 |
| $ | 2.98 |
|
Discontinued operations |
| 0.00 |
| 0.00 |
| ||
Total |
| $ | 2.92 |
| $ | 2.98 |
|
Basic |
|
|
|
|
| ||
Continuing operations |
| $ | 2.93 |
| $ | 2.99 |
|
Discontinued operations |
| 0.00 |
| 0.00 |
| ||
Total |
| $ | 2.93 |
| $ | 2.99 |
|
Stock options to purchase 399,844 shares and 29,033 shares were outstanding as of September 30, 2017 and 2016, respectively, but were not included in the computation of diluted earnings per share because the options’ exercise price during the respective period was greater than the average market price of the common shares, and, therefore, the effect would have been antidilutive.
Reclassifications and Taxes Related to Items of Other Comprehensive Income
| | | | | | | | | |
(Dollars in millions) |
| Before Tax |
| Tax (Expense)/ |
| Net of Tax | |||
For the six months ended June 30, 2022: | | Amount | | Benefit | | Amount | |||
Other comprehensive income/(loss): |
| |
|
| |
|
| |
|
Foreign currency translation adjustments | | $ | 655 | | $ | (483) | | $ | 172 |
Net changes related to available-for-sale securities: | |
|
| |
|
| |
|
|
Unrealized gains/(losses) arising during the period | | $ | (1) | | $ | 0 | | $ | 0 |
Reclassification of (gains)/losses to other (income) and expense | |
| — | |
| — | |
| — |
Total net changes related to available-for-sale securities | | $ | (1) | | $ | 0 | | $ | 0 |
Unrealized gains/(losses) on cash flow hedges: | |
|
| |
|
| |
|
|
Unrealized gains/(losses) arising during the period | | $ | 260 | | $ | (69) | | $ | 191 |
Reclassification of (gains)/losses to: | |
|
| |
|
| |
|
|
Cost of services | |
| (28) | |
| 7 | |
| (21) |
Cost of sales | |
| (35) | |
| 10 | |
| (25) |
Cost of financing | |
| 12 | |
| (3) | |
| 9 |
SG&A expense | |
| (20) | |
| 5 | |
| (14) |
Other (income) and expense | |
| 45 | |
| (11) | |
| 34 |
Interest expense | |
| 43 | |
| (11) | |
| 32 |
Total unrealized gains/(losses) on cash flow hedges | | $ | 276 | | $ | (71) | | $ | 205 |
Retirement-related benefit plans*: | |
|
| |
|
| |
|
|
Prior service costs/(credits) | | $ | (5) | | $ | 5 | | $ | 0 |
Net (losses)/gains arising during the period | | | 10 | | | (7) | | | 3 |
Curtailments and settlements | |
| 19 | |
| (5) | |
| 14 |
Amortization of prior service (credits)/costs | |
| 13 | |
| (3) | |
| 10 |
Amortization of net (gains)/losses | |
| 917 | |
| (256) | |
| 662 |
Total retirement-related benefit plans | | $ | 954 | | $ | (266) | | $ | 689 |
Other comprehensive income/(loss) | | $ | 1,885 | | $ | (819) | | $ | 1,066 |
* | These AOCI components are included in the computation of net periodic pension cost. Refer to note 18, “Retirement-Related Benefits,” for additional information. |
41
Notes to Consolidated Financial Statements — (continued)
Reclassifications and Taxes Related to Items of Other Comprehensive Income
|
| For the Nine Months Ended |
| ||||
|
| September 30, 2017 |
| September 30, 2016 |
| ||
Number of shares on which basic earnings per share is calculated: |
|
|
|
|
| ||
Weighted-average shares outstanding during period |
| 935,600,777 |
| 957,693,385 |
| ||
Add — Incremental shares under stock compensation plans |
| 3,213,758 |
| 2,258,854 |
| ||
Add — Incremental shares associated with contingently issuable shares |
| 1,394,930 |
| 771,943 |
| ||
Number of shares on which diluted earnings per share is calculated |
| 940,209,466 |
| 960,724,182 |
| ||
|
|
|
|
|
| ||
Income from continuing operations (millions) |
| $ | 6,811 |
| $ | 7,375 |
|
Loss from discontinued operations, net of tax (millions) |
| (3 | ) | (4 | ) | ||
Net income on which basic earnings per share is calculated (millions) |
| $ | 6,807 |
| $ | 7,371 |
|
Income from continuing operations (millions) |
| $ | 6,811 |
| $ | 7,375 |
|
Net income applicable to contingently issuable shares (millions) |
| (2 | ) | — |
| ||
Income from continuing operations on which diluted earnings per share is calculated (millions) |
| $ | 6,809 |
| $ | 7,375 |
|
Loss from discontinued operations, net of tax, on which basic and diluted earnings per share is calculated (millions) |
| (3 | ) | (4 | ) | ||
Net income on which diluted earnings per share is calculated (millions) |
| $ | 6,806 |
| $ | 7,371 |
|
|
|
|
|
|
| ||
Earnings/(loss) per share of common stock: |
|
|
|
|
| ||
Assuming dilution |
|
|
|
|
| ||
Continuing operations |
| $ | 7.24 |
| $ | 7.67 |
|
Discontinued operations |
| 0.00 |
| 0.00 |
| ||
Total |
| $ | 7.24 |
| $ | 7.67 |
|
Basic |
|
|
|
|
| ||
Continuing operations |
| $ | 7.28 |
| $ | 7.70 |
|
Discontinued operations |
| 0.00 |
| 0.00 |
| ||
Total |
| $ | 7.28 |
| $ | 7.70 |
|
| | | | | | | | | |
(Dollars in millions) |
| Before Tax |
| Tax (Expense)/ |
| Net of Tax | |||
For the six months ended June 30, 2021: | | Amount | | Benefit | | Amount | |||
Other comprehensive income/(loss): |
| |
|
| |
|
| |
|
Foreign currency translation adjustments | | $ | 577 | | $ | (184) | | $ | 393 |
Net changes related to available-for-sale securities: | |
|
| |
| | |
|
|
Unrealized gains/(losses) arising during the period | | $ | 0 | | $ | 0 | | $ | 0 |
Reclassification of (gains)/losses to other (income) and expense | |
| — | |
| — | |
| — |
Total net changes related to available-for-sale securities | | $ | 0 | | $ | 0 | | $ | 0 |
Unrealized gains/(losses) on cash flow hedges: | |
|
| |
|
| |
|
|
Unrealized gains/(losses) arising during the period | | $ | 153 | | $ | (39) | | $ | 114 |
Reclassification of (gains)/losses to: | |
| | |
| | |
| |
Cost of services | |
| (21) | |
| 5 | |
| (16) |
Cost of sales | |
| 32 | |
| (8) | |
| 24 |
Cost of financing | |
| 12 | |
| (3) | |
| 9 |
SG&A expense | |
| 31 | |
| (8) | |
| 23 |
Other (income) and expense | |
| 165 | |
| (41) | |
| 123 |
Interest expense | |
| 31 | |
| (8) | |
| 24 |
Total unrealized gains/(losses) on cash flow hedges | | $ | 404 | | $ | (102) | | $ | 301 |
Retirement-related benefit plans*: | |
|
| |
|
| |
|
|
Prior service costs/(credits) | | $ | 0 | | $ | 0 | | $ | 0 |
Net (losses)/gains arising during the period | | | 22 | | | 4 | | | 25 |
Curtailments and settlements | |
| 34 | |
| (10) | |
| 23 |
Amortization of prior service (credits)/costs | |
| 4 | |
| 0 | |
| 4 |
Amortization of net (gains)/losses | |
| 1,291 | |
| (352) | |
| 938 |
Total retirement-related benefit plans | | $ | 1,350 | | $ | (359) | | $ | 991 |
Other comprehensive income/(loss) | | $ | 2,330 | | $ | (645) | | $ | 1,685 |
* | These AOCI components are included in the computation of net periodic pension cost. Refer to note 18, “Retirement-Related Benefits,” for additional information. |
Stock optionsAccumulated Other Comprehensive Income/(Loss) (net of tax)
| | | | | | | | | | | | | | | |
|
|
| |
|
| |
| Net Change |
| Net Unrealized |
|
| | ||
| | Net Unrealized | | Foreign | | Retirement- | | Gains/(Losses) | | Accumulated | |||||
| | Gains/(Losses) | | Currency | | Related | | on Available- | | Other | |||||
| | on Cash Flow | | Translation | | Benefit | | For-Sale | | Comprehensive | |||||
(Dollars in millions) | | Hedges | | Adjustments* | | Plans | | Securities | | Income/(Loss) | |||||
January 1, 2022 | | $ | (18) | | $ | (3,362) | | $ | (19,854) | | $ | (1) | | $ | (23,234) |
Other comprehensive income before reclassifications | |
| 191 | |
| 172 | |
| 3 | |
| 0 | |
| 366 |
Amount reclassified from accumulated other comprehensive income | |
| 14 | |
| — | |
| 686 | |
| — | |
| 699 |
Total change for the period | | $ | 205 | | $ | 172 | | $ | 689 | | $ | 0 | | $ | 1,066 |
June 30, 2022 | | $ | 187 | | $ | (3,189) | | $ | (19,165) | | $ | (1) | | $ | (22,169) |
* | Foreign currency translation adjustments are presented gross except for any associated hedges which are presented net of tax. |
42
Notes to purchase 146,795Consolidated Financial Statements — (continued)
| | | | | | | | | | | | | | | |
|
|
| |
|
| |
| Net Change |
| Net Unrealized |
|
| | ||
| | Net Unrealized | | Foreign | | Retirement- | | Gains/(Losses) | | Accumulated | |||||
| | Gains/(Losses) | | Currency | | Related | | on Available- | | Other | |||||
| | on Cash Flow | | Translation | | Benefit | | For-Sale | | Comprehensive | |||||
(Dollars in millions) | | Hedges | | Adjustments* | | Plans | | Securities | | Income/(Loss) | |||||
January 1, 2021 | | $ | (456) | | $ | (4,665) | | $ | (24,216) | | $ | 0 | | $ | (29,337) |
Other comprehensive income before reclassifications | |
| 114 | |
| 393 | |
| 25 | |
| 0 | |
| 532 |
Amount reclassified from accumulated other comprehensive income | |
| 187 | |
| — | |
| 966 | |
| — | |
| 1,153 |
Total change for the period | | $ | 301 | | $ | 393 | | $ | 991 | | $ | 0 | | $ | 1,685 |
June 30, 2021 | | $ | (155) | | $ | (4,271) | | $ | (23,225) | | $ | (1) | | $ | (27,652) |
* Foreign currency translation adjustments are presented gross except for any associated hedges which are presented net of tax.
16. Derivative Financial Instruments:
The company operates in multiple functional currencies and is a significant lender and borrower in the global markets. In the normal course of business, the company is exposed to the impact of interest rate changes and foreign currency fluctuations, and to a lesser extent equity and commodity price changes and client credit risk. The company limits these risks by following established risk management policies and procedures, including the use of derivatives, and, where cost effective, financing with debt in the currencies in which assets are denominated. For interest rate exposures, derivatives are used to better align rate movements between the interest rates associated with the company’s lease and other financial assets and the interest rates associated with its financing debt. Derivatives are also used to manage the related cost of debt. For foreign currency exposures, derivatives are used to better manage the cash flow volatility arising from foreign exchange rate fluctuations.
In the Consolidated Balance Sheet, the company does not offset derivative assets against liabilities in master netting arrangements nor does it offset receivables or payables recognized upon payment or receipt of cash collateral against the fair values of the related derivative instruments. At June 30, 2022 and December 31, 2021, the amount recognized in other accounts receivables for the right to reclaim cash collateral was $52 million and $2 million, respectively. At June 30, 2022 and December 31, 2021, the amount recognized in accounts payable for the obligation to return cash collateral was $14 million and $38 million, respectively. The company restricts the use of cash collateral received to rehypothecation, and therefore reports it in restricted cash in the Consolidated Balance Sheet. At June 30, 2022 and December 31, 2021, the amount rehypothecated was $12 million and $2 million, respectively. Additionally, if derivative exposures covered by a qualifying master netting agreement had been netted in the Consolidated Balance Sheet at June 30, 2022 and December 31, 2021, the total derivative asset and liability positions each would have been reduced by $187 million and $60 million, respectively.
On May 19, 2022, in connection with the disposition of 22.3 million shares of Kyndryl common stock, the company entered into a cash-settled swap with the lender of the short-term credit facility as the counterparty that maintained IBM’s continued economic exposure in those shares pursuant to the Exchange. Refer to note 8, “Financial Assets & Liabilities,” for additional information. The notional value of the swap is $311 million. Upon settlement of the swap, no later than November 2, 2022, IBM will receive or pay an amount derived from the difference between the VWAP of the Kyndryl shares over the outstanding term of the swap and 533,089 shares (average of first, second and third quarter share amounts) were outstandingthe strike price as of SeptemberMay 19, 2022. The fair value of the swap at June 30, 20172022 was $88 million and 2016,is included within other accrued expenses and liabilities in the Consolidated Balance Sheet. For the three and six months ended June 30, 2022, an unrealized loss of $88 million was recorded in other (income) and expense in the Consolidated Income Statement.
In its hedging programs, the company may use forward contracts, futures contracts, interest-rate swaps, cross-currency swaps, equity swaps, and options depending upon the underlying exposure. The company is not a party to leveraged derivative instruments.
43
Notes to Consolidated Financial Statements — (continued)
A brief description of the major hedging programs, categorized by underlying risk, follows.
Interest Rate Risk
Fixed and Variable Rate Borrowings
The company issues debt in the global capital markets to fund its operations and financing business. Access to cost-effective financing can result in interest rate mismatches with the underlying assets. To manage these mismatches and to reduce overall interest cost, the company may use interest-rate swaps to convert specific fixed-rate debt issuances into variable-rate debt (i.e., fair value hedges) and to convert specific variable-rate debt issuances into fixed-rate debt (i.e., cash flow hedges). At June 30, 2022 and December 31, 2021, the total notional amount of the company’s interest-rate swaps was $4.4 billion and $0.4 billion, respectively. The weighted-average remaining maturity of these instruments at June 30, 2022 and December 31, 2021 was approximately 5.4 years and 1.2 years, respectively. These interest-rate contracts were accounted for as fair value hedges. The company did 0t have any cash flow hedges relating to this program outstanding at June 30, 2022 and December 31, 2021.
Forecasted Debt Issuance
The company is exposed to interest rate volatility on future debt issuances. To manage this risk, the company may use instruments such as forward starting interest-rate swaps to lock in the rate on the interest payments related to the forecasted debt issuances. There were 0 instruments outstanding at June 30, 2022 and December 31, 2021.
In connection with cash flow hedges of forecasted interest payments related to the company's borrowings, the company recorded net losses (before taxes) of $148 million and $157 million at June 30, 2022 and December 31, 2021, respectively, butin AOCI. The company estimates that $18 million of the deferred net losses (before taxes) on derivatives in AOCI at June 30, 2022 will be reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying interest payments.
Foreign Exchange Risk
Long-Term Investments in Foreign Subsidiaries (Net Investment)
A large portion of the company’s foreign currency denominated debt portfolio is designated as a hedge of net investment in foreign subsidiaries to reduce the volatility in stockholders’ equity caused by changes in foreign currency exchange rates in the functional currency of major foreign subsidiaries with respect to the U.S. dollar. At June 30, 2022 and December 31, 2021, the carrying value of debt designated as hedging instruments was $14.0 billion and $14.1 billion, respectively. The company also uses cross-currency swaps and foreign exchange forward contracts for this risk management purpose. At June 30, 2022 and December 31, 2021, the total notional amount of derivative instruments designated as net investment hedges was $4.7 billion and $6.8 billion, respectively. At both June 30, 2022 and December 31, 2021, the weighted-average remaining maturity of these instruments was approximately 0.1 year.
Anticipated Royalties and Cost Transactions
The company’s operations generate significant nonfunctional currency, third-party vendor payments and intercompany payments for royalties and goods and services among the company’s non-U.S. subsidiaries and with the company. In anticipation of these foreign currency cash flows and in view of the volatility of the currency markets, the company selectively employs foreign exchange forward contracts to manage its currency risk. These forward contracts are accounted for as cash flow hedges. At June 30, 2022, the maximum remaining length of time over which the company hedged its exposure is approximately two years. At June 30, 2022 and December 31, 2021, the total notional amount of forward contracts designated as cash flow hedges of forecasted royalty and cost transactions was $8.2 billion and $7.2 billion, respectively. At both June 30, 2022 and December 31, 2021, the weighted-average remaining maturity of these instruments was approximately 0.6 years.
44
Notes to Consolidated Financial Statements — (continued)
At June 30, 2022 and December 31, 2021, in connection with cash flow hedges of anticipated royalties and cost transactions, the company recorded net gains (before taxes) of $537 million and $315 million, respectively, in AOCI. The company estimates that $471 million of deferred net gains (before taxes) on derivatives in AOCI at June 30, 2022 will be reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying anticipated transactions.
Foreign Currency Denominated Borrowings
The company is exposed to exchange rate volatility on foreign currency denominated debt. To manage this risk, the company employs cross-currency swaps to convert fixed-rate foreign currency denominated debt to fixed-rate debt denominated in the functional currency of the borrowing entity. These swaps are accounted for as cash flow hedges. At June 30, 2022, the maximum length of time remaining over which the company hedged its exposure is approximately six years. At June 30, 2022 and December 31, 2021, the total notional amount of cross-currency swaps designated as cash flow hedges of foreign currency denominated debt was $3.0 billion and $2.0 billion, respectively.
At June 30, 2022 and December 31, 2021, in connection with cash flow hedges of foreign currency denominated borrowings, the company recorded net losses (before taxes) of $128 million and $174 million, respectively, in AOCI. The company estimates that $31 million of deferred net gains (before taxes) on derivatives in AOCI at June 30, 2022 will be reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying exposure.
Subsidiary Cash and Foreign Currency Asset/Liability Management
The company uses its Global Treasury Centers to manage the cash of its subsidiaries. These centers principally use currency swaps to convert cash flows in a cost-effective manner. In addition, the company uses foreign exchange forward contracts to economically hedge, on a net basis, the foreign currency exposure of a portion of the company’s nonfunctional currency assets and liabilities. The terms of these forward and swap contracts are generally less than one year. The changes in the fair values of these contracts and of the underlying hedged exposures are generally offsetting and are recorded in other (income) and expense in the Consolidated Income Statement. At June 30, 2022 and December 31, 2021, the total notional amount of derivative instruments in economic hedges of foreign currency exposure was $5.6 billion and $6.8 billion, respectively.
Equity Risk Management
The company is exposed to market price changes in certain broad market indices and in the company’s own stock primarily related to certain obligations to employees. Changes in the overall value of these employee compensation obligations are recorded in SG&A expense in the Consolidated Income Statement. Although not designated as accounting hedges, the company utilizes derivatives, including equity swaps and futures, to economically hedge the exposures related to its employee compensation obligations. The derivatives are linked to the total return on certain broad market indices or the total return on the company’s common stock, and are recorded at fair value with gains or losses also reported in SG&A expense in the Consolidated Income Statement. At June 30, 2022 and December 31, 2021, the total notional amount of derivative instruments in economic hedges of these compensation obligations was $1.1 billion and $1.4 billion, respectively.
45
Notes to Consolidated Financial Statements — (continued)
Cumulative Basis Adjustments for Fair Value Hedges
At June 30, 2022 and December 31, 2021, the following amounts were recorded in the Consolidated Balance Sheet related to cumulative basis adjustments for fair value hedges:
| | | | | | | |
|
| June 30, |
| December 31, |
| ||
(Dollars in millions) | | 2022 | | 2021 |
| ||
Short-term debt: |
| |
|
| |
| |
Carrying amount of the hedged item | | $ | (224) | | $ | (227) | |
Cumulative hedging adjustments included in the carrying amount — assets/(liabilities)* | |
| 1 | |
| (2) | |
Long-term debt: | |
|
| |
|
| |
Carrying amount of the hedged item | | $ | (4,366) | | $ | (508) | |
Cumulative hedging adjustments included in the carrying amount — assets/(liabilities)* | |
| (188) | |
| (309) | |
* Includes ($276) million and ($302) million of hedging adjustments on discontinued hedging relationships at June 30, 2022 and December 31, 2021, respectively.
The Effect of Derivative Instruments in the Consolidated Income Statement
The total amounts of income and expense line items presented in the Consolidated Income Statement in which the effects of fair value hedges, cash flow hedges, net investment hedges and derivatives not designated as hedging instruments are recorded and the total effect of hedge activity on these income and expense line items are as follows:
| | | | | | | | | | | | | |
| | | | | | | | Gains/(Losses) of |
| ||||
(Dollars in millions) | | Total | | Total Hedge Activity |
| ||||||||
For the three months ended June 30: |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||||
Cost of services | | $ | 5,399 | | $ | 4,720 | | $ | 13 | | $ | 7 | |
Cost of sales | |
| 1,750 | |
| 1,499 | * |
| 23 | |
| (10) | |
Cost of financing | |
| 96 | |
| 146 | * |
| 1 | |
| 0 | |
SG&A expense | |
| 4,855 | |
| 4,849 | |
| (152) | |
| 67 | |
Other (income) and expense | |
| (81) | |
| 302 | |
| (439) | |
| (79) | |
Interest expense | |
| 297 | |
| 281 | |
| 3 | |
| (1) | |
* Reclassified to conform to current year presentation.
46
Notes to Consolidated Financial Statements — (continued)
| | | | | | | | | | | | | | |
| | Gain (Loss) Recognized in Consolidated Income Statement | ||||||||||||
| | Consolidated | | Recognized on | | Attributable to Risk | ||||||||
(Dollars in millions) | | Income Statement | | Derivatives | | Being Hedged (2) | ||||||||
For the three months ended June 30: |
| Line Item |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Derivative instruments in fair value hedges (1): |
|
|
| |
|
| |
|
| |
|
| |
|
Interest rate contracts |
| Cost of financing | | $ | (17) | | $ | 0 | | $ | 23 | | $ | 4 |
|
| Interest expense | |
| (61) | |
| 0 | |
| 81 | |
| 11 |
Derivative instruments not designated as hedging instruments: |
|
| |
|
| |
|
| |
|
| |
|
|
Foreign exchange contracts |
| Other (income) and expense | |
| (313) | |
| (30) | |
| N/A | |
| N/A |
Equity contracts |
| SG&A expense | |
| (166) | |
| 83 | |
| N/A | |
| N/A |
| | Other (income) and expense | | | (88) | | | — | | | N/A | | | N/A |
Total |
|
| | $ | (645) | | $ | 54 | | $ | 104 | | $ | 15 |
| | | | | | | | | | | | | | | | | | | | | |
| | Gain (Loss) Recognized in Consolidated Income Statement and Other Comprehensive Income |
| ||||||||||||||||||
(Dollars in millions) | | | | | | | | Consolidated | | Reclassified | | Amounts Excluded from |
| ||||||||
For the three months | | Recognized in OCI | | Income Statement | | from AOCI | | Effectiveness Testing (3) |
| ||||||||||||
ended June 30: |
| 2022 |
| 2021 |
| Line Item |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||||||
Derivative instruments in cash flow hedges: |
| |
|
| |
|
|
|
| |
|
| |
| | |
|
| |
| |
Interest rate contracts | | $ | — | | $ | — |
| Cost of financing | | $ | (1) | | $ | (1) | | $ | — | | $ | — | |
| | | | | | |
| Interest expense | |
| (3) | |
| (3) | |
| — | |
| — | |
Foreign exchange contracts | |
| 200 | |
| (34) |
| Cost of services | |
| 13 | |
| 7 | |
| — | |
| — | |
| | | | | | |
| Cost of sales | |
| 23 | |
| (10) | |
| — | |
| — | |
| | | | | | |
| Cost of financing | |
| (5) | |
| (5) | | | — | | | — | |
| | | | | | |
| SG&A expense | |
| 14 | |
| (16) | |
| — | |
| — | |
| | | | | | |
| Other (income) and expense | |
| (38) | |
| (49) | |
| — | |
| — | |
| | | | | | |
| Interest expense | |
| (19) | |
| (12) | | | — | | | — | |
Instruments in net investment hedges (4): | |
| | |
|
|
|
| |
|
| |
|
| |
|
| |
|
| |
Foreign exchange contracts | |
| 1,379 | |
| (177) |
| Cost of financing | |
| — | |
| — | |
| 1 | |
| 1 | |
| |
| | |
| |
| Interest expense | |
| — | |
| — | |
| 5 | |
| 4 | |
Total | | $ | 1,579 | | $ | (211) |
|
| | $ | (16) | | $ | (90) | | $ | 6 | | $ | 5 | |
| (1) | The amount includes changes in clean fair values of the derivative instruments in fair value hedging relationships and the periodic accrual for coupon payments required under these derivative contracts. |
| (2) | The amount includes basis adjustments to the carrying value of the hedged item recorded during the period and amortization of basis adjustments recorded on de-designated hedging relationships during the period. |
| (3) | The company’s policy is to recognize all fair value changes in amounts excluded from effectiveness testing in net income each period. |
| (4) | Instruments in net investment hedges include derivative and non-derivative instruments with the amounts recognized in OCI providing an offset to the translation of foreign subsidiaries. |
N/A - not applicable
| | | | | | | | | | | | | |
| | | | | | | | Gains/(Losses) of |
| ||||
(Dollars in millions) | | Total | | Total Hedge Activity |
| ||||||||
For the six months ended June 30: |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||||
Cost of services | | $ | 10,747 | | $ | 9,364 | | $ | 28 | | $ | 21 | |
Cost of sales | |
| 3,165 | |
| 2,878 | * |
| 35 | |
| (32) | |
Cost of financing | |
| 194 | |
| 283 | * |
| (1) | |
| 2 | |
SG&A expense | |
| 9,452 | |
| 9,536 | |
| (223) | |
| 101 | |
Other (income) and expense | |
| 166 | |
| 647 | |
| (541) | |
| (239) | |
Interest expense | |
| 607 | |
| 561 | |
| (3) | |
| 4 | |
* Reclassified to conform to current year presentation.
47
Notes to Consolidated Financial Statements — (continued)
| | | | | | | | | | | | | | |
| | Gain (Loss) Recognized in Consolidated Income Statement | ||||||||||||
| | Consolidated | | Recognized on | | Attributable to Risk | ||||||||
(Dollars in millions) | | Income Statement | | Derivatives | | Being Hedged (2) | ||||||||
For the six months ended June 30: | | Line Item | | 2022 |
| 2021 | | 2022 |
| 2021 | ||||
Derivative instruments in fair value hedges (1): |
|
|
| |
|
| |
|
| |
|
| |
|
Interest rate contracts |
| Cost of financing | | $ | (18) | | $ | 0 | | $ | 26 | | $ | 11 |
|
| Interest expense | |
| (65) | |
| (1) | |
| 97 | |
| 29 |
Derivative instruments not designated as hedging instruments: |
|
| |
|
| |
|
| |
|
| |
|
|
Foreign exchange contracts |
| Other (income) and expense | |
| (409) | |
| (74) | |
| N/A | |
| N/A |
Equity contracts |
| SG&A expense | |
| (243) | |
| 133 | |
| N/A | |
| N/A |
| | Other (income) and expense | | | (88) | | | — | | | N/A | | | N/A |
Total |
|
| | $ | (821) | | $ | 57 | | $ | 123 | | $ | 40 |
| | | | | | | | | | | | | | | | | | | | | |
| | Gain (Loss) Recognized in Consolidated Income Statement and Other Comprehensive Income |
| ||||||||||||||||||
(Dollars in millions) | | | | | | | | Consolidated | | Reclassified | | Amounts Excluded from |
| ||||||||
For the six months | | Recognized in OCI | | Income Statement | | from AOCI | | Effectiveness Testing (3) |
| ||||||||||||
ended June 30: |
| 2022 |
| 2021 |
| Line Item |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||||||
Derivative instruments in cash flow hedges: |
| |
|
| |
|
|
|
| |
|
| |
| | |
|
| |
| |
Interest rate contracts | | $ | — | | $ | — |
| Cost of financing | | $ | (2) | | $ | (2) | | $ | — | | $ | — | |
| | | | | | |
| Interest expense | |
| (7) | |
| (6) | |
| — | |
| — | |
Foreign exchange contracts | |
| 260 | |
| 153 |
| Cost of services | |
| 28 | |
| 21 | |
| — | |
| — | |
| | | | | | |
| Cost of sales | |
| 35 | |
| (32) | |
| — | |
| — | |
| | | | | | |
| Cost of financing | |
| (10) | |
| (9) | | | — | | | — | |
| | | | | | |
| SG&A expense | |
| 20 | |
| (31) | |
| — | |
| — | |
| | | | | | |
| Other (income) and expense | |
| (45) | |
| (165) | |
| — | |
| — | |
| | | | | | |
| Interest expense | |
| (36) | |
| (25) | | | — | | | — | |
Instruments in net investment hedges (4): | |
| | |
|
|
|
| |
|
| |
|
| |
|
| |
|
| |
Foreign exchange contracts | |
| 1,920 | |
| 730 |
| Cost of financing | |
| — | |
| — | |
| 2 | |
| 3 | |
| |
| | |
| |
| Interest expense | |
| — | |
| — | |
| 7 | |
| 8 | |
Total | | $ | 2,180 | | $ | 883 |
|
| | $ | (16) | | $ | (251) | | $ | 9 | | $ | 11 | |
| (1) | The amount includes changes in clean fair values of the derivative instruments in fair value hedging relationships and the periodic accrual for coupon payments required under these derivative contracts. |
| (2) | The amount includes basis adjustments to the carrying value of the hedged item recorded during the period and amortization of basis adjustments recorded on de-designated hedging relationships during the period. |
| (3) | The company’s policy is to recognize all fair value changes in amounts excluded from effectiveness testing in net income each period. |
| (4) | Instruments in net investment hedges include derivative and non-derivative instruments with the amounts recognized in OCI providing an offset to the translation of foreign subsidiaries. |
N/A - not applicable
For the three and six months ended June 30, 2022 and 2021, there were no material gains or losses excluded from the assessment of hedge effectiveness (for fair value or cash flow hedges), or associated with an underlying exposure that did not or was not expected to occur (for cash flow hedges); nor are there any anticipated in the normal course of business.
48
Notes to Consolidated Financial Statements — (continued)
17. Stock-Based Compensation:
Stock-based compensation cost for stock awards and stock options is measured at grant date, based on the fair value of the award, and is recognized over the employee requisite service period. The following table presents total stock-based compensation cost included in income from continuing operations.
| | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | ||||||||
(Dollars in millions) | | 2022 | | 2021 | | 2022 | | 2021 | ||||
Cost | | $ | 43 | | $ | 35 | | $ | 84 | | $ | 68 |
Selling, general and administrative | |
| 153 | |
| 141 | |
| 289 | |
| 256 |
Research, development and engineering | |
| 58 | |
| 50 | |
| 115 | |
| 99 |
Pre-tax stock-based compensation cost | | $ | 254 | | $ | 225 | | $ | 488 | | $ | 423 |
Income tax benefits | |
| (82) | |
| (64) | |
| (139) | |
| (112) |
Total net stock-based compensation cost | | $ | 172 | | $ | 162 | | $ | 348 | | $ | 311 |
Effective April 1, 2022, the computation of diluted earnings per share becausecompany increased the options’ exercise price during the respective periods was greater thandiscount for eligible participants under its Employees Stock Purchase Plan (ESPP) from 5 percent to 15 percent off the average market price on the date of purchase. With this change, the ESPP is considered compensatory under the accounting requirements for stock-based compensation.
Pre-tax stock-based compensation cost for the three months ended June 30, 2022 increased $29 million compared to the corresponding period in the prior year, including increases in ESPP ($14 million), performance share units ($8 million), stock options ($5 million) and restricted stock units ($2 million). The increases primarily relate to the ESPP being considered compensatory and a change in the timing of the common shares,company’s executive grant cycle in 2022.
Pre-tax stock-based compensation cost for the six months ended June 30, 2022 increased $64 million compared to the corresponding period in the prior year, including increases in restricted stock units ($29 million), ESPP ($14 million), performance share units ($10 million) and therefore,stock options ($10 million). The increases are driven by the effect would have been antidilutive.same factors described above.
Total unrecognized compensation cost related to non-vested awards at June 30, 2022 was $1.4 billion and is expected to be recognized over a weighted-average period of approximately 2.5 years.
Capitalized stock-based compensation cost was not material at June 30, 2022 and 2021.
18. Retirement-Related Benefits:
The company offers defined benefit (DB) pension plans, defined contribution pension plans, as well as nonpension postretirement plans primarily consisting of retiree medical benefits. The following tables provide the pre-tax cost for all retirement-related plans.
| | | | | | | | | |
|
| | |
|
| |
| Yr. to Yr. |
|
(Dollars in millions) | | | | | | | | Percent |
|
For the three months ended June 30: | | 2022 | | 2021 | | Change |
| ||
Retirement-related plans — cost: |
| |
|
| |
|
|
| |
Defined benefit and contribution pension plans — cost | | $ | 456 | | $ | 600 |
| (24.0) | % |
Nonpension postretirement plans — cost | |
| 33 | |
| 44 |
| (25.0) | |
Total | | $ | 489 | | $ | 644 |
| (24.1) | % |
49
15. Notes to Consolidated Financial Statements — (continued)
| | | | | | | | | |
|
| | |
|
| |
| Yr. to Yr. |
|
(Dollars in millions) | | | | | | | | Percent |
|
For the six months ended June 30: | | 2022 | | 2021 | | Change |
| ||
Retirement-related plans — cost: |
| |
|
| |
|
|
| |
Defined benefit and contribution pension plans — cost | | $ | 934 | | $ | 1,219 |
| (23.4) | % |
Nonpension postretirement plans — cost | |
| 66 | |
| 88 |
| (25.0) | |
Total | | $ | 1,000 | | $ | 1,307 |
| (23.5) | % |
The following tables provide the components of the cost/(income) for the company’s pension plans.
Cost/(Income) of Pension Plans
| | | | | | | | | | | | |
(Dollars in millions) | | U.S. Plans | | Non-U.S. Plans | ||||||||
For the three months ended June 30: |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Service cost | | $ | — | | $ | — | | $ | 59 | | $ | 68 |
Interest cost* | |
| 302 | |
| 277 | |
| 131 | |
| 108 |
Expected return on plan assets* | |
| (475) | |
| (451) | |
| (259) | |
| (279) |
Amortization of prior service costs/(credits)* | |
| 2 | |
| 4 | |
| 3 | |
| (5) |
Recognized actuarial losses* | |
| 179 | |
| 249 | |
| 260 | |
| 352 |
Curtailments and settlements* | |
| — | |
| — | |
| 11 | |
| 16 |
Multi-employer plans | |
| — | |
| — | |
| 3 | |
| 5 |
Other costs/(credits)* | |
| — | |
| — | |
| 6 | |
| 3 |
Total net periodic pension (income)/cost of defined benefit plans | | $ | 8 | | $ | 80 | | $ | 215 | | $ | 268 |
Cost of defined contribution plans | |
| 141 | |
| 151 | |
| 92 | |
| 101 |
Total defined benefit and contribution pension plans cost recognized in the Consolidated Income Statement | | $ | 149 | | $ | 231 | | $ | 307 | | $ | 369 |
| | | | | | | | | | | | |
(Dollars in millions) | | U.S. Plans | | Non-U.S. Plans | ||||||||
For the six months ended June 30: |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Service cost | | $ | — | | $ | — | | $ | 123 | | $ | 133 |
Interest cost* | |
| 603 | |
| 555 | |
| 270 | |
| 216 |
Expected return on plan assets* | |
| (950) | |
| (901) | |
| (532) | |
| (559) |
Amortization of prior service costs/(credits)* | |
| 4 | |
| 8 | |
| 7 | |
| (7) |
Recognized actuarial losses* | |
| 359 | |
| 498 | |
| 537 | |
| 708 |
Curtailments and settlements* | |
| — | |
| — | |
| 19 | |
| 34 |
Multi-employer plans | |
| — | |
| — | |
| 7 | |
| 11 |
Other costs/(credits)* | |
| — | |
| — | |
| 15 | |
| 15 |
Total net periodic pension (income)/cost of defined benefit plans | | $ | 15 | | $ | 160 | | $ | 446 | | $ | 551 |
Cost of defined contribution plans | |
| 282 | |
| 302 | |
| 190 | |
| 206 |
Total defined benefit and contribution pension plans cost recognized in the Consolidated Income Statement | | $ | 298 | | $ | 462 | | $ | 636 | | $ | 757 |
* These components of net periodic pension cost are included in other (income) and expense in the Consolidated Income Statement.
50
Notes to Consolidated Financial Statements — (continued)
The following tables provide the components of the cost for the company’s nonpension postretirement plans.
Cost of Nonpension Postretirement Plans
| | | | | | | | | | | | |
(Dollars in millions) | | U.S. Plan | | Non-U.S. Plans | ||||||||
For the three months ended June 30: |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Service cost | | $ | 1 | | $ | 2 | | $ | 1 | | $ | 1 |
Interest cost* | |
| 18 | |
| 16 | |
| 9 | |
| 8 |
Expected return on plan assets* | |
| — | |
| — | |
| (1) | |
| (1) |
Amortization of prior service costs/(credits)* | |
| 1 | |
| 1 | |
| 0 | |
| 0 |
Recognized actuarial losses* | |
| 2 | |
| 13 | |
| 1 | |
| 4 |
Curtailments and settlements* | |
| — | |
| — | |
| — | |
| 0 |
Total nonpension postretirement plans cost recognized in the Consolidated Income Statement | | $ | 23 | | $ | 32 | | $ | 10 | | $ | 13 |
| | | | | | | | | | | | |
(Dollars in millions) | | U.S. Plan | | Non-U.S. Plans | ||||||||
For the six months ended June 30: |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Service cost | | $ | 2 | | $ | 4 | | $ | 2 | | $ | 2 |
Interest cost* | |
| 37 | |
| 32 | |
| 18 | |
| 16 |
Expected return on plan assets* | |
| — | |
| — | |
| (1) | |
| (2) |
Amortization of prior service costs/(credits)* | |
| 2 | |
| 2 | |
| 0 | |
| 0 |
Recognized actuarial losses* | |
| 4 | |
| 26 | |
| 2 | |
| 8 |
Curtailments and settlements* | |
| — | |
| — | |
| — | |
| 0 |
Total nonpension postretirement plans cost recognized in the Consolidated Income Statement | | $ | 46 | | $ | 64 | | $ | 20 | | $ | 25 |
* These components of net periodic pension cost are included in other (income) and expense in the Consolidated Income Statement.
The company does not anticipate any significant changes to the expected plan contributions in 2022 from the amounts disclosed in the 2021 Annual Report.
The table below includes contributions to the following plans:
| | | | | | |
(Dollars in millions) | | Plan Contributions | ||||
For the six months ended June 30: | | | 2022 | 2021 | ||
U.S. and non-U.S. nonpension postretirement benefit plans | | $ | 202 | | $ | 191 |
Non-U.S. DB and multi-employer plans* | |
| 43 | |
| 42 |
Total plan contributions | | $ | 245 | | $ | 233 |
* Amounts reported net of refunds.
During the six months ended June 30, 2022 and 2021, the company contributed $182 million and $235 million of U.S. Treasury Securities, respectively, to the non-U.S. DB plans and nonpension postretirement benefit plans. Additionally, during the six months ended June 30, 2022 and 2021, the company contributed $261 million and $249 million in U.S. Treasury securities, respectively, to the Active Medical Trust. Contributions made with U.S. Treasury securities are considered a non-cash transaction.
51
Notes to Consolidated Financial Statements — (continued)
19. Subsequent Events:
On October 31, 2017,July 20, 2022, the company issued $3.25 billion of fixed-rate notes in tranches with maturities ranging from 3 to 30 years and coupons ranging from 4.00 to 4.90 percent.
On July 25, 2022, the company announced that the Board of Directors approved a quarterly dividend of $1.50$1.65 per common share. The dividend is payable December 9, 2017September 10, 2022 to shareholders of record on NovemberAugust 10, 2017.2022.
On October 31, 2017, the company announced that the Board
52
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FOR THE THREE AND NINESIX MONTHS ENDED SEPTEMBERJUNE 30, 20172022
Snapshot
Snapshot
Financial Results Summary — Three Months Ended SeptemberJune 30:
|
|
|
|
|
| Yr. to Yr. |
| ||
|
|
|
|
|
| Percent/ |
| ||
(Dollars and shares in millions except per share amounts) |
|
|
|
|
| Margin |
| ||
For the three months ended September 30: |
| 2017 |
| 2016 |
| Change |
| ||
Revenue |
| $ | 19,153 |
| $ | 19,226 |
| (0.4 | )%* |
Gross profit margin |
| 45.9 | % | 46.9 | % | (0.9 | )pts. | ||
Total expense and other (income) |
| $ | 5,735 |
| $ | 5,751 |
| (0.3 | )% |
Total expense and other (income)-to-revenue ratio |
| 29.9 | % | 29.9 | % | 0.0 | pts. | ||
Income from continuing operations, before income taxes |
| $ | 3,065 |
| $ | 3,263 |
| (6.1 | )% |
Provision for income taxes from continuing operations |
| $ | 339 |
| $ | 409 |
| (17.1 | )% |
Income from continuing operations |
| $ | 2,726 |
| $ | 2,854 |
| (4.5 | )% |
Income from continuing operations margin |
| 14.2 | % | 14.8 | % | (0.6 | )pts. | ||
Loss from discontinued operations, net of tax |
| $ | 0 |
| $ | (1 | ) | (79.3 | )% |
Net income |
| $ | 2,726 |
| $ | 2,853 |
| (4.5 | )% |
Earnings per share from continuing operations: |
|
|
|
|
|
|
| ||
Assuming dilution |
| $ | 2.92 |
| $ | 2.98 |
| (2.0 | )% |
Basic |
| $ | 2.93 |
| $ | 2.99 |
| (2.0 | )% |
Consolidated earnings per share - assuming dilution |
| $ | 2.92 |
| $ | 2.98 |
| (2.0 | )% |
Weighted-average shares outstanding: |
|
|
|
|
|
|
| ||
Assuming dilution |
| 933.2 |
| 957.3 |
| (2.5 | )% | ||
Basic |
| 929.4 |
| 954.0 |
| (2.6 | )% | ||
| | | | | | | | | |
|
|
| |
|
| |
| Yr. to Yr. |
|
| | | | | | | | Percent/ |
|
(Dollars and shares in millions except per share amounts) | | | | | | | | Margin |
|
For the three months ended June 30: | | 2022 | | 2021 | | Change |
| ||
Revenue | | $ | 15,535 | | $ | 14,218 |
| 9.3 | %* |
Gross profit margin | |
| 53.4 | % |
| 55.2 | % | (1.9) | pts. |
Total expense and other (income) | | $ | 6,568 | | $ | 6,940 |
| (5.4) | % |
Income from continuing operations before income taxes | | $ | 1,722 | | $ | 912 |
| 88.8 | % |
Provision for income taxes from continuing operations | | $ | 257 | | $ | 101 |
| 153.2 | % |
Income from continuing operations | | $ | 1,465 | | $ | 810 |
| 80.8 | % |
Income from continuing operations margin | |
| 9.4 | % |
| 5.7 | % | 3.7 | pts. |
Income/(loss) from discontinued operations, net of tax | | $ | (73) | | $ | 515 | | nm | |
Net income | | $ | 1,392 | | $ | 1,325 |
| 5.1 | % |
Earnings per share from continuing operations - assuming dilution | | $ | 1.61 | | $ | 0.90 |
| 78.9 | % |
Consolidated earnings per share - assuming dilution | | $ | 1.53 | | $ | 1.47 | | 4.1 | % |
Weighted-average shares outstanding - assuming dilution | |
| 910.7 | |
| 904.2 |
| 0.7 | % |
* (1.0)15.6 percent adjusted for currency.
nm - not meaningful
Organization of Information:
On November 3, 2021, we completed the separation of our managed infrastructure services unit into a new public company with the distribution of 80.1 percent of the outstanding common stock of Kyndryl Holdings, Inc. (Kyndryl) to IBM stockholders on a pro rata basis. To affect the separation, IBM stockholders received one share of Kyndryl common stock for every five shares of IBM common stock held at the close of business on October 25, 2021, the record date for the distribution. IBM retained 19.9 percent of the shares of Kyndryl common stock immediately following the separation with the intent to dispose of such shares within twelve months after the distribution. The company accounts for the retained Kyndryl common stock as a fair value investment included within prepaid expenses and other current assets in the Consolidated Balance Sheet with subsequent fair value changes included in other (income) and expense in the Consolidated Income Statement. On May 23, 2022, the company transferred 22,301,536 (22.3 million) shares of Kyndryl common stock, equal to 9.95 percent or half of the company’s 19.9 percent retained interest, to a third-party financial institution pursuant to an exchange agreement. Refer to note 8, “Financial Assets & Liabilities,” for additional information.
The accounting requirements for reporting the separation of Kyndryl as a discontinued operation were met when the separation was completed. Accordingly, the historical results of Kyndryl are presented as discontinued operations and, as such, have been excluded from continuing operations and segment results for all periods presented. Consolidated diluted earnings per share includes the results of discontinued operations. Refer to note 3, “Separation of Kyndryl,” for additional information.
In October 2014,the first quarter of 2022, the company announcedrealigned its management structure to reflect the planned divestiture of its healthcare software assets which was completed in the second quarter of 2022. This change impacted the company’s Software segment and Other–divested businesses category. In the fourth quarter of 2021, immediately prior to the separation of Kyndryl, the company made a definitive agreementnumber of changes to divest its Microelectronics businessorganizational structure and manufacturing operations.management system.
53
Management Discussion – (continued)
These changes impacted the company’s reportable segments but did not impact the Consolidated Financial Statements. Refer to note 5, “Segments,” for additional information on the company’s reportable segments. The operating results of the Microelectronics businesssegments are reported on a comparable basis for all periods.
To provide useful decision-making information for management and shareholders, the company defines and measures hybrid cloud revenue as discontinued operations.end-to-end cloud capabilities within hybrid cloud environments, which includes technology (software and hardware), services and solutions to enable clients to implement cloud solutions across public, private and multi-clouds. The transaction closed on July 1, 2015.definition of hybrid cloud revenue is consistent with the prior methodology for cloud revenue historically presented. This spans across IBM’s Consulting, Software and Infrastructure segments. Examples include (but are not limited to) Red Hat Enterprise Linux (RHEL), Red Hat OpenShift, Cloud Paks, as-a-service offerings, service engagements related to cloud deployment of technology and applications, and infrastructure used in cloud deployments.
Within the 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. Certain prior-period amounts have been reclassified to conform to the current-period presentation. This is annotated where applicable.
Currency:
The references to “adjusted for currency” or “at constant currency” in the Management Discussion do not include operational impacts that could result from fluctuations in foreign currency rates. When the company referswe refer to growth rates at constant currency or adjustsadjust 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 yearprior-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. SeeRefer to “Currency Rate Fluctuations” on page 81 for additional information.
Management Discussion — (continued)
Operating (non-GAAP) Earnings:
In an effort to provide better transparency into the operational results of the business, the companysupplementally, management 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, discontinued operationscertain impacts from the Kyndryl separation 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), management 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 and any changes to regulations, laws, audit adjustments, etc. that affect the recorded one-time charge. Management also characterizes direct and incremental charges incurred related to the Kyndryl separation as non-operating given their unique and non-recurring nature. These charges primarily relate to any net unrealized gains or losses on the Kyndryl common stock and the related cash-settled swap with a third-party financial institution, which are recorded in other (income) and expense in the Consolidated Income Statement. The Kyndryl shares were retained by the company immediately following the separation, with the intent to dispose of such shares within twelve months after the distribution. 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, and tax charges related to acquisition integration.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 dependent onsignificantly 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. Throughout the Management Discussion, & Analysis, the impact of acquisitions over the prior 12-month12 month period may be a driver of higher expensesexpense year to year. For retirement-related costs, the companymanagement characterizes certain items as operating and others as non-operating. The company includes
54
Management Discussion – (continued)
non-operating, consistent with GAAP. We include defined benefit plan and nonpension postretirement benefit plan service cost, amortization of prior service costcosts, multi-employer plan costs and the cost of defined contribution plans in operating earnings. Non-operating retirement-related cost includescosts 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 multi-employer plan costs, 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 companymanagement 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 comparisonscomparison to peer companies; and allows the company to provide a long-term strategic view of the business going forward. The company’sIn addition, these non-GAAP measures provide a perspective consistent with areas of interest we routinely receive from investors and analysts. Our reportable segment financial results reflect pre-tax operating earnings from continuing operations, consistent with the company’sour management and measurement system.
The following table provides the company’s operating (non-GAAP) operating earnings for the thirdsecond quarter of 20172022 and 2016.2021.
|
|
|
|
|
| Yr. to Yr. |
| ||
(Dollars in millions except per share amounts) |
|
|
|
|
| Percent |
| ||
For the three months ended September 30: |
| 2017 |
| 2016 |
| Change |
| ||
Net income as reported |
| $ | 2,726 |
| $ | 2,853 |
| (4.5 | )% |
Loss from discontinued operations, net of tax |
| 0 |
| (1 | ) | (79.3 | ) | ||
Income from continuing operations |
| $ | 2,726 |
| $ | 2,854 |
| (4.5 | )% |
Non-operating adjustments (net of tax): |
|
|
|
|
|
|
| ||
Acquisition-related charges |
| 159 |
| 197 |
| (19.1 | ) | ||
Non-operating retirement-related costs/(income) |
| 193 |
| 99 |
| 96.1 |
| ||
Operating (non-GAAP) earnings* |
| $ | 3,079 |
| $ | 3,149 |
| (2.2 | )% |
Diluted operating (non-GAAP) earnings per share |
| $ | 3.30 |
| $ | 3.29 |
| 0.3 | % |
| | | | | | | | | |
|
|
| |
|
| |
| Yr. to Yr. |
|
(Dollars in millions except per share amounts) | | | | | | | | Percent |
|
For the three months ended June 30: | | 2022 | | 2021 | | Change |
| ||
Net income as reported | | $ | 1,392 | | $ | 1,325 |
| 5.1 | % |
Income/(loss) from discontinued operations, net of tax | |
| (73) | |
| 515 |
| nm | |
Income from continuing operations | | $ | 1,465 | | $ | 810 |
| 80.8 | % |
Non-operating adjustments (net of tax): | |
| | |
|
|
|
| |
Acquisition-related charges | | $ | 345 | | $ | 368 |
| (6.2) | % |
Non-operating retirement-related costs/(income) | | | 146 | | | 264 | | (44.8) | |
U.S. tax reform impacts | |
| 4 | |
| 14 |
| (70.4) | |
Kyndryl-related impacts | |
| 145 | |
| — |
| nm | |
Operating (non-GAAP) earnings* | | $ | 2,105 | | $ | 1,456 |
| 44.6 | % |
Diluted operating (non-GAAP) earnings per share* | | $ | 2.31 | | $ | 1.61 |
| 43.5 | % |
* SeeRefer to page 8591 for a more detailed reconciliation of net income to operating earnings.earnings and operating earnings per share.
nm - not meaningful
Macroeconomic Environment:
The geopolitical situation in Eastern Europe intensified in February 2022, with Russia’s invasion of Ukraine. The safety and security of our employees and their families in the impacted regions has been our primary focus. We have provided our employees with relocation assistance, financial support and other forms of direct engagement and IBM employees from around the world have mobilized and participated in multiple volunteer initiatives, showcasing the best of IBM values and culture.
The Russian war in Ukraine resulted in the U.S., UK, and the European Union member governments, among others, placing economic sanctions on numerous Russian entities, specific Russian-controlled entities, as well as Belarus. In March 2022, IBM announced the suspension of its business activities in Russia. As the uncertainty about the long-term ramifications of the war grew, in May 2022, IBM made the decision to carry out an orderly wind-down of its Russian operations. For the period ended June 30, 2022, we assessed certain accounting-related matters that generally require consideration of current information reasonably available to us and forecasted financial data in the context of unknown future impacts to IBM as a result of the wind-down. These assessments resulted in certain immaterial asset and restructuring charges for the quarter ended June 30, 2022. These charges, together with the year-to-year lost business due to the wind-down, impacted our pre-tax income by approximately $100 million for the three months ended June 30,
55
Management Discussion – (continued)
2022. The long-term impacts of the Russian war in Ukraine remain uncertain; however, we do not expect a significant impact on the company’s future results of operations or financial position. For full year 2021, Russia, Ukraine and Belarus made up less than one percent of the company’s full year revenue. While the revenue impact is not expected to be material to total consolidated IBM revenue for the full year 2022, the business in Russia has historically been high margin and therefore, will continue to be a headwind to our profit and cash flows.
In the third year of the COVID-19 pandemic, our priority continues to be the health of IBM employees, our clients, business partners and community. The pandemic has reinforced the need for clients to modernize their businesses to succeed in this new normal, with hybrid cloud and AI at the core of their digital transformations. The spending environment continues to be strong, and we remain focused on providing the technology and consulting services that our clients need to accelerate their digital organizations and emerge from the pandemic even stronger.
Financial Performance Summary — Three Months Ended SeptemberJune 30:
In the thirdsecond quarter of 2017, the company2022, we reported $19.2$15.5 billion in revenue, $2.7 billion in income from continuing operations and $3.1of $1.5 billion inand operating (non-GAAP) earnings resulting in dilutedof $2.1 billion. Diluted earnings per share from continuing operations of $2.92was $1.61 as reported and $3.30$2.31 on an operating (non-GAAP) basis. The companyOn a consolidated basis, we generated $3.6$1.3 billion in cash from operations and $2.5$2.1 billion in free cash flow in the third quarter of 2017 andflow. We delivered shareholder returns of $2.3$1.5 billion in gross common stock repurchasesdividends. These results reflect the investments, portfolio actions and dividends.operational changes we have made to execute our hybrid cloud and AI strategy and the strong demand for our solutions. Our balance sheet continues to provide us with the flexibility to support our business needs.
Total consolidated revenue decreased 0.4grew 9.3 percent as reported and 16 percent adjusted for currency compared to the prior-year period. This includes incremental sales to Kyndryl which contributed approximately 5 points to the revenue growth. Software delivered revenue growth of 6.4 percent as reported and 12 percent adjusted for currency, including approximately 7 points of growth from incremental sales to Kyndryl. Within Software, Hybrid Platform & Solutions increased 4.3 percent as reported and 9 percent adjusted for currency, with incremental sales to Kyndryl contributing approximately 1.5 points of this growth. There was solid performance across all business areas, led by continued strong double-digit growth in Red Hat. Transaction Processing grew 11.9 percent as reported and 19 percent adjusted for currency, including approximately 22 points of growth from incremental Kyndryl sales. Consulting revenue increased 9.8 percent as reported and 18 percent adjusted for currency, with strong growth across all three business lines and geographies. Infrastructure revenue increased 19.0 percent year to year as reported and 1.025 percent adjusted for currency inreflecting the third quartersolid execution around our new z16 program. The Infrastructure revenue performance also includes approximately 7 points of 2017, with sequential improvementgrowth from incremental sales to Kyndryl. Across the segments, total hybrid cloud revenue of 4.3 points as reported and 2.3 points adjusted for currency from the second-quarter year-to-year rates. The Cognitive Solutions segment and the Systems segment both had revenue growth year to year$5.9 billion in the third quarter as reported and adjusted for currency. The year-to-year effect of currency in the third quarter (0.6 points help) improved from the second quarter impact (1.4 points hurt).
Management Discussion — (continued)
The company is embedding cloud and cognitive capabilities across the business and the strategic imperatives are a signpost of the progress being made in helping enterprise clients extract value from data and become digital businesses. In the third quarter of 2017, the company continued to deliver solid revenue growth in its strategic imperatives - cloud, analytics, mobile, security and social, which together generated $8.8 billion of revenue and2022 grew 1118 percent as reported and 1024 percent adjusted for currency, with double-digit growth incurrency. Over the trailing 12 months, total hybrid cloud and security. Strategic imperatives growth in the third quarter largely represented organic growth as the acquisitive content has leveled on a year-to-year basis. Total Cloud revenue of $4.1was $21.7 billion, increased 20up 16 percent as reported and adjusted for currency, with as-a-Service revenue up 25 percent (24 percent adjusted for currency). The annual exit run rate for as-a-Service revenue increased to $9.4 billion in the third quarter of 2017 compared to $7.5 billion in the third quarter of 2016. Analytics revenue of $5.0 billion increased 5 percent both as reported and adjusted for currency. Mobile revenue increased 7 percent as reported and adjusted for currency and Security revenue increased 51 percent (49 percent adjusted for currency), driven by security software solutions and strong demand for the pervasive encryption capabilities in the new z14 mainframe.
From a segment perspective, in the third quarter, Cognitive Solutions revenue increased 3.9 percent as reported and 3 percent adjusted for currency with growth in Solutions Software and Transaction Processing Software as reported and adjusted for currency. Performance in the third quarter included growth in annuity revenue, including as-a-Service solutions, as well as growth in software transactional performance. Global Business Services (GBS) revenue decreased 2.3 percent as reported and 2 percent adjusted for currency, primarily driven by declines in both Application Management and Global Process Services, partially offset by growth in Consulting. The GBS business continued to shift resources and move into the high-value strategic areas of digital, cloud and analytics. GBS strategic imperatives revenue increased 10 percent (11(19 percent adjusted for currency) year to year. Technology Services & Cloud Platforms revenue decreased 3.3 percent as reported and 4 percent adjusted for currency, primarily driven by a decline in Infrastructure Services. However, within Technology Services & Cloud Platforms, strategic imperatives revenue was up 12 percent as reported and adjusted for currency year to year, driven by hybrid cloud services, security and mobile. Systems revenue increased 10.4 percent as reported and 10 percent adjusted for currency driven by strong contribution from the new z14 mainframe and continued growth in Storage Systems.
From a geographic perspective, Americas revenue decreased 2.0grew 14.3 percent (2 percent adjusted for currency) year to year with the U.S. down 2.6 percent and Latin America down 1.5 percent (2as reported (15 percent adjusted for currency). Canada was up 2.1 percent as reported, but down 2 percent adjusted for currency. Europe/Middle East/Africa (EMEA) revenue increased 2.44.9 percent as reported, but decreased 1 percent adjusted for currency, with growth in France, Germany and Spain and a decline in the UK. Asia Pacific revenue decreased 1.2 percent as reported, but increased 2 percent adjusted for currency. Within Asia Pacific, Japan decreased 4.0 percent as reported, but increased 4 percent adjusted for currency, and China increased 3.9 percent (4(17 percent adjusted for currency). Asia Pacific grew 3.1 percent (15 percent adjusted for currency).
The consolidated gross profitGross margin of 45.953.4 percent decreased 0.91.9 points year to year, however, gross profit dollars grew compared to the prior-year period driven by continued investments, mixstrong revenue performance in our high-value businesses. Overall, gross margin was impacted by escalating labor and component costs. These higher retirement-related costs partially offset by benefits from productivity. The operatingare being addressed through our pricing, however, it will take some time for these actions to be reflected in our margin profile. Operating (non-GAAP) gross margin of 47.654.5 percent decreased 0.42.0 points compared to the prior year driven primarily by the same factors, excluding the impact of higher non-operating retirement-related costs. The consolidated gross margin and the operating (non-GAAP) gross margin both improved 0.4 points compared to the second-quarter 2017 gross margins.for similar reasons.
Total expense and other (income) decreased 0.35.4 percent in the thirdsecond quarter of 2017 compared2022 versus the prior-year period primarily driven by the effects of currency, a gain from the divestiture of our healthcare software assets, lower non-operating retirement-related costs and benefits from the actions taken to streamline operations and simplify our go-to-market model. This was partially offset by impacts related to the prior year. The year-to-year decrease was primarily the result of lower operationalKyndryl retained shares and higher spending (4 points), largely offset by lower intellectual property income (4 points)reflecting our continuing investment in innovation, talent and spending related to acquisitions completed in the prior 12 months. The expense dynamics reflect continued efficiency in the underlying spending offset by continued investment to build and reinvent new solutions and platforms.our ecosystem. Total operating (non-GAAP) expense and other
56
Management Discussion – (continued)
(income) decreased 0.86.0 percent year to year, driven primarily by the same factors.factors described above excluding the lower non-operating retirement-related costs and the impacts related to the Kyndryl retained shares.
Pre-tax income from continuing operations of $3.1$1.7 billion in the third quarter of 2017 decreased 6.1increased 88.8 percent year to year and the pre-tax margin was 16.011.1 percent, an increase of 4.7 points versus the second quarter of 2021. Our pre-tax income includes a decreasegain from the sale of 1.0 points comparedour healthcare software assets of $232 million, which was partially offset by charges from stranded costs associated with the divestiture and losses related to the third quarterhealth business of 2016.approximately $75 million. In addition, the orderly wind-down of our Russian operations also had an impact on our pre-tax income in the current-year period. The continuing operations effective tax rateprovision for income taxes in the thirdsecond quarter of 20172022 was 11.0 percent, a decrease of 1.5 points$257 million compared to $101 million in the thirdsecond quarter of 2016,2021. The current-year and prior-year tax provisions were driven by an increasemany factors including the impacts of the geographical mix of income, incentives and changes in foreignunrecognized tax credits, partially offset by a benefit related to tax audit activity in the prior year period. Incomebenefits. Net income from continuing operations of $2.7$1.5 billion decreased 4.5increased 80.8 percent and the net income from continuing operations margin was 14.29.4 percent, a decrease of 0.6 points. Losses from discontinued operations, net of tax, were $0.2 million in the third quarter of 2017 and $1.0 million in the third quarter of 2016. Net income of $2.7 billion decreased 4.5 percentup 3.7 points year to year.
Operating (non-GAAP) pre-tax income from continuing operations of $3.6 billion decreased 1.7 percent year to year. Operating (non-GAAP) pre-tax margin from continuing operations decreased 0.2 points to 18.8 percent. Operating (non-GAAP) income from continuing operations of $3.1 billion decreased 2.2 percent and the operating (non-GAAP) income
Management Discussion — (continued)
margin from continuing operations of 16.1 percent decreased 0.3 points. The operating (non-GAAP) effective tax rate from continuing operations in the third quarter of 2017 was 14.7 percent versus 14.2 percent in the prior year.
Diluted earnings per share from continuing operations of $2.92 in the third quarter of 2017 decreased 2.0 percent year to year. In the third quarter of 2017, the company repurchased 6.6 million shares of its common stock at a cost of $0.9 billion and had $1.5 billion remaining in the share repurchase authorization at September 30, 2017. Operating (non-GAAP) diluted earnings per share of $3.30 increased 0.3 percent versus the third quarter of 2016.
The company generated $3.6 billion in cash flow from operating activities in the third quarter of 2017, a decrease of $0.5 billion compared to the third quarter of 2016. Net cash used in investing activities of $1.9 billion was $1.0 billion higher than the prior year, primarily driven by a reduction in cash sourced from non-operating finance receivables ($0.4 billion) and an increase in cash used from net purchases of marketable securities and other investments ($0.4 billion). Net cash used in financing activities of $2.8 billion decreased $1.4 billion compared to the prior year, primarily driven by higher net debt issuances ($1.6 billion).
In January 2017, the company disclosed that it expected GAAP earnings per share from continuing operations of at least $11.95 and operating (non-GAAP) earnings of at least $13.80 per diluted share for 2017. The company also disclosed that it expected 2017 free cash flow to be consistent with 2016. Refer to page 82 in the Liquidity and Capital Resources section for additional information on this non-GAAP measure. In October 2017, the company disclosed that it continues to maintain these expectations. Refer to the Looking Forward section on pages 80 and 81 for additional information on the company’s expectations.
Financial Results Summary - Nine Months Ended September 30:
|
|
|
|
|
| Yr. to Yr. |
| ||
|
|
|
|
|
| Percent/ |
| ||
(Dollars and shares in millions except per share amounts) |
|
|
|
|
| Margin |
| ||
For the nine months ended September 30: |
| 2017 |
| 2016 |
| Change |
| ||
Revenue |
| $ | 56,597 |
| $ | 58,149 |
| (2.7 | )%* |
Gross profit margin |
| 44.8 | % | 47.1 | % | (2.3 | )pts. | ||
Total expense and other (income) |
| $ | 18,434 |
| $ | 20,056 |
| (8.1 | )% |
Total expense and other (income)-to-revenue ratio |
| 32.6 | % | 34.5 | % | (1.9 | )pts. | ||
Income from continuing operations, before income taxes |
| $ | 6,931 |
| $ | 7,345 |
| (5.6 | )% |
Provision for/(benefit from) income taxes from continuing operations |
| $ | 120 |
| $ | (31 | ) | nm | % |
Income from continuing operations |
| $ | 6,811 |
| $ | 7,375 |
| (7.7 | )% |
Income from continuing operations margin |
| 12.0 | % | 12.7 | % | (0.6 | )pts. | ||
Loss from discontinued operations, net of tax |
| $ | (3 | ) | $ | (4 | ) | (17.5 | )% |
Net income |
| $ | 6,807 |
| $ | 7,371 |
| (7.6 | )% |
Earnings per share from continuing operations: |
|
|
|
|
|
|
| ||
Assuming dilution |
| $ | 7.24 |
| $ | 7.67 |
| (5.6 | )% |
Basic |
| $ | 7.28 |
| $ | 7.70 |
| (5.5 | )% |
Consolidated earnings per share - assuming dilution |
| $ | 7.24 |
| $ | 7.67 |
| (5.6 | )% |
Weighted-average shares outstanding: |
|
|
|
|
|
|
| ||
Assuming dilution |
| 940.2 |
| 960.7 |
| (2.1 | )% | ||
Basic |
| 935.6 |
| 957.7 |
| (2.3 | )% | ||
|
|
|
|
|
|
|
| ||
|
| 9/30/17 |
| 12/31/16 |
|
|
| ||
Assets |
| $ | 121,636 |
| $ | 117,470 |
| 3.5 | % |
Liabilities |
| $ | 101,879 |
| $ | 99,078 |
| 2.8 | % |
Equity |
| $ | 19,757 |
| $ | 18,392 |
| 7.4 | % |
* (2.2) percent adjusted for currency
nm - not meaningful
The following table provides the company’s (non-GAAP) operating earnings for the first nine months of 2017 and 2016.
Management Discussion — (continued)
|
|
|
|
|
| Yr. to Yr. |
| ||
(Dollars in millions except per share amounts) |
|
|
|
|
| Percent |
| ||
For the nine months ended September 30: |
| 2017 |
| 2016 |
| Change |
| ||
Net income as reported |
| $ | 6,807 |
| $ | 7,371 |
| (7.6 | )% |
Loss from discontinued operations, net of tax |
| (3 | ) | (4 | ) | (17.5 | ) | ||
Income from continuing operations |
| $ | 6,811 |
| $ | 7,375 |
| (7.7 | )% |
Non-operating adjustments (net of tax): |
|
|
|
|
|
|
| ||
Acquisition-related charges |
| 537 |
| 542 |
| (0.7 | ) | ||
Non-operating retirement-related costs/(income) |
| 777 |
| 338 |
| 129.9 |
| ||
Operating (non-GAAP) earnings* |
| $ | 8,125 |
| $ | 8,255 |
| (1.6 | )% |
Diluted operating (non-GAAP) earnings per share |
| $ | 8.64 |
| $ | 8.59 |
| 0.6 | % |
* See page 86 for a more detailed reconciliation of net income to operating earnings.
Financial Performance Summary — Nine Months Ended September 30:
In the first nine months of 2017, the company reported $56.6 billion in revenue, and delivered $6.8 billion in income from continuing operations, resulting in diluted earnings per share from continuing operations of $7.24 as reported and $8.64 on an operating (non-GAAP) basis. The company generated $11.0 billion in cash from operations and $6.2 billion in free cash flow in the first nine months of 2017 and shareholder returns of $7.8 billion in gross common stock repurchases and dividends.
Total consolidated revenue decreased 2.7 percent year to year as reported and 2.2 percent adjusted for currency in the first nine months of 2017.
In the first nine months of 2017, the company’s strategic imperatives revenue grew 9 percent year to year as reported and 10 percent adjusted for currency. Total Cloud revenue of $11.6 billion was up 22 percent year to year as reported and 23 percent adjusted for currency, with as-a-Service revenue up 36 percent (37 percent adjusted for currency). Analytics revenue of $14.5$2.5 billion increased 547.9 percent as reported and 6 percent adjusted for currency. Mobile revenue was up 17 percent year to year (19 percent adjusted for currency) and Security revenue increased 21 percent as reported and adjusted for currency.
From a segment perspective, for the first nine months, Cognitive Solutions revenue increased 1.0 percent as reported and 1 percent adjusted for currency. On an as reported and adjusted for currency basis, Solutions Software increased year to year, while Transaction Processing Software declined. GBS revenue decreased 3.0 percent as reported and 2 percent adjusted for currency with declines in Application Management , Consulting and Global Process Services. GBS strategic imperatives revenue increased 10 percent (11 percent adjusted for currency) year to year. Technology Services & Cloud Platforms revenue decreased 3.7 percent as reported and 3 percent adjusted for currency, primarily driven by Infrastructure Services which declined 4.4 percent (4 percent adjusted for currency). Technology Services & Cloud Platforms strategic imperatives revenue was up 20 percent (21 percent adjusted for currency) year to year, led by hybrid cloud services. Systems revenue decreased 6.2 percent as reported (6 percent adjusted for currency) with declines in z Systems and Power Systems, both due to product refresh cycle dynamics, partially offset by growth in Storage Systems.
From a geographic perspective, Americas revenue decreased 1.8 percent (2 percent adjusted for currency) year to year with the U.S. down 3.0 percent, partially offset by growth in Latin America (4.5 percent as reported, 1 percent adjusted for currency). EMEA revenue decreased 4.7 percent (3 percent adjusted for currency) driven primarily by declines in the UK and Germany. Asia Pacific revenue decreased 1.9 percent (1 percent adjusted for currency), with Japan down 1.8 percent as reported, but up 2 percent adjusted for currency.
The consolidated gross margin of 44.8 percent decreased 2.3 points year to year and reflects investments, mix and higher retirement-related costs, partially offset by benefits from productivity. The operating (non-GAAP) gross margin of 46.5 percent decreased 1.7 points versus the prior year primarily driven by the same factors, excluding the impact of higher non-operational retirement-related costs.
Total expense and other (income) decreased $1.6 billion or 8.1 percent in the first nine months of 2017 compared to the prior year. The year-to-year decrease was primarily the result of continued focus on efficiency in spending and reduced expenses for workforce transformation. This included a lower level of workforce rebalancing charges (4 points), a prior-year charge for real estate actions (2 points) and lower operational spending (2 points). In addition, the effects of currency (1 point) contributed to the year-to-year decline. The year-to-year decrease in expense and other (income) was partially offset by
Management Discussion — (continued)
spending related to acquisitions (2 points) completed in the prior 12 months. Total operating (non-GAAP) expense and other (income) decreased 9.9 percent year to year, driven primarily by the same factors.
Pre-tax income from continuing operations of $6.9 billion decreased 5.6 percent and the pre-tax margin was 12.2 percent, a decrease of 0.4 points versus the first nine months of 2016. The continuing operations effective tax rate for the first nine months of 2017 was 1.7 percent compared to (0.4) percent in the prior year. The tax rate in the first nine months of 2017 benefitted from discrete tax items, including the first-quarter intra-entity transfer of assets ($0.6 billion) and certain second-quarter discrete items. The prior year negative tax rate was primarily the result of a refund ($1.2 billion) of previously paid non-U.S. taxes plus interest in the first quarter of 2016. Income from continuing operations of $6.8 billion decreased 7.7 percent and the net income margin was 12.0 percent, a decrease of 0.6 points compared to the first nine months of 2016. Losses from discontinued operations, net of tax, were $3.5 million in the first nine months of 2017 and $4.2 million in the prior-year period. Net income of $6.8 billion decreased 7.6 percent year to year. Operating (non-GAAP) pre-tax income from continuing operations of $8.7 billion increased 2.5 percent year to year and the operating (non-GAAP) pre-tax margin from continuing operations increased 0.84.2 points to 15.516.2 percent. The operating (non-GAAP) income tax provision for the second quarter of 2022 was $413 million, compared to $246 million in the second quarter of 2021. The current-year and prior-year tax provisions were driven by the same factors described above. Operating (non-GAAP) income from continuing operations of $8.1$2.1 billion decreased 1.6increased 44.6 percent and the operating (non-GAAP) income margin from continuing operations of 14.413.5 percent increased 0.2 points. The operating (non-GAAP) effective tax rate from continuing operations in the first nine months of 2017 was 7.1 percent versus 3.2 percent in the first nine months of 2016.up 3.3 points year to year.
Diluted earnings per share from continuing operations of $7.24 decreased 5.6 percent year to year. In the first nine months of 2017, the company repurchased 22.9 million shares of its common stock and had $1.5 billion remainingwas $1.61 in the current share repurchase authorization at September 30, 2017. Operatingsecond quarter of 2022 compared to $0.90 in the prior year, an increase of 78.9 percent and operating (non-GAAP) diluted earnings per share of $8.64$2.31 increased 0.643.5 percent versus the prior-year period.
Consolidated diluted earnings per share in the second quarter of 2022 was $1.53 compared to $1.47 in the prior-year period. This includes a year-to-year reduction of $0.65 from discontinued operations due to the separation of Kyndryl.
Our cash flows from operating, investing and financing activities, as reflected in the Consolidated Statement of Cash Flows, include the cash flows of discontinued operations. On a consolidated basis, cash provided by operating activities was $1.3 billion in the second quarter of 2022, a decrease of $1.3 billion compared to the second quarter of 2021, primarily driven by a decrease in cash provided by financing receivables. Investing activities were a net source of cash of $0.2 billion in the current quarter, compared to a net use of cash of $2.7 billion in the prior-year period, with the year-to-year change primarily driven by a decrease in net cash used in acquisitions and an increase in cash provided by divestitures. Net cash used in financing activities of $4.2 billion in the second quarter of 2022 increased $1.1 billion compared to the prior-year period.
57
Management Discussion – (continued)
Financial Results Summary —Six Months Ended June 30:
| | | | | | | | | |
|
|
| |
|
| |
| Yr. to Yr. |
|
| | | | | | | | Percent/ |
|
(Dollars and shares in millions except per share amounts) | | | | | | | | Margin |
|
For the six months ended June 30: | | 2022 | | 2021 | | Change |
| ||
Revenue | | $ | 29,732 | | $ | 27,405 |
| 8.5 | %* |
Gross profit margin | |
| 52.6 | % |
| 54.3 | % | (1.7) | pts. |
Total expense and other (income) | | $ | 13,280 | | $ | 13,724 |
| (3.2) | % |
Income from continuing operations before income taxes | | $ | 2,345 | | $ | 1,155 |
| 103.0 | % |
Provision for/(benefit from) income taxes from continuing operations | | $ | 218 | | $ | (58) |
| nm | |
Income from continuing operations | | $ | 2,127 | | $ | 1,213 |
| 75.3 | % |
Income from continuing operations margin | |
| 7.2 | % |
| 4.4 | % | 2.7 | pts. |
Income/(loss) from discontinued operations, net of tax | | $ | (2) | | $ | 1,067 | | nm | |
Net income | | $ | 2,125 | | $ | 2,280 |
| (6.8) | % |
Earnings per share from continuing operations - assuming dilution | | $ | 2.34 | | $ | 1.34 |
| 74.6 | % |
Consolidated earnings per share - assuming dilution | | $ | 2.34 | | $ | 2.52 | | (7.1) | % |
Weighted-average shares outstanding - assuming dilution | |
| 910.0 | |
| 903.0 |
| 0.8 | % |
| | | | | | | | | |
| | At 6/30/2022 | | At 12/31/2021 | | | | ||
Assets | | $ | 127,503 | | $ | 132,001 |
| (3.4) | % |
Liabilities | | $ | 108,026 | | $ | 113,005 |
| (4.4) | % |
Equity | | $ | 19,476 | | $ | 18,996 |
| 2.5 | % |
* 13.3 percent adjusted for currency.
nm - not meaningful
The following table provides the company’s operating (non-GAAP) earnings for the first six months of 2022 and 2021.
| | | | | | | | | |
|
|
| |
|
| |
| Yr. to Yr. |
|
(Dollars in millions except per share amounts) | |
| | |
| | | Percent |
|
For the six months ended June 30: | | 2022 | | 2021 | | Change |
| ||
Net income as reported | | $ | 2,125 | | $ | 2,280 |
| (6.8) | % |
Income/(loss) from discontinued operations, net of tax | |
| (2) | |
| 1,067 |
| nm | |
Income from continuing operations | | $ | 2,127 | | $ | 1,213 |
| 75.3 | % |
Non-operating adjustments (net of tax): | |
| | |
|
|
|
| |
Acquisition-related charges | | $ | 704 | | $ | 699 |
| 0.8 | % |
Non-operating retirement-related costs/(income) | | | 290 | | | 563 | | (48.5) | |
U.S. tax reform impacts | |
| (112) | |
| (6) |
| nm | |
Kyndryl-related impacts | |
| 367 | |
| — |
| nm | |
Operating (non-GAAP) earnings* | | $ | 3,376 | | $ | 2,469 |
| 36.7 | % |
Diluted operating (non-GAAP) earnings per share* | | $ | 3.71 | | $ | 2.73 |
| 35.9 | % |
* Refer to page 92 for a more detailed reconciliation of net income to operating earnings and operating earnings per share.
nm - not meaningful
Financial Performance Summary —Six Months Ended June 30:
In the first six months of 2022, we reported $29.7 billion in revenue, income from continuing operations of $2.1 billion and operating (non-GAAP) earnings of $3.4 billion. Diluted earnings per share from continuing operations was $2.34 as reported and $3.71 on an operating (non-GAAP) basis. On a consolidated basis, we generated $4.6 billion in cash from operations and $3.3 billion in free cash flow. We delivered shareholder returns of $3.0 billion in dividends.
58
Management Discussion – (continued)
Total revenue grew 8.5 percent as reported and 13 percent adjusted for currency compared to the prior-year period. This includes incremental sales to Kyndryl which contributed 5 points to the revenue growth. Software delivered revenue growth of 9.2 percent as reported and 13 percent adjusted for currency, with growth in both Hybrid Platform & Solutions and Transaction Processing. The Software revenue performance includes approximately 8 points of growth from incremental sales to Kyndryl. Consulting revenue increased 11.5 percent as reported and 18 percent adjusted for currency, with growth across all three business areas. Infrastructure revenue increased 8.8 percent year to year as reported and 13 percent adjusted for currency, with approximately 8 points of growth from incremental sales to Kyndryl.
From a geographic perspective, Americas revenue grew 11.8 percent year to year as reported (12 percent adjusted for currency). EMEA increased 6.3 percent (16 percent adjusted for currency). Asia Pacific grew 3.9 percent (13 percent adjusted for currency).
Gross margin of 52.6 percent decreased 1.7 points year to year, however, gross profit dollars grew compared to the prior-year period. Overall, gross margin was impacted by the significant investments we are making to drive our hybrid cloud and AI strategy and by higher labor and component costs. Operating (non-GAAP) gross margin of 53.8 percent decreased 1.8 points versus the prior year for similar reasons.
Total expense and other (income) decreased 3.2 percent in the first six months of 2022 versus the prior-year period primarily driven by the effects of currency, a gain from the divestiture of our healthcare software assets, lower non-operating retirement-related costs, benefits from the actions taken to streamline operations and simplify our go-to-market model and lower spending for shared services transferred to Kyndryl. This was partially offset by impacts related to the Kyndryl retained shares and higher spending reflecting our continuing investment in innovation, our ecosystem and talent. Total operating (non-GAAP) expense and other (income) decreased 4.3 percent year to year, driven primarily by the factors described above excluding the lower non-operating retirement-related costs and the impacts related to the Kyndryl retained shares.
Pre-tax income from continuing operations of $2.3 billion increased 103.0 percent and pre-tax margin was 7.9 percent, an increase of 3.7 points versus the first six months of 2021. The continuing operations provision for income taxes in the first six months of 2022 was $218 million, compared to a benefit from income taxes of $58 million in the first six months of 2021. The increase in the continuing operations tax provision in the first six months of 2022 compared to the prior year was primarily driven by tax impacts from the resolution of certain tax audits in the first quarter of 2021. Net income from continuing operations of $2.1 billion increased 75.3 percent and the net income from continuing operations margin was 7.2 percent, up 2.7 points year to year.
At September 30, 2017,Operating (non-GAAP) pre-tax income from continuing operations of $4.0 billion increased 47.2 percent and the operating (non-GAAP) pre-tax margin from continuing operations increased 3.6 points to 13.6 percent. The operating (non-GAAP) provision for income taxes was $657 million in the first six months of 2022, compared to $272 million in the first six months of 2021. The increase in the operating (non-GAAP) income tax provision in the first six months of 2022 compared to the prior year was primarily driven by the same factor described above. Operating (non-GAAP) income from continuing operations of $3.4 billion increased 36.7 percent and the operating (non-GAAP) income margin from continuing operations of 11.4 percent was up 2.3 points year to year.
Diluted earnings per share from continuing operations was $2.34 in the first six months of 2022 compared to $1.34 in the prior year, an increase of 74.6 percent and operating (non-GAAP) diluted earnings per share of $3.71 increased 35.9 percent versus the prior-year period.
Consolidated diluted earnings per share in the first six months of 2022 was $2.34 compared to $2.52 in the prior-year period. This includes a year-to-year reduction of $1.18 from discontinued operations due to the separation of Kyndryl.
59
Management Discussion – (continued)
Our balance sheet remains strong, andat June 30, 2022 continues to provide us with the newly reorganized financing entity, IBM Credit LLC, the company is better positionedflexibility to support the business over the long term.business. Cash and cash equivalents, restricted cash and marketable securities at quarter endJune 30, 2022 were $11.5$7.8 billion, an increase of $3.0$0.2 billion from December 31, 2016. 2021. Total debt of $50.3 billion at June 30, 2022 decreased $1.4 billion primarily driven by currency impacts.
Key drivers in the balance sheet and total cash flows were:
Total assets increased $4.2decreased $4.5 billion (decreased $0.4($1.0 billion adjusted for currency) from December 31, 20162021 driven by:
| ● | A decrease in receivables of $1.9 billion ($1.0 billion adjusted for currency) primarily due to collections of higher year-end balances; |
| ● | A decrease in goodwill and net intangible assets of $1.5 billion ($0.4 billion adjusted for currency) primarily driven by currency impacts, intangibles amortization and derecognition of goodwill and intangible assets of $0.6 billion related to the divestiture of our healthcare software assets; and |
| ● | A decrease in net property, plant and equipment and operating right-of-use assets of $0.8 billion ($0.5 billion adjusted for currency); partially offset by |
| ● | An increase in cash and cash equivalents, restricted cash and marketable securities of $0.2 billion ($0.6 billion adjusted for currency). |
· Increases in cash and marketable securities ($3.0 billion), deferred taxes ($2.1 billion), retirement plan assets ($1.5 billion) and goodwill ($0.6 billion); partially offset by
· Decreases in total receivables ($2.7 billion) and intangible assets ($0.7 billion).
Total liabilities increased $2.8decreased $5.0 billion (decreased $1.5($0.6 billion adjusted for currency) from December 31, 20162021 driven by:
| ● | A decrease in total debt of $1.4 billion ($0.1 billion adjusted for currency) primarily driven by maturities and currency impacts, partially offset by issuances; |
| ● | A decrease in retirement and nonpension postretirement benefit obligations of $1.3 billion ($0.6 billion adjusted for currency); and |
| ● | A decrease in taxes payable of $0.5 billion ($0.4 billion adjusted for currency) primarily due to indirect tax payments. |
· Increases in total debt ($3.5 billion); partially offset by
· Decreases in accounts payable ($0.8 billion).
Total equity of $19.8$19.5 billion increased $1.4$0.5 billion from December 31, 20162021 as a result of:
· Increases from net income ($6.8 billion), retirement-related ($1.4 billion) and equity translation adjustments ($0.8 billion); partially offset by
· Decreases from dividends ($4.1 billion) and share repurchases ($3.7 billion).
The company generated $11.0 billion
| ● | Net income of $2.1 billion; |
| ● | A decrease in accumulated other comprehensive losses of $1.1 billion driven by retirement-related benefit plans, cash flow hedges and foreign currency translation adjustments; and |
| ● | Common stock of $0.4 billion; partially offset by |
| ● | Dividends paid of $3.0 billion. |
Our cash flows from operating, investing and financing activities, as reflected in the Consolidated Statement of Cash Flows, include the cash flows of discontinued operations. On a consolidated basis, cash provided by operating activities was $4.6 billion in the first six months of 2022, a decrease of $2.1$3.0 billion compared to the first ninesix months of 2016,2021, primarily driven primarily by the prior-year tax refund and a decrease in cash provided by financing receivables. Net cash used in investing activities of $3.3$1.2 billion was $4.0 billion lower than the prior year, primarily driven by a decrease in cash used for acquisitions ($5.0 billion). Net cash used in financing activities of $5.5 billion increased $0.9decreased $3.5 billion compared to the prior-year period. Financing activities were a net use of cash of $2.8 billion in the first ninesix months of 2016, driven primarily by increased gross common share repurchases ($1.0 billion).2022 compared to $8.9 billion in the first six months of 2021.
60
Management Discussion – (continued)
Management Discussion — (continued)Second
Third Quarter and First NineSix Months in Review
Results of Continuing Operations
As discussed in the “Organization of Information” section, with the completion of the separation on November 3, 2021, results of Kyndryl are reported as discontinued operations. Prior periods have been reclassified to conform to this presentation in the Management Discussion to allow for a meaningful comparison of continuing operations.
Segment Details
The following istables present each reportable segment’s revenue and gross margin results, followed by an analysis of the thirdsecond quarter and first ninesix months of 20172022 versus the thirdsecond quarter and first ninesix months of 20162021 reportable segment external revenue and gross marginsegments results. Segment pre-tax income includes transactions betweenPrior-year results have been recast to conform with the segments that are intendedchanges as described in the “Organization of Information” section.
| | | | | | | | | | | |
|
|
| |
|
| |
|
|
| Yr. to Yr. |
|
| | | | | | | | | | Percent |
|
| | | | | | | | Yr. to Yr. | | Change |
|
(Dollars in millions) | |
| | |
| | | Percent/Margin | | Adjusted For |
|
For the three months ended June 30: | | 2022 | | 2021* | | Change | | Currency |
| ||
Revenue: |
| |
|
| |
|
|
|
|
| |
Software | | $ | 6,166 | | $ | 5,795 | | 6.4 | % | 11.6 | % |
Gross margin | |
| 79.2 | % |
| 79.7 | % | (0.5) | pts. |
| |
Consulting | |
| 4,809 | |
| 4,378 | | 9.8 | % | 17.8 | % |
Gross margin | |
| 24.2 | % |
| 27.6 | % | (3.4) | pts. |
| |
Infrastructure | |
| 4,235 | |
| 3,560 |
| 19.0 | % | 25.4 | % |
Gross margin | |
| 53.8 | % |
| 57.1 | % | (3.3) | pts. |
| |
Financing | |
| 146 | |
| 209 |
| (29.9) | % | (26.6) | % |
Gross margin | |
| 35.3 | % |
| 29.9 | % | 5.3 | pts. |
| |
Other | |
| 180 | |
| 277 | | (34.9) | % | (31.1) | % |
Gross margin | |
| (49.3) | % |
| (25.2) | % | (24.1) | pts. |
| |
Total revenue | | $ | 15,535 | | $ | 14,218 |
| 9.3 | % | 15.6 | % |
Total gross profit | | $ | 8,290 | | $ | 7,852 |
| 5.6 | % |
| |
Total gross margin | |
| 53.4 | % |
| 55.2 | % | (1.9) | pts. |
| |
Non-operating adjustments: | |
|
| |
|
|
|
|
|
| |
Amortization of acquired intangible assets | | | 180 | |
| 179 |
| 0.6 | % |
| |
Operating (non-GAAP) gross profit | | $ | 8,470 | | $ | 8,031 |
| 5.5 | % |
| |
Operating (non-GAAP) gross margin | |
| 54.5 | % |
| 56.5 | % | (2.0) | pts. |
| |
* Recast to reflect an arm’s-length transfer price and excludes certain unallocated corporate items.segment changes.
61
|
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|
|
|
| Yr. to Yr. |
| ||
|
|
|
|
|
|
|
| Percent |
| ||
|
|
|
|
|
| Yr. to Yr. |
| Change |
| ||
(Dollars in millions) |
|
|
|
|
| Percent/Margin |
| Adjusted For |
| ||
For the three months ended September 30: |
| 2017 |
| 2016 |
| Change |
| Currency |
| ||
Revenue: |
|
|
|
|
|
|
|
|
| ||
Cognitive Solutions |
| $ | 4,400 |
| $ | 4,235 |
| 3.9 | % | 3.0 | % |
Gross margin |
| 78.7 | % | 80.4 | % | (1.7 | )pts. |
|
| ||
Global Business Services |
| 4,093 |
| 4,191 |
| (2.3 | )% | (2.2 | )% | ||
Gross margin |
| 27.3 | % | 28.8 | % | (1.5 | )pts. |
|
| ||
Technology Services & Cloud Platforms |
| 8,457 |
| 8,748 |
| (3.3 | )% | (4.1 | )% | ||
Gross margin |
| 41.1 | % | 42.0 | % | (1.0 | )pts. |
|
| ||
Systems |
| 1,721 |
| 1,558 |
| 10.4 | % | 9.6 | % | ||
Gross margin |
| 53.6 | % | 51.1 | % | 2.6 | pts. |
|
| ||
Global Financing |
| 427 |
| 412 |
| 3.7 | % | 2.8 | % | ||
Gross margin |
| 25.2 | % | 37.8 | % | (12.6 | )pts. |
|
| ||
Other |
| 56 |
| 81 |
| (31.8 | )% | (32.8 | )% | ||
Gross margin |
| (511.4 | )% | (279.2 | )% | (232.2 | )pts. |
|
| ||
Total consolidated revenue |
| $ | 19,153 |
| $ | 19,226 |
| (0.4 | )% | (1.0 | )% |
Total consolidated gross profit |
| $ | 8,800 |
| $ | 9,013 |
| (2.4 | )% |
|
|
Total consolidated gross margin |
| 45.9 | % | 46.9 | % | (0.9 | )pts. |
|
| ||
Non-operating adjustments: |
|
|
|
|
|
|
|
|
| ||
Amortization of acquired intangible assets |
| 114 |
| 129 |
| (12.2 | )% |
|
| ||
Retirement-related costs/(income) |
| 203 |
| 79 |
| 158.7 | % |
|
| ||
Operating (non-GAAP) gross profit |
| $ | 9,116 |
| $ | 9,221 |
| (1.1 | )% |
|
|
Operating (non-GAAP) gross margin |
| 47.6 | % | 48.0 | % | (0.4 | )pts. |
|
| ||
Management Discussion —– (continued)
| | | | | | | | | | | |
|
|
| |
|
| |
|
|
| Yr. to Yr. |
|
| | | | | | | | | | Percent |
|
| | | | | | | | Yr. to Yr. | | Change |
|
(Dollars in millions) | |
| | |
| | | Percent/Margin | | Adjusted For |
|
For the six months ended June 30: | | 2022 | | 2021* | | Change | | Currency |
| ||
Revenue: |
| |
|
| |
|
|
|
|
| |
Software | | $ | 11,938 | | $ | 10,933 | | 9.2 | % | 13.4 | % |
Gross margin | |
| 79.0 | % |
| 78.8 | % | 0.3 | pts. |
| |
Consulting | |
| 9,637 | |
| 8,641 | | 11.5 | % | 17.6 | % |
Gross margin | |
| 24.3 | % |
| 27.7 | % | (3.5) | pts. |
| |
Infrastructure | |
| 7,453 | |
| 6,853 |
| 8.8 | % | 13.4 | % |
Gross margin | |
| 52.4 | % |
| 56.7 | % | (4.4) | pts. |
| |
Financing | |
| 300 | |
| 417 |
| (28.0) | % | (25.5) | % |
Gross margin | |
| 36.5 | % |
| 32.7 | % | 3.8 | pts. |
| |
Other | |
| 404 | |
| 561 | | (28.0) | % | (25.0) | % |
Gross margin | |
| (40.2) | % |
| (27.4) | % | (12.8) | pts. |
| |
Total revenue | | $ | 29,732 | | $ | 27,405 |
| 8.5 | % | 13.3 | % |
Total gross profit | | $ | 15,625 | | $ | 14,879 |
| 5.0 | % |
| |
Total gross margin | |
| 52.6 | % |
| 54.3 | % | (1.7) | pts. |
| |
Non-operating adjustments: | |
|
| |
|
|
|
|
|
| |
Amortization of acquired intangible assets | |
| 361 | |
| 353 |
| 2.3 | % |
| |
Operating (non-GAAP) gross profit | | $ | 15,986 | | $ | 15,232 |
| 5.0 | % |
| |
Operating (non-GAAP) gross margin | |
| 53.8 | % |
| 55.6 | % | (1.8) | pts. |
| |
|
|
|
|
|
|
|
| Yr. to Yr. |
| ||
|
|
|
|
|
|
|
| Percent |
| ||
|
|
|
|
|
| Yr. to Yr. |
| Change |
| ||
(Dollars in millions) |
|
|
|
|
| Percent/Margin |
| Adjusted For |
| ||
For the nine months ended September 30: |
| 2017 |
| 2016 |
| Change |
| Currency |
| ||
Revenue: |
|
|
|
|
|
|
|
|
| ||
Cognitive Solutions |
| $ | 13,021 |
| $ | 12,889 |
| 1.0 | % | 1.3 | % |
Gross margin |
| 78.4 | % | 81.5 | % | (3.1 | )pts. |
|
| ||
Global Business Services |
| 12,196 |
| 12,578 |
| (3.0 | )% | (1.9 | )% | ||
Gross margin |
| 25.3 | % | 27.0 | % | (1.7 | )pts. |
|
| ||
Technology Services & Cloud Platforms |
| 25,079 |
| 26,029 |
| (3.7 | )% | (3.3 | )% | ||
Gross margin |
| 40.2 | % | 41.5 | % | (1.3 | )pts. |
|
| ||
Systems |
| 4,863 |
| 5,184 |
| (6.2 | )% | (5.9 | )% | ||
Gross margin |
| 51.5 | % | 55.1 | % | (3.6 | )pts. |
|
| ||
Global Financing |
| 1,246 |
| 1,245 |
| 0.1 | % | (0.4 | )% | ||
Gross margin |
| 29.2 | % | 39.6 | % | (10.4 | )pts. |
|
| ||
Other |
| 192 |
| 223 |
| (14.2 | )% | (14.3 | )% | ||
Gross margin |
| (456.0 | )% | (295.2 | )% | (160.8 | )pts. |
|
| ||
Total consolidated revenue |
| $ | 56,597 |
| $ | 58,149 |
| (2.7 | )% | (2.2 | )% |
Total consolidated gross profit |
| $ | 25,365 |
| $ | 27,401 |
| (7.4 | )% |
|
|
Total consolidated gross margin |
| 44.8 | % | 47.1 | % | (2.3 | )pts. |
|
| ||
Non-operating adjustments: |
|
|
|
|
|
|
|
|
| ||
Amortization of acquired intangible assets |
| 349 |
| 371 |
| (5.7 | )% |
|
| ||
Retirement-related costs/(income) |
| 591 |
| 238 |
| 148.2 | % |
|
| ||
Operating (non-GAAP) gross profit |
| $ | 26,305 |
| $ | 28,010 |
| (6.1 | )% |
|
|
Operating (non-GAAP) gross margin |
| 46.5 | % | 48.2 | % | (1.7 | )pts. |
|
| ||
* Recast to reflect segment changes.
Cognitive Solutions
Software
|
|
|
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|
|
|
| Yr. to Yr. |
| ||
|
|
|
|
|
|
|
| Percent |
| ||
|
|
|
|
|
| Yr. to Yr. |
| Change |
| ||
(Dollars in millions) |
|
|
|
|
| Percent |
| Adjusted For |
| ||
For the three months ended September 30: |
| 2017 |
| 2016 |
| Change |
| Currency |
| ||
Cognitive Solutions external revenue: |
| $ | 4,400 |
| $ | 4,235 |
| 3.9 | % | 3.0 | % |
Solutions Software |
| $ | 3,029 |
| $ | 2,919 |
| 3.8 | % | 2.9 | % |
Transaction Processing Software |
| 1,371 |
| 1,316 |
| 4.2 |
| 3.2 |
| ||
| | | | | | | | | | | |
|
|
| |
|
| |
|
|
| Yr. to Yr. |
|
| | | | | | | | | | Percent |
|
| | | | | | | | Yr. to Yr. | | Change |
|
(Dollars in millions) | |
| | |
| | | Percent | | Adjusted For |
|
For the three months ended June 30: | | 2022 | | 2021* | | Change | | Currency |
| ||
Software revenue: | | $ | 6,166 | | $ | 5,795 |
| 6.4 | % | 11.6 | % |
Hybrid Platform & Solutions | | $ | 4,390 | | $ | 4,208 |
| 4.3 | % | 9.0 | % |
Red Hat | | | | | | | | 11.9 | | 16.9 | |
Automation | | | | | | | | 3.6 | | 8.4 | |
Data & AI | | | | | | | | 0.4 | | 4.5 | |
Security | | | | | | | | 0.0 | | 5.0 | |
Transaction Processing | | | 1,776 | |
| 1,587 |
| 11.9 |
| 18.7 | |
* Recast to reflect segment changes.
|
|
|
|
|
|
|
| Yr. to Yr. |
| ||
|
|
|
|
|
|
|
| Percent |
| ||
|
|
|
|
|
| Yr. to Yr. |
| Change |
| ||
(Dollars in millions) |
|
|
|
|
| Percent |
| Adjusted For |
| ||
For the nine months ended September 30: |
| 2017 |
| 2016 |
| Change |
| Currency |
| ||
Cognitive Solutions external revenue: |
| $ | 13,021 |
| $ | 12,889 |
| 1.0 | % | 1.3 | % |
Solutions Software |
| $ | 9,015 |
| $ | 8,842 |
| 2.0 | % | 2.3 | % |
Transaction Processing Software |
| 4,006 |
| 4,048 |
| (1.0 | ) | (0.8 | ) | ||
62
Cognitive Solutions third-quarter annuity revenue grew as reported and adjusted for currency including strong Software-as-a-Service (SaaS) performance with continued double-digit revenue growth as reported and adjusted for currency. There was growth, as reported and adjusted for currency, in software services which support solutions offerings through industry and product expertise. Transactional revenue also grew this quarter as reported and adjusted for currency compared to the
Management Discussion —– (continued)
| | | | | | | | | | | |
|
|
| |
|
| |
|
|
| Yr. to Yr. |
|
| | | | | | | | | | Percent |
|
| | | | | | | | Yr. to Yr. | | Change |
|
(Dollars in millions) | |
| | |
| | | Percent | | Adjusted For |
|
For the six months ended June 30: | | 2022 | | 2021* | | Change | | Currency |
| ||
Software revenue: | | $ | 11,938 | | $ | 10,933 |
| 9.2 | % | 13.4 | % |
Hybrid Platform & Solutions | | $ | 8,470 | | $ | 8,008 |
| 5.8 | % | 9.5 | % |
Red Hat | | | | | | | | 14.9 | | 18.9 | |
Automation | | | | | | | | 3.3 | | 7.0 | |
Data & AI | | | | | | | | 1.2 | | 4.4 | |
Security | | | | | | | | 2.5 | | 6.5 | |
Transaction Processing | | | 3,468 | |
| 2,925 |
| 18.6 |
| 24.1 | |
* Recast to reflect segment changes.
prior year as clients commit to the platform long term. Within the segment, third-quarter revenue growth was driven by organic performance as acquisitive content has leveled on a year-to-year basis.
In the third quarter, Solutions Software revenue of $3,029 million grew 3.8 percent as reported (3 percent adjusted for currency) compared to the prior year. Transaction Processing Software revenue of $1,371 million grew 4.2 percent as reported (3 percent adjusted for currency) compared to the third quarter of 2016. Within Solutions Software, third quarter year-to-year growth was led by offerings in security and analytics. Security software grew double digits as reported and adjusted for currency year to year in the third quarter with strong performance across the portfolio as cognitive capabilities continue to be embedded into these offerings. Analytics revenue growth was broad-based as the company continues to reinvent these offerings. With new offerings and new clients added to the platform this quarter, Internet of Things (IoT) revenue grew double digits in the third quarter both as reported and adjusted for currency. Within Transaction Processing Software, the year-to-year growth reflects clients’ ongoing long-term commitment and the value the company’s platform provides to them. This portfolio predominately runs on-premise mission critical workloads running on z Systems in industries such as banking, airlines and retail.
Cognitive Solutions total third-quarter strategic imperatives revenue of $2.9 billion grew 5 percent year to year as reported and adjusted for currency. Cloud revenue of $0.6 billion grew 10 percent as reported and adjusted for currency, with an as-a-Service exit run rate of $2.0 billion. For the first nine months of the year, total strategic imperatives revenue of $8.5 billion grew 4 percent as reported and adjusted for currency year to year. Cloud revenue of $1.8 billion grew 24 percent as reported and adjusted for currency.
|
|
|
|
|
| Yr. to Yr. |
| ||
|
|
|
|
|
| Percent/ |
| ||
(Dollars in millions) |
|
|
|
|
| Margin |
| ||
For the three months ended September 30: |
| 2017 |
| 2016 |
| Change |
| ||
Cognitive Solutions: |
|
|
|
|
|
|
| ||
External gross profit |
| $ | 3,465 |
| $ | 3,407 |
| 1.7 | % |
External gross profit margin |
| 78.7 | % | 80.4 | % | (1.7 | )pts. | ||
Pre-tax income |
| $ | 1,649 |
| $ | 1,574 |
| 4.8 | % |
Pre-tax margin |
| 32.8 | % | 32.1 | % | 0.7 | pts. | ||
|
|
|
|
|
| Yr. to Yr. |
| ||
|
|
|
|
|
| Percent/ |
| ||
(Dollars in millions) |
|
|
|
|
| Margin |
| ||
For the nine months ended September 30: |
| 2017 |
| 2016 |
| Change |
| ||
Cognitive Solutions: |
|
|
|
|
|
|
| ||
External gross profit |
| $ | 10,207 |
| $ | 10,509 |
| (2.9 | )% |
External gross profit margin |
| 78.4 | % | 81.5 | % | (3.1 | )pts. | ||
Pre-tax income |
| $ | 4,539 |
| $ | 4,039 |
| 12.4 | % |
Pre-tax margin |
| 30.2 | % | 27.3 | % | 3.0 | pts. | ||
Cognitive Solutions gross profit margin decreased 1.7 points to 78.7 percent in the third quarter of 2017 compared to the prior year. For the first nine months of the year, gross profit margin decreased 3.1 points to 78.4 percent. The gross profit margin decline year to year is driven by continued investment and an increasing mix toward SaaS.
In the third quarter, pre-tax income of $1,649$6,166 million increased 4.8 percent compared to the prior year with a pre-tax margin improvement of 0.7 points to 32.8 percent. For the first nine months of the year, pre-tax income of $4,539 million increased 12.4 percent compared to the prior year with a pre-tax margin improvement of 3.0 points to 30.2 percent. The company continues to embed cognitive into offerings, scale platforms and build high value vertical solutions. The year-to-year benefit in the nine-month period also reflects a lower level of charges related to workforce rebalancing and real estate actions year to year.
Management Discussion — (continued)
Global Business Services
|
|
|
|
|
|
|
| Yr. to Yr. |
| ||
|
|
|
|
|
|
|
| Percent |
| ||
|
|
|
|
|
| Yr. to Yr. |
| Change |
| ||
(Dollars in millions) |
|
|
|
|
| Percent |
| Adjusted For |
| ||
For the three months ended September 30: |
| 2017 |
| 2016 |
| Change |
| Currency |
| ||
Global Business Services external revenue: |
| $ | 4,093 |
| $ | 4,191 |
| (2.3 | )% | (2.2 | )% |
Consulting |
| $ | 1,803 |
| $ | 1,799 |
| 0.2 | % | 0.9 | % |
Global Process Services |
| 314 |
| 354 |
| (11.3 | ) | (11.9 | ) | ||
Application Management |
| 1,976 |
| 2,038 |
| (3.0 | ) | (3.2 | ) | ||
|
|
|
|
|
|
|
| Yr. to Yr. |
| ||
|
|
|
|
|
|
|
| Percent |
| ||
|
|
|
|
|
| Yr. to Yr. |
| Change |
| ||
(Dollars in millions) |
|
|
|
|
| Percent |
| Adjusted For |
| ||
For the nine months ended September 30: |
| 2017 |
| 2016 |
| Change |
| Currency |
| ||
Global Business Services external revenue: |
| $ | 12,196 |
| $ | 12,578 |
| (3.0 | )% | (1.9 | )% |
Consulting |
| $ | 5,394 |
| $ | 5,520 |
| (2.3 | )% | (0.9 | )% |
Global Process Services |
| 948 |
| 1,048 |
| (9.6 | ) | (9.2 | ) | ||
Application Management |
| 5,855 |
| 6,011 |
| (2.6 | ) | (1.6 | ) | ||
Global Business Services revenue of $4,093 million decreased 2.3 percent as reported and 2 percent adjusted for currency in the third quarter of 2017 compared to the prior year. The company continues to transform this business and shift its practices to where there is opportunity, which is around digital, cognitive, cloud and automation. GBS signings grew for the third consecutive quarter as reported and adjusted for currency, and strategic imperatives revenue grew double digits year to year as reported and adjusted for currency. However, this growth continues to be more than offset by declines in the more traditional areas that the company is shifting away from. For the first nine months of the year, Global Business Services revenue of $12,196 million decreased 3.0 percent as reported and 2 percent adjusted for currency.
In the third quarter, Consulting revenue of $1,803 million increased 0.2 percent as reported (1 percent adjusted for currency) with continued improvement on a sequential basis led by the company’s digital strategy and iX platform. The Consulting backlog returned to growth as reported and adjusted for currency in the third quarter versus the prior year. Global Process Services (GPS) revenue of $314 million decreased 11.36.4 percent as reported (12 percent adjusted for currency) in the second quarter of 2022 compared to the prior-year period. This includes incremental sales to Kyndryl which contributed approximately 7 points to the revenue growth. Software subscription and support renewal rates continued to grow this quarter, contributing to our solid and growing recurring revenue base. Within Software, over the trailing 12 months, hybrid cloud revenue of $9,044 million grew 20 percent as reported (23 percent adjusted for currency) year to year, driven by growth in our hybrid cloud and AI capabilities.
Hybrid Platform & Solutions revenue of $4,390 million increased 4.3 percent as reported (9 percent adjusted for currency) in the second quarter of 2022 compared to the prior-year period. Incremental sales to Kyndryl contributed approximately 1.5 points to the revenue growth. We had solid performance across all business areas. Red Hat revenue grew 11.9 percent as reported (17 percent adjusted for currency) in the second quarter of 2022, reflecting new adoption and expansion of RHEL and OpenShift. Automation revenue grew 3.6 percent as reported (8 percent adjusted for currency), reflecting solid performance in AIOps and Management and Integration, which demonstrates the importance of automation in the IT journeys of our clients. We had strength in offerings, such as Turbonomic and Instana for observability, Cloud Pak for Watson AIOps, and our modern integration platform, Cloud Pak for Integration. Data & AI revenue increased 0.4 percent as reported (4 percent adjusted for currency), led by demand for Data Fabric, Data Management, and Asset & Supply Chain Management solutions. Security revenue was flat as reported, but grew 5 percent adjusted for currency, driven by growth in Threat Management and Identity, as enterprises continue to adopt a zero-trust security strategy and implement additional identity controls.
For the second quarter of 2022, Hybrid Platform & Solutions grew annual recurring revenue (ARR) by 8 percent compared to the prior-year period. ARR is a key performance metric management uses to assess the health and growth trajectory of our Hybrid Platform & Solutions business within the Software segment. ARR is calculated by estimating the current quarter’s recurring, committed value for certain types of active contracts as of the period-end date and then multiplying that value by four. This value is based on each arrangement’s contract value and start date, mitigating fluctuations during the contract term, and includes the following consumption models: (1) software subscription agreements, including committed term licenses, (2) as-a-service arrangements such as SaaS and PaaS, (3) maintenance and support contracts, and (4) security managed services contracts. ARR should be viewed independently of revenue as this performance metric and its inputs may not represent the amount of revenue recognized in the period and therefore is not intended to represent current period revenue or revenue that will be recognized in future periods. ARR is calculated at estimated constant currency.
Transaction Processing revenue of $1,776 million increased 11.9 percent as reported (19 percent adjusted for currency) in the second quarter of 2022 compared to the prior-year period. Incremental sales to Kyndryl contributed approximately 22 points to the revenue growth. We continued to have strong renewal rates for this mission-critical software.
63
Management Discussion – (continued)
For the first six months of 2022, Software revenue of $11,938 million increased 9.2 percent as reported (13 percent adjusted for currency) compared to the same period in 2021. Incremental sales to Kyndryl contributed approximately 8 points to the revenue growth. We had growth in Hybrid Platform & Solutions and Transaction Processing during the first six months of 2022, with all of the Transaction Processing revenue growth driven by sales to Kyndryl.
| | | | | | | | | |
|
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| |
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| |
| Yr. to Yr. |
|
| | | | | | | | Percent/ |
|
(Dollars in millions) | |
| | |
| | | Margin |
|
For the three months ended June 30: | | 2022 | | 2021* | | Change |
| ||
Software: |
| |
|
| |
|
|
| |
Gross profit | | $ | 4,884 | | $ | 4,617 |
| 5.8 | % |
Gross profit margin | |
| 79.2 | % |
| 79.7 | % | (0.5) | pts. |
Pre-tax income | | $ | 1,375 | | $ | 1,059 |
| 29.9 | % |
Pre-tax margin | |
| 22.3 | % |
| 18.3 | % | 4.0 | pts. |
* Recast to reflect segment changes.
| | | | | | | | | |
|
|
| |
|
| |
| Yr. to Yr. |
|
| | | | | | | | Percent/ |
|
(Dollars in millions) | |
| | |
| | | Margin |
|
For the six months ended June 30: | | 2022 | | 2021* | | Change |
| ||
Software: |
| |
|
| |
|
|
| |
Gross profit | | $ | 9,434 | | $ | 8,612 |
| 9.5 | % |
Gross profit margin | |
| 79.0 | % |
| 78.8 | % | 0.3 | pts. |
Pre-tax income | | $ | 2,509 | | $ | 1,717 |
| 46.2 | % |
Pre-tax margin | |
| 21.0 | % |
| 15.7 | % | 5.3 | pts. |
* Recast to reflect segment changes.
Software gross profit margin decreased 0.5 points to 79.2 percent in the second quarter of 2022 compared to the prior-year period, driven primarily by profit margin declines in software and services. For the first six months of 2022, gross profit margin increased 0.3 points to 79.0 percent, driven primarily by a mix to software, partially offset by a margin decline in services.
In the second quarter, pre-tax income of $1,375 million increased 29.9 percent and pre-tax margin of 22.3 percent increased 4.0 points compared to the prior year. Application We continued to expand our pre-tax margin given the solid revenue growth and new Kyndryl commercial relationship. For the first six months of 2022, pre-tax income of $2,509 million increased 46.2 percent and pre-tax margin increased 5.3 points to 21.0 percent compared to the prior-year period, driven by the year-to-year increase in gross profit contribution reflecting our solid revenue growth.
Consulting
| | | | | | | | | | | |
|
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| |
|
| |
|
|
| Yr. to Yr. |
|
| | | | | | | | | | Percent |
|
| | | | | | | | Yr. to Yr. | | Change |
|
(Dollars in millions) | |
| | |
| | | Percent | | Adjusted For |
|
For the three months ended June 30: | | 2022 | | 2021* | | Change | | Currency |
| ||
Consulting revenue: | | $ | 4,809 | | $ | 4,378 | | 9.8 | % | 17.8 | % |
Business Transformation | | $ | 2,227 | | $ | 2,049 | | 8.7 | % | 16.1 | % |
Technology Consulting | |
| 928 | |
| 814 | | 14.0 |
| 22.6 | |
Application Operations | |
| 1,653 | |
| 1,514 | | 9.2 |
| 17.4 | |
* Recast to reflect segment change.
64
Management Discussion – (continued)
| | | | | | | | | | | |
|
|
| |
|
| |
|
|
| Yr. to Yr. |
|
| | | | | | | | | | Percent |
|
| | | | | | | | Yr. to Yr. | | Change |
|
(Dollars in millions) | |
| | |
| | | Percent | | Adjusted For |
|
For the six months ended June 30: | | 2022 | | 2021* | | Change | | Currency |
| ||
Consulting revenue: | | $ | 9,637 | | $ | 8,641 | | 11.5 | % | 17.6 | % |
Business Transformation | | $ | 4,482 | | $ | 4,002 | | 12.0 | % | 17.7 | % |
Technology Consulting | |
| 1,884 | | | 1,649 | | 14.2 |
| 20.7 | |
Application Operations | |
| 3,272 | | | 2,989 | | 9.5 |
| 15.8 | |
* Recast to reflect segment change.
Consulting revenue of $1,976$4,809 million decreased 3.0grew 9.8 percent as reported (3(18 percent adjusted for currency). in the second quarter of 2022 compared to the prior-year period, with strong revenue growth across all business areas and geographies. We maintained a solid book-to-bill ratio of 1.1 on a trailing twelve-month basis, as clients continued to choose to co-create with IBM, trusting our deep industry expertise. The company continuesexpansion of our skills, capabilities, and ecosystems are enabling us to capture demand as we drive adoption of our hybrid cloud platform and help clients implement new cloud-centric architectures inwith their critical applications. Overall performance was impacted by areas of this business that are not as differentiated and are experiencing pricing pressure.
Third-quarter 2017 GBS strategic imperativesdigital transformations. Within Consulting, over the trailing 12 months, hybrid cloud revenue of $2.5 billion$8,650 million grew 1028 percent as reported (11(32 percent adjusted for currency) year to year. CloudThe momentum behind our Red Hat practice remains strong, as we nearly doubled our Red Hat consulting revenue in the second quarter and continued to have solid growth in Red Hat consulting signings. Our strategic partnerships also contributed to our performance in the second quarter, with solid double-digit revenue growth from these partnerships, led by Azure, AWS, SAP and Salesforce.
In the second quarter of 2022, Business Transformation revenue of $1.0 billion grew 35$2,227 million increased 8.7 percent as reported and adjusted for currency, with an as-a-Service exit run rate of $1.2 billion. For the first nine months of the year, total strategic imperatives revenue of $7.2 billion grew 10 percent as reported (11(16 percent adjusted for currency) yearon a year-to-year basis, as clients looked to year. CloudIBM to help them transform critical workflows at scale. This growth was led by our offerings focused on customer experience transformation, data transformation and our SAP practices.
Technology Consulting revenue of $2.9 billion grew 41$928 million increased 14.0 percent as reported (43(23 percent adjusted for currency).
Management Discussion — (continued)
|
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| Yr. to Yr. |
| ||
|
|
|
|
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| Percent/ |
| ||
(Dollars in millions) |
|
|
|
|
| Margin |
| ||
For the three months ended September 30: |
| 2017 |
| 2016 |
| Change |
| ||
Global Business Services: |
|
|
|
|
|
|
| ||
External gross profit |
| $ | 1,117 |
| $ | 1,206 |
| (7.4 | )% |
External gross profit margin |
| 27.3 | % | 28.8 | % | (1.5 | )pts. | ||
Pre-tax income |
| $ | 453 |
| $ | 544 |
| (16.8 | )% |
Pre-tax margin |
| 10.8 | % | 12.7 | % | (1.9 | )pts. | ||
|
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| ||
|
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|
| Yr. to Yr. |
| ||
|
|
|
|
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| Percent/ |
| ||
(Dollars in millions) |
|
|
|
|
| Margin |
| ||
For the nine months ended September 30: |
| 2017 |
| 2016 |
| Change |
| ||
Global Business Services: |
|
|
|
|
|
|
| ||
External gross profit |
| $ | 3,083 |
| $ | 3,393 |
| (9.2 | )% |
External gross profit margin |
| 25.3 | % | 27.0 | % | (1.7 | )pts. | ||
Pre-tax income |
| $ | 1,065 |
| $ | 1,210 |
| (12.0 | )% |
Pre-tax margin |
| 8.5 | % | 9.4 | % | (0.8 | )pts. | ||
|
|
|
|
|
|
|
| ||
GBS third quarter gross profit margin decreased 1.5 points to 27.3 percent year to year with a decline similar to in the second quarter 2017. In the third quarter of 2017, pre-tax income of $453 million decreased 16.8 percent year to year. The pre-tax margin declined 1.9 points to 10.8 percent, however it improved more than 3 points sequentially2022 compared to the second quarter 2017. For the first nine months of the year, pre-tax income of $1,065 million decreased 12.0 percentprior-year period, led by our cloud modernization and the pre-tax margin declined 0.8 points to 8.5 percent. Pre-tax income performance for the first nine months of 2017 includes a lower level of charges related to workforce rebalancing and real estate actionscloud application development offerings, as comparedwell as on-prem modernization, which also contributed to the prior year.
The GBS margin has been impacted by investments to drive transformation and reflects pricing and profit pressurestrong revenue performance in the more traditional IT services. The company will continue to focus on improving productivity with a streamlined practice model and new project management approaches. As it grows its practices around cloud, analytics and mobility services, the company will continue to invest in skills necessary to drive this transformation.quarter.
Technology Services & Cloud Platforms
|
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| Yr. to Yr. |
| ||
|
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| Percent |
| ||
|
|
|
|
|
| Yr. to Yr. |
| Change |
| ||
(Dollars in millions) |
|
|
|
|
| Percent |
| Adjusted For |
| ||
For the three months ended September 30: |
| 2017 |
| 2016 |
| Change |
| Currency |
| ||
Technology Services & Cloud Platforms external revenue: |
| $ | 8,457 |
| $ | 8,748 |
| (3.3 | )% | (4.1 | )% |
Infrastructure Services |
| $ | 5,665 |
| $ | 5,901 |
| (4.0 | )% | (4.8 | )% |
Technical Support Services |
| 1,801 |
| 1,831 |
| (1.6 | ) | (2.1 | ) | ||
Integration Software |
| 990 |
| 1,016 |
| (2.6 | ) | (3.4 | ) | ||
|
|
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|
| ||
|
|
|
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|
| Yr. to Yr. |
| ||
|
|
|
|
|
|
|
| Percent |
| ||
|
|
|
|
|
| Yr. to Yr. |
| Change |
| ||
(Dollars in millions) |
|
|
|
|
| Percent |
| Adjusted For |
| ||
For the nine months ended September 30: |
| 2017 |
| 2016 |
| Change |
| Currency |
| ||
Technology Services & Cloud Platforms external revenue: |
| $ | 25,079 |
| $ | 26,029 |
| (3.7 | )% | (3.3 | )% |
Infrastructure Services |
| $ | 16,695 |
| $ | 17,458 |
| (4.4 | )% | (3.9 | )% |
Technical Support Services |
| 5,357 |
| 5,446 |
| (1.6 | ) | (1.5 | ) | ||
Integration Software |
| 3,027 |
| 3,126 |
| (3.2 | ) | (2.7 | ) | ||
|
|
|
|
|
|
|
|
|
| ||
Technology Services & Cloud PlatformsApplication Operations revenue of $8,457$1,653 million decreased 3.3increased 9.2 percent as reported and 4 percent adjusted for currency in the third quarter of 2017 compared to the prior year. In the third quarter, there were declines across
Management Discussion — (continued)
all lines of business, however there was double-digit growth as reported and adjusted for currency in strategic imperatives revenue. Global Technology Services (GTS) signings also grew more than 25 percent year to year. For the first nine months of the year, Technology Services and Cloud Platforms revenue of $25,079 million decreased 3.7 percent as reported and 3 percent adjusted for currency.
In the third quarter, Infrastructure Services revenue of $5,665 million declined 4.0 percent as reported (5(17 percent adjusted for currency) compared to the prior year. This decline reflectssecond quarter of 2021, with solid growth across our cloud offerings, partially offset by declines in on-prem offerings. We are providing the continued impact associated with contract conclusions at the end of 2016cloud platform and the shift away from certain lower value work within this business. The full year-to-year benefit from certain larger contracts signed in second-quarter 2017 are not yet providing offsetting growth. However, in the third quarter, there was strong signings performance both as reported and adjusted for currency asapplication management services our clients contractrequire to implementrun their hybrid cloud environments.
Technical Support Services third-quarterFor the first six months of 2022, Consulting revenue of $1,801$9,637 million decreased 1.6increased 11.5 percent as reported (2(18 percent adjusted for currency) yearreflecting strong year-to-year growth across all three business areas.
| | | | | | | | | |
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| |
|
| |
| Yr. to Yr. |
|
| | | | | | | | Percent/ |
|
(Dollars in millions) | |
| | |
| | | Margin |
|
For the three months ended June 30: | | 2022 | | 2021* | | Change |
| ||
Consulting: |
| |
|
| |
|
|
| |
Gross profit | | $ | 1,163 | | $ | 1,209 |
| (3.8) | % |
Gross profit margin | |
| 24.2 | % |
| 27.6 | % | (3.4) | pts. |
Pre-tax income | | $ | 343 | | $ | 270 |
| 26.9 | % |
Pre-tax margin | |
| 7.1 | % |
| 6.2 | % | 1.0 | pts. |
* Recast to year. Within this linereflect segment change.
65
Management Discussion – (continued)
| | | | | | | | | |
|
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| |
|
| |
| Yr. to Yr. |
|
| | | | | | | | Percent/ |
|
(Dollars in millions) | |
| | |
| | | Margin |
|
For the six months ended June 30: | | 2022 | | 2021* | | Change |
| ||
Consulting: |
| |
|
| |
|
|
| |
Gross profit | | $ | 2,339 | | $ | 2,396 |
| (2.4) | % |
Gross profit margin | |
| 24.3 | % |
| 27.7 | % | (3.5) | pts. |
Pre-tax income | | $ | 691 | | $ | 547 |
| 26.3 | % |
Pre-tax margin | |
| 7.2 | % |
| 6.3 | % | 0.8 | pts. |
* Recast to reflect segment change.
Consulting gross profit margin of 24.2 percent decreased 3.4 points in the company is focused on growing its multi-vendor support services which provide clients with a single sourcesecond quarter of expertise and visibility across different vendor solutions. Integration Software third quarter revenue of $990 million decreased 2.6 percent as reported (3 percent adjusted for currency)2022 compared to the prior year. There wassame period in 2021, reflecting the significant investments we have been making to capture demand and fuel our revenue growth. We continued growthto invest in SaaS acrossour partner ecosystem, scale acquisitions and add skills. Our Consulting business is most impacted by the portfolio asinflationary labor market and increasing labor costs to acquire new talent and increase capacity. We are starting to capture these higher costs in our pricing, however, given the company helps clients implement hybrid cloud environments. This growth was offset by declinestiming between contract signing and revenue recognition, it takes time to realize the impacts in areas such as on premise DevOps and IT service management.
Technology Services & Cloud Platforms third-quarter 2017 strategic imperatives revenue of $2.6 billion grew 12 percent year to year as reported and adjusted for currency. Cloud revenue of $1.8 billion grew 16 percent as reported and adjusted for currency, with an as-a-Service exit run rate of $6.2 billion.our margin performance. For the first ninesix months of the year, total strategic imperatives revenue of $7.4 billion grew 20 percent as reported (21 percent adjusted for currency) year to year. Cloud revenue of $5.1 billion grew 24 percent as reported (25 percent adjusted for currency).
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| Yr. to Yr. |
| ||
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| ||
(Dollars in millions) |
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| Margin |
| ||
For the three months ended September 30: |
| 2017 |
| 2016 |
| Change |
| ||
Technology Services & Cloud Platforms: |
|
|
|
|
|
|
| ||
External Technology Services gross profit |
| $ | 2,667 |
| $ | 2,825 |
| (5.6 | )% |
External Technology Services gross profit margin |
| 35.7 | % | 36.5 | % | (0.8 | )pts. | ||
External Integration Software gross profit |
| $ | 805 |
| $ | 851 |
| (5.4 | )% |
External Integration Software gross profit margin |
| 81.3 | % | 83.8 | % | (2.4 | )pts. | ||
External total gross profit |
| $ | 3,473 |
| $ | 3,676 |
| (5.5 | )% |
External total gross profit margin |
| 41.1 | % | 42.0 | % | (1.0 | )pts. | ||
Pre-tax income |
| $ | 1,192 |
| $ | 1,288 |
| (7.5 | )% |
Pre-tax margin |
| 13.8 | % | 14.4 | % | (0.6 | )pts. | ||
|
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|
| Yr. to Yr. |
| ||
|
|
|
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| Percent/ |
| ||
(Dollars in millions) |
|
|
|
|
| Margin |
| ||
For the nine months ended September 30: |
| 2017 |
| 2016 |
| Change |
| ||
Technology Services & Cloud Platforms: |
|
|
|
|
|
|
| ||
External Technology Services gross profit |
| $ | 7,630 |
| $ | 8,176 |
| (6.7 | )% |
External Technology Services gross profit margin |
| 34.6 | % | 35.7 | % | (1.1 | )pts. | ||
External Integration Software gross profit |
| $ | 2,450 |
| $ | 2,630 |
| (6.9 | )% |
External Integration Software gross profit margin |
| 80.9 | % | 84.2 | % | (3.2 | )pts. | ||
External total gross profit |
| $ | 10,080 |
| $ | 10,806 |
| (6.7 | )% |
External total gross profit margin |
| 40.2 | % | 41.5 | % | (1.3 | )pts. | ||
Pre-tax income |
| $ | 2,888 |
| $ | 2,825 |
| 2.2 | % |
Pre-tax margin |
| 11.3 | % | 10.6 | % | 0.6 | pts. | ||
Technology Services & Cloud Platforms2022, Consulting gross profit margin of 24.3 percent decreased 1.0 points year to year in the third quarter to 41.1 percent and pre-tax income of $1,192 million decreased 7.5 percent. The pre-tax margin declined 0.6 points year to year to 13.8 percent, but improved sequentially by 23.5 points compared to the prior-year period, reflecting the same dynamics described above.
Pre-tax income of $343 million increased 26.9 percent and pre-tax margin of 7.1 percent increased 1.0 points in the second quarter of 2017.2022 compared to the prior-year period as a result of the actions we have taken to streamline our operations and go-to-market structure. For the first ninesix months of the year,2022, pre-tax income of $2,888$691 million increased 2.226.3 percent and the pre-tax margin improved 0.6of 7.2 percent increased 0.8 points to 11.3 percent. The
Management Discussion — (continued)
year-to-year performance in the nine months of 2017 compared to the prior year includes a lower levelprior-year period, reflecting the benefits of charges related to workforcethe actions described above.
Consulting Signings and real estate actions.Book-to-Bill
| | | | | | | | | | | |
| | | | | | | | | | Yr. to Yr. |
|
| | | | | | | | | | Percent |
|
| | | | | | | | Yr. to Yr. | | Change |
|
(Dollars in millions) | | | | | | | | Percent | | Adjusted For |
|
For the three months ended June 30: |
| 2022 |
| 2021 |
| Change |
| Currency |
| ||
Total Consulting signings | | $ | 4,654 | | $ | 4,655 |
| 0.0 | % | 7.4 | % |
| | | | | | | | | | | |
| | | | | | | | | | Yr. to Yr. |
|
| | | | | | | | | | Percent |
|
| | | | | | | | Yr. to Yr. | | Change |
|
(Dollars in millions) | | | | | | | | Percent | | Adjusted For |
|
For the six months ended June 30: |
| 2022 |
| 2021 |
| Change |
| Currency |
| ||
Total Consulting signings | | $ | 9,791 | | $ | 8,451 |
| 15.9 | % | 22.4 | % |
The company continues to yield savings from prior-year workforce transformation, is focused on delivering productivity to clients, and continues to invest to expand its cloud infrastructure which is currently impacting margin. With over sixty cloud centers across nineteen countries, the IBM Cloud provides clients with flexibility in how and where they store their data.
Services Backlog and Signings
|
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| Yr. to Yr. |
| ||
|
|
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|
|
| Percent |
| ||
|
|
|
|
|
| Yr. to Yr. |
| Change |
| ||
|
| At September 30, |
| At September 30, |
| Percent |
| Adjusted For |
| ||
(Dollars in billions) |
| 2017 |
| 2016 |
| Change |
| Currency |
| ||
Total backlog |
| $ | 119.3 |
| $ | 121.3 |
| (1.6 | )% | (2.1 | )% |
The estimated total services backlog at September 30, 2017 was $119 billion, a decrease of 1.6 percent as reported and 2 percent adjusted for currency with modest growth in GTS as reported (essentially flat adjusted for currency) and a decrease in GBS year to year as reported and adjusted for currency.
Total services backlog includes Infrastructure Services, Consulting, Global Process Services, Application Management and Technical Support Services. Total backlog is intended to be a statement of overall work under contract for these businesses and therefore includes Technical Support Services. It does not include as-a-Service offerings that have flexibility in contractual commitment terms. Backlog estimates are subject to change and are affected by several factors, including terminations, changes in the scope of contracts, periodic revalidations, adjustments for revenue not materialized and adjustments for currency.
Services signings are management’s initial estimate of the value of a client’s commitment under a services contract.contract within IBM Consulting. There are no third-party standards or requirements governing the calculation of signings. The calculation used by management involves estimates and judgments to gauge the extent of a client’s commitment, including the type and duration of the agreement, and the presence of termination charges or wind-down costs.
Signings include Infrastructure Services, Consulting, Global Process Services and Application Management contracts. Contract extensions and increases in scope are treated as signings only to the extent of the incremental new value. Technical Support Services isTotal signings can vary over time due to a variety of factors including, but not included in signings as maintenance contracts tendlimited to, be more steady state, where revenues equal renewals.
Contract portfolios purchased inthe timing of signing a small number of larger contracts. Signings associated with an acquisition are treated as positive backlog adjustments provided those contracts meet the company’s requirements for initial signings. A new signing will be recognized ifon a newprospective basis.
Management believes the estimated values of signings disclosed provide an indication of our forward-looking revenue. Signings are used to monitor the performance of the business and viewed as useful information for management and shareholders. The conversion of signings into revenue may vary based on the types of services agreement is signed incidental or coincidental to an acquisition or divestiture.and solutions,
66
|
|
|
|
|
|
|
| Yr. to Yr. |
| ||
|
|
|
|
|
|
|
| Percent |
| ||
|
|
|
|
|
| Yr. to Yr. |
| Change |
| ||
(Dollars in millions) |
|
|
|
|
| Percent |
| Adjusted For |
| ||
For the three months ended September 30: |
| 2017 |
| 2016 |
| Change |
| Currency |
| ||
Total signings |
| $ | 10,385 |
| $ | 8,955 |
| 16.0 | % | 14.8 | % |
|
|
|
|
|
|
|
| Yr. to Yr. |
| ||
|
|
|
|
|
|
|
| Percent |
| ||
|
|
|
|
|
| Yr. to Yr. |
| Change |
| ||
(Dollars in millions) |
|
|
|
|
| Percent |
| Adjusted For |
| ||
For the nine months ended September 30: |
| 2017 |
| 2016 |
| Change |
| Currency |
| ||
Total signings |
| $ | 29,178 |
| $ | 30,031 |
| (2.8 | )% | (1.8 | )% |
Management Discussion —– (continued)
contract duration, customer decisions, and other factors, which may include, but are not limited to, the macroeconomic environment.
SystemsBook-to-bill represents the ratio of IBM Consulting signings to its revenue over the same period. The metric is a useful indicator of the demand of our business over time. This definition should be read in conjunction with the signings definition noted above.
Infrastructure
|
|
|
|
|
|
|
| Yr. to Yr. |
| ||
|
|
|
|
|
|
|
| Percent |
| ||
|
|
|
|
|
| Yr. to Yr. |
| Change |
| ||
(Dollars in millions) |
|
|
|
|
| Percent |
| Adjusted For |
| ||
For the three months ended September 30: |
| 2017 |
| 2016 |
| Change |
| Currency |
| ||
Systems external revenue: |
| $ | 1,721 |
| $ | 1,558 |
| 10.4 | % | 9.6 | % |
Systems Hardware |
| $ | 1,301 |
| $ | 1,128 |
| 15.3 | % | 14.4 | % |
z Systems |
|
|
|
|
| 63.8 |
| 61.9 |
| ||
Power Systems |
|
|
|
|
| (7.2 | ) | (7.8 | ) | ||
Storage Systems |
|
|
|
|
| 4.9 |
| 4.3 |
| ||
Operating Systems Software |
| 420 |
| 430 |
| (2.3 | ) | (2.9 | ) | ||
| | | | | | | | | | | |
| | | | | | | | | | Yr. to Yr. |
|
| | | | | | | | | | Percent |
|
| | | | | | | | Yr. to Yr. | | Change |
|
(Dollars in millions) | | | | | | | | Percent | | Adjusted For |
|
For the three months ended June 30: |
| 2022 |
| 2021* |
| Change |
| Currency |
| ||
Infrastructure revenue: | | $ | 4,235 | | $ | 3,560 |
| 19.0 | % | 25.4 | % |
Hybrid Infrastructure | | $ | 2,760 | | $ | 2,059 |
| 34.1 | % | 40.7 | % |
zSystems | |
|
| |
| |
| 69.1 |
| 76.9 | |
Distributed Infrastructure | |
|
| |
|
|
| 11.5 |
| 17.4 | |
Infrastructure Support | |
| 1,474 | |
| 1,501 |
| (1.8) |
| 4.5 | |
|
|
|
|
|
|
|
| Yr. to Yr. |
| ||
|
|
|
|
|
|
|
| Percent |
| ||
|
|
|
|
|
| Yr. to Yr. |
| Change |
| ||
(Dollars in millions) |
|
|
|
|
| Percent |
| Adjusted For |
| ||
For the nine months ended September 30: |
| 2017 |
| 2016 |
| Change |
| Currency |
| ||
Systems external revenue: |
| $ | 4,863 |
| $ | 5,184 |
| (6.2 | )% | (5.9 | )% |
Systems Hardware |
| $ | 3,629 |
| $ | 3,852 |
| (5.8 | )% | (5.5 | )% |
z Systems |
|
|
|
|
| (13.4 | ) | (13.3 | ) | ||
Power Systems |
|
|
|
|
| (12.7 | ) | (12.6 | ) | ||
Storage Systems |
|
|
|
|
| 6.1 |
| 6.6 |
| ||
Operating Systems Software |
| 1,234 |
| 1,332 |
| (7.4 | ) | (7.1 | ) | ||
* Recast to reflect segment change.
Systems
| | | | | | | | | | | |
| | | | | | | | | | Yr. to Yr. |
|
| | | | | | | | | | Percent |
|
| | | | | | | | Yr. to Yr. | | Change |
|
(Dollars in millions) | | | | | | | | Percent | | Adjusted For |
|
For the six months ended June 30: |
| 2022 |
| 2021* |
| Change |
| Currency |
| ||
Infrastructure revenue: | | $ | 7,453 | | $ | 6,853 |
| 8.8 | % | 13.4 | % |
Hybrid Infrastructure | | $ | 4,461 | | $ | 3,841 |
| 16.1 | % | 20.7 | % |
zSystems | |
|
| |
|
|
| 27.6 |
| 32.4 | |
Distributed Infrastructure | |
|
| |
|
|
| 8.6 |
| 13.0 | |
Infrastructure Support | |
| 2,993 | |
| 3,012 |
| (0.7) |
| 4.1 | |
* Recast to reflect segment change.
Infrastructure revenue of $1,721$4,235 million grew 10.4increased 19.0 percent year to year as reported (10(25 percent adjusted for currency) in the thirdsecond quarter of 20172022 compared to the prior-year period. This includes incremental sales to Kyndryl which contributed approximately 7 points to the revenue growth. The revenue growth in the quarter was driven primarily by a combinationstrong client acceptance of strong z14 market acceptancethe new IBM z16 mainframe and aligned storage systems. Within Infrastructure, over the third consecutive quarter of growth as reported and adjusted for currency in Storage Systems. Systems Hardwaretrailing 12 months, hybrid cloud revenue of $1,301$3,719 million grew 15.3decreased 7 percent as reported (14 percent adjusted for currency) with the growth in z Systems and Storage partially offset by a decrease in Power Systems as reported and adjusted for currency. Operating Systems Software revenue of $420 million decreased 2.3 percent as reported (3 percent adjusted for currency) compared to the prior year. For the first nine months of 2017, Systems revenue of $4,863 million decreased 6.2 percent as reported (6 percent adjusted for currency) with declines in both Systems Hardware and Operating Systems Software, both as reported and adjusted for currency.
Within Systems Hardware, third quarter z Systems revenue grew 63.8 percent as reported (62(5 percent adjusted for currency) year to year, driven primarily by the successful launchproduct cycle dynamics.
Hybrid Infrastructure revenue of the z14 mainframe in mid-September 2017. This success is due to strong demand for technology that helps address the growing threat of global data breaches and the need for clients to operate within regulated environments. The z14 mainframe has unprecedented encryption capabilities that are widely appealing and the company has already experienced good traction across a broad mix of industries and geographies in the quarter.
Power Systems third quarter revenue decreased 7.2$2,760 million increased 34.1 percent as reported (8(41 percent adjusted for currency) in the second quarter of 2022 compared to the prior-year period. Incremental sales to Kyndryl contributed approximately 7 points to the revenue growth. Within Hybrid Infrastructure, zSystems revenue grew 69.1 percent as reported (77 percent adjusted for currency) on a year-to-year basis, reflecting solid execution around our z16 program, building on the momentum from the z15 program. The z16 brings the power of embedded AI at scale, cyber-resilient security and cloud-native development for hybrid cloud to our clients. We saw growth in new workloads, such as Linux, and demand for the z16 AI capabilities including real-time fraud detection that leverages the on-chip AI accelerator. Clients are investing in the zSystems platform as an essential part of their hybrid cloud infrastructure. Distributed Infrastructure revenue grew 11.5 percent as reported (17 percent adjusted for currency), led by Storage, including high-end storage which is tied to the z16, and distributed storage. Power revenue declined year to year. This reflects the company’s continued shift to a growing Linux market while continuing to serve a high value, but declining UNIX market. Linux had continued revenue growthyear as reported, but grew adjusted for currency, driven primarily by growth in high-end Power10, partially offset by declines in the low-end and midrange systems. Recently, we announced the expansion of our Power10 server platform designed to deliver flexible and secured infrastructure for hybrid cloud environments.
67
Management Discussion – (continued)
Infrastructure Support revenue of $1,474 million decreased 1.8 percent as reported, but grew 5 percent adjusted for currency in the thirdsecond quarter of 2022 compared to the prior-year period. This includes incremental sales to Kyndryl which contributed approximately 8 points of revenue growth for the quarter. Although there was growth in UNIX high-end systems this quarter, overall UNIX declined as reported and adjusted for currency.
Storage Systems third quarterFor the first six months of 2022, Infrastructure revenue of $7,453 million increased by 4.98.8 percent as reported (4(13 percent adjusted for currency) yearcompared to year withthe prior-year period. Incremental sales to Kyndryl contributed approximately 8 points of revenue growth as reported and adjusted for currency across the major hardware product areas. There was continued growth as reported and adjusted for currency in all-flash array offerings in line with this high-growth market.
Third-quarter Systems strategic imperatives revenue of $0.9 billion grew 26 percent year to year as reported (25 percent adjusted for currency). Cloud revenue of $0.7 billion grew 24 percent as reported (23 percent adjusted for currency). For the first ninesix months of the year, total strategic imperatives revenue of $2.2 billion decreased 3 percent as reported and adjusted for currency year2022.
| | | | | | | | | |
| | | | | | | | Yr. to Yr. |
|
| | | | | | | | Percent/ |
|
(Dollars in millions) | | | | | | | | Margin |
|
For the three months ended June 30: |
| 2022 |
| 2021* |
| Change |
| ||
Infrastructure: |
| | |
| |
|
|
| |
Gross profit | | $ | 2,280 | | $ | 2,033 |
| 12.1 | % |
Gross profit margin | |
| 53.8 | % |
| 57.1 | % | (3.3) | pts. |
Pre-tax income | | $ | 757 | | $ | 489 |
| 54.8 | % |
Pre-tax margin | |
| 17.9 | % |
| 13.7 | % | 4.1 | pts. |
* Recast to year, primarily a reflection of product cycle dynamics. Cloud revenue of $1.7 billion decreased 5 percent as reported and adjusted for currency.
Management Discussion — (continued)reflect segment change.
|
|
|
|
|
| Yr. to Yr. |
| ||
|
|
|
|
|
| Percent/ |
| ||
(Dollars in millions) |
|
|
|
|
| Margin |
| ||
For the three months ended September 30: |
| 2017 |
| 2016 |
| Change |
| ||
Systems: |
|
|
|
|
|
|
| ||
External Systems Hardware gross profit |
| $ | 557 |
| $ | 416 |
| 33.8 | % |
External Systems Hardware gross profit margin |
| 42.9 | % | 36.9 | % | 5.9 | pts. | ||
External Operating Systems Software gross profit |
| $ | 366 |
| $ | 380 |
| (3.7 | )% |
External Operating Systems Software gross profit margin |
| 87.0 | % | 88.3 | % | (1.2 | )pts. | ||
External total gross profit |
| $ | 923 |
| $ | 796 |
| 16.0 | % |
External total gross profit margin |
| 53.6 | % | 51.1 | % | 2.6 | pts. | ||
Pre-tax income/(loss) |
| $ | 339 |
| $ | 136 |
| 149.7 | % |
Pre-tax margin |
| 17.4 | % | 7.8 | % | 9.6 | pts. | ||
| | | | | | | | | |
| | | | | | | | Yr. to Yr. |
|
| | | | | | | | Percent/ |
|
(Dollars in millions) | | | | | | | | Margin |
|
For the six months ended June 30: |
| 2022 |
| 2021* |
| Change |
| ||
Infrastructure: |
| |
|
| |
|
|
| |
Gross profit | | $ | 3,905 | | $ | 3,889 |
| 0.4 | % |
Gross profit margin | |
| 52.4 | % |
| 56.7 | % | (4.4) | pts. |
Pre-tax income | | $ | 956 | | $ | 780 |
| 22.5 | % |
Pre-tax margin | |
| 12.8 | % |
| 11.4 | % | 1.4 | pts. |
|
|
|
|
|
| Yr. to Yr. |
| ||
|
|
|
|
|
| Percent/ |
| ||
(Dollars in millions) |
|
|
|
|
| Margin |
| ||
For the nine months ended September 30: |
| 2017 |
| 2016 |
| Change |
| ||
Systems: |
|
|
|
|
|
|
| ||
External Systems Hardware gross profit |
| $ | 1,432 |
| $ | 1,676 |
| (14.6 | )% |
External Systems Hardware gross profit margin |
| 39.5 | % | 43.5 | % | (4.0 | )pts. | ||
External Operating Systems Software gross profit |
| $ | 1,074 |
| $ | 1,182 |
| (9.2 | )% |
External Operating Systems Software gross profit margin |
| 87.0 | % | 88.7 | % | (1.7 | )pts. | ||
External total gross profit |
| $ | 2,506 |
| $ | 2,858 |
| (12.3 | )% |
External total gross profit margin |
| 51.5 | % | 55.1 | % | (3.6 | )pts. | ||
Pre-tax income/(loss) |
| $ | 227 |
| $ | 354 |
| (35.9 | )% |
Pre-tax margin |
| 4.2 | % | 6.1 | % | (1.9 | )pts. | ||
* Recast to reflect segment change.
The Systems
Infrastructure gross profit margin increased 2.6decreased 3.3 points to 53.653.8 percent in the third quarter of 2017 compared to the prior year, with sequential improvement compared to the second quarter of 2017. The overall increase year-to-year was2022 compared to the prior-year period, driven primarily by profit margin declines and product mix primarily toward the high-margin z Systems. There was also margin improvement in z Systemsacross Hybrid Infrastructure and Storage Systems, with Power Systems essentially flat year to year.Infrastructure Support. For the first ninesix months of the year, the Systems2022, gross profit margin decreased 3.64.4 points to 51.552.4 percent compared to the prior year, with margin declines across all hardware brands and Operating Systems Software,prior-year period, driven by the same factors as well as an impact from mix.the second quarter.
In the thirdsecond quarter of 2017,2022, Infrastructure pre-tax income of $339$757 million grew 149.7increased 54.8 percent and pre-tax margin increased 9.64.1 points year to year to 17.4 percent driven by the strong performance in z Systems. For the first nine months of the year, pre-tax income of $227 million decreased 35.917.9 percent compared to the prior year which also included a higher levelprior-year period, reflecting mix benefits from the growth in zSystems, partially offset by the impact of charges relatedincreased component costs and supplier premiums. For the first six months of 2022, Infrastructure pre-tax income of $956 million increased 22.5 percent and pre-tax margin increased 1.4 points to workforce rebalancing and real estate actions. The company remains focused on continually reinventing this portfolio to address new workloads.
Global Financing
Global Financing is a reportable segment that is measured as a stand-alone entity. Global Financing facilitates IBM clients’ acquisition of information technology systems, software and services by providing financing solutions in the areas where the company has the expertise, while generating strong returns on equity. Global Financing also optimizes the recovery of residual values by selling assets sourced from end of lease, leasing used equipment to new clients, or extending lease arrangements with current clients. Sales of equipment include equipment returned at the end of a lease, surplus internal equipment and used equipment purchased externally. Residual value is a risk unique to the financing business and management of this risk is dependent upon the ability to accurately project future equipment values at lease inception. Global Financing has insight into product plans and cycles for the IBM products under lease. Based upon this product information, Global Financing continually monitors projections of future equipment values and compares them with the residual values reflected in the portfolio.
Management Discussion — (continued)
Results of Operations
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| September 30, |
| September 30, |
| ||||||||
(Dollars in millions) |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
External revenue |
| $ | 427 |
| $ | 412 |
| $ | 1,246 |
| $ | 1,245 |
|
Internal revenue |
| 272 |
| 352 |
| 925 |
| 1,340 |
| ||||
Total revenue |
| $ | 698 |
| $ | 763 |
| $ | 2,171 |
| $ | 2,585 |
|
Pre-tax income |
| $ | 244 |
| $ | 355 |
| $ | 836 |
| $ | 1,208 |
|
In the third quarter of 2017, Global Financing total revenue of $698 million decreased 8.512.8 percent compared to the prior year. This was due to a decline in internal revenue of 22.8 percent,prior-year period, driven primarily by a decrease in internal used equipment sales (down 31.2 percent to $184 million), partially offset by an increase in internal financing (up 4.4 percent to $88 million). External revenue increased 3.7 percent as reported (2.8 percent adjusted for currency), due to an increase in external used equipment sales (up 31.6 percent to $141 million), partially offset by a decrease in external financing (down 6.1 percent to $286 million).
The decrease in total revenue in the first nine months of 2017 compared to the same period in 2016 was due tofactors described above.
Financing
See pages 87 through 90 for a decline in internal revenuediscussion of 30.9 percent, driven by a decrease in internal used equipment sales (down 39.9 percent to $662 million), partially offset by an increase in internal financing (up 10.1 percent to $263 million). External revenue was flat (down 0.4 percent adjusted for currency), with a decline in financing (down 6.3 percent to $877 million), partially offset by an increase in external used equipment sales (up 19.3 percent to $370 million).Financing’s segment results.
68
The year-to-year increase in internal financing revenue in the third quarter of 2017 was due to higher average asset balances, partially offset by lower asset yields. The year-to-year increase in internal financing revenue in the first nine months of 2017 was due to higher average asset balances and higher asset yields. The decrease in external financing revenue in the third quarter of 2017, compared to the same period in 2016, was due to lower asset yields, partially offset by higher average asset balances. The decrease in external financing revenue in the first nine months of 2017, compared to the same period in 2016 was due to lower asset yields.
Total sales of used equipment represented 46.5 percent and 47.5 percent of Global Financing’s revenue in the third quarter and first nine months of 2017, respectively, and 49.1 percent and 54.6 percent in the third quarter and first nine months of 2016, respectively. The decreases in both periods were due to a lower volume of used equipment sales for internal transactions. The gross profit margin on used sales was 33.2 percent and 54.6 percent in the third quarter of 2017 and 2016, respectively, and 45.4 percent and 60.8 percent in the first nine months of 2017 and 2016, respectively. The decrease in the gross profit margin was driven by a shift in mix away from higher margin internal equipment sales and declines in internal sales margins.
Global Financing pre-tax income decreased 31.4 percent to $244 million in the third quarter of 2017, compared to the same period in 2016, due to lower gross profit ($118 million), partially offset by a decrease in total expenses ($6 million). Pre-tax income decreased 30.8 percent to $836 million in the first nine months of 2017, compared to the same period in 2016, due to lower gross profit ($426 million), partially offset by a decrease in total expense ($55 million), including a decrease in financing receivables provisions ($61 million), primarily due to higher Brazil reserve requirements in the prior year.
Global Financing return on equity was 23.8 percent and 24.6 percent for the three and nine months ended September 30, 2017, respectively, compared to 27.2 percent and 30.3 percent for the three and nine months ended September 30, 2016, respectively. The decrease in return on equity in the third quarter and first nine months of 2017 compared to the same periods of 2016, was due to the decrease in net income, partially offset by a decrease in equity. See page 84 for the details of the after-tax income and return on equity calculation.
Total unguaranteed residual value of leases was $668 million as of September 30, 2017. In addition to the unguaranteed residual value, on a limited basis, Global Financing will obtain guarantees of the future value of the equipment to be returned at end of lease. Third-party residual value guarantees increase the minimum lease payments as provided for by accounting standards that are utilized in determining the classification of a lease as a sales-type lease, direct financing lease or operating lease and provide protection against risk of loss arising from declines in equipment values for these assets. The aggregate asset values associated with the guarantees of sales-type leases were $79 million and $43 million for the financing
Management Discussion —– (continued)
transactions originated during the quarters ended September 30, 2017 and 2016, respectively and $186 million and $201 million for the nine months ended September 30, 2017 and 2016, respectively.
Geographic Revenue
In addition to the revenue presentation by reportable segment, the companywe also measuresmeasure revenue performance on a geographic basis. The following geographic, regional and country-specific revenue performance excludes OEM revenue.
| | | | | | | | | | | |
| | | | | | | | | | |
|
| | | | | | | | | | Yr. to Yr. | |
| | | | | | | | | | Percent |
|
| | | | | | | | Yr. to Yr. | | Change |
|
(Dollars in millions) | | | | | | | | Percent | | Adjusted For |
|
For the three months ended June 30: |
| 2022 |
| 2021 |
| Change |
| Currency |
| ||
Total Revenue | | $ | 15,535 | | $ | 14,218 |
| 9.3 | % | 15.6 | % |
Americas | | $ | 8,142 | | $ | 7,122 |
| 14.3 | % | 14.7 | % |
Europe/Middle East/Africa (EMEA) | |
| 4,526 | |
| 4,314 |
| 4.9 |
| 17.4 | |
Asia Pacific | |
| 2,868 | |
| 2,782 |
| 3.1 |
| 15.1 | |
|
|
|
|
|
|
|
| Yr. to Yr. |
| |||||||||||||
|
|
|
|
|
|
|
| Percent |
| |||||||||||||
|
|
|
|
|
| Yr. to Yr. |
| Change |
| |||||||||||||
| | | | | | | | | | | | |||||||||||
| | | | | | | | | | |
| |||||||||||
| | | | | | | | | | Yr. to Yr. | | |||||||||||
| | | | | | | | | | Percent |
| |||||||||||
| | | | | | | | Yr. to Yr. | | Change |
| |||||||||||
(Dollars in millions) |
|
|
|
|
| Percent |
| Adjusted For |
| | | | | | | | Percent | | Adjusted For |
| ||
For the three months ended September 30: |
| 2017 |
| 2016 |
| Change |
| Currency |
| |||||||||||||
For the six months ended June 30: |
| 2022 |
| 2021 |
| Change |
| Currency |
| |||||||||||||
Total Revenue |
| $ | 19,153 |
| $ | 19,226 |
| (0.4 | )% | (1.0 | )% | | $ | 29,732 | | $ | 27,405 |
| 8.5 | % | 13.3 | % |
Geographies: |
| $ | 19,063 |
| $ | 19,159 |
| (0.5 | )% | (1.1 | )% | |||||||||||
Americas |
| 8,887 |
| 9,070 |
| (2.0 | ) | (2.5 | ) | | $ | 15,198 | | $ | 13,599 |
| 11.8 | % | 12.0 | % | ||
Europe/Middle East/Africa (EMEA) |
| 5,989 |
| 5,851 |
| 2.4 |
| (1.4 | ) | |
| 8,757 | |
| 8,242 |
| 6.3 |
| 15.7 | | ||
Asia Pacific |
| 4,187 |
| 4,238 |
| (1.2 | ) | 2.2 |
| |
| 5,778 | |
| 5,563 |
| 3.9 |
| 13.2 | | ||
|
|
|
|
|
|
|
| Yr. to Yr. |
| ||
|
|
|
|
|
|
|
| Percent |
| ||
|
|
|
|
|
| Yr. to Yr. |
| Change |
| ||
(Dollars in millions) |
|
|
|
|
| Percent |
| Adjusted For |
| ||
For the nine months ended September 30: |
| 2017 |
| 2016 |
| Change |
| Currency |
| ||
Total Revenue |
| $ | 56,597 |
| $ | 58,149 |
| (2.7 | )% | (2.2 | )% |
Geographies: |
| $ | 56,343 |
| $ | 57,932 |
| (2.7 | )% | (2.2 | )% |
Americas |
| 26,727 |
| 27,229 |
| (1.8 | ) | (2.3 | ) | ||
Europe/Middle East/Africa (EMEA) |
| 17,186 |
| 18,032 |
| (4.7 | ) | (3.3 | ) | ||
Asia Pacific |
| 12,430 |
| 12,671 |
| (1.9 | ) | (0.6 | ) | ||
Total geographic revenue of $19,063$15,535 million decreased 0.5increased 9.3 percent as reported and 1(16 percent adjusted for currencycurrency) in the thirdsecond quarter of 20172022 compared to the prior year. prior-year period, which includes approximately 5 points of revenue growth from incremental sales to Kyndryl.
Americas revenue of $8,887$8,142 million decreased 2.0increased 14.3 percent as reported and 2(15 percent adjusted for currency. EMEAcurrency), which includes approximately 3 points of revenue of $5,989 milliongrowth from incremental sales to Kyndryl. Within North America, the U.S. increased 2.413.6 percent and Canada increased 4.3 percent as reported but declined 1(8 percent adjusted for currency). Latin America increased 33.0 percent as reported (32 percent adjusted for currency), with Brazil increasing 43.2 percent as reported (38 percent adjusted for currency).
In EMEA, total revenue of $4,526 million increased 4.9 percent as reported (17 percent adjusted for currency), which includes approximately 6 points of revenue growth from incremental sales to Kyndryl. Germany, the UK, Italy and France increased 6.5 percent, 6.3 percent, 1.5 percent and 0.8 percent, respectively, as reported, and increased 20 percent, 18 percent, 14 percent and 13 percent, respectively, adjusted for currency. The suspension and orderly wind-down of our Russian operations impacted the revenue growth rate in EMEA by 2.0 points as reported (2 points adjusted for currency).
Asia Pacific revenue of $4,187$2,868 million declined 1.2increased 3.1 percent as reported (15 percent adjusted for currency), which includes approximately 6 points of revenue growth from incremental sales to Kyndryl. Japan decreased 0.4 percent as reported, but grew 2 percent adjusted for currency in the third quarter versus the prior year. Each of the three geographies had year-to-year revenue performance improvement (as reported and at constant currency) compared to the second-quarter 2017 year-to-year performance.
Within Americas, third-quarter revenue in the U.S. decreased 2.6 percent compared to the prior year. Canada increased 2.1 percent as reported but declined 2 percent year to year adjusted for currency. Latin America decreased 1.5 percent as reported and 218 percent adjusted for currency. Within Latin America, BrazilIndia and Australia increased 31.7 percent and 9.5 percent, respectively, as reported, and increased 38 percent and 18 percent, respectively, adjusted for currency. China decreased 11.312.8 percent as reported and 13 percent adjusted for currency while Mexico increased 31.0 percent as reported and 27 percent adjusted for currency.
In the third quarter, within EMEA, the UK declined 9.3 percent (9(11 percent adjusted for currency). France
For the first six months of 2022, total revenue of $29,732 million increased 14.28.5 percent (8 percent adjusted for currency), Germany increased 8.4 percent (3 percent adjusted for currency), Spain increased 10.9 percent (5 percent adjusted for currency), Norway increased 30.0 percent (24 percent adjusted for currency) and Italy increased 7.3 percent (2as reported (13 percent adjusted for currency) compared to the sameprior-year period, in the prior year. The Middle East and Africa regionwhich includes approximately 5 points of revenue growth from incremental sales to Kyndryl.
69
Management Discussion – (continued)
Americas revenue of $15,198 million increased 3.111.8 percent as reported and 2(12 percent adjusted for currency.currency), which includes approximately 4 points of revenue growth from incremental sales to Kyndryl. Within North America, the U.S. increased 10.4 percent and Canada increased 6.0 percent as reported (8 percent adjusted for currency). Latin America increased 29.6 percent as reported (29 percent adjusted for currency), with Brazil increasing 35.2 percent as reported (30 percent adjusted for currency).
Within Asia Pacific, JapanIn EMEA, total revenue decreased 4.0of $8,757 million increased 6.3 percent as reported (16 percent adjusted for currency), which includes approximately 7 points of revenue growth from incremental sales to Kyndryl. The UK, Germany and France increased 10.4 percent, 7.4 percent and 5.7 percent, respectively, as reported, and increased 18 percent, 18 percent and 16 percent, respectively, adjusted for currency. Italy declined 1.0 percent as reported, but grew 49 percent adjusted for currency compared tocurrency. The suspension and orderly wind-down of our Russian operations impacted the same periodrevenue growth rate in the prior year. India grew 14.1EMEA by 1.6 points as reported (2 points adjusted for currency).
Asia Pacific revenue of $5,778 million increased 3.9 percent as reported (10(13 percent adjusted for currency) while Australia declined 7.8, which includes approximately 6 points of revenue growth from incremental sales to Kyndryl. Japan increased 1.8 percent (11as reported (16 percent adjusted for currency). China revenue grew 3.9India and Australia increased 28.7 percent as reported (4and 10.4 percent, adjusted for currency) and Taiwan grew 19.2 percent as reported (14 percent adjusted for currency).
Total geographic revenue of $56,343 million decreased 2.7 percentrespectively, as reported, and 2increased 34 percent adjusted for currency in the first nine months of 2017 compared to the prior year. Americas revenue of $26,727 million decreased 1.8and 19 percent, as reported and 2 percent adjusted for currency. EMEA revenue of $17,186 million decreased 4.7 percent as reported and 3 percent adjusted for currency. Asia Pacific revenue of $12,430 million decreased 1.9 percent as reported and 1 percent adjusted for currency.
Management Discussion — (continued)
Within Americas, U.S. revenue decreased 3.0 percent compared to the first nine months of the prior year. Canada increased 0.9 percent as reported, which was essentially flat year to year on an adjusted for currency basis. Latin America increased 4.5 percent as reported and 1 percent adjusted for currency. Within Latin America, Brazil increased 5.7 percent as reported, but declined 2 percent adjusted for currency while Mexico increased 11.3 percent as reported and 13 percent adjusted for currency.
Within EMEA, the UK decreased 15.6 percent as reported and 8 percent adjusted for currency compared to the first nine months of the prior year. Germany decreased 4.7 percent as reported and 5 percent adjusted for currency. Switzerland decreased 12.3 percent as reported and 12 percent adjusted for currency. Spain increased 4.4 percent (5 percent adjusted for currency). The Central and Eastern European region declined 1.7 percent (2 percent adjusted for currency) and the Middle East and Africa region was essentially flat as reported, but down 2 percent adjusted for currency.
Within Asia Pacific, Japan declined 1.8 percent as reported, but grew 2 percent adjusted for currency compared to the first nine months of the prior year. Australia decreased 6.6 percent as reported and 9 percentrespectively, adjusted for currency. China decreased 7.812 percent as reported and 6 percent adjusted for currency. India increased 8.9 percent as reported and 6 percent adjusted for currency. South Korea increased 5.4 percent as reported and 3 percent adjusted for currency.
Expense
Expense
Total Expense and Other (Income)
|
|
|
|
|
| Yr. to Yr. |
| ||
(Dollars in millions) |
|
|
|
|
| Percent |
| ||
For the three months ended September 30: |
| 2017 |
| 2016 |
| Change |
| ||
Total consolidated expense and other (income) |
| $ | 5,735 |
| $ | 5,751 |
| (0.3 | )% |
Non-operating adjustments: |
|
|
|
|
|
|
| ||
Amortization of acquired intangible assets |
| $ | (125 | ) | $ | (136 | ) | (8.1 | )% |
Acquisition-related charges |
| 0 |
| (4 | ) | (101.8 | ) | ||
Non-operating retirement-related (costs)/income |
| (103 | ) | (60 | ) | 71.9 |
| ||
Operating (non-GAAP) expense and other (income) |
| $ | 5,507 |
| $ | 5,550 |
| (0.8 | )% |
Total consolidated expense-to-revenue ratio |
| 29.9 | % | 29.9 | % | 0.0 | pts. | ||
Operating (non-GAAP) expense-to-revenue ratio |
| 28.8 | % | 28.9 | % | (0.1 | )pts. | ||
|
|
|
|
|
| Yr. to Yr. |
| ||
(Dollars in millions) |
|
|
|
|
| Percent |
| ||
For the nine months ended September 30: |
| 2017 |
| 2016 |
| Change |
| ||
Total consolidated expense and other (income) |
| $ | 18,434 |
| $ | 20,056 |
| (8.1 | )% |
Non-operating adjustments: |
|
|
|
|
|
|
| ||
Amortization of acquired intangible assets |
| $ | (382 | ) | $ | (371 | ) | 2.8 | % |
Acquisition-related charges |
| (19 | ) | (1 | ) | nm |
| ||
Non-operating retirement-related (costs)/income |
| (474 | ) | (206 | ) | 130.0 |
| ||
Operating (non-GAAP) expense and other (income) |
| $ | 17,559 |
| $ | 19,478 |
| (9.9 | )% |
Total consolidated expense-to-revenue ratio |
| 32.6 | % | 34.5 | % | (1.9 | )pts. | ||
Operating (non-GAAP) expense-to-revenue ratio |
| 31.0 | % | 33.5 | % | (2.5 | )pts. | ||
| | | | | | | | | |
| | | | | | | | Yr. to Yr. |
|
(Dollars in millions) | | | | | | | | Percent |
|
For the three months ended June 30: |
| 2022 |
| 2021 |
| Change |
| ||
Total expense and other (income) | | $ | 6,568 | | $ | 6,940 |
| (5.4) | % |
Non-operating adjustments: | |
|
| |
|
|
|
| |
Amortization of acquired intangible assets | | $ | (278) | | $ | (276) | | 0.6 | % |
Acquisition-related charges | |
| (2) | | | (18) | | (90.8) | |
Non-operating retirement-related (costs)/income | | | (192) | | | (317) | | (39.5) | |
Kyndryl-related impacts | |
| (145) | | | — | | nm | |
Operating (non-GAAP) expense and other (income) | | $ | 5,952 | | $ | 6,329 | | (6.0) | % |
Total expense-to-revenue ratio | |
| 42.3 | % | | 48.8 | % | (6.5) | pts. |
Operating (non-GAAP) expense-to-revenue ratio | |
| 38.3 | % | | 44.5 | % | (6.2) | pts. |
nm - not meaningful
| | | | | | | | | |
| | | | | | | | Yr. to Yr. |
|
(Dollars in millions) | | | | | | | | Percent |
|
For the six months ended June 30: |
| 2022 |
| 2021 |
| Change |
| ||
Total expense and other (income) | | $ | 13,280 | | $ | 13,724 |
| (3.2) | % |
Non-operating adjustments: | |
|
| ��� |
|
|
|
| |
Amortization of acquired intangible assets | | $ | (558) | | $ | (549) |
| 1.5 | % |
Acquisition-related charges | |
| (9) | |
| (34) |
| (74.8) | |
Non-operating retirement-related (costs)/income | | | (394) | |
| (649) |
| (39.4) | |
Kyndryl-related impacts | |
| (367) | |
| — |
| nm | |
Operating (non-GAAP) expense and other (income) | | $ | 11,953 | | $ | 12,491 |
| (4.3) | % |
Total expense-to-revenue ratio | |
| 44.7 | % |
| 50.1 | % | (5.4) | pts. |
Operating (non-GAAP) expense-to-revenue ratio | |
| 40.2 | % |
| 45.6 | % | (5.4) | pts. |
nm - not meaningful
70
Management Discussion – (continued)
Total expense and other (income) decreased 5.4 percent in the second quarter of 2022 versus the prior-year period primarily driven by the effects of currency, a gain from the divestiture of our healthcare software assets, lower non-operating retirement-related costs and benefits from the actions taken to streamline operations and simplify our go-to-market model, partially offset by impacts related to the Kyndryl retained shares and higher spending reflecting our continuing investment in innovation, our ecosystem and talent. Total operating (non-GAAP) expense and other (income) decreased 6.0 percent year to year, driven primarily by the factors described above excluding the lower non-operating retirement-related costs and the impacts related to the Kyndryl retained shares.
For additional information regarding total expense and other (income) for both expense presentations, see the following analyses by category.
Management Discussion — (continued)
Selling, General and Administrative Expense
|
|
|
|
|
| Yr. to Yr. |
| ||
(Dollars in millions) |
|
|
|
|
| Percent |
| ||
For the three months ended September 30: |
| 2017 |
| 2016 |
| Change |
| ||
Selling, general and administrative expense: |
|
|
|
|
|
|
| ||
Selling, general and administrative — other |
| $ | 3,898 |
| $ | 3,983 |
| (2.1 | )% |
Advertising and promotional expense |
| 337 |
| 341 |
| (1.4 | ) | ||
Workforce rebalancing charges |
| 17 |
| 25 |
| (31.1 | ) | ||
Retirement-related costs |
| 175 |
| 174 |
| 0.7 |
| ||
Amortization of acquired intangible assets |
| 125 |
| 136 |
| (8.1 | ) | ||
Stock-based compensation |
| 88 |
| 105 |
| (16.5 | ) | ||
Bad debt expense |
| 7 |
| (32 | ) | nm |
| ||
Total consolidated selling, general and administrative expense |
| $ | 4,648 |
| $ | 4,732 |
| (1.8 | )% |
Non-operating adjustments: |
|
|
|
|
|
|
| ||
Amortization of acquired intangible assets |
| $ | (125 | ) | $ | (136 | ) | (8.1 | )% |
Acquisition-related charges |
| 0 |
| (3 | ) | nm |
| ||
Non-operating retirement-related (costs)/income |
| (53 | ) | (53 | ) | (0.5 | ) | ||
Operating (non-GAAP) selling, general and administrative expense |
| $ | 4,470 |
| $ | 4,541 |
| (1.6 | )% |
nm — not meaningful
|
|
|
|
|
| Yr. to Yr. |
| ||
(Dollars in millions) |
|
|
|
|
| Percent |
| ||
For the nine months ended September 30: |
| 2017 |
| 2016 |
| Change |
| ||
Selling, general and administrative expense: |
|
|
|
|
|
|
| ||
Selling, general and administrative — other |
| $ | 12,293 |
| $ | 12,697 |
| (3.2 | )% |
Advertising and promotional expense |
| 1,090 |
| 1,051 |
| 3.7 |
| ||
Workforce rebalancing charges |
| 188 |
| 1,038 |
| (81.9 | ) | ||
Retirement-related costs |
| 690 |
| 551 |
| 25.3 |
| ||
Amortization of acquired intangible assets |
| 382 |
| 371 |
| 2.8 |
| ||
Stock-based compensation |
| 277 |
| 295 |
| (6.1 | ) | ||
Bad debt expense |
| 40 |
| 90 |
| (56.0 | ) | ||
Total consolidated selling, general and administrative expense |
| $ | 14,959 |
| $ | 16,093 |
| (7.0 | )% |
Non-operating adjustments: |
|
|
|
|
|
|
| ||
Amortization of acquired intangible assets |
| $ | (382 | ) | $ | (371 | ) | 2.8 | % |
Acquisition-related charges |
| (12 | ) | 6 |
| nm |
| ||
Non-operating retirement-related (costs)/income |
| (326 | ) | (183 | ) | 78.0 |
| ||
Operating (non-GAAP) selling, general and administrative expense |
| $ | 14,240 |
| $ | 15,545 |
| (8.4 | )% |
| | | | | | | | | |
| | | | | | | | Yr. to Yr. |
|
(Dollars in millions) | | | | | | | | Percent |
|
For the three months ended June 30: |
| 2022 |
| 2021 |
| Change |
| ||
Selling, general and administrative expense: |
| |
|
| |
|
|
| |
Selling, general and administrative — other | | $ | 3,996 | | $ | 3,954 |
| 1.1 | % |
Advertising and promotional expense | |
| 395 | |
| 393 |
| 0.7 | |
Workforce rebalancing charges | |
| 28 | |
| 107 |
| (74.3) | |
Amortization of acquired intangible assets | |
| 277 | |
| 276 |
| 0.6 | |
Stock-based compensation | |
| 153 | |
| 141 |
| 8.2 | |
Provision for/(benefit from) expected credit loss expense | |
| 6 | |
| (22) |
| nm | |
Total selling, general and administrative expense | | $ | 4,855 | | $ | 4,849 |
| 0.1 | % |
Non-operating adjustments: | |
|
| |
|
|
|
| |
Amortization of acquired intangible assets | | $ | (277) | | $ | (276) |
| 0.6 | % |
Acquisition-related charges | | | (2) | |
| (18) |
| (90.8) | |
Kyndryl-related impacts | |
| 0 | | | — | | nm | |
Operating (non-GAAP) selling, general and administrative expense | | $ | 4,576 | | $ | 4,555 |
| 0.4 | % |
nm - not meaningful
| | | | | | | | | |
| | | | | | | | Yr. to Yr. |
|
(Dollars in millions) | | | | | | | | Percent |
|
For the six months ended June 30: |
| 2022 |
| 2021 |
| Change |
| ||
Selling, general and administrative expense: |
| |
|
| |
|
|
| |
Selling, general and administrative — other | | $ | 7,820 | | $ | 7,844 |
| (0.3) | % |
Advertising and promotional expense | |
| 732 | |
| 737 |
| (0.8) | |
Workforce rebalancing charges | |
| 33 | |
| 201 |
| (83.7) | |
Amortization of acquired intangible assets | |
| 557 | |
| 548 |
| 1.5 | |
Stock-based compensation | |
| 289 | |
| 256 |
| 12.9 | |
Provision for/(benefit from) expected credit loss expense | |
| 22 | |
| (49) |
| nm | |
Total selling, general and administrative expense | | $ | 9,452 | | $ | 9,536 |
| (0.9) | % |
Non-operating adjustments: | |
|
| |
|
|
|
| |
Amortization of acquired intangible assets | | $ | (557) | | $ | (548) |
| 1.5 | % |
Acquisition-related charges | | | (9) | |
| (34) |
| (74.8) | |
Kyndryl-related impacts | |
| 0 | |
| — |
| nm | |
Operating (non-GAAP) selling, general and administrative expense | | $ | 8,887 | | $ | 8,954 |
| (0.8) | % |
nm - not meaningful
71
Management Discussion – (continued)
Total selling, general and administrative (SG&A) expense decreased 1.8increased 0.1 percent in the thirdsecond quarter of 2017 driven primarily by the following factors:
· Lower spending from increased focus on driving expense efficiency (3 points); partially offset by
· The effects of currency (1 point); and
· The impact of acquisitions completed in the prior 12-month period (1 point).
Operating (non-GAAP) expense decreased 1.6 percent year to year driven primarily by the same factors, excluding higher non-operating retirement-related costs net of the one-time non-operating UK gain.
SG&A expense decreased 7.0 percent in the first nine months of 20172022 versus the first nine months of 2016prior-year period driven primarily by the following factors:
| ● | Higher spending (7 points) reflecting our continuing investment to drive our hybrid cloud and AI strategy, expenses of acquired businesses and higher travel and commission expense, partially offset by benefits from the actions taken to streamline operations and simplify our go-to-market model and lower spending for shared services transferred to Kyndryl; partially offset by |
| ● | The effects of currency (4 points); and |
| ● | Lower workforce rebalancing charges (2 points). |
Management Discussion — (continued)Operating (non-GAAP) expense increased 0.4 percent year to year primarily driven by the same factors.
· Lower workforce rebalancing charges (5 points);
· Lower spending (2 points); and
· The effects of currency (1 point); partially offset by
· The impact of acquisitions completedSG&A expense decreased 0.9 percent in the prior 12-monthfirst six months of 2022 versus the prior-year period (1 point).driven primarily by the following factors:
| ● | The effects of currency (3 points); and |
| ● | Lower workforce rebalancing charges (2 points); partially offset by |
| ● | Higher spending (4 points) driven primarily by the same factors described above. |
Operating (non-GAAP) expense decreased 8.40.8 percent year to year, primarily driven primarily by the same factors.
Third-quarter SG&A reflects a year-to-year impact of $105Provisions for expected credit loss expense increased $71 million related to several commercial disputes and a benefit of $91 million resulting from the favorable resolution of pension-related litigation in the UK. Operating (non-GAAP) SG&A does not include the benefit from the pension litigation.
Bad debt expense decreased $51 million year to year in the first ninesix months of 2017,2022 compared to the prior-year period, primarily driven by increasedan increase in specific reserves in Brazilthe current year compared to decreases in both general and specific reserves in the prior year.prior-year period. The receivables provision coverage was 1.92.2 percent at SeptemberJune 30, 2017, a decrease2022, an increase of 10 basis points compared tofrom December 31, 20162021, due to the decline in total receivables balance, and a decrease of 10020 basis points from SeptemberJune 30, 2016. The decrease year to year in the receivables provision coverage was due primarily to write-offs of previously reserved receivables in December 2016.2021.
Research, Development and Engineering
| | | | | | | | | |
| | | | | | | | Yr. to Yr. |
|
(Dollars in millions) | | | | | | | | Percent |
|
For the three months ended June 30: |
| 2022 |
| 2021 |
| Change |
| ||
Research, development and engineering expense | | $ | 1,673 | | $ | 1,641 |
| 1.9 | % |
|
|
|
|
|
| Yr. to Yr. |
| ||
(Dollars in millions) |
|
|
|
|
| Percent |
| ||
For the three months ended September 30: |
| 2017 |
| 2016 |
| Change |
| ||
Total consolidated research, development and engineering expense |
| $ | 1,342 |
| $ | 1,397 |
| (3.9 | )% |
Non-operating adjustment: |
|
|
|
|
|
|
| ||
Non-operating retirement-related (costs)/income |
| $ | (51 | ) | $ | (7 | ) | 615.0 | % |
Operating (non-GAAP) research, development and engineering expense |
| $ | 1,291 |
| $ | 1,390 |
| (7.1 | )% |
| | | | | | | | | |
| | | | | | | | Yr. to Yr. |
|
(Dollars in millions) | | | | | | | | Percent |
|
For the six months ended June 30: |
| 2022 |
| 2021 |
| Change |
| ||
Research, development and engineering expense | | $ | 3,352 | | $ | 3,257 |
| 2.9 | % |
|
|
|
|
|
| Yr. to Yr. |
| ||
(Dollars in millions) |
|
|
|
|
| Percent |
| ||
For the nine months ended September 30: |
| 2017 |
| 2016 |
| Change |
| ||
Total consolidated research, development and engineering expense |
| $ | 4,360 |
| $ | 4,320 |
| 0.9 | % |
Non-operating adjustment: |
|
|
|
|
|
|
| ||
Non-operating retirement-related (costs)/income |
| $ | (148 | ) | $ | (23 | ) | 547.8 | % |
Operating (non-GAAP) research, development and engineering expense |
| $ | 4,212 |
| $ | 4,297 |
| (2.0 | )% |
Research, development and engineering (RD&E) expense was 7.0 percent and 7.7 percent of revenue in the thirdsecond quarter of 2022 increased 1.9 percent year to year reflecting our continuing investment to deliver innovation in AI, hybrid cloud and first nine monthsemerging areas such as quantum. Higher spending (4 points) in the current-year period was partially offset by the effects of 2017, respectively, compared to 7.3 percent and 7.4 percent in prior year periods, respectively. The company continues to invest in research and development as it builds new markets and maintains its leadership in enterprise IT.currency (2 points).
RD&E expense in the third quarterfirst six months of 2017 decreased 3.92022 increased 2.9 percent year to year, primarily driven by:
· Lowerby higher spending net of higher retirement-related costs (5(4 points); partially offset by
· The the effects of currency (1 point).
72
Operating (non-GAAP) RD&E expense decreased 7.1 percent in the third quarter of 2017 compared to the prior year, driven primarily by the same factors, excluding higher non-operating retirement-related costs.
RD&E expense in the first nine months of 2017 increased 0.9 percent year to year primarily driven by:
· The impact of acquisitions completed in the prior 12-month period (2 points); partially offset by
Management Discussion —– (continued)
· Lower spending, net of higher retirement-related costs.
Operating (non-GAAP) RD&E expense decreased 2.0 percent in the first nine months of 2017 compared to the prior year, driven primarily by the same factors, excluding higher non-operating retirement-related costs.
Intellectual Property and Custom Development Income
| | | | | | | | | |
| | | | | | | | Yr. to Yr. |
|
(Dollars in millions) | | | | | | | | Percent |
|
For the three months ended June 30: |
| 2022 |
| 2021 |
| Change |
| ||
Intellectual property and custom development income: |
| |
|
| |
|
|
| |
Licensing of intellectual property including royalty-based fees | | $ | 113 | | $ | 66 |
| 71.7 | % |
Custom development income | |
| 57 | |
| 64 |
| (10.9) | |
Sales/other transfers of intellectual property | |
| 6 | |
| 4 |
| 70.4 | |
Total | | $ | 176 | | $ | 133 |
| 32.2 | % |
| | | | | | | | | |
| | | | | | | | Yr. to Yr. |
|
(Dollars in millions) | | | | | | | | Percent |
|
For the six months ended June 30: |
| 2022 |
| 2021 |
| Change |
| ||
Intellectual property and custom development income: |
| |
|
| |
|
|
| |
Licensing of intellectual property including royalty-based fees | | $ | 184 | | $ | 140 |
| 31.6 | % |
Custom development income | |
| 105 | |
| 129 |
| (18.7) | |
Sales/other transfers of intellectual property | |
| 8 | |
| 10 |
| (20.5) | |
Total | | $ | 297 | | $ | 278 |
| 6.5 | % |
|
|
|
|
|
| Yr. to Yr. |
| ||
(Dollars in millions) |
|
|
|
|
| Percent |
| ||
For the three months ended September 30: |
| 2017 |
| 2016* |
| Change |
| ||
Intellectual Property and Custom Development Income: |
|
|
|
|
|
|
| ||
Licensing of intellectual property including royalty-based fees |
| $ | 236 |
| $ | 474 |
| (50.1 | )% |
Custom development income |
| 62 |
| 53 |
| 16.4 |
| ||
Sales/other transfers of intellectual property |
| 10 |
| 1 |
| 607.5 |
| ||
Total |
| $ | 308 |
| $ | 528 |
| (41.7 | )% |
* Reclassified to conform to 2017 presentation.
|
|
|
|
|
| Yr. to Yr. |
| ||
(Dollars in millions) |
|
|
|
|
| Percent |
| ||
For the nine months ended September 30: |
| 2017 |
| 2016* |
| Change |
| ||
Intellectual Property and Custom Development Income: |
|
|
|
|
|
|
| ||
Licensing of intellectual property including royalty-based fees |
| $ | 921 |
| $ | 935 |
| (1.5 | )% |
Custom development income |
| 186 |
| 158 |
| 18.2 |
| ||
Sales/other transfers of intellectual property |
| 11 |
| 17 |
| (38.4 | ) | ||
Total |
| $ | 1,118 |
| $ | 1,110 |
| 0.7 | % |
* Reclassified to conform to 2017 presentation.
Licensing ofTotal intellectual property including royalty-based fees decreased 50.1and custom development income increased 32.2 percent year to year in the thirdsecond quarter, of 2017 and decreased 1.56.5 percent in the first ninesix months of 20172022 compared to the prior-year period.The company entered into new partnership agreements in the first nine months of 2017, which included two transactions with period income greater than $100 million. The company is licensing IP to partners who are allocating their skills to extend the value of assets that are high value, but may be in mature markets. The licensing of intellectual property for the first nine months of 2016 included three transactions with period income greater than $100 million. The timing and amount of licensing, sales or other transfers of IP may vary significantly from period to period depending upon the timing of licensing agreements, economic conditions, industry consolidation and the timing of new patents and know-how development.
Management Discussion — (continued)
Other (Income) and Expense
| | | | | | | | | |
| | | | | | | | Yr. to Yr. |
|
(Dollars in millions) | | | | | | | | Percent |
|
For the three months ended June 30: |
| 2022 |
| 2021 |
| Change |
| ||
Other (income) and expense: |
| |
|
| |
|
|
| |
Foreign currency transaction losses/(gains) | | $ | (494) | | $ | (15) |
| nm | |
(Gains)/losses on derivative instruments | |
| 439 | |
| 79 |
| 454.6 | % |
Interest income | |
| (28) | |
| (11) |
| 147.9 | |
Net (gains)/losses from securities and investment assets | |
| 54 | |
| 0 |
| nm | |
Retirement-related costs/(income) | |
| 192 | |
| 317 |
| (39.5) | |
Other | |
| (243) | |
| (68) |
| 255.4 | |
Total other (income) and expense | | $ | (81) | | $ | 302 |
| nm | |
Non-operating adjustments: | |
|
| |
|
|
|
| |
Amortization of acquired intangible assets | | $ | (1) | | $ | (1) |
| — | |
Non-operating retirement-related (costs)/income | | | (192) | | | (317) | | (39.5) | % |
Kyndryl-related impacts | |
| (145) | |
| — |
| nm | |
Operating (non-GAAP) other (income) and expense | | $ | (418) | | $ | (16) |
| nm | |
nm - not meaningful
73
Management Discussion – (continued)
|
|
|
|
|
| Yr. to Yr. |
| ||
(Dollars in millions) |
|
|
|
|
| Percent |
| ||
For the three months ended September 30: |
| 2017 |
| 2016 |
| Change |
| ||
Other (income) and expense: |
|
|
|
|
|
|
| ||
Foreign currency transaction losses/(gains) |
| $ | 37 |
| $ | 93 |
| (60.3 | )% |
(Gains)/losses on derivative instruments |
| (29 | ) | (23 | ) | 22.0 |
| ||
Interest income |
| (38 | ) | (22 | ) | 72.7 |
| ||
Net (gains)/losses from securities and investment assets |
| (6 | ) | (5 | ) | 20.9 |
| ||
Other |
| (79 | ) | (51 | ) | 54.9 |
| ||
Total consolidated other (income) and expense |
| $ | (114 | ) | $ | (8 | ) | nm | % |
Non-operating adjustment: |
|
|
|
|
|
|
| ||
Acquisition-related charges |
| $ | 0 |
| $ | (2 | ) | (100.0 | )% |
Operating (non-GAAP) other (income) and expense |
| $ | (114 | ) | $ | (10 | ) | nm | % |
| | | | | | | | | |
| | | | | | | | Yr. to Yr. |
|
(Dollars in millions) | | | | | | | | Percent |
|
For the six months ended June 30: |
| 2022 |
| 2021 |
| Change |
| ||
Other (income) and expense: |
| |
|
| |
|
|
| |
Foreign currency transaction losses/(gains) | | $ | (670) | | $ | (124) |
| 441.1 | % |
(Gains)/losses on derivative instruments | |
| 541 | |
| 239 |
| 126.3 | |
Interest income | |
| (46) | |
| (25) |
| 82.6 | |
Net (gains)/losses from securities and investment assets | |
| 273 | |
| (6) |
| nm | |
Retirement-related costs/(income) | |
| 394 | |
| 649 |
| (39.4) | |
Other | |
| (327) | |
| (87) |
| 276.7 | |
Total other (income) and expense | | $ | 166 | | $ | 647 |
| (74.4) | % |
Non-operating adjustments: | |
|
| |
|
|
|
| |
Amortization of acquired intangible assets | | $ | (1) | | $ | (1) |
| — | |
Non-operating retirement-related (costs)/income | | | (394) | | | (649) | | (39.4) | % |
Kyndryl-related impacts | |
| (367) | |
| — |
| nm | |
Operating (non-GAAP) other (income) and expense | | $ | (596) | | $ | (3) |
| nm | |
nm - not meaningful
|
|
|
|
|
| Yr. to Yr. |
| ||
(Dollars in millions) |
|
|
|
|
| Percent |
| ||
For the nine months ended September 30: |
| 2017 |
| 2016 |
| Change |
| ||
Other (income) and expense: |
|
|
|
|
|
|
| ||
Foreign currency transaction losses/(gains) |
| $ | 374 |
| $ | 514 |
| (27.2 | )% |
(Gains)/losses on derivative instruments |
| (351 | ) | (339 | ) | 3.5 |
| ||
Interest income |
| (102 | ) | (76 | ) | 35.5 |
| ||
Net (gains)/losses from securities and investment assets |
| (16 | ) | 29 |
| nm |
| ||
Other |
| (123 | ) | 153 |
| nm |
| ||
Total consolidated other (income) and expense |
| $ | (218 | ) | $ | 281 |
| nm | % |
Non-operating adjustment: |
|
|
|
|
|
|
| ||
Acquisition-related charges |
| $ | (7 | ) | $ | (7 | ) | (1.0 | )% |
Operating (non-GAAP) other (income) and expense |
| $ | (225 | ) | $ | 274 |
| nm | % |
nm - not meaningful
Total consolidated other (income) and expense was income of $114$81 million in the thirdsecond quarter of 20172022 compared to incomeexpense of $8$302 million in the third quarter of 2016.prior-year period. The increase in income of $106 million year to yearyear-to-year change was primarily driven by:
| ● | Higher gains on divestitures ($243 million) primarily driven by the divestiture of our healthcare software assets (included in “Other”); |
| ● | Net exchange gains (including derivative instruments) in the current year versus net exchange losses in the prior year ($120 million). The current year includes a loss on the cash-settled swap related to the Kyndryl retained shares ($88 million); and |
| ● | Lower non-operating retirement-related costs ($125 million). Refer to “Retirement-Related Plans” for additional information; partially offset by |
| ● | Net unrealized losses related to the Kyndryl retained shares ($56 million). |
· Lower foreign currency transaction losses ($56 million);
· Higher gains on real estate transactions (reflected in Other in the table above) ($19 million); and
· Higher interest income ($16 million).
The consolidatedOperating (non-GAAP) other (income) and expense was $418 million of income in the second quarter of $2182022 andincreased $402 million compared to the prior-year period. The year-to-year change was driven primarily by the factors described above, excluding the higher non-operating retirement-related costs and impacts related to the Kyndryl retained shares.
Total other (income) and expense was $166 million of expense in the first six months of 2022 compared to $647 million in the first nine months of 2017 compared to expense of $281 million in the first nine months of 2016.prior-year period. The increase in income of $499 million year over yearyear-to-year decrease was primarily driven by:
| ● | Lower non-operating retirement-related costs ($256 million). Refer to “Retirement-Related Plans” for additional information; |
| ● | Net exchange gains (including derivative instruments) in the current year versus net exchange losses in the prior year ($244 million). The current year includes a loss on the cash-settled swap related to the Kyndryl retained shares ($88 million); and |
| ● | Higher gains on divestitures ($275 million) primarily driven by the divestiture of our healthcare software assets (included in “Other”); partially offset by |
74
· Real estate capacity charges (reflected in Other in the table above) in the prior year related to workforce transformation ($328 million);Management Discussion – (continued)
| ● | Net unrealized losses related to the Kyndryl retained shares ($278 million). |
· Lower foreign currency transaction losses ($140 million);
· Reduced losses from securitiesOperating (non-GAAP) other (income) and investment assets ($45 million), primarily related to the saleexpense was $596 million of Lenovo sharesincome in the first quartersix months of 2016;2022 and
· Higher interest income ($27 million); partially offset increased $593 million compared to the prior-year period. The year-to-year increase was driven primarily by
· Lower the effects of currency and higher gains on divestitures ($42 million).
Management Discussion — (continued)described above.
Interest Expense
| | | | | | | | | |
| | | | | | | | Yr. to Yr. |
|
(Dollars in millions) | | | | | | | | Percent |
|
For the three months ended June 30: |
| 2022 |
| 2021 |
| Change |
| ||
Interest expense | | $ | 297 | | $ | 281 |
| 5.5 | % |
|
|
|
|
|
| Yr. to Yr. |
| |||||||||||
| | | | | | | | | | |||||||||
| | | | | | | | Yr. to Yr. |
| |||||||||
(Dollars in millions) |
|
|
|
|
| Percent |
| | | | | | | | Percent |
| ||
For the three months ended September 30: |
| 2017 |
| 2016 |
| Change |
| |||||||||||
For the six months ended June 30: |
| 2022 |
| 2021 |
| Change |
| |||||||||||
Interest expense |
| $ | 168 |
| $ | 158 |
| 6.4 | % | | $ | 607 | | $ | 561 |
| 8.2 | % |
|
|
|
|
|
| Yr. to Yr. |
| ||
(Dollars in millions) |
|
|
|
|
| Percent |
| ||
For the nine months ended September 30: |
| 2017 |
| 2016 |
| Change |
| ||
Interest expense |
| $ | 451 |
| $ | 473 |
| (4.6 | )% |
Interest expense increased $10$15 million and $46 million year to year in the thirdsecond quarter but decreased $22 million in theand first ninesix months of 2017.2022, respectively. Interest expense is presented in cost of financing in the Consolidated Income Statement of Earnings if the related external borrowings are to support the Global Financing external business. Overall interest expense (excluding capitalized interest) for the thirdsecond quarter and first ninesix months of 20172022 was $335$379 million and $947$772 million, respectively, a decrease of $6 million and an increase of $29 million and $43$1 million, respectively, versuscompared to the comparable prior-year periods,periods. The year-to-year dynamics for both the second quarter and first six months of 2022 were primarily driven by a lower average debt balance, offset by higher average interest rates and higher average debt balance.compared to the prior-year periods.
Retirement-Related Plans
The following tables provide the total pre-tax cost for all retirement-related plans. TheseThe operating cost amounts are included in the Consolidated Income Statement of Earnings within the caption (e.g., Cost, SG&A, RD&E) relating to the job function of the plan participants. The non-operating cost amounts are included in other (income) and expense.
|
|
|
|
|
| Yr. to Yr. |
| ||
(Dollars in millions) |
|
|
|
|
| Percent |
| ||
For the three months ended September 30: |
| 2017 |
| 2016 |
| Change |
| ||
Retirement-related plans — cost: |
|
|
|
|
|
|
| ||
Service cost |
| $ | 111 |
| $ | 114 |
| (2.5 | )% |
Amortization of prior service costs/(credits) |
| (22 | ) | (28 | ) | (21.3 | ) | ||
Cost of defined contribution plans |
| 258 |
| 262 |
| (1.4 | ) | ||
Total operating costs/(income) |
| $ | 347 |
| $ | 347 |
| (0.2 | )% |
Interest cost |
| $ | 746 |
| $ | 826 |
| (9.6 | )% |
Expected return on plan assets |
| (1,096 | ) | (1,392 | ) | (21.3 | ) | ||
Recognized actuarial losses |
| 728 |
| 692 |
| 5.2 |
| ||
Curtailments/settlements |
| 2 |
| 4 |
| (55.8 | ) | ||
Multi-employer plan/other |
| (74 | ) | 8 |
| nm |
| ||
Total non-operating costs/(income) |
| $ | 306 |
| $ | 139 |
| 121.1 | % |
Total retirement-related plans — cost |
| $ | 653 |
| $ | 486 |
| 34.4 | % |
| | | | | | | | | |
| | | | | | | | Yr. to Yr. |
|
(Dollars in millions) | | | | | | | | Percent |
|
For the three months ended June 30: |
| 2022 |
| 2021 |
| Change |
| ||
Retirement-related plans — cost: |
| |
|
| |
|
|
| |
Service cost | | $ | 61 | | $ | 71 |
| (13.3) | % |
Multi-employer plans | |
| 3 | |
| 5 |
| (29.7) | |
Cost of defined contribution plans | |
| 233 | |
| 252 |
| (7.5) | |
Total operating costs | | $ | 298 | | $ | 327 |
| (9.1) | % |
Interest cost | | $ | 460 | | $ | 410 |
| 12.2 | % |
Expected return on plan assets | |
| (734) | |
| (731) |
| 0.4 | |
Recognized actuarial losses | |
| 442 | |
| 617 |
| (28.4) | |
Amortization of prior service costs/(credits) | |
| 6 | |
| 0 |
| nm | |
Curtailments/settlements | |
| 11 | |
| 16 |
| (32.1) | |
Other costs | |
| 6 | |
| 3 |
| 72.0 | |
Total non-operating costs/(income) | | $ | 192 | | $ | 317 |
| (39.5) | % |
Total retirement-related plans — cost | | $ | 489 | | $ | 644 |
| (24.1) | % |
nm - not meaningful
75
Management Discussion —– (continued)
| | | | | | | | | |
| | | | | | | | Yr. to Yr. |
|
(Dollars in millions) | | | | | | | | Percent |
|
For the six months ended June 30: |
| 2022 |
| 2021 |
| Change |
| ||
Retirement-related plans — cost: |
| |
|
| |
|
|
| |
Service cost | | $ | 127 | | $ | 139 |
| (8.6) | % |
Multi-employer plans | |
| 7 | |
| 11 |
| (31.5) | |
Cost of defined contribution plans | |
| 472 | |
| 508 |
| (7.1) | |
Total operating costs | | $ | 606 | | $ | 658 |
| (7.8) | % |
Interest cost | | $ | 927 | | $ | 820 |
| 13.1 | % |
Expected return on plan assets | |
| (1,483) | |
| (1,461) |
| 1.5 | |
Recognized actuarial losses | |
| 902 | |
| 1,239 |
| (27.2) | |
Amortization of prior service costs/(credits) | |
| 13 | |
| 4 |
| 257.5 | |
Curtailments/settlements | |
| 19 | |
| 34 |
| (43.9) | |
Other costs | |
| 15 | |
| 15 |
| 5.6 | |
Total non-operating costs/(income) | | $ | 394 | | $ | 649 |
| (39.4) | % |
Total retirement-related plans — cost | | $ | 1,000 | | $ | 1,307 |
| (23.5) | % |
|
|
|
|
|
| Yr. to Yr. |
| ||
(Dollars in millions) |
|
|
|
|
| Percent |
| ||
For the nine months ended September 30: |
| 2017 |
| 2016 |
| Change |
| ||
Retirement-related plans — cost: |
|
|
|
|
|
|
| ||
Service cost |
| $ | 323 |
| $ | 335 |
| (3.6 | )% |
Amortization of prior service costs/(credits) |
| (66 | ) | (81 | ) | (18.5 | ) | ||
Cost of defined contribution plans |
| 776 |
| 802 |
| (3.3 | ) | ||
Total operating costs/(income) |
| $ | 1,033 |
| $ | 1,056 |
| (2.2 | )% |
Interest cost |
| $ | 2,215 |
| $ | 2,483 |
| (10.8 | )% |
Expected return on plan assets |
| (3,250 | ) | (4,190 | ) | (22.4 | ) | ||
Recognized actuarial losses |
| 2,143 |
| 2,069 |
| 3.5 |
| ||
Curtailments/settlements |
| 3 |
| 19 |
| (81.6 | ) | ||
Multi-employer plans/other |
| (46 | ) | 64 |
| nm |
| ||
Total non-operating costs/(income) |
| $ | 1,065 |
| $ | 444 |
| 139.8 | % |
Total retirement-related plans — cost |
| $ | 2,097 |
| $ | 1,500 |
| 39.8 | % |
nm - not meaningful
In the third quarter of 2017, totalTotal pre-tax retirement-related plan cost increaseddecreased by $167$155 million compared to the thirdsecond quarter of 2016,2021 primarily driven by lower expected return on plan assets ($296 million) and an increasea decrease in recognized actuarial losses ($36175 million); and lower cost of defined contribution plans ($19 million), partially offset by lowerhigher interest costs ($79 million) and a reduction in other ($83 million), driven by the pension obligation adjustment recorded related to the UK pension litigation ($9150 million). Total cost for the first ninesix months of 2017 increased by $5972022 decreased $307 million versuscompared to the first ninesix months of 2016,2021, primarily driven by a decrease in recognized actuarial losses ($337 million), lower cost of defined contribution plans ($36 million) and higher expected return on plan assets ($94022 million) and an increase in recognized actuarial losses ($73 million); partially offset by lowerhigher interest costs ($268108 million) and other costs ($109 million).
As discusseddescribed in the “Snapshot” on page 51, the company“Operating (non-GAAP) Earnings” section, management characterizes certain retirement-related costs as operating and others as non-operating. Utilizing this characterization, operating retirement-related costs in the thirdsecond quarter of 20172022 were $347$298 million, flata decrease of $30 million compared to the thirdsecond quarter of 2016.2021. For the first six months of 2022, operating retirement-related costs were $606 million, a decrease of $52 million compared to the prior-year period. These operating cost decreases were primarily driven by lower cost of defined contribution plans. Non-operating costs of $306$192 million in the thirdsecond quarter of 2017 increased $1682022 decreased $125 million year to year and for the first six months of 2022 were $394 million, a decrease of $256 million compared to the prior-year period. These non-operating cost decreases were driven primarily by lower expected return on plan assets ($296 million) and an increasea decrease in recognized actuarial losses, ($36 million); partially offset by lowerhigher interest costs ($79 million) and other costs ($83 million). Forcosts.
Taxes
The continuing operations provision for income taxes for the first nine monthssecond quarter of 2017, operating retirement-related costs were $1,033 million, a decrease of $242022 was $257 million, compared to $101 million in the second quarter of 2021. The operating (non-GAAP) income tax provision for the second quarter of 2022 was $413 million, compared to $246 million in the second quarter of 2021.
The continuing operations provision for income taxes for the first ninesix months of 2016,2022 was $218 million, compared to a benefit from income taxes of $58 million for the first six months of 2021. The operating (non-GAAP) provision for income taxes for the first six months of 2022 was $657 million, compared to $272 million for the first six months of 2021.
The continuing operations provision for income taxes for the first six months of 2022 was primarily driven by lower defined contribution plan costs ($26 million). Non-operating coststhe impacts of $1,065 million increased $621 millionforeign tax credit regulations, geographical mix of income, incentives and changes in unrecognized tax benefits. The continuing operations benefit from income taxes for the first six months of 2021 was primarily related to the tax impacts from the resolution of certain tax audits in the first ninequarter of 2021. The increase in the operating (non-GAAP) income tax provision in the first six months of 20172022, compared to the prior year driven primarily by lower expected return on plan assets ($940 million) and an increase in recognized actuarial losses ($73 million); partially offset by lower interest costs ($268 million) and other costs ($109 million), driven by the third-quarter pension obligation adjustment in the UK.
Taxes
The continuing operations effective tax rate for the third quarter of 2017 was 11.0 percent, a decrease of 1.5 points compared to the third quarter of 2016. The continuing operations effective tax rate for the first nine months of 2017 was 1.7 percent, an increase of 2.2 points compared to the first nine months of 2016. The operating (non-GAAP) tax rate for the third quarter of 2017 was 14.7 percent, an increase of 0.5 points compared to the third quarter of 2016. The operating (non-GAAP) tax rate for the first nine months of 2017 was 7.1 percent, an increase of 3.9 points compared to the first nine months of 2016.
The change in the continuing operations effective tax rate for the third quarter of 2017 compared to 2016 was driven by an increase in foreign tax credits, partially offset by a prior year tax benefit related to foreign tax audit activity. The change in the operating (non-GAAP) tax rate for the third quarter was driven by the same factors.
The change in the continuing operations effective tax rate for the first nine months of 2017 compared to 2016 was primarily driven by tax impacts from the year-to-year benefits above, as well as a discreteresolution of certain tax benefit related to the intra-entity transfer recognizedaudits in the first quarter of 20172021.
76
Management Discussion – (continued)
IBM’s full-year tax provision and other neteffective tax rate are impacted by recurring factors including the geographic mix of income before taxes, incentives, changes in unrecognized tax benefits and discrete period impactstax events, such as the settlement of income tax audits and changes in or new interpretations of tax laws. The GAAP tax provision and effective tax rate could also be affected by adjustments to the previously recorded charges for U.S. tax reform attributable to any changes in law, new regulations and guidance, and audit adjustments, among others.
During the fourth quarter of 2020, the U.S. Internal Revenue Service (IRS) concluded its examination of the company’s U.S. income tax returns for 2013 and 2014, which had a specific focus on certain cross-border transactions that occurred in 2013 and issued a final Revenue Agent’s Report (RAR). The IRS’ proposed adjustments relative to these cross-border transactions, if sustained, would result in additional taxable income of approximately $4.5 billion. The company strongly disagrees with the IRS on these specific matters and filed its IRS Appeals protest in the first two quartersquarter of 2021. In the third quarter of 2018, the IRS commenced its audit of the company’s U.S. tax returns for 2015 and 2016. The company anticipates that this audit will be completed in 2022. In the fourth quarter of 2021, the IRS commenced its audit of the company’s U.S. tax returns for 2017 primarily related to foreign tax audit activity. These benefits were more than offset by a prior year tax benefit related to the Japan tax matter (a refund of $1.0 billion plus interest of $0.2 billion). The change in the operating (non-GAAP) tax rate was driven by the same factors.
Management Discussion — (continued)
and 2018. With respect to major U.S. state and foreign taxing jurisdictions, the company is generally no longer subject to tax examinations for years prior to 2012.2015. The company is no longer subject to income tax examination of its U.S. federal tax return for years prior to 2013. The open years contain matters that could be subject to differing interpretations of applicable tax laws and regulations as it relates to the amount and/or timing of income, deductions, and tax credits. Although the outcome of tax audits is always uncertain, the company believes that adequate amounts of tax, interest and interestpenalties have been provided for any adjustments that are expected to result for these years.
In the first quarter of 2016, the IRS commenced its audit of the company’s U.S. tax returns for 2013 and 2014. The company anticipates that this audit will be completed by the end of the first quarter of 2018.
The amount of unrecognized tax benefits at December 31, 2016 increased by $108 million in the third quarter of 2017 and increased by $466 million in the first nine months of 2017 to $4,206 million. The overall increase for the nine months ended September 30, 2017 was primarily related to potential U.S. audit matters. The total amount of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate was $3,107 million at September 30, 2017.
The company is involved in a number of income tax-related matters in India challengingas a result of tax assessments issued by the India Tax Authorities. As of SeptemberAt June 30, 2017,2022, the company hashad recorded $566$676 million as prepaid income taxes in India. A significant portion of this balance represents cash tax deposits paid over time to protect the company’s right to appeal various income tax assessments made by the IndianIndia Tax Authorities. TheAlthough the outcome of tax audits is always uncertain, the company believes it will prevail onthat adequate amounts of tax, interest and penalties have been provided for any adjustments that are expected to result for these matters.years.
The amount of unrecognized tax benefits at June 30, 2022 is $8,597 million which can be reduced by $540 million associated with timing adjustments, U.S. tax credits, potential transfer pricing adjustments, and state income taxes. The net amount of $8,057 million, if recognized, would favorably affect the company’s effective tax rate.
77
Management Discussion – (continued)
Earnings Per Share
Basic earnings per share is computed on the basis of the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share is computed on the basis of the weighted-average number of shares of common stock outstanding plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options and stock awards.
| | | | | | | | | |
| | | | | | | | Yr. to Yr. |
|
| | | | | | | | Percent |
|
For the three months ended June 30: |
| 2022 |
| 2021 |
| Change |
| ||
Earnings per share of common stock from continuing operations: |
| |
|
| |
|
|
| |
Assuming dilution | | $ | 1.61 | | $ | 0.90 |
| 78.9 | % |
Basic | | $ | 1.62 | | $ | 0.91 |
| 78.0 | % |
Diluted operating (non-GAAP) | | $ | 2.31 | | $ | 1.61 |
| 43.5 | % |
Weighted-average shares outstanding: (in millions) | |
|
| |
|
|
|
| |
Assuming dilution | |
| 910.7 | |
| 904.2 |
| 0.7 | % |
Basic | |
| 901.5 | |
| 895.0 |
| 0.7 | % |
|
|
|
|
|
| Yr. to Yr. |
| |||||||||||
|
|
|
|
|
| Percent |
| |||||||||||
For the three months ended September 30: |
| 2017 |
| 2016 |
| Change |
| |||||||||||
| | | | | | | | | | |||||||||
| | | | | | | | Yr. to Yr. |
| |||||||||
| | | | | | | | Percent |
| |||||||||
For the six months ended June 30: |
| 2022 |
| 2021 |
| Change |
| |||||||||||
Earnings per share of common stock from continuing operations: |
|
|
|
|
|
|
|
| |
|
| |
|
|
| | ||
Assuming dilution |
| $ | 2.92 |
| $ | 2.98 |
| (2.0 | )% | | $ | 2.34 | | $ | 1.34 |
| 74.6 | % |
Basic |
| $ | 2.93 |
| $ | 2.99 |
| (2.0 | )% | | $ | 2.36 | | $ | 1.36 |
| 73.5 | % |
Diluted operating (non-GAAP) |
| $ | 3.30 |
| $ | 3.29 |
| 0.3 | % | | $ | 3.71 | | $ | 2.73 |
| 35.9 | % |
Weighted-average shares outstanding: (in millions) |
|
|
|
|
|
|
| |
|
| |
|
|
|
| | ||
Assuming dilution |
| 933.2 |
| 957.3 |
| (2.5 | )% | |
| 910.0 | |
| 903.0 |
| 0.8 | % | ||
Basic |
| 929.4 |
| 954.0 |
| (2.6 | )% | |
| 900.4 | |
| 894.3 |
| 0.7 | % | ||
|
|
|
|
|
| Yr. to Yr. |
| ||
|
|
|
|
|
| Percent |
| ||
For the nine months ended September 30: |
| 2017 |
| 2016 |
| Change |
| ||
Earnings per share of common stock from continuing operations: |
|
|
|
|
|
|
| ||
Assuming dilution |
| $ | 7.24 |
| $ | 7.67 |
| (5.6 | )% |
Basic |
| $ | 7.28 |
| $ | 7.70 |
| (5.5 | )% |
Diluted operating (non-GAAP) |
| $ | 8.64 |
| $ | 8.59 |
| 0.6 | % |
Weighted-average shares outstanding: (in millions) |
|
|
|
|
|
|
| ||
Assuming dilution |
| 940.2 |
| 960.7 |
| (2.1 | )% | ||
Basic |
| 935.6 |
| 957.7 |
| (2.3 | )% | ||
Actual shares outstanding at SeptemberJune 30, 20172022 were 925.8903.2 million. The weighted-average number of common shares outstanding assuming dilution during the thirdsecond quarter and first ninesix months of 20172022 were 24.16.5 million (0.7 percent) and 20.57.0 million (0.8 percent) shares lowerhigher, respectively, than the same periods of 2016. The decrease was primarily the result of the common stock repurchase program.2021.
Management Discussion — (continued)
Financial Position
Dynamics
Dynamics
At September 30, 2017, theOur balance sheet remains strong, andat June 30, 2022 continues to provide us with the newly reorganized financing entity, IBM Credit LLC, the company is better positionedflexibility to support the business over the long term. business.
Cash, restricted cash and marketable securities at quarter endJune 30, 2022 were $11,515 million. The company continues to manage the investment portfolio to meet its capital preservation and liquidity objectives. Total debt$7,778 million, an increase of $45,625 million increased $3,457$222 million from December 31, 2016,2021. Total debt of $50,309 million at June 30, 2022 decreased $1,394 million from December 31, 2021 primarily driven by newcurrency impacts. We continue to manage our debt issuanceslevels while being acquisitive and without sacrificing investments in our business or our solid dividend policy.
Our cash flow is presented on a consolidated basis and includes discontinued operations. Refer to note 3, “Separation of $9,336 million, partially offset by maturities of $6,259 million. Within total debt, $29,390 million, or approximately 64 percent, is in support of the Global Financing business. This includes IBM Credit LLC’s first public debt issuance of $3,000 million in September 2017.Kyndryl,” for additional information. In the first ninesix months of 2017, the company2022, we generated $10,991$4,569 million in cash from operations. The company has consistently generated strongoperating activities, compared to $7,539 million in the first six months of 2021, primarily due to financing receivables. We also invested $958 million in acquisitions and returned $2,963 million to shareholders through dividends in the first six months of 2022. Our cash flow from operationsgeneration permits us to invest and continuesdeploy capital to have access to additional sources of liquidity through the capital markets and its Credit Facilities.
The assets and debt associatedareas with the Global Financing business are a significant partmost attractive long-term opportunities.
78
Management Discussion – (continued)
Our pension plans were well funded at the end of 2021, with worldwide qualified plans funded at 107 percent. Overall pension funded status as of the company’s financial position. The financial position amounts appearing on pages 5 and 6 are the consolidated amounts including Global Financing.end of June 2022 has increased from year-end 2021, mainly due to higher interest rates. We currently have no change to expected plan contributions in 2022.
Global Financing Financial Position Key Metrics:
|
| At September 30, |
| At December 31, |
| ||
(Dollars in millions) |
| 2017 |
| 2016 |
| ||
Cash and cash equivalents |
| $ | 1,919 |
| $ | 1,844 |
|
Net investment in sales-type and direct financing leases |
| 6,700 |
| 6,893 |
| ||
Equipment under operating leases — external clients (1) |
| 504 |
| 548 |
| ||
Client loans |
| 11,269 |
| 11,478 |
| ||
Total client financing assets |
| 18,473 |
| 18,920 |
| ||
Commercial financing receivables |
| 8,561 |
| 9,700 |
| ||
Intercompany financing receivables (2) (3) |
| 4,897 |
| 4,959 |
| ||
Total assets |
| $ | 36,498 |
| $ | 36,492 |
|
Debt |
| $ | 29,390 |
| $ | 27,859 |
|
Total equity |
| $ | 3,278 |
| $ | 3,812 |
|
(1)Includes intercompany mark-up, priced on an arm’s-length basis, on products purchased from the company’s product divisions which is eliminated in IBM’s consolidated results.
(2)Entire amount eliminated for purposes of IBM’s consolidated results and therefore does not appear on pages 5 and 6.
(3)These assets, along with all other financing assets in this table, are leveraged at the value in the table using Global Financing debt.
At September 30, 2017, substantially all client and commercial financing assets were IT related assets, and approximately 52 percent of the total external portfolio was with investment grade clients with no direct exposure to consumers. The increase in investment grade year to year (2 points) was driven primarily by rating changes within the existing portfolio, not by changing the company’s approach to the market. This investment grade percentage is based on the credit ratings of the companies in the portfolio. Additionally, the company takes actions to transfer exposure to third parties. On that basis, the investment grade content would increase by 15 points to 67 percent, an increase of 2 points year to year.
The company has a long-standing practice of taking mitigation actions, in certain circumstances, to transfer credit risk to third parties, including credit insurance, financial guarantees, non-recourse borrowings, transfers of receivables recorded as true sales in accordance with accounting guidance or sales of equipment under operating lease.
Management Discussion — (continued)
IBM Working Capital
| | | | | | |
| | At June 30, | | At December 31, | ||
(Dollars in millions) |
| 2022 |
| 2021 | ||
Current assets | | $ | 27,896 | | $ | 29,539 |
Current liabilities | |
| 31,844 | |
| 33,619 |
Working capital | | $ | (3,948) | | $ | (4,080) |
Current ratio | |
| 0.88:1 | |
| 0.88:1 |
|
| At September 30, |
| At December 31, |
| ||
(Dollars in millions) |
| 2017 |
| 2016 |
| ||
Current assets |
| $ | 44,742 |
| $ | 43,888 |
|
Current liabilities |
| 31,697 |
| 36,275 |
| ||
Working capital |
| $ | 13,045 |
| $ | 7,613 |
|
|
|
|
|
|
| ||
Current ratio |
| 1.41:1 |
| 1.21:1 |
| ||
Working capital increased $5,432$132 million from the year-end 20162021 position. The key changes are described below:
Current assets increased $854decreased $1,643 million (decreased $1,534($556 million adjusted for currency) due to:
· An increase in cash and cash equivalents of $3,089 million ($2,214 million adjusted for currency); partially offset by
· A decline in receivables of $2,118 million ($3,365 million adjusted for currency) primarily as a result of collections of higher year-end balances.
| ● | A decline in receivables of $1,760 million ($1,120 million adjusted for currency) mainly due to collections of higher year-end balances; partially offset by |
| ● | An increase of $222 million ($555 million adjusted for currency) in cash, restricted cash and marketable securities. |
Current liabilities decreased $4,578$1,775 million ($6,173151 million adjusted for currency) as a result of:
| ● | A decrease in short-term debt of $805 million ($812 million adjusted for currency) due to maturities of $3,891 million; partially offset by reclassifications of $3,120 million from long-term debt to reflect upcoming maturities; |
| ● | A decrease in taxes payable of $547 million ($428 million adjusted for currency) primarily due to indirect tax payments; |
| ● | A decrease in accounts payable of $248 million ($121 million adjusted for currency) primarily due to declines from seasonally higher year-end balances; and |
| ● | A decrease in other accrued expenses and liabilities of $211 million (an increase of $490 million adjusted for currency) primarily due to payments of $374 million for workforce rebalancing actions, partially offset by an increase in derivatives of $206 million; partially offset by |
| ● | An increase in deferred income of $4 million or $523 million adjusted for currency primarily driven by annual customer billings and an increase in software renewal rates. |
· A decrease in short-term debt of $3,214 million ($3,230 million adjusted for currency) primarily as a result of maturities of $6,258 million; partially offset by reclassifications of $3,670 million from long-term debt to reflect upcoming maturities and a decrease in commercial paper of $899 million; and
· A decrease in accounts payable of $767 million ($969 million adjusted for currency) reflecting declines from typically higher year-end balances.
Receivables and Allowances
Roll Forward of Total IBM Receivables Allowance for Credit Losses
| | | | | | | | | | | | | |
(Dollars in millions) | | | | | | | | | | | | | |
January 1, 2022 |
| Additions / (Releases) * |
| Write-offs ** |
| Foreign currency and other |
| June 30, 2022 | |||||
$ | 443 | | $ | 29 | | $ | (40) | | $ | (12) | | $ | 420 |
* | Additions/(Releases) for Allowance for Credit Losses are recorded in expense. |
** | Refer to note A, “Significant Accounting Policies,” in our 2021 Annual Report for additional information regarding allowance for credit loss write-offs. |
79
(Dollars in millions) |
|
|
|
|
|
|
|
|
| |||||
January 1, 2017 |
| Additions * |
| Write-offs ** |
| Other*** |
| September 30, 2017 |
| |||||
$ | 776 |
| $ | 37 |
| $ | (157 | ) | $ | 33 |
| $ | 689 |
|
Management Discussion – (continued)
* AdditionsExcluding receivables classified as held for Allowance for Credit Losses are charged to expense.
** Refer to note A, “Significant Accounting Policies,” insale, the company’s 2016 Annual Report on pages 98 and 99 for additional information regarding allowance for credit loss write-offs.
*** Primarily represents translation adjustments.
The total IBM receivables provision coverage was 1.92.2 percent at SeptemberJune 30, 2017, a decrease2022, an increase of 10 basis points compared to December 31, 2016.2021. The increase was primarily driven by the decline in total receivables. The majority of the write-offs during the ninesix months ended SeptemberJune 30, 20172022 related to Global Financing receivables which had been previously reserved.
Global Financing Segment Receivables and Allowances
The following table presents external financingFinancing segment receivables excluding residual values,receivables classified as held for sale, and the allowance for credit losses.immaterial miscellaneous receivables.
| | | | | | | |
| | At June 30, | | At December 31, |
| ||
(Dollars in millions) |
| 2022 |
| 2021 |
| ||
Amortized cost * | | $ | 12,123 | | $ | 12,859 | |
Specific allowance for credit losses | |
| 135 | |
| 159 | |
Unallocated allowance for credit losses | |
| 37 | |
| 42 | |
Total allowance for credit losses | |
| 172 | |
| 201 | |
Net financing receivables | | $ | 11,951 | | $ | 12,658 | |
Allowance for credit losses coverage | |
| 1.4 | % |
| 1.6 | % |
Management Discussion — (continued)* Includes deferred initial direct costs which are expensed in IBM’s consolidated financial results.
|
| At September 30, |
| At December 31, |
| ||
(Dollars in millions) |
| 2017 |
| 2016 |
| ||
Gross financing receivables |
| $ | 26,405 |
| $ | 28,043 |
|
Specific allowance for credit losses |
| 258 |
| 335 |
| ||
Unallocated allowance for credit losses |
| 96 |
| 103 |
| ||
Total allowance for credit losses |
| 354 |
| 438 |
| ||
Net financing receivables |
| $ | 26,051 |
| $ | 27,605 |
|
Allowance for credit losses coverage |
| 1.3 | % | 1.6 | % | ||
The percentage of Global Financing segment receivables reserved decreased from 1.6 percent at December 31, 2016,2021, to 1.31.4 percent at SeptemberJune 30, 2017. The decline was2022, primarily driven by the 2017 write-offs of $119 million of receivables previously reserved partially offset by the overall decline in gross receivables. Specific reserves decreased 23 percent from $335 million at December 31, 2016, to $258 million at September 30, 2017. Unallocated reserves decreased 7 percent from $103 million at December 31, 2016, to $96 million at September 30, 2017.
Roll Forward of Global Financing Segment Receivables Allowance for Credit Losses
(Dollars in millions) |
|
|
|
|
|
|
|
|
| |||||
January 1, 2017 |
| Additions * |
| Write-offs ** |
| Other *** |
| September 30, 2017 |
| |||||
$ | 438 |
| $ | 14 |
| $ | (119 | ) | $ | 20 |
| $ | 354 |
|
* Additions for Allowance for Credit Losses are charged to expense.
** Refer to note A, “Significant Accounting Policies,” (included in the company’s 2016Total IBM)
| | | | | | | | | | | | | |
(Dollars in millions) |
|
| |
|
| |
|
| |
|
| | |
January 1, 2022 | | Additions / (Releases)* | | Write-offs ** | | Foreign currency and other | | June 30, 2022 | |||||
$ | 201 | | $ | (10) | | $ | (18) | | $ | 0 | | $ | 172 |
* | Additions/(Releases) for Allowance for Credit Losses are recorded in expense. |
** | Refer to note A, “Significant Accounting Policies,” in our 2021 Annual Report |
Financing’s expected credit loss write-offs.
*** Primarily represents translation adjustments.
Global Financing’s bad debt expense (including reserves for off-balance sheet commitments which are recorded in other liabilities) was a net release of $1$2 million and $12 million for the three and six months ended SeptemberJune 30, 2017,2022, respectively, compared to a net release of $2$12 million and $29 million for the same period in 2016. Global Financing’s bad debt expense was $14 million for the ninethree and six months ended SeptemberJune 30, 2017, compared to $75 million for the same period2021, respectively. The declines in 2016, due to highernet releases in both periods of 2022 were primarily driven by lower unallocated reserve requirements in Brazil in the prior year.year in Americas due to sales of receivables.
Noncurrent Assets and Liabilities
| | | | | | |
| | At June 30, | | At December 31, | ||
(Dollars in millions) |
| 2022 |
| 2021 | ||
Noncurrent assets | | $ | 99,607 | | $ | 102,462 |
Long-term debt | | $ | 44,328 | | $ | 44,917 |
Noncurrent liabilities (excluding debt) | | $ | 31,855 | | $ | 34,469 |
|
| At September 30, |
| At December 31, |
| ||
(Dollars in millions) |
| 2017 |
| 2016 |
| ||
Noncurrent assets |
| $ | 76,894 |
| $ | 73,582 |
|
Long-term debt |
| $ | 41,327 |
| $ | 34,655 |
|
Noncurrent liabilities (excluding debt) |
| $ | 28,856 |
| $ | 28,147 |
|
80
Management Discussion – (continued)
The increasedecrease in noncurrent assets of $3,313$2,855 million ($1,153472 million adjusted for currency) was driven by:
| ● | A decrease in goodwill and net intangible assets of $1,544 million ($426 million adjusted for currency) primarily driven by currency impacts, intangibles amortization and derecognition of goodwill and intangible assets of $647 million related to the divestiture of our healthcare software assets, partially offset by additions from new acquisitions; and |
| ● | A decrease in net property, plant and equipment and operating right-of-use assets of $793 million ($500 million adjusted for currency). |
· AnLong-term debt decreased $589 million (an increase of $2,065 million in deferred taxes ($1,731$740 million adjusted for currency) driven by increases in the U.S. ($998 million) and the first-quarter 2017 intra-entity transfer, including the cumulative effect of adoption of the new FASB guidance ($827 million); anddue to:
| ● | Reclassifications to short-term debt of $3,120 million to reflect upcoming maturities and currency impacts; partially offset by |
| ● | Issuances of $4,085 million. |
· An increase in retirement plans assets of $1,487Noncurrent liabilities (excluding debt) decreased $2,615 million ($1,2621,189 million adjusted for currency) driven by the expected returns on plan assets, partially offset by interest costs; partially offset bydue to:
| ● | A decrease in retirement and postretirement benefit obligations of $1,317 million ($550 million adjusted for currency); |
| ● | A decrease of $510 million in other liabilities primarily due to currency impacts of $391 million; |
| ● | A decrease of $508 million ($348 million adjusted for currency) in deferred income reflecting seasonal reductions from higher year-end balances; and |
| ● | A decrease in long-term operating lease liabilities of $280 million ($172 million adjusted for currency) related primarily to real estate leases. |
Debt
· A decrease of $562 million in long-term financing receivables ($888 million adjusted for currency) reflecting seasonal reductions from higher year-end balances.
Long-term debt increased $6,671 million ($5,662 million adjusted for currency) from the year-end balance primarily driven by:
· Issuances of $9,124 million; partially offset by
· Reclassification to short-term debt of $3,670 million to reflect upcoming maturities.
Management Discussion — (continued)
The increase in noncurrent liabilities (excluding debt) of $708 million (a decrease of $944 million adjusted for currency) was driven by:
· An increase in retirement and nonpension postretirement liabilities of $483 million (decreased $598 million adjusted for currency) driven by currency impacts and higher interest and service costs; partially offset by contributions.
Debt
The company’sOur funding requirements are continually monitored and we execute our strategies are executed to manage the overall asset and liability profile. Additionally, the company maintainswe maintain sufficient flexibility to access global funding sources as needed.
| | | | | | |
| | At June 30, | | At December 31, | ||
(Dollars in millions) |
| 2022 |
| 2021 | ||
Total company debt | | $ | 50,309 | | $ | 51,703 |
Financing segment debt* | | $ | 12,265 | | $ | 13,929 |
Non-Financing debt | | $ | 38,044 | | $ | 37,775 |
* Financing segment debt includes debt of $1,140 million at June 30, 2022 and $1,345 million at December 31, 2021 to support intercompany financing receivables and other intercompany assets. Refer to Financing’s “Financial Position” on page 88 for additional details.
|
| At September 30, |
| At December 31, |
| ||
(Dollars in millions) |
| 2017 |
| 2016 |
| ||
Total company debt |
| $ | 45,625 |
| $ | 42,169 |
|
Total Global Financing segment debt |
| $ | 29,390 |
| $ | 27,859 |
|
Debt to support external clients |
| 25,433 |
| 24,034 |
| ||
Debt to support internal clients |
| 3,957 |
| 3,825 |
| ||
Non-Global Financing debt |
| $ | 16,235 |
| $ | 14,309 |
|
Total debt of $45,625$50,309 million increased $3,457decreased $1,394 million ($72 million adjusted for currency) from December 31, 2016.2021, primarily driven by maturities of $3,941 million and currency impacts, partially offset by issuances of $4,419 million.
Non-Financing debt of $38,044 million increased $269 million ($1,235 million adjusted for currency) from December 31, 2021 primarily due to new debt issuances.
81
Global Management Discussion – (continued)
Financing segment debt of $12,265 million decreased $1,664 million ($1,307 million adjusted for currency) from December 31, 2021 primarily due to lower funding requirements associated with financing receivables.
Financing provides financing solutions predominantly for the company’sIBM’s external client assets, as well as for assets under contract by other IBM units. These assets, primarily for Technology Services & Cloud Platforms, generate long-term, stable revenue streams similar toand the Global Financing asset portfolio. Based on their attributes, these Technology Services & Cloud Platforms assets are leveraged with the balance of the Global Financing asset base. The increase in debt is consistent with the company’s expectations at year-end 2016 to increase leverage in the Global Financing business.
Non-Global Financing debt of $16,235 million was up $1,926 million from December 31, 2016 and down $116 million from September 30, 2016.
Consolidated debt-to-capitalization ratio at September 30, 2017 was 69.8 percent versus 69.6 percent at December 31, 2016 and 71.2 percent at September 30, 2016.
Given the significant leverage, the company also presents a debt-to-capitalization ratio which excludes Global Financing debt and equity as management believes this is more representative of the company’s core business operations. This ratio can vary from period to period as the company manages its global cash and debt positions. “Core” debt-to-capitalization ratio (excluding Global Financing debt and equity) was 49.6 percent at September 30, 2017 compared to 49.5 percent at December 31, 2016 and 54.6 percent at September 30, 2016.
Global Financing debt-to-equity ratio
|
| At September 30, |
| At December 31, |
|
|
| 2017 |
| 2016 |
|
Global Financing debt-to-equity ratio |
| 9.0 | x | 7.3 | x |
The debt used to fund Global Financing assets is primarily composed of intercompany loans and external debt.loans. Total debt changes generally correspond with the level of client and commercial financing receivables, the level of cash and cash equivalents, the change in intercompany and external payables and the change in intercompany investment from IBM. The terms of the intercompany loans are set by the company to substantially match the term, currency and currencyinterest rate variability underlying the financing receivable and are based on arm’s-length pricing. The Financing debt-to-equity ratio remained at 9.0 to 1 at June 30, 2022.
Global Financing provides financing predominantly for the company’s external client assets, as well as for assets under contract by other IBM units. As previously stated, the company measures GlobalWe measure Financing as a stand-alone entity, and accordingly, interest expense relating to debt supporting Global Financing’s external client and internal business is included in the “Global Financing“Financing Results of Operations” on page 65 and in “Segment Information” on pages 29 and 30.
Management Discussion — (continued)
note 5, “Segments.” In the company’s Consolidated Income Statement, of Earnings, the external debt-related interest expense supporting Global Financing’s internal financing to the companyIBM is reclassified from cost of financing toclassified as interest expense.
Equity
Total equity increased by $1,365$480 million from December 31, 2016 as a result of2021, primarily due to an increase from net income of $2,125 million, a decrease in retained earningsaccumulated other comprehensive losses of $2,806$1,066 million an increase indriven by retirement-related amounts of $1,446 millionbenefit plans ($689 million), cash flow hedges ($205 million) and an increase of $794 million related toforeign currency translation adjustments ($172 million), and common stock of $420 million; partially offset by an increase in treasury stockdividends paid of $3,762 million primarily due to common stock repurchases.$2,963 million.
Cash Flow
The company’sOur cash flows from operating, investing and financing activities, as reflected in the Consolidated Statement of Cash Flows on page 7, are summarized in the following table.table below and include the cash flows of discontinued operations. These amounts also include the cash flows associated with the Global Financing business.
| | | | | | |
(Dollars in millions) | | | | | | |
For the six months ended June 30: |
| 2022 |
| 2021 | ||
Net cash provided by/(used in): |
| |
|
| |
|
Operating activities | | $ | 4,569 | | $ | 7,539 |
Investing activities | |
| (1,186) | |
| (4,671) |
Financing activities | |
| (2,819) | |
| (8,914) |
Effect of exchange rate changes on cash, cash equivalents and restricted cash | |
| (267) | |
| (65) |
Net change in cash, cash equivalents and restricted cash | | $ | 297 | | $ | (6,110) |
(Dollars in millions) |
|
|
|
|
| ||
For the nine months ended September 30: |
| 2017 |
| 2016 |
| ||
Net cash provided by/(used in) continuing operations: |
|
|
|
|
| ||
Operating activities |
| $ | 10,991 |
| $ | 13,105 | * ** |
Investing activities |
| (3,278 | ) | (7,289 | )* | ||
Financing activities |
| (5,499 | ) | (4,619 | )** | ||
Effect of exchange rate changes on cash and cash equivalents |
| 875 |
| 155 |
| ||
Net change in cash and cash equivalents |
| $ | 3,089 |
| $ | 1,352 |
|
* Revised classification of certain financing receivables. Refer to note 1, “Basis of Presentation,” for additional information.
** Reclassified to reflect adoption of the FASB guidance on share-based compensation.
Net cash provided by operating activities decreased by $2,114$2,970 million as compared to the first ninesix months of 20162021 driven by the following factors:primarily by:
· An increase in net income tax payments of $1,211 million, driven by the prior year Japan tax refund received;
· A decrease in cash provided by financing receivables of $868 million; and
· Performance-related declines within net income; partially offset by
· Working capital improvements of $1,009 million driven by strong cash collections.
| ● | A decrease of cash provided by financing receivables of $3,396 million primarily driven by higher prior-year sales of receivables and z16 product cycle dynamics; partially offset by |
| ● | A decrease in workforce rebalancing payments of $685 million; and |
| ● | An increase in cash from working capital improvements of $484 million. |
Net cash used in investing activities decreased $4,011$3,485 million as compared to the first nine monthsdriven primarily by:
| ● | A decrease in cash used in acquisitions of $1,909 million; |
82
Table of 2016 driven by:Contents
Management Discussion – (continued)
· A decrease in net cash used related to acquisitions of $5,002 million.
| ● | An increase in cash provided by divestitures of $1,293 million; and |
| ● | A decrease in cash used in net capital expenditures of $346 million. |
Net cash used in financing activities increased $880decreased $6,094 million asdriven primarily by:
| ● | A decrease in net cash used in debt transactions of $6,233 million primarily driven by higher maturities in the prior year and net issuances in the current year. |
Results of Discontinued Operations
Loss from discontinued operations, net of tax was $73 million in the second quarter of 2022 compared to income of $515 million in the prior-year period. For the first ninesix months of 2016 driven by:2022, loss from discontinued operations, net of tax was $2 million compared to income of $1,067 million in the prior-year period. As the separation of Kyndryl occurred on November 3, 2021, the first half of 2021 included a full six months of Kyndryl operations. The loss in the second quarter of 2022 primarily reflects the net impact of changes in separation-related estimates and the settlement of assets and liabilities in accordance with the separation and distribution agreement. The loss in the first six months of 2022 reflects the same drivers as above and also includes income primarily related to a joint venture historically managed by Kyndryl, which did not transfer at separation due to the transfer being subject to regulatory approval. Upon receiving regulatory approval in the first quarter of 2022, the company sold its majority shares in the joint venture to Kyndryl. See note 3, “Separation of Kyndryl,” for additional information.
Looking Forward
Technology serves as a fundamental source of competitive advantage for our clients and is especially critical as our clients continue to navigate several strategic challenges and opportunities including competition for talent, supply chain issues, inflation, cybersecurity and geopolitical instability. Organizations are also under intense pressure to fast-track their digital transformation and harness the power of their data, which is growing exponentially. We continue to see a strong demand environment for our technology and consulting solutions as we help our clients respond to these challenges and opportunities. We have taken a series of significant steps to capture this demand, including changes to our portfolio, and focused investments in our offerings, technical talent, our ecosystem and go-to-market model. Our first half results reflect these investments and changes we have made to execute a platform-centric, hybrid cloud and AI strategy and continue to reinforce our confidence in the strategy.
· An increaseHybrid Cloud and AI Progress
The hybrid cloud platform we have built is open, secure and flexible and at its core is based on Red Hat, which gives clients powerful software capabilities based on open-source innovation. Our software has been optimized to run on that platform and includes advanced data and AI, automation and the security capabilities our clients need. Our global team of consultants offers deep business expertise and co-creates with clients to accelerate their digital transformation journeys. Our infrastructure allows clients to take full advantage of an extended hybrid cloud environment.
Clients are choosing our hybrid cloud capabilities to unlock more business value and meet their rapidly changing demands. We have more than 4,000 hybrid cloud platform clients, including more than 250 added in common stock repurchasesthe second quarter of $1,043 million; partially offset2022. This platform adoption provides two avenues for growth - from the incremental number of clients, but more importantly it allows us to expand our software, consulting and infrastructure footprint as we help our clients digitally transform.
Critical to our platform-centric strategy is our ecosystem of partners. We continue to expand and extend our partnerships, through strategic collaboration agreements and in the second quarter of 2022, revenue from these partnerships grew solid double digits.
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Management Discussion – (continued)
We continue to invest, both organically and inorganically, to deliver innovation for our clients. Our ability to deliver next generation technologies remains essential. Quantum is an example of our commitment to advance the future of technology. We continue to build on our progress toward our roadmap to deliver a 1,000+ qubit system in 2023 and a 4,000+ qubit system in 2025. In addition, technology developed by
· An increase IBM and our collaborators has been selected by the National Institute of Standards and Technology (NIST) as the basis of the next generation of quantum-safe encryption protocols. Another example of innovation is our z16 system which became generally available in net cash sourced from debt transactionsthe second quarter of $422 million primarily driven by2022. The z16 brings to our clients the power of embedded AI at scale, cyber-resilient security and cloud-native development for hybrid cloud. We also made another two acquisitions in the second quarter of 2022 to strengthen our portfolio, including Randori, a higher levelleading attack surface management (ASM) and cybersecurity provider, building on the recent acquisitions of issuances which exceeded higher maturities.ReaQta and launch of QRadar XDR.
Management Discussion — (continued)
Looking Forward
The company’s strategies,We are confident in the strategy that we are executing and in the fundamentals of our business. Our balance sheet and liquidity position remain strong. At June 30, 2022 we had $7.8 billion of cash and cash equivalents, restricted cash and marketable securities and we continue to manage our debt levels while being acquisitive and without sacrificing investments in our business or our solid dividend policy. IBM is now a more focused, faster-growing and actions are all taken with an objective of optimizing long-term performance. A long-term perspective ensures that the company is well-positionedhigher-value company. We expect to take advantage of the major shifts in technology, business and the global economy.
Within the IT industry, there are major shifts occurring—driven by cognitive, including data and analytics,continue our progress as a leading hybrid cloud and changes in the ways individuals and enterprises are engaging. TheAI company is bringing together its cognitive technologieswith a focus on cloud platforms to create industry-based solutions in order to solve enterprise clients’ real problems. The company continues to address the higher value areas of enterprise IT and is amassing a unique set of capabilities and is differentiating itself from other technology providers as it moves into new spaces, and in some cases, creating entirely new markets. IBM is more than a hardware, software and services company; it has emerged as a cognitive solutions and cloud platform company, focused on industry differentiation. The company’s strategic imperatives represent revenue from its cloud, analytics, mobile, social and security solutions, across its segments, and are a signpost of progress in addressing these market shifts.
In 2017, the company is continuing to embed cognitive and cloud across the business, to build new platforms and solutions and reinvent core capabilities. This is fueling the shift toward strategic imperatives revenue. Consistent with the long-term model, over the course of 2017, the company has continued to acquire and integrate key capabilities, remix skills, invest in areas of growth and return value to shareholders. This iscash generation while maintaining our solid and modestly growing dividend policy. Our mid-term financial model was previously communicated at our investor briefing on October 4, 2021.
Retirement-Related Plans
Our pension plans are well funded. Contributions for all taken into account in the full-year view. Overall, the company continues to expect GAAP earnings per share from continuing operations for 2017 to be at least $11.95. Excluding acquisition-related charges of $0.75 per share and non-operating retirement-related items of $1.10 per share, operating (non-GAAP) earnings per share is expected to be at least $13.80.
Overall, looking forward to the fourth quarter of 2017, as a result of the typical large transactional base in the fourth quarter, there is a range of possible scenarios. In 2016, the company increased revenue by $2.5 billion from third to fourth quarter. In 2017, the company expects stronger sequential performance than the typical third to fourth quarter increase, with potentially $300 million to $400 million more revenue, depending on currency, due in part to the mainframe cycle. The company’s GAAP and operating (non-GAAP) gross margins have shown good progression in recent quarters, driven by mix and some moderation in the headwinds from investment. In the fourth quarter of 2017, the company expects GAAP and operating (non-GAAP) gross margins to be consistent with the sequential improvement the company has experienced the last few years of an approximate 2.5 to 3.5 point increase in gross margins from third to fourth quarter. In expense, the company expects to continue to drive efficiency in spending, however with the weaker U.S. dollar, currency hedgesplans are expected to have an impact. The company continues to have a strong pipeline of IP income opportunities. At mid-October spot rates, the currency impact to revenue growth for the fourth-quarter 2017 is expected to be approximately a three-point tailwind,$2.1 billion in 2022, approximately flat compared to 2021, of which would result in a neutral$0.2 billion generally relates to a one-point tailwindlegally required contributions to full-year 2017.
Free cash flow realization,non-U.S. defined as free cash flow to income from continuing operations (GAAP), was 96 percent over the last twelve monthsbenefit and is again expected to be in line with the longer-term model of over 90 percent in 2017. The company continues tomulti-employer plans. We expect full year free cash flow to be relatively flat year to year, as the first half year-to-year headwind shifts to a tailwind driven by lower tax and workforce rebalancing payments in 2017. This also reflects the level of profit consistent with the company’s full year expectations of earnings per share.
The company’s tax rate reflects its mix of business, both country and product mix. The company continues to expect that the 2017 GAAP tax rate will be approximately 3 points lower than the operating (non-GAAP) tax rate expectation. Expectations for the operating (non-GAAP) tax rate are approximately 15 percent plus or minus three points, excluding discrete items. This range was widened in 2017 due to mix variables and tax reform discussions underway in the U.S, which could result in planning actions this year. The tax rates for the first nine months of 2017, excluding discrete items, were in line with the company’s January 2017 expectations. The company may have discrete tax items in the fourth quarter of 2017, however the amount and timing is unknown and any benefits may be mitigated by other actions. The rate will change year to year based on nonrecurring events, such as the settlement of income tax audits and changes in tax laws, as well as recurring factors including the geographic mix of income before taxes, the timing and amount of foreign dividend repatriation, state and local taxes and the effects of various global income tax strategies.
In January 2017, the company reorganized its client and commercial financing business as a wholly owned subsidiary, IBM Credit LLC. As announced, the financing business target leverage was increased from 7:1 to 9:1. The subsidiary began accessing the capital markets directly in September 2017, with its first public debt issuance. At September 30, 2017, this business continues to be leveraged at a debt-to-equity ratio of 9:1.
Management Discussion — (continued)
The company expects 20172022 pre-tax retirement-related plan cost to be approximately $2.9$2.1 billion, an increasea decrease of approximately $900$500 million compared to 2016.2021. This estimate reflects current pension plan assumptions at December 31, 2016.2021. Within total retirement-related plan cost, operating retirement-related plan cost is expected to be approximately $1.4$1.2 billion, a decrease of approximately flat$100 million versus 2016.2021. Non-operating retirement-related plan cost is expected to be approximately $1.5$0.9 billion, an increasea decrease of approximately $900$400 million compared to 2016,2021, primarily driven by lower recognized actuarial losses and higher income from expected return on assets. Contributions for all retirement-related plans are expected to be approximately $2.4 billion in 2017, approximately flat
Currency Rate Fluctuations
In the second quarter of 2022, there has been significant movement of the U.S. dollar (USD) as compared to 2016.
Currency Rate Fluctuations
many other currencies. Changes in the relative values of non-U.S. currencies to the U.S. dollar (USD)USD affect the company’sour financial results and financial position. At SeptemberJune 30, 2017,2022, currency changes resulted in assets and liabilities denominated in local currencies being translated into morefewer dollars than at year-end 2016. The company uses2021. We use financial hedging instruments to limit specific currency risks related to financing transactions and other foreign currency-based transactions.
During periodsThe combination of sustainedthe rate and velocity of movements in currency, and the marketplacefact that we do not hedge 100 percent of our currency exposures, will result in a currency impact to our profit and competition adjust to the changing rates. For example, when pricing offeringscash flows in the marketplace, the company may use some of the advantage from a weakening U.S. dollar to improve its position competitively, and price more aggressively to win the business, essentially passing on a portion of the currency advantage to its customers. Competition will frequently take the same action. Consequently, the company believes that some of the currency-based changes in cost impact the prices charged to clients. The company also maintains2022. We maintain currency hedging programs for cash management purposes which temporarily mitigate, but do not eliminate, the volatility of currency impacts on the company’sour financial results. During periods of sustained movements in currency, the marketplace and competition adjust to the changing rates over time.
The company translatesWe translate revenue, cost and expense in itsour non-U.S. operations at current exchange rates in the reported period. References to “adjusted for currency” or “constant currency” reflect adjustments based upon a simple mathematical formula. However, this constant currency methodology that the company utilizeswe utilize to disclose this information does not incorporate any operational actions that management could take to mitigate fluctuating currency rates.rates, such as updates to pricing and sourcing. Currency movements impacted the company’sour year-to-year revenue and earnings per share growth in the first ninesix months of 2017.2022. Based on the currency rate movements in the first ninesix months of 2017,2022, total revenue decreased 2.7increased 8.5 percent as reported and decreased 2.213.3 percent at constant currency versus the first ninesix months of 2016.2021. On an income from continuing
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Management Discussion – (continued)
operations before income taxtaxes basis, these translation impacts, offsetmitigated by the net impact of hedging activities, resulted in a theoretical maximum (assuming no pricing or sourcing actions) decrease of approximately $10$200 million in the first ninesix months of 20172022 on an as-reported basis and a decrease of $20approximately $160 million on an operating (non-GAAP) basis. The same mathematical exercise resulted in an increase of approximately $50$65 million in the first ninesix months of 20162021 on an as-reported basis and an increase of $75$100 million on an operating (non-GAAP) basis. The company viewsWe view these amounts as a theoretical maximum impact to itsour as-reported financial results. Considering the operational responses mentioned above, movements of exchange rates, and the nature and timing of hedging instruments, it is difficult to predict future currency impacts on any particular period, but the company believes it could be substantially less than the theoretical maximum given the competitive pressure in the marketplace.
period.
For non-U.S. subsidiaries and branches that operate in U.S. dollars or whose economic environment is highly inflationary, translation adjustments are reflected in results of operations. Generally, the company manageswe manage currency risk in these entities by linking prices and contracts to U.S. dollars.
The company continues to monitor the economic conditions in Venezuela. In mid-February 2016, changes to the currency exchange systems were announced which eliminated the SICAD exchange rate and replaced the SIMADI rate with DICOM, which is expected to be a floating exchange rate. The company recorded a pre-tax loss of $43 million in the first quarter of 2016 in other (income) and expense in the Consolidated Statement of Earnings as a result of the elimination of the SICAD and devaluation in the new exchange. Total pre-tax loss for the first nine months of 2017 was $9 million compared to $46 million in the first nine months of 2016. The company’s net assets denominated in local currency were $8 million at September 30, 2017. The company’s operations in Venezuela comprised less than 1 percent of total 2016 and 2015 revenue, respectively.
Liquidity and Capital Resources
In the company’s 2016our 2021 Annual Report, on pages 6847 to 71,49, there is a discussion of the company’sour liquidity including two tables that present fivethree years of data. The table presented on page 6847 includes net cash from operating activities, cash and cash equivalents, restricted cash and short-term marketable securities, and the size of the company’sour global credit facilities for each of the past fivethree years. For the ninesix months
Management Discussion — (continued)
ended, or as of,at, as applicable, SeptemberJune 30, 2017,2022, those amounts are $11.0$4.6 billion forof net cash from operating activities, $11.5$7.8 billion of cash and cash equivalents, restricted cash and short-term marketable securities and $10.25$10.0 billion in global credit facilities, respectively. While we have no current plans to draw on these credit facilities, they are available as back-up liquidity. On July 20, 2017,June 30, 2022, the company and IBM Credit entered into aamended its existing $2.5 billion 364-dayThree-Year Credit Agreement and a $2.5$7.5 billion three-yearFive-Year Credit Agreement. These new agreements permit borrowings upAgreement (the Credit Agreements) to an aggregate of $5 billionextend the maturity dates to June 20, 2025 and June 22, 2027, respectively, and to replace the London Interbank Offered Rate (LIBOR) interest rate provisions with customary provisions based on a revolving basis.the Secured Overnight Financing Rate (SOFR). Refer to note 12, “Borrowings,” for additional details on these credit facilities.
The major rating agencies’agencies' ratings on the company’sour debt securities at SeptemberJune 30, 20172022 appear in the following table below. The Fitch ratings were reaffirmed on September 30, 2016 and remain unchanged from March 31, 2022.
| | | | |
| | STANDARD | | MOODY’S |
| | AND | | INVESTORS |
IBM RATINGS: | POOR’S | SERVICE | ||
Senior long-term debt | A- | A3 | ||
Commercial paper | A-2 | Prime-2 |
IBM has ample financial flexibility, supported by our strong liquidity position and cash flows, to operate at a single A credit rating. Debt levels have decreased $1.4 billion from December 31, 2016. On May 3, 2017, Moody’s Investors Service lowered its rating on2021, primarily driven by currency, and $22.7 billion from our peak levels at June 30, 2019 (immediately preceding the company’s senior long-term debt from Aa3 to A1, while reaffirming its rating on commercial paper. On May 5, 2017, Standard and Poor’s lowered its ratings on the company’s senior long-term debt to A+ from AA- and commercial paper to A-1 from A-1+Red Hat acquisition).IBM remains a strong investment grade company with significant financial flexibility to execute its strategy and capital allocation plans. The company does
We do not have “ratings trigger” provisions in itsour debt covenants or documentation, which would allow the holders to declare an event of default and seek to accelerate payments thereunder in the event of a change in credit rating. The company’sOur debt covenants are well within the required levels. Our contractual agreements governing derivative instruments contain standard market clauses which can trigger the termination of the agreement if the company’sour credit rating were to fall below investment grade. At SeptemberJune 30, 2017,2022, the fair value of those instruments that were in a liability position was $352$551 million, before any applicable netting, and this position is subject to fluctuations in fair value period to period based on the level of the company’sour outstanding instruments and market conditions. The company hasWe have no other contractual arrangements that, in the event of a change in credit rating, would result in a material adverse effect on itsour financial position or liquidity.
Effective December 31, 2021, the use of LIBOR was substantially eliminated for purposes of any new financial contract executions. The UK’s Financial Conduct Authority (FCA) extended the phase out of LIBOR in the case of U.S. dollar settings for certain tenors until the end of June 2023. Any legacy USD LIBOR based financial contracts are
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Management Discussion – (continued)
expected to be addressed using the LIBOR rates published through the June 2023 extension period. The company prepares itsreplacement of the LIBOR benchmark within the company’s risk management activities did not have a material impact in the consolidated financial results.
We prepare our Consolidated Statement of Cash Flows in accordance with applicable accounting standards for cash flow presentation on page 7 of this Form 10-Q and highlightshighlight causes and events underlying sources and uses of cash in that format on page 79.pages 82 and 83. For the purpose of running its business, the companyIBM manages, monitors and analyzes cash flows in a different manner.
Management uses free cash flow as a measure to evaluate its operating results, plan share repurchaseshareholder return levels, make strategic investments and assess its ability and need to incur and service debt. The entire free cash flow amount is not necessarily available for discretionary expenditures. The company definesWe define free cash flow as net cash from operating activities less the change in Global Financing receivables and net capital expenditures, including the investment in software. A key objective of the Global Financing business is to generate strong returns on equity, and increasingour Financing receivables isare the basis for that growth. Accordingly, management considers Global Financing receivables as a profit-generating investment, not as working capital that should be minimized for efficiency. Therefore, management includes presentations of both free cash flow and net cash from operating activities that exclude the effect of Global Financing receivables. Free cash flow guidance is derived using an estimate of profit, working capital and operational cash outflows. As previously noted, the company views Global Financing receivables as a profit-generating investment which it seeks to maximize and therefore it is not considered when formulating guidance for free cash flow. As a result the company does not estimate a GAAP Net Cash from Operations expectation metric.
Management Discussion — (continued)
The following is management’s view of cash flows for the first ninesix months of 20172022 and 20162021 prepared in a manner
consistent with the description above.above and is presented on a consolidated basis, including cash flows of discontinued operations.
(Dollars in millions) |
|
|
|
|
| ||
For the nine months ended September 30: |
| 2017 |
| 2016 |
| ||
Net cash from operating activities per GAAP |
| $ | 10,991 |
| $ | 13,105 | * ** |
Less: change in Global Financing receivables |
| 2,468 |
| 3,336 | * | ||
Net cash from operating activities, excluding Global Financing receivables |
| 8,523 |
| 9,769 | ** | ||
Capital expenditures, net |
| (2,347 | ) | (2,801 | ) | ||
Free cash flow (FCF) |
| 6,176 |
| 6,969 | ** | ||
Acquisitions |
| (442 | ) | (5,445 | ) | ||
Divestitures |
| 35 |
| 35 |
| ||
Share repurchase |
| (3,674 | ) | (2,632 | ) | ||
Common stock repurchases for tax withholdings |
| (153 | ) | (115 | )** | ||
Dividends |
| (4,119 | ) | (3,927 | ) | ||
Non-Global Financing debt |
| 1,896 |
| 3,365 |
| ||
Other (includes Global Financing receivables and Global Financing debt) |
| 3,270 |
| 3,523 |
| ||
Change in cash, cash equivalents and short-term marketable securities |
| $ | 2,988 |
| $ | 1,773 |
|
| | | | | | |
(Dollars in millions) | | | | | | |
For the six months ended June 30: |
| 2022 |
| 2021 | ||
Net cash from operating activities per GAAP* | | $ | 4,569 | | $ | 7,539 |
Less: change in Financing receivables | |
| 367 | |
| 3,763 |
Net cash from operating activities, excluding Financing receivables | | $ | 4,202 | | $ | 3,776 |
Capital expenditures, net | |
| (871) | |
| (1,217) |
Free cash flow | | $ | 3,331 | | $ | 2,559 |
Acquisitions | |
| (958) | |
| (2,866) |
Divestitures | |
| 1,268 | |
| (25) |
Common stock repurchases for tax withholdings | |
| (315) | |
| (234) |
Dividends | |
| (2,963) | |
| (2,924) |
Non-Financing debt | |
| 1,740 | |
| (2,331) |
Other (includes Financing net receivables and Financing debt) | |
| (1,882) | |
| (288) |
Change in cash, cash equivalents, restricted cash and short-term marketable securities | | $ | 221 | | $ | (6,110) |
* Revised classificationIncludes cash flows of certain financing receivables.discontinued operations. See note 3, “Separation of Kyndryl,” for additional information.
** Reclassified to reflect adoption of the FASB guidance on share-based compensation.
In the first ninesix months of 2017, the company2022, we generated free cash flow of $6.2$3.3 billion, a decreasean increase of $0.8 billion versus the prior year. The year-to-year decrease was driven primarily by a cash tax refund related to the Japan tax matter in the prior year. In addition, working capital contributed to the free cash flow performance in the first nine months of 2017. Net capital expenditures of $2.3 billion included investments to expand the company’s cloud and cognitive capabilities.prior-year period. In the first ninesix months of 2017, the company2022, we also continued to focus its cash utilization on returningreturn value to shareholders including $4.1with $3.0 billion in dividends and $3.7invested $1.0 billion in gross common stock repurchases.
acquisitions.
Events that could temporarily change the historical cash flow dynamics discussed previously and in the company’s 2016our 2021 Annual Report 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 12,14, “Contingencies,” in this Form 10-Q. With respect to pension funding, the company expectswe expect to make legally mandated pension plan contributions to certain non-U.S. defined benefit plans of approximately $400$200 million in 2017.2022. Contributions related to all retirement-related plans are expected to be approximately $2.4$2.1 billion in 2017.2022. 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. The company isWe are not
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Management Discussion – (continued)
quantifying any further impact from pension funding because it is not possible to predict future movements in the capital markets or changes in pension plan funding regulations.
In 2022, we are not legally required to make any contributions to the U.S. defined benefit pension plans.
The company’s U.S.Our cash flows continue to beare sufficient to fund itsour current domestic operations and obligations, including investing and financing activities such as dividends and debt service. The company’s U.S. operations generate substantial cash flows, and, in those circumstances where the company hasWhen additional cash requirements in the U.S., the company hasarise, we have several liquidity options available. These options may include the ability to borrow additional funds at reasonable interest rates utilizing its Credit Facilities, repatriating certain foreign earnings and utilizing intercompany loansour committed global credit facilities. With our share repurchase program suspended since the close of the Red Hat acquisition, our overall shareholder payout remains at a comfortable level and we remain fully committed to our long-standing dividend policy.
Financing
Financing is a reportable segment that is measured as a stand-alone entity. Financing facilitates IBM clients’ acquisition of information technology systems, software and services by providing financing solutions in the areas where the company has the expertise, while generating solid returns on equity.
Results of Operations
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | Yr. to Yr. | |
(Dollars in millions) | | | | | | | | Percent | |
For the three months ended June 30: |
| 2022 |
| 2021* |
| Change | | ||
Revenue | | $ | 146 | | $ | 209 |
| (29.9) | % |
Pre-tax income | | $ | 102 | | $ | 131 |
| (22.4) | % |
* Recast to reflect 2021 segment changes.
| | | | | | | | | |
| | | | | | | | Yr. to Yr. | |
(Dollars in millions) | | | | | | | | Percent | |
For the six months ended June 30: |
| 2022 |
| 2021* |
| Change | | ||
Revenue | | $ | 300 | | $ | 417 |
| (28.0) | % |
Pre-tax income | | $ | 186 | | $ | 229 |
| (18.9) | % |
* Recast to reflect 2021 segment changes.
Our Financing business is focused on IBM’s products and services. For the three months ended June 30, 2022, financing revenue decreased 29.9 percent as reported (27 percent adjusted for currency) compared to the prior year, driven by client financing down $61 million to $145 million. For the six months ended June 30, 2022, financing revenue decreased 28.0 percent as reported (26 percent adjusted for currency) compared to the prior year, driven by client financing down $114 million to $297 million. The decreases in client financing revenue in both periods in 2022 were primarily driven by the strategic actions taken in the prior year including selling certain client lease and loan financing receivables to third parties. While these strategic actions impact revenue and pre-tax income on a year-to-year basis, our repositioning of the Financing business has strengthened our liquidity position, improved the quality of our portfolio, and lowered our debt needs.
Financing pre-tax income decreased 22.4 percent to $102 million in the second quarter of 2022, compared to the prior year and the pre-tax margin of 69.7 percent increased 6.8 points year to year. For the six months ended June 30, 2022, Financing pre-tax income decreased 18.9 percent to $186 million compared to the prior year and the pre-tax margin of 62.0 percent increased 7.0 points year to year. The decreases in pre-tax income in both periods in 2022 were primarily driven by the strategic actions described above.
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Management Discussion – (continued)
Financial Position
| | | | | | |
| | At June 30, | | At December 31, | ||
(Dollars in millions) |
| 2022 |
| 2021 | ||
Cash and cash equivalents | | $ | 700 | | $ | 1,359 |
Client financing receivables: | | | | | | |
Net investment in sales-type and direct financing leases(1) | |
| 3,888 | |
| 3,396 |
Client loans | |
| 7,891 | |
| 8,818 |
Total client financing receivables | | $ | 11,779 | | $ | 12,215 |
Commercial financing receivables: | |
| | |
| |
Held for investment | | | 171 | | | 444 |
Held for sale | | | 614 | | | 793 |
Other receivables | | | 53 | | | 61 |
Total external receivables(2) | | $ | 12,618 | | $ | 13,512 |
Intercompany financing receivables(3) (4) | |
| 664 | |
| 778 |
Other assets(5) | | | 1,046 | | | 1,231 |
Total assets | | $ | 15,028 | | $ | 16,880 |
| | | | | | |
Intercompany payables(3) | | $ | 394 | | $ | 467 |
Debt(6) | | | 12,265 | | | 13,929 |
Other liabilities | | | 1,006 | | | 937 |
Total liabilities | | $ | 13,665 | | $ | 15,333 |
Total equity | | $ | 1,363 | | $ | 1,547 |
Total liabilities and equity | ��� | $ | 15,028 | | $ | 16,880 |
| (1) | Includes deferred initial direct costs which are expensed in IBM’s consolidated financial results. |
| (2) | The difference between the decrease in total external receivables of $0.9 billion (from $13.5 billion in December 2021 to $12.6 billion in June 2022) and the $0.4 billion change in Financing segment’s receivables disclosed in the free cash flow presentation on page 86 is primarily attributable to currency impacts. |
| (3) | This entire amount is eliminated for purposes of IBM’s consolidated financial results and therefore does not appear in the Consolidated Balance Sheet. |
| (4) | These assets, along with all other financing assets in this table, are leveraged at the value in the table using Financing segment debt. |
| (5) | Includes $0.6 billion of other intercompany assets in June 2022 and $0.7 billion in December 2021. |
| (6) | Financing segment debt is primarily composed of intercompany loans. |
Total external receivables decreased $894 million primarily driven by collections of higher year-end balances partially offset by an increase in volumes in the second quarter of 2022 reflecting the z16 product cycle, with corresponding changes in debt funding.
At June 30, 2022, we continue to apply our rigorous credit policies. Approximately 71 percent of the total external portfolio was with investment-grade clients with no direct exposure to consumers, an increase of 7 points year to year and an increase of 3 points compared to March 31, 2022. This investment grade percentage is based on the credit ratings of the companies in the portfolio and reflects certain foreign subsidiaries.mitigating actions taken to reduce the risk to IBM.
We have a long-standing practice of taking mitigation actions, in certain circumstances, to transfer credit risk to third parties. These actions may include credit insurance, financial guarantees, nonrecourse borrowings, transfers of receivables recorded as true sales in accordance with accounting guidance or sales of equipment under operating lease. Sale of receivables arrangements are also utilized in the normal course of business as part of our cash and liquidity management.
Throughout 2021, sales of client financing receivables were utilized as part of the company’s cash and liquidity management as well as for credit mitigation. In the first half of 2022, sales of client financing receivables were largely focused on credit mitigation. In addition, the company has an existing agreement with a third-party investor to sell IBM
88
Management Discussion – (continued)
short-term commercial financing receivables on a revolving basis. The company does earn a significant amount of its pre-tax income outside the U.S. The company’s policy ishas expanded this agreement to indefinitely reinvest the undistributed earnings of its foreign subsidiaries,other countries and accordingly, no provision for federal income taxes has been made on accumulated earnings of foreign subsidiaries. The company periodically repatriates a portion of these earnings to the extent that it does not incur an additional U.S. tax liability. Quantification of the deferred tax liability, if any, associated with indefinitely reinvested earnings is not practicable. While the company currently does not have a need to repatriate funds held by its foreign subsidiaries, if these funds are needed for operations and obligationsgeographies since commencement in the U.S., and Canada in 2020.
The following table presents the company could electtotal amount of client and commercial financing receivables transferred:
| | | | | | |
(Dollars in millions) |
| | ||||
For the six months ended June 30: | | 2022 | | 2021 | ||
Client financing receivables: | | | | | | |
Lease receivables | | $ | 15 | | $ | 732 |
Loan receivables | |
| 2 | |
| 1,359 |
Total client financing receivables transferred | | $ | 17 | | $ | 2,091 |
Commercial financing receivables: | | | | | | |
Receivables transferred during the period | | $ | 3,914 | | $ | 2,621 |
Receivables uncollected at end of period* | | $ | 815 | | $ | 821 |
* | Of the total amount of commercial financing receivables sold and derecognized from the Consolidated Balance Sheet, the amounts presented remained uncollected from the business partners as of June 30, 2022 and 2021. |
For additional information relating to repatriate these funds which could result in a reassessment of the company’s policyfinancing receivables refer to note 9, “Financing Receivables.” Refer to pages 26 through 30 for additional information related to Financing segment receivables, allowance for credit losses and increased tax expense.
Management Discussion — (continued)debt.
Global Financing Return on Equity Calculation
| | | | | | | | | | | | | |
| | For Three Months Ended | | For Six Months Ended | | ||||||||
| | June 30, | | June 30, | | ||||||||
(Dollars in millions) | | 2022 | | 2021* | | 2022 |
| 2021* |
| ||||
Numerator | | | | | | | | |
|
| |
| |
Financing after-tax income** | | $ | 84 | | $ | 97 | | $ | 153 | | $ | 169 | |
Annualized after-tax income (1) | | $ | 336 | | $ | 388 | | $ | 305 | | $ | 339 | |
Denominator | |
| | |
| | |
| | |
| | |
Average Financing equity (2)+ | | $ | 1,358 | | $ | 1,978 | | $ | 1,421 | | $ | 2,100 | |
Financing return on equity (1)/(2) | |
| 24.8 | % |
| 19.6 | % |
| 21.5 | % |
| 16.1 | % |
* | Recast to reflect 2021 segment changes. |
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| September 30, |
| September 30, |
| ||||||||
(Dollars in millions) |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
Numerator |
|
|
|
|
|
|
|
|
| ||||
Global Financing after-tax income* |
| $ | 194 |
| $ | 244 |
| $ | 621 |
| $ | 829 |
|
Annualized after-tax income (a) |
| $ | 776 |
| $ | 977 |
| $ | 828 |
| $ | 1,106 |
|
Denominator |
|
|
|
|
|
|
|
|
| ||||
Average Global Financing equity (b)** |
| $ | 3,255 |
| $ | 3,595 |
| $ | 3,372 |
| $ | 3,647 |
|
Global Financing return on equity (a)/(b) |
| 23.8 | % | 27.2 | % | 24.6 | % | 30.3 | % | ||||
** Calculated based upon an estimated tax rate principally based on Global Financing’s geographic mix of earnings as IBM’s provision for income taxes is determined on a consolidated basis.
È | Average of the ending equity for Financing for the last two quarters and three quarters, for the three months ended June 30 and for the six months ended June 30, respectively. |
** Average of the endingReturn on equity for Global Financing for the last 2 quarterswas 24.8 percent and 3 quarters,21.5 percent for the three and six months ended SeptemberJune 30, 2022, respectively, compared to 19.6 percent and 16.1 percent for the nine months ended Septembersame periods in 2021. The increases in both periods in 2022 were primarily driven by a lower average equity balance, partially offset by a decrease in net income, which reflects the strategic actions taken in the prior year to reposition the Financing business.
Residual Value
Residual value is a risk unique to the financing business, and management of this risk is dependent upon the ability to accurately project future equipment values at lease inception. Financing has insight into product plans and cycles for IBM products. Based upon this product information, Financing continually monitors projections of future equipment values and compares them with the residual values reflected in the portfolio.
Financing optimizes the recovery of residual values by selling assets sourced from end of lease, leasing used equipment to new clients, or extending lease arrangements with current clients.
89
Management Discussion – (continued)
The following table presents the recorded amount of unguaranteed residual value for sales-type and direct financing leases, as well as operating leases at June 30, respectively.2022 and December 31, 2021. In addition, the table presents the run out of when the unguaranteed residual value assigned to equipment on leases at June 30, 2022 is expected to be returned to the company.
Unguaranteed Residual Value
| | | | | | | | | | | | | | | | | | |
| | At | | At | | Estimated Run Out of June 30, 2022 Balance | ||||||||||||
| | December 31, | | June 30, | | | | | | | | | | | 2025 and | |||
(Dollars in millions) |
| 2021 |
| 2022 |
| 2022 |
| 2023 |
| 2024 |
| Beyond | ||||||
Sales-type and direct financing leases | | $ | 335 | | $ | 383 | | $ | 59 | | $ | 112 | | $ | 72 | | $ | 140 |
Operating leases | |
| 13 | |
| 8 | |
| 5 | |
| 2 | |
| 0 | |
| 0 |
Total unguaranteed residual value | | $ | 348 | | $ | 390 | | $ | 64 | | $ | 114 | | $ | 72 | | $ | 141 |
90
Management Discussion – (continued)
Management Discussion — (continued)
GAAP Reconciliation
The tables below provide a reconciliation of the company’sour income statement results as reported under GAAP to itsour operating earnings presentation which is a non-GAAP measure. The company’sManagement’s calculation of operating (non-GAAP) earnings, as presented, may differ from similarly titled measures reported by other companies. Refer to the “Snapshot”“Operating (non-GAAP) Earnings” section on page 51 for the company’smanagement’s rationale for presenting operating earnings information.
| | | | | | | | | | | | | | | | | | | |
| | | | | Acquisition- | | Retirement- | | U.S. | | Kyndryl- | | | |
| ||||
(Dollars in millions except per share amounts) | | | | | Related | | Related | | Tax Reform | | Related | | Operating |
| |||||
For the three months ended June 30, 2022: |
| GAAP |
| Adjustments |
| Adjustments |
| Impacts |
| Impacts | | (non-GAAP) |
| ||||||
Gross profit | | $ | 8,290 | | $ | 180 | | $ | — | | $ | — | | $ | — | | $ | 8,470 | |
Gross profit margin | |
| 53.4 | % |
| 1.2 | pts. |
| — | pts. |
| — | pts. | | — | pts. |
| 54.5 | % |
S,G&A | | $ | 4,855 | | $ | (279) | | $ | — | | $ | — | | $ | 0 | | $ | 4,576 | |
Other (income) and expense | |
| (81) | |
| (1) | |
| (192) | |
| — | | | (145) | |
| (418) | |
Total expense and other (income) | |
| 6,568 | |
| (280) | |
| (192) | |
| — | | | (145) | |
| 5,952 | |
Pre-tax income from continuing operations | |
| 1,722 | |
| 460 | |
| 192 | |
| — | | | 145 | |
| 2,518 | |
Pre-tax margin from continuing operations | |
| 11.1 | % |
| 3.0 | pts. |
| 1.2 | pts. |
| — | pts. | | 0.9 | pts. |
| 16.2 | % |
Provision for (benefit from) income taxes* | | $ | 257 | | $ | 115 | | $ | 46 | | $ | (4) | | $ | — | | $ | 413 | |
Effective tax rate | |
| 14.9 | % |
| 1.8 | pts. |
| 0.7 | pts. |
| (0.2) | pts. | | (0.9) | pts. |
| 16.4 | % |
Income from continuing operations | | $ | 1,465 | | $ | 345 | | $ | 146 | | $ | 4 | | $ | 145 | | $ | 2,105 | |
Income margin from continuing operations | |
| 9.4 | % |
| 2.2 | pts. |
| 0.9 | pts. |
| 0.0 | pts. | | 0.9 | pts. |
| 13.5 | % |
Diluted earnings per share from continuing operations | | $ | 1.61 | | $ | 0.38 | | $ | 0.16 | | $ | 0.00 | | $ | 0.16 | | $ | 2.31 | |
(Dollars in millions except per share amounts) |
|
|
| Acquisition-related |
| Retirement-related |
| Operating |
| ||||
For the three months ended September 30, 2017 |
| GAAP |
| adjustments |
| adjustments |
| (Non-GAAP) |
| ||||
Gross profit |
| $ | 8,800 |
| $ | 114 |
| $ | 203 |
| $ | 9,116 |
|
Gross profit margin |
| 45.9 | % | 0.6 | pts. | 1.1 | pts. | 47.6 | % | ||||
S,G&A |
| $ | 4,648 |
| $ | (125 | ) | $ | (53 | ) | $ | 4,470 |
|
R,D&E |
| 1,342 |
| — |
| (51 | ) | 1,291 |
| ||||
Other (income) and expense |
| (114 | ) | — |
| — |
| (114 | ) | ||||
Total expense and other (income) |
| 5,735 |
| (125 | ) | (103 | ) | 5,507 |
| ||||
Pre-tax income from continuing operations |
| 3,065 |
| 238 |
| 306 |
| 3,609 |
| ||||
Pre-tax margin from continuing operations |
| 16.0 | % | 1.2 | pts. | 1.6 | pts. | 18.8 | % | ||||
Provision for income taxes* |
| $ | 339 |
| $ | 79 |
| $ | 113 |
| $ | 531 |
|
Effective tax rate |
| 11.0 | % | 1.5 | pts. | 2.2 | pts. | 14.7 | % | ||||
Income from continuing operations |
| $ | 2,726 |
| $ | 159 |
| $ | 193 |
| $ | 3,079 |
|
Income margin from continuing operations |
| 14.2 | % | 0.8 | pts. | 1.0 | pts. | 16.1 | % | ||||
Diluted earnings per share from |
|
|
|
|
|
|
|
|
| ||||
continuing operations |
| $ | 2.92 |
| $ | 0.17 |
| $ | 0.21 |
| $ | 3.30 |
|
| | | | | | | | | | | | | | | | | | | |
| | | | | Acquisition- | | Retirement- | | U.S. | | Kyndryl- | | | |
| ||||
(Dollars in millions except per share amounts) | | | | | Related | | Related | | Tax Reform | | Related | | Operating |
| |||||
For the three months ended June 30, 2021: |
| GAAP |
| Adjustments |
| Adjustments |
| Impacts |
| Impacts | | (non-GAAP) |
| ||||||
Gross profit | | $ | 7,852 | | $ | 179 | | $ | — | | $ | — | | $ | — | | $ | 8,031 | |
Gross profit margin | |
| 55.2 | % |
| 1.3 | pts. |
| — | pts. |
| — | pts. | | — | pts. |
| 56.5 | % |
S,G&A | | $ | 4,849 | | $ | (294) | | $ | — | | $ | — | | $ | — | | $ | 4,555 | |
Other (income) and expense | |
| 302 | |
| (1) | |
| (317) | |
| — | | | — | |
| (16) | |
Total expense and other (income) | |
| 6,940 | |
| (294) | |
| (317) | |
| — | | | — | |
| 6,329 | |
Pre-tax income from continuing operations | |
| 912 | |
| 474 | |
| 317 | |
| — | | | — | |
| 1,702 | |
Pre-tax margin from continuing operations | |
| 6.4 | % |
| 3.3 | pts. |
| 2.2 | pts. |
| — | pts. | | — | pts. |
| 12.0 | % |
Provision for (benefit from) income taxes* | | $ | 101 | | $ | 105 | | $ | 53 | | $ | (14) | | $ | — | | $ | 246 | |
Effective tax rate | |
| 11.1 | % |
| 3.1 | pts. |
| 1.0 | pts. |
| (0.8) | pts. | | — | pts. |
| 14.5 | % |
Income from continuing operations | | $ | 810 | | $ | 368 | | $ | 264 | | $ | 14 | | $ | — | | $ | 1,456 | |
Income margin from continuing operations | |
| 5.7 | % |
| 2.6 | pts. |
| 1.9 | pts. |
| 0.1 | pts. | | — | pts. |
| 10.2 | % |
Diluted earnings per share from continuing operations | | $ | 0.90 | | $ | 0.41 | | $ | 0.29 | | $ | 0.01 | | $ | — | | $ | 1.61 | |
* The tax impact on operating (non-GAAP) pre-tax income from continuing operations is calculated under the same accounting principles applied to the GAAP pre-tax income which employs an annual effective tax rate method to the results.
(Dollars in millions except per share amounts) |
|
|
| Acquisition-related |
| Retirement-related |
| Operating |
| ||||
For the three months ended September 30, 2016 |
| GAAP |
| adjustments |
| adjustments |
| (Non-GAAP) |
| ||||
Gross profit |
| $ | 9,013 |
| $ | 129 |
| $ | 79 |
| $ | 9,221 |
|
Gross profit margin |
| 46.9 | % | 0.7 | pts. | 0.4 | pts. | 48.0 | % | ||||
S,G&A |
| $ | 4,732 |
| $ | (138 | ) | $ | (53 | ) | $ | 4,541 |
|
R,D&E |
| 1,397 |
| — |
| (7 | ) | 1,390 |
| ||||
Other (income) and expense |
| (8 | ) | (2 | ) | — |
| (10 | ) | ||||
Total expense and other (income) |
| 5,751 |
| (140 | ) | (60 | ) | 5,550 |
| ||||
Pre-tax income from continuing operations |
| 3,263 |
| 269 |
| 139 |
| 3,671 |
| ||||
Pre-tax margin from continuing operations |
| 17.0 | % | 1.4 | pts. | 0.7 | pts. | 19.1 | % | ||||
Provision for income taxes* |
| $ | 409 |
| $ | 73 |
| $ | 40 |
| $ | 521 |
|
Effective tax rate |
| 12.5 | % | 1.1 | pts. | 0.6 | pts. | 14.2 | % | ||||
Income from continuing operations |
| $ | 2,854 |
| $ | 197 |
| $ | 99 |
| $ | 3,149 |
|
Income margin from continuing operations |
| 14.8 | % | 1.0 | pts. | 0.5 | pts. | 16.4 | % | ||||
Diluted earnings per share from |
|
|
|
|
|
|
|
|
| ||||
continuing operations |
| $ | 2.98 |
| $ | 0.21 |
| $ | 0.10 |
| $ | 3.29 |
|
91
Management Discussion – (continued)
| | | | | | | | | | | | | | | | | | | |
| | | | Acquisition- | | Retirement- | | U.S. | | Kyndryl- | | |
| ||||||
(Dollars in millions except per share amounts) | | | | Related | | Related | | Tax Reform | | Related | | Operating |
| ||||||
For the six months ended June 30, 2022: |
| GAAP |
| Adjustments |
| Adjustments |
| Impacts |
| Impacts | | (non-GAAP) |
| ||||||
Gross profit | | $ | 15,625 | | $ | 361 | | $ | — | | $ | — | | $ | — | | $ | 15,986 | |
Gross profit margin | |
| 52.6 | % |
| 1.2 | pts. |
| — | pts. |
| — | pts. | | — | pts. |
| 53.8 | % |
S,G&A | | $ | 9,452 | | $ | (565) | | $ | — | | $ | — | | $ | 0 | | $ | 8,887 | |
Other (income) and expense | |
| 166 | |
| (1) | |
| (394) | |
| — | | | (367) | |
| (596) | |
Total expense and other (income) | |
| 13,280 | |
| (566) | |
| (394) | |
| — | | | (367) | |
| 11,953 | |
Pre-tax income from continuing operations | |
| 2,345 | |
| 928 | |
| 394 | |
| — | | | 367 | |
| 4,033 | |
Pre-tax margin from continuing operations | |
| 7.9 | % |
| 3.1 | pts. |
| 1.3 | pts. |
| — | pts. | | 1.2 | pts. |
| 13.6 | % |
Provision for income taxes* | | $ | 218 | | $ | 224 | | $ | 104 | | $ | 112 | | $ | — | | $ | 657 | |
Effective tax rate | |
| 9.3 | % |
| 3.4 | pts. |
| 1.7 | pts. |
| 2.8 | pts. | | (0.8) | pts. |
| 16.3 | % |
Income from continuing operations | | $ | 2,127 | | $ | 704 | | $ | 290 | | $ | (112) | | $ | 367 | | $ | 3,376 | |
Income margin from continuing operations | |
| 7.2 | % |
| 2.4 | pts. |
| 1.0 | pts. |
| (0.4) | pts. | | 1.2 | pts. |
| 11.4 | % |
Diluted earnings per share from continuing operations | | $ | 2.34 | | $ | 0.77 | | $ | 0.32 | | $ | (0.12) | | $ | 0.40 | | $ | 3.71 | |
| | | | | | | | | | | | | | | | | | | |
| | | | Acquisition- | | Retirement- | | U.S. | | Kyndryl- | | |
| ||||||
(Dollars in millions except per share amounts) | | | | Related | | Related | | Tax Reform | | Related | | Operating |
| ||||||
For the six months ended June 30, 2021: |
| GAAP |
| Adjustments |
| Adjustments |
| Impacts |
| Impacts | | (non-GAAP) |
| ||||||
Gross profit | | $ | 14,879 | | $ | 353 | | $ | — | | $ | — | | $ | — | | $ | 15,232 | |
Gross profit margin | |
| 54.3 | % |
| 1.3 | pts. |
| — | pts. �� |
| — | pts. | | — | pts. |
| 55.6 | % |
S,G&A | | $ | 9,536 | | $ | (582) | | $ | — | | $ | — | | $ | — | | $ | 8,954 | |
Other (income) and expense | |
| 647 | |
| (1) | |
| (649) | |
| — | | | — | |
| (3) | |
Total expense and other (income) | |
| 13,724 | |
| (583) | |
| (649) | |
| — | | | — | |
| 12,491 | |
Pre-tax income from continuing operations | |
| 1,155 | |
| 936 | |
| 649 | |
| — | | | — | |
| 2,741 | |
Pre-tax margin from continuing operations | |
| 4.2 | % |
| 3.4 | pts. |
| 2.4 | pts. |
| — | pts. | | — | pts. |
| 10.0 | % |
Provision for (benefit from) income taxes* | | $ | (58) | | $ | 238 | | $ | 86 | | $ | 6 | | $ | — | | $ | 272 | |
Effective tax rate | |
| (5.0) | % |
| 10.4 | pts. |
| 4.3 | pts. |
| 0.2 | pts. | | — | pts. |
| 9.9 | % |
Income from continuing operations | | $ | 1,213 | | $ | 699 | | $ | 563 | | $ | (6) | | $ | — | | $ | 2,469 | |
Income margin from continuing operations | |
| 4.4 | % |
| 2.5 | pts. |
| 2.1 | pts. |
| 0.0 | pts. | | — | pts. |
| 9.0 | % |
Diluted earnings per share from continuing operations | | $ | 1.34 | | $ | 0.77 | | $ | 0.62 | | $ | (0.01) | | $ | — | | $ | 2.73 | |
* The tax impact on operating (non-GAAP) pre-tax income from continuing operations is calculated under the same accounting principles applied to the GAAP pre-tax income which employs an annual effective tax rate method to the results.
92
Management Discussion – (continued)
Management Discussion — (continued)
(Dollars in millions except per share amounts) |
|
|
| Acquisition-related |
| Retirement-related |
| Operating |
| ||||
For the nine months ended September 30, 2017 |
| GAAP |
| adjustments |
| adjustments |
| (Non-GAAP) |
| ||||
Gross profit |
| $ | 25,365 |
| $ | 349 |
| $ | 591 |
| $ | 26,305 |
|
Gross profit margin |
| 44.8 | % | 0.6 | pts. | 1.0 | pts. | 46.5 | % | ||||
S,G&A |
| $ | 14,959 |
| $ | (393 | ) | $ | (326 | ) | $ | 14,240 |
|
R,D&E |
| 4,360 |
| — |
| (148 | ) | 4,212 |
| ||||
Other (income) and expense |
| (218 | ) | (7 | ) | — |
| (225 | ) | ||||
Total expense and other (income) |
| 18,434 |
| (401 | ) | (474 | ) | 17,559 |
| ||||
Pre-tax income from continuing operations |
| 6,931 |
| 750 |
| 1,065 |
| 8,746 |
| ||||
Pre-tax margin from continuing operations |
| 12.2 | % | 1.3 | pts. | 1.9 | pts. | 15.5 | % | ||||
Provision for income taxes* |
| $ | 120 |
| $ | 212 |
| $ | 288 |
| $ | 621 |
|
Effective tax rate |
| 1.7 | % | 2.3 | pts. | 3.1 | pts. | 7.1 | % | ||||
Income from continuing operations |
| $ | 6,811 |
| $ | 537 |
| $ | 777 |
| $ | 8,125 |
|
Income margin from continuing operations |
| 12.0 | % | 0.9 | pts. | 1.4 | pts. | 14.4 | % | ||||
Diluted earnings per share from |
|
|
|
|
|
|
|
|
| ||||
continuing operations |
| $ | 7.24 |
| $ | 0.57 |
| $ | 0.83 |
| $ | 8.64 |
|
* The tax impact on operating (non-GAAP) pre-tax income from continuing operations is calculated under the same accounting principles applied to the GAAP pre-tax income which employs an annual effective tax rate method to the results.
(Dollars in millions except per share amounts) |
|
|
| Acquisition-related |
| Retirement-related |
| Operating |
| ||||
For the nine months ended September 30, 2016 |
| GAAP |
| adjustments |
| adjustments |
| (Non-GAAP) |
| ||||
Gross profit |
| $ | 27,401 |
| $ | 371 |
| $ | 238 |
| $ | 28,010 |
|
Gross profit margin |
| 47.1 | % | 0.6 | pts. | 0.4 | pts. | 48.2 | % | ||||
S,G&A |
| $ | 16,093 |
| $ | (365 | ) | $ | (183 | ) | $ | 15,545 |
|
R,D&E |
| 4,320 |
| — |
| (23 | ) | 4,297 |
| ||||
Other (income) and expense |
| 281 |
| (7 | ) | — |
| 274 |
| ||||
Total expense and other (income) |
| 20,056 |
| (372 | ) | (206 | ) | 19,478 |
| ||||
Pre-tax income from continuing operations |
| 7,345 |
| 743 |
| 444 |
| 8,532 |
| ||||
Pre-tax margin from continuing operations |
| 12.6 | % | 1.3 | pts. | 0.8 | pts. | 14.7 | % | ||||
Provision for/(benefit from) income taxes* |
| $ | (31 | ) | $ | 201 |
| $ | 106 |
| $ | 277 |
|
Effective tax rate |
| (0.4 | )% | 2.4 | pts. | 1.3 | pts. | 3.2 | % | ||||
Income from continuing operations |
| $ | 7,375 |
| $ | 542 |
| $ | 338 |
| $ | 8,255 |
|
Income margin from continuing operations |
| 12.7 | % | 0.9 | pts. | 0.6 | pts. | 14.2 | % | ||||
Diluted earnings per share from |
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continuing operations |
| $ | 7.67 |
| $ | 0.57 |
| $ | 0.35 |
| $ | 8.59 |
|
* The tax impact on operating (non-GAAP) pre-tax income from continuing operations is calculated under the same accounting principles applied to the GAAP pre-tax income which employs an annual effective tax rate method to the results.
Management Discussion — (continued)
Forward-Looking and Cautionary Statements
Except for the historical information and discussions contained herein, statements contained in this Form 10-Q 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 the 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; cybersecuritythe company’s ability to successfully manage acquisitions, alliances and data privacy considerations;dispositions, including integration challenges, failure to achieve objectives, the assumption of liabilities, and higher debt levels; fluctuations in financial results; impact of local legal, economic, political, health and healthother conditions; adverse effects from environmental matters, tax matters and the company’s pension plans;failure to meet growth and productivity objectives; 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 personnelemployees and its reliance on critical skills; impacts of relationships with critical suppliers; product quality issues; impacts of business with government clients; reliance on third party distribution channels and ecosystems; cybersecurity and data privacy considerations; adverse effects related to climate change and environmental matters, tax matters; legal proceedings and investigatory risks; the company’s pension plans; 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;potential failure of the company’s abilityseparation of Kyndryl to successfully manage acquisitions, alliances and dispositions; risks from legal proceedings;qualify for tax-free treatment; 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 or herein by reference. TheAny forward-looking statement in this Form 10-Q 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.
Item 4. Controls and Procedures
The company’s management evaluated, with the participation of the Chief Executive Officer and Chief Financial Officer, the effectiveness of the company’s disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the company’s disclosure controls and procedures were effective as of the end of the period covered by this report. There has been no change in the company’s internal control over financial reporting that occurred during the quarter covered by this report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting.
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Part II — Other Information
Refer to note 12,14, “Contingencies,” on pages 44 to 46 ofin this Form 10-Q.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds and Issuer Repurchases of Equity Securities
The following table provides information relating to the company’s repurchase of common stock for the thirdsecond quarter of 2017.2022.
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| Total Number |
| Approximate |
| ||
|
|
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|
| of Shares |
| Dollar Value |
| ||
|
|
|
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|
| Purchased as |
| of Shares that |
| ||
|
| Total Number |
| Average |
| Part of Publicly |
| May Yet Be |
| ||
|
| of Shares |
| Price Paid |
| Announced |
| Purchased Under |
| ||
Period |
| Purchased |
| per Share |
| Program |
| The Program* |
| ||
July 1, 2017 - July 31, 2017 |
| 1,403,534 |
| $ | 149.09 |
| 1,403,534 |
| $ | 2,191,734,677 |
|
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|
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|
|
|
| ||
August 1, 2017 - August 31, 2017 |
| 3,167,041 |
| $ | 142.65 |
| 3,167,041 |
| $ | 1,739,970,319 |
|
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|
|
|
|
|
|
| ||
September 1, 2017 - September 30, 2017 |
| 1,982,071 |
| $ | 144.56 |
| 1,982,071 |
| $ | 1,453,447,857 |
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|
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| ||
Total |
| 6,552,646 |
| $ | 144.60 |
| 6,552,646 |
|
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| |
| | | | | | | | | | |
| | | | | | | Total Number | | Approximate | |
| | | | | | | of Shares | | Dollar Value | |
| | | | | | | Purchased as | | of Shares that | |
| | Total Number | | Average | | Part of Publicly | | May Yet Be | ||
| | of Shares | | Price Paid | | Announced | | Purchased Under | ||
Period |
| Purchased |
| per Share |
| Program |
| The Program* | ||
April 1, 2022 - April 30, 2022 |
| — | | $ | — |
| — | | $ | 2,007,611,768 |
| | | | | | | | | | |
May 1, 2022 - May 31, 2022 |
| — | | $ | — |
| — | | $ | 2,007,611,768 |
| | | | | | | | | | |
June 1, 2022 - June 30, 2022 |
| — | | $ | — |
| — | | $ | 2,007,611,768 |
| | | | | | | | | | |
Total |
| — | | $ | — |
| — | |
|
|
* On October 25, 2016,30, 2018, the Board of Directors authorized $3.0$4.0 billion in funds for use in the company’s common stock repurchase program. The company stated that it would repurchase shares on the open market or in private transactions depending on market conditions. The common stock repurchase program does not have an expiration date. This table does not include shares tendered to satisfy the exercise price in connection with cashless exercises of employee stock options or shares tendered to satisfy tax withholding obligations in connection with employee equity awards.
The company suspended its share repurchase program at the time of the Red Hat closing. At June 30, 2022 there was approximately $2.0 billion in authorized funds remaining for purchases under this program.
94
Exhibit Number
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Exhibit Number | | |
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31.1 | | |
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31.2 | | |
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32.1 | | |
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32.2 | | |
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101.INS | | XBRL Instance Document – the instance document does not appear on the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
| | |
101.SCH | | XBRL Taxonomy Extension Schema Document |
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101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
| | |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
| | |
101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
| | |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
| | |
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 |
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* Refiled by the company in electronic format in accordance with SEC Release Nos. 33-10322 and 34-80132 relating to exhibit hyperlinks, which became effective September 1, 2017.Table of Contents
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 thereunto duly authorized.
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| International Business Machines Corporation | |||||
| (Registrant) | |||||
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Date: |
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| By: | /s/ Robert F. Del Bene | ||||
| | Robert F. Del Bene | ||||
| | Vice President and Controller | ||||
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