UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTER ENDED MARCH 31, ~~2021~~2022

1-2360

(Commission file number)

INTERNATIONAL BUSINESS MACHINES CORPORATION

(Exact name of registrant as specified in its charter)

New York	13-0871985
(State of incorporation)	(IRS employer identification number)

One New Orchard Road Armonk, New York	10504
(Address of principal executive offices)	(Zip Code)

914-499-1900

(Registrant’s telephone number)

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

Title of each class	Trading ~~symbol~~symbol(s)	Name of each exchange on which registered
Capital stock, par value $.20 per share	IBM	New York Stock Exchange
		NYSE Chicago
~~0.500% Notes due 2021~~	~~IBM 21B~~	~~New York Stock Exchange~~
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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐

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. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The registrant had ~~893,522,828~~899,435,325 shares of common stock outstanding at March 31, ~~2021.~~2022.

Table of Contents

Index

9
	Page
~~Part I - Financial Information~~:

~~Item 1. Consolidated Financial Statements (Unaudited)~~:

~~Consolidated Income Statement for the three months ended March 31, 2021 and 2020~~	3

~~Consolidated Statement of Comprehensive Income for the three months ended March 31, 2021 and 2020~~	4

~~Consolidated Balance Sheet at March 31, 2021 and December 31, 2020~~	5

~~Consolidated Statement of Cash Flows for the three months ended March 31, 2021 and 2020~~	7

~~Consolidated Statement of Equity for the three months ended March 31, 2021 and 2020~~	8

~~Notes to Consolidated Financial Statements~~	9

~~Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition~~	41

~~Item 4. Controls and Procedures~~	72

~~Part II - Other Information~~:

~~Item 1. Legal Proceedings~~	73

~~Item 2. Unregistered Sales of Equity Securities and Use of Proceeds and Issuer Repurchases of Equity Securities~~	73

~~Item 6. Exhibits~~	74

~~Table of Contents~~

Part I - Financial Information:

Item 1. Consolidated Financial Statements (Unaudited):

Consolidated Income Statement for the three months ended March 31, 2022 and 2021

Consolidated Statement of Comprehensive Income for the three months ended March 31, 2022 and 2021

Consolidated Balance Sheet at March 31, 2022 and December 31, 2021

Consolidated Statement of Cash Flows for the three months ended March 31, 2022 and 2021

Consolidated Statement of Equity for the three months ended March 31, 2022 and 2021

Notes to Consolidated Financial Statements

Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition

Item 4. Controls and Procedures

Part II - Other Information:

Item 1. Legal Proceedings

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds and Issuer Repurchases of Equity Securities

Item 5. Other Information

Item 6. Exhibits

Table of Contents

Part I - Financial Information

Item 1. Consolidated Financial Statements:

INTERNATIONAL BUSINESS MACHINES CORPORATION

AND SUBSIDIARY COMPANIES

CONSOLIDATED INCOME STATEMENT

(UNAUDITED)


	Three Months Ended March 31,
(Dollars in millions except per share amounts)	2022		2021*
Revenue:
Services	$	7,703	$	7,096
Sales		6,339		5,880	**
Financing		155		211	**
Total revenue		14,197		13,187
Cost:
Services		5,349		4,644
Sales		1,415		1,379	**
Financing		98		137	**
Total cost		6,862		6,160
Gross profit		7,335		7,027
Expense and other (income):
Selling, general and administrative		4,597		4,688
Research, development and engineering		1,679		1,616
Intellectual property and custom development income		(121)		(146)
Other (income) and expense		246		346
Interest expense		311		280
Total expense and other (income)		6,712		6,784
Income from continuing operations before income taxes		623		244
Provision for/(benefit from) income taxes		(39)		(160)
Income from continuing operations	$	662	$	403
Income from discontinued operations, net of tax		71		552
Net income	$	733	$	955

Earnings/(loss) per share of common stock:
Assuming dilution:
Continuing operations	$	0.73	$	0.45
Discontinued operations		0.08		0.61
Total	$	0.81	$	1.06
Basic:
Continuing operations	$	0.74	$	0.45
Discontinued operations		0.08		0.62
Total	$	0.82	$	1.07

Weighted-average number of common shares outstanding: (millions)
Assuming dilution		909.2		901.7
Basic		899.3		893.6

*	Reclassified to reflect discontinued operations presentation.

** Reclassified to conform to current year presentation.

(Amounts may not add due to rounding.)

(The accompanying notes are an integral part of the financialstatements.)

Table of Contents

INTERNATIONAL BUSINESS MACHINES CORPORATION

AND SUBSIDIARY COMPANIES

~~CONSOLIDATED INCOME STATEMENT~~

~~(UNAUDITED)~~

Three Months Ended March 31,

(Dollars in millions except per share amounts)

2021

2020

Revenue:





Services

$
11,404

$
11,373

Sales

6,083

5,895

Financing

242

302

Total revenue

17,730

17,571

Cost:





Services

7,775

7,843

Sales

1,585

1,624

Financing

165

181

Total cost

9,525

9,649

Gross profit

8,204

7,922

Expense and other (income):





Selling, general and administrative

5,174

5,955

Research, development and engineering

1,630

1,625

Intellectual property and custom development income

(147)

(116)

Other (income) and expense

362

182

Interest expense

280

326

Total expense and other (income)

7,299

7,972

Income/(loss) from continuing operations before income taxes

905

(49)

Provision for/(benefit from) income taxes

(51)

(1,226)

Income from continuing operations

$
956

$
1,176

Income/(loss) from discontinued operations, net of tax

(1)

(1)

Net income

$
955

$
1,175

Earnings/(loss) per share of common stock:





Assuming dilution:





Continuing operations

$
1.06

$
1.31

Discontinued operations

0.00

0.00

Total

$
1.06

$
1.31

Basic:





Continuing operations

$
1.07

$
1.32

Discontinued operations

0.00

0.00

Total

$
1.07

$
1.32

Weighted-average number of common shares outstanding: (millions)





Assuming dilution

901.7

895.0

Basic

893.6

888.0

~~(Amounts may not add due to rounding.)~~

~~(The accompanying notes are an integral part of the financialstatements.)~~

~~Table of Contents~~

~~INTERNATIONAL BUSINESS MACHINES CORPORATION~~

~~AND SUBSIDIARY COMPANIES~~

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(UNAUDITED)


	Three Months Ended March 31,				Three Months Ended March 31,
(Dollars in millions)	2021		2020		2022		2021*
Net income	$	955	$	1,175	$	733	$	955
Other comprehensive income/(loss), before tax:
Foreign currency translation adjustments		549		(919)		442		549
Net changes related to available-for-sale securities:
Unrealized gains/(losses) arising during the period		0		0		0		0
Reclassification of (gains)/losses to net income		—		—		—		—
Total net changes related to available-for-sale securities		0		0		0		0
Unrealized gains/(losses) on cash flow hedges:
Unrealized gains/(losses) arising during the period		187		(180)		60		187
Reclassification of (gains)/losses to net income		160		91		(1)		160
Total unrealized gains/(losses) on cash flow hedges		347		(90)		59		347
Retirement-related benefit plans:
Prior service costs/(credits)		0		(4)		(5)		0
Net (losses)/gains arising during the period		20		8		9		20
Curtailments and settlements		17		8		8		17
Amortization of prior service (credits)/costs		3		1		7		3
Amortization of net (gains)/losses		648		570		468		648
Total retirement-related benefit plans		689		582		486		689
Other comprehensive income/(loss), before tax		1,586		(427)		987		1,586
Income tax (expense)/benefit related to items of other comprehensive income		(505)		(260)		(285)		(505)
Other comprehensive income/(loss), net of tax		1,080		(686)		703		1,080
Total comprehensive income/(loss)	$	2,036	$	489
Total comprehensive income					$	1,436	$	2,036

* 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.)

Table of Contents

INTERNATIONAL BUSINESS MACHINES CORPORATION

AND SUBSIDIARY COMPANIES

CONSOLIDATED BALANCE SHEET

(UNAUDITED)

ASSETS

At March 31,

At December 31,
(Dollars in millions)

2021

2020
Assets:




Current assets:




Cash and cash equivalents

$
10,531

$
13,212
Restricted cash

142

463
Marketable securities

600

600
Notes and accounts receivable — trade (net of allowances of $345 in 2021 and $351 in 2020)

6,458

7,132
Short-term financing receivables (net of allowances of $200 in 2021 and $218 in 2020)

8,822

10,892
Other accounts receivable (net of allowances of $16 in 2021 and $28 in 2020)

787

714
Inventory, at lower of average cost or net realizable value:


Finished goods

234

190
Work in process and raw materials

1,594

1,649
Total inventory

1,828

1,839
Deferred costs

2,223

2,107
Prepaid expenses and other current assets

2,647

2,206
Total current assets

34,038

39,165
Property, plant and equipment

32,269

33,176
Less: Accumulated depreciation

22,817

23,136
Property, plant and equipment — net

9,452

10,040
Operating right-of-use assets — net

4,483

4,686
Long-term financing receivables (net of allowances of $36 in 2021 and $45 in 2020)

5,922

7,086
Prepaid pension assets

7,800

7,610
Deferred costs

2,336

2,449
Deferred taxes

8,953

9,241
Goodwill

59,984

59,617
Intangible assets — net

13,535

13,796
Investments and sundry assets

2,125

2,282
Total assets

$
148,629

$
155,971


	At March 31,		At December 31,
(Dollars in millions)	2022		2021
Assets:
Current assets:
Cash and cash equivalents	$	9,934	$	6,650
Restricted cash		286		307
Marketable securities		550		600
Notes and accounts receivable — trade (net of allowances of $225 in 2022 and $218 in 2021)		5,963		6,754
Short-term financing receivables:
Held for investment (net of allowances of $157 in 2022 and $176 in 2021)		6,759		7,221
Held for sale		410		793
Other accounts receivable (net of allowances of $28 in 2022 and $24 in 2021)		1,003		1,002
Inventory, at lower of average cost or net realizable value:
Finished goods		269		208
Work in process and raw materials		1,507		1,442
Total inventory		1,776		1,649
Deferred costs		1,103		1,097
Prepaid expenses and other current assets		3,548		3,466
Total current assets		31,330		29,539
Property, plant and equipment		20,006		20,085
Less: Accumulated depreciation		14,448		14,390
Property, plant and equipment — net		5,559		5,694
Operating right-of-use assets — net		3,108		3,222
Long-term financing receivables (net of allowances of $21 in 2022 and $25 in 2021)		4,610		5,425
Prepaid pension assets		9,995		9,850
Deferred costs		916		924
Deferred taxes		7,567		7,370
Goodwill		56,106		55,643
Intangible assets — net		12,312		12,511
Investments and sundry assets		1,771		1,823
Total assets	$	133,275	$	132,001

(Amounts may not add due to rounding.)

(The accompanying notes are an integral part of the financial statements.)

Table of Contents

INTERNATIONAL BUSINESS MACHINES CORPORATION

AND SUBSIDIARY COMPANIES

CONSOLIDATED BALANCE SHEET – (CONTINUED)

(UNAUDITED)

LIABILITIES AND EQUITY


	At March 31,		At December 31,		At March 31,		At December 31,
(Dollars in millions except per share amounts)	2021		2020		2022		2021
Liabilities:
Current liabilities:
Taxes	$	2,640	$	3,301	$	1,798	$	2,289
Short-term debt		5,198		7,183		7,690		6,787
Accounts payable		4,140		4,908		3,453		3,955
Compensation and benefits		3,256		3,440		2,937		3,204
Deferred income		14,197		12,833		13,526		12,518
Operating lease liabilities		1,337		1,357		954		974
Other accrued expenses and liabilities		5,775		6,847		3,699		3,892
Total current liabilities		36,542		39,869		34,056		33,619
Long-term debt		51,206		54,355		46,545		44,917
Retirement and nonpension postretirement benefit obligations		17,346		18,248		13,937		14,435
Deferred income		4,153		4,301		3,423		3,577
Operating lease liabilities		3,379		3,574		2,358		2,462
Other liabilities		14,489		14,897		13,844		13,996
Total liabilities		127,116		135,244		114,162		113,005
Equity:
IBM stockholders’ equity:
Common stock, par value $0.20 per share, and additional paid-in capital		56,788		56,556		57,603		57,319
Shares authorized: 4,687,500,000
Shares issued: 2021 - 2,244,015,188
2020 - 2,242,969,004
Shares issued: 2022 - 2,250,139,983
2021 - 2,248,577,848
Retained earnings		162,218		162,717		153,401		154,209
Treasury stock - at cost		(169,360)		(169,339)		(169,422)		(169,392)
Shares: 2021 - 1,350,492,360
2020 - 1,350,315,580
Shares: 2022 - 1,350,704,659
2021 - 1,350,509,249
Accumulated other comprehensive income/(loss)		(28,257)		(29,337)		(22,532)		(23,234)
Total IBM stockholders’ equity		21,389		20,597		19,050		18,901
Noncontrolling interests		124		129		62		95
Total equity		21,513		20,727		19,112		18,996
Total liabilities and equity	$	148,629	$	155,971	$	133,275	$	132,001

(Amounts may not add due to rounding.)

(The accompanying notes are an integral part of the financial statements.)

Table of Contents

INTERNATIONAL BUSINESS MACHINES CORPORATION

AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)


	Three Months Ended March 31,				Three Months Ended March 31,
(Dollars in millions)	2021		2020		2022		2021
Cash flows from operating activities:
Net income	$	955	$	1,175	$	733	$	955
Adjustments to reconcile net income to cash provided by operating activities
Depreciation		1,052		1,012		631		1,052
Amortization of intangibles		620		622		625		620
Stock-based compensation		213		189		234		213
Net (gain)/loss on asset sales and other		7		315		(51)		7
Changes in operating assets and liabilities, net of acquisitions/divestitures		2,066		1,162		1,076		2,066
Net cash provided by operating activities		4,914		4,476		3,248		4,914

Cash flows from investing activities:
Payments for property, plant and equipment		(494)		(630)		(281)		(494)
Proceeds from disposition of property, plant and equipment		139		46		72		139
Investment in software		(175)		(153)		(169)		(175)
Acquisition of businesses, net of cash acquired		(1,120)		(13)		(698)		(1,120)
Divestitures of businesses, net of cash transferred		(15)		26		61		(15)
Non-operating finance receivables — net		(9)		(20)		0		(9)
Purchases of marketable securities and other investments		(875)		(1,096)		(1,025)		(875)
Proceeds from disposition of marketable securities and other investments		549		938		682		549
Net cash provided by/(used in) investing activities		(2,000)		(902)		(1,358)		(2,000)

Cash flows from financing activities:
Proceeds from new debt		51		6,055		4,084		51
Payments to settle debt		(4,261)		(5,285)		(1,129)		(4,261)
Short-term borrowings/(repayments) less than 90 days — net		(89)		586		(8)		(89)
Common stock repurchases for tax withholdings		(41)		(44)		(80)		(41)
Financing — other		15		13		(15)		15
Cash dividends paid		(1,457)		(1,440)		(1,475)		(1,457)
Net cash provided by/(used in) financing activities		(5,783)		(115)		1,377		(5,783)

Effect of exchange rate changes on cash, cash equivalents and restricted cash		(134)		(403)		(5)		(134)
Net change in cash, cash equivalents and restricted cash		(3,002)		3,057		3,263		(3,002)

Cash, cash equivalents and restricted cash at January 1		13,675		8,314		6,957		13,675
Cash, cash equivalents and restricted cash at March 31	$	10,673	$	11,371	$	10,219	$	10,673

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 financial statements.)

Table of Contents

INTERNATIONAL BUSINESS MACHINES CORPORATION

AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF EQUITY

(UNAUDITED)

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



955





955



955
Other comprehensive income/(loss)







1,080

1,080



1,080
Total comprehensive income/(loss)









$
2,036



$
2,036
Cash dividends paid — common stock ($1.63 per share)



(1,457)





(1,457)



(1,457)
Common stock issued under employee plans (1,046,184 shares)

232







232



232
Purchases (339,506 shares) and sales (162,726 shares) of treasury stock under employee plans — net



2

(21)



(18)



(18)
Changes in noncontrolling interests









(6)

(6)
Equity – March 31, 2021

$
56,788

$
162,218

$
(169,360)

$
(28,257)

$
21,389

$
124

$
21,513


	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				733						733				733
Other comprehensive income/(loss)								703		703				703
Total comprehensive income/(loss)									$	1,436			$	1,436
Cash dividends paid — common stock ($1.64 per share)				(1,475)						(1,475)				(1,475)
Common stock issued under employee plans (1,562,135 shares)		221								221				221
Purchases (595,710 shares) and sales (400,300 shares) of treasury stock under employee plans — net				(3)		(30)				(34)				(34)
Other equity		63		(63)						0				0
Changes in noncontrolling interests												(33)		(33)
Equity – March 31, 2022	$	57,603	$	153,401	$	(169,422)	$	(22,532)	$	19,050	$	62	$	19,112

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, 2020

$
55,895

$
162,954

$
(169,413)

$
(28,597)

$
20,841

$
144

$
20,985
Cumulative effect of change in accounting principle*

(66)

(66)

(66)
Net income plus other comprehensive income/(loss):














Net income



1,175





1,175



1,175
Other comprehensive income/(loss)







(686)

(686)



(686)
Total comprehensive income/(loss)









$
489



$
489
Cash dividends paid — common stock ($1.62 per share)



(1,440)





(1,440)



(1,440)
Common stock issued under employee plans (935,486 shares)

197







197



197
Purchases (310,454 shares) and sales (156,471 shares) of treasury stock under employee plans — net



3

(24)



(21)



(21)
Changes in noncontrolling interests











(15)

(15)
Equity - March 31, 2020

$
56,092

$
162,626

$
(169,437)

$
(29,283)

$
19,999

$
129

$
20,128

* ~~Reflects the adoption of the FASB guidance on credit losses. Refer to note 2, “Accounting Changes.”~~


	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				955						955				955
Other comprehensive income/(loss)								1,080		1,080				1,080
Total comprehensive income/(loss)									$	2,036			$	2,036
Cash dividends paid — common stock ($1.63 per share)				(1,457)						(1,457)				(1,457)
Common stock issued under employee plans (1,046,184 shares)		232								232				232
Purchases (339,506 shares) and sales (162,726 shares) of treasury stock under employee plans — net				2		(21)				(18)				(18)
Changes in noncontrolling interests												(6)		(6)
Equity - March 31, 2021	$	56,788	$	162,218	$	(169,360)	$	(28,257)	$	21,389	$	124	$	21,513

(Amounts may not add due to rounding.)

(The accompanying notes are an integral part of the financial statements.)

Table of Contents

Notes to Consolidated Financial Statements

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, including the macroeconomic impacts of the COVID-19 pandemic.~~circumstances. As a result, actual results may be different from these estimates.

On ~~October 8, 2020,~~November 3, 2021, the company ~~announced that it will separate~~completed the separation of its managed infrastructure services unit ~~of its Global Technology Services (GTS) segment~~ into a new public ~~company.~~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 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. The ~~managed infrastructure services unit is comprised~~company retained 19.9 percent of ~~outsourcing~~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 ~~infrastructure modernization~~current assets in the Consolidated Balance Sheet with subsequent fair value changes included in other (income) and ~~management services and~~expense in the ~~name~~Consolidated Income Statement. 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 ~~new company will be Kyndryl. The~~ separation ~~is expected to be achieved through a U.S. federal tax-free spin-off to IBM shareholders and completed by~~wascompleted. Accordingly, the ~~end~~historical results of 2021. It will be subject to customary market, regulatory and other closing conditions, including final IBM Board of Directors’ approval. The announcement did not have any classification impact to the company’s Consolidated Financial Statements or segment reporting. IBM will report the managed infrastructure services unitKyndryl are presented as discontinued operations ~~after separation.~~and, as such, have been excludedfrom continuing operations and segment results for all periods presented. Refer to note 3, “Separation of Kyndryl,” for additional information.

In the first quarter of 2022, the company realigned its management structure to reflect the planned divestiture of its healthcare data and analytics assets. 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 comparable basis for all periods.

For the three months ended March 31, 2022, the company recorded a benefit from income taxes of $39 million and its effective tax rate was (6.3) percent. The rate was driven by many factors including the impacts of recently published foreign tax credit regulations, geographical mix of income, incentives, and changes in unrecognized tax benefits. For the three months ended March 31, 2021, the company reported a benefit from income taxes of ~~$51 million. The~~$160 million and its effective tax ~~benefit~~rate was primarily driven by the resolution of certain tax audit matters in the first quarter of 2021. For the three months ended March 31, 2020, the company reported a benefit from income taxes of $1,226 million. The(65.5) percent. This tax benefit was primarily related to the ~~tax impacts of an intra-entity sale~~resolution of certain ~~of the company’s intellectual property.~~tax audits.

Noncontrolling interest amounts of ~~$7.6 million and $4.5~~$4.9 million, net of tax, for both the three months ended March 31, ~~2021~~2022 and ~~2020, respectively,~~2021 are included as a reduction within other (income) and expense in the Consolidated Income Statement.

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 ~~2020~~2021 Annual Report.

Table of Contents

Notes to Consolidated Financial Statements — (continued)

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 period amounts have been reclassified to conform to the current period presentation. This is annotated where applicable. In addition, an adjustment of $63 million between common stock and retained earnings related to the issuance of treasury stock in connection with certain previously issued stock-based compensation awards has been reflected in the Consolidated Balance Sheet and Consolidated Statement of Equity at March 31, 2022.

2. Accounting Changes:

New Standards to be Implemented

Disclosures about Government Assistance

Standard/Description–Issuance date: November 2021. This guidance requires an entity to provide certain annual disclosures about government assistance received and accounted for by applying a grant or contribution accounting model by analogy.

Effective Date and Adoption Considerations–The guidance is effective for annual disclosures beginning in 2022 and early adoption was permitted. The company will 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, 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.

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 recognition of a day-one loss even if the lessor expected the arrangement to be profitable overall. The amendment requires these types of lease contracts to be classified as operating leases which eliminates any recognition of a day-one loss.

Effective Date and Adoption Considerations–The amendment was effective January 1, 2022 and early adoption was permitted. The company adopted the guidance on a prospective 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.

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

Table of Contents

Notes to Consolidated Financial Statements — (continued)

had originated the contracts. Deferred revenue acquired in a business combination is no 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 retrospective transition method whereby the new guidance was applied to all 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 Income Taxes

Standard/Description–Issuance date: December 2019. This guidance simplifies various aspects of income tax accounting by removing certain exceptions to the general principle of the guidance and also clarifies and amends existing guidance to improve consistency in application.

Effective Date and Adoption Considerations– The guidance was effective January 1, 2021 and early adoption was permitted. The company adopted the guidance on a prospective basis as of the effective date.

~~Table of Contents~~

~~Notes to Consolidated Financial Statements — (continued)~~

Effect on Financial Statements or Other Significant Matters– The guidance did not have a material impact in the consolidated financial results.

~~Reference Rate Reform~~

~~Standard/Description~~~~–Issuance date: March 2020,~~

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 ~~amendments in 2021. This guidance provides optional expedients~~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. For additional information on the retained shares, refer to note 8, “Financial Assets & Liabilities.” The historical results of Kyndryl have been presented as discontinued operations and, ~~exceptions~~as such, have been excluded from continuing operations and segment results for ~~applying GAAP~~all periods presented.

The company’s presentation of discontinued operations excludes general corporate overhead costs which were historically allocated to ~~contract modifications, hedging relationships, and other transactions~~Kyndryl, consistent with the company’s management system, that ~~reference London Interbank Offered Rate (LIBOR) or another reference rate expected~~do not meet the requirements to be presented in discontinued ~~subject~~operations. Such allocations include labor and non-labor expenses related to ~~meeting certain criteria.~~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.

~~Effective Date~~Separation costs of $3 million and ~~Adoption Considerations~~~~–The guidance is effective as~~$50 million incurred during the three months ended March 31, 2022 and 2021, respectively, are included in income from discontinued operations, net of ~~March 12, 2020 through December 31, 2022.~~

~~Effect on Financial Statements or Other Significant Matters~~~~–The company made a policy election~~tax, in the first quarter of 2020 to adopt the practical expedient which allows for the continuation of fair value hedge accounting for interest rate derivative contracts upon the transition from LIBOR to Secured Overnight Financing Rate (SOFR) or another reference rate alternative, without any impact to the Consolidated Income Statement. ~~The company is continuing~~These charges primarily relate to ~~evaluate~~transaction and third-party support costs, business separation and applicable employee retention fees, pension settlement charges and related tax charges.

IBM will provide transition services to Kyndryl predominantly consisting of information technology services for a period no longer than two years after the ~~potential~~separation. The impact of these transition services on the ~~replacement~~company’s Consolidated Financial Statements for the three months ended March 31, 2022 was not material.

IBM and Kyndryl entered into various commercial agreements pursuant to which Kyndryl will purchase hardware, software and services from IBM for use in the delivery of Kyndryl services agreements and under which IBM will receive services from Kyndryl, related to hosting data centers and servicing IBM’s information infrastructure. As part of the ~~LIBOR benchmark on its interest rate risk management activities; however, it is not expected~~separation, IBM has also committed to ~~have~~provide Kyndryl upgraded hardware at no cost to Kyndryl over a ~~material impact in~~two-year period after the ~~consolidated financial results.~~

~~Simplifying~~separation. The total estimate of IBM’s obligation under the ~~Test for Goodwill Impairment~~

~~Standard/Description~~–Issuance date: January 2017. This guidance simplifies the goodwill impairment test by removing Step 2. It also requires disclosure of any reporting units that have zero or negative carrying amounts if they have goodwill allocated to them.

~~Effective Date~~agreement at both March 31, 2022 and ~~Adoption Considerations~~~~–The guidance was effective January 1, 2020 and early adoption was permitted. The company adopted the guidance on a prospective 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.~~

~~Financial Instruments–Credit Losses~~

~~Standard/Description~~–Issuance date: June 2016, with amendments in 2018, 2019 and 2020. This changes the guidance for credit losses based on an expected loss model rather than an incurred loss model. It 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. It also expands the scope of financial instruments subject to impairment, including off-balance sheet commitments and residual value.

~~Effective Date and Adoption Considerations~~–The guidance was effective January 1, 2020 with one-year early adoption permitted. The company adopted the guidance as of the effective date, using the transition methodology whereby prior comparative periods were not retrospectively presented in the Consolidated Financial Statements.

~~Effect on Financial Statements or Other Significant Matters~~–At January 1, 2020, an increase in the allowance for credit losses of $81 million was recorded for accounts receivable–trade and financing receivables (inclusive of its related off-balance sheet commitments). Additionally, net deferred taxes were reduced by $14 million in the Consolidated Balance Sheet, resulting in a cumulative-effect net decrease to retained earnings of $66 million. Refer to note 8, “Financing Receivables,” and note 12, “Commitments,” for additional information.

1011

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Notes to Consolidated Financial Statements — (continued)

December 31, 2021 was $265 million and is included in other accrued expenses and liabilities in the Consolidated Balance Sheet.

The following table presents the major categories of income from discontinued operations:


(Dollars in millions)
For the three months ended March 31:	2022		2021*
Revenue	$	17	$	4,543
Cost of sales		21		3,365
Selling, general and administrative expense		(6)		488
RD&E and Other (income) and expense		(69)		29
Income from discontinued operations before income taxes	$	73	$	661
Provision for income taxes		2		109
Income from discontinued operations, net of tax	$	71	$	552

*	Excludes intercompany transactions between IBM and Kyndryl and general corporate overhead costs transferred to Kyndryl as discussed above.

Income from discontinued operations, net of tax, for the three months ended March 31, 2022 primarily relates 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, resulting in a pre-tax gain on sale of $68 million. Also reflected in the discontinued operations results are charges related to the settlement of assets and liabilities in accordance with the Separation and Distribution Agreement.

The following table presents selected financial information related to cash flows from discontinued operations:


(Dollars in millions)
For the three months ended March 31:	2022		2021
Net cash provided by/(used in) operating activities	$	0	$	702	*
Net cash provided by/(used in) investing activities		48		(104)

*	Excludes intercompany transactions between IBM and Kyndryl and general corporate overhead costs transferred to Kyndryl as discussed above.

3.4. Revenue Recognition:

Disaggregation of Revenue

The following tables provide details of revenue by major products/service offerings, hybrid cloud revenue, and revenue by geography.

Table of Contents

Notes to Consolidated Financial Statements — (continued)

Revenue by Major Products/Service Offerings

(Dollars in millions)

For the three months ended March 31:

2021

2020
Cloud & Data Platforms

$
2,866

$
2,536
Cognitive Applications

1,233

1,182
Transaction Processing Platforms

1,338

1,520
Total Cloud & Cognitive Software

$
5,437

$
5,238
Consulting

2,189

2,071
Application Management

1,770

1,840
Global Process Services

274

225
Total Global Business Services

$
4,234

$
4,136
Infrastructure & Cloud Services

4,853

4,916
Technology Support Services

1,517

1,550
Total Global Technology Services

$
6,370

$
6,467
Systems Hardware

1,114

997
Operating Systems Software

313

371
Total Systems

$
1,427

$
1,368
Global Financing*

240

299
Other

23

62
Total revenue

$
17,730

$
17,571


(Dollars in millions)
For the three months ended March 31:	2022		2021*
Hybrid Platform & Solutions	$	4,080	$	3,800
Transaction Processing		1,692		1,338
Total Software	$	5,772	$	5,138
Business Transformation		2,255		1,953
Application Operations		1,619		1,474
Technology Consulting		955		835
Total Consulting	$	4,829	$	4,262
Hybrid Infrastructure		1,700		1,782
Infrastructure Support		1,519		1,512
Total Infrastructure	$	3,219	$	3,293
Financing**		154		208
Other		224		284
Total revenue	$	14,197	$	13,187

*	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


(Dollars in millions)
For the three months ended March 31:	2022		2021*
Software	$	2,130	$	1,744
Consulting		2,135		1,722
Infrastructure		672		837
Other		72		87
Total	$	5,009	$	4,390

*	Recast to reflect segment changes.

Revenue by Geography


(Dollars in millions)
For the three months ended March 31:	2021		2020		2022		2021
Americas	$	8,179	$	8,166	$	7,056	$	6,477
Europe/Middle East/Africa		5,641		5,517		4,231		3,928
Asia Pacific		3,909		3,888		2,910		2,781
Total	$	17,730	$	17,571	$	14,197	$	13,187

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 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.~~

1113

Table of Contents

Notes to Consolidated Financial Statements — (continued)

terminations, changes in the scope of contracts, periodic revalidations, adjustment for revenue that has not materialized and adjustments for currency.

At March 31, ~~2021,~~2022, the aggregate amount of the transaction price allocated to RPO related to customer contracts that are unsatisfied or partially unsatisfied was ~~$114~~$58 billion. Approximately 6070 percent of the amount is expected to be recognized as revenue in the subsequent two years, approximately 3026 percent in the subsequent three to five years and the balance ~~(mostly Infrastructure & Cloud Services)~~ thereafter.

Revenue Recognized for Performance Obligations Satisfied (or Partially Satisfied) in Prior Periods

For the three months ended March 31, ~~2021,~~2022, revenue was reduced by ~~$45~~$29 million 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 March 31,		At December 31,		At March 31,		At December 31,
(Dollars in millions)	2021		2020		2022		2021
Notes and accounts receivable–trade (net of allowances of $345 in 2021 and $351 in 2020)	$	6,458	$	7,132
Notes and accounts receivable — trade (net of allowances of $225 in 2022 and $218 in 2021)					$	5,963	$	6,754
Contract assets*		522		497		517		471
Deferred income (current)		14,197		12,833		13,526		12,518
Deferred income (noncurrent)		4,153		4,301		3,423		3,577

* Included within prepaid expenses and other current assets in the Consolidated Balance Sheet.
*
Included within prepaid expenses and other current assets in the Consolidated Balance Sheet.

The amount of revenue recognized during the three months ended March 31, ~~2021~~2022 that was included within the deferred income balance at December 31, ~~2020~~2021 was ~~$4.2~~$4.0 billion 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 three months ended March 31, ~~2021~~2022 and the year ended December 31, ~~2020:~~2021:


(Dollars in millions)	(Dollars in millions)									(Dollars in millions)
January 1, 2021		Additions / (Releases)		Write-offs		Other*		March 31, 2021
January 1, 2022										January 1, 2022	Additions / (Releases)		Write-offs		Foreign currency and other		March 31, 2022
$	351	$	1	$	(6)	$	(2)	$	345	218	$	23	$	(7)	$	(9)	$	225

January 1, 2020

Additions / (Releases)

Write-offs

Other*

December 31, 2020
$
316

$
76

$
(46)

$
5

$
351

*	~~Primarily represents translation adjustments~~.


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.

Table of Contents

4.Notes to Consolidated Financial Statements — (continued)

5. Segments:

In January 2022, IBM announced the divestiture of its healthcare data and analytics assets which is expected to close 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. In the first quarter of 2022, the financial results of these assets are presented in Other–divested businesses. This change did not impact IBM’s Consolidated Financial Statements.

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 below table displays the segment updates in the fourth quarter of 2021.


Previous Segments	Changes⁽¹⁾	New Segments
Cloud & Cognitive Software	• Revenue categories	Software
Global Business Services	• Revenue categories	Consulting
Global Technology Services	- Separated managed infrastructure services⁽²⁾	N/A
	- Technology Support Services
	- IBM Cloud IaaS
	- Managed infrastructure services retained JV⁽³⁾
Systems	• Revenue categories	Infrastructure
	+ Technology Support Services
	+ IBM Cloud IaaS
	+ Global asset recovery service
Global Financing	- Global asset recovery service	Financing
Other	+ Managed infrastructure services retained JV⁽³⁾	Other

(1) Does not include minor mission moves.

(2) IBM completed the separation of its managed infrastructure services business to Kyndryl on November 3, 2021.

(3)	Represents a joint venture relationship that was historically managed by the managed infrastructure services business that was not transferred to Kyndryl as part of the separation.

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.~~company and have been recast for the prior-year periods 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 ~~in part,~~ by the chief operating decision maker, both in evaluating the performance of, and in allocating resources to, each of the segments.

1215

Table of Contents

Notes to Consolidated Financial Statements — (continued)

SEGMENT INFORMATION

��


Cloud &

Global

Global









Cognitive

Business

Technology

Global

Total

(Dollars in millions)

Software

Services

Services

Systems

Financing

Segments

For the three months ended March 31, 2021:













External revenue

$
5,437

$
4,234

$
6,370

$
1,427

$
240

$
17,707

Internal revenue

832

55

313

189

168

1,557

Total revenue

$
6,269

$
4,289

$
6,683

$
1,616

$
408

$
19,264

Pre-tax income/(loss) from continuing operations

$
1,428

$
390

$
140

$
(2)

$
166

$
2,122

Revenue year-to-year change

3.6
%

2.5
%

(1.2)
%

6.6
%

(20.2)
%

1.3
%
Pre-tax income/(loss) year-to-year change

53.0
%

44.1
%

nm


nm

(14.2)
%

111.6
%
Pre-tax income/(loss) margin

22.8
%

9.1
%

2.1
%

(0.1)
%

40.8
%

11.0
%

For the three months ended March 31, 2020:













External revenue

$
5,238

$
4,136

$
6,467

$
1,368

$
299

$
17,508

Internal revenue

813

46

294

148

212

1,514

Total revenue

$
6,052

$
4,183

$
6,761

$
1,516

$
511

$
19,023

Pre-tax income/(loss) from continuing operations

$
933

$
271

$
(178)

$
(217)

$
194

$
1,003

Pre-tax income/(loss) margin

15.4
%

6.5
%

(2.6)
%

(14.3)
%

37.9
%

5.3
%

~~nm - not meaningful~~


													Total
(Dollars in millions)	Software			Consulting			Infrastructure			Financing			Segments
For the three months ended March 31, 2022:
Revenue	$	5,772		$	4,829		$	3,219		$	154		$	13,973
Pre-tax income from continuing operations	$	1,134		$	348		$	199		$	84		$	1,766
Revenue year-to-year change		12.3	%		13.3	%		(2.3)	%		(26.2)	%		8.3	%
Pre-tax income year-to-year change		72.3	%		25.8	%		(31.7)	%		(14.3)	%		33.3	%
Pre-tax income margin		19.7	%		7.2	%		6.2	%		54.6	%		12.6	%

*For the three months ended March 31, 2021:**
Revenue	$	5,138		$	4,262		$	3,293		$	208		$	12,902
Pre-tax income from continuing operations	$	658		$	277		$	292		$	98		$	1,325
Pre-tax income margin		12.8	%		6.5	%		8.9	%		47.0	%		10.3	%

Reconciliations to IBM as Reported:


(Dollars in millions)
For the three months ended March 31:	2021		2020		2022		2021*
Revenue:
Total reportable segments	$	19,264	$	19,023	$	13,973	$	12,902
Other–divested businesses		1		18
Other ‒ divested businesses						154		197
Other revenue		21		44		70		87
Eliminations of internal transactions		(1,557)		(1,514)
Total consolidated revenue	$	17,730	$	17,571	$	14,197	$	13,187

Pre-tax income from continuing operations:
Total reportable segments	$	2,122	$	1,003	$	1,766	$	1,325
Amortization of acquired intangible assets		(452)		(473)		(461)		(447)
Acquisition-related (charges)/income		(16)		0		(7)		(16)
Non-operating retirement-related (costs)/income		(343)		(264)		(202)		(332)
Spin-off related charges		(61)		—
Elimination of internal transactions		(73)		(55)
Other–divested businesses		(8)		25
Unallocated corporate amounts		(263)		(284)
Total pre-tax income/(loss) from continuing operations	$	905	$	(49)
Kyndryl-related impacts**						(222)		—
Eliminations of internal transactions						(11)		(9)
Other ‒ divested businesses						(52)		(15)
Unallocated corporate amounts and other						(188)		(262)
Total pre-tax income from continuing operations					$	623	$	244

*	Recast to conform to current year presentation.

**	Refer to note 8, “Financial Assets & Liabilities,” for additional information.

~~Table of Contents~~

~~Notes to Consolidated Financial Statements — (continued)~~

5.6. Acquisitions & Divestitures:

Acquisitions

Purchase price consideration for all acquisitions was paid primarily in cash. All acquisitions, except 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 three months ended March 31, ~~2021,~~2022, the company completed 3 acquisitions at an aggregate cost of ~~$987~~$798 million.

The Global Business Services segment completed the acquisition of Nordcloud, a consulting company providing services in cloud implementation, application transformation and managed services; and Taos Mountain, LLC (Taos), a leading cloud professional and managed services provider. The Cloud & Cognitive Software segment, through Red Hat, completed the acquisition of StackRox, an innovator in container and Kubernetes-native security. 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.

~~The purchase consideration~~16

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Notes to Consolidated Financial Statements — (continued)


Acquisition	Segment	Description of Acquired Business
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

At March 31, 2022, the ~~acquisition~~remaining cash to be remitted by the company related to certain first quarter 2022 acquisitions was $113 million, most of ~~Nordcloud includes a fair value estimate of contingent consideration~~which is expected to be paid ~~annually through~~by the first quarter of ~~2024 upon achieving certain revenue milestones. The annual payments are not expected to be material.~~2023.

The following table reflects the purchase price related to these acquisitions and the resulting purchase price allocation as of March 31, ~~2021.~~2022.


	Amortization	Total		Amortization	Total
(Dollars in millions)	Life (in years)	Acquisitions		Life (in years)	Acquisitions
Current assets		$	72		$	52
Property, plant and equipment/noncurrent assets			4			2
Intangible assets:
Goodwill	N/A		746	N/A		649
Client relationships	7		134	7		140
Completed technology	3-7		114	4-7		39
Trademarks	2-6		27	2-3		5
Total assets acquired		$	1,097		$	887
Current liabilities			48			55
Noncurrent liabilities			62			35
Total liabilities assumed		$	110		$	89
Total purchase price		$	987		$	798

N/A - not applicable

~~Table of Contents~~

~~Notes to Consolidated Financial Statements — (continued)~~

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 ~~6.8~~6.7 years. ~~These~~Goodwill of $461 million and $188 million was assigned to the Consulting and Software segments, respectively. It is expected that 0ne 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. Goodwill of $501 million and $245 million was assigned to the Global Business Services segment and Cloud & Cognitive Software segment, respectively. It is expected that approximately 11 percent of the goodwill will be deductible for tax purposes.

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.

~~At December 31, 2020, the remaining cash~~17

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Notes to ~~be remitted by the company related to certain fourth-quarter 2020 acquisitions was $323 million. This amount was classified as restricted cash in the~~ Consolidated ~~Balance Sheet at December 31, 2020. At March 31, 2021, the remaining amount to be remitted was not material.~~Financial Statements — (continued)

Divestitures

In ~~the fourth~~first quarter of ~~2020,~~2022, the ~~company entered into a definitive agreement to sell certain remaining OEM commercial financing capabilities reported within the Global Financing segment.~~Infrastructure segment completed 1 divestiture. The financial terms related to this transaction ~~are~~were not material.

Transactions Announced — In January 2022, the company signed a definitive agreement in which Francisco Partners will acquire IBM’s healthcare data and analytics assets reported within Other - divested business (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. The transaction is expected to ~~be completed~~close in phases with the initial closing of the U.S. and Canada expected in the second quarter of 2022, and subsequent closings expected in the second half of ~~2021.~~2022, subject to customary regulatory clearances and closing conditions. The company expects to recognize a pre-tax gain on the sale, the final amount of which is not yet determinable.

At March 31, 2022, the business met the criteria for held for sale classification. Held for sale assets of approximately $727 million, which consist primarily of goodwill, intangible assets-net and property, plant, and equipment-net of approximately $484 million, $165 million and $45 million, respectively, and held for sale liabilities of $123 million, which consist primarily of deferred income, were included in the company’s Consolidated Balance Sheet at March 31, 2022.

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Notes to Consolidated Financial Statements — (continued)

6.7. Earnings Per Share of Common Stock:

The following table provides the computation of basic and diluted earnings per share of common stock for the three months ended March 31, ~~2021~~2022 and ~~2020.~~2021.


(Dollars in millions except per share amounts)
For the three months ended March 31:	2021		2020		2022		2021
Number of shares on which basic earnings per share is calculated:
Weighted-average shares outstanding during period		893,630,916		887,969,345		899,316,026		893,630,916
Add — Incremental shares under stock-based compensation plans		6,622,441		5,740,415		8,375,246		6,622,441
Add — Incremental shares associated with contingently issuable shares		1,492,709		1,329,477		1,534,864		1,492,709
Number of shares on which diluted earnings per share is calculated		901,746,065		895,039,238		909,226,136		901,746,065

Income from continuing operations	$	956	$	1,176	$	662	$	403
Income/(loss) from discontinued operations, net of tax		(1)		(1)
Income from discontinued operations, net of tax						71		552
Net income on which basic earnings per share is calculated	$	955	$	1,175	$	733	$	955

Income from continuing operations	$	956	$	1,176	$	662	$	403
Net income applicable to contingently issuable shares		—		(2)		—		—
Income from continuing operations on which diluted earnings per share is calculated	$	956	$	1,174	$	662	$	403
Income/(loss) from discontinued operations, net of tax, on which basic and diluted earnings per share is calculated		(1)		(1)
Income from discontinued operations, net of tax, on which basic and diluted earnings per share is calculated						71		552
Net income on which diluted earnings per share is calculated	$	955	$	1,173	$	733	$	955

Earnings/(loss) per share of common stock:
Assuming dilution
Continuing operations	$	1.06	$	1.31	$	0.73	$	0.45
Discontinued operations		0.00		0.00		0.08		0.61
Total	$	1.06	$	1.31	$	0.81	$	1.06
Basic
Continuing operations	$	1.07	$	1.32	$	0.74	$	0.45
Discontinued operations		0.00		0.00		0.08		0.62
Total	$	1.07	$	1.32	$	0.82	$	1.07

Stock options to purchase ~~1,510,886~~1,163,321 shares and ~~1,136,899~~1,510,886 shares were outstanding as of March 31, ~~2021~~2022 and ~~2020,~~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.

7.8. Financial Assets & Liabilities:

Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The company classifies 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;

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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.

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.

●

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 cash 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 impairment for credit losses and no material non-credit ~~impairment~~impairments were recorded for the three months ended March 31, ~~2021~~2022 and ~~2020,~~2021, respectively.

Certain non-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 non-financial assets depend on the type of asset. There were no material impairments of non-financial assets for the three months ended March 31, ~~2021~~2022 and ~~2020,~~2021, respectively.

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Notes to Consolidated Financial Statements — (continued)

The following table presents the company’s financial assets and financial liabilities that are measured at fair value on a recurring basis at March 31, ~~2021~~2022 and December 31, ~~2020.~~2021.


	Fair Value									Fair Value
	Hierarchy	At March 31, 2021				At December 31, 2020				Hierarchy	At March 31, 2022				At December 31, 2021
(Dollars in millions)	Level	Assets (7)		Liabilities (8)		Assets (7)		Liabilities (8)		Level	Assets (7)		Liabilities (8)		Assets (7)		Liabilities (8)
Cash equivalents: (1)
Time deposits and certificates of deposit (2)	2	$	5,943	$	N/A	$	7,668	$	N/A	2	$	3,875	$	N/A	$	1,903	$	N/A
Money market funds	1		141		N/A		148		N/A	1		2,393		N/A		263		N/A
U.S. government securities (2)	2		—		N/A		500		N/A	2		—		N/A		599		N/A
Total cash equivalents		$	6,084	$	N/A	$	8,316	$	N/A		$	6,268	$	N/A	$	2,766	$	N/A
Equity investments (3)	1		1		N/A		2		N/A	1		—		N/A		0		N/A
Kyndryl common stock										1		585		N/A		807		N/A
Debt securities-current (2)(4)	2		600		N/A		600		N/A	2		550		N/A		600		N/A
Debt securities-noncurrent (2)(5)	2		6		N/A		7		N/A	2,3		36		N/A		37		N/A
Derivatives designated as hedging instruments:
Interest rate contracts	2		20		—		100		—	2		11		6		12		—
Foreign exchange contracts	2		404		276		111		580	2		505		179		359		117
Derivatives not designated as hedging instruments:
Foreign exchange contracts	2		13		50		13		47	2		19		30		21		42
Equity contracts (6)	1,2		13		6		12		—	1,2		5		17		6		4
Total		$	7,141	$	332	$	9,161	$	627		$	7,980	$	231	$	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)	~~Primarily includes~~ U.S. treasury bills that are reported within marketable securities in the Consolidated Balance Sheet.

(5)	~~Primarily includes~~Includes corporate and government debt securities that are reported within investments and sundry assets in the Consolidated Balance Sheet.

(6)	Level 1 includes immaterial amounts related to equity futures contracts.

(7)

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 March 31, ~~2021~~2022 were ~~$386~~$511 million and ~~$64~~$29 million, respectively, and at December 31, ~~2020~~2021 were ~~$85~~$358 million and ~~$151~~$40 million, respectively.

(8)

The gross balances of derivative liabilities contained within other accrued expenses and liabilities, and other liabilities in the Consolidated Balance Sheet at March 31, ~~2021~~2022 were ~~$277~~$117 million and ~~$55~~$114 million, respectively, and at December 31, ~~2020~~2021 were ~~$587~~$60 million and ~~$40~~$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. The company accounts for the Kyndryl shares as a fair value investment. The fair value of the shares was $585 million and $807 million at March 31, 2022 and December 31, 2021, respectively, and is included within prepaid expenses and other current assets in the Consolidated Balance Sheet. An unrealized loss of $222 million was recorded in other (income) and expense in the Consolidated Income Statement for the three months ended March 31, 2022. Refer to note 3, “Separation of Kyndryl,” for additional information.

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 and including short-term finance lease liabilities) are financial liabilities with carrying values that approximate fair

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Notes to Consolidated Financial Statements — (continued)

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-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 March 31, ~~2021~~2022 and December 31, ~~2020,~~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.

~~Table of Contents~~

~~Notes to Consolidated Financial Statements — (continued)~~

Long-Term Debt

Fair value of publicly 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 ~~$51,206~~$46,545 million and ~~$54,355~~$44,917 million, and the estimated fair value was ~~$55,962~~$47,896 million and ~~$61,598~~$49,465 million at March 31, ~~2021~~2022 and December 31, ~~2020,~~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.

8.9. 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 ~~Systems~~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.

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

(Dollars in millions)

Receivables

Direct Financing

Financing

At March 31, 2021:

(Loans)

Leases

Receivables

Total
Financing receivables, gross

$
10,218

$
3,923

$
1,119

$
15,261
Unearned income

(421)

(290)

0

(711)
Residual value*

—

430

—

430
Amortized cost

$
9,797

$
4,064

$
1,119

$
14,980
Allowance for credit losses

(154)

(74)

(7)

(236)
Total financing receivables, net

$
9,643

$
3,989

$
1,112

$
14,744
Current portion

$
6,050

$
1,660

$
1,112

$
8,822
Noncurrent portion

$
3,592

$
2,329

$
—

$
5,922


	Client Financing Receivables								Client Financing Receivables
	Client Loan and		Investment in						Client Loan and		Investment in
	Installment Payment		Sales-Type and		Commercial				Installment Payment		Sales-Type and		Commercial Financing Receivables
(Dollars in millions)	Receivables		Direct Financing		Financing				Receivables		Direct Financing		Held for		Held for
At December 31, 2020:	(Loans)		Leases		Receivables		Total
At March 31, 2022:									(Loans)		Leases		Investment		Sale*		Total
Financing receivables, gross	$	12,159	$	4,001	$	2,419	$	18,580	$	8,342	$	3,213	$	198	$	410	$	12,164
Unearned income		(488)		(335)		0		(823)		(321)		(211)		—		—		(532)
Residual value*		—		485		—		485
Unguaranteed residual value										—		325		—		—		325
Amortized cost	$	11,671	$	4,151	$	2,419	$	18,242	$	8,022	$	3,328	$	198	$	410	$	11,957
Allowance for credit losses		(173)		(82)		(8)		(263)		(114)		(59)		(6)		—		(179)
Total financing receivables, net	$	11,498	$	4,069	$	2,411	$	17,979	$	7,908	$	3,269	$	192	$	410	$	11,779
Current portion	$	6,955	$	1,525	$	2,411	$	10,892	$	5,133	$	1,434	$	192	$	410	$	7,169
Noncurrent portion	$	4,542	$	2,544	$	—	$	7,086	$	2,775	$	1,835	$	—	$	—	$	4,610

* ~~Includes guaranteed and unguaranteed residual~~The carrying value of the receivables classified as held for sale approximates fair value.

1922

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Notes to Consolidated Financial Statements — (continued)


	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

* 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, with enhanced focus due to the current macroeconomic uncertainty.~~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 ~~$425~~$386 million and ~~$482~~$408 million at March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively. These borrowings are included in note ~~11,~~12, “Borrowings.”

Transfer of Financial Assets

~~For the three months ended March 31,~~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, ~~the company sold $995 million~~sales of client financing receivables ~~to third parties, consisting of loan and lease receivables of $653 million and $342 million, respectively. More than half~~were utilized as part of the company’s cash and liquidity management as well as for credit mitigation. In the first quarter of 2022, sales of client financing receivables ~~sold~~ were ~~classified as current assets at the time of sale.~~

~~On December 24, 2020,~~largely focused on credit mitigation. In addition, the company ~~entered into~~has an existing agreement with a third-party investor to sell ~~up to $3,000 million of~~ IBM short-term commercial financing receivables ~~at any one time,~~ on a revolving basis. The company ~~sold $1,167 million~~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 under the agreement for the three months ended March 31, 2021. In addition, the company included $257 million and $383 million of commercial financing receivables classified as held for sale at March 31, 2021 and December 31, 2020, respectively, in short-term financing receivables in the Consolidated Balance Sheet. The carrying value of the receivables classified as held for sale approximates fair value.transferred:


(Dollars in millions)
For the three months ended March 31:	2022		2021
Client financing receivables
Lease receivables	$	15	$	342
Loan receivables		2		653
Total client financing receivables transferred	$	17	$	995
Commercial financing receivables
Receivables transferred during the period	$	1,989	$	1,167
Receivables uncollected at end of period*		724		724

*	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 March 31, 2022 and 2021.

The ~~transfers~~transfer of these receivables qualified as true sales and therefore reduced financing ~~receivables, resulting~~receivables. The cash proceeds from the sales are included in ~~a benefit to~~ cash flows from operating ~~activities. The~~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 three months ended March 31, 2021 were not material. The company did~~ ~~not~~ ~~have any sales of financing receivables for the three months ended March 31, 2020.~~

~~Financing Receivables by Portfolio Segment~~

The following tables present the amortized cost basis for client financing receivables at March 31, 2021 and December 31, 2020, 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.

2023

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Notes to Consolidated Financial Statements — (continued)

Statement, including fees and net gain or loss associated with the transfers of these receivables for the three months ending March 31, 2022 and 2021 were not material.

Financing Receivables by Portfolio Segment

The following tables present the amortized cost basis for client financing receivables at March 31, 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.


(Dollars in millions)
At March 31, 2021:	Americas		EMEA		Asia Pacific		Total
At March 31, 2022:									Americas		EMEA		Asia Pacific		Total
Amortized cost	$	6,867	$	4,244	$	2,750	$	13,861	$	6,116	$	3,333	$	1,900	$	11,349
Allowance for credit losses
Beginning balance at January 1, 2021	$	141	$	77	$	37	$	255
Allowance for credit losses:
Beginning balance at January 1, 2022									$	111	$	61	$	23	$	195
Write-offs		(2)		(1)		(6)		(9)	$	(15)	$	0	$	(2)	$	(17)
Recoveries		0		0		0		1		1		0		0		1
Additions/(releases)		(11)		2		(3)		(12)		(5)		(3)		(1)		(8)
Other*		(3)		(3)		0		(6)		3		(1)		0		2
Ending balance at March 31, 2021	$	125	$	76	$	27	$	229
Ending balance at March 31, 2022									$	95	$	56	$	21	$	172


(Dollars in millions)
At December 31, 2020:	Americas		EMEA		Asia Pacific		Total
At December 31, 2021:									Americas		EMEA		Asia Pacific		Total
Amortized cost	$	7,758	$	5,023	$	3,042	$	15,822	$	6,573	$	3,793	$	2,031	$	12,397
Allowance for credit losses
Beginning balance at January 1, 2020	$	142	$	69	$	41	$	252
Allowance for credit losses:
Beginning balance at January 1, 2021									$	141	$	77	$	37	$	255
Write-offs	$	(28)	$	(3)	$	(3)	$	(34)	$	(8)	$	(2)	$	(7)	$	(17)
Recoveries		0		0		2		3		0		0		1		1
Additions/(releases)		33		5		(4)		34		(19)		(11)		(7)		(38)
Other*		(6)		6		1		1		(3)		(3)		0		(7)
Ending balance at December 31, 2020	$	141	$	77	$	37	$	255
Ending balance at December 31, 2021									$	111	$	61	$	23	$	195

* Primarily represents translation adjustments.

~~IBM continues to monitor~~When determining the ~~global impacts from~~allowances, financing receivables are evaluated either on an individual or a collective basis. For the ~~COVID-19 pandemic as well as its impact~~company’s policy on ~~external economic models. The company’s allowance~~determining allowances for credit losses, ~~at March 31, 2021 and December 31, 2020 reflects the qualitative process which is described further in~~refer to note A, “Significant Accounting ~~Policies”~~Policies,” in the company’s ~~2020~~2021 Annual Report. Any changes to economic models that occurred after the balance sheet date will be reflected in future periods.

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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						Amortized		Billed		Amortized
	Total		Amortized		Cost		Invoices		Cost		Total		Amortized		Cost		Invoices		Cost
(Dollars in millions)	Amortized		Cost		> 90 Days and		> 90 Days and		Not		Amortized		Cost		> 90 Days and		> 90 Days and		Not
At March 31, 2021:	Cost		> 90 Days (1)		Accruing (1)		Accruing		Accruing (2)
At March 31, 2022:											Cost		> 90 Days (1)		Accruing (1)		Accruing		Accruing (2)
Americas	$	6,867	$	271	$	182	$	11	$	94	$	6,116	$	356	$	282	$	8	$	77
EMEA		4,244		102		14		3		93		3,333		97		7		2		90
Asia Pacific		2,750		32		9		4		24		1,900		45		26		2		19
Total client financing receivables	$	13,861	$	405	$	205	$	18	$	212	$	11,349	$	498	$	315	$	12	$	186


					Amortized		Billed		Amortized						Amortized		Billed		Amortized
	Total		Amortized		Cost		Invoices		Cost		Total		Amortized		Cost		Invoices		Cost
(Dollars in millions)	Amortized		Cost		> 90 Days and		> 90 Days and		Not		Amortized		Cost		> 90 Days and		> 90 Days and		Not
At December 31, 2020:	Cost		> 90 Days (1)		Accruing (1)		Accruing		Accruing (2)
At December 31, 2021:											Cost		> 90 Days (1)		Accruing (1)		Accruing		Accruing (2)
Americas	$	7,758	$	295	$	200	$	12	$	96	$	6,573	$	188	$	100	$	6	$	90
EMEA		5,023		119		28		5		95		3,793		99		7		2		95
Asia Pacific		3,042		42		12		4		32		2,031		25		5		2		20
Total client financing receivables	$	15,822	$	456	$	241	$	20	$	223	$	12,397	$	312	$	112	$	10	$	205

(1)	At a contract level, which includes total billed and unbilled amounts for financing receivables aged greater than 90 days.

(2)

Of the amortized cost not accruing, there was a related allowance of ~~$167~~$135 million and ~~$178~~$153 million at March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively. Financing income recognized on these receivables was immaterial for the three months ended March 31, ~~2021~~2022 and ~~2020,~~2021, 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 March 31, ~~2021~~2022 and December 31, ~~2020,~~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 ~~reduces~~reduce the risk to IBM.


(Dollars in millions)	Americas				EMEA				Asia Pacific				Americas				EMEA				Asia Pacific
At March 31, 2021:	Aaa – Baa3		Ba1 – D		Aaa – Baa3		Ba1 – D		Aaa – Baa3		Ba1 – D
At March 31, 2022:													Aaa – Baa3		Ba1 – D		Aaa – Baa3		Ba1 – D		Aaa – Baa3		Ba1 – D
Vintage year:
2022													$	512	$	314	$	290	$	178	$	177	$	48
2021	$	808	$	421	$	310	$	349	$	253	$	105		2,110		869		914		544		444		175
2020		1,966		923		1,086		887		721		230		845		363		404		282		338		78
2019		871		457		471		431		499		94		450		194		206		241		256		41
2018		666		283		311		166		365		133		223		91		104		65		182		52
2017		206		117		43		103		165		40
2016 and prior		56		92		34		53		109		36
2017 and prior														81		64		23		82		79		29
Total	$	4,573	$	2,294	$	2,254	$	1,989	$	2,111	$	639	$	4,221	$	1,896	$	1,940	$	1,393	$	1,477	$	423

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Notes to Consolidated Financial Statements — (continued)


(Dollars in millions)	Americas				EMEA				Asia Pacific				Americas				EMEA				Asia Pacific
At December 31, 2020:	Aaa – Baa3		Ba1 – D		Aaa – Baa3		Ba1 – D		Aaa – Baa3		Ba1 – D
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	$	2,818	$	1,449	$	1,513	$	1,427	$	958	$	351		1,013		392		506		342		381		86
2019		988		623		668		519		564		123		544		236		287		291		297		51
2018		829		360		329		245		419		167		338		117		189		85		211		64
2017		285		154		70		128		205		52		108		50		15		52		74		17
2016		90		52		33		46		114		33
2015 and prior		28		81		22		22		38		18
2016 and prior														20		53		21		46		38		20
Total	$	5,038	$	2,720	$	2,635	$	2,387	$	2,298	$	743	$	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 three months ended March 31, ~~2021~~2022 or for the year ended December 31, ~~2020.~~2021.

9.10. Leases:

Accounting for Leases as a Lessor

The following table presents amounts included in the Consolidated Income Statement related to lessor activity:


(Dollars in millions)
For the three months ended March 31:	2021		2020		2022		2021
Lease income – sales-type and direct financing leases:
Lease income — sales-type and direct financing leases:
Sales-type lease selling price	$	363	$	211	$	54	$	360
Less: Carrying value of underlying assets*		59		76		(19)		(57)
Gross profit	$	304	$	135	$	36	$	304
Interest income on lease receivables		51		74		45		51
Total sales-type and direct financing lease income	$	355	$	208	$	81	$	354
Lease income – operating leases		51		71
Lease income — operating leases						30		51
Variable lease income	��	57		30		28		57
Total lease income	$	463	$	310	$	138	$	463

* Excludes unguaranteed residual value.

Sales-type lease revenue was $54 million for the three months ended March 31, 2022 and $360 million for the three months ended March 31, 2021. The decrease was predominantly due to the zSystems product cycle dynamics.

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Notes to Consolidated Financial Statements — (continued)

~~10.~~11. Intangible Assets Including Goodwill:

Intangible Assets

The following ~~table presents~~tables present the company's intangible asset balances by major asset class.


	At March 31, 2021						At March 31, 2022
	Gross Carrying		Accumulated		Net Carrying		Gross Carrying		Accumulated		Net Carrying
(Dollars in millions)	Amount		Amortization		Amount*		Amount		Amortization		Amount*
Intangible asset class:
Capitalized software	$	1,854	$	(837)	$	1,017	$	1,805	$	(729)	$	1,076
Client relationships		8,874		(2,275)		6,599		9,013		(3,017)		5,996
Completed technology		5,972		(1,784)		4,188		6,092		(2,427)		3,665
Patents/trademarks		2,196		(480)		1,717		2,192		(624)		1,567
Other**		56		(41)		14		38		(30)		8
Total	$	18,952	$	(5,417)	$	13,535	$	19,140	$	(6,828)	$	12,312

At December 31, 2020


Gross Carrying

Accumulated

Net Carrying
(Dollars in millions)

Amount

Amortization

Amount*
Intangible asset class:

Capitalized software

$
1,777

$
(814)

$
963
Client relationships

8,838

(2,056)

6,783
Completed technology

5,957

(1,671)

4,286
Patents/trademarks

2,246

(499)

1,747
Other**

56

(39)

16
Total

$
18,874

$
(5,079)

$
13,796


	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 March 31, ~~2021~~2022 and December 31, ~~2020~~2021 include a decrease in net intangible asset balances of ~~$137~~$60 million and ~~an increase of $279~~$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 ~~$261~~$199 million during the first three months of ~~2021,~~2022, primarily due to intangible asset amortization, partially offset by additions of acquired intangibles and capitalized software. The aggregate intangible amortization expense was ~~$620~~$625 million and ~~$622~~$614 million for the quarters ended March 31, ~~2021~~2022 and ~~2020,~~2021, respectively. In the first three months of ~~2021,~~2022, the company retired ~~$256~~$297 million of fully amortized intangible assets, impacting both the gross carrying amount and accumulated amortization by this amount.

The future amortization expense relating to intangible assets currently recorded in the Consolidated Balance Sheet is estimated to be the following at March 31, ~~2021:~~2022:


	Capitalized		Acquired				Capitalized		Acquired
(Dollars in millions)	Software		Intangibles		Total		Software		Intangibles		Total
Remainder of 2021	$	469	$	1,379	$	1,848
2022		368		1,774		2,142
Remainder of 2022							$	459	$	1,377	$	1,836
2023		168		1,459		1,627		404		1,535		1,938
2024		12		1,408		1,420		203		1,487		1,690
2025		—		1,389		1,389		10		1,470		1,480
2026								0		1,453		1,453
Thereafter		—		5,109		5,109		0		3,915		3,915

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Notes to Consolidated Financial Statements — (continued)

Goodwill

The changes in the goodwill balances by segment for the three months ended March 31, ~~2021~~2022 and for the year ended December 31, ~~2020~~2021 are as follows:


							Foreign												Foreign
							Currency												Currency
					Purchase		Translation								Purchase				Translation
(Dollars in millions)	Balance		Goodwill		Price		and Other		Balance		Balance		Goodwill		Price				and Other		Balance
Segment	1/1/2021		Additions		Adjustments		Adjustments*		3/31/2021		1/1/2022		Additions		Adjustments		Divestitures		Adjustments*		3/31/2022
Cloud & Cognitive Software	$	43,934	$	245	$	6	$	(249)	$	43,935
Global Business Services		6,145		501		0		(61)		6,585
Global Technology Services		7,245		—		—		(70)		7,175
Systems		2,293		—		0		(4)		2,289
Software											$	43,966	$	188	$	(27)	$	—	$	(99)	$	44,027
Consulting												6,797		461		(3)		—		(49)		7,205
Infrastructure												4,396		—		—		(1)		(5)		4,390
Other												484		—		—		—		—		484
Total	$	59,617	$	746	$	6	$	(384)	$	59,984	$	55,643	$	649	$	(31)	$	(1)	$	(153)	$	56,106


							Foreign												Foreign
							Currency												Currency
					Purchase		Translation								Purchase				Translation
(Dollars in millions)	Balance		Goodwill		Price		and Other		Balance		Balance		Goodwill		Price				and Other		Balance
Segment	1/1/2020		Additions		Adjustments		Adjustments*		12/31/2020		1/1/2021		Additions		Adjustments		Divestitures		Adjustments*		12/31/2021
Cloud & Cognitive Software	$	43,037	$	362	$	(139)	$	675	$	43,934
Global Business Services		5,775		205		—		165		6,145
Global Technology Services		7,141		—		—		104		7,245
Systems		2,270		8		—		15		2,293
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	$	58,222	$	575	$	(139)	$	960	$	59,617	$	53,765	$	2,549	$	2	$	(50)	$	(623)	$	55,643

* Primarily driven by foreign currency translation.
*
Primarily driven by foreign currency translation.
**
Recast to conform to current year presentation due to segment change.

There were 0 goodwill impairment losses recorded during the first three months of ~~2021~~2022 or full-year ~~2020~~2021 and the company has 0 accumulated impairment losses. Purchase price adjustments recorded in the first three months of ~~2021~~2022 and full-year ~~2020~~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 during the first three months of 2022 and 2021 were not material. ~~In full-year 2020, net purchase price adjustments recorded to noncurrent tax assets and liabilities were related to the Red Hat acquisition.~~

~~11.~~12. Borrowings:

Short-Term Debt


	At March 31,		At December 31,		At March 31,		At December 31,
(Dollars in millions)	2021		2020		2022		2021
Short-term loans	$	36	$	130	$	13	$	22
Long-term debt–current maturities		5,162		7,053
Long-term debt — current maturities						7,676		6,764
Total	$	5,198	$	7,183	$	7,690	$	6,787

The weighted-average interest rate for short-term loans was ~~5.3~~4.4 percent and ~~5.7~~6.7 percent at March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively.

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Notes to Consolidated Financial Statements — (continued)

Long-Term Debt

Pre-Swap Borrowing


		Balance		Balance			Balance		Balance
(Dollars in millions)	Maturities	3/31/2021		12/31/2020		Maturities	3/31/2022		12/31/2021
U.S. dollar debt (weighted-average interest rate at March 31, 2021):*
0.7%	2021	$	2,635	$	5,499
2.6%	2022		5,712		6,233
3.5%	2023		1,636		2,395
U.S. dollar debt (weighted-average interest rate at March 31, 2022):*
2.7%						2022	$	4,661	$	5,673
3.4%						2023		1,563		1,573
3.3%	2024		5,025		5,029	2024		5,014		5,016
6.8%	2025		626		631
6.9%						2025		607		608
3.3%	2026		4,368		4,370	2026		4,354		4,356
3.0%	2027		2,219		2,219
2.8%						2027		2,871		2,221
6.5%	2028		313		313	2028		313		313
3.5%	2029		3,250		3,250	2029		3,250		3,250
2.0%	2030		1,350		1,350	2030		1,350		1,350
5.9%	2032		600		600
4.4%						2032		1,100		600
8.0%	2038		83		83	2038		83		83
4.5%	2039		2,745		2,745	2039		2,745		2,745
2.9%	2040		650		650	2040		650		650
4.0%	2042		1,107		1,107	2042		1,107		1,107
7.0%	2045		27		27	2045		27		27
4.7%	2046		650		650	2046		650		650
4.3%	2049		3,000		3,000	2049		3,000		3,000
3.0%	2050		750		750	2050		750		750
3.4%						2052		650		—
7.1%	2096		316		316	2096		316		316
		$	37,062	$	41,218		$	35,062	$	34,290
Other currencies (weighted-average interest rate at March 31, 2021, in parentheses):*
Other currencies (weighted-average interest rate at March 31, 2022, in parentheses):*
Euro (1.1%)	2021–2040	$	17,618	$	18,355	2023–2040	$	17,783	$	15,903
Pound sterling (2.6%)	2022		414		411	2022		395		406
Japanese yen (0.3%)	2022–2026		1,316		1,409	2022–2026		1,198		1,263
Other (4.4%)	2021–2025		299		324
Other (13.8%)						2022–2025		384		378
		$	56,708	$	61,718		$	54,821	$	52,240
Finance lease obligations (1.5%)	2021–2030		317		296
Finance lease obligations (1.9%)						2022–2030		100		99
		$	57,025	$	62,013		$	54,921	$	52,339
Less: net unamortized discount			868		875			849		839
Less: net unamortized debt issuance costs			147		156			142		130
Add: fair value adjustment**			357		426			291		311
		$	56,367	$	61,408		$	54,221	$	51,681
Less: current maturities			5,162		7,053			7,676		6,764
Total		$	51,206	$	54,355		$	46,545	$	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’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

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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 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 ~~2020,~~2022, the company issued ~~an aggregate of $4.1~~$2.3 billion of Euro fixed-rate notes in tranches with maturities ranging from 8 to 12 years and ~~the proceeds were primarily used~~coupons ranging from 0.875 to ~~early redeem outstanding~~1.25 percent and $1.8 billion of U.S. dollar fixed-rate ~~debt which was due in 2021 in the aggregate amount of $2.9 billion. The~~ notes ~~were redeemed at a price equal~~with maturities ranging from 5 to ~~100 percent of the aggregate principal plus a make-whole premium~~30 years and ~~accrued interest. The company incurred a loss of $49 million upon redemption that was recorded in other (income) and expense in the Consolidated Income Statement.~~

coupons ranging from 2.20 to 3.43 percent. In the first quarter of 2021, IBM Credit LLC early redeemed all of its outstanding fixed-rate debt in the aggregate amount of $1.75 billion with maturity dates ranging from 2021 to 2023 and deregistered with the U.S. Securities and Exchange Commission. The notes were redeemed at a price equal to 100 percent of the aggregate principal plus a make-whole premium and accrued interest. The company incurred a loss of approximately $22 million upon redemption that was recorded in other (income) and expense in the Consolidated Income Statement.

Pre-swap annual contractual obligations of long-term debt outstanding at March 31, ~~2021,~~2022, are as follows:


(Dollars in millions)	Total		Total
Remainder of 2021	$	4,060
2022		6,826
Remainder of 2022			$	5,668
2023		4,928		4,807
2024		6,442		6,364
2025		4,144		3,943
2026				4,700
Thereafter		30,625		29,440
Total	$	57,025	$	54,921

Interest on Debt


(Dollars in millions)
For the three months ended March 31:	2021		2020		2022		2021
Cost of financing	$	106	$	119	$	82	$	106
Interest expense		280		326		311		280
Interest capitalized		2		5		2		2
Total interest paid and accrued	$	388	$	449	$	395	$	388

Lines of Credit

~~IBM~~The company has ~~a $10.25 billion Five-Year Credit Agreement,~~ a $2.5 billion Three-Year Credit Agreement and a ~~$2.5~~$7.5 billion ~~364-day~~Five-Year Credit Agreement with ~~respective~~ maturity dates of ~~July 20,~~June 21, 2024 ~~July 20, 2023~~ and ~~July 1, 2021.~~June 22, 2026, respectively. The Credit Agreements permit the company and its subsidiary borrowers to borrow up to $10 billion on a revolving basis.

At March 31, ~~2021,~~2022, there were 0 borrowings by the company, or its subsidiaries, under these credit facilities.

~~12.~~13. Commitments:

The company’s extended lines of credit to third-party entities include unused amounts of ~~$1.6 billion and $2.1~~$1.7 billion at March 31, ~~2021~~2022 and December 31, ~~2020, respectively.~~2021. 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 $2.9 billion and $3.2 billion at March 31, 2022 and December 31, 2021,

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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 $4.7 billion and $5.2 billion at March 31, 2021 and December 31, 2020, 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”~~Policies,” in the company’s ~~2020~~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 March 31, ~~2021.~~2022.

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 March 31, ~~2021~~2022 and December 31, ~~2020~~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)

2021

2020
Balance at January 1

$
83

$
113
Current period accruals

16

20
Accrual adjustments to reflect actual experience

(4)

(6)
Charges incurred

(23)

(26)
Balance at March 31

$
72

$
100


(Dollars in millions)	2022		2021
Balance at January 1	$	77	$	83
Current period accruals		14		16
Accrual adjustments to reflect actual experience		(2)		(4)
Charges incurred		(20)		(23)
Balance at March 31	$	69	$	72

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Notes to Consolidated Financial Statements — (continued)

Extended Warranty Liability (Deferred Income)


(Dollars in millions)	2021		2020		2022		2021
Balance at January 1	$	425	$	477	$	350	$	425
Revenue deferred for new extended warranty contracts		18		40		18		18
Amortization of deferred revenue		(53)		(57)		(44)		(53)
Other*		(6)		(13)		(1)		(6)
Balance at March 31	$	383	$	447	$	323	$	383
Current portion	$	199	$	219	$	155	$	199
Noncurrent portion	$	185	$	228	$	168	$	185

* Other primarily consists of foreign currency translation adjustments.

~~13.~~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 orand its clients ~~could become~~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 March 31, ~~2021,~~2022 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

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Notes to Consolidated Financial Statements — (continued)

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 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.

The company is a defendant in an action filed on March 6, 2003 in state court in Salt Lake City, Utah 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 some of AT&T’s UNIX IP rights, and alleges copyright infringement, unfair competition, interference with contract and breach of contract with regard to the company’s distribution of AIX and Dynix and contribution of code to Linux and 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 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 appeal 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 1 of SCO’s remaining claims, which was remanded to the Federal Court in Utah.

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.

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 ~~requires~~required IBM to pay approximately $20 million in damages, plus interest and litigation costs. ~~CISGIL is expected to seek permission from~~In April 2022, the Court of Appeal awarded CISGIL additional damages of approximately $89 million, plus interest and litigation costs. IBM intends to seek appeal of the judgment.

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.

~~In May 2015,~~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 ~~related to~~alleging that during the ~~company’s~~period from April 4, 2017 through October 2014 announcement that it was divesting its global commercial semiconductor technology business, alleging violations of the Employee Retirement Income Security Act (ERISA). Management’s Retirement Plans Committee20, 2021, certain strategic imperatives revenues were misclassified. The company, 2 current IBM senior executives, and ~~3 current or~~2 former IBM senior executives are named as defendants. On ~~September 29, 2017,~~March 25, 2022, the ~~Court granted~~Board of Directors received a shareholder demand letter making similar allegations and demanding that the ~~defendants’ motion~~company’s Board of Directors take action to ~~dismiss~~assert the ~~first amended complaint. On December 10, 2018,~~company’s rights. A special committee of independent directors has been formed to investigate the ~~Second Circuit Court of Appeals reversed~~issues raised in the ~~District Court order. On January 14, 2020, the Supreme Court of the United States vacated the decision and remanded the case to the Second Circuit. On June 22, 2020, the Second~~

~~Table of Contents~~letter.

~~Notes to Consolidated Financial Statements — (continued)~~

~~Circuit reinstated its prior decision and remanded the case to the District Court. In February 2021, the parties reached an agreement to settle the matter subject to court approval.~~

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

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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 ~~$700~~$450 million. The company believes it will prevail on these matters and that this amount is not a meaningful indicator of liability.

~~14.~~15. Equity Activity:

Reclassifications and Taxes Related to Items of Other Comprehensive Income


(Dollars in millions)	Before Tax		Tax (Expense)/		Net of Tax		Before Tax		Tax (Expense)/		Net of Tax
For the three months ended March 31, 2021:	Amount		Benefit		Amount
For the three months ended March 31, 2022:							Amount		Benefit		Amount
Other comprehensive income/(loss):
Foreign currency translation adjustments	$	549	$	(228)	$	321	$	442	$	(136)	$	306
Net changes related to available-for-sale securities:
Unrealized gains/(losses) arising during the period	$	0	$	0	$	0	$	0	$	0	$	0
Reclassification of (gains)/losses to other (income) and expense		—		—		—		—		—		—
Total net changes related to available-for-sale securities	$	0	$	0	$	0	$	0	$	0	$	0
Unrealized gains/(losses) on cash flow hedges:
Unrealized gains/(losses) arising during the period	$	187	$	(47)	$	140	$	60	$	(16)	$	44
Reclassification of (gains)/losses to:
Cost of services		(14)		3		(10)		(15)		4		(11)
Cost of sales		22		(6)		16		(12)		4		(9)
Cost of financing		6		(2)		4		5		(1)		4
SG&A expense		15		(4)		11		(6)		2		(4)
Other (income) and expense		116		(29)		87		7		(2)		5
Interest expense		16		(4)		12		21		(5)		15
Total unrealized gains/(losses) on cash flow hedges	$	347	$	(88)	$	259	$	59	$	(15)	$	44
Retirement-related benefit plans (1):
Prior service costs/(credits)	$	0	$	0	$	0	$	(5)	$	5	$	0
Net (losses)/gains arising during the period		20		(6)		14		9		(4)		5
Curtailments and settlements		17		(5)		12		8		(2)		6
Amortization of prior service (credits)/costs		3		0		3		7		(2)		5
Amortization of net (gains)/losses		648		(177)		471		468		(131)		337
Total retirement-related benefit plans	$	689	$	(189)	$	500	$	486	$	(134)	$	352
Other comprehensive income/(loss)	$	1,586	$	(505)	$	1,080	$	987	$	(285)	$	703

(1)	These accumulated other comprehensive income (AOCI) components are included in the computation of net periodic pension cost. Refer to note ~~17,~~18, “Retirement-Related Benefits,” for additional information.

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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		Before Tax		Tax (Expense)/		Net of Tax
For the three months ended March 31, 2020:	Amount		Benefit		Amount
For the three months ended March 31, 2021:							Amount		Benefit		Amount
Other comprehensive income/(loss):
Foreign currency translation adjustments	$	(919)	$	(122)	$	(1,041)	$	549	$	(228)	$	321
Net changes related to available-for-sale securities:
Unrealized gains/(losses) arising during the period	$	0	$	0	$	0	$	0	$	0	$	0
Reclassification of (gains)/losses to other (income) and expense		—		—		—		—		—		—
Total net changes related to available-for-sale securities	$	0	$	0	$	0	$	0	$	0	$	0
Unrealized gains/(losses) on cash flow hedges:
Unrealized gains/(losses) arising during the period	$	(180)	$	45	$	(135)	$	187	$	(47)	$	140
Reclassification of (gains)/losses to:
Cost of services		(10)		2		(7)		(14)		3		(10)
Cost of sales		(9)		2		(6)		22		(6)		16
Cost of financing		8		(2)		6		6		(2)		4
SG&A expense		(10)		2		(7)		15		(4)		11
Other (income) and expense		89		(22)		67		116		(29)		87
Interest expense		22		(5)		16		16		(4)		12
Total unrealized gains/(losses) on cash flow hedges	$	(90)	$	23	$	(67)	$	347	$	(88)	$	259
Retirement-related benefit plans (1):
Prior service costs/(credits)	$	(4)	$	1	$	(3)	$	0	$	0	$	0
Net (losses)/gains arising during the period		8		(2)		6		20		(6)		14
Curtailments and settlements		8		(3)		6		17		(5)		12
Amortization of prior service (credits)/costs		1		1		1		3		0		3
Amortization of net (gains)/losses		570		(157)		412		648		(177)		471
Total retirement-related benefit plans	$	582	$	(160)	$	422	$	689	$	(189)	$	500
Other comprehensive income/(loss)	$	(427)	$	(260)	$	(686)	$	1,586	$	(505)	$	1,080

(1)	These AOCI components are included in the computation of net periodic pension cost. Refer to note ~~17,~~18, “Retirement-Related Benefits,” for additional information.

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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, 2022	$	(18)	$	(3,362)	$	(19,854)	$	(1)	$	(23,234)
Other comprehensive income before reclassifications		44		306		5		0		355
Amount reclassified from accumulated other comprehensive income		0		—		348		—		348
Total change for the period	$	44	$	306	$	352	$	0	$	703
March 31, 2022	$	26	$	(3,056)	$	(19,502)	$	(1)	$	(22,532)


					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		140		321		14		0		475
Amount reclassified from accumulated other comprehensive income		119		—		486		—		606
Total change for the period	$	259	$	321	$	500	$	0	$	1,080
March 31, 2021	$	(197)	$	(4,343)	$	(23,716)	$	(1)	$	(28,257)

* 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, 2020

$
(179)

$
(3,700)

$
(24,718)

$
0

$
(28,597)
Other comprehensive income before reclassifications

(135)

(1,041)

3

0

(1,174)
Amount reclassified from accumulated other comprehensive income

68

—

419

—

488
Total change for the period

$
(67)

$
(1,041)

$
422

$
0

$
(686)
March 31, 2020

$
(246)

$
(4,741)

$
(24,296)

$
0

$
(29,283)

* Foreign currency translation adjustments are presented gross except for any associated hedges which are presented net of tax.

~~15.~~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. ~~NaN~~At March 31, 2022 and December 31, 2021, the amount ~~was~~ recognized in other accounts receivable for ~~the obligation to return or~~ the right to reclaim cash collateral atwas $3 million and $2 million, respectively. At March 31, ~~2021~~2022 and December 31, ~~2020.~~2021, the amount recognized in accounts payable for the obligation to return cash collateral was $25 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. ~~NaN amount was rehypothecated at~~At March 31, ~~2021~~2022 and December 31, ~~2020.~~2021, the amount rehypothecated was $3 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 March 31 ~~2021~~, 2022 and December 31 ~~2020,~~, 2021, the total derivative asset and liability positions each would have been reduced by ~~$181~~$95 million and ~~$213~~$60 million, respectively.

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Notes to Consolidated Financial Statements — (continued)

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.

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 March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, the total notional amount of the company’s interest-rate swaps was $2.4 billion and $0.4 billion, ~~and $3.0 billion,~~ respectively. In the first quarter of 2021, in addition to the scheduled swap maturities, the company terminated $1.25 billion of interest-rate swaps concurrent with the early redemption of the underlying hedged fixed-rate debt. The weighted-average remaining maturity of these instruments at March 31, ~~2021~~2022 and December 31, ~~2020~~2021 was approximately ~~2.0~~5.0 years and 1.2 years, respectively. These interest-rate contracts were accounted for as fair value hedges. The company did not have any cash flow hedges relating to this program outstanding at March 31, ~~2021~~2022 and December 31, ~~2020.~~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 March 31, ~~2021~~2022 and December 31, ~~2020.~~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 ~~$170~~$152 million and ~~net losses of $174~~$157 million ~~(before taxes)~~ at March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively, in AOCI. The company estimates that $18 million ~~(before taxes)~~ of the deferred net losses (before taxes) on derivatives in AOCI at March 31, ~~2021~~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 March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, the carrying value of debt designated as hedging instruments was ~~$15.7~~$15.0 billion and ~~$16.4~~$14.1 billion, respectively. The company also uses cross-currency swaps and foreign exchange forward contracts for this risk management purpose. At March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, the total notional amount of derivative instruments designated as net investment hedges was ~~$8.2~~$5.7 billion and ~~$7.2~~$6.8 billion, respectively. At both March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, the weighted-average remaining maturity of these instruments was approximately ~~0.2 years and 0.3 years, respectively.~~0.1 years.

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

~~Table of Contents~~

~~Notes to Consolidated Financial Statements — (continued)~~

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. ~~The~~At March 31, 2022, the maximum remaining length of time over which the

Table of Contents

Notes to Consolidated Financial Statements — (continued)

company hedged its exposure is approximately ~~three~~two years. At March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, the total notional amount of forward contracts designated as cash flow hedges of forecasted royalty and cost transactions was ~~$7.7~~$7.9 billion and ~~$8.0~~$7.2 billion, respectively. At both March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, the weighted-average remaining maturity of these instruments was approximately ~~0.7 years at both periods.~~0.6 years.

At March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, in connection with cash flow hedges of anticipated royalties and cost transactions, the company recorded net gains (before taxes) of ~~$115~~$338 million and ~~net losses of $192~~$315 million, ~~(before taxes),~~ respectively, in AOCI. The company estimates that ~~$30~~$263 million ~~(before taxes)~~ of deferred net gains (before taxes) on derivatives in AOCI at March 31, ~~2021~~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 March 31, ~~2021,~~2022, the maximum length of time remaining over which the company hedged its exposure is approximately ~~seven~~six years. At March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, the total notional amount of cross-currency swaps designated as cash flow hedges of foreign currency denominated debt was ~~$1.5~~$3.0 billion ~~at both periods.~~and $2.0 billion, respectively.

At March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, in connection with cash flow hedges of foreign currency denominated borrowings, the company recorded net losses (before taxes) of ~~$199~~$141 million and ~~net losses of $236~~$174 million, ~~(before taxes),~~ respectively, in AOCI. The company estimates that ~~$24~~$25 million ~~(before taxes)~~ of deferred net ~~losses~~gains (before taxes) on derivatives in AOCI at March 31, ~~2021~~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 March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, the total notional amount of derivative instruments in economic hedges of foreign currency exposure was ~~$6.1~~$5.9 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 March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, the total notional amount of derivative instruments in economic hedges of these compensation obligations was $1.3 billion ~~at both periods.~~and $1.4 billion, respectively.

3538

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Notes to Consolidated Financial Statements — (continued)

Cumulative Basis Adjustments for Fair Value Hedges

At March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, the following amounts were recorded in the Consolidated Balance Sheet related to cumulative basis adjustments for fair value hedges:


	March 31,		December 31,		March 31,		December 31,
(Dollars in millions)	2021		2020		2022		2021
Short-term debt:
Carrying amount of the hedged item	$	—	$	(1,302)	$	(225)	$	(227)
Cumulative hedging adjustments included in the carrying amount — assets/(liabilities)		—		(2)		0		(2)
Long-term debt:
Carrying amount of the hedged item	$	(781)	$	(2,097)	$	(2,480)	$	(508)
Cumulative hedging adjustments included in the carrying amount — assets/(liabilities)*		(357)		(424)		(290)		(309)

* Includes ($~~340)~~289) million and ($~~353)~~302) million of hedging adjustments on discontinued hedging relationships at March 31, ~~2021~~2022 and December 31, ~~2020,~~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									Gains/(Losses) of
(Dollars in millions)	Total				Total Hedge Activity				Total					Total Hedge Activity
For the three months ended March 31:	2021		2020		2021		2020		2022		2021			2022		2021
Cost of services	$	7,775	$	7,843	$	14	$	10	$	5,349	$	4,644		$	15	$	14
Cost of sales		1,585		1,624		(22)		9		1,415		1,379	*		12		(22)
Cost of financing		165		181		2		3		98		137	*		(2)		2
SG&A expense		5,174		5,955		34		(191)		4,597		4,688			(70)		34
Other (income) and expense		362		182		(160)		(101)		246		346			(102)		(160)
Interest expense		280		326		5		10		311		280			(6)		5

* Reclassified to conform to current year presentation.

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Notes to Consolidated Financial Statements — (continued)


	Gain (Loss) Recognized in Consolidated Income Statement									Gain (Loss) Recognized in Consolidated Income Statement
	Consolidated	Recognized on				Attributable to Risk				Consolidated	Recognized on				Attributable to Risk
(Dollars in millions)	Income Statement	Derivatives				Being Hedged (2)				Income Statement	Derivatives				Being Hedged (2)
For the three months ended March 31:	Line Item	2021		2020		2021		2020		Line Item	2022		2021		2022		2021
Derivative instruments in fair value hedges (1):
Interest rate contracts	Cost of financing	$	(1)	$	18	$	7	$	(13)	Cost of financing	$	(1)	$	(1)	$	4	$	7
	Interest expense		(1)		49		18		(37)	Interest expense		(4)		(1)		16		18
Derivative instruments not designated as hedging instruments:
Foreign exchange contracts	Other (income) and expense		(44)		(11)		N/A		N/A	Other (income) and expense		(95)		(44)		N/A		N/A
Equity contracts	SG&A expense		49		(201)		N/A		N/A	SG&A expense		(76)		49		N/A		N/A
Total		$	3	$	(146)	$	25	$	(50)		$	(176)	$	3	$	20	$	25


	Gain (Loss) Recognized in Consolidated Income Statement and Other Comprehensive Income													Gain (Loss) Recognized in Consolidated Income Statement and Other Comprehensive Income
(Dollars in millions)					Consolidated	Reclassified				Amounts Excluded from								Consolidated	Reclassified				Amounts Excluded from
For the three months	Recognized in OCI				Income Statement	from AOCI				Effectiveness Testing (3)				Recognized in OCI				Income Statement	from AOCI				Effectiveness Testing (3)
ended March 31:	2021		2020		Line Item	2021		2020		2021		2020		2022		2021		Line Item	2022		2021		2022		2021
Derivative instruments in cash flow hedges:
Interest rate contracts	$	—	$	—	Cost of financing	$	(1)	$	(1)	$	—	$	—	$	—	$	—	Cost of financing	$	(1)	$	(1)	$	—	$	—
					Interest expense		(3)		(3)		—		—					Interest expense		(3)		(3)		—		—
Foreign exchange contracts		187		(180)	Cost of services		14		10		—		—		60		187	Cost of services		15		14		—		—
					Cost of sales		(22)		9		—		—					Cost of sales		12		(22)		—		—
					Cost of financing		(5)		(7)		—		—					Cost of financing		(5)		(5)		—		—
					SG&A expense		(15)		10		—		—					SG&A expense		6		(15)		—		—
					Other (income) and expense		(116)		(89)		—		—					Other (income) and expense		(7)		(116)		—		—
					Interest expense		(13)		(18)		—		—					Interest expense		(17)		(13)		—		—
Instruments in net investment hedges (4):
Foreign exchange contracts		907		485	Cost of financing		—		—		2		7		541		907	Cost of financing		—		—		1		2
					Interest expense		—		—		4		20					Interest expense		—		—		2		4
Total	$	1,094	$	304		$	(160)	$	(91)	$	6	$	27	$	601	$	1,094		$	1	$	(160)	$	3	$	6

(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 months ending March 31, ~~2021~~2022 and ~~2020,~~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.

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Notes to Consolidated Financial Statements — (continued)

~~16.~~17. Stock-Based Compensation:

Stock-based compensation cost 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.


(Dollars in millions)
For the three months ended March 31:	2021		2020		2022		2021
Cost	$	41	$	27	$	40	$	34
Selling, general and administrative		123		117		136		115
Research, development and engineering		49		45		57		49
Pre-tax stock-based compensation cost	$	213	$	189	$	234	$	198
Income tax benefits		(52)		(45)		(57)		(48)
Total net stock-based compensation cost	$	161	$	144	$	177	$	149

Pre-tax stock-based compensation cost for the three months ended March 31, ~~2021~~2022 increased ~~$24~~$36 million compared to the corresponding period in the prior ~~year. This was due to~~year, including increases in stock options ($5 million), performance share units ($163 million) and restricted stock units ($828 million).

In The increases primarily relate to a change in the ~~first quarter~~timing of ~~2021,~~ the company’s Executive Compensation and Management Resources Committee of the Board of Directors approved changes to certain outstanding performance share unit targets to include the impact of the planned spin-off of Kyndryl, along with actions taken to enable the separation and enable IBM’s growth strategy under current market conditions. The impact under modification accounting was not material.executive grant cycle in 2022.

Total unrecognized compensation cost related to non-vested awards at March 31, ~~2021~~2022 was ~~$1.2~~$1.5 billion and is expected to be recognized over a weighted-average period of approximately ~~2.1~~2.6 years.

Capitalized stock-based compensation cost was not material at March 31, ~~2021~~2022 and ~~2020.~~

~~17.~~ ~~Retirement-Related Benefits:~~2021.

~~The~~Effective April 1, 2022, the company ~~offers defined benefit pension plans, defined contribution pension plans, as well as nonpension postretirement plans primarily consisting~~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 ~~retiree medical benefits. The following table provides~~purchase. With this change, the ~~pre-tax cost~~ESPP is considered compensatory under the accounting requirements for ~~all retirement-related plans.~~

Yr. to Yr.

(Dollars in millions)

Percent

For the three months ended March 31:

2021

2020

Change

Retirement-related plans — cost:







Defined benefit and contribution pension plans — cost

$
672

$
584

15.2
%
Nonpension postretirement plans — cost

44

52

(14.5)

Total

$
717

$
636

12.8
%

stock-based compensation.

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Table of Contents

Notes to Consolidated Financial Statements — (continued)

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 March 31:	2022		2021		Change
Retirement-related plans — cost:
Defined benefit and contribution pension plans — cost	$	478	$	619	(22.8)	%
Nonpension postretirement plans — cost		33		44	(25.0)
Total	$	510	$	663	(23.0)	%

The following table provides the components of the cost/(income) for the company’s pension plans.

Cost/(Income) of Pension Plans


(Dollars in millions)	U.S. Plan				Non-U.S. Plans				U.S. Plans				Non-U.S. Plans
For the three months ended March 31:	2021		2020		2021		2020		2022		2021		2022		2021
Service cost	$	—	$	—	$	92	$	95	$	—	$	—	$	64	$	65
Interest cost (1)		277		375		111		129		302		277		139		108
Expected return on plan assets (1)		(451)		(542)		(291)		(309)		(475)		(451)		(274)		(279)
Amortization of prior service costs/(credits) (1)		4		4		(2)		(5)		2		4		4		(2)
Recognized actuarial losses (1)		249		207		375		342		179		249		278		356
Curtailments and settlements (1)		—		—		17		8		—		—		8		17
Multi-employer plans		—		—		8		7		—		—		4		6
Other costs/(credits) (1)		—		—		11		5		—		—		9		11
Total net periodic pension (income)/cost of defined benefit plans	$	80	$	44	$	322	$	274	$	8	$	80	$	231	$	283
Cost of defined contribution plans		151		155		119		110		141		151		98		105
Total defined benefit and contribution pension plans cost recognized in the Consolidated Income Statement	$	231	$	199	$	441	$	385	$	149	$	231	$	328	$	388

~~(1)~~

~~These components of net periodic pension cost are included in other (income) and expense in the Consolidated Income Statement.~~

(1)

These components of net periodic pension cost are included in other (income) and expense in the Consolidated Income Statement.

The following table provides 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				U.S. Plan				Non-U.S. Plans
For the three months ended March 31:	2021		2020		2021		2020		2022		2021		2022		2021
Service cost	$	2	$	2	$	1	$	1	$	1	$	2	$	1	$	1
Interest cost (1)		16		26		8		10		18		16		9		8
Expected return on plan assets (1)		—		—		(1)		(1)		—		—		0		(1)
Amortization of prior service costs/(credits) (1)		1		1		0		0		1		1		0		0
Recognized actuarial losses (1)		13		7		4		6		2		13		1		4
Curtailments and settlements (1)		—		—		—		0		—		—		—		—
Total nonpension postretirement plans cost recognized in the Consolidated Income Statement	$	32	$	36	$	12	$	16	$	23	$	32	$	10	$	12

(1)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 2021 from the amounts disclosed in the 2020 Annual Report.~~

~~The table below includes contributions to the following plans:~~

(Dollars in millions)

Plan Contributions
For the three months ended March 31:

2021

2020
U.S. nonpension postretirement benefit plan

$
106

$
136
Non-U.S. DB and multi-employer plans

66

82
Total plan contributions

$
172

$
217

During the three months ended March 31, 2021 and 2020, the company contributed $150 million and $185 million of U.S Treasury Securities, respectively, to the non-U.S. DB plans and nonpension postretirement benefit plans.

3942

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Notes to Consolidated Financial Statements — (continued)

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 three months ended March 31:		2022	2021
U.S. and non-U.S. nonpension postretirement benefit plans	$	120	$	106
Non-U.S. DB and multi-employer plans*		35		64
Total plan contributions	$	154	$	170

*	Amounts reported net of refunds.

During the three months ended March 31, 2022 and 2021, the company contributed $105 million and $150 million of U.S Treasury Securities, respectively, to the non-U.S. DB plans and nonpension postretirement benefit plans. Additionally, during the three months ended March 31, ~~2021~~2022 and ~~2020,~~2021, the company contributed ~~$129~~$156 million and ~~$70~~$129 million of U.S. Treasury Securities, respectively, to the Active Medical Trust. Contributions made with U.S. Treasury securities are considered a non-cash transaction.

~~18.~~19. Subsequent Events:

On April ~~27, 2021,~~26, 2022, the company announced that the Board of Directors approved an increase in the quarterly dividend to ~~$1.64~~$1.65 per common share. The dividend is payable June 10, ~~2021~~2022 to shareholders of record on May 10, ~~2021.~~2022.

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Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

FOR THE THREE MONTHS ENDED MARCH 31, ~~2021~~2022

Snapshot

Financial Results Summary — Three Months Ended March 31:

Yr. to Yr.

Percent/

(Dollars and shares in millions except per share amounts)

Margin

For the three months ended March 31:

2021

2020

Change

Revenue

$
17,730

$
17,571

0.9
%*
Gross profit margin

46.3
%

45.1
%
1.2
pts.
Total expense and other (income)

$
7,299

$
7,972

(8.4)
%
Income/(loss) from continuing operations before income taxes

$
905

$
(49)

nm

Provision for/(benefit from) income taxes from continuing operations

$
(51)

$
(1,226)

(95.9)
%
Income from continuing operations

$
956

$
1,176

(18.7)
%
Income from continuing operations margin

5.4
%

6.7
%
(1.3)
pts.
Net income

$
955

$
1,175

(18.7)
%
Earnings per share from continuing operations - assuming dilution

$
1.06

$
1.31

(19.1)
%
Weighted-average shares outstanding - assuming dilution

901.7

895.0

0.7
%

At 3/31/2021

At 12/31/2020

Assets

$
148,629

$
155,971

(4.7)
%
Liabilities

$
127,116

$
135,244

(6.0)
%
Equity

$
21,513

$
20,727

3.8
%


							Yr. to Yr.
							Percent/
(Dollars and shares in millions except per share amounts)							Margin
For the three months ended March 31:	2022			2021			Change
Revenue	$	14,197		$	13,187		7.7	%*
Gross profit margin		51.7	%		53.3	%	(1.6)	pts.
Total expense and other (income)	$	6,712		$	6,784		(1.1)	%
Income from continuing operations before income taxes	$	623		$	244		156.0	%
Provision for/(benefit from) income taxes from continuing operations	$	(39)		$	(160)		(75.5)	%
Income from continuing operations	$	662		$	403		64.3	%
Income from continuing operations margin		4.7	%		3.1	%	1.6	pts.
Income from discontinued operations, net of tax	$	71		$	552		(87.2)	%
Net income	$	733		$	955		(23.3)	%
Earnings per share from continuing operations - assuming dilution	$	0.73		$	0.45		62.2	%
Consolidated earnings per share - assuming dilution	$	0.81		$	1.06		(23.6)	%
Weighted-average shares outstanding - assuming dilution		909.2			901.7		0.8	%

	At 3/31/2022			At 12/31/2021
Assets	$	133,275		$	132,001		1.0	%
Liabilities	$	114,162		$	113,005		1.0	%
Equity	$	19,112		$	18,996		0.6	%

* ~~(2.5)~~10.9 percent adjusted for ~~currency; (2.4) percent excluding divested businesses and adjusted for~~ currency.

~~nm - not meaningful~~

Organization of Information:

On ~~October 8, 2020, we announced our plan to separate our~~November 3, 2021, the company completed the separation of its managed infrastructure services unit ~~of our Global Technology Services (GTS) segment~~ into a new public ~~company.~~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 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. The ~~managed infrastructure services unit is comprised~~company retained 19.9 percent of ~~outsourcing~~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 ~~infrastructure modernization~~current assets in the Consolidated Balance Sheet with subsequent fair value changes included in other (income) and ~~management services and~~expense in the ~~name~~Consolidated Income Statement.

The accounting requirements for reporting the separation of Kyndryl as a discontinued operation were met when the ~~new company will be Kyndryl. The~~ separation ~~is expected to be achieved through a U.S. federal tax-free spin-off to IBM shareholders and completed by~~was completed. Accordingly, the ~~end~~historical results of 2021. It will be subject to customary market, regulatory and other closing conditions, including final IBM Board of Directors’ approval. The announcement did not have any classification impact to our Consolidated Financial Statements or segment reporting. We will report the managed infrastructure services unitKyndryl are presented as discontinued operations ~~after separation.~~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.

Table of Contents

Management Discussion – (continued)

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 comparable basis for all periods.

To provide useful decision-making information for management and shareholders, the company defines and measures hybrid cloud revenue as 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 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.

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 we refer to growth rates at constant currency or adjust such growth rates for currency, it is done so that certain financial results can be viewed without the impact of fluctuations in foreign currency exchange rates, thereby facilitating period-to-period comparisons of its business performance. Financial results adjusted for currency are calculated by translating current period activity in local currency using the comparable prior-year period’s currency conversion rate. This approach is used for countries where the functional currency is the local currency. Generally, when the dollar either strengthens or weakens against

~~Table of Contents~~

~~Management Discussion – (continued)~~

other currencies, the growth at constant currency rates or adjusting for currency will be higher or lower than growth reported at actual exchange rates. Refer to “Currency Rate Fluctuations” for additional information.

~~Revenue Adjusted for Divested Businesses and Constant Currency:~~

To provide better transparency on the recurring performance of the ongoing business, the company provides total revenue, geographic revenue and cloud revenue growth rates excluding divested businesses and at constant currency. These divested businesses are included in the category “Other–divested businesses.”

Operating (non-GAAP) Earnings:

In an effort to provide better transparency into the operational results of the business, supplementally, 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 operations and~~ certain ~~managed infrastructure services spin-off charges~~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 ~~accomplish~~ the ~~managed infrastructure services spin-off~~Kyndryl separation as non-operating given their unique and non-recurring nature. These charges primarily relate to ~~transaction~~any unrealized gains or losses on Kyndryl common stock which are recorded in other (income) and ~~third-party support costs, business~~expense in the Consolidated Income Statement. The unrealized gains or losses reflect fair value changes in the shares that were retained by the company immediately following the separation, ~~and applicable employee retention fees, pension settlement charges and related tax charges. All other spending for~~with the ~~managed infrastructure services business operations is included in both earnings from continuing operations and in operating (non-GAAP) earnings.~~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, tax charges related to acquisition integration and pre-closing charges, such as financing costs. These charges are excluded as they may be inconsistent in amount and timing from period to period and are significantly impacted by the size, type and frequency of the company’s acquisitions. All other spending for acquired companies is included in both earnings from continuing operations and in operating (non-GAAP) earnings. Throughout the Management Discussion, the impact of acquisitions over the prior ~~12-month~~12 month period may be a driver of higher expense year to year. For retirement-related costs, management characterizes certain items as operating and others as non-operating, consistent with GAAP. We include defined benefit plan and nonpension postretirement benefit plan service costs, multi-employer plan costs and the cost of defined contribution plans in operating earnings. Non-operating retirement-related costs include defined benefit plan and nonpension postretirement benefit plan amortization of prior

Table of Contents

Management Discussion – (continued)

service costs, interest cost, expected return on plan assets, amortized actuarial gains/losses, the impacts of any plan curtailments/settlements and pension insolvency costs and other costs. Non-operating retirement-related costs are primarily related to changes in pension plan assets and liabilities which are tied to financial market performance, and the company considers these costs to be outside of the operational performance of the business.

Overall, management believes that supplementally providing investors with a view of operating earnings as described above provides increased transparency and clarity into both the operational results of the business and the performance of the company’s pension plans; improves visibility to management decisions and their impacts on operational performance; enables better comparison to peer companies; and allows the company to provide a long-term strategic view of the business going forward. ~~Our reportable segment financial results reflect pre-tax operating earnings from continuing operations, consistent with our management and measurement system.~~ In 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 our management and measurement system.

The following table provides the company’s operating (non-GAAP) earnings for the first quarter of 2022 and 2021.


					Yr. to Yr.
(Dollars in millions except per share amounts)					Percent
For the three months ended March 31:	2022		2021		Change
Net income as reported	$	733	$	955	(23.3)	%
Income from discontinued operations, net of tax		71		552	(87.2)
Income from continuing operations	$	662	$	403	64.3	%
Non-operating adjustments (net of tax):
Acquisition-related charges	$	359	$	330	8.5	%
Non-operating retirement-related costs/(income)		144		299	(51.8)
U.S. tax reform impacts		(116)		(19)	nm
Kyndryl-related impacts		222		—	nm
Operating (non-GAAP) earnings*	$	1,271	$	1,013	25.5	%
Diluted operating (non-GAAP) earnings per share*	$	1.40	$	1.12	25.0	%

* Refer to page 74 for a more detailed reconciliation of net income to operating earnings.

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 remains our primary focus. Since February 2022, we have been providing our employees with relocation assistance, financial support and other forms of direct engagement. IBM employees from around the world have mobilized and are participating 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. On March 7, 2022, IBM announced the suspension of business activities in Russia. For the period ended March 31, 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 suspension of this business. These assessments did not result in any material impacts to our consolidated financial results as of and for the quarter ended March 31, 2022. We will continue to assess these matters in future periods. 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, would result in a headwind to our profit and cash flows.

4246

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Management Discussion – (continued)

~~The following table provides~~In the ~~company’s operating (non-GAAP) earnings for the first quarter of 2021 and 2020.~~

Yr. to Yr.

(Dollars in millions except per share amounts)

Percent

For the three months ended March 31:

2021

2020

Change

Net income as reported

$
955

$
1,175

(18.7)
%
Income/(loss) from discontinued operations, net of tax

(1)

(1)

(41.7)

Income from continuing operations

$
956

$
1,176

(18.7)
%
Non-operating adjustments (net of tax):





Acquisition-related charges

$
335

$
371

(9.8)
%
Non-operating retirement-related costs/(income)

282

250

12.4

U.S. tax reform impacts

(19)

(149)

(87.4)

Spin-off-related charges

46

—

nm

Operating (non-GAAP) earnings*

$
1,599

$
1,649

(3.0)
%
Diluted operating (non-GAAP) earnings per share*

$
1.77

$
1.84

(3.8)
%

* Refer to page 71 for a more detailed reconciliation of net income to operating earnings.

~~nm - not meaningful~~

~~Separation of Kyndryl:~~

IBM is redefining its future as a hybrid cloud platform and AI company. The October 8, 2020 announcement of our plan to separate the managed infrastructure services unit of our GTS segment into a new public company will create two industry-leading companies, each with strategic focus and flexibility to capitalize on their respective missions and drive client and shareholder value. IBM will focus on its open hybrid cloud platform and AI capabilities to accelerate clients’ digital transformations. Upon separation, Kyndryl will immediately be the world's leading managed infrastructure services provider and will have greater agility to design, run and modernize the infrastructurethird year of the ~~world’s most important organizations. Both IBM and Kyndryl will have greater ability~~COVID-19 pandemic, our priority continues to focus on their operating and financial models, have more freedom to partner with others and both will align their investments and capital structure to their strategic focus areas. We continue to make good progress on executingbe the ~~necessary financial, legal and regulatory milestones to enable the separation and remain on track to complete the separation by the end of 2021.~~

~~Environmental Dynamics:~~

On March 11, 2020, the World Health Organization (WHO) declared the novel coronavirus (COVID-19) a global pandemic which resulted in significant governmental measures being initiated around the globe to slow down and control the spread of the virus. The health of IBM employees, our clients, business partners and community continue to be our primary focus. We are actively engaged to ensure our plans continue to be aligned with recommendations of the WHO, the U.S. Centers for Disease Control and Prevention and governmental regulations.

~~This environment~~community. The pandemic has ~~only~~ 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 ~~reliance~~spending environment continues to improve, and we remain focused on providing the technology ~~particularly hybrid cloud~~ and ~~AI technologies~~consulting services that give clients the scalability and flexibility needed to adjust to the rapid market changes, has become more acute. We are helping to advise, build, move and manage our clients’ journey to the cloud, working with our clients need to ~~apply AI, automation~~accelerate their digital organizations and other technologies to make their workflows more intelligent and responsive and partnering with clients to help them enhance employee engagement and productivity, reskill the workforce faster and reimagine ways of working.

~~We expect the rate and pace of recovery~~emerge from the pandemic to differ by geography and industry. However, the overall spending environment is beginning to improve. For example, we saw improvement in project activity and client-based business volumes in the first quarter of 2021, including some of the industries most affected by the pandemic.

~~Table of Contents~~

~~Management Discussion – (continued)~~

The underlying fundamentals of our business continue to remain sound and provide some level of stability in our revenue, profit and cash as we continue to manage through this macroeconomic uncertainty. As the world recovers from the effects of the pandemic, IBM continues to be well positioned to support our clients to emerge even stronger.

Financial Performance Summary — Three Months Ended March 31:

In the first quarter of ~~2021,~~2022, we reported ~~$17.7~~$14.2 billion in revenue, ~~$1.0 billion in~~ income from continuing operations of $0.7 billion and operating (non-GAAP) earnings of ~~$1.6 billion, resulting in diluted~~$1.3 billion. Diluted earnings per share from continuing operations ~~of $1.06~~was $0.73 as reported and ~~$1.77~~$1.40 on an operating (non-GAAP) basis. ~~We also~~On a consolidated basis, we generated ~~$4.9~~$3.2 billion in cash from operations ~~$1.5~~and $1.2 billion in free cash flow ~~which included $0.6 billion of cash impacts from the structural actions initiated in fourth-quarter 2020 and spin-off-related charges,~~ and delivered shareholder returns of $1.5 billion ~~through~~in dividends. These results reflect ~~sequential year-to-year improvement~~progress in ~~revenue from~~our key growth areas as we continue to see a strong demand environment for both our technology and consulting. We continued to increase investments in innovation, our ecosystem and talent and our balance sheet provides us with the ~~fourth-quarter 2020, gross and pre-tax margin expansion and solid cash generation.~~flexibility to support our business needs.

Total ~~consolidated~~ revenue ~~increased 0.9~~grew 7.7 percent as reported ~~but decreased 2~~and 11 percent adjusted for currency. On a segment basis, Cloud & Cognitive Software returned to growth and increased 3.8 percent as reported (1 percent adjusted for currency). Within this segment, Cloud & Data Platforms grew 13.0 percent as reported (10 percent adjusted for currency) with continued solid Red Hat performance led by Red Hat Enterprise Linux and our OpenShift hybrid cloud platform. Cognitive Applications revenue grew 4.3 percent as reported (2 percent adjusted for currency)currency compared to the prior-year ~~period~~period. This includes incremental sales to Kyndryl which contributed over 5 points to the revenue growth. Software delivered strong revenue growth of 12.3 percent as reported and 15 percent adjusted for currency, including over 8 points of growth from incremental sales to Kyndryl. Hybrid Platform & Solutions increased 7.4 percent as reported and 10 percent adjusted for currency, with incremental sales to Kyndryl contributing approximately 1.5 points of this growth. Revenue growth was led by ~~strength~~strong double-digit growth in ~~Security, while~~Red Hat. Transaction Processing ~~Platforms declined~~grew 26.5 percent as reported and 31 percent adjusted for currency, including approximately 28 points of growth from incremental Kyndryl sales. Consulting revenue increased 13.3 percent as reported and 17 percent adjusted for currency, with a strong demand profile and growth across all three business areas. Infrastructure revenue decreased 2.3 percent year to year as ~~client buying behavior continued to focus on operating expense over capital expenditures. Global Business Services (GBS) grew 2.4 percent as~~ reported ~~(decreased 1 percent~~and was flat adjusted for ~~currency),~~currency, with ~~sequential year-to-year improvement~~the overall decline in revenue reflecting our product cycle dynamics. This performance also includes over 8 points of growth from incremental sales to Kyndryl. Across the fourth-quarter 2020. Within GBS, Consulting returned to growth and Global Process Services (GPS) had strong double-digit growth, while Application Management decreased year to year. GTS decreased 1.5 percent as reported (5 percent adjusted for currency), but had sequential year-to-year improvement from the fourth-quarter 2020 as clients increased their project activity and business volumes, including some clients in industries most impacted by the pandemic. Systems increased 4.3 percent as reported (2 percent adjusted for currency) led by strong performance in IBM Z, partially offset by declines in Storage and Power.

~~Total~~segments, total hybrid cloud revenue of ~~$6.5~~$5.0 billion in the first quarter of ~~2021~~2022 grew 2114 percent as reported ~~(17~~and 17 percent adjusted for currency) and 18 percent excluding divested businesses and adjusted for currency. Over the trailing 12 months, total cloud revenue was $26.3 billion, up 19 percent as reported (17 percent adjusted for currency) and 18 percent excluding divested businesses and adjusted for currency.

From a geographic perspective, Americas revenue was essentially flat year to year as reported and adjusted for currency. Europe/Middle East/Africa (EMEA) increased 2.3 percent as reported, but decreased 6 percent adjusted for currency. Asia Pacific increased 0.6grew 8.9 percent year to year as reported ~~but decreased 4~~(9 percent adjusted for ~~currency.~~currency). Europe/Middle East/Africa (EMEA) increased 7.7 percent (14 percent adjusted for currency). Asia Pacific grew 4.6 percent (11 percent adjusted for currency).

~~Total consolidated gross~~Gross margin of ~~46.3~~51.7 percent ~~increased 1.2~~decreased 1.6 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 due to mix from our Infrastructure product cycles. These impacts were partially offset by improvement in the ~~operating~~Software gross margin. Operating (non-GAAP) gross margin of ~~47.3~~52.9 percent ~~increased 1.1~~decreased 1.7 points ~~compared to~~versus the prior year ~~reflecting our focus on productivity, shift to higher-value offerings and portfolio mix with strong software contribution.~~for similar reasons.

Total expense and other (income) ~~of $7.3 billion~~ decreased ~~8.4~~1.1 percent in the first quarter of ~~2021~~2022 versus the prior-year period primarily driven by the effects of currency, lower non-operating retirement-related costs and lower workforce rebalancing charges, ~~reductions in travel and other expenses from COVID-19 restrictions and a decrease in expected credit loss expense,~~ partially offset by ~~the effects of currency,~~an unrealized loss on Kyndryl retained shares and higher ~~non-operating retirement-related costs and spin-off-related charges in the current year. Our expense dynamics also reflect~~spending reflecting our continuing investment in innovation, ~~skills and~~ our ecosystem ~~as we execute~~and talent, both organically and through acquisitions. We are aggressively hiring to better serve clients, while increasing our research spend to deliver innovation in AI, hybrid cloud and ~~AI strategy.~~emerging areas such as quantum. Total operating (non-GAAP) expense and other (income) decreased ~~11.0~~2.6 percent year to year, driven primarily by the factors described above excluding the ~~higher~~lower non-operating retirement-related costs and ~~spin-off-related charges.~~the unrealized loss on Kyndryl shares.

~~The pre-tax~~Pre-tax income from continuing operations of $0.6 billion increased 156.0 percent and pre-tax margin was ~~$0.9 billion~~4.4 percent, an increase of 2.5 points versus the first quarter of 2021. The continuing operations benefit from income taxes in the first quarter of ~~2021~~2022 was $39 million compared to a ~~pre-tax loss of $49~~$160 million benefit in the first quarter of ~~2020.~~2021. The ~~prior-year period included workforce rebalancing charges~~current-year benefit was driven by many factors including the impacts of ~~$728~~recently published foreign tax credit regulations,

4447

Table of Contents

Management Discussion – (continued)

~~million compared to $146 million~~geographical mix of income, incentives and changes in the first quarter of 2021. The pre-tax margin from continuing operations was 5.1 percent, an increase of 5.4 points versus the prior-year period. The continuing operations benefit from income taxes in the first quarter of 2021 was $0.1 billion compared to a benefit from income taxes of $1.2 billion in the first quarter of 2020. The current-year benefit was primarily driven by the resolution of certainunrecognized tax ~~audit matters.~~benefits. The prior-year benefit was primarily related to the tax impacts ~~of an intra-entity sale~~from the resolution of certain ~~of the company’s intellectual property.~~tax audits. Net income from continuing operations ~~in the first quarter~~ of ~~2021 of $1.0~~$0.7 billion ~~decreased 18.7~~increased 64.3 percent and the net income ~~margin~~ from continuing operations margin was ~~5.4~~4.7 percent, ~~a decrease of 1.3~~up 1.6 points year to year.

Operating (non-GAAP) pre-tax income from continuing operations of ~~$1.8~~$1.5 billion increased ~~158.3~~45.9 percent ~~compared to~~and the ~~prior-year period, primarily due to lower workforce rebalancing impacts of $582 million. The~~ operating (non-GAAP) pre-tax margin from continuing operations increased ~~6.1~~2.8 points to ~~10.0~~10.7 percent. The operating (non-GAAP) income tax provision for the first quarter of 2022 was ~~$0.2 billion~~$244 million, compared to a provision for income taxes of $25 million in the first quarter of ~~2021, compared to a benefit from~~2021. The increase in the operating (non-GAAP) income ~~taxes of $1.0 billion~~tax provision in the first quarter of ~~2020. The operating (non-GAAP) income tax provision year-to-year change~~2022, compared to the prior year was primarily driven by tax impacts from the ~~same factors described above.~~resolution of certain tax audits in the first quarter of 2021. Operating (non-GAAP) income from continuing operations of ~~$1.6~~$1.3 billion ~~decreased 3.0~~increased 25.5 percent ~~with an~~and the operating (non-GAAP) income margin from continuing operations of 9.0 percent ~~down 0.4~~was up 1.3 points year to year.

Diluted earnings per share from continuing operations of ~~$1.06~~$0.73 in the first quarter of ~~2021 decreased 19.1~~2022 increased 62.2 percent and operating (non-GAAP) diluted earnings per share of ~~$1.77 decreased 3.8~~$1.40 increased 25.0 percent versus the prior-year period.

Consolidated diluted earnings per share in the first quarter of ~~2020.~~2022 was $0.81 compared to $1.06 in the prior-year period. This includes a year-to-year reduction of $0.53 from discontinued operations due to the separation of Kyndryl.

~~In the first quarter, we continued to take actions to further enhance our~~Our balance sheet ~~and liquidity position. At~~at March 31, ~~2021,~~2022 continues to provide us with the ~~balance sheet remained strong with~~ flexibility to support ~~and invest in~~ the business. Cash and cash equivalents, restricted cash and marketable securities at March 31, ~~2021~~2022 were ~~$11.3~~$10.8 billion, ~~a decrease~~an increase of ~~$3.0~~$3.2 billion from December 31, ~~2020. In line with our overall~~2021. Total debt ~~pay down strategy, we have reduced total~~of $54.2 billion at March 31, 2022 increased $2.5 billion primarily due to new debt ~~by $5.1 billion from December 31, 2020 and $16.6 billion since the second quarter of 2019 (immediately preceding the Red Hat transaction).~~issuances.

Key drivers in the balance sheet and total cash flows were:

Total assets ~~decreased $7.3~~increased $1.3 billion ($~~5.5~~1.8 billion adjusted for currency) from December 31, ~~2020~~2021 driven by:

●

~~A decrease~~An increase in cash and cash equivalents, restricted cash and marketable securities of ~~$3.0~~$3.2 billion ~~(2.8~~($3.3 billion adjusted for currency); and

●

~~A decrease~~An increase in ~~receivables~~goodwill and net intangible assets of ~~$3.8~~$0.3 billion ($~~3.3~~0.5 billion adjusted for currency) ~~primarily~~ due to ~~collections of seasonally higher year-end balances~~additions from new acquisitions; partially offset by intangibles amortization and ~~sales of financing receivables.~~

~~Total liabilities decreased $8.1 billion ($5.7 billion adjusted for currency) from December 31, 2020 driven by:~~

●

A decrease in total debt of $5.1 billion ($4.4 billion adjusted for currency) primarily due to maturities of $4.2 billion, including a $1.8 billion early redemption of outstanding IBM Credit LLC (IBM Credit) debt;currency impacts; partially offset by

●

A decrease in ~~other accrued expenses and liabilities~~receivables of ~~$1.1~~$2.5 billion ($~~0.9~~2.4 billion adjusted for currency) primarily due to ~~payments~~collections of ~~$0.7 billion for workforce rebalancing actions and cash payments related to fourth-quarter 2020 acquisitions; and~~higher year-end balances.

Total liabilities increased $1.2 billion ($2.1 billion adjusted for currency) from December 31, 2021 driven by:

●

~~Decreases~~An increase in ~~retirement and nonpension postretirement benefit obligations~~total debt of ~~$0.9~~$2.5 billion ($~~0.4~~2.9 billion adjusted for currency) ~~and accounts payable~~primarily due to issuances of ~~$0.8~~$4.1 billion, ~~($0.7 billion adjusted for currency);~~ partially offset by maturities of $1.1 billion; and

●

An increase in deferred income of ~~$1.2~~$0.9 billion ($~~1.6~~1.0 billion adjusted for currency) primarily driven by annual customer billings and ~~higher~~continued growth in software renewal ~~rates.~~rates; partially offset by

●

A decrease in accounts payable of $0.5 billion primarily due to declines from seasonally higher year-end balances;

●

A decrease in retirement and nonpension postretirement benefit obligations of $0.5 billion ($0.3 billion adjusted for currency); and

4548

Table of Contents

Management Discussion – (continued)

●

A decrease in taxes payable of $0.5 billion primarily due to indirect tax payments.

Total equity of ~~$21.5~~$19.1 billion increased ~~$0.8~~$0.1 billion from December 31, ~~2020~~2021 as a result of:

●

An Net income of $0.7 billion;

●

~~increase~~A decrease in accumulated other comprehensive ~~income~~losses of ~~$1.1~~$0.7 billion ~~primarily related to~~driven by retirement-related benefit plans and foreign currency ~~translation;~~translation adjustments; and

●

~~Net income~~Common stock of ~~$1.0~~$0.2 billion; partially offset by

●

Dividends paid of $1.5 billion.

~~We generated $4.9 billion~~Our cash flows from operating, investing and financing activities, as reflected in the Consolidated Statement of Cash Flows, include the cash ~~flow~~flows of discontinued operations.

On a consolidated basis, cash provided by operating activities ~~an increase~~was $3.2 billion in the first three months of ~~$0.4~~2022, a decrease of $1.7 billion compared to the first ~~quarter~~three months of ~~2020. In~~2021. Net cash used in investing activities of $1.4 billion decreased $0.6 billion compared to the ~~first quarter of 2021, investing~~prior-year period. Financing activities were a net ~~use~~source of cash of ~~$2.0 billion compared to $0.9~~$1.4 billion in the ~~prior year. The $1.1 billion change year~~first three months of 2022 compared to ~~year was primarily driven by an increase in cash used for acquisitions. Financing activities were~~ a net use of cash of $5.8 billion in the first ~~quarter~~three months of ~~2021 compared to $0.1 billion in the prior-year period. The year-to-year change was driven primarily by a decrease in net cash provided by debt transactions of $5.7 billion.~~

2021.

4649

Table of Contents

Management Discussion – (continued)

FirstQuarter 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 is~~table below presents each reportable segment’s revenue and gross margin results, followed by an analysis of the first quarter of ~~2021~~2022 versus the first quarter of ~~2020~~2021 reportable ~~segment external revenue and gross margin~~segments results. ~~Segment pre-tax income/(loss) includes transactions between segments that are intended~~Prior-year results have been recast to ~~reflect an arm’s-length transfer price and excludes certain unallocated corporate items.~~conform with the changes as described in the “Organization of Information” section.


									Yr. to Yr.										Yr. to Yr.
									Percent										Percent
							Yr. to Yr.		Change								Yr. to Yr.		Change
(Dollars in millions)							Percent/Margin		Adjusted For								Percent/Margin		Adjusted For
For the three months ended March 31:	2021			2020			Change		Currency		2022			2021*			Change		Currency
Revenue:
Cloud & Cognitive Software	$	5,437		$	5,238		3.8	%	0.8	%
Software											$	5,772		$	5,138		12.3	%	15.4	%
Gross margin		76.0	%		75.4	%	0.6	pts.				78.8	%		77.8	%	1.1	pts.
Global Business Services		4,234			4,136		2.4	%	(1.4)	%
Consulting												4,829			4,262		13.3	%	17.4	%
Gross margin		28.2	%		27.2	%	1.0	pts.				24.3	%		27.8	%	(3.5)	pts.
Global Technology Services		6,370			6,467		(1.5)	%	(5.3)	%
Infrastructure												3,219			3,293		(2.3)	%	0.3	%
Gross margin		34.5	%		34.0	%	0.6	pts.				50.5	%		56.3	%	(5.9)	pts.
Systems		1,427			1,368		4.3	%	2.2	%
Gross margin		54.5	%		50.2	%	4.3	pts.
Global Financing		240			299		(20.0)	%	(21.9)	%
Financing												154			208		(26.2)	%	(24.5)	%
Gross margin		31.9	%		40.7	%	(8.8)	pts.				37.7	%		35.5	%	2.2	pts.
Other		23			62		(63.8)	%	(64.5)	%		224			284		(21.3)	%	(18.9)	%
Gross margin		nm			(254.3)	%	nm					(32.9)	%		(29.6)	%	(3.3)	pts.
Total consolidated revenue	$	17,730		$	17,571		0.9	%*	(2.5)	%
Total consolidated gross profit	$	8,204		$	7,922		3.6	%
Total consolidated gross margin		46.3	%		45.1	%	1.2	pts.
Total revenue											$	14,197		$	13,187		7.7	%	10.9	%
Total gross profit											$	7,335		$	7,027		4.4	%
Total gross margin												51.7	%		53.3	%	(1.6)	pts.
Non-operating adjustments:
Amortization of acquired intangible assets		175			188		(7.0)	%				181			174		4.0	%
Spin-off-related charges		3			—		nm
Operating (non-GAAP) gross profit	$	8,382		$	8,110		3.3	%			$	7,516		$	7,201		4.4	%
Operating (non-GAAP) gross margin		47.3	%		46.2	%	1.1	pts.				52.9	%		54.6	%	(1.7)	pts.

* (2.4) percent excluding divested businesses and adjusted for currency.

~~nm – not meaningful~~
*
Recast to reflect segment changes.

~~Cloud & Cognitive Software~~

Yr. to Yr.

Percent

Yr. to Yr.

Change

(Dollars in millions)





Percent

Adjusted For

For the three months ended March 31:

2021

2020

Change

Currency

Cloud & Cognitive Software external revenue:

$
5,437

$
5,238

3.8
%
0.8
%
Cloud & Data Platforms

$
2,866

$
2,536

13.0
%
9.7
%
Cognitive Applications

1,233

1,182

4.3

1.6

Transaction Processing Platforms

1,338

1,520

(12.0)

(14.7)

~~Table of Contents~~

~~Management Discussion – (continued)~~

Cloud & Cognitive Software revenue of $5,437 million increased 3.8 percent as reported (1 percent adjusted for currency) in the first quarter of 2021 compared to the prior year, driven by Cloud & Data Platforms and Cognitive Applications. We continued to increase our software subscription and support renewal rates across the segment.

In the first quarter, Cloud & Data Platforms revenue of $2,866 million increased 13.0 percent as reported (10 percent adjusted for currency) compared to the prior year driven by continued solid performance in Red Hat, led by Red Hat Enterprise Linux and OpenShift, both of which have gained share. With approximately 3,000 hybrid cloud platform clients, we have now tripled the revenue base of OpenShift since we acquired Red Hat.

Cognitive Applications first-quarter revenue of $1,233 million increased 4.3 percent as reported (2 percent adjusted for currency) compared to the prior year, led by strength across Security software and services, which was partially offset by declines in our Watson Health offerings. Our Cloud Pak for Security solution helped enterprises manage threats and protect their digital workloads, data and identities across hybrid cloud environments. Our clients opted for accelerated time to value and ease of operation with QRadar on Cloud to rapidly detect cybersecurity attacks and network breaches.

Transaction Processing Platforms revenue of $1,338 million decreased 12.0 percent as reported (15 percent adjusted for currency) in the first quarter compared to the prior year. We offer clients flexibility in how they purchase our software and clients’ buying behaviors have been shifting toward more consumption-based models. As a result, we are seeing a continued preference for operating expense over capital expenditures, putting pressure on our sales of perpetual licenses. In the first quarter, we had strong renewals in our Transaction Processing Platforms’ software, which provides mission-critical capabilities to our clients.

Within Cloud & Cognitive Software, cloud revenue of $1.8 billion grew 38 percent as reported (34 percent adjusted for currency) in the first quarter of 2021, reflecting the investments and actions we have taken to capture the hybrid cloud opportunity with solutions such as Red Hat OpenShift and Cloud Paks.

Yr. to Yr.

Percent/

(Dollars in millions)





Margin

For the three months ended March 31:

2021

2020

Change

Cloud & Cognitive Software:







External gross profit

$
4,132

$
3,951

4.6
%
External gross profit margin

76.0
%

75.4
%
0.6
pts.
Pre-tax income

$
1,428

$
933

53.0
%
Pre-tax margin

22.8
%

15.4
%
7.4
pts.

Cloud & Cognitive Software gross profit margin increased 0.6 points to 76.0 percent in the first quarter of 2021 compared to the first-quarter 2020. The gross profit margin expansion was driven primarily by the contribution from Red Hat and year-to-year improvement in services margin, partially offset by a decline in transaction processing software margin.

In the first quarter, pre-tax income of $1,428 million increased 53.0 percent year to year and pre-tax margin increased 7.4 points to 22.8 percent compared to the prior year. The pre-tax margin improvement was driven primarily by higher gross profit contribution and lower workforce rebalancing charges year to year, partially offset by our continued investment in new innovation and our software ecosystem.

~~Table of Contents~~

~~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 March 31:

2021

2020

Change

Currency

Global Business Services external revenue:

$
4,234

$
4,136

2.4
%
(1.4)
%
Consulting

$
2,189

$
2,071

5.7
%
1.9
%
Application Management

1,770

1,840

(3.8)

(7.5)

Global Process Services

274

225

21.8

18.7

Global Business Services revenue of $4,234 million increased 2.4 percent as reported, but decreased 1 percent adjusted for currency in the first quarter of 2021 compared to the prior year, with growth in Consulting and Global Process Services, offset by declines in Application Management. GBS revenue improved sequentially year to year compared to the fourth quarter of 2020 both as reported and adjusted for currency. This revenue performance reflects the trend that clients are digitally transforming their businesses using hybrid cloud and AI to capture new growth opportunities, increase productivity and create operating flexibility.

In the first quarter, Consulting revenue of $2,189 million grew 5.7 percent as reported and 2 percent adjusted for currency. We had growth in our consulting offerings that advise clients and help them build and modernize their applications, reflecting our expanding practices with our ecosystem partners and strong momentum in our Red Hat engagements. In the first quarter, the number of Red Hat client engagements doubled year to year to more than 150. In addition, we had double-digit growth in offerings which leverage data and AI to transform client processes in areas such as finance and supply chain.

~~Application Management revenue of $1,770 million decreased 3.8 percent as reported and 8 percent adjusted for currency compared to the first quarter of 2020.~~We had growth in offerings which build and move applications to the cloud, offset by declines in the more traditional on-premise services. Our application incumbency enables GBS to be the partner of choice for a client’s digital transformation, which brings high value to our clients and is an important component of IBM’s hybrid cloud strategy and platform adoption.

Global Process Services first-quarter revenue of $274 million grew 21.8 percent as reported and 19 percent adjusted for currency. We had broad-based growth in areas such as finance, and talent and transformation as clients leveraged hybrid cloud to scale their activities to capture productivity and gain insights.

Within GBS, cloud revenue of $1.7 billion grew 33 percent as reported (28 percent adjusted for currency) in the first quarter of 2021. Cloud revenue growth accelerated with the year-to-year growth rate in first-quarter 2021 doubling compared to fourth-quarter 2020, with strong growth across the portfolio.

Yr. to Yr.

Percent/

(Dollars in millions)





Margin

For the three months ended March 31:

2021

2020

Change

Global Business Services:







External gross profit

$
1,194

$
1,125

6.2
%
External gross profit margin

28.2
%

27.2
%
1.0
pts.
Pre-tax income

$
390

$
271

44.1
%
Pre-tax margin

9.1
%

6.5
%
2.6
pts.

GBS first-quarter gross profit margin of 28.2 percent grew 1.0 points on a year-to-year basis, driven primarily by margin expansion across all three areas of business reflecting our shift to higher-value offerings, increased productivity, improvements in delivery capabilities and a reduction in client-related travel. Pre-tax income increased 44.1 percent to $390 million compared to the prior year. Pre-tax margin increased 2.6 points to 9.1 percent in the first-quarter 2021

~~Table of Contents~~

~~Management Discussion – (continued)~~

compared to the prior-year period, driven primarily by the gross profit margin expansion and lower workforce rebalancing charges year to year. We continued to invest, organically and inorganically, to accelerate revenue performance, including closing two acquisitions in the quarter, building and expanding practices with ecosystem partners and hiring to expand our sales and delivery capacity.

~~Global Technology Services~~

Yr. to Yr.

Percent

Yr. to Yr.

Change

(Dollars in millions)

Percent

Adjusted For

For the three months ended March 31:

2021

2020

Change

Currency

Global Technology Services external revenue:

$
6,370

$
6,467

(1.5)
%
(5.3)
%
Infrastructure & Cloud Services

$
4,853

$
4,916

(1.3)
%
(5.5)
%
Technology Support Services

1,517

1,550

(2.1)

(4.8)

Global Technology Services revenue of $6,370 million decreased 1.5 percent as reported (5 percent adjusted for currency) in the first quarter of 2021 compared to the prior year, reflecting a sequential improvement in the year-to-year growth rate compared to the fourth quarter of 2020.

In the first quarter, Infrastructure & Cloud Services revenue of $4,853 million decreased 1.3 percent as reported and 5 percent adjusted for currency compared to the prior-year period. There was an improved trajectory in project activity and client-based business volumes in the first-quarter 2021, including with clients in some industries most affected by the pandemic, such as retail and consumer products. Infrastructure services signings were down year to year, a reflection of the strong signings in the first-quarter 2020 driven by large renewals. In the first-quarter 2021, we had growth in our mid-sized signings as enterprises continued to recognize the long-term value for GTS to design, run and manage the most modern, efficient and reliable technology infrastructures. We continued to make progress on our plan to separate our managed infrastructure services business by the end of 2021 and are deeply engaged with our clients to ensure a smooth transition.

~~Technology Support Services (TSS) first-quarter revenue of $1,517 million decreased 2.1 percent as reported (5 percent adjusted for currency) reflecting the Systems hardware product cycles.~~

~~Within GTS, cloud revenue of $2.4 billion grew 6 percent as reported (2 percent adjusted for currency) in the first quarter of 2021.~~

Yr. to Yr.

Percent/

(Dollars in millions)

Margin

For the three months ended March 31:

2021

2020

Change

Global Technology Services:








External gross profit

$
2,200

$
2,196

0.2
%
External gross profit margin

34.5
%

34.0
%
0.6
pts.
Pre-tax income/(loss)

$
140

$
(178)

nm

Pre-tax margin

2.1
%

(2.6)
%
4.7
pts.

~~nm - not meaningful~~

Global Technology Services gross profit margin increased 0.6 points to 34.5 percent in the first quarter of 2021 as compared to the prior year. The increase in project activity and client-based business volumes in the first-quarter 2021 contributed to the expanded gross profit margin reflecting improved utilization of existing resources. The improvement in gross margin also reflects the benefit from the productivity actions taken in 2020 which have not yet been fully realized. GTS had pre-tax income of $140 million in the first quarter of 2021 as compared to a pre-tax loss of $178 million in the first quarter of 2020, primarily driven by higher workforce rebalancing charges in the prior year.

Table of Contents

Management Discussion – (continued)

~~Services Backlog and Signings~~Software


							Yr. to Yr.								Yr. to Yr.
							Percent								Percent
					Yr. to Yr.		Change						Yr. to Yr.		Change
	At March 31,		At March 31,		Percent		Adjusted For
(Dollars in billions)	2021		2020		Change		Currency
Total backlog	$	104.8	$	107.8	(2.8)	%	(6.5)	%
(Dollars in millions)													Percent		Adjusted For
For the three months ended March 31:									2022		2021*		Change		Currency
Software revenue:									$	5,772	$	5,138	12.3	%	15.4	%
Hybrid Platform & Solutions									$	4,080	$	3,800	7.4	%	10.0	%
Red Hat													18.0		21.1
Automation													3.0		5.4
Data & AI													2.1		4.4
Security													5.4		8.2
Transaction Processing										1,692		1,338	26.5		30.6

* Recast to reflect segment changes.

~~The estimated total services backlog at March 31, 2021 was $104.8 billion, a decrease~~Software revenue of ~~2.8~~$5,772 million increased 12.3 percent as reported (7(15 percent adjusted for currency).

Total services backlog includes Infrastructure & Cloud Services, Security Services, Consulting, Global Process Services, Application Management and Technology Support Services. Total backlog is intended to be a statement in the first quarter of ~~overall work under contract which is either non-cancellable, or which historically has very low likelihood of termination, given the criticality of certain services~~2022 compared to the ~~company’s clients. Total backlog does not include as-a-Service arrangements that allow~~prior-year period. This includes incremental sales to Kyndryl which contributed over 8 points to the revenue growth. Both Hybrid Platform & Solutions and Transaction Processing grew, with Transaction Processing benefitting significantly from sales to Kyndryl. Within Software, hybrid cloud revenue of $2.1 billion grew 22 percent as reported (25 percent adjusted for ~~termination under contractual commitment terms. Backlog estimates are subject to change~~currency) driven by strong growth in Hybrid Platform & Solutions. In addition, we had continued year-to-year growth this quarter in our software subscription 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.~~support renewal rates.

~~Services~~Hybrid Platform & Solutions revenue of $4,080 million increased 7.4 percent as reported (10 percent adjusted for currency) in the first quarter of 2022 compared to the prior-year period. Incremental sales to Kyndryl contributed approximately 1.5 points to the revenue growth. We continue to drive focus around the strategic hybrid cloud and AI needs of our clients, including Red Hat, Data & AI, Automation and Security. Red Hat revenue grew 18.0 percent as reported (21 percent adjusted for currency) in the first quarter of 2022, driven by strong performance across the Red Hat portfolio. Our foundational hybrid cloud offerings, RHEL and OpenShift, each gained market share this quarter. Red Hat’s hybrid cloud offerings continue to transform enterprise IT, and we continue to deliver new innovations. Automation revenue grew 3.0 percent as reported (5 percent adjusted for currency), led by AIOps and Management and Integration. We have invested in an AI-powered approach to Automation and our solutions are resonating with clients as they address growing complexity, digital shifts, and skill shortages across their businesses. Data & AI revenue increased 2.1 percent as reported (4 percent adjusted for currency), driven by good performance across the portfolio, including continued adoption of Data Fabric, expansion of our Data Management footprint, a focus on sustainable operations with Asset & Supply Chain Management and the need for reliable data sharing with Information Exchange. Security revenue grew 5.4 percent as reported (8 percent adjusted for currency) compared to strong performance in the prior-year first quarter. We had growth in the first quarter of 2022 in Threat Management and Data Security due to the evolving cybersecurity environment. We also continue to have good client demand for Cloud Pak for Security and continue to invest in security innovation including our ReaQta acquisition in 2021.

For the first quarter of 2022, Hybrid Platform & Solutions grew annual recurring revenue (ARR) by 9 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.

Table of Contents

Management Discussion – (continued)

Transaction Processing revenue of $1,692 million grew 26.5 percent as reported (31 percent adjusted for currency) in the first quarter compared to the prior-year period. Incremental sales to Kyndryl contributed approximately 28 points to the revenue growth. We also continued to have strong renewals of these critical software offerings which build on the expanded zSystems capacity and traction throughout the strong z15 program.


							Yr. to Yr.
							Percent/
(Dollars in millions)							Margin
For the three months ended March 31:	2022			2021*			Change
Software:
Gross profit	$	4,550		$	3,995		13.9	%
Gross profit margin		78.8	%		77.8	%	1.1	pts.
Pre-tax income	$	1,134		$	658		72.3	%
Pre-tax margin		19.7	%		12.8	%	6.8	pts.

* Recast to reflect segment changes.

Software gross profit margin increased 1.1 points to 78.8 percent in the first quarter of 2022 compared to the prior-year period, reflecting the broad-based revenue performance in the quarter. Pre-tax income of $1,134 million increased 72.3 percent year to year and pre-tax margin increased 6.8 points to 19.7 percent in the first quarter of 2022 compared to the prior year. The pre-tax margin improvement was driven primarily by higher gross profit contribution.

Consulting


							Yr. to Yr.
							Percent
					Yr. to Yr.		Change
(Dollars in millions)					Percent		Adjusted For
For the three months ended March 31:	2022		2021*		Change		Currency
Consulting revenue:	$	4,829	$	4,262	13.3	%	17.4	%
Business Transformation	$	2,255	$	1,953	15.5	%	19.3	%
Technology Consulting		955		835	14.4		18.9
Application Operations		1,619		1,474	9.8		14.2

* Recast to reflect segment change.

Consulting revenue of $4,829 million increased 13.3 percent as reported and 17 percent adjusted for currency in the first quarter of 2022 compared to the prior-year period, with strong growth in revenue and signings across all three business areas. Our book-to-bill remains solid at 1.1 for the first quarter of 2022 as clients continue to trust IBM to execute their complex business transformations by leveraging our skills, deep industry expertise and our ecosystem. Within Consulting, hybrid cloud revenue of $2.1 billion grew 24 percent as reported (29 percent adjusted for currency), with continued strong demand and momentum in our Red Hat practice which added over 130 new clients this quarter. In the first quarter of 2022, Red Hat related signings nearly doubled year to year. Our strategic partnerships also contributed to our performance with solid double-digit revenue growth in the quarter from these partnerships, led by Salesforce, SAP, AWS and Azure.

Business Transformation revenue of $2,255 million increased 15.5 percent as reported and 19 percent adjusted for currency on a year-to-year basis. We had broad-based growth with strength in our practices centered on customer experience, talent and data transformations as well as supply chain and finance application deployments. We continued to bring together technology and strategic consulting to transform critical workflows at scale.

Technology Consulting revenue of $955 million increased 14.4 percent as reported and 19 percent adjusted for currency in the first quarter of 2022 compared to the prior-year period, led by growth in our engagements around developing and modernizing applications for cloud deployments.

Table of Contents

Management Discussion – (continued)

Application Operations revenue of $1,619 million increased 9.8 percent as reported and 14 percent adjusted for currency compared to the first quarter of 2021, led by growth in cloud application management. We had growth in areas that focus on the management of applications and cloud platform services required to run hybrid cloud environments.


							Yr. to Yr.
							Percent/
(Dollars in millions)							Margin
For the three months ended March 31:	2022			2021*			Change
Consulting:
Gross profit	$	1,176		$	1,187		(0.9)	%
Gross profit margin		24.3	%		27.8	%	(3.5)	pts.
Pre-tax income	$	348		$	277		25.8	%
Pre-tax margin		7.2	%		6.5	%	0.7	pts.

* Recast to reflect segment change.

Consulting first-quarter gross profit margin of 24.3 percent decreased 3.5 points on a year-to-year basis, reflecting the significant investments we have made to enable revenue growth. We continued to invest in our partner ecosystem to expand our reach and continue to scale our recent acquisitions. We are also investing in talent across our workforce, by further developing skills in existing resources, adding certifications and bringing in technical skills in areas of hybrid cloud and AI. Consulting continues to be impacted by the competitive and inflationary labor market which exerts pressure on the profitability of our existing contracts. We expect to capture this increased resource cost through price in our engagements and recognize this will take a few quarters to be reflected in our margin profile. Pre-tax income increased 25.8 percent to $348 million compared to the prior year. Pre-tax margin increased 0.7 points to 7.2 percent in the first-quarter 2022 compared to the prior year. We have taken actions to streamline our operations and go-to-market structure which have contributed to the pre-tax margin expansion.

Consulting Signings and Book-to-Bill


							Yr. to Yr.
							Percent
					Yr. to Yr.		Change
(Dollars in millions)					Percent		Adjusted For
For the three months ended March 31:	2022		2021		Change		Currency
Total Consulting signings	$	5,136	$	3,796	35.3	%	40.9	%

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 & Cloud Services, Security 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. Total ~~services~~ signings can vary over time due to a variety of factors including, but not limited to, the timing of signing a small number of larger ~~contracts, such as in Infrastructure & Cloud Services or Global Process Services.~~Technology Support Services are generally not included in signings as the maintenance contracts tend to be more steady state, where revenues equal renewals. Certain longer-term TSS contracts that have characteristics similar to outsourcing contracts are included in signings.

~~Contract portfolios purchased in~~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 ~~new services agreement is signed incidental or coincidental to an acquisition or divestiture.~~prospective basis.

Management believes ~~that~~ the estimated values of ~~services backlog and~~ signings disclosed ~~herein~~ provide ~~insight into~~an indication of our ~~potential future revenue, which is~~forward-looking revenue. Signings are used ~~by management as a tool~~ to monitor the performance of the business and viewed as useful ~~decision-making~~ information for ~~investors.~~management and shareholders. The conversion of signings ~~and backlog~~ into revenue may vary based on the types of services and solutions, contract duration, customer decisions, and ~~as well as~~ other factors, which may include, but are not limited to, the macroeconomic ~~environment or external events.~~environment.

Book-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.

5153

Table of Contents

Management Discussion – (continued)

~~Systems~~Infrastructure


							Yr. to Yr.								Yr. to Yr.
							Percent								Percent
					Yr. to Yr.		Change						Yr. to Yr.		Change
(Dollars in millions)					Percent		Adjusted For						Percent		Adjusted For
For the three months ended March 31:	2021		2020		Change		Currency		2022		2021*		Change		Currency
Systems external revenue:	$	1,427	$	1,368	4.3	%	2.2	%
Systems Hardware	$	1,114	$	997	11.8	%	9.7	%
IBM Z					50.3		48.7
Power Systems					(10.3)		(12.7)
Storage Systems					(11.6)		(14.0)
Operating Systems Software		313		371	(15.7)		(17.9)
Infrastructure revenue:									$	3,219	$	3,293	(2.3)	%	0.3	%
Hybrid Infrastructure									$	1,700	$	1,782	(4.6)	%	(2.5)	%
zSystems													(19.0)		(17.6)
Distributed Infrastructure													5.2		7.8
Infrastructure Support										1,519		1,512	0.4		3.7

* Recast to reflect segment change.

~~Systems~~Infrastructure revenue of ~~$1,427~~$3,219 million ~~increased 4.3~~decreased 2.3 percent as reported and ~~2 percent~~was flat adjusted for currency in the first quarter of ~~2021~~2022 compared to the ~~prior year. Systems Hardware~~prior-year period. This includes incremental sales to Kyndryl which contributed over 8 points to the revenue growth. Within Infrastructure, hybrid cloud revenue of ~~$1,114~~$0.7 billion decreased 20 percent as reported (18 percent adjusted for currency), driven by product cycle dynamics.

Hybrid Infrastructure revenue of $1,700 million ~~increased 11.8~~decreased 4.6 percent as reported (2 percent adjusted for currency) compared to first quarter of 2021. Incremental sales to Kyndryl contributed over 8 points to the revenue growth. Within Hybrid Infrastructure, zSystems revenue declined 19.0 percent as reported (18 percent adjusted for currency) year to year. This was the eleventh quarter of availability of the z15 program, which has been a very strong program in both revenue performance and capacity, with more z15 MIPs shipped than in any other previous program. In April 2022, we announced the newest solution, IBM z16, which provides differentiated capabilities including embedded AI at scale, cyber-resilient security and cloud-native development for hybrid cloud. Distributed Infrastructure revenue grew 5.2 percent as reported and 108 percent adjusted for currency. Revenue growth in Power reflects clients’ demand for SAP S/4HANA data intensive workloads on our newest Power10 high-end system.

Infrastructure Support revenue of $1,519 million increased 0.4 percent as reported and 4 percent adjusted for currency ~~driven by strong performance~~compared to the prior-year period. This includes incremental sales to Kyndryl which contributed over 8 points of revenue growth for the quarter.


							Yr. to Yr.
							Percent/
(Dollars in millions)							Margin
For the three months ended March 31:	2022			2021*			Change
Infrastructure:
Gross profit	$	1,625		$	1,856		(12.4)	%
Gross profit margin		50.5	%		56.3	%	(5.9)	pts.
Pre-tax income	$	199		$	292		(31.7)	%
Pre-tax margin		6.2	%		8.9	%	(2.7)	pts.

* Recast to reflect segment change.

Infrastructure gross profit margin decreased 5.9 points to 50.5 percent in ~~IBM Z, partially offset by declines in Power Systems and Storage Systems. Operating Systems Software revenue~~the first quarter of ~~$313 million decreased 15.7 percent as reported and 18 percent adjusted for currency~~2022 compared to the prior year, driven primarily by ~~declines in IBM Z operating systems~~mix due to ~~higher transactional revenue in the prior-year first quarter.~~

IBM Z revenue increased 50.3 percent as reported (49 percent adjusted for currency) year to year reflecting very strong growth more than six quarters into the z15 product cycle. In the first quarter of 2021, we had growth in areas such as financial services where robust market volatility drove demand for increased capacity. Clients also purchased z15 for its enterprise-grade security and unmatched reliability for regulatory requirements. The innovations we bring to each new generation of IBM Z continue to spur renewed interest and drive client demand, and as of the end of the first quarter of 2021, z15 has shipped the largest capacity in the platform’s history. The IBM Z platform is an important element in our hybrid cloud strategy, attracting new workloads, integrating cloud-native capabilities including Red Hat, and supporting our industry-specific cloud solutions.

~~Power Systems revenue decreased 10.3 percent as reported (13 percent adjusted for currency) year to year, reflecting~~ product cycle dynamics. ~~We had double-digit growth in high-end systems, offset by declines in mid-range and low-end systems.~~

~~Storage Systems revenue~~Pre-tax income decreased ~~11.6~~31.7 percent ~~as reported (14 percent adjusted for currency) driven primarily by a decline in high-end storage systems as some clients continued~~ to ~~delay large capital purchases and leverage their existing capacity for the near term.~~

~~Within Systems, cloud revenue of $0.5 billion increased 23 percent as reported (21 percent adjusted for currency)~~$199 million in the first quarter of ~~2021.~~2022 compared to the prior-year period. Pre-tax margin decreased 2.7 points to 6.2 points compared to the prior-year first quarter, reflecting the zSystems product cycle.

Yr. to Yr.

Percent/

(Dollars in millions)

Margin

For the three months ended March 31:

2021

2020

Change

Systems:







External Systems Hardware gross profit

$
528

$
380

39.2
%
External Systems Hardware gross profit margin

47.4
%

38.1
%
9.3
pts.
External Operating Systems Software gross profit

$
249

$
307

(18.9)
%
External Operating Systems Software gross profit margin

79.8
%

82.9
%
(3.1)
pts.
External total gross profit

$
778

$
687

13.2
%
External total gross profit margin

54.5
%

50.2
%
4.3
pts.
Pre-tax loss

$
(2)

$
(217)

nm

Pre-tax margin

(0.1)
%

(14.3)
%
14.2
pts.

~~nm - not meaningful~~Financing

See pages 70 through 73 for a discussion of Financing’s segment results.

5254

Table of Contents

Management Discussion – (continued)

Systems gross profit margin increased 4.3 points to 54.5 percent in the first quarter of 2021 compared to the prior year. Systems margin improvement was primarily driven by IBM Z and Power Systems margin expansion and a mix to IBM Z, partially offset by margin declines in Storage Systems and Operating Systems Software.

The pre-tax loss of $2 million in the first quarter of 2021 decreased $215 million compared to the first-quarter loss in 2020. The pre-tax margin increased 14.2 points year to year to (0.1) points, primarily driven by the Systems Hardware margin expansion and lower workforce rebalancing charges in first-quarter 2021 compared to the prior year.

~~Global Financing~~

~~See pages 68 through 70 for a discussion of Global Financing’s segment results.~~

Geographic Revenue

In addition to the revenue presentation by reportable segment, we also measure revenue performance on a geographic basis.


									Yr. to Yr.
							Yr. to Yr.		Percent Change								Yr. to Yr.
							Percent		Excluding Divested								Percent
					Yr. to Yr.		Change		Businesses And						Yr. to Yr.		Change
(Dollars in millions)					Percent		Adjusted For		Adjusted For						Percent		Adjusted For
For the three months ended March 31:	2021		2020		Change		Currency		Currency		2022		2021		Change		Currency
Total Revenue	$	17,730	$	17,571	0.9	%	(2.5)	%	(2.4)	%	$	14,197	$	13,187	7.7	%	10.9	%
Americas	$	8,179	$	8,166	0.2	%	0.2	%	0.3	%	$	7,056	$	6,477	8.9	%	8.9	%
Europe/Middle East/Africa (EMEA)		5,641		5,517	2.3		(5.6)		(5.5)			4,231		3,928	7.7		13.9
Asia Pacific		3,909		3,888	0.6		(3.7)		(3.6)			2,910		2,781	4.6		11.3

Total revenue of ~~$17,730~~$14,197 million increased ~~0.9~~7.7 percent as reported ~~but declined 2~~(11 percent adjusted for ~~currency~~currency) in the first quarter of 2022 compared to the prior ~~year.~~year, which includes approximately 5 points of revenue growth from incremental sales to Kyndryl.

Americas revenue of ~~$8,179~~$7,056 million ~~was essentially flat~~increased 8.9 percent as reported ~~and~~(9 percent adjusted for ~~currency.~~currency), which includes approximately 4 points of revenue growth from incremental sales to Kyndryl. Within ~~Americas,~~North America, the U.S. increased ~~0.7~~7.0 percent compared to the prior ~~year.~~year and Canada increased ~~7.6~~8.2 percent as reported ~~and 1~~(8 percent adjusted for ~~currency.~~currency). Latin America ~~decreased 9.7~~increased 25.5 percent as reported ~~and 3~~(25 percent adjusted for ~~currency,~~currency), with Brazil ~~declining 15.1~~increasing 24.8 percent as reported (20 percent adjusted for currency).

In EMEA, total revenue of $4,231 million increased 7.7 percent as reported (14 percent adjusted for currency), which includes approximately 7 points of revenue growth from incremental sales to Kyndryl. The UK, France and 1Germany increased 14.4 percent, 12.6 percent and 8.5 percent, respectively, as reported, and increased 18 percent, 20 percent and 16 percent, respectively, adjusted for currency. Italy decreased 3.7 percent as reported, but increased 3 percent adjusted for currency.

~~In EMEA, total~~Asia Pacific revenue of ~~$5,641~~$2,910 million increased ~~2.3~~4.6 percent as reported ~~but declined 6~~(11 percent adjusted for ~~currency. Within EMEA,~~currency), which includes approximately 6 points of revenue growth from incremental sales to Kyndryl. Japan increased 4.0 percent as reported ~~the UK, Germany~~(14 percent adjusted for currency). India and ~~Italy~~Australia increased ~~7.1 percent, 3.3~~25.9 percent and ~~2.7~~11.4 percent, respectively, ~~but declined 1 percent, 5~~as reported and 30 percent and 619 percent, respectively, adjusted for currency. ~~France~~China decreased ~~4.7~~11.2 percent as reported ~~and 12~~(13 percent adjusted for ~~currency.~~

currency).

Asia Pacific revenue of $3,909 million increased 0.6 percent as reported, but declined 4 percent adjusted for currency. Within Asia Pacific, Japan was flat as reported, but declined 3 percent adjusted for currency compared to the prior year. Australia increased 15.9 percent as reported, but decreased 2 percent adjusted for currency. As reported, India and China decreased 11.7 percent and 10.3 percent, respectively, and declined 12 percent and 15 percent, respectively, adjusted for currency.

5355

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Management Discussion – (continued)

Expense

Total Expense and Other (Income)


							Yr. to Yr.								Yr. to Yr.
(Dollars in millions)							Percent								Percent
For the three months ended March 31:	2021			2020			Change		2022			2021			Change
Total consolidated expense and other (income)	$	7,299		$	7,972		(8.4)	%
Total expense and other (income)									$	6,712		$	6,784		(1.1)	%
Non-operating adjustments:
Amortization of acquired intangible assets	$	(278)		$	(285)		(2.6)	%	$	(280)		$	(273)		2.5	%
Acquisition-related charges		(16)			0		nm			(7)			(16)		(57.4)
Non-operating retirement-related (costs)/income		(343)			(264)		29.7			(202)			(332)		(39.2)
Spin-off-related charges		(58)			—		nm
Kyndryl-related impacts										(222)			—		nm
Operating (non-GAAP) expense and other (income)	$	6,604		$	7,422		(11.0)	%	$	6,001		$	6,162		(2.6)	%
Total consolidated expense-to-revenue ratio		41.2	%		45.4	%	(4.2)	pts.
Total expense-to-revenue ratio										47.3	%		51.4	%	(4.2)	pts.
Operating (non-GAAP) expense-to-revenue ratio		37.3	%		42.2	%	(5.0)	pts.		42.3	%		46.7	%	(4.5)	pts.

nm — not meaningful

Total expense and other (income) decreased ~~8.4~~1.1 percent in the first quarter of ~~2021~~2022 versus the ~~prior year~~ prior-year period

primarily driven ~~by lower workforce rebalancing charges, reductions in travel and other expenses from COVID-19 restrictions and a decrease in expected credit loss expense, partially offset~~ by the effects of currency, ~~higher~~lower non-operating retirement-related costs, lower workforce rebalancing charges and ~~spin-off-related charges in the current year. Our expense dynamics also reflect~~lower spending for shared services transferred to Kyndryl, partially offset by an unrealized loss from Kyndryl retained shares and higher spending reflecting our continuing investment in innovation, ~~skills and~~ our ecosystem ~~as we execute~~and talent, both organically and through acquisitions. We are aggressively hiring to better serve clients, while increasing our research spend to deliver innovation in AI, hybrid cloud and ~~AI strategy.~~ emerging areas such as quantum. Total operating (non-GAAP) expense and other (income) decreased ~~11.0~~2.6 percent year to year, driven primarily by the factors described above excluding the ~~higher~~lower non-operating retirement-related costs and ~~spin-off-related charges.~~the unrealized loss on Kyndryl stock.

For additional information regarding total expense and other (income) for both expense presentations, see the following analyses by category.

Selling, General and Administrative Expense


					Yr. to Yr.						Yr. to Yr.
(Dollars in millions)					Percent						Percent
For the three months ended March 31:	2021		2020		Change		2022		2021		Change
Selling, general and administrative expense:
Selling, general and administrative — other	$	4,306	$	4,341	(0.8)	%	$	3,824	$	3,890	(1.7)	%
Advertising and promotional expense		352		428	(17.9)			336		345	(2.4)
Workforce rebalancing charges		146		728	(79.9)			5		94	(94.4)
Amortization of acquired intangible assets		277		284	(2.6)			279		272	2.6
Stock-based compensation		123		117	5.7			136		115	18.6
Provision for/(benefit from) expected credit loss expense		(29)		56	nm			16		(28)	nm
Total consolidated selling, general and administrative expense	$	5,174	$	5,955	(13.1)	%
Total selling, general and administrative expense							$	4,597	$	4,688	(1.9)	%
Non-operating adjustments:
Amortization of acquired intangible assets	$	(277)	$	(284)	(2.6)	%	$	(279)	$	(272)	2.6	%
Acquisition-related charges		(16)		0	nm			(7)		(16)	(57.4)
Spin-off-related charges		(58)		—	nm
Kyndryl-related impacts								0		—	nm
Operating (non-GAAP) selling, general and administrative expense	$	4,823	$	5,670	(14.9)	%	$	4,311	$	4,399	(2.0)	%

nm — not meaningful

Total selling, general and administrative (SG&A) expense decreased ~~13.1~~1.9 percent in the first quarter of ~~2021~~2022 versus the ~~prior year~~prior-year period driven primarily by the following factors:

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Management Discussion – (continued)

●

Lower workforce rebalancing charges (9(2 points);

●

~~Lower spending (3 points) including reductions in travel~~ and ~~other expenses associated with COVID-19 restrictions, partially offset by continuing investment in innovation, skills and our ecosystem; and~~

●

~~A benefit from expected credit loss expense compared to a provision in the prior-year period (1 point); partially offset by~~

●

The effects of currency (2 points); partially offset by

●

A provision for expected credit loss expense compared to a benefit in the prior-year period (1 point); and

●

~~Spin-off-related charges~~Higher spending (1 point) reflecting our continuing investment in ~~the current year (1 point).~~innovation, our ecosystem and talent, partially offset by lower spending for shared services transferred to Kyndryl.

Operating (non-GAAP) expense decreased ~~14.9~~2.0 percent year to year primarily driven by the same ~~factors excluding the spin-off-related charges.~~factors.

~~Provisions~~The provision for expected credit loss expense ~~decreased $86~~increased $44 million year to year in the first three months of ~~2021~~2022 primarily driven by higher expense for specific reserves in the ~~prior-year~~current-year period and a decrease in general reserves in the ~~current year.~~prior-year period. The receivables provision coverage was ~~2.6~~2.3 percent at March 31, ~~2021,~~2022, excluding receivables classified as held for sale, an increase of 20 basis points ~~from~~compared to December 31, ~~2020 and an~~2021. The increase ~~of 50 basis points from March 31, 2020~~was primarily driven by the overall decline in total receivables.

Research, Development and Engineering


					Yr. to Yr.						Yr. to Yr.
(Dollars in millions)					Percent						Percent
For the three months ended March 31:	2021		2020		Change		2022		2021		Change
Research, development and engineering expense	$	1,630	$	1,625	0.3	%	$	1,679	$	1,616	3.9	%

Research, development and engineering (RD&E) expense ~~was 9.2 percent of revenue~~ in the first quarter of ~~2021 and the prior-year period~~2022 increased 3.9 percent year to year reflecting our continuing investment to deliver innovation in ~~innovation.~~

~~RD&E expense~~AI, hybrid cloud and emerging areas such as quantum. Higher spending (5 points) in the ~~first quarter of 2021 increased 0.3 percent year to year primarily driven~~current-year period was partially offset by the effects of currency ~~(2 points), partially offset by lower spending~~ (1 point).

Intellectual Property and Custom Development Income


					Yr. to Yr.						Yr. to Yr.
(Dollars in millions)					Percent						Percent
For the three months ended March 31:	2021		2020		Change		2022		2021		Change
Intellectual Property and Custom Development Income:
Licensing of intellectual property including royalty-based fees	$	72	$	34	111.1	%	$	71	$	74	(4.0)	%
Custom development income		69		76	(9.2)			48		65	(26.2)
Sales/other transfers of intellectual property		6		7	(4.6)			2		6	(73.3)
Total	$	147	$	116	26.3	%	$	121	$	146	(16.9)	%

Total intellectual property and custom development income ~~increased 26.3~~in the first quarter of 2022 decreased 16.9 percent year to ~~year driven by an increase in licensing of intellectual property including royalty-based fees.~~year. 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.

5557

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Management Discussion – (continued)

Other (Income) and Expense


					Yr. to Yr.						Yr. to Yr.
(Dollars in millions)					Percent						Percent
For the three months ended March 31:	2021		2020		Change		2022		2021		Change
Other (income) and expense:
Foreign currency transaction losses/(gains)	$	(109)	$	(126)	(13.8)	%	$	(176)	$	(109)	61.0	%
(Gains)/losses on derivative instruments		160		101	59.1			102		160	(36.1)
Interest income		(14)		(51)	(73.5)			(17)		(14)	27.5
Net (gains)/losses from securities and investment assets		(6)		(5)	8.0			218		(6)	nm
Retirement-related costs/(income)		343		264	29.7			202		332	(39.2)
Other		(13)		0	nm			(83)		(18)	356.9
Total consolidated other (income) and expense	$	362	$	182	98.4	%
Total other (income) and expense							$	246	$	346	(28.8)	%
Non-operating adjustments:
Amortization of acquired intangible assets	$	(1)	$	(1)	—		$	(1)	$	(1)	—
Non-operating retirement-related (costs)/income		(343)		(264)	29.7	%		(202)		(332)	(39.2)	%
Kyndryl-related impacts								(222)		—	nm
Operating (non-GAAP) other (income) and expense	$	18	$	(83)	nm		$	(179)	$	13	nm

nm - not meaningful

Total ~~consolidated~~ other (income) and expense was expense of ~~$362~~$246 million in the first quarter of ~~2021~~2022 compared to expense of ~~$182~~$346 million in the prior-year period. The year-to-year change was primarily driven by:

●

~~Higher~~Lower non-operating retirement-related costs ($78130 million). Refer to “Retirement-Related Plans” for additional information; and

●

Net exchange ~~losses~~gains (including derivative instruments) in the ~~current year~~current-year period versus net exchange ~~gains~~losses in the ~~prior year~~prior-year period ($77124 million); ~~and~~partially offset by

●

~~Lower interest income~~An unrealized loss on the Kyndryl retained shares ($38222 million) ~~driven by lower interest rates in the current-year period.~~.

Operating (non-GAAP) other (income) and expense was ~~expense~~income of ~~$18~~$179 million in the first quarter of ~~2021~~2022 compared to ~~income~~expense of ~~$83~~$13 million in the prior-year period. The year-to-year change was driven primarily by the ~~same factors excluding the higher non-operating retirement-related costs.~~foreign exchange dynamics described above.

Interest Expense


					Yr. to Yr.						Yr. to Yr.
(Dollars in millions)					Percent						Percent
For the three months ended March 31:	2021		2020		Change		2022		2021		Change
Interest expense	$	280	$	326	(13.9)	%	$	311	$	280	10.9	%

Interest expense ~~decreased $45~~increased $31 million in the first quarter of ~~2021~~2022 compared to the prior-year period. Interest expense is presented in cost of financing in the Consolidated Income Statement if the related external borrowings are to support the ~~Global~~ Financing external business. Overall interest expense (excluding capitalized interest) for the first quarter of ~~2021~~2022 was ~~$386~~$393 million, ~~a decrease~~an increase of ~~$58~~$7 million versus the ~~comparable~~ prior-year period, primarily driven by higher average interest rates, partially offset by a lower average debt balance ~~and lower average interest rates~~ in the current year.

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Management Discussion – (continued)

Retirement-Related Plans

The following table provides the total pre-tax cost for all retirement-related plans. The operating cost amounts are included in the Consolidated Income Statement 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 March 31:

2021

2020

Change

Retirement-related plans — cost:







Service cost

$
95

$
99

(3.2)
%
Multi-employer plans

8

7

3.6

Cost of defined contribution plans

271

265

2.1

Total operating costs

$
374

$
371

0.7
%
Interest cost

$
413

$
540

(23.5)
%
Expected return on plan assets

(742)

(852)

(12.9)

Recognized actuarial losses

640

563

13.8

Amortization of prior service costs/(credits)

3

1

nm

Curtailments/settlements

17

8

106.5

Other costs

11

5

106.7

Total non-operating costs/(income)

$
343

$
264

29.7
%
Total retirement-related plans — cost

$
717

$
636

12.8
%

~~nm - not meaningful~~


					Yr. to Yr.
(Dollars in millions)					Percent
For the three months ended March 31:	2022		2021		Change
Retirement-related plans — cost:
Service cost	$	66	$	68	(3.8)	%
Multi-employer plans		4		6	(32.9)
Cost of defined contribution plans		239		256	(6.8)
Total operating costs	$	309	$	330	(6.6)	%
Interest cost	$	467	$	410	14.1	%
Expected return on plan assets		(749)		(731)	2.5
Recognized actuarial losses		460		622	(26.0)
Amortization of prior service costs/(credits)		7		3	106.8
Curtailments/settlements		8		17	(55.0)
Other costs		9		11	(15.4)
Total non-operating costs/(income)	$	202	$	332	(39.2)	%
Total retirement-related plans — cost	$	510	$	663	(23.0)	%

Total pre-tax retirement-related plan cost ~~increased~~decreased by ~~$81~~$152 million compared to the first quarter of ~~2020,~~2021, primarily driven by ~~lower~~a decrease in recognized actuarial losses ($162 million), higher expected return on plan assets ($~~110~~18 million), and ~~an increase in recognized actuarial losses~~lower cost of defined contribution plans ($7817 million), partially offset by ~~lower~~higher interest costs ($~~127~~58 million).

As described in the “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 first quarter of ~~2021~~2022 were ~~$374~~$309 million, ~~an increase~~a decrease of $3$22 million compared to the first quarter of ~~2020,~~2021, primarily driven by ~~higher~~lower cost of defined contribution plans ~~cost~~ ($517 million). Non-operating costs of ~~$343~~$202 million in the first quarter of ~~2021 increased $78~~2022 decreased $130 million year to year, driven by ~~lower~~ a decrease in recognized actuarial losses ($162 million), and higher expected return on plan assets ($~~110 million) and an increase in recognized actuarial losses ($78~~18 million), partially offset by ~~lower~~higher interest costs ($~~127~~58 million).

Taxes

The continuing operations benefit from income taxes for the first quarter of ~~2021~~2022 was ~~$51~~$39 million, compared to a benefit from income taxes of ~~$1,226~~$160 million in the first quarter of ~~2020.~~2021. The operating (non-GAAP) income tax provision for the first quarter of ~~2021~~2022 was ~~$179~~$244 million, compared to a ~~benefit from~~provision for income taxes of ~~$961~~$25 million in the first quarter of ~~2020.~~2021.

The continuing operations benefit from income taxes in the first quarter of 2022 was driven by many factors including the impacts of recently published foreign tax credit regulations, geographical mix of income, incentives and changes in unrecognized tax benefits. The continuing operations benefit from income taxes in the first quarter of 2021 was primarily ~~driven by~~related to the tax impacts from the resolution of certain tax ~~audit matters.~~audits. The ~~benefit from~~increase in the operating (non-GAAP) income ~~taxes~~tax provision in the first quarter of ~~2020 was primarily related~~2022, compared to the ~~tax impacts of an intra-entity sale of certain of the company’s intellectual property. The operating (non-GAAP) income tax provision year-to-year change~~prior year was primarily driven by tax impacts from the ~~same factors.~~resolution of certain tax audits in the first quarter of 2021.

IBM’s full-year tax provision and effective tax rate are impacted by recurring factors including the geographic mix of income before taxes, ~~state and local taxes, the effects of various global income~~incentives, changes in unrecognized tax ~~strategies~~benefits and any discrete tax events, such as the settlement of income tax audits and changes in or new interpretations of tax laws. The GAAP tax provision and effective

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Management Discussion – (continued)

~~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 quarter 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 ~~2021.~~2022. In the fourth quarter of 2021, the IRS commenced its audit of the company’s U.S. tax returns for 2017 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 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 penalties have been provided for any adjustments that are expected to result for these years.

The company is involved in a number of income tax-related matters in India ~~challenging~~for having challenged tax assessments issued by the India Tax Authorities. ~~As of~~At March 31, ~~2021,~~2022, the company had recorded ~~$739~~$709 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 India Tax Authorities. Although the outcome of tax audits are always uncertain, the company believes that adequate amounts of tax, interest and penalties have been provided for any adjustments that are expected to result for these years.

The amount of unrecognized tax benefits at March 31, ~~2021~~2022 is ~~$8,392~~$8,699 million which can be reduced by ~~$568~~$548 million associated with timing adjustments, U.S. tax credits, potential transfer pricing adjustments, and state income taxes. The net amount of ~~$7,824~~$8,151 million, if recognized, would favorably affect the company’s effective tax rate.

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.						Yr. to Yr.
					Percent						Percent
For the three months ended March 31:	2021		2020		Change		2022		2021		Change
Earnings per share of common stock from continuing operations:
Assuming dilution	$	1.06	$	1.31	(19.1)	%	$	0.73	$	0.45	62.2	%
Basic	$	1.07	$	1.32	(18.9)	%	$	0.74	$	0.45	64.4	%
Diluted operating (non-GAAP)	$	1.77	$	1.84	(3.8)	%	$	1.40	$	1.12	25.0	%
Weighted-average shares outstanding: (in millions)
Assuming dilution		901.7		895.0	0.7	%		909.2		901.7	0.8	%
Basic		893.6		888.0	0.6	%		899.3		893.6	0.6	%

Actual shares outstanding at March 31, ~~2021~~2022 were ~~893.5~~899.4 million. The weighted-average number of common shares outstanding assuming dilution during the first quarter of ~~2021~~2022 was ~~6.7~~7.5 million shares ~~(0.7~~(0.8 percent) higher than the same period of ~~2020.~~2021.

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Management Discussion – (continued)

Financial Position

Dynamics

AtOur balance sheet at March 31, ~~2021, our balance sheet remained strong~~2022 continues to provide us with flexibility to support the business. We continue to manage the investment portfolio to meet our capital preservation and liquidity objectives and have continued to take actions to enhance our balance sheet strength and liquidity position.

Cash, restricted cash and marketable securities at March 31, ~~2021~~2022 were ~~$11,273~~$10,769 million, ~~a decrease~~an increase of ~~$3,002~~$3,213 million from December 31, 2020. Financing receivables declined $3,235 million to $14,744 million since the end of 2020 primarily resulting from collections of seasonally higher year-end balances and our strategic actions to re-focus our Global Financing portfolio.2021. Total debt of ~~$56,404~~$54,234 million at March 31, ~~2021 decreased $5,134~~2022 increased $2,531 million from December 31, ~~2020~~2021 primarily due to new debt issuances. We issued $4,080 million of debt in February 2022 which will support maturities later in the year. We continue to manage our debt levels while being acquisitive and ~~$16,635 million since the end of the second quarter of 2019 (immediately preceding the Red Hat acquisition). We have made good progress in deleveraging,~~ without sacrificing investments in our business or our solid dividend policy. ~~We have consistently generated strong~~

Our cash flow ~~from operations~~is presented on a consolidated basis and ~~continue~~includes discontinued operations. Refer to ~~have access to~~note 3, “Separation of Kyndryl,” for additional ~~sources of liquidity through the capital markets and $15,250 million of our unused credit facilities.~~information. In the first three months of ~~2021,~~2022, we generated ~~$4,914~~$3,248 million in ~~net~~ cash from ~~operations,~~operating activities, compared to ~~$4,476~~$4,914 million in the first three months of ~~2020.~~2021. We invested $698 million in acquisitions and returned $1,475 million to shareholders through dividends in the first quarter of 2022. Our cash generation permits us to invest and deploy capital to areas with the most attractive long-term opportunities.

Our pension plans were well funded at the end of ~~2020,~~2021, with worldwide qualified plans funded at ~~102~~107 percent. Overall pension funded status as of the end of March 2022 was fairly consistent with year-end ~~2020,~~2021, and we currently have no change to expected plan contributions in ~~2021.~~

The assets and debt associated with the Global Financing business are a significant part of our financial position. The financial position amounts appearing on pages 5 and 6 are the consolidated amounts including Global Financing. The amounts appearing in the separate Global Financing section, beginning on page 68, are supplementary data presented to facilitate an understanding of the Global Financing business.2022.

IBM Working Capital


	At March 31,		At December 31,		At March 31,		At December 31,
(Dollars in millions)	2021		2020		2022		2021
Current assets	$	34,038	$	39,165	$	31,330	$	29,539
Current liabilities		36,542		39,869		34,056		33,619
Working capital	$	(2,505)	$	(705)	$	(2,726)	$	(4,080)
Current ratio		0.93:1		0.98:1		0.92:1		0.88:1

Working capital ~~decreased $1,800~~increased $1,354 million from the year-end ~~2020~~2021 position. The key changes are described below:

Current assets ~~decreased $5,127~~increased $1,791 million ($~~4,563~~1,926 million adjusted for currency) due to:

●

~~A decrease~~An increase of ~~$3,002~~$3,213 million ($~~2,798~~3,261 million adjusted for currency) in cash and cash equivalents, restricted cash, and marketable securities; partially offset by

●

A decline in receivables of $1,635 million ($1,547 million adjusted for currency) mainly due to collections of higher year-end balances.

Current liabilities increased $437 million ($767 million adjusted for currency) as a result of:

●

An increase in deferred income of $1,008 million ($1,086 million adjusted for currency) primarily driven by annual customer billings and continued growth in software renewal rates; and

●

An increase in short-term debt of $903 million ($883 million adjusted for currency) primarily due to reclassifications of $2,014 million from long-term debt to reflect upcoming maturities; partially offset by maturities of $1,087 million; partially offset by

●

A decrease in ~~receivables~~accounts payable of ~~$2,671~~$502 million ($~~2,311~~474 million adjusted for currency) primarily due ~~collections of~~to declines from seasonally higher year-end ~~balances and sales of financing receivables; partially offset by~~balances;

●

~~An increase in prepaid expenses and other current assets of $442 million ($380 million adjusted for currency) primarily driven by an increase in derivative assets.~~

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Management Discussion – (continued)

~~Current liabilities decreased $3,327 million ($2,588 million adjusted for currency) as a result of:~~

●

A decrease in short-term debt of $1,985 million ($1,975 million adjusted for currency) due to maturities of $2,952 million, including a $500 million early redemption of IBM Credit debt; partially offset by reclassifications of $1,090 million from long-term debt to reflect upcoming maturities; and

●

A decrease in other accrued expenses and liabilities of $1,072 million ($866 million adjusted for currency) primarily due to payments of $702 million for workforce rebalancing actions and cash payments related to fourth-quarter 2020 acquisitions; and

●

~~A decrease in accounts payable of $768 million ($695 million adjusted for currency) reflecting declines from seasonally higher year-end balances; and~~

●

A decrease in taxes payable of ~~$661~~$492 million ($~~572~~476 million adjusted for currency)~~; partially offset by~~ primarily due to indirect tax payments; and

●

~~An increase in deferred income~~A decrease of ~~$1,363~~$461 million ($~~1,623~~243 million adjusted for currency) ~~driven by annual customer billings~~in compensation and ~~an increase in software renewal rates.~~benefits and other accrued expenses and liabilities.

Receivables and Allowances

Roll Forward of Total IBM Receivables Allowance for Credit Losses

(Dollars in millions)

January 1, 2021

Additions / (Releases) *

Write-offs **

Other +

March 31, 2021
$
644

$
(24)

$
(16)

$
(7)

$
597


(Dollars in millions)
January 1, 2022		Additions / (Releases) *		Write-offs **		Foreign currency and other		March 31, 2022
$	443	$	17	$	(24)	$	(5)	$	432

* Additions/(Releases) for Allowance for Credit Losses are recorded in expense.

**Refer to note A, “Significant Accounting Policies,” in our ~~2020~~2021 Annual Report for additional information regarding allowance for credit loss write-offs.

~~+ Primarily represents translation adjustments.~~

~~The~~Excluding receivables classified as held for sale, the total IBM receivables provision coverage was ~~2.6~~2.3 percent at March 31 ~~2021,~~, 2022, an increase of 20 basis points compared to December 31, ~~2020.~~2021. The increase ~~in coverage and decrease in the allowance~~ was primarily driven by the overall ~~decrease~~decline in total receivables. The majority of the write-offs during the three months ended March 31, ~~2021~~2022 related to receivables which had been previously reserved.

~~Global~~ Financing Segment Receivables and Allowances

The following table presents external ~~Global~~ Financing segment receivables excluding receivables classified as held for sale, and immaterial miscellaneous receivables.


	At March 31,			At December 31,			At March 31,			At December 31,
(Dollars in millions)	2021			2020			2022			2021
Amortized cost *	$	15,004		$	18,264		$	11,563		$	12,859
Specific allowance for credit losses		174			184			141			159
Unallocated allowance for credit losses		63			79			37			42
Total allowance for credit losses		236			263			179			201
Net financing receivables	$	14,768		$	18,001		$	11,385		$	12,658
Allowance for credit losses coverage		1.6	%		1.4	%		1.5	%		1.6	%

* Includes deferred initial direct costs which are expensed in IBM’s consolidated financial results.

The percentage of ~~Global~~ Financing segment receivables reserved ~~increased~~decreased from ~~1.4~~1.6 percent at December 31, ~~2020,~~2021, to ~~1.6~~1.5 percent at March 31, ~~2021,~~2022, primarily driven by write-offs of previously reserved receivables, partially offset by the decline in amortized cost.

~~Table of Contents~~

~~Management Discussion – (continued)~~

Roll Forward of ~~Global~~ Financing Segment Receivables Allowance for Credit Losses (included in Total IBM)

(Dollars in millions)












January 1, 2021

Additions / (Releases)*

Write-offs **

Other +

March 31, 2021
$
263

$
(12)

$
(9)

$
(5)

$
236


(Dollars in millions)
January 1, 2022		Additions / (Releases)*		Write-offs **		Foreign currency and other		March 31, 2022
$	201	$	(8)	$	(17)	$	3	$	179

*	Additions/(Releases) for Allowance for Credit Losses are recorded in expense.

**	Refer to note A, “Significant Accounting Policies,” in our ~~2020~~2021 Annual Report for additional information regarding allowance for credit loss write-offs.

+	~~Primarily represents translation adjustments.~~

~~Global~~ Financing’s expected credit loss expense (including ~~impacts from~~reserves for off-balance sheet commitments which are recorded in other liabilities) was a net release of ~~$18~~$10 million for the three months ended March 31, ~~2021,~~2022, compared to ~~an addition~~a net

Table of ~~$11~~Contents

Management Discussion – (continued)

release of $18 million for the same period in ~~2020.~~2021. The decrease in net releases was primarily driven by lower unallocated ~~reserves~~reserve requirements in the prior year in Americas ~~and EMEA~~due to sales of receivables, partially offset by specific reserve releases in the current year ~~reflecting lower asset balances at March 31, 2021 when compared to the same period~~ in ~~the prior year.~~Americas and EMEA.

Noncurrent Assets and Liabilities


	At March 31,		At December 31,		At March 31,		At December 31,
(Dollars in millions)	2021		2020		2022		2021
Noncurrent assets	$	114,591	$	116,806	$	101,945	$	102,462
Long-term debt	$	51,206	$	54,355	$	46,545	$	44,917
Noncurrent liabilities (excluding debt)	$	39,368	$	41,020	$	33,562	$	34,469

~~Noncurrent~~The decrease in noncurrent assets ~~decreased $2,215~~of $517 million ($~~944~~146 million adjusted for currency) ~~due to:~~was driven by:

●

A decrease in long-term financing receivables of ~~$1,165~~$815 million ($~~1,006~~793 million adjusted for currency) ~~primarily as a result of reductions~~due to reclasses to short-term receivables and declines from seasonally higher year-end ~~volumes and sales of receivables; and~~

●

~~A decrease in net property, plant and equipment of $588 million ($405 million adjusted for currency);~~balances; partially offset by

●

An increase in goodwill and net intangible assets of ~~$107~~$265 million ($~~629~~460 million adjusted for currency) due to additions from new acquisitions; partially offset by intangibles amortization and currency impacts.

Long-term debt ~~decreased $3,150~~increased $1,628 million ($~~2,454~~1,972 million adjusted for currency) ~~due to:~~primarily driven by:

●

~~Early redemption~~Issuances of ~~IBM Credit debt of $1,250~~$4,063 million; partially offset by

●

Reclassifications to short-term debt of ~~$1,090~~$2,014 million to reflect upcoming ~~maturities; and~~

●

~~The impacts of currency.~~maturities.

Noncurrent liabilities (excluding debt) decreased ~~$1,652~~$907 million ($~~656~~616 million adjusted for currency) primarily ~~due to:~~driven by:

●

A decrease in retirement and postretirement benefit obligations of ~~$901~~$498 million ($~~379~~324 million adjusted for currency); and

●

A decrease ~~in other liabilities~~ of ~~$409~~$410 million ($~~113~~292 million adjusted for currency). in deferred income, operating lease liabilities and other liabilities.

~~Table of Contents~~

~~Management Discussion – (continued)~~

Debt

Our funding requirements are continually monitored and we execute our strategies ~~are executed~~ to manage the overall asset and liability profile. Additionally, we maintain sufficient flexibility to access global funding sources as needed.


	At March 31,		At December 31,		At March 31,		At December 31,
(Dollars in millions)	2021		2020		2022		2021
Total company debt	$	56,404	$	61,538	$	54,234	$	51,703
Total Global Financing segment debt	$	18,307	$	21,167
Debt to support external clients		14,941		17,819
Debt to support internal clients		3,366		3,348
Non-Global Financing debt	$	38,096	$	40,371
Financing segment debt*					$	12,168	$	13,929
Non-Financing debt					$	42,067	$	37,775

* Financing segment debt includes debt of $1,183 million at March 31, 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 71 for additional details.

Total debt of ~~$56,404~~$54,234 million ~~decreased $5,134~~increased $2,531 million ($~~4,428~~2,855 million adjusted for currency) from December 31, ~~2020,~~2021, primarily driven by ~~debt~~issuances of $4,080 million, partially offset by maturities ~~and early retirements~~ of ~~$4,241~~$1,111 million. ~~Total debt has decreased $16,635 million since the end~~

Table of ~~the second quarter 2019 (immediately preceding the Red Hat acquisition).~~Contents

~~Non-Global Financing~~Management Discussion – (continued)

Non-Financing debt of ~~$38,096~~$42,067 million increased $4,292 million ($4,582 million adjusted for currency) from December 31, 2021 primarily due to new debt issuances.

Financing segment debt of $12,168 million decreased ~~$2,275~~$1,761 million ($~~1,842~~1,727 million adjusted for currency) from December 31, ~~2020 due to scheduled debt maturities in the first quarter of 2021.~~

~~Global Financing debt of $18,307 million decreased $2,859 million ($2,586 million adjusted for currency) from December 31, 2020~~2021 primarily due to lower funding requirements associated with financing receivables. In the first quarter of 2021, IBM Credit early redeemed all of its outstanding fixed-rate debt in the aggregate amount of $1.75 billion and deregistered with the U.S Securities and Exchange Commission.

~~Global~~ Financing provides financing solutions predominantly for IBM’s external client assets, ~~as well as for assets under contract by other IBM units. These assets, primarily for Global Technology Services, generate long-term, stable revenue streams similar to~~and the Global Financing asset portfolio. Based on their attributes, these Global Technology Services assets are leveraged with the balance of the Global Financing asset base. Global Financing's funding of the Global Technology Services assets will wind down with the separation of the managed infrastructure services business as Global Financing refocuses its portfolio to support IBM's open hybrid cloud platform and AI capabilities.

~~The~~ debt used to fund ~~Global~~ Financing assets is primarily composed ~~primarily~~ of intercompany 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 interest rate variability underlying the financing receivable and are based on arm’s-length pricing. The ~~Global~~ Financing debt-to-equity ratio remained at 9.0 to 1 at March 31, ~~2021.~~2022.

We measure ~~Global~~ 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” and in note 4,5, “Segments.” In the Consolidated Income Statement, the external debt-related interest expense supporting ~~Global~~ Financing’s internal financing to IBM is ~~reclassified from cost of financing to~~classified as interest expense.

Equity

Total equity increased ~~$786~~$116 million from December 31, ~~2020,~~2021, primarily due to an increase in accumulated other comprehensive income of $1,080 million mainly due to retirement-related benefit plans of $500 million and an increase in foreign currency translation gains of $321 million, and an increase from net income of ~~$955~~$733 million, a decrease in accumulated other comprehensive losses of $703 million driven by retirement-related benefit plans of ($352 million) and foreign currency translation adjustments ($306 million), and common stock of $221 million; partially offset by dividends paid of ~~$1,457~~$1,475 million.

~~Table of Contents~~

~~Management Discussion – (continued)~~

Cash Flow

Our 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 three months ended March 31:	2021		2020		2022		2021
Net cash provided by/(used in) continuing operations:
Net cash provided by/(used in):
Operating activities	$	4,914	$	4,476	$	3,248	$	4,914
Investing activities		(2,000)		(902)		(1,358)		(2,000)
Financing activities		(5,783)		(115)		1,377		(5,783)
Effect of exchange rate changes on cash, cash equivalents and restricted cash		(134)		(403)		(5)		(134)
Net change in cash, cash equivalents and restricted cash	$	(3,002)	$	3,057	$	3,263	$	(3,002)

Net cash provided by operating activities ~~increased $438~~decreased $1,666 million as compared to the first three months of ~~2020~~2021 driven primarily by:

●

~~An increase~~A decrease of cash provided by financing receivables of ~~$262~~$1,232 million primarily driven by higher prior year sales of financing receivables;

●

A decrease in ~~interest payments on debt~~deferred income of ~~approximately $190 million; and~~

●

~~Performance-related improvements within net income; partially offset by~~

●

~~An increase~~$605 million due to strong performance in ~~workforce rebalancing payments of $585 million.~~

~~Net cash used in investing activities increased $1,098 million driven primarily by:~~

●

~~An increase in cash used for acquisitions of $1,107 million;~~the prior-year period; and

●

An increase in inventory to mitigate supply chain disruption and in anticipation of the z16 cycle; partially offset by

●

A decrease in workforce rebalancing payments of $401 million.

Table of Contents

Management Discussion – (continued)

Net cash used in investing activities decreased $642 million driven by:

●

A decrease in cash used for ~~net purchases~~acquisitions of ~~marketable securities~~$422 million; and ~~other investments of $168 million; partially offset by~~

●

A decrease in cash used for net capital expenditures of ~~$208~~$152 million.

~~Net~~Financing activities were a net source of cash ~~used~~of $1,377 million in ~~financing activities increased $5,668~~the first three months of 2022 compared to a net use of cash of $5,783 million in the first three months of 2021. The year-to-year change of $7,160 million was driven ~~primarily~~ by:

●

~~A decrease~~An increase in net cash provided by debt transactions of ~~$5,656~~$7,247 million primarily driven by a higher level of ~~net additions~~maturities in the prior ~~year; partially offset by a lower level of maturities in the~~year, and current year ~~consistent with our overall debt pay down strategy.~~net additions.

Results of Discontinued Operations

Income from discontinued operations, net of tax was $71 million in the first quarter of 2022 compared to $552 million in the prior-year period. As the separation of Kyndryl occurred on November 3, 2021, the first quarter of 2021 included a full quarter of Kyndryl operations. The current-year income primarily relates 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.

6365

Table of Contents

Management Discussion – (continued)

Looking Forward

~~Separation~~Our first quarter results reflect the changes we have made to position our company for the future. This solid start to 2022 reinforces the confidence we have in our strategy. Harnessing the power of ~~Kyndryl~~technologies such as hybrid cloud and AI remains essential as our clients face several strategic challenges and opportunities including competition for talent, supply chain issues, inflation, cybersecurity and geopolitical instability. We continue to see a strong demand environment for both technology and consulting as we help our clients respond to these challenges and opportunities. Over the last two years, we have taken a series of significant steps to capture this demand, and our investments and actions are paying off.

On October 8, 2020 we announced our plan to separate the managed infrastructure services unit of our GTS segment into a new public company, to be named Kyndryl. The separation is expected to be achieved through a U.S. federal tax-free spin-off to IBM shareholders and be completed by the end of 2021. The separation will create two industry-leading companies, each with strategic focus and flexibility to capitalize on their respective missions and drive client and shareholder value. IBM will accelerate our open hybrid cloud platform growth strategy and AI capabilities to drive clients’ digital transformations. Upon separation, Kyndryl will immediately be the world's leading managed infrastructure services provider and will have greater agility to design, run and modernize the infrastructure of the world’s most important organizations. Both IBM and Kyndryl will have greater ability to focus on their operating and financial models, have more freedom to partner with others and both will align their investments and capital structure to their strategic focus areas. We have made good progress on executing the necessary financial, legal and regulatory milestones to enable the separation and remain on track to complete the separation by the end of 2021.

~~IBM’s~~ Hybrid Cloud and AI ~~Strategy~~Progress

~~We are reshaping our future as a~~The hybrid cloud platform and AI company. Businesses have made significant investments in their IT infrastructure and are dealing with specific constraints such as compliance, data sovereignty and latency needs in their operations. They need an environment that is not only hybrid, but a hybrid platform that is flexible, secure and built from open source innovation. This gives them a credible path to modernizing legacy systems with advanced cloud services and building cloud-native applications. This is what 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 for the platform and helps our ~~platform for~~clients apply AI, automation and ~~why we have such confidence in our strategy.~~security to make their businesses work better. Our global team of consultants offers deep business expertise by co-creating with clients and finding ways to harness the power of technology to accelerate their digital transformation journeys. Our infrastructure allows clients to take full advantage of an extended hybrid cloud environment.

~~To accelerate our~~This platform-centric strategy ~~we are increasing our investment, both organic and inorganic in skills, ecosystem and innovation. Our hiring~~ is ~~up year to year and we closed six acquisitions since mid-December 2020.~~producing solid results. We have ~~redesigned~~more than 4,000 hybrid cloud platform clients, including 200 added in the first quarter of 2022. This 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 and build new and differentiated experiences and services.

We have taken actions to streamline our operations and simplify our go-to-market model, ~~and expect to yield benefits as we move through the year.~~consistent with our more focused, platform-centric business. We are ~~building out pre-sales garages~~making significant changes to ~~co-create solutions~~the way we work to build a client-centric culture based on technical experience. Our new client engagement model, based on experiential selling, client engineering, and co-creation, is strongly resonating with our clients. We are accelerating our strategy with continued investment in innovation, our ecosystem and talent.

Innovation – we continue to meet the needs of our clients ~~adding go-to-market delivery capabilities~~today while shaping the technologies of tomorrow through increased investments in ~~GBS~~R&D to deliver innovation in AI, hybrid cloud and ~~technical skills~~emerging areas like quantum. In the first quarter of 2022, we announced a new AIOps solution in ~~Red Hat~~collaboration with Flexera that is designed to automate software license compliance, and in April 2022, we announced the IBM z16 platform which is designed for cloud-native development and cybersecurity resilience. We continue to invest in quantum and we are ~~increasing R&D~~the only company to have an operational computer that is available on our cloud. We made three acquisitions in ~~areas like AI~~first quarter 2022 to further strengthen our portfolio and ~~quantum~~add value to ~~drive innovation.~~our clients.

Ecosystem – we continue to invest in our ecosystem, both organically and inorganically, and gain momentum with our partner ecosystem. Consulting signings with our ecosystem partners were up more than 50 percent to approximately $2 billion in the first quarter of 2022. We are ~~executing the structural actions initiated~~also investing through acquisition, for example Neudesic, which was acquired in the ~~fourth~~first quarter of ~~2020, which will continue through~~2022, adds key hyperscaler capabilities to address hybrid multi-cloud demand.

Talent – we are investing in talent across our workforce. We are upskilling existing resources, adding capabilities and skills to support our garages and client engineering centers, adding client success managers to help clients get the ~~first half~~most of ~~2021. While~~their IBM solutions and expanding our technical talent across the ~~savings from the structural actions will improve the profit profile~~business.

The fundamentals of ~~Kyndryl, we expect more of the savings to be reinvested in IBM’s remaining business. We have also taken actions to enhance~~ our business model remain solid. Our balance sheet ~~strength~~ and ~~liquidity.~~liquidity position remain strong. At March 31, ~~2021,~~2022, we had ~~$11.3~~$10.8 billion of cash and cash equivalents, restricted cash and marketable ~~securities.~~securities and we continue to manage our debt levels while being acquisitive and without sacrificing investments in our business or our solid dividend policy.

Table of Contents

Management Discussion – (continued)

IBM is now a very different company. We have, ~~refocused~~in effect, changed our ~~Global Financing~~company’s trajectory. Our business on IBM’s hybrid cloud and AI offerings, reducing our capital needs. Debt levels have decreased $16.6 billion from our peak levels at June 30, 2019 (immediately preceding the Red Hat acquisition) and we will continue to deleverage throughout 2021 utilizing our debt maturities schedule.

Looking forward, there is tremendous opportunity for us to help our clients become digital businesses. We continue to take prudent actions to improve our operating model and accelerate our strategic priorities.reflects a higher growth, higher value mix with a significant recurring base, led by software. We are managing for the long-term and are confident in the direction and focus of our business. We expect to continue our progress as a leading hybrid cloud and AI company with a focus on revenue growth and cash generation while maintaining our solid and modestly growing dividend policy. Our expectations for 2022 continue to be aligned with our mid-term financial model which was previously communicated at our investor briefing on October 4, 2021.

Retirement-Related Plans

Our pension plans are well funded. Contributions for all retirement-related plans are expected to be approximately ~~$2.3~~$2.1 billion in ~~2021, an increase of~~2022, approximately ~~$100 million~~flat compared to ~~2020,~~2021, of which ~~$0.3~~$0.2 billion generally relates to legally required contributions to non-U.S. defined benefit and multi-employer plans. We expect ~~2021~~2022 pre-tax retirement-related plan cost to be approximately ~~$2.9~~$2.1 billion, ~~an increase~~a decrease of approximately ~~$300~~$500 million compared to ~~2020.~~2021. This estimate reflects current pension plan assumptions at December 31, ~~2020.~~2021. Within total retirement-related plan cost, operating retirement-related plan cost is expected to be approximately ~~$1.5~~$1.2 billion, a decrease of approximately ~~flat~~$100 million versus ~~2020.~~

~~Table of Contents~~

~~Management Discussion – (continued)~~

2021. Non-operating retirement-related plan cost is expected to be approximately ~~$1.4~~$0.9 billion, ~~an increase~~a decrease of approximately ~~$300~~$400 million compared to ~~2020,~~2021, primarily driven by lower recognized actuarial losses and higher income from expected return on assets.

Currency Rate Fluctuations

Changes in the relative values of non-U.S. currencies to the U.S. dollar (USD) affect our financial results and financial position. At March 31, ~~2021,~~2022, currency changes resulted in assets and liabilities denominated in local currencies being translated into fewer dollars than at year-end ~~2020.~~2021. We use financial hedging instruments to limit specific currency risks related to financing transactions and other foreign currency-based transactions.

During periods of sustained movements in currency, the marketplace and competition adjust to the changing rates. For example, when pricing offerings in the marketplace, we may use some of the advantage from a weakening U.S. dollar to improve our position competitively, and price more aggressively to win the business, essentially passing on a portion of the currency advantage to our customers. Competition will frequently take the same action. Consequently, we believe that some of the currency-based changes in cost impact the prices charged to clients. We also maintain currency hedging programs for cash management purposes which temporarily mitigate, but do not eliminate, the volatility of currency impacts on our financial results.

We translate revenue, cost and expense in our 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 we utilize to disclose this information does not incorporate any operational actions that management could take to mitigate fluctuating currency rates. Currency movements impacted our year-to-year revenue and earnings per share growth in the first three months of ~~2021.~~2022. Based on the currency rate movements in the first three months of ~~2021,~~2022, total revenue increased ~~0.9~~7.7 percent as reported ~~but decreased 2.5~~and 10.9 percent at constant currency versus the first three months of ~~2020.~~2021. On an income from continuing operations before income ~~tax~~taxes basis, these translation impacts, mitigated by the net impact of hedging activities, resulted in a theoretical maximum (assuming no pricing or sourcing actions) decrease of approximately $30 million in the first three months of 2022 on an as-reported basis and a decrease of approximately $50 million on an operating (non-GAAP) basis. The same mathematical exercise resulted in an increase of approximately ~~$100~~$50 million in the first three months of 2021 on an as-reported basis and an increase of approximately $125 million on an operating (non-GAAP) basis. The same mathematical exercise also resulted in an increase of approximately $60 million in the first three months of 2020 on an as-reported basis and an increase of approximately $50$70 million on an operating (non-GAAP) basis. We view these amounts as a theoretical maximum impact to ~~its~~our 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 we believe it could be substantially less than the theoretical maximum given the competitive pressure in the marketplace.

Table of Contents

Management Discussion – (continued)

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 manages~~we manage currency risk in these entities by linking prices and contracts to U.S. dollars.

Liquidity and Capital Resources

In our ~~2020~~2021 Annual Report, on pages 5647 to ~~58,~~49, there is a discussion of our liquidity including two tables that present three years of data. The table presented on page 5647 includes consolidated net cash from operating activities, cash and cash equivalents, restricted cash and short-term marketable securities, and the size of our global credit facilities for each of the past three years. For the three months ended, or at, as applicable, March 31, ~~2021,~~2022, those amounts are ~~$4.9~~$3.2 billion of consolidated net cash from operating activities, ~~$11.3~~$10.8 billion of cash and cash equivalents, restricted cash and short-term marketable securities and ~~$15.3~~$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 9, 2019, we closed the acquisition of Red Hat for cash consideration of $34.8 billion. The transaction was funded through a combination of cash on hand and proceeds from debt issuances. In order to reduce this debt and return

~~Table of Contents~~

~~Management Discussion – (continued)~~

~~to target leverage ratios within a couple of years, the company suspended its share repurchase program at the time of the Red Hat acquisition closing.~~

The major rating agencies’ ratings on our debt securities at March 31, ~~2021~~2022 appear in the following table and remain unchanged from December 31, ~~2020.~~2021.


	STANDARD	MOODY’S
	AND	INVESTORS
IBM RATINGS:	POOR’S	SERVICE
Senior long-term debt	AA-	A2A3
Commercial paper	~~A-1~~A-2	~~Prime-1~~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~~While debt levels have ~~decreased $5.1~~increased $2.5 billion from December 31, ~~2020 and $16.6~~2021 primarily due to new debt issuances in the first quarter of 2022, debt levels have decreased $18.8 billion from our peak levels at June 30, 2019 (immediately preceding the Red Hat acquisition) ~~and we will continue to deleverage throughout 2021 utilizing our debt maturities schedule.~~.

We do not have “ratings trigger” provisions in our 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. Our 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 our credit rating were to fall below investment grade. At March 31, ~~2021,~~2022, the fair value of those instruments that were in a liability position was ~~$332~~$231 million, before any applicable netting, and this position is subject to fluctuations in fair value period to period based on the level of our outstanding instruments and market conditions. We have no other contractual arrangements that, in the event of a change in credit rating, would result in a material adverse effect on our financial position or liquidity.

In July 2017, the UK's Financial Conduct Authority (FCA), which regulates the London Interbank Offered Rate (LIBOR), had announced ~~that it intends~~its intent to phase out LIBOR by the end of ~~2021.~~2021 and the Alternative Reference Rates Committee identified the Secured Overnight Financing Rate (SOFR) as its preferred alternative rate for USD LIBOR. In March 2021, the FCA ~~announced an extension of~~extended the phase out in the case of U.S. dollar settings for certain tenors until the end of June 2023. ~~Various central bank committees and working groups continue~~Effective December 31, 2021, the use of LIBOR was substantially eliminated for purposes of any new financial contract executions. Any legacy USD LIBOR based financial contracts are expected to ~~discuss replacement of benchmark~~be addressed using the LIBOR rates published through the ~~process for amending existing LIBOR-based contracts, and the potential economic impacts of different alternatives.~~June 2023 extension period. The Alternative Reference Rates Committee has identified the Secured Overnight Financing Rate (SOFR) as its preferred alternative rate for USD LIBOR. SOFR is a measure of the cost of borrowing cash overnight, collateralized by U.S. Treasury securities, and is based on directly observable U.S. Treasury-backed repurchase transactions. We are continuing to evaluate the potential impact of the replacement of the LIBOR benchmark ~~interest rate, including~~within the company’s risk management internal operational readiness and monitoring the FASB standard-setting process to address financial reporting issues that might arise in connection with transition from LIBOR to a new benchmark rate. However, it isactivities did not ~~expected to~~ 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 highlight causes and events underlying sources and uses of cash in that format on ~~page 63.~~pages 64 and 65. For the purpose of running its business, IBM manages, monitors and analyzes cash flows in a different manner.

Management uses free cash flow as a measure to evaluate its operating results, plan shareholder return levels, strategic investments and assess its ability and need to incur and service debt. The entire free cash flow amount is not

Table of Contents

Management Discussion – (continued)

necessarily available for discretionary expenditures. We 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 our ~~Global~~ Financing receivables are 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.

~~Table of Contents~~

~~Management Discussion – (continued)~~

The following is management’s view of cash flows for the first three months of ~~2021~~2022 and ~~2020~~2021 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 three months ended March 31:	2021		2020		2022		2021
Net cash from operating activities per GAAP	$	4,914	$	4,476
Less: change in Global Financing receivables		2,863		2,381
Net cash from operating activities, excluding Global Financing receivables	$	2,052	$	2,095
Net cash from operating activities per GAAP*					$	3,248	$	4,914
Less: change in Financing receivables						1,631		2,863
Net cash from operating activities, excluding Financing receivables					$	1,618	$	2,052
Capital expenditures, net		(529)		(737)		(378)		(529)
Free cash flow	$	1,522	$	1,358	$	1,240	$	1,522
Acquisitions		(1,120)		(13)		(698)		(1,120)
Divestitures		(15)		26		61		(15)
Common stock repurchases for tax withholdings		(41)		(44)		(80)		(41)
Dividends		(1,457)		(1,440)		(1,475)		(1,457)
Non-Global Financing debt		(1,725)		3,503
Other (includes Global Financing net receivables and Global Financing debt)		(166)		(382)
Non-Financing debt						4,675		(1,725)
Other (includes Financing net receivables and Financing debt)						(510)		(166)
Change in cash, cash equivalents, restricted cash and short-term marketable securities	$	(3,002)	$	3,008	$	3,213	$	(3,002)

* Includes cash flows of discontinued operations. See note 3, “Separation of Kyndryl,” for additional information.

In the first three months of ~~2021,~~2022, we generated free cash flow of ~~$1.5~~$1.2 billion, ~~an increase~~a decrease of ~~$0.2~~$0.3 billion versus the ~~prior year. The current-year period includes cash impacts from structural actions initiated by the company in the fourth quarter of 2020 and spin-off-related charges in the amount of $0.6 billion.~~prior-year period. In the first quarter of ~~2021,~~2022, we also continued to return value to shareholders with $1.5 billion in ~~dividends.~~dividends and invested $0.7 billion in acquisitions.

Events that could temporarily change the historical cash flow dynamics discussed previously and in our ~~2020~~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, 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 ~~13,~~14, “Contingencies,” in this Form 10-Q. With respect to pension funding, we expect to make legally mandated pension plan contributions to certain non-U.S. defined benefit plans of approximately ~~$300~~$200 million in ~~2021.~~2022. Contributions related to all retirement-related plans are expected to be approximately ~~$2.3~~$2.1 billion in ~~2021.~~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. We are not quantifying any further impact from pension funding because it is not possible to predict future movements in the capital markets or pension plan funding regulations.

In ~~2021,~~2022, we are not legally required to make any contributions to the U.S. defined benefit pension plans.

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

6769

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Management Discussion – (continued)

~~Global~~ Financing

~~Global~~ Financing is a reportable segment that is measured as a stand-alone entity. ~~Global~~ Financing facilitates IBM ~~clients’~~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.

Percent/

(Dollars in millions)

Margin

For the three months ended March 31:

2021

2020

Change

External revenue

$
240

$
299

(20.0)
%
Internal revenue

168

212

(20.6)

Total revenue

$
408

$
511

(20.2)
%
Pre-tax income

$
166

$
194

(14.2)
%

~~Return on Equity Calculation~~

(Dollars in millions)

For the three months ended March 31:

2021

2020

Numerator

Global Financing after-tax income*

$
123

$
192

Annualized after-tax income (1)

$
492

$
766

Denominator





Average Global Financing equity (2)**

$
2,191

$
2,610

Global Financing return on equity (1)/(2)

22.5
%

29.4
%



					Yr. to Yr.
(Dollars in millions)					Percent/
For the three months ended March 31:	2022		2021*		Change
Revenue	$	154	$	208	(26.2)	%
Pre-tax income	$	84	$	98	(14.3)	%

*	~~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.~~

**	~~Average of the ending equity for Global Financing for the last two quarters.~~

~~We have refocused our Global~~* Recast to reflect 2021 segment changes.

Our Financing business remains focused on IBM’s products and services. For the three months ended March 31, 2022, financing revenue decreased 26.2 percent (24 percent adjusted for currency) compared to the prior year, driven by client financing down $53 million to $152 million. The ~~wind down of our OEM commercial~~decrease in client financing ~~operations is complete. In 2020, we entered into agreements~~revenue was due to ~~sell~~a lower average asset balance, primarily driven by the strategic actions taken in the prior year including selling certain client financing receivables to third parties. While these strategic actions ~~continue to be a driver of the decline in external~~impact revenue and pre-tax income on a year-to-year basis, our repositioning of the ~~Global~~ Financing business has strengthened our liquidity position, improved the quality of our portfolio, and lowered our debt needs.

~~Global~~ Financing ~~total revenue~~pre-tax income decreased ~~20.2~~14.3 percent ~~in the first quarter of 2021~~to $84 million compared to the prior year and the pre-tax margin of 54.6 percent increased 7.6 points year to year. ~~External revenue decreased 20.0 percent (22 percent adjusted for currency), driven by external financing (down 21.4 percent to $185 million). Internal revenue declined 20.6 percent due to decreases~~The decrease in internal financing (down 55.5 percent to $37 million), partially offset by internal used equipment sales (up 1.8 percent to $131 million). The decreases in external and internal financing were due to lower average asset balances and yields.

Sales of used equipment of $186 million decreased 3.7 percent for the three months ended March 31, 2021 as compared to the prior-year period. The gross profit margin on used equipment sales was 54.0 percent and 52.0 percent for the three months ended March 31, 2021 and 2020, respectively.

~~Global Financing~~ pre-tax income ~~decreased 14.2 percent year to year primarily~~was driven by a ~~decline~~decrease in gross profit, ~~of $37 million due to lower revenue,~~ partially offset by a decrease in total expense, primarily as a result of ~~$10 million.~~

~~Global Financing return on equity was 22.5 percent for~~ the three months ended March 31, 2021, compared to 29.4 percent for the three months ended March 31, 2020. The decrease in return on equity in the first quarter of 2021 was driven by lower year-to-year net income.strategic actions described above.

6870

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Management Discussion – (continued)

Financial Position


	At March 31,		At December 31,		At March 31,		At December 31,
(Dollars in millions)	2021		2020		2022		2021
Cash and cash equivalents	$	1,492	$	1,862	$	825	$	1,359
Client financing receivables:
Net investment in sales-type and direct financing leases ⁽¹⁾		4,013		4,092		3,285		3,396
Client loans		9,643		11,498		7,908		8,818
Total client financing receivables		13,656		15,590	$	11,193	$	12,215
Commercial financing receivables		1,112		2,411
Held for investment						192		444
Held for sale						410		793
Other receivables		49		91		49		61
Total external receivables ⁽²⁾		14,817		18,092	$	11,843	$	13,512
Intercompany financing receivables ^{(3) (4)}		3,982		3,959		727		778
Other assets		1,424		1,162
Other assets⁽⁵⁾						1,076		1,231
Total assets	$	21,715	$	25,075	$	14,471	$	16,880

Intercompany payables ⁽³⁾	$	321	$	303	$	163	$	467
Debt ⁽⁵⁾		18,307		21,167
Debt ⁽⁶⁾						12,168		13,929
Other liabilities		1,056		1,254		788		937
Total liabilities		19,685		22,723	$	13,119	$	15,333
Total equity		2,030		2,352	$	1,352	$	1,547
Total liabilities and equity	$	21,715	$	25,075	$	14,471	$	16,880

(1)	Includes deferred initial direct costs which are expensed in IBM’s consolidated financial results.

(2)

The difference between the ~~year-to-date~~ decrease in total external receivables of ~~$3.3~~$1.7 billion (from ~~$18.1~~$13.5 billion in ~~2020~~December 2021 to ~~$14.8~~$11.8 billion in ~~2021)~~March 2022) and the ~~$2.9~~$1.6 billion change in ~~Global~~ Financing segment’s receivables disclosed in the free cash flow presentation on page 6769 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 ~~Global~~ Financing segment debt.

(5)	~~Global~~ Includes $0.6 billion of other intercompany assets in March 2022 and $0.7 billion in December 2021.

(6)	Financing segment debt is ~~comprised~~ primarily composed of intercompany loans.

Total external receivables decreased $1,669 million primarily due to collections of higher year-end balances, with corresponding reductions in debt funding.

At March 31, ~~2021, approximately 64~~2022, we continue to apply our rigorous credit policies. Approximately 68 percent of the total external portfolio was with investment-grade clients with no direct exposure to consumers, an increase of 24 points year to ~~year. We continue~~year and an increase of 1 point compared to ~~apply our rigorous credit policies, particularly in industries and countries disrupted by COVID-19, as it relates to the origination of new business.~~December 31, 2021. This investment grade percentage is based on the credit ratings of the companies in the portfolio and reflects certain mitigating ~~credit enhancement~~ actions taken ~~by the client~~ 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, with enhanced focus due to current macroeconomic uncertainty.~~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.~~

~~During~~management as well as for credit mitigation. In the ~~three months ended March 31, 2021, the company sold $995 million~~first quarter of 2022, sales of client financing receivables ~~to third parties, consisting of loan and lease receivables of $653 million and $342 million, respectively. More than half of the receivables sold~~ were ~~classified as current assets at the time of sale.~~

largely focused on credit mitigation. In addition, the company ~~sold $1,167 million of~~has an existing agreement with a third-party investor to sell IBM short-term commercial financing receivables for the three months ended March 31, 2021 to a third-party investor. The company also classified $257 million and $383 million of IBM commercial financing receivables as held for sale at March 31, 2021 and December 31, 2020, respectively, in short-term financing receivables in the Consolidated Balance Sheet. Payment terms for commercial financing receivables generally range from 30 to 90 days and may be sold to a third-party investor 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.

6971

Table of Contents

Management Discussion – (continued)

The ~~reduction~~following table presents the total amount of client and commercial financing receivables ~~due~~transferred:


(Dollars in millions)
For the three months ended March 31:	2022		2021
Client financing receivables
Lease receivables	$	15	$	342
Loan receivables		2		653
Total client financing receivables transferred	$	17	$	995
Commercial financing receivables
Receivables transferred during the period	$	1,989	$	1,167
Receivables uncollected at end of period*		724		724

*	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 March 31, 2022 and 2021.

For additional information relating to ~~these sales resulted in~~financing receivables refer to note 9, “Financing Receivables.” Refer to pages 22 through 26 for additional information related to Financing segment receivables, allowance for credit losses and debt.

Return on Equity Calculation


(Dollars in millions)
For the three months ended March 31:	2022			2021*
Numerator
Financing after-tax income**	$	69		$	73
Annualized after-tax income (1)	$	275		$	290
Denominator
Average Financing equity (2)^È	$	1,450		$	2,184
Financing return on equity (1)/(2)		19.0	%		13.3	%

*	Recast to reflect 2021 segment changes.

** Calculated based upon an estimated tax rate principally based on Financing’s geographic mix of earnings as IBM’s provision for income taxes is determined on a ~~benefit~~consolidated basis.

^È	Average of the ending equity for Financing for the last two quarters.

Return on equity was 19.0 percent compared to cash flows from operating activities, however had no impact to free cash flow. The impact to the Consolidated Income Statement, including fees and net gain or loss associated with the transfer of these receivables13.3 percent for the three months ended March 31, 2022 and 2021, respectively. The increase was ~~not material. For additional information relating~~primarily driven by a lower average equity balance, which reflects the strategic actions taken in the prior year to reposition the ~~sales of financing receivables refer to note 8, “Financing Receivables.”~~

~~Refer to pages 60 through 62 for additional information related to Global~~ Financing ~~receivables, allowance for credit losses and debt.~~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. ~~Global~~ Financing has insight into product plans and cycles for IBM products. 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.

~~Global~~ 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.

The following table presents the recorded amount of unguaranteed residual value for sales-type and direct financing leases, as well as operating leases at March 31, ~~2021~~2022 and December 31, ~~2020.~~2021. In addition, the table presents the run out of when the unguaranteed residual value assigned to equipment on leases at March 31, ~~2021 and December 31, 2020,~~2022 is expected to be returned to the ~~company~~

~~Unguaranteed Residual Value~~

At

At

Estimated Run Out of March 31, 2021 Balance

December 31,

March 31,

2024 and
(Dollars in millions)

2020

2021

2021

2022

2023

Beyond
Sales-type and direct financing leases

$
469

$
421

$
68

$
136

$
138

$
80
Operating leases

48

39

31

4

1

3
Total unguaranteed residual value

$
516

$
460

$
99

$
140

$
139

$
83

company.

7072

Table of Contents

Management Discussion – (continued)

Unguaranteed Residual Value


	At		At		Estimated Run Out of March 31, 2022 Balance
	December 31,		March 31,								2025 and
(Dollars in millions)	2021		2022		2022		2023		2024		Beyond
Sales-type and direct financing leases	$	335	$	325	$	72	$	128	$	65	$	60
Operating leases		13		10		6		2		0		2
Total unguaranteed residual value	$	348	$	335	$	78	$	130	$	65	$	62

Table of Contents

Management Discussion – (continued)

GAAP Reconciliation

The tables below provide a reconciliation of our income statement results as reported under GAAP to our operating earnings presentation which is a non-GAAP measure. Management’s calculation of operating (non-GAAP) earnings, as presented, may differ from similarly titled measures reported by other companies. ~~Refer~~Please refer to the “Operating (non-GAAP) Earnings” section for ~~the company’s~~management’s rationale for presenting operating earnings information.


				Acquisition-			Retirement-			U.S.				Spin-off-								Acquisition-			Retirement-			U.S.			Kyndryl-
(Dollars in millions except per share amounts)				Related			Related			Tax Reform				Related		Operating						Related			Related			Tax Reform			Related			Operating
For the three months ended March 31, 2021:	GAAP			Adjustments			Adjustments			Impacts				Charges		(non-GAAP)
For the three months ended March 31, 2022:																			GAAP			Adjustments			Adjustments			Impacts			Impacts			(non-GAAP)
Gross profit	$	8,204		$	175		$	—		$	—		$	3		$	8,382		$	7,335		$	181		$	—		$	—		$	—		$	7,516
Gross profit margin		46.3	%		1.0	pts.		—	pts.		—	pts.		0.0	pts.		47.3	%		51.7	%		1.3	pts.		—	pts.		—	pts.		—	pts.		52.9	%
S,G&A	$	5,174		$	(293)		$	—		$	—		$	(58)		$	4,823		$	4,597		$	(286)		$	—		$	—		$	0		$	4,311
Other (income) and expense		362			(1)			(343)			—			—			18			246			(1)			(202)			—			(222)			(179)
Total expense and other (income)		7,299			(294)			(343)			—			(58)			6,604			6,712			(287)			(202)			—			(222)			6,001
Pre-tax income from continuing operations		905			469			343			—			61			1,777			623			468			202			—			222			1,515
Pre-tax margin from continuing operations		5.1	%		2.6	pts.		1.9	pts.		—	pts.		0.3	pts.		10.0	%		4.4	%		3.3	pts.		1.4	pts.		—	pts.		1.6	pts.		10.7	%
Provision for (benefit from) income taxes*	$	(51)		$	134		$	61		$	19		$	15		$	179		$	(39)		$	109		$	58		$	116		$	—		$	244
Effective tax rate		(5.6)	%		9.0	pts.		4.5	pts.		1.1	pts.		1.0	pts.		10.1	%		(6.3)	%		9.1	pts.		4.6	pts.		7.7	pts.		0.9	pts.		16.1	%
Income from continuing operations	$	956		$	335		$	282		$	(19)		$	46		$	1,599		$	662		$	359		$	144		$	(116)		$	222		$	1,271
Income margin from continuing operations		5.4	%		1.9	pts.		1.6	pts.		(0.1)	pts.		0.3	pts.		9.0	%		4.7	%		2.5	pts.		1.0	pts.		(0.8)	pts.		1.6	pts.		9.0	%
Diluted earnings per share from continuing operations	$	1.06		$	0.37		$	0.31		$	(0.02)		$	0.05		$	1.77		$	0.73		$	0.39		$	0.16		$	(0.13)		$	0.24		$	1.40


				Acquisition-			Retirement-			U.S.				Spin-off-								Acquisition-			Retirement-			U.S.			Kyndryl-
(Dollars in millions except per share amounts)				Related			Related			Tax Reform				Related		Operating						Related			Related			Tax Reform			Related			Operating
For the three months ended March 31, 2020:	GAAP			Adjustments			Adjustments			Impacts				Charges		(non-GAAP)
For the three months ended March 31, 2021:																			GAAP			Adjustments			Adjustments			Impacts			Impacts			(non-GAAP)
Gross profit	$	7,922		$	188		$	—		$	—		$	—		$	8,110		$	7,027		$	174		$	—		$	—		$	—		$	7,201
Gross profit margin		45.1	%		1.1	pts.		—	pts.		—	pts.		—	pts.		46.2	%		53.3	%		1.3	pts.		—	pts.		—	pts.		—	pts.		54.6	%
S,G&A	$	5,955		$	(285)		$	—		$	—		$	—		$	5,670		$	4,688		$	(288)		$	—		$	—		$	—		$	4,399
Other (income) and expense		182			(1)			(264)			—			—			(83)			346			(1)			(332)			—			—			13
Total expense and other (income)		7,972			(285)			(264)			—			—			7,422			6,784			(289)			(332)			—			—			6,162
Pre-tax income/(loss) from continuing operations		(49)			473			264			—			—			688
Pre-tax income from continuing operations																				244			463			332			—			—			1,039
Pre-tax margin from continuing operations		(0.3)	%		2.7	pts.		1.5	pts.		—	pts.		—	pts.		3.9	%		1.8	%		3.5	pts.		2.5	pts.		—	pts.		—	pts.		7.9	%
Provision for (benefit from) income taxes* **	$	(1,226)		$	102		$	14		$	149		$	—		$	(961)
Provision for (benefit from) income taxes*																			$	(160)		$	132		$	33		$	19		$	—		$	25
Effective tax rate																				(65.5)	%		41.9	pts.		24.2	pts.		1.8	pts.		—	pts.		2.4	%
Income from continuing operations	$	1,176		$	371		$	250		$	(149)		$	—		$	1,649		$	403		$	330		$	299		$	(19)		$	—		$	1,013
Income margin from continuing operations		6.7	%		2.1	pts.		1.4	pts.		(0.8)	pts.		—	pts.		9.4	%		3.1	%		2.5	pts.		2.3	pts.		(0.1)	pts.		—	pts.		7.7	%
Diluted earnings per share from continuing operations	$	1.31		$	0.42		$	0.28		$	(0.17)		$	—		$	1.84		$	0.45		$	0.37		$	0.33		$	(0.02)		$	—		$	1.12

* The tax impact on operating (non-GAAP) pre-tax income/(loss) from continuing operations is calculated under the same accounting principles applied to the GAAP pre-tax income/(loss) which employs an annual effective tax rate method to the results.

** The effective tax rate is not displayed, as the calculated rate for the three months ended March 31, 2020 was not meaningful.

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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 economic environment and client spending budgets; 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; the possibility that the proposed separation of the managed infrastructure services unit of the company’s Global Technology Services segment will not be completed within the anticipated time period or at all, the possibility of disruption or unanticipated costs in connection with the proposed separation or the possibility that the separation will not achieve its intended benefits; the company’s ability to successfully manage acquisitions, alliances and dispositions, including integration challenges, failure to achieve objectives, the assumption of liabilities, and higher debt levels; fluctuations in financial results; impact of local legal, economic, political, health and other conditions; the company’s 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 employees 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 ~~from~~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; potential failure of the separation of Kyndryl to 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 or in materials incorporated therein by reference. Any 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

Item 1. Legal Proceedings

Refer to note ~~13,~~14, “Contingencies,” in 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 first quarter of ~~2021.~~2022.


				Total Number	Approximate					Total Number	Approximate
				of Shares	Dollar Value					of Shares	Dollar Value
				Purchased as	of Shares that					Purchased as	of Shares that
	Total Number	Average		Part of Publicly	May Yet Be		Total Number	Average		Part of Publicly	May Yet Be
	of Shares	Price Paid		Announced	Purchased Under		of Shares	Price Paid		Announced	Purchased Under
Period	Purchased	per Share		Program	The Program*		Purchased	per Share		Program	The Program*
January 1, 2021 - January 31, 2021	—	$	—	—	$	2,007,611,768
January 1, 2022 - January 31, 2022							—	$	—	—	$	2,007,611,768

February 1, 2021 - February 28, 2021	—	$	—	—	$	2,007,611,768
February 1, 2022 - February 28, 2022							—	$	—	—	$	2,007,611,768

March 1, 2021 - March 31, 2021	—	$	—	—	$	2,007,611,768
March 1, 2022 - March 31, 2022							—	$	—	—	$	2,007,611,768

Total	—	$	—	—			—	$	—	—

* On October 30, 2018, the Board of Directors authorized $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 March 31, ~~2021~~2022 there was approximately $2.0 billion in authorized funds remaining for purchases under this program.

Item 5. Other Information

Amendment to By-Laws

As disclosed in the company’s 2022 Proxy Statement filed on March 7, 2022, Michael L. Eskew was not a nominee for election at the company’s annual meeting of stockholders held on April 26, 2022, and his term on the Board of Directors ended. As a result, Article III, Section 2 of the company’s By-Laws was amended to decrease the number of directors to twelve, effective April 26, 2022. The full text of IBM’s By-Laws, as amended effective April 26, 2022, is included as Exhibit 3.2 to this report.

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Item 6. Exhibits


Exhibit Number

~~10.1~~3.2		~~Form~~The By-Laws of ~~LTPP equity award agreement for performance share units, effective January 1, 2021.~~IBM, as amended through April 26, 2022.

31.1		Certification by principal executive officer pursuant to Rule 13A-14(a) or 15D-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification by principal financial officer pursuant to Rule 13A-14(a) or 15D-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification by principal executive officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification by principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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

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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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.


		International Business Machines Corporation
		(Registrant)

Date:	April ~~27, 2021~~26, 2022
		By:	/s/ Robert F. Del Bene
			Robert F. Del Bene
			Vice President and Controller

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January 1, 2020		Additions / (Releases)		Write-offs		Other*		December 31, 2020
$	316	$	76	$	(46)	$	5	$	351

																	��
	Cloud &			Global			Global
	Cognitive			Business			Technology						Global			Total
(Dollars in millions)	Software			Services			Services			Systems			Financing			Segments
For the three months ended March 31, 2021:
External revenue	$	5,437		$	4,234		$	6,370		$	1,427		$	240		$	17,707
Internal revenue		832			55			313			189			168			1,557
Total revenue	$	6,269		$	4,289		$	6,683		$	1,616		$	408		$	19,264
Pre-tax income/(loss) from continuing operations	$	1,428		$	390		$	140		$	(2)		$	166		$	2,122
Revenue year-to-year change		3.6	%		2.5	%		(1.2)	%		6.6	%		(20.2)	%		1.3	%
Pre-tax income/(loss) year-to-year change		53.0	%		44.1	%		nm			nm			(14.2)	%		111.6	%
Pre-tax income/(loss) margin		22.8	%		9.1	%		2.1	%		(0.1)	%		40.8	%		11.0	%

For the three months ended March 31, 2020:
External revenue	$	5,238		$	4,136		$	6,467		$	1,368		$	299		$	17,508
Internal revenue		813			46			294			148			212			1,514
Total revenue	$	6,052		$	4,183		$	6,761		$	1,516		$	511		$	19,023
Pre-tax income/(loss) from continuing operations	$	933		$	271		$	(178)		$	(217)		$	194		$	1,003
Pre-tax income/(loss) margin		15.4	%		6.5	%		(2.6)	%		(14.3)	%		37.9	%		5.3	%


	At		At		Estimated Run Out of March 31, 2021 Balance
	December 31,		March 31,								2024 and
(Dollars in millions)	2020		2021		2021		2022		2023		Beyond
Sales-type and direct financing leases	$	469	$	421	$	68	$	136	$	138	$	80
Operating leases		48		39		31		4		1		3
Total unguaranteed residual value	$	516	$	460	$	99	$	140	$	139	$	83