~~0000051143srt:AsiaPacificMemberibm:ClientFinancingReceivablesPortfolioSegmentMemberus-gaap:FinancingReceivablesEqualToGreaterThan90DaysPastDueMember2021-06-30~~

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 ~~JUNE 30, 2021~~MARCH 31, 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).~~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 ~~896,320,073~~899,435,325 shares of common stock outstanding at ~~June 30, 2021.~~March 31, 2022.

~~Table of Contents~~

Part I - Financial Information:

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

~~INTERNATIONAL BUSINESS MACHINES CORPORATION~~

~~AND SUBSIDIARY COMPANIES~~

~~CONSOLIDATED INCOME STATEMENT~~

~~(UNAUDITED)~~

Three Months Ended June 30,

Six Months Ended June 30,
(Dollars in millions except per share amounts)

2021

2020

2021

2020
Revenue:








Services

$
11,485

$
10,937

$
22,889

$
22,311
Sales

7,018

6,918

13,101

12,813
Financing

242

268

485

570
Total revenue

18,745

18,123

36,474

35,694
Cost:








Services

7,871

7,520

15,646

15,363
Sales

1,694

1,739

3,279

3,363
Financing

176

165

341

345
Total cost

9,741

9,423

19,266

19,071
Gross profit

9,004

8,700

17,208

16,622
Expense and other (income):








Selling, general and administrative

5,334

5,248

10,508

11,203
Research, development and engineering

1,657

1,582

3,286

3,207
Intellectual property and custom development income

(135)

(203)

(282)

(319)
Other (income) and expense

315

179

676

361
Interest expense

281

323

562

649
Total expense and other (income)

7,451

7,129

14,751

15,101
Income from continuing operations before income taxes

1,552

1,571

2,457

1,522
Provision for/(benefit from) income taxes

227

209

177

(1,017)
Income from continuing operations

$
1,325

$
1,362

$
2,281

$
2,538
Income/(loss) from discontinued operations, net of tax

—

(1)

(1)

(2)
Net income

$
1,325

$
1,361

$
2,280

$
2,536

Earnings/(loss) per share of common stock:








Assuming dilution:








Continuing operations

$
1.47

$
1.52

$
2.52

$
2.83
Discontinued operations

—

0.00

0.00

0.00
Total

$
1.47

$
1.52

$
2.52

$
2.83
Basic:








Continuing operations

$
1.48

$
1.53

$
2.55

$
2.85
Discontinued operations

—

0.00

0.00

0.00
Total

$
1.48

$
1.53

$
2.55

$
2.85

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








Assuming dilution

904.2

894.9

903.0

895.0
Basic

895.0

889.4

894.3

888.7

~~(Amounts may not add due~~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 ~~rounding.)~~Consolidated Financial Statements

~~(The accompanying notes are an integral part~~9

Item 2. Management’s Discussion and Analysis of ~~the financial~~ 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 STATEMENT OF COMPREHENSIVE INCOME

(UNAUDITED)


	Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended March 31,
(Dollars in millions)	2021		2020		2021		2020		2022		2021*
Net income	$	1,325	$	1,361	$	2,280	$	2,536	$	733	$	955
Other comprehensive income/(loss), before tax:
Foreign currency translation adjustments		28		4		577		(915)		442		549
Net changes related to available-for-sale securities:
Unrealized gains/(losses) arising during the period		0		1		0		1		0		0
Reclassification of (gains)/losses to net income		—		—		—		—		—		—
Total net changes related to available-for-sale securities		0		1		0		1		0		0
Unrealized gains/(losses) on cash flow hedges:
Unrealized gains/(losses) arising during the period		(34)		(36)		153		(216)		60		187
Reclassification of (gains)/losses to net income		90		(59)		251		32		(1)		160
Total unrealized gains/(losses) on cash flow hedges		56		(94)		404		(184)		59		347
Retirement-related benefit plans:
Prior service costs/(credits)		0		—		0		(4)		(5)		0
Net (losses)/gains arising during the period		2		57		22		65		9		20
Curtailments and settlements		16		13		34		21		8		17
Amortization of prior service (credits)/costs		1		0		4		1		7		3
Amortization of net (gains)/losses		643		566		1,291		1,136		468		648
Total retirement-related benefit plans		661		637		1,350		1,219		486		689
Other comprehensive income/(loss), before tax		745		548		2,330		121		987		1,586
Income tax (expense)/benefit related to items of other comprehensive income		(140)		(21)		(645)		(281)		(285)		(505)
Other comprehensive income/(loss), net of tax		605		527		1,685		(160)		703		1,080
Total comprehensive income	$	1,930	$	1,888	$	3,965	$	2,377	$	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 June 30,

At December 31,
(Dollars in millions)

2021

2020
Assets:




Current assets:




Cash and cash equivalents

$
7,350

$
13,212
Restricted cash

215

463
Marketable securities

600

600
Notes and accounts receivable — trade (net of allowances of $300 in 2021 and $351 in 2020)

6,827

7,132
Short-term financing receivables (net of allowances of $195 in 2021 and $218 in 2020)

8,194

10,892
Other accounts receivable (net of allowances of $23 in 2021 and $28 in 2020)

802

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


Finished goods

213

190
Work in process and raw materials

1,594

1,649
Total inventory

1,807

1,839
Deferred costs

2,211

2,107
Prepaid expenses and other current assets

2,768

2,206
Total current assets

30,774

39,165
Property, plant and equipment

32,575

33,176
Less: Accumulated depreciation

23,152

23,136
Property, plant and equipment — net

9,423

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

4,387

4,686
Long-term financing receivables (net of allowances of $33 in 2021 and $45 in 2020)

5,674

7,086
Prepaid pension assets

8,046

7,610
Deferred costs

2,362

2,449
Deferred taxes

8,954

9,241
Goodwill

61,645

59,617
Intangible assets — net

13,539

13,796
Investments and sundry assets

2,010

2,282
Total assets

$
146,814

$
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 June 30,		At December 31,		At March 31,		At December 31,
(Dollars in millions except per share amounts)	2021		2020		2022		2021
Liabilities:
Current liabilities:
Taxes	$	2,260	$	3,301	$	1,798	$	2,289
Short-term debt		6,442		7,183		7,690		6,787
Accounts payable		4,214		4,908		3,453		3,955
Compensation and benefits		3,846		3,440		2,937		3,204
Deferred income		13,272		12,833		13,526		12,518
Operating lease liabilities		1,334		1,357		954		974
Other accrued expenses and liabilities		5,249		6,847		3,699		3,892
Total current liabilities		36,616		39,869		34,056		33,619
Long-term debt		48,735		54,355		46,545		44,917
Retirement and nonpension postretirement benefit obligations		17,265		18,248		13,937		14,435
Deferred income		4,113		4,301		3,423		3,577
Operating lease liabilities		3,278		3,574		2,358		2,462
Other liabilities		14,741		14,897		13,844		13,996
Total liabilities		124,747		135,244		114,162		113,005
Equity:
IBM stockholders’ equity:
Common stock, par value $0.20 per share, and additional paid-in capital		56,912		56,556		57,603		57,319
Shares authorized: 4,687,500,000
Shares issued: 2021 - 2,246,982,842
2020 - 2,242,969,004
Shares issued: 2022 - 2,250,139,983
2021 - 2,248,577,848
Retained earnings		162,086		162,717		153,401		154,209
Treasury stock - at cost		(169,404)		(169,339)		(169,422)		(169,392)
Shares: 2021 - 1,350,662,770
2020 - 1,350,315,580
Shares: 2022 - 1,350,704,659
2021 - 1,350,509,249
Accumulated other comprehensive income/(loss)		(27,652)		(29,337)		(22,532)		(23,234)
Total IBM stockholders’ equity		21,942		20,597		19,050		18,901
Noncontrolling interests		125		129		62		95
Total equity		22,067		20,727		19,112		18,996
Total liabilities and equity	$	146,814	$	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)


	Six Months Ended June 30,				Three Months Ended March 31,
(Dollars in millions)	2021		2020		2022		2021
Cash flows from operating activities:
Net income	$	2,280	$	2,536	$	733	$	955
Adjustments to reconcile net income to cash provided by operating activities
Depreciation		2,102		2,068		631		1,052
Amortization of intangibles		1,250		1,245		625		620
Stock-based compensation		457		436		234		213
Net (gain)/loss on asset sales and other		(144)		161		(51)		7
Changes in operating assets and liabilities, net of acquisitions/divestitures		1,594		1,606		1,076		2,066
Net cash provided by operating activities		7,539		8,052		3,248		4,914

Cash flows from investing activities:
Payments for property, plant and equipment		(1,054)		(1,215)		(281)		(494)
Proceeds from disposition of property, plant and equipment		215		82		72		139
Investment in software		(379)		(301)		(169)		(175)
Acquisition of businesses, net of cash acquired		(2,866)		(19)		(698)		(1,120)
Divestitures of businesses, net of cash transferred		(25)		757		61		(15)
Non-operating finance receivables — net		16		95		0		(9)
Purchases of marketable securities and other investments		(1,890)		(3,478)		(1,025)		(875)
Proceeds from disposition of marketable securities and other investments		1,312		1,942		682		549
Net cash provided by/(used in) investing activities		(4,671)		(2,138)		(1,358)		(2,000)

Cash flows from financing activities:
Proceeds from new debt		243		10,190		4,084		51
Payments to settle debt		(5,974)		(8,423)		(1,129)		(4,261)
Short-term borrowings/(repayments) less than 90 days — net		(68)		(449)		(8)		(89)
Common stock repurchases for tax withholdings		(234)		(211)		(80)		(41)
Financing — other		44		43		(15)		15
Cash dividends paid		(2,924)		(2,890)		(1,475)		(1,457)
Net cash provided by/(used in) financing activities		(8,914)		(1,739)		1,377		(5,783)

Effect of exchange rate changes on cash, cash equivalents and restricted cash		(65)		(301)		(5)		(134)
Net change in cash, cash equivalents and restricted cash		(6,110)		3,874		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 June 30	$	7,565	$	12,188
Cash, cash equivalents and restricted cash at March 31					$	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 - April 1, 2021

$
56,788

$
162,218

$
(169,360)

$
(28,257)

$
21,389

$
124

$
21,513
Net income plus other comprehensive income/(loss):














Net income



1,325





1,325



1,325
Other comprehensive income/(loss)







605

605



605
Total comprehensive income/(loss)









$
1,930



$
1,930
Cash dividends paid — common stock ($1.64 per share)



(1,467)





(1,467)



(1,467)
Common stock issued under employee plans (2,967,655 shares)

124







124



124
Purchases (1,334,081 shares) and sales (1,163,671 shares) of treasury stock under employee plans — net



11

(44)



(33)



(33)
Changes in noncontrolling interests











1

1
Equity – June 30, 2021

$
56,912

$
162,086

$
(169,404)

$
(27,652)

$
21,942

$
125

$
22,067

Common












Stock and

Accumulated

Additional

Other

Total IBM

Non-

Paid-in

Retained

Treasury

Comprehensive

Stockholders’

Controlling

Total
(Dollars in millions except per share amounts)

Capital

Earnings

Stock

Income/(Loss)

Equity

Interests

Equity
Equity - April 1, 2020

$
56,092

$
162,626

$
(169,437)

$
(29,283)

$
19,999

$
129

$
20,128
Net income plus other comprehensive income/(loss):














Net income



1,361





1,361



1,361
Other comprehensive income/(loss)







527

527



527
Total comprehensive income/(loss)









$
1,888



$
1,888
Cash dividends paid — common stock ($1.63 per share)



(1,450)





(1,450)



(1,450)
Common stock issued under employee plans (2,296,269 shares)

42







42



42
Purchases (1,311,046 shares) and sales (1,701,568 shares) of treasury stock under employee plans — net



22

50



72



72
Changes in noncontrolling interests











8

8
Equity - June 30, 2020

$
56,135

$
162,559

$
(169,386)

$
(28,757)

$
20,551

$
137

$
20,688

~~(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 – (CONTINUED)~~

~~(UNAUDITED)~~


	Common														Common
	Stock and						Accumulated								Stock and						Accumulated
	Additional						Other		Total IBM		Non-				Additional						Other		Total IBM		Non-
	Paid-in		Retained		Treasury		Comprehensive		Stockholders’		Controlling		Total		Paid-in		Retained		Treasury		Comprehensive		Stockholders’		Controlling		Total
(Dollars in millions except per share amounts)	Capital		Earnings		Stock		Income/(Loss)		Equity		Interests		Equity		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
Equity - January 1, 2022															$	57,319	$	154,209	$	(169,392)	$	(23,234)	$	18,901	$	95	$	18,996
Net income plus other comprehensive income/(loss):
Net income				2,280						2,280				2,280				733						733				733
Other comprehensive income/(loss)								1,685		1,685				1,685								703		703				703
Total comprehensive income/(loss)									$	3,965			$	3,965									$	1,436			$	1,436
Cash dividends paid — common stock ($3.27 per share)				(2,924)						(2,924)				(2,924)
Common stock issued under employee plans (4,013,839 shares)		355								355				355
Purchases (1,673,587 shares) and sales (1,326,397 shares) of treasury stock under employee plans — net				13		(65)				(51)				(51)
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												(4)		(4)												(33)		(33)
Equity - June 30, 2021	$	56,912	$	162,086	$	(169,404)	$	(27,652)	$	21,942	$	125	$	22,067
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



2,536





2,536



2,536
Other comprehensive income/(loss)







(160)

(160)



(160)
Total comprehensive income/(loss)









$
2,377



$
2,377
Cash dividends paid — common stock ($3.25 per share)



(2,890)





(2,890)



(2,890)
Common stock issued under employee plans (3,231,755 shares)

239







239



239
Purchases (1,621,500 shares) and sales (1,858,039 shares) of treasury stock under employee plans — net



24

26



50



50
Changes in noncontrolling interests











(7)

(7)
Equity - June 30, 2020

$
56,135

$
162,559

$
(169,386)

$
(28,757)

$
20,551

$
137

$
20,688

* Reflects the adoption of the FASB guidance on current expected 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 ofof 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.~~ expense in the Consolidated Income Statement. Refer to note 8, “Financial Assets & Liabilities,” for additional information.

The ~~new company will be named Kyndryl. The~~accounting requirements for reporting the separation ~~is expected to be achieved through~~of Kyndryl as a ~~U.S. federal tax-free spin-off to IBM shareholders and completed by~~discontinued operation were met when the ~~end~~separation wascompleted. Accordingly, the 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 Kyndryl 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.

~~For the three and six months ended June 30, 2021, the company reported a provision for income taxes of $227 million and $177 million, respectively. The company reported a tax benefit in~~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, ~~which was primarily driven by~~immediately prior to the ~~resolution~~separation of ~~certain tax audit matters.~~ 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 ~~and six~~ months ended ~~June 30, 2020,~~March 31, 2022, the company ~~reported a provision for income taxes of $209 million and~~recorded a benefit from income taxes of ~~$1,017~~$39 million ~~respectively.~~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 $160 million and its effective tax rate was (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 in the first quarter of 2020.~~tax audits.

Noncontrolling interest amounts of ~~$6.5 million and $6.8~~$4.9 million, net of tax, for both the three months ended ~~June 30,~~March 31, 2022 and 2021 ~~and 2020, respectively, and $14.1 million and $11.3 million, net of tax, for the six months ended June 30, 2021 and 2020, respectively,~~ 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~~prior period amounts have been reclassified to conform to the ~~current-period~~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.

~~Table of Contents~~

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

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.

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, with amendments in 2021. This guidance provides optional expedients and exceptions for applying GAAP to contract modifications, hedging relationships, and other transactions that reference London Interbank Offered Rate (LIBOR) or another reference rate expected to be discontinued, subject to meeting certain criteria.

~~Effective Date and Adoption Considerations~~~~–The guidance is effective as of March 12, 2020 through December 31, 2022.~~

~~Effect on Financial Statements or Other Significant Matters~~–The company made a policy election 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 has evaluated the replacement of the LIBOR benchmark on its interest rate risk management activities and does not expect it to have a material impact in the consolidated financial results.

~~Simplifying 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 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.

3. Separation of Kyndryl:

On November 3, 2021, the company completed the separation of its managed infrastructure services unit into a new public company with the distribution of 80.1 percent of the outstanding shares of Kyndryl to IBM stockholders on a pro rata basis. The company retained 19.9 percent of the shares of Kyndryl common stock. 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, as such, have been excluded from continuing operations and segment results for all periods presented.

The company’s presentation of discontinued operations excludes general corporate overhead costs which were historically allocated to Kyndryl, consistent with the company’s management system, that do not meet the requirements to be presented in discontinued operations. Such allocations include labor and non-labor expenses related to IBM’s corporate support functions (e.g. finance, accounting, tax, treasury, IT, HR, legal, among others) that historically provided support to Kyndryl and transferred to Kyndryl at separation. In addition, discontinued operations excludes the historical intercompany purchases and sales between IBM and Kyndryl that were eliminated in consolidation.

Separation costs of $3 million and $50 million incurred during the three months ended March 31, 2022 and 2021, respectively, are included in income from discontinued operations, net of tax, in the Consolidated Income Statement. These charges primarily relate to transaction and third-party support costs, business separation and applicable employee retention fees, pension settlement charges and related tax charges.

IBM will provide transition services to Kyndryl predominantly consisting of information technology services for a period no longer than two years after the separation. The impact of these transition services on the company’s Consolidated Financial Statements for the three 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 separation, IBM has also committed to provide Kyndryl upgraded hardware at no cost to Kyndryl over a two-year period after the separation. The total estimate of IBM’s obligation under the agreement at both March 31, 2022 and

Table of Contents

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

Three Months Ended June 30,

Six Months Ended June 30,

(Dollars in millions)

2021

2020

2021

2020

Cloud & Data Platforms

$
3,120

$
2,797

$
5,986

$
5,333

Cognitive Applications

1,391

1,246

2,624

2,428

Transaction Processing Platforms

1,587

1,706

2,925

3,226

Total Cloud & Cognitive Software

$
6,098

$
5,748

$
11,534

$
10,987

Consulting

2,236

1,936

4,425

4,007

Application Management

1,821

1,734

3,591

3,573

Global Process Services

284

221

559

447

Total Global Business Services

$
4,341

$
3,890

$
8,575

$
8,027

Infrastructure & Cloud Services

4,836

4,813

9,689

9,729

Technology Support Services

1,506

1,503

3,023

3,054

Total Global Technology Services

$
6,342

$
6,316

$
12,712

$
12,783

Systems Hardware

1,384

1,488

2,498

2,484

Operating Systems Software

333

365

646

736

Total Systems

$
1,717

$
1,852

$
3,144

$
3,220

Global Financing*

242

265

482

564

Other

5

50

28

113

Total revenue

$
18,745

$
18,123

$
36,474

$
35,694


(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


	Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in millions)	2021		2020		2021		2020
For the three months ended March 31:									2022		2021
Americas	$	8,820	$	8,450	$	16,999	$	16,617	$	7,056	$	6,477
Europe/Middle East/Africa		6,038		5,695		11,679		11,212		4,231		3,928
Asia Pacific		3,887		3,977		7,797		7,865		2,910		2,781
Total	$	18,745	$	18,123	$	36,474	$	35,694	$	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.~~

1213

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 ~~June 30, 2021,~~March 31, 2022, the aggregate amount of the transaction price allocated to RPO related to customer contracts that are unsatisfied or partially unsatisfied was ~~$115~~$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 ~~and six~~ months ended ~~June 30, 2021,~~March 31, 2022, revenue was reduced by ~~$34~~$29 million ~~and $47 million, respectively,~~ for performance obligations satisfied (or partially satisfied) in previous periods mainly due to changes in estimates on contracts with cost-to-cost measures of progress.

Reconciliation of Contract Balances

The following table provides information about notes and accounts receivable–trade, contract assets and deferred income balances:


	At June 30,		At December 31,		At March 31,		At December 31,
(Dollars in millions)	2021		2020		2022		2021
Notes and accounts receivable–trade (net of allowances of $300 in 2021 and $351 in 2020)	$	6,827	$	7,132
Notes and accounts receivable — trade (net of allowances of $225 in 2022 and $218 in 2021)					$	5,963	$	6,754
Contract assets*		547		497		517		471
Deferred income (current)		13,272		12,833		13,526		12,518
Deferred income (noncurrent)		4,113		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 ~~and six~~ months ended ~~June 30, 2021~~March 31, 2022 that was included within the deferred income balance at ~~March~~December 31, 2021 ~~and December 31, 2020~~ was ~~$4.9~~$4.0 billion ~~and $7.2 billion, respectively,~~ and was primarily related to services and software.

The following table provides roll forwards of the notes and accounts receivable–trade allowance for expected credit losses for the ~~six~~three months ended ~~June 30, 2021~~March 31, 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*		June 30, 2021
January 1, 2022										January 1, 2022	Additions / (Releases)		Write-offs		Foreign currency and other		March 31, 2022
$	351	$	(37)	$	(15)	$	1	$	300	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.

1315

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 June 30, 2021:













External revenue

$
6,098

$
4,341

$
6,342

$
1,717

$
242

$
18,740

Internal revenue

726

58

326

241

260

1,611

Total revenue

$
6,824

$
4,399

$
6,668

$
1,958

$
502

$
20,351

Pre-tax income from continuing operations

$
1,720

$
371

$
381

$
176

$
246

$
2,894

Revenue year-to-year change

5.1
%

11.5
%

0.7
%

(6.4)
%

(0.7)
%

3.5
%
Pre-tax income year-to-year change

0.7
%

2.5
%

52.3
%

(28.8)
%

39.3
%

5.5
%
Pre-tax income margin

25.2
%

8.4
%

5.7
%

9.0
%

48.9
%

14.2
%

For the three months ended June 30, 2020:













External revenue

$
5,748

$
3,890

$
6,316

$
1,852

$
265

$
18,072

Internal revenue

743

55

304

240

241

1,582

Total revenue

$
6,491

$
3,945

$
6,621

$
2,092

$
506

$
19,655

Pre-tax income from continuing operations

$
1,708

$
362

$
250

$
248

$
176

$
2,744

Pre-tax income margin

26.3
%

9.2
%

3.8
%

11.8
%

34.9
%

14.0
%


													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 June 30:	2021		2020
For the three months ended March 31:					2022		2021*
Revenue:
Total reportable segments	$	20,351	$	19,655	$	13,973	$	12,902
Other — divested businesses		0		13
Other ‒ divested businesses						154		197
Other revenue		5		37		70		87
Eliminations of internal transactions		(1,611)		(1,582)
Total consolidated revenue	$	18,745	$	18,123	$	14,197	$	13,187

Pre-tax income from continuing operations:
Total reportable segments	$	2,894	$	2,744	$	1,766	$	1,325
Amortization of acquired intangible assets		(462)		(472)		(461)		(447)
Acquisition-related (charges)/income		(18)		(1)		(7)		(16)
Non-operating retirement-related (costs)/income		(328)		(273)		(202)		(332)
Separation-related charges		(175)		—
Elimination of internal transactions		(139)		(121)
Other — divested businesses		(15)		(22)
Unallocated corporate amounts		(205)		(283)
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	$	1,552	$	1,571	$	623	$	244

*	Recast to conform to current year presentation.

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

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, 2022, the company completed 3 acquisitions at an aggregate cost of $798 million. Each acquisition is expected to enhance the company’s portfolio of products and services capabilities and further advance IBM’s hybrid cloud and AI strategy.

Table of Contents

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 remaining cash to be remitted by the company related to certain first quarter 2022 acquisitions was $113 million, most of which is expected to be paid by the first quarter of 2023.

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


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

N/A - not applicable

The goodwill generated is primarily attributable to the assembled workforce of the acquired businesses and the increased synergies expected to be achieved from the integration of the acquired businesses into the company’s various integrated solutions and services, neither of which qualifies as an amortizable intangible asset.

The overall weighted-average useful life of the identified amortizable intangible assets acquired was 6.7 years. Goodwill of $461 million and $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.

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.

1417

Table of Contents

Notes to Consolidated Financial Statements — (continued)

Divestitures

In first quarter of 2022, the Infrastructure segment completed 1 divestiture. The financial terms related to this transaction 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 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 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.

Table of Contents

Notes to Consolidated Financial Statements — (continued)

~~SEGMENT INFORMATION~~7.

Cloud &

Global

Global









Cognitive

Business

Technology

Global

Total

(Dollars in millions)

Software

Services

Services

Systems

Financing

Segments

For the six months ended June 30, 2021:













External revenue

$
11,534

$
8,575

$
12,712

$
3,144

$
482

$
36,447

Internal revenue

1,558

113

639

430

428

3,168

Total revenue

$
13,093

$
8,688

$
13,351

$
3,574

$
910

$
39,615

Pre-tax income from continuing operations

$
3,147

$
761

$
520

$
174

$
412

$
5,015

Revenue year-to-year change

4.4
%

6.9
%

(0.2)
%

(1.0)
%

(10.5)
%

2.4
%
Pre-tax income year-to-year change

19.2
%

20.3
%

624.6
%

466.3
%

11.3
%

33.9
%
Pre-tax income margin

24.0
%

8.8
%

3.9
%

4.9
%

45.3
%

12.7
%

For the six months ended June 30, 2020:













External revenue

$
10,987

$
8,027

$
12,783

$
3,220

$
564

$
35,581

Internal revenue

1,556

101

599

388

453

3,096

Total revenue

$
12,543

$
8,128

$
13,382

$
3,608

$
1,017

$
38,677

Pre-tax income from continuing operations

$
2,641

$
633

$
72

$
31

$
370

$
3,747

Pre-tax income margin

21.1
%

7.8
%

0.5
%

0.9
%

36.4
%

9.7
%

~~Reconciliations to IBM as Reported:~~

(Dollars in millions)






For the six months ended June 30:

2021

2020

Revenue:





Total reportable segments

$
39,615

$
38,677

Other — divested businesses

1

32

Other revenue

27

81

Eliminations of internal transactions

(3,168)

(3,096)

Total consolidated revenue

$
36,474

$
35,694

Pre-tax income from continuing operations:





Total reportable segments

$
5,015

$
3,747

Amortization of acquired intangible assets

(914)

(945)

Acquisition-related (charges)/income

(34)

(2)

Non-operating retirement-related (costs)/income

(670)

(538)

Separation-related charges

(236)

—

Eliminations of internal transactions

(212)

(176)

Other — divested businesses

(24)

3

Unallocated corporate amounts

(468)

(568)

Total pre-tax income from continuing operations

$
2,457

$
1,522

~~Table of Contents~~

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

5. ~~Acquisitions & Divestitures:~~

~~Acquisitions~~

Purchase price consideration for all acquisitions was paid primarily in cash. All acquisitions, except as otherwise stated, were for 100 percent of the acquired business and are reported in the Consolidated Statement of Cash Flows, net of acquired cash and cash equivalents.

During the six months ended June 30, 2021, the company completed 7 acquisitions at an aggregate cost of $2,940 million. Each acquisition is expected to enhance the company’s portfolio of products and services capabilities and further advance IBM’s hybrid cloud and AI strategy.

~~Acquisition~~	~~Segment~~	~~Description of Acquired Business~~
~~First Quarter~~

~~Nordcloud~~	~~Global Business Services~~	~~Consulting company providing services in cloud implementation, application transformation and managed services~~

~~Taos Mountain, LLC (Taos)~~	~~Global Business Services~~	~~Leading cloud professional and managed services provider~~

~~StackRox~~	~~Cloud & Cognitive Software~~	~~Innovator in container and Kubernetes-native security~~
~~Second Quarter~~

~~Turbonomic, Inc. (Turbonomic)~~	~~Cloud & Cognitive Software~~	~~Application Resource Management and Network Performance Management software provider~~

~~ECX Copy Data Management business~~	~~Cloud & Cognitive Software~~	~~Smart data protection solution~~
~~from Catalogic Software, Inc.~~

~~Waeg~~	~~Global Business Services~~	~~Leading Salesforce Consulting Partner~~

~~myInvenio~~	~~Cloud & Cognitive Software~~	~~Process mining software company~~

On June 16, 2021, the company completed the acquisition of Turbonomic, a privately held company, for cash consideration of $1,834 million of which $120 million was unremitted as of June 30, 2021. Of the amount outstanding, $70 million was recorded as restricted cash in the Consolidated Balance Sheet and is expected to be paid in the third quarter of 2021, with the remaining $50 million expected to be paid by December 31, 2022.

The purchase consideration for the acquisition of Nordcloud includes a fair value estimate of contingent consideration to be paid annually through the first quarter of 2024 upon achieving certain revenue milestones. The annual payments are not expected to be material.

~~Table of Contents~~

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

~~The following table reflects the purchase price related to these acquisitions and the resulting purchase price allocations as of June 30, 2021.~~

Amortization

Other
(Dollars in millions)

Life (in years)

Turbonomic

Acquisitions
Current assets

$
126

$
85
Property, plant and equipment/noncurrent assets

—

5
Intangible assets:

Goodwill

N/A

1,444

833
Client relationships

7

290

144
Completed technology

4-7

117

131
Trademarks

1-7

18

27
Total assets acquired

$
1,996

$
1,225
Current liabilities

49

52
Noncurrent liabilities

113

67
Total liabilities assumed

$
161

$
119
Total purchase price

$
1,834

$
1,105

~~N/A – not applicable~~

The goodwill generated is primarily attributable to the assembled workforce of the acquired businesses and the increased synergies expected to be achieved from the integration of the acquired businesses into the company’s various integrated solutions and services neither of which qualifies as an amortizable intangible asset.

~~Turbonomic~~—The overall weighted-average useful life of the identified amortizable intangible assets acquired was 6.9 years. Goodwill of $1,377 million and $67 million was assigned to the Cloud & Cognitive Software and Global Business Services segments, respectively. It is expected that NaN of the goodwill will be deductible for tax purposes.

~~Other acquisitions~~—The overall weighted-average useful life of the identified amortizable intangible assets acquired was 6.4 years. Goodwill of $549 million, $283 million and $2 million was assigned to the Global Business Services, Cloud & Cognitive Software and Global Technology Services segments, respectively. It is expected that approximately 10 percent of the goodwill will be deductible for tax purposes.

On July 15, 2021, the company announced its intent to acquire Bluetab Solutions Group, S.L. (Bluetab), a privately held IT Services provider serving large corporations in the highly specialized Data Solutions space. The acquisition is expected to close in the third quarter of 2021, subject to customary closing conditions, including regulatory clearance. Upon closing, Bluetab will be integrated into the Global Business Services segment.

~~Divestitures~~

~~In the second quarter of 2021, the Cloud & Cognitive Software segment completed 1 divestiture. The financial terms related to this transaction were not material.~~

In the fourth quarter of 2020, the company entered into a definitive agreement to sell certain remaining OEM commercial financing capabilities reported within the Global Financing segment. The financial terms related to this transaction are not material. The transaction is expected to be completed in the second half of 2021.

~~Table of Contents~~

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

6. Earnings Per Share of Common Stock:

The following ~~tables provide~~table provides the computation of basic and diluted earnings per share of common stock for the three ~~and six~~ months ended ~~June 30, 2021~~March 31, 2022 and ~~2020.~~2021.


(Dollars in millions except per share amounts)
For the three months ended June 30:	2021		2020
For the three months ended March 31:					2022		2021
Number of shares on which basic earnings per share is calculated:
Weighted-average shares outstanding during period		895,043,024		889,435,166		899,316,026		893,630,916
Add — Incremental shares under stock-based compensation plans		7,431,661		4,290,365		8,375,246		6,622,441
Add — Incremental shares associated with contingently issuable shares		1,758,754		1,213,549		1,534,864		1,492,709
Number of shares on which diluted earnings per share is calculated		904,233,439		894,939,080		909,226,136		901,746,065

Income from continuing operations	$	1,325	$	1,362	$	662	$	403
Income/(loss) from discontinued operations, net of tax		—		(1)
Income from discontinued operations, net of tax						71		552
Net income on which basic earnings per share is calculated	$	1,325	$	1,361	$	733	$	955

Income from continuing operations	$	1,325	$	1,362	$	662	$	403
Net income applicable to contingently issuable shares		—		—		—		—
Income from continuing operations on which diluted earnings per share is calculated	$	1,325	$	1,362	$	662	$	403
Income/(loss) from discontinued operations, net of tax, on which basic and diluted earnings per share is calculated		—		(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	$	1,325	$	1,361	$	733	$	955

Earnings/(loss) per share of common stock:
Assuming dilution
Continuing operations	$	1.47	$	1.52	$	0.73	$	0.45
Discontinued operations		—		0.00		0.08		0.61
Total	$	1.47	$	1.52	$	0.81	$	1.06
Basic
Continuing operations	$	1.48	$	1.53	$	0.74	$	0.45
Discontinued operations		—		0.00		0.08		0.62
Total	$	1.48	$	1.53	$	0.82	$	1.07

Stock options to purchase ~~375,990~~1,163,321 shares and ~~1,511,989~~1,510,886 shares were outstanding as of ~~June 30,~~March 31, 2022 and 2021, ~~and 2020,~~ 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.

~~Table of Contents~~

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

(Dollars in millions except per share amounts)

For the six months ended June 30:

2021

2020
Number of shares on which basic earnings per share is calculated:




Weighted-average shares outstanding during period

894,336,970

888,702,256
Add — Incremental shares under stock-based compensation plans

7,027,051

5,015,390
Add — Incremental shares associated with contingently issuable shares

1,625,732

1,271,513
Number of shares on which diluted earnings per share is calculated

902,989,752

894,989,159

Income from continuing operations

$
2,281

$
2,538
Income/(loss) from discontinued operations, net of tax

(1)

(2)
Net income on which basic earnings per share is calculated

$
2,280

$
2,536

Income from continuing operations

$
2,281

$
2,538
Net income applicable to contingently issuable shares

—

(2)
Income from continuing operations on which diluted earnings per share is calculated

$
2,281

$
2,536
Income/(loss) from discontinued operations, net of tax, on which basic and diluted earnings per share is calculated

(1)

(2)
Net income on which diluted earnings per share is calculated

$
2,280

$
2,534

Earnings/(loss) per share of common stock:




Assuming dilution




Continuing operations

$
2.52

$
2.83
Discontinued operations

0.00

0.00
Total

$
2.52

$
2.83
Basic




Continuing operations

$
2.55

$
2.85
Discontinued operations

0.00

0.00
Total

$
2.55

$
2.85

Stock options to purchase 943,438 shares and 1,324,444 shares (average of first and second quarter share amounts) were outstanding as of June 30, 2021 and 2020, 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 1–1—Quoted prices (unadjusted) in active markets for identical assets or liabilities that can be accessed at the measurement date;

Table of Contents

Notes to Consolidated Financial Statements — (continued)

●

Level 2–2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and

●

Level 3–3—Unobservable inputs for the asset or liability.

~~Table of Contents~~

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

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 ~~impairments~~impairment for credit losses and no material non-credit impairments were recorded for the three ~~and six~~ months ended ~~June 30,~~March 31, 2022 and 2021, ~~and 2020,~~ 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 ~~and six~~ months ended ~~June 30,~~March 31, 2022 and 2021, ~~and 2020,~~ respectively.

Table of Contents

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 ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021.


	Fair Value									Fair Value
	Hierarchy	At June 30, 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	$	3,453	$	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		$	3,593	$	N/A	$	8,316	$	N/A		$	6,268	$	N/A	$	2,766	$	N/A
Equity investments (3)	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		18		—		100		—	2		11		6		12		—
Foreign exchange contracts	2		372		126		111		580	2		505		179		359		117
Derivatives not designated as hedging instruments:
Foreign exchange contracts	2		12		13		13		47	2		19		30		21		42
Equity contracts (6)	1,2		4		3		12		—	1,2		5		17		6		4
Total		$	4,606	$	142	$	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)	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 ~~June 30, 2021~~March 31, 2022 were ~~$352~~$511 million and ~~$55~~$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 ~~June 30, 2021~~March 31, 2022 were ~~$79~~$117 million and ~~$62~~$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

Table of Contents

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 ~~June 30, 2021~~March 31, 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 ~~$48,735~~$46,545 million and ~~$54,355~~$44,917 million, and the estimated fair value was ~~$54,231~~$47,896 million and ~~$61,598~~$49,465 million at ~~June 30, 2021~~March 31, 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 June 30, 2021:

(Loans)

Leases

Receivables

Total
Financing receivables, gross

$
9,776

$
3,576

$
1,019

$
14,370
Unearned income

(400)

(267)

0

(667)
Residual value*

—

392

—

392
Amortized cost

$
9,376

$
3,701

$
1,019

$
14,096
Allowance for credit losses

(151)

(70)

(6)

(228)
Total financing receivables, net

$
9,225

$
3,631

$
1,012

$
13,868
Current portion

$
5,614

$
1,567

$
1,012

$
8,194
Noncurrent portion

$
3,610

$
2,064

$
—

$
5,674


	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.

Table of Contents

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 ~~$366~~$386 million and ~~$482~~$408 million at ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively. These borrowings are included in note ~~11,~~12, “Borrowings.”

Transfer of Financial Assets

~~For the six months ended June 30,~~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 $2,091 million~~sales of client financing receivables ~~to third parties, consisting of loan and lease receivables of $1,359 million and $732 million, respectively. More than half~~were utilized as part of the ~~receivables sold were classified~~company’s cash and liquidity management as ~~current assets at~~well as for credit mitigation. In the ~~time~~first quarter of ~~sale. For the six months ended June 30, 2020, the company sold $711 million~~2022, sales of client financing receivables ~~to third parties, consisting of loan and lease receivables of $294 million and $417 million, respectively.~~

~~On December 24, 2020,~~were 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 $2,621 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 six months ended June 30, 2021. In addition, the company included $467 million and $383 million of commercial financing receivables classified as held for sale at June 30, 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. The company did 0t have any sales of commercial financing receivables for the six months ended June 30, 2020.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. The cash proceeds from the sales are included in cash flows from operating activities and the impacts to the Consolidated Income ~~Statement, including fees and net gain or loss associated with the transfers of these receivables for the six months ended June 30, 2021 and June 30, 2020, were not material.~~

~~Financing Receivables by Portfolio Segment~~

The following tables present the amortized cost basis of client financing receivables at June 30, 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.

Table of Contents

Notes to Consolidated Financial Statements — (continued)

(Dollars in millions)












At June 30, 2021:

Americas

EMEA

Asia Pacific

Total
Amortized cost

$
6,538

$
4,039

$
2,500

$
13,077
Allowance for credit losses:








Beginning balance at January 1, 2021

$
141

$
77

$
37

$
255
Write-offs

$
(4)

$
(1)

$
(7)

$
(12)
Recoveries

0

0

1

1
Additions/(releases)

(16)

(2)

(4)

(22)
Other*

1

(2)

0

(1)
Ending balance at June 30, 2021

$
122

$
73

$
26

$
221

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 December 31, 2020:	Americas		EMEA		Asia Pacific		Total
At March 31, 2022:									Americas		EMEA		Asia Pacific		Total
Amortized cost	$	7,758	$	5,023	$	3,042	$	15,822	$	6,116	$	3,333	$	1,900	$	11,349
Allowance for credit losses:
Beginning balance at January 1, 2020	$	142	$	69	$	41	$	252
Beginning balance at January 1, 2022									$	111	$	61	$	23	$	195
Write-offs	$	(28)	$	(3)	$	(3)	$	(34)	$	(15)	$	0	$	(2)	$	(17)
Recoveries		0		0		2		3		1		0		0		1
Additions/(releases)		33		5		(4)		34		(5)		(3)		(1)		(8)
Other*		(6)		6		1		1		3		(1)		0		2
Ending balance at December 31, 2020	$	141	$	77	$	37	$	255
Ending balance at March 31, 2022									$	95	$	56	$	21	$	172


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

* Primarily represents translation adjustments.

~~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 June 30, 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.

Table of Contents

Notes to Consolidated Financial Statements — (continued)

Past Due Financing Receivables

The company summarizes information about the amortized cost basis offor 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 June 30, 2021:	Cost		> 90 Days (1)		Accruing (1)		Accruing		Accruing (2)
At March 31, 2022:											Cost		> 90 Days (1)		Accruing (1)		Accruing		Accruing (2)
Americas	$	6,538	$	343	$	251	$	9	$	95	$	6,116	$	356	$	282	$	8	$	77
EMEA		4,039		103		15		4		92		3,333		97		7		2		90
Asia Pacific		2,500		33		10		3		23		1,900		45		26		2		19
Total client financing receivables	$	13,077	$	479	$	276	$	16	$	210	$	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 offor 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 ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively. Financing income recognized on these receivables was immaterial for the three ~~and six~~ months ended ~~June 30,~~March 31, 2022 and 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 offor client financing receivables by credit quality indicator at ~~June 30, 2021~~March 31, 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 June 30, 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	$	1,339	$	757	$	664	$	607	$	428	$	167		2,110		869		914		544		444		175
2020		1,514		668		796		614		549		158		845		363		404		282		338		78
2019		751		360		391		389		421		90		450		194		206		241		256		41
2018		528		227		250		144		317		99		223		91		104		65		182		52
2017		176		91		33		80		131		33
2016 and prior		46		80		24		46		78		29
2017 and prior														81		64		23		82		79		29
Total	$	4,355	$	2,183	$	2,159	$	1,880	$	1,924	$	576	$	4,221	$	1,896	$	1,940	$	1,393	$	1,477	$	423

Table of Contents

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 ~~six~~three months ended ~~June 30, 2021~~March 31, 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:


	Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in millions)	2021		2020		2021		2020
Lease income – sales-type and direct financing leases:
For the three months ended March 31:									2022		2021
Lease income — sales-type and direct financing leases:
Sales-type lease selling price	$	394	$	368	$	757	$	579	$	54	$	360
Less: Carrying value of underlying assets*		103		117		162		194		(19)		(57)
Gross profit	$	291	$	251	$	595	$	385	$	36	$	304
Interest income on lease receivables		47		65		98		139		45		51
Total sales-type and direct financing lease income	$	338	$	316	$	693	$	524	$	81	$	354
Lease income – operating leases		47		68		99		139
Lease income — operating leases										30		51
Variable lease income		22		27		79		58		28		57
Total lease income	$	408	$	411	$	871	$	721	$	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.

Table of Contents

Notes to Consolidated Financial Statements — (continued)

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

Intangible Assets

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


	At June 30, 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	$	1,866	$	(863)	$	1,002	$	1,805	$	(729)	$	1,076
Client relationships		9,183		(2,517)		6,666		9,013		(3,017)		5,996
Completed technology		6,090		(1,939)		4,151		6,092		(2,427)		3,665
Patents/trademarks		2,228		(520)		1,708		2,192		(624)		1,567
Other**		56		(43)		12		38		(30)		8
Total	$	19,421	$	(5,882)	$	13,539	$	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 ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020 included~~2021 include a decrease in net intangible asset balances of ~~$109~~$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 ~~$257~~$199 million during the first ~~six~~three months of ~~2021,~~2022, primarily due to intangible asset amortization, partially offset by additions of acquired intangibles and capitalized software. The aggregate intangible ~~asset~~ amortization expense was ~~$630~~$625 million and ~~$1,251~~$614 million for the ~~second quarter~~quarters ended March 31, 2022 and ~~first six months of~~ 2021, ~~respectively, compared to $623 million and $1,245 million for the second quarter and first six months of 2020,~~ respectively. In the first ~~six~~three months of ~~2021,~~2022, the company retired ~~$420~~$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 ~~was~~is estimated to be the following at ~~June 30, 2021:~~March 31, 2022:


	Capitalized		Acquired				Capitalized		Acquired
(Dollars in millions)	Software		Intangibles		Total		Software		Intangibles		Total
Remainder of 2021	$	330	$	956	$	1,287
2022		418		1,843		2,261
Remainder of 2022							$	459	$	1,377	$	1,836
2023		217		1,530		1,748		404		1,535		1,938
2024		37		1,481		1,518		203		1,487		1,690
2025		—		1,460		1,460		10		1,470		1,480
2026								0		1,453		1,453
Thereafter		—		5,267		5,267		0		3,915		3,915

Table of Contents

Notes to Consolidated Financial Statements — (continued)

Goodwill

The changes in the goodwill balances by segment for the ~~six~~three months ended ~~June 30, 2021~~March 31, 2022 and for the year ended December 31, ~~2020 were~~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			Divestitures	Adjustments*		6/30/2021		1/1/2022		Additions		Adjustments		Divestitures		Adjustments*		3/31/2022
Cloud & Cognitive Software	$	43,934	$	1,660	$	6	$	(2)	$	(136)	$	45,461
Global Business Services		6,145		616		(11)		—		(43)		6,706
Global Technology Services		7,245		2		—		—		(62)		7,184
Systems		2,293		—		0		—		0		2,293
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	$	2,278	$	(6)	$	(2)	$	(242)	$	61,645	$	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			Divestitures	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.
**
Recast to conform to current year presentation due to segment change.

There were 0 goodwill impairment losses recorded during the first ~~six~~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 ~~six~~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 induring the first ~~six~~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 June 30,		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		6,406		7,053
Long-term debt — current maturities						7,676		6,764
Total	$	6,442	$	7,183	$	7,690	$	6,787

The weighted-average interest rate for short-term loans was ~~5.1~~4.4 percent and ~~5.7~~6.7 percent at ~~June 30, 2021~~March 31, 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	6/30/2021		12/31/2020		Maturities	3/31/2022		12/31/2021
U.S. dollar debt (weighted-average interest rate at June 30, 2021):*
0.8%	2021	$	1,117	$	5,499
2.6%	2022		5,696		6,233
U.S. dollar debt (weighted-average interest rate at March 31, 2022):*
2.7%						2022	$	4,661	$	5,673
3.4%	2023		1,600		2,395	2023		1,563		1,573
3.3%	2024		5,021		5,029	2024		5,014		5,016
6.8%	2025		621		631
6.9%						2025		607		608
3.3%	2026		4,505		4,370	2026		4,354		4,356
3.0%	2027		2,222		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
		$	35,624	$	41,218		$	35,062	$	34,290
Other currencies (weighted-average interest rate at June 30, 2021, in parentheses):*
Other currencies (weighted-average interest rate at March 31, 2022, in parentheses):*
Euro (1.1%)	2021–2040	$	17,797	$	18,355	2023–2040	$	17,783	$	15,903
Pound sterling (2.6%)	2022		414		411	2022		395		406
Japanese yen (0.3%)	2022–2026		1,311		1,409	2022–2026		1,198		1,263
Other (5.9%)	2021–2025		306		324
Other (13.8%)						2022–2025		384		378
		$	55,452	$	61,718		$	54,821	$	52,240
Finance lease obligations (1.4%)	2021–2030		349		296
Finance lease obligations (1.9%)						2022–2030		100		99
		$	55,800	$	62,013		$	54,921	$	52,339
Less: net unamortized discount			860		875			849		839
Less: net unamortized debt issuance costs			142		156			142		130
Add: fair value adjustment**			342		426			291		311
		$	55,140	$	61,408		$	54,221	$	51,681
Less: current maturities			6,406		7,053			7,676		6,764
Total		$	48,735	$	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 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

Table of Contents

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 ~~June 30, 2021, were~~March 31, 2022, are as follows:


(Dollars in millions)			Total
At June 30, 2021:	Total
Remainder of 2021	$	2,470
2022		6,862
Remainder of 2022			$	5,668
2023		5,016		4,807
2024		6,498		6,364
2025		4,219		3,943
2026				4,700
Thereafter		30,734		29,440
Total	$	55,800	$	54,921

Interest on Debt


(Dollars in millions)
For the six months ended June 30:	2021		2020
For the three months ended March 31:					2022		2021
Cost of financing	$	210	$	237	$	82	$	106
Interest expense		562		649		311		280
Interest capitalized		3		5		2		2
Total interest paid and accrued	$	775	$	891	$	395	$	388

Lines of Credit

~~On June 22, 2021, the~~The company ~~entered into~~has a ~~new~~ $2.5 billion Three-Year Credit Agreement and a $7.5 billion Five-Year Credit Agreement ~~to replace the existing $2.5 billion Three-Year and $10.25 billion Five-Year Credit Agreements. The~~with maturity dates ~~for the new Three-Year and Five-Year Credit Agreements (the Credit Agreements) are~~of June 21, 2024 and June 22, 2026, respectively. The Credit Agreements permit the company and its subsidiary borrowers to borrow up to $10 billion on a revolving basis. In connection with entering into the Credit Agreements, the company also terminated its $2.5 billion 364-Day Credit Agreement scheduled to expire on July 1, 2021. Subject to certain conditions stated in the Credit Agreements, the company may borrow, prepay and re-borrow amounts under the Credit Agreements at any time during the term of such agreements. Funds borrowed may be used for the general corporate purposes of the company.

~~Table of Contents~~

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

Interest rates on borrowings under the Credit Agreements will be based on prevailing market interest rates, as further described in the Credit Agreements. The Credit Agreements contain customary representations and warranties, covenants, events of default, and indemnification provisions.

At ~~June 30, 2021,~~March 31, 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 ~~$1.5 billion and $2.1~~$1.7 billion at ~~June 30, 2021~~March 31, 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 ~~$4.8~~$2.9 billion and ~~$5.2~~$3.2 billion at ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020,~~ 2021,

Table of Contents

Notes to Consolidated Financial Statements — (continued)

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 ~~June 30, 2021.~~March 31, 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 ~~June 30, 2021~~March 31, 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.

~~Table of Contents~~

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

Standard Warranty Liability


(Dollars in millions)	2021		2020		2022		2021
Balance at January 1	$	83	$	113	$	77	$	83
Current period accruals		36		43		14		16
Accrual adjustments to reflect actual experience		(2)		(14)		(2)		(4)
Charges incurred		(45)		(49)		(20)		(23)
Balance at June 30	$	73	$	93
Balance at March 31					$	69	$	72

Table of Contents

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		50		93		18		18
Amortization of deferred revenue		(104)		(115)		(44)		(53)
Other*		(5)		(9)		(1)		(6)
Balance at June 30	$	367	$	445
Balance at March 31					$	323	$	383
Current portion	$	184	$	216	$	155	$	199
Noncurrent portion	$	183	$	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 ~~June 30, 2021~~March 31, 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.

~~Table of Contents~~

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

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 required IBM to pay approximately $20 million in damages, plus interest and litigation costs. ~~CISGIL was granted permission to appeal and the matter is now pending at~~In April 2022, the Court of Appeal ~~in London.~~

~~Table~~awarded CISGIL additional damages of ~~Contents~~approximately $89 million, plus interest and litigation costs. IBM intends to seek appeal of the judgment.

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

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~~$1.5 billion. On September 14, 2021, the court ruled on GF’s motion to dismiss. On April 7, 2022, the Appellate Division unanimously reversed the lower court’s dismissal of IBM’s fraud claim. IBM’s claims for breaches of contract, promissory estoppel, and fraud are proceeding.

On April 5, 2022, a putative securities law class action was commenced in the United States District Court for the Southern District of New York alleging that during the period from April 4, 2017 through October 20, 2021, certain strategic imperatives revenues were misclassified. The company, 2 current IBM senior executives, and 2 former IBM senior executives are named as defendants. On March 25, 2022, the Board of Directors received a shareholder demand letter making similar allegations and demanding that the company’s Board of Directors take action to assert the company’s rights. A special committee of independent directors has been formed to investigate the issues raised in the letter.

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.

~~Table of Contents~~

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

~~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 June 30, 2021:	Amount		Benefit			Amount
For the three months ended March 31, 2022:								Amount		Benefit		Amount
Other comprehensive income/(loss):
Foreign currency translation adjustments	$	28	$	44		$	72	$	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	$	(34)	$	9		$	(26)	$	60	$	(16)	$	44
Reclassification of (gains)/losses to:					��
Cost of services		(7)		2			(5)		(15)		4		(11)
Cost of sales		10		(3)			8		(12)		4		(9)
Cost of financing		6		(1)			4		5		(1)		4
SG&A expense		16		(4)			12		(6)		2		(4)
Other (income) and expense		49		(12)			37		7		(2)		5
Interest expense		16		(4)			12		21		(5)		15
Total unrealized gains/(losses) on cash flow hedges	$	56	$	(14)		$	42	$	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		2		10			11		9		(4)		5
Curtailments and settlements		16		(5)			11		8		(2)		6
Amortization of prior service (credits)/costs		1		1			1		7		(2)		5
Amortization of net (gains)/losses		643		(175)			467		468		(131)		337
Total retirement-related benefit plans	$	661	$	(170)		$	491	$	486	$	(134)	$	352
Other comprehensive income/(loss)	$	745	$	(140)		$	605	$	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.

~~Table of Contents~~

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

~~Reclassifications and Taxes Related to Items of Other Comprehensive Income~~

(Dollars in millions)

Before Tax

Tax (Expense)/

Net of Tax
For the three months ended June 30, 2020:

Amount

Benefit

Amount
Other comprehensive income/(loss):






Foreign currency translation adjustments

$
4

$
135

$
139
Net changes related to available-for-sale securities:






Unrealized gains/(losses) arising during the period

$
1

$
0

$
1
Reclassification of (gains)/losses to other (income) and expense

—

—

—
Total net changes related to available-for-sale securities

$
1

$
0

$
1
Unrealized gains/(losses) on cash flow hedges:






Unrealized gains/(losses) arising during the period

$
(36)

$
9

$
(26)
Reclassification of (gains)/losses to:

Cost of services

1

0

1
Cost of sales

(9)

3

(7)
Cost of financing

7

(2)

5
SG&A expense

(7)

2

(5)
Other (income) and expense

(70)

18

(52)
Interest expense

19

(5)

15
Total unrealized gains/(losses) on cash flow hedges

$
(94)

$
25

$
(70)
Retirement-related benefit plans (1):






Prior service costs/(credits)

$
—

$
0

$
0
Net (losses)/gains arising during the period

57

(22)

35
Curtailments and settlements

13

(4)

9
Amortization of prior service (credits)/costs

0

1

1
Amortization of net (gains)/losses

566

(155)

411
Total retirement-related benefit plans

$
637

$
(180)

$
457
Other comprehensive income/(loss)

$
548

$
(21)

$
527

~~(1)~~

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

3634

Table of Contents

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 six months ended June 30, 2021:	Amount		Benefit		Amount
For the three months ended March 31, 2021:							Amount		Benefit		Amount
Other comprehensive income/(loss):
Foreign currency translation adjustments	$	577	$	(184)	$	393	$	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	$	153	$	(39)	$	114	$	187	$	(47)	$	140
Reclassification of (gains)/losses to:
Cost of services		(21)		5		(16)		(14)		3		(10)
Cost of sales		32		(8)		24		22		(6)		16
Cost of financing		12		(3)		9		6		(2)		4
SG&A expense		31		(8)		23		15		(4)		11
Other (income) and expense		165		(41)		123		116		(29)		87
Interest expense		31		(8)		24		16		(4)		12
Total unrealized gains/(losses) on cash flow hedges	$	404	$	(102)	$	301	$	347	$	(88)	$	259
Retirement-related benefit plans (1):
Prior service costs/(credits)	$	0	$	0	$	0	$	0	$	0	$	0
Net (losses)/gains arising during the period		22		4		25		20		(6)		14
Curtailments and settlements		34		(10)		23		17		(5)		12
Amortization of prior service (credits)/costs		4		0		4		3		0		3
Amortization of net (gains)/losses		1,291		(352)		938		648		(177)		471
Total retirement-related benefit plans	$	1,350	$	(359)	$	991	$	689	$	(189)	$	500
Other comprehensive income/(loss)	$	2,330	$	(645)	$	1,685	$	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.

3735

Table of Contents

Notes to Consolidated Financial Statements — (continued)

~~Reclassifications and Taxes Related to Items of Other Comprehensive Income~~

(Dollars in millions)

Before Tax

Tax (Expense)/

Net of Tax
For the six months ended June 30, 2020:

Amount

Benefit

Amount
Other comprehensive income/(loss):






Foreign currency translation adjustments

$
(915)

$
13

$
(902)
Net changes related to available-for-sale securities:




Unrealized gains/(losses) arising during the period

$
1

$
0

$
1
Reclassification of (gains)/losses to other (income) and expense

—

—

—
Total net changes related to available-for-sale securities

$
1

$
0

$
1
Unrealized gains/(losses) on cash flow hedges:






Unrealized gains/(losses) arising during the period

$
(216)

$
55

$
(162)
Reclassification of (gains)/losses to:

Cost of services

(9)

2

(6)
Cost of sales

(18)

5

(13)
Cost of financing

15

(4)

11
SG&A expense

(17)

4

(13)
Other (income) and expense

19

(5)

15
Interest expense

41

(10)

31
Total unrealized gains/(losses) on cash flow hedges

$
(184)

$
47

$
(137)
Retirement-related benefit plans (1):






Prior service costs/(credits)

$
(4)

$
1

$
(3)
Net (losses)/gains arising during the period

65

(24)

41
Curtailments and settlements

21

(6)

15
Amortization of prior service (credits)/costs

1

1

2
Amortization of net (gains)/losses

1,136

(312)

824
Total retirement-related benefit plans

$
1,219

$
(341)

$
879
Other comprehensive income/(loss)

$
121

$
(281)

$
(160)

~~(1)~~

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

Accumulated Other Comprehensive Income/(Loss) (net of tax)


					Net Change		Net Unrealized								Net Change		Net Unrealized
	Net Unrealized		Foreign		Retirement-		Gains/(Losses)		Accumulated		Net Unrealized		Foreign		Retirement-		Gains/(Losses)		Accumulated
	Gains/(Losses)		Currency		Related		on Available-		Other		Gains/(Losses)		Currency		Related		on Available-		Other
	on Cash Flow		Translation		Benefit		For-Sale		Comprehensive		on Cash Flow		Translation		Benefit		For-Sale		Comprehensive
(Dollars in millions)	Hedges		Adjustments*		Plans		Securities		Income/(Loss)		Hedges		Adjustments*		Plans		Securities		Income/(Loss)
January 1, 2021	$	(456)	$	(4,665)	$	(24,216)	$	0	$	(29,337)
January 1, 2022											$	(18)	$	(3,362)	$	(19,854)	$	(1)	$	(23,234)
Other comprehensive income before reclassifications		114		393		25		0		532		44		306		5		0		355
Amount reclassified from accumulated other comprehensive income		187		—		966		—		1,153		0		—		348		—		348
Total change for the period	$	301	$	393	$	991	$	0	$	1,685	$	44	$	306	$	352	$	0	$	703
June 30, 2021	$	(155)	$	(4,271)	$	(23,225)	$	(1)	$	(27,652)
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.

~~Table of Contents~~

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

Net Change

Net Unrealized



Net Unrealized

Foreign

Retirement-

Gains/(Losses)

Accumulated

Gains/(Losses)

Currency

Related

on Available-

Other

on Cash Flow

Translation

Benefit

For-Sale

Comprehensive
(Dollars in millions)

Hedges

Adjustments*

Plans

Securities

Income/(Loss)
January 1, 2020

$
(179)

$
(3,700)

$
(24,718)

$
0

$
(28,597)
Other comprehensive income before reclassifications

(162)

(902)

38

1

(1,025)
Amount reclassified from accumulated other comprehensive income

25

—

841

—

866
Total change for the period

$
(137)

$
(902)

$
879

$
1

$
(160)
June 30, 2020

$
(316)

$
(4,602)

$
(23,839)

$
1

$
(28,757)

*~~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 right to reclaim cash collateral was $3 million and $4$2 million, ~~was~~respectively. At March 31, 2022 and December 31, 2021, the amount recognized asin accounts payable for the obligation to return cash collateral ~~at June 30, 2021. NaN amounts were recognized for the right to reclaim or the obligation to return cash collateral at December 31, 2020.~~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 June 30, 2021~~At March 31, 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 ~~June 30,~~ March 31~~2021~~, 2022 and December 31~~2020,~~, 2021, the total derivative asset and liability positions each would have been reduced by ~~$105~~$95 million and ~~$213~~$60 million, respectively.

Table of Contents

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 ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, the total notional amount of the company’s interest-rate

~~Table of Contents~~

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

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 ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021 was approximately ~~1.7~~5.0 years and 1.2 years, respectively. These interest-rate contracts were accounted for as fair value hedges. The company did 0tnot have any cash flow hedges relating to this program outstanding at ~~June 30, 2021~~March 31, 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 ~~June 30, 2021~~March 31, 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 ~~$166~~$152 million and ~~$174~~$157 million ~~(before taxes)~~ at ~~June 30, 2021~~March 31, 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 ~~June 30, 2021~~March 31, 2022 will be reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying interest payments.

Foreign Exchange Risk

Long-Term Investments in Foreign Subsidiaries (Net Investment)

A large portion of the company’s foreign currency denominated debt portfolio is designated as a hedge of net investment in foreign subsidiaries to reduce the volatility in stockholders’ equity caused by changes in foreign currency exchange rates in the functional currency of major foreign subsidiaries with respect to the U.S. dollar. At ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, the carrying value of debt designated as hedging instruments was ~~$15.8~~$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 ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, the total notional amount of derivative instruments designated as net investment hedges was ~~$7.9~~$5.7 billion and ~~$7.2~~$6.8 billion, respectively. At ~~June 30, 2021~~both March 31, 2022 and December 31, ~~2020,~~2021, the weighted-average remaining maturity of these instruments was approximately 0.1 ~~years and 0.3 years, respectively.~~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 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 ~~June 30, 2021~~March 31, 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 ~~$7.0~~$7.9 billion and ~~$8.0~~$7.2 billion, respectively. At ~~June 30, 2021~~both March 31, 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 ~~June 30, 2021~~March 31, 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 ~~$170~~$338 million and ~~net losses of $192~~$315 million, ~~(before taxes),~~ respectively, in AOCI. The company estimates that ~~$94~~$263 million ~~(before taxes)~~ of deferred net gains (before taxes) on derivatives in AOCI at ~~June 30, 2021~~March 31, 2022 will be reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying anticipated transactions.

~~Table of Contents~~

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

Foreign Currency Denominated Borrowings

The company is exposed to exchange rate volatility on foreign currency denominated debt. To manage this risk, the company employs cross-currency swaps to convert fixed-rate foreign currency denominated debt to fixed-rate debt denominated in the functional currency of the borrowing entity. These swaps are accounted for as cash flow hedges. At ~~June 30, 2021,~~March 31, 2022, the maximum length of time remaining over which the company hedged its exposure is approximately ~~seven~~ six years. At ~~June 30, 2021~~March 31, 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.

InAt March 31, 2022 and December 31, 2021, in connection with cash flow hedges of foreign currency denominated borrowings, the company recorded net losses (before taxes) of ~~$203~~$141 million and ~~$236~~$174 million, ~~(before taxes) at June 30, 2021 and December 31, 2020,~~ respectively, in AOCI. The company estimates that $25 million ~~(before taxes)~~ of deferred net ~~losses~~gains (before taxes) on derivatives in AOCI at ~~June 30, 2021~~March 31, 2022 will be reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying exposure.

Subsidiary Cash and Foreign Currency Asset/Liability Management

The company uses its Global Treasury Centers to manage the cash of its subsidiaries. These centers principally use currency swaps to convert cash flows in a cost-effective manner. In addition, the company uses foreign exchange forward contracts to economically hedge, on a net basis, the foreign currency exposure of a portion of the company’s nonfunctional currency assets and liabilities. The terms of these forward and swap contracts are generally less than one year. The changes in the fair values of these contracts and of the underlying hedged exposures are generally offsetting and are recorded in other (income) and expense in the Consolidated Income Statement. At ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, the total notional amount of derivative instruments in economic hedges of foreign currency exposure was ~~$4.9~~$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 ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, the total notional amount of derivative instruments in economic hedges of these compensation obligations was ~~$1.4~~$1.3 billion and ~~$1.3~~$1.4 billion, respectively.

4138

Table of Contents

Notes to Consolidated Financial Statements — (continued)

Cumulative Basis Adjustments for Fair Value Hedges

At ~~June 30, 2021~~March 31, 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:


	June 30,		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	$	(767)	$	(2,097)	$	(2,480)	$	(508)
Cumulative hedging adjustments included in the carrying amount — assets/(liabilities)*		(342)		(424)		(290)		(309)

* Includes ($~~327)~~289) million and ($~~353)~~302) million of hedging adjustments on discontinued hedging relationships at ~~June 30, 2021~~March 31, 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 June 30:	2021		2020		2021		2020
For the three months ended March 31:									2022		2021			2022		2021
Cost of services	$	7,871	$	7,520	$	7	$	(1)	$	5,349	$	4,644		$	15	$	14
Cost of sales		1,694		1,739		(10)		9		1,415		1,379	*		12		(22)
Cost of financing		176		165		0		2		98		137	*		(2)		2
SG&A expense		5,334		5,248		67		157		4,597		4,688			(70)		34
Other (income) and expense		315		179		(79)		92		246		346			(102)		(160)
Interest expense		281		323		(1)		7		311		280			(6)		5

* Reclassified to conform to current year presentation.

4239

Table of Contents

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 June 30:	Line Item	2021		2020		2021		2020
For the three months ended March 31:										Line Item	2022		2021		2022		2021
Derivative instruments in fair value hedges (1):
Interest rate contracts	Cost of financing	$	0	$	3	$	4	$	3	Cost of financing	$	(1)	$	(1)	$	4	$	7
	Interest expense		0		8		11		8	Interest expense		(4)		(1)		16		18
Derivative instruments not designated as hedging instruments:
Foreign exchange contracts	Other (income) and expense		(30)		22		N/A		N/A	Other (income) and expense		(95)		(44)		N/A		N/A
Equity contracts	SG&A expense		83		150		N/A		N/A	SG&A expense		(76)		49		N/A		N/A
Total		$	54	$	183	$	15	$	11		$	(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 June 30:	2021		2020		Line Item	2021		2020		2021		2020
ended March 31:														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		(34)		(36)	Cost of services		7		(1)		—		—		60		187	Cost of services		15		14		—		—
					Cost of sales		(10)		9		—		—					Cost of sales		12		(22)		—		—
					Cost of financing		(5)		(6)		—		—					Cost of financing		(5)		(5)		—		—
					SG&A expense		(16)		7		—		—					SG&A expense		6		(15)		—		—
					Other (income) and expense		(49)		70		—		—					Other (income) and expense		(7)		(116)		—		—
					Interest expense		(12)		(16)		—		—					Interest expense		(17)		(13)		—		—
Instruments in net investment hedges (4):
Foreign exchange contracts		(177)		(535)	Cost of financing		—		—		1		4		541		907	Cost of financing		—		—		1		2
					Interest expense		—		—		4		10					Interest expense		—		—		2		4
Total	$	(211)	$	(571)		$	(90)	$	59	$	5	$	14	$	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, 2022 and 2021, there were no material gains or losses excluded from the assessment of hedge effectiveness (for fair value or cash flow hedges), or associated with an underlying exposure that did not or was not expected to occur (for cash flow hedges); nor are there any anticipated in the normal course of business.

Gains/(Losses) of

(Dollars in millions)

Total

Total Hedge Activity

For the six months ended June 30:

2021

2020

2021

2020

Cost of services

$
15,646

$
15,363

$
21

$
9

Cost of sales

3,279

3,363

(32)

18

Cost of financing

341

345

2

6

SG&A expense

10,508

11,203

101

(34)

Other (income) and expense

676

361

(239)

(9)

Interest expense

562

649

4

16

4340

Table of Contents

Notes to Consolidated Financial Statements — (continued)

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:	2022		2021
Cost	$	40	$	34
Selling, general and administrative		136		115
Research, development and engineering		57		49
Pre-tax stock-based compensation cost	$	234	$	198
Income tax benefits		(57)		(48)
Total net stock-based compensation cost	$	177	$	149

Pre-tax stock-based compensation cost for the three months ended March 31, 2022 increased $36 million compared to the corresponding period in the prior year, including increases in stock options ($5 million), performance share units ($3 million) and restricted stock units ($28 million). The increases primarily relate to a change in the timing of the company’s executive grant cycle in 2022.

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

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

Effective April 1, 2022, the company increased the discount for eligible participants under its Employees Stock Purchase Plan (ESPP) from 5 percent to 15 percent off the average market price on the date of purchase. With this change, the ESPP is considered compensatory under the accounting requirements for stock-based compensation.

Table of Contents

Notes to Consolidated Financial Statements — (continued)

Gain (Loss) Recognized in Consolidated Income Statement

Consolidated

Recognized on

Attributable to Risk
(Dollars in millions)

Income Statement

Derivatives

Being Hedged (2)
For the six months ended June 30:

Line Item

2021

2020

2021

2020
Derivative instruments in fair value hedges (1):














Interest rate contracts

Cost of financing

$
0

$
21

$
11

$
(11)

Interest expense

(1)

56

29

(29)
Derivative instruments not designated as hedging instruments:










Foreign exchange contracts

Other (income) and expense

(74)

10

N/A

N/A
Equity contracts

SG&A expense

133

(51)

N/A

N/A
Total



$
57

$
37

$
40

$
(39)

Gain (Loss) Recognized in Consolidated Income Statement and Other Comprehensive Income

(Dollars in millions)

Consolidated

Reclassified

Amounts Excluded from

For the six months

Recognized in OCI

Income Statement

from AOCI

Effectiveness Testing (3)

ended June 30:

2021

2020

Line Item

2021

2020

2021

2020

Derivative instruments in cash flow hedges:















Interest rate contracts

$
—

$
—

Cost of financing

$
(2)

$
(2)

$
—

$
—

Interest expense

(6)

(6)

—

—

Foreign exchange contracts

153

(216)

Cost of services

21

9

—

—

Cost of sales

(32)

18

—

—

Cost of financing

(9)

(13)

—

—

SG&A expense

(31)

17

—

—

Other (income) and expense

(165)

(19)

—

—

Interest expense

(25)

(35)

—

—

Instruments in net investment hedges (4):















Foreign exchange contracts

730

(50)

Cost of financing

—

—

3

11

Interest expense

—

—

8

30

Total

$
883

$
(266)



$
(251)

$
(32)

$
11

$
41

~~(1)~~

The amount includes changes in clean fair values of the derivative instruments in fair value hedging relationships and the periodic accrual for coupon payments required under these derivative contracts.

~~(2)~~

The amount includes basis adjustments to the carrying value of the hedged item recorded during the period and amortization of basis adjustments recorded on de-designated hedging relationships during the period.

~~(3)~~

~~The company’s policy is to recognize all fair value changes in amounts excluded from effectiveness testing in net income each period.~~

~~(4)~~

~~Instruments in net investment hedges include derivative and non-derivative instruments with the amounts recognized in OCI providing an offset to the translation of foreign subsidiaries.~~

~~N/A - not applicable~~

For the three and six months ended June 30, 2021 and 2020, 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.

~~Table of Contents~~

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

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

Three Months Ended June 30,

Six Months Ended June 30,
(Dollars in millions)

2021

2020

2021

2020
Cost

$
41

$
40

$
82

$
67
Selling, general and administrative

152

155

275

272
Research, development and engineering

50

52

99

97
Pre-tax stock-based compensation cost

$
243

$
247

$
457

$
436
Income tax benefits

(69)

(52)

(121)

(96)
Total net stock-based compensation cost

$
175

$
196

$
336

$
340

Pre-tax stock-based compensation cost for the three months ended June 30, 2021 decreased $4 million compared to the corresponding period in the prior year. This was primarily due to decreases from performance share units ($8 million), partially offset by increases from restricted stock units ($3 million).

Pre-tax stock-based compensation cost for the six months ended June 30, 2021 increased $21 million compared to the corresponding period in the prior year. This was primarily due to increases related to restricted stock units ($10 million) and performance share units ($9 million).

~~Total unrecognized compensation cost related to non-vested awards at June 30, 2021 was $1.5 billion and is expected to be recognized over a weighted-average period of approximately 2.3 years.~~

~~Capitalized stock-based compensation cost was not material at June 30, 2021 and 2020.~~

~~17.~~18. Retirement-Related Benefits:

The company offers defined benefit (DB) pension plans, defined contribution pension plans, as well as nonpension postretirement plans primarily consisting of retiree medical benefits. The following tables provide the pre-tax cost for all retirement-related plans.

Yr. to Yr.

(Dollars in millions)

Percent

For the three months ended June 30:

2021

2020

Change

Retirement-related plans — cost:







Defined benefit and contribution pension plans — cost

$
653

$
596

9.6
%
Nonpension postretirement plans — cost

45

50

(10.4)

Total

$
698

$
645

8.1
%


					Yr. to Yr.						Yr. to Yr.
(Dollars in millions)					Percent						Percent
For the six months ended June 30:	2021		2020		Change
For the three months ended March 31:							2022		2021		Change
Retirement-related plans — cost:
Defined benefit and contribution pension plans — cost	$	1,325	$	1,179	12.4	%	$	478	$	619	(22.8)	%
Nonpension postretirement plans — cost		89		102	(12.5)			33		44	(25.0)
Total	$	1,414	$	1,281	10.4	%	$	510	$	663	(23.0)	%

~~Table of Contents~~

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

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

Cost/(Income) of Pension Plans

(Dollars in millions)

U.S. Plans

Non-U.S. Plans
For the three months ended June 30:

2021

2020

2021

2020
Service cost

$
—

$
—

$
95

$
95
Interest cost (1)

277

375

112

137
Expected return on plan assets (1)

(451)

(542)

(291)

(311)
Amortization of prior service costs/(credits) (1)

4

4

(4)

(5)
Recognized actuarial losses (1)

249

207

370

340
Curtailments and settlements (1)

—

—

16

13
Multi-employer plans

—

—

7

7
Other costs/(credits) (1)

—

—

3

9
Total net periodic pension (income)/cost of defined benefit plans

$
80

$
44

$
308

$
284
Cost of defined contribution plans

151

154

114

113
Total defined benefit and contribution pension plans cost recognized in the Consolidated Income Statement

$
231

$
198

$
422

$
397


(Dollars in millions)	U.S. Plans				Non-U.S. Plans				U.S. Plans				Non-U.S. Plans
For the six months ended June 30:	2021		2020		2021		2020
For the three months ended March 31:									2022		2021		2022		2021
Service cost	$	—	$	—	$	187	$	190	$	—	$	—	$	64	$	65
Interest cost (1)		555		750		223		266		302		277		139		108
Expected return on plan assets (1)		(901)		(1,084)		(581)		(620)		(475)		(451)		(274)		(279)
Amortization of prior service costs/(credits) (1)		8		8		(6)		(9)		2		4		4		(2)
Recognized actuarial losses (1)		498		415		745		682		179		249		278		356
Curtailments and settlements (1)		—		—		34		21		—		—		8		17
Multi-employer plans		—		—		15		14		—		—		4		6
Other costs/(credits) (1)		—		—		15		14		—		—		9		11
Total net periodic pension (income)/cost of defined benefit plans	$	160	$	89	$	630	$	559	$	8	$	80	$	231	$	283
Cost of defined contribution plans		302		309		234		223		141		151		98		105
Total defined benefit and contribution pension plans cost recognized in the Consolidated Income Statement	$	462	$	398	$	864	$	782	$	149	$	231	$	328	$	388

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

~~Table of Contents~~

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

The following ~~tables provide~~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
For the three months ended June 30:

2021

2020

2021

2020
Service cost

$
2

$
2

$
1

$
1
Interest cost (1)

16

26

8

8
Expected return on plan assets (1)

—

—

(1)

(1)
Amortization of prior service costs/(credits) (1)

1

1

0

0
Recognized actuarial losses (1)

13

7

4

5
Curtailments and settlements (1)

—

—

0

—
Total nonpension postretirement plans cost recognized in the Consolidated Income Statement

$
32

$
36

$
13

$
14


(Dollars in millions)	U.S. Plan				Non-U.S. Plans				U.S. Plan				Non-U.S. Plans
For the six months ended June 30:	2021		2020		2021		2020
For the three months ended March 31:									2022		2021		2022		2021
Service cost	$	4	$	4	$	2	$	3	$	1	$	2	$	1	$	1
Interest cost (1)		32		51		16		18		18		16		9		8
Expected return on plan assets (1)		—		—		(2)		(2)		—		—		0		(1)
Amortization of prior service costs/(credits) (1)		2		2		0		0		1		1		0		0
Recognized actuarial losses (1)		26		15		8		11		2		13		1		4
Curtailments and settlements (1)		—		—		0		0		—		—		—		—
Total nonpension postretirement plans cost recognized in Consolidated Income Statement	$	64	$	72	$	25	$	29
Total nonpension postretirement plans cost recognized in the Consolidated Income Statement									$	23	$	32	$	10	$	12

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

Table of Contents

Notes to Consolidated Financial Statements — (continued)

The company does not anticipate any significant changes to the expected plan contributions in ~~2021~~2022 from the amounts disclosed in the ~~2020~~2021 Annual Report.

The table below includes contributions to the following plans:



(Dollars in millions)	Plan Contributions				Plan Contributions
For the six months ended June 30:		2021	2020
U.S. nonpension postretirement benefit plan	$	191	$	200
Non-U.S. DB and multi-employer plans *		46		111
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	$	237	$	311	$	154	$	170

* Amounts reported net of refunds.
*
Amounts reported net of refunds.

During the ~~six~~three months ended ~~June 30,~~March 31, 2022 and 2021, ~~and 2020,~~ the company contributed ~~$235~~$105 million and ~~$250~~$150 million of ~~U.S.~~U.S Treasury Securities, respectively, to the non-U.S. DB plans and ~~U.S.~~ nonpension postretirement benefit plans. Additionally, during the ~~six~~three months ended ~~June 30,~~March 31, 2022 and 2021, ~~and 2020,~~ the company contributed ~~$249~~$156 million and ~~$160~~$129 million inof U.S. Treasury ~~securities,~~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 ~~July 27, 2021,~~April 26, 2022, the company announced that the Board of Directors approved aan increase in the quarterly dividend ~~of $1.64~~to $1.65 per common share. The dividend is payable ~~September~~June 10, ~~2021~~2022 to shareholders of record on ~~August~~May 10, ~~2021.~~2022.

4743

Table of Contents

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

FOR THE THREE ~~AND SIX~~ MONTHS ENDED ~~JUNE 30, 2021~~MARCH 31, 2022

Snapshot

Financial Results Summary — Three Months Ended ~~June 30:~~March 31:


							Yr. to Yr.								Yr. to Yr.
							Percent/								Percent/
(Dollars and shares in millions except per share amounts)							Margin								Margin
For the three months ended June 30:	2021			2020			Change
For the three months ended March 31:									2022			2021			Change
Revenue	$	18,745		$	18,123		3.4	%*	$	14,197		$	13,187		7.7	%*
Gross profit margin		48.0	%		48.0	%	0.0	pts.		51.7	%		53.3	%	(1.6)	pts.
Total expense and other (income)	$	7,451		$	7,129		4.5	%	$	6,712		$	6,784		(1.1)	%
Income from continuing operations before income taxes	$	1,552		$	1,571		(1.2)	%	$	623		$	244		156.0	%
Provision for income taxes from continuing operations	$	227		$	209		8.8	%
Provision for/(benefit from) income taxes from continuing operations									$	(39)		$	(160)		(75.5)	%
Income from continuing operations	$	1,325		$	1,362		(2.7)	%	$	662		$	403		64.3	%
Income from continuing operations margin		7.1	%		7.5	%	(0.4)	pts.		4.7	%		3.1	%	1.6	pts.
Income from discontinued operations, net of tax									$	71		$	552		(87.2)	%
Net income	$	1,325		$	1,361		(2.7)	%	$	733		$	955		(23.3)	%
Earnings per share from continuing operations - assuming dilution	$	1.47		$	1.52		(3.3)	%	$	0.73		$	0.45		62.2	%
Consolidated earnings per share - assuming dilution									$	0.81		$	1.06		(23.6)	%
Weighted-average shares outstanding - assuming dilution		904.2			894.9		1.0	%		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	%

* ~~(0.6)~~10.9 percent adjusted for ~~currency; (0.5) percent excluding divested businesses and adjusted for~~ currency.

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 Kyndryl 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.

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

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 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.”

~~Table of Contents~~

~~Management Discussion – (continued)~~

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 impacts from the Kyndryl ~~separation-related charges~~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 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 Kyndryl is included in both earnings from continuing operations and in operating (non-GAAP) earnings.with the intent to dispose of such shares within twelve months after the distribution. For acquisitions, operating (non-GAAP) earnings exclude the amortization of purchased intangible assets and acquisition-related charges such as in-process research and development, transaction costs, applicable retention, restructuring and related expenses, 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.

4946

Table of Contents

Management Discussion – (continued)

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

Yr. to Yr.

(Dollars in millions except per share amounts)

Percent

For the three months ended June 30:

2021

2020

Change

Net income as reported

$
1,325

$
1,361

(2.7)
%
Income/(loss) from discontinued operations, net of tax

—

(1)

(100.0)

Income from continuing operations

$
1,325

$
1,362

(2.7)
%
Non-operating adjustments (net of tax):





Acquisition-related charges

$
373

$
365

2.0
%
Non-operating retirement-related costs/(income)

261

222

17.4

U.S. tax reform impacts

14

—

nm

Separation-related charges

131

—

nm

Operating (non-GAAP) earnings*

$
2,103

$
1,949

7.9
%
Diluted operating (non-GAAP) earnings per share*

$
2.33

$
2.18

6.9
%

* Refer to page 89 for a more detailed reconciliation of net income to operating earnings and operating earnings per share.

~~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 on technology, particularly hybrid cloud and AI technologies 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 to apply AI, automation 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 from the pandemic to differ by geography and industry. However, the~~ spending environment continues to improve, and we remain focused on providing the ~~economy is reopening~~technology and consulting services that our clients need to accelerate their digital organizations and emerge from the pandemic even stronger.

Financial Performance Summary — Three Months Ended March 31:

In the first quarter of 2022, we reported $14.2 billion in ~~many parts~~revenue, income from continuing operations of $0.7 billion and operating (non-GAAP) earnings of $1.3 billion. Diluted earnings per share from continuing operations was $0.73 as reported and $1.40 on an operating (non-GAAP) basis. On a consolidated basis, we generated $3.2 billion in cash from operations and $1.2 billion in free cash flow and delivered shareholder returns of $1.5 billion in dividends. These results reflect progress in 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 ~~world,~~flexibility to support our business needs.

Total revenue grew 7.7 percent as reported and 11 percent adjusted for currency compared to the prior-year 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 strong double-digit growth in Red Hat. Transaction Processing 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 reported and was flat adjusted for currency, with 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 segments, total hybrid cloud revenue of $5.0 billion in the first quarter of 2022 grew 14 percent as reported and 17 percent adjusted for currency.

From a geographic perspective, Americas revenue grew 8.9 percent year to year as reported (9 percent adjusted for 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).

Gross margin of 51.7 percent 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 Software gross margin. Operating (non-GAAP) gross margin of 52.9 percent decreased 1.7 points versus the prior year for similar reasons.

Total expense and other (income) decreased 1.1 percent in the first quarter of 2022 versus the prior-year period primarily driven by the effects of currency, lower non-operating retirement-related costs and lower workforce rebalancing charges, partially offset by an unrealized loss on Kyndryl retained shares and higher spending reflecting our continuing investment in innovation, our ecosystem 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 emerging areas such as ~~the U.S., Canada~~quantum. Total operating (non-GAAP) expense and ~~several countries in Western Europe. From an industry standpoint, we have seen meaningful improvement in areas most affected~~other (income) decreased 2.6 percent year to year, driven primarily by the ~~pandemic such as travel, transportation, automotive~~factors described above excluding the lower non-operating retirement-related costs and ~~industrial products.~~the unrealized loss on Kyndryl shares.

Pre-tax income from continuing operations of $0.6 billion increased 156.0 percent and pre-tax margin was 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 2022 was $39 million compared to a $160 million benefit in the first quarter of 2021. The current-year benefit was driven by many factors including the impacts of recently published foreign tax credit regulations,

5047

Table of Contents

Management Discussion – (continued)

geographical mix of income, incentives and changes in unrecognized tax benefits. The ~~underlying fundamentals of our business continue~~prior-year benefit was primarily related 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~~tax impacts from the ~~effects~~resolution of certain tax audits. Net income from continuing operations of $0.7 billion increased 64.3 percent and the ~~pandemic, IBM continues~~net income from continuing operations margin was 4.7 percent, up 1.6 points year to ~~be well positioned~~year.

Operating (non-GAAP) pre-tax income from continuing operations of $1.5 billion increased 45.9 percent and the operating (non-GAAP) pre-tax margin from continuing operations increased 2.8 points to ~~support our clients~~10.7 percent. The operating (non-GAAP) income tax provision for the first quarter of 2022 was $244 million, compared to ~~emerge even stronger.~~a provision for income taxes of $25 million in the first quarter of 2021. The increase in the operating (non-GAAP) income tax provision in the first quarter of 2022, compared to the prior year was primarily driven by tax impacts from the resolution of certain tax audits in the first quarter of 2021. Operating (non-GAAP) income from continuing operations of $1.3 billion increased 25.5 percent and the operating (non-GAAP) income margin from continuing operations of 9.0 percent was up 1.3 points year to year.

~~Financial Performance Summary — Three Months Ended June 30:~~

~~In the second quarter of 2021, we reported $18.7 billion in revenue, $1.3 billion in income from continuing operations and operating (non-GAAP) earnings of $2.1 billion, resulting in diluted~~Diluted earnings per share from continuing operations of ~~$1.47 as reported~~$0.73 in the first quarter of 2022 increased 62.2 percent and ~~$2.33 on an~~ operating (non-GAAP) ~~basis. We also generated $2.6 billion in cash from operations, $1.0 billion in free cash flow, which includes $0.6 billion~~diluted earnings per share of ~~cash impacts from~~$1.40 increased 25.0 percent versus the structural actions initiated in the fourth quarter of 2020 and Kyndryl separation-related charges, and delivered shareholder returns of $1.5 billion through dividends. These results reflect continued progress in our revenue performance, gross profit dollar expansion and our balance sheet and liquidity position remains strong.prior-year period.

Consolidated diluted earnings per share in the first quarter of 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.

Our balance sheet at March 31, 2022 continues to provide us with the flexibility to support the business. Cash and cash equivalents, restricted cash and marketable securities at March 31, 2022 were $10.8 billion, an increase of $3.2 billion from December 31, 2021. Total ~~consolidated revenue~~debt of $54.2 billion at March 31, 2022 increased ~~3.4 percent as reported but was flat excluding divested businesses~~$2.5 billion primarily due to new debt issuances.

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

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

●

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

●

An increase in goodwill and net intangible assets of $0.3 billion ($0.5 billion adjusted for currency) due to additions from new acquisitions; partially offset by intangibles amortization and currency impacts; partially offset by

●

A decrease in receivables of $2.5 billion ($2.4 billion adjusted for currency) primarily due to collections of higher year-end balances.

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

●

An increase in total debt of $2.5 billion ($2.9 billion adjusted for currency) primarily due to issuances of $4.1 billion, partially offset by maturities of $1.1 billion; and

●

An increase in deferred income of $0.9 billion ($1.0 billion adjusted for currency) primarily driven by annual customer billings and continued growth in software renewal 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

Table of Contents

Management Discussion – (continued)

●

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

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

●

Net income of $0.7 billion;

●

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

●

Common stock of $0.2 billion; partially offset by

●

Dividends paid of $1.5 billion.

Our cash flows from operating, investing and financing activities, as reflected in the Consolidated Statement of Cash Flows, include the cash flows of discontinued operations.

On a consolidated basis, cash provided by operating activities was $3.2 billion in the first three months of 2022, a decrease of $1.7 billion compared to the first three months of 2021. Net cash used in investing activities of $1.4 billion decreased $0.6 billion compared to the prior-year period. ~~With the economy reopening in many parts~~Financing activities were a net source of the world, the overall spend environment continues to improve, including in some industries that had been most impacted by the pandemic. On a segment basis, Cloud & Cognitive Software increased 6.1 percent as reported and 2 percent adjusted for currency with improvement in year-to-year growth compared to the last quarter. This performance was led by growth across both Cloud & Data Platforms and Cognitive Applications, partially offset by a decline in Transaction Processing Platforms. Cloud & Data Platforms grew 11.5 percent as reported (8 percent adjusted for currency) led by hybrid cloud platform and Cloud Pak growth. Cognitive Applications increased 11.6 percent (8 percent adjusted for currency) led by growth in Security and AI applications. Global Business Services (GBS) increased 11.6 percent as reported (7 percent adjusted for currency) as clients accelerate the rate and pacecash of their digital transformations. GBS revenue returned to pre-pandemic levels this quarter with growth across all lines of business. GTS increased 0.4 percent as reported but decreased 4 percent adjusted for currency with a modest improvement in year-to-year performance compared to the first quarter of 2021, driven by improving trends in client-based business volumes and project activity. Systems decreased 7.3 percent as reported (10 percent adjusted for currency) reflecting product cycle dynamics across IBM Z, Power and Storage.

~~Total cloud revenue of $7.0~~$1.4 billion in the ~~second quarter~~first three months of 2021 grew 13 percent as reported (9 percent adjusted for currency and excluding divested businesses and adjusted for currency). Over the trailing 12 months, total cloud revenue was $27.0 billion, up 15 percent as reported (12 percent adjusted for currency) and 13 percent excluding divested businesses and adjusted for currency.

From a geographic perspective, Americas revenue grew 4.4 percent year to year as reported (3 percent adjusted for currency). Europe/Middle East/Africa (EMEA) increased 6.0 percent as reported but decreased 3 percent adjusted for currency. Asia Pacific declined 2.3 percent year to year as reported (5 percent adjusted for currency).

~~Total consolidated gross margin of 48.0 percent was flat year to year, while gross profit dollars increased 3.5 percent~~2022 compared to ~~the prior-year period. The operating (non-GAAP) gross margin~~a net use of ~~49.3 percent increased 0.3 points versus the prior-year period reflecting actions taken to streamline and simplify our operating model.~~

~~Total expense and other (income)~~cash of ~~$7.5~~$5.8 billion ~~increased 4.5 percent~~ in the ~~second quarter~~first three months of 2021 versus the prior-year period. Our expense dynamics reflect a higher level of investment in innovation, skills and our ecosystem as we execute our hybrid cloud and AI strategy. We are aggressively hiring, scaling our garage footprint, increasing our research spend in areas including quantum, hybrid cloud and AI, and expanding our ecosystem. The year-to-year increase in expense was also driven by the effects of currency, separation-related charges in the current-year period, lower IP income and higher non-operating retirement-related costs, partially offset by a benefit from expected credit loss expense, lower workforce rebalancing charges and lower interest expense in the current-year period. Total operating (non-GAAP) expense and other (income) increased 2.1 percent year to year, driven primarily by the factors above excluding separation-related charges and higher non-operating retirement-related costs.2021.

5149

Table of Contents

Management Discussion – (continued)

The pre-tax income from continuing operations of $1.6 billion decreased 1.2 percent year to year, and the pre-tax margin from continuing operations was 8.3 percent, a decrease of 0.4 points. The continuing operations provision for income taxes was $0.2 billionFirst Quarter in both the second quarter of 2021 and 2020. Net income from continuing operations of $1.3 billion decreased 2.7 percent, and the net income margin from continuing operations was 7.1 percent, a decrease of 0.4 points year to year.Review

Operating (non-GAAP) pre-tax income from continuing operations of $2.5 billion increased 9.3 percent year to year and the operating (non-GAAP) pre-tax margin from continuing operations increased 0.7 points to 13.5 percent. The operating (non-GAAP) provision for income taxes was $0.4 billion in both the second quarter of 2021 and 2020. Operating (non-GAAP) income from continuing operations of $2.1 billion increased 7.9 percent with an operating (non-GAAP) income margin from continuing operations of 11.2 percent, up 0.5 points year to year.

Diluted earnings per share from continuing operations of $1.47 in the second quarter of 2021 decreased 3.3 percent and operating (non-GAAP) diluted earnings per share of $2.33 increased 6.9 percent versus the second quarter of 2020. Diluted earnings per share from continuing operations includes impacts related to the amortization of purchased intangibles assets and other acquisition-related charges, retirement-related charges, U.S. tax reform enactment impacts and Kyndryl separation-related charges. The impact of the Kyndryl separation-related charges for second-quarter 2021 was ($0.15) per share.

We generated $2.6 billion in cash flow provided by operating activities, a decrease of $1.0 billion compared to the second quarter of 2020, primarily driven by payroll tax and value-added tax payment deferrals and exemptions of $0.6 billion in the prior year due to tax relief programs related to COVID-19 and a decline from accounts receivable of $0.3 billion. Net cash from operating activities includes approximately $0.5 billion of cash impacts from our structural actions initiated in the fourth quarter of 2020 and Kyndryl separation-related charges. In the second quarter of 2021, investing activities were a net use of cash of $2.7 billion, an increase of $1.4 billion compared to the prior-year period, primarily driven by an increase in cash used for acquisitions. Financing activities were a use of cash of $3.1 billion in the second quarter of 2021 compared to $1.6 billion in the second quarter of 2020. The $1.5 billion change was primarily driven by debt transactions, as we continued to deleverage in accordance with our debt maturity schedules.

~~Table of Contents~~

~~Management Discussion – (continued)~~

~~Financial Results Summary —Six Months Ended June 30:~~

Yr. to Yr.

Percent/

(Dollars and shares in millions except per share amounts)

Margin

For the six months ended June 30:

2021

2020

Change

Revenue

$
36,474

$
35,694

2.2
%*
Gross profit margin

47.2
%

46.6
%
0.6
pts.
Total expense and other (income)

$
14,751

$
15,101

(2.3)
%
Income from continuing operations before income taxes

$
2,457

$
1,522

61.5
%
Provision for/(benefit from) income taxes from continuing operations

$
177

$
(1,017)

nm

Income from continuing operations

$
2,281

$
2,538

(10.2)
%
Income from continuing operations margin

6.3
%

7.1
%
(0.9)
pts.
Net income

$
2,280

$
2,536

(10.1)
%
Earnings per share from continuing operations - assuming dilution

$
2.52

$
2.83

(11.0)
%
Weighted-average shares outstanding - assuming dilution

903.0

895.0

0.9
%

At 6/30/2021

At 12/31/2020

Assets

$
146,814

$
155,971

(5.9)
%
Liabilities

$
124,747

$
135,244

(7.8)
%
Equity

$
22,067

$
20,727

6.5
%

* (1.5) percent adjusted for currency; (1.4) percent excluding divested businesses and adjusted for currency.

~~nm - not meaningful~~

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

Yr. to Yr.

(Dollars in millions except per share amounts)





Percent

For the six months ended June 30:

2021

2020

Change

Net income as reported

$
2,280

$
2,536

(10.1)
%
Income/(loss) from discontinued operations, net of tax

(1)

(2)

(67.4)

Income from continuing operations

$
2,281

$
2,538

(10.2)
%
Non-operating adjustments (net of tax):





Acquisition-related charges

$
707

$
736

(3.9)
%
Non-operating retirement-related costs/(income)

542

472

14.8

U.S. tax reform impacts

(6)

(149)

(96.3)

Separation-related charges

177

—

nm

Operating (non-GAAP) earnings*

$
3,702

$
3,598

2.9
%
Diluted operating (non-GAAP) earnings per share*

$
4.10

$
4.02

2.0
%

* Refer to page 90 for a more detailed reconciliation of net income to operating earnings and operating earnings per share.

~~nm - not meaningful~~

~~Financial Performance Summary —Six Months Ended June 30:~~

In the first six months of 2021, we reported $36.5 billion in revenue, $2.3 billion in income from continuing operations and operating (non-GAAP) earnings of $3.7 billion, resulting in diluted earnings per share from continuing operations of $2.52 as reported and $4.10 on an operating (non-GAAP) basis. We generated $7.5 billion in cash from operations, $2.6 billion in free cash flow and delivered shareholder returns of $2.9 billion through dividends.

Total consolidated revenue increased 2.2 percent as reported but declined 1 percent excluding divested businesses and adjusted for currency. Cloud & Cognitive Software increased 5.0 percent as reported (2 percent adjusted for

~~Table of Contents~~

~~Management Discussion – (continued)~~

currency). Within this segment, Cloud & Data Platforms grew 12.2 percent as reported (9 percent adjusted for currency) with continued solid Red Hat performance led by Red Hat Enterprise Linux (RHEL) and our OpenShift hybrid cloud platform. Cognitive Applications grew 8.1 percent as reported (5 percent adjusted for currency), while Transaction Processing Platforms declined 9.3 percent as reported (13 percent adjusted for currency). GBS increased 6.8 percent as reported (3 percent adjusted for currency) with growth in Consulting and Global Process Services. Application Management increased 0.5 percent as reported, but declined 4 percent adjusted for currency. GTS decreased 0.6 percent as reported (5 percent adjusted for currency) with declines in Infrastructure & Cloud Services and Technology Support Services. Systems decreased 2.4 percent as reported (5 percent adjusted for currency) and was impacted by product cycle dynamics in the current-year period.

~~Total cloud revenue of $13.5 billion in the first six months of 2021 grew 17 percent as reported (13 percent adjusted for currency and excluding divested businesses and adjusted for currency).~~

From a geographic perspective, Americas revenue grew 2.3 percent year to year as reported (2 percent adjusted for currency). EMEA increased 4.2 percent as reported but decreased 4 percent adjusted for currency. Asia Pacific declined 0.9 percent year to year as reported (4 percent adjusted for currency).

Total consolidated gross margin of 47.2 percent increased 0.6 points year to year with margin expansion in Cloud & Cognitive Software, GTS, GBS and Systems. Operating (non-GAAP) gross margin of 48.3 percent increased 0.7 points compared to the prior-year period.

Total expense and other (income) decreased 2.3 percent in the first six months of 2021 versus the prior-year period. Our expense reflects the higher level of investment we are making in innovation, skills and our ecosystem, more than offset by lower workforce rebalancing charges, a benefit from expected credit loss expense, lower travel expense and lower interest expense in the current-year period. Expense also reflects an increase from the effects of currency, separation-related charges in the current-year period and higher non-operating retirement-related costs. Total operating (non-GAAP) expense and other (income) decreased 4.9 percent year to year, driven primarily by the factors above excluding the separation-related charges and non-operating retirement-related costs.

Pre-tax income from continuing operations of $2.5 billion increased 61.5 percent compared to the first six months of 2020. The pre-tax margin from continuing operations was 6.7 percent, an increase of 2.5 points versus the prior-year period. In the prior-year period, workforce rebalancing charges were $865 million, compared to $241 million in the current year. The continuing operations provision for income taxes in the first six months of 2021 was $0.2 billion compared to a benefit from income taxes of $1.0 billion in the first six months of 2020. The company reported a tax benefit in the first quarter of 2021, which was primarily driven by the resolution of certain tax audit matters. The prior-year benefit was primarily related to the tax impacts of an intra-entity sale of certain of the company’s intellectual property. Net income from continuing operations of $2.3 billion decreased 10.2 percent, and the net income margin from continuing operations was 6.3 percent, a decrease of 0.9 points year to year.

Operating (non-GAAP) pre-tax income from continuing operations of $4.3 billion increased 43.4 percent year to year and the operating (non-GAAP) pre-tax margin from continuing operations increased 3.4 points to 11.8 percent. These results reflect higher workforce rebalancing charges in 2020 as described above. The operating (non-GAAP) provision for income taxes was $0.6 billion in the first six months of 2021, compared to a benefit from income taxes of $0.6 billion in the first six months of 2020. The prior year operating (non-GAAP) benefit from income taxes was primarily driven by the same factor described above. Operating (non-GAAP) income from continuing operations of $3.7 billion increased 2.9 percent with an operating (non-GAAP) income margin from continuing operations of 10.1 percent.

Diluted earnings per share from continuing operations of $2.52 in the first six months of 2021 decreased 11.0 percent and operating (non-GAAP) diluted earnings per share of $4.10 increased 2.0 percent versus the first six months of 2020. Diluted earnings per share from continuing operations includes impacts related to the amortization of purchased intangibles assets and other acquisition-related charges, retirement-related charges, U.S. tax reform enactment impacts

~~Table of Contents~~

~~Management Discussion – (continued)~~

~~and Kyndryl separation-related charges. The impact of the Kyndryl separation-related charges for the first six months of 2021 was ($0.20) per share.~~

In the second quarter, we continued to take actions to further enhance our balance sheet and liquidity position. At June 30, 2021, the balance sheet remained strong with the flexibility to support and invest in the business. Cash and cash equivalents, restricted cash and marketable securities at June 30, 2021 were $8.2 billion, a decrease of $6.1 billion from December 31, 2020, primarily due to debt reduction payments and acquisitions. In line with our overall debt pay down strategy, we have reduced total debt by $6.4 billion from December 31, 2020 and $17.9 billion since the second quarter of 2019 (immediately preceding the Red Hat transaction).

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

~~Total assets decreased $9.2 billion ($7.9 billion adjusted for currency) from December 31, 2020 driven by:~~

~~A decrease in cash and cash equivalents, restricted cash and marketable securities of $6.1 billion ($6.0 billion adjusted for currency); and~~

A decrease in financing receivables of $4.1 billion ($3.9 billion adjusted for currency) primarily as a result of collections of seasonally higher year-end balances and sales of receivables; partially offset by

•~~An increase in goodwill of $2.0 billion ($2.3 billion adjusted for currency).~~

~~Total liabilities decreased $10.5 billion ($8.7 billion adjusted for currency) from December 31, 2020 driven by:~~

~~A decrease in total debt of $6.4 billion ($5.8 billion adjusted for currency) primarily driven by debt maturities and early retirements of $6.0 billion;~~

~~A decrease in other accrued expenses and liabilities of $1.6 billion ($1.3 billion adjusted for currency) primarily due to payments of $1.1 billion for workforce rebalancing actions;~~

~~A decrease in taxes payable of $0.8 billion ($0.7 billion adjusted for currency) primarily driven by tax payments and decline in reserves as a result of the resolution of certain tax audit matters;~~

~~A decrease in retirement and nonpension postretirement benefit obligations of $1.0 billion ($0.6 billion adjusted for currency); and~~

~~A decrease in accounts payable of $0.7 billion ($0.6 billion adjusted for currency) reflecting declines from seasonally higher year-end balances.~~

~~Total equity of $22.1 billion increased $1.3 billion from December 31, 2020 as a result of:~~

•~~Net income of $2.3 billion; and~~

~~An increase in accumulated other comprehensive income of $1.7 billion primarily due to retirement-related benefit plans and an increase in foreign currency translation gains; partially offset by~~

•~~Dividends paid of $2.9 billion.~~

~~Table of Contents~~

~~Management Discussion – (continued)~~

We generated $7.5 billion in cash flow provided by operating activities, a decrease of $0.5 billion compared to the first six months of 2020. Cash flows from operating activities includes approximately $1.2 billion of cash impacts from our structural actions initiated in the fourth quarter of 2020 and Kyndryl separation-related charges. In the first six months of 2021, investing activities were a net use of cash of $4.7 billion compared to $2.1 billion in the prior-year period. The $2.5 billion increase year to year was driven primarily by an increase in net cash used for acquisitions ($2.8 billion) and a decrease in cash provided by divestitures ($0.8 billion), partially offset by a decrease in cash used for net purchases of marketable securities and other investments ($1.0 billion). Financing activities were a net use of cash of $8.9 billion in the first six months of 2021 compared to $1.7 billion in the prior-year period. The $7.2 billion increase year to year was primarily driven by a decrease in net cash provided by debt transactions with a higher level of net issuances in the prior year.

~~Table of Contents~~

~~Management Discussion – (continued)~~

~~Second~~ ~~Quarter and First Six Months in Review~~

Results of Continuing Operations

As discussed in the “Organization of Information” section, with the completion of the separation on November 3, 2021, results of Kyndryl are reported as discontinued operations. Prior periods have been reclassified to conform to this presentation in the Management Discussion to allow for a meaningful comparison of continuing operations.

Segment Details

The ~~following is~~table below presents each reportable segment’s revenue and gross margin results, followed by an analysis of the ~~second~~first quarter ~~and~~of 2022 versus the first ~~six months~~quarter of 2021 ~~versus~~reportable segments results. Prior-year results have been recast to conform with the ~~second quarter and first six months~~changes as described in the “Organization of 2020 reportable segment external revenue and gross margin results. Segment pre-tax income includes transactions between segments that are intended to reflect an arm’s-length transfer price and excludes certain unallocated corporate items.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 June 30:	2021			2020			Change		Currency
For the three months ended March 31:											2022			2021*			Change		Currency
Revenue:
Cloud & Cognitive Software	$	6,098		$	5,748		6.1	%	2.5	%
Software											$	5,772		$	5,138		12.3	%	15.4	%
Gross margin		78.1	%		77.1	%	1.0	pts.				78.8	%		77.8	%	1.1	pts.
Global Business Services		4,341			3,890		11.6	%	7.3	%
Consulting												4,829			4,262		13.3	%	17.4	%
Gross margin		27.9	%		28.4	%	(0.6)	pts.				24.3	%		27.8	%	(3.5)	pts.
Global Technology Services		6,342			6,316		0.4	%	(4.1)	%
Infrastructure												3,219			3,293		(2.3)	%	0.3	%
Gross margin		35.3	%		34.2	%	1.1	pts.				50.5	%		56.3	%	(5.9)	pts.
Systems		1,717			1,852		(7.3)	%	(10.2)	%
Gross margin		55.1	%		57.8	%	(2.7)	pts.
Global Financing		242			265		(8.6)	%	(11.6)	%
Financing												154			208		(26.2)	%	(24.5)	%
Gross margin		27.4	%		38.6	%	(11.2)	pts.				37.7	%		35.5	%	2.2	pts.
Other		5			50		(89.6)	%	(89.3)	%		224			284		(21.3)	%	(18.9)	%
Gross margin		nm			(338.2)	%	nm					(32.9)	%		(29.6)	%	(3.3)	pts.
Total consolidated revenue	$	18,745		$	18,123		3.4	%*	(0.6)	%
Total consolidated gross profit	$	9,004		$	8,700		3.5	%
Total consolidated gross margin		48.0	%		48.0	%	0.0	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		180			187		(3.8)	%				181			174		4.0	%
Separation-related charges		58			—		nm
Operating (non-GAAP) gross profit	$	9,242		$	8,887		4.0	%			$	7,516		$	7,201		4.4	%
Operating (non-GAAP) gross margin		49.3	%		49.0	%	0.3	pts.				52.9	%		54.6	%	(1.7)	pts.

*	Recast to reflect segment changes.

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

~~nm - not meaningful~~

5750

Table of Contents

Management Discussion – (continued)

Yr. to Yr.

Percent

Yr. to Yr.

Change

(Dollars in millions)





Percent/Margin

Adjusted For

For the six months ended June 30:

2021

2020

Change

Currency

Revenue:









Cloud & Cognitive Software

$
11,534

$
10,987

5.0
%
1.6
%
Gross margin

77.1
%

76.3
%
0.8
pts.


Global Business Services

8,575

8,027

6.8
%
2.8
%
Gross margin

28.0
%

27.8
%
0.2
pts.


Global Technology Services

12,712

12,783

(0.6)
%
(4.7)
%
Gross margin

34.9
%

34.1
%
0.8
pts.


Systems

3,144

3,220

(2.4)
%
(5.0)
%
Gross margin

54.8
%

54.6
%
0.2
pts.


Global Financing

482

564

(14.7)
%
(17.1)
%
Gross margin

29.7
%

39.7
%
(10.0)
pts.


Other

28

113

(75.3)
%
(75.6)
%
Gross margin

nm

(291.7)
%
nm



Total consolidated revenue

$
36,474

$
35,694

2.2
%*
(1.5)
%
Total consolidated gross profit

$
17,208

$
16,622

3.5
%


Total consolidated gross margin

47.2
%

46.6
%
0.6
pts.


Non-operating adjustments:









Amortization of acquired intangible assets

355

375

(5.4)
%


Separation-related charges

61

—

nm

Operating (non-GAAP) gross profit

$
17,624

$
16,998

3.7
%


Operating (non-GAAP) gross margin

48.3
%

47.6
%
0.7
pts.

Software


							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
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

* ~~(1.4) 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 June 30:

2021

2020

Change

Currency

Cloud & Cognitive Software external revenue:

$
6,098

$
5,748

6.1
%
2.5
%
Cloud & Data Platforms

$
3,120

$
2,797

11.5
%
7.9
%
Cognitive Applications

1,391

1,246

11.6

8.0

Transaction Processing Platforms

1,587

1,706

(7.0)

(10.5)

Yr. to Yr.

Percent

Yr. to Yr.

Change

(Dollars in millions)





Percent

Adjusted For

For the six months ended June 30:

2021

2020

Change

Currency

Cloud & Cognitive Software external revenue:

$
11,534

$
10,987

5.0
%
1.6
%
Cloud & Data Platforms

$
5,986

$
5,333

12.2
%
8.8
%
Cognitive Applications

2,624

2,428

8.1

4.9

Transaction Processing Platforms

2,925

3,226

(9.3)

(12.5)

~~Cloud & Cognitive~~ Software revenue of ~~$6,098~~$5,772 million increased ~~6.1~~12.3 percent as reported ~~and 2~~(15 percent adjusted for ~~currency~~currency) in the ~~second~~first quarter of ~~2021~~2022 compared to the prior-year ~~period, led~~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 currency) driven by strong growth in ~~both Cloud~~Hybrid Platform & ~~Data Platforms and Cognitive Applications, partially offset by declines~~Solutions. In addition, we had continued year-to-year growth this quarter in ~~Transaction Processing Platforms. We continued to have strong~~our software subscription and support renewal ~~rates~~rates.

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~~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 ~~deferred income increased more than a billion~~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.

5851

Table of Contents

Management Discussion – (continued)

~~dollars~~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. For~~year and pre-tax margin increased 6.8 points to 19.7 percent in the first ~~six months~~quarter of ~~2021, Cloud & Cognitive Software~~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 ~~$11,534~~$4,829 million increased ~~5.0~~13.3 percent as reported and 217 percent adjusted for currency ~~driven~~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 ~~same factors.~~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.

~~In the second quarter, Cloud & Data Platforms~~Business Transformation revenue of ~~$3,120~~$2,255 million increased ~~11.5~~15.5 percent as reported and 819 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 ~~strength~~growth in our ~~hybrid~~engagements around developing and modernizing applications for cloud platform and Cloud Paks. In the quarter, both RHEL and OpenShift continued to deliver strong growth and gained share in their respective markets. We now have more than 3,200 clients using our hybrid cloud platform, which is approximately four times the number of clients since we announced the Red Hat acquisition. Cloud Paks continued to resonate with our clients. In the second quarter, we had strength in Cloud Pak for Integration, which delivers rapid and cost-saving solutions for integration development as well as Cloud Pak for Business Automation as clients leveraged AI-powered automation to solve operational challenges. The acquisition of Turbonomic in the second quarter further extends our automation offerings.deployments.

Cognitive Applications second-quarter revenue of $1,391 million increased 11.6 percent as reported and 8 percent adjusted for currency compared to the prior-year period. This growth was driven by Security software and services, Maximo asset management, our Weather offerings and Sterling supply chain. With the acceleration of cybersecurity attacks, clients are increasingly looking for modernized security platforms to detect and protect against ransomware and other attacks. This quarter, we had strength in our integrated software and services offerings including Cloud Pak for Security, Data Security and X-Force Security Services. In the area of supply chain, the demand for omnichannel solutions accelerated requirements for Sterling Order Management in industries such as retail.

Transaction Processing Platforms revenue of $1,587 million decreased 7.0 percent as reported and 11 percent adjusted for currency in the second quarter compared to the prior-year period. We provide flexibility to our clients in how they purchase this mission-critical software and since early last year, we are seeing a continued preference for operating expenses over capital expenditures, which has continued to put pressure on perpetual licenses, in favor of more consumption-like models. Our continued strong software renewals this quarter reflect that clients remain committed to our products.

Within Cloud & Cognitive Software, cloud revenue of $2.1 billion grew 29 percent as reported (25 percent adjusted for currency) in the second quarter of 2021 compared to the prior-year period. For the first six months of 2021, cloud revenue of $4.0 billion grew 33 percent as reported (29 percent adjusted for currency) compared to the first six months of the prior year.

Yr. to Yr.

Percent/

(Dollars in millions)





Margin

For the three months ended June 30:

2021

2020

Change

Cloud & Cognitive Software:







External gross profit

$
4,761

$
4,432

7.4
%
External gross profit margin

78.1
%

77.1
%
1.0
pts.
Pre-tax income

$
1,720

$
1,708

0.7
%
Pre-tax margin

25.2
%

26.3
%
(1.1)
pts.

Yr. to Yr.

Percent/

(Dollars in millions)





Margin

For the six months ended June 30:

2021

2020

Change

Cloud & Cognitive Software:







External gross profit

$
8,893

$
8,384

6.1
%
External gross profit margin

77.1
%

76.3
%
0.8
pts.
Pre-tax income

$
3,147

$
2,641

19.2
%
Pre-tax margin

24.0
%

21.1
%
3.0
pts.

5952

Table of Contents

Management Discussion – (continued)

~~Cloud & Cognitive Software gross profit margin increased 1.0 points to 78.1 percent in the second quarter~~Application Operations revenue of 2021 compared to the prior-year period driven primarily by revenue growth and improvement in services margins, partially offset by the investments we are making in new innovations and our ecosystem. For the first six months of 2021, gross profit margin increased 0.8 points to 77.1 percent, driven primarily by the same factors.

~~In the second quarter, pre-tax income of $1,720~~$1,619 million increased 0.7 percent and pre-tax margin decreased 1.1 points to 25.2 percent compared to the prior year. The pre-tax income improvement reflects the revenue growth and gross profit margin expansion in the current year. The pre-tax margin decline reflects the investments we are making in new innovations and our ecosystem and higher workforce rebalancing charges year to year, partially offset by the gross margin expansion. For the first six months of 2021, pre-tax income of $3,147 million increased 19.2 percent and pre-tax margin of 24.0 percent increased 3.0 points compared to the prior year, primarily driven by the gross margin expansion and lower workforce rebalancing charges in the current year.

~~Global Business Services~~

Yr. to Yr.

Percent

Yr. to Yr.

Change

(Dollars in millions)





Percent

Adjusted For

For the three months ended June 30:

2021

2020

Change

Currency

Global Business Services external revenue:

$
4,341

$
3,890

11.6
%
7.3
%
Consulting

$
2,236

$
1,936

15.5
%
11.2
%
Application Management

1,821

1,734

5.1

0.7

Global Process Services

284

221

28.4

24.7

Yr. to Yr.

Percent

Yr. to Yr.

Change

(Dollars in millions)





Percent

Adjusted For

For the six months ended June 30:

2021

2020

Change

Currency

Global Business Services external revenue:

$
8,575

$
8,027

6.8
%
2.8
%
Consulting

$
4,425

$
4,007

10.4
%
6.4
%
Application Management

3,591

3,573

0.5

(3.5)

Global Process Services

559

447

25.0

21.7

~~Global Business Services revenue of $4,341 million grew 11.6~~9.8 percent as reported and 7 percent adjusted for currency in the second quarter of 2021 compared to the prior-year period, with growth across all three business units. Our revenue performance reflects the trend that clients are accelerating their rate and pace of digital transformations. Our Red Hat practice had continued strong results with more than 170 Red Hat client engagements added this quarter. We continue to invest in GBS by expanding our skills and investing to integrate and scale our recent acquisitions. For the first six months of 2021, GBS revenue of $8,575 million increased 6.8 percent as reported and 3 percent adjusted for currency reflecting strong year-to-year growth in Consulting and Global Process Services.

In the second-quarter 2021, Consulting revenue of $2,236 million grew 15.5 percent as reported and 11 percent adjusted for currency which reflects the investments we are making in building skills in third-party cloud providers and in expanding our practices with ecosystem partners. Clients are finding value in our differentiated garage methodology to co-create solutions for the majority of our value propositions across Enterprise Resource Planning implementation, Business Process Outsourcing and Application Modernization.

Application Management revenue of $1,821 million increased 5.1 percent as reported and 1 percent adjusted for currency in the second quarter of 2021 compared to the second-quarter 2020 as we continue to transition from managing applications on-premise to those that run in hybrid multicloud environments.

~~Table of Contents~~

~~Management Discussion – (continued)~~

Global Process Services second-quarter revenue of $284 million grew 28.4 percent as reported and 25 percent adjusted for currency compared to the prior-year period, reflecting strong growth in our intelligent workflow offerings. These end-to-end offerings, which leverage hybrid cloud and AI to transform client processes, connect Consulting with Business Process Outsourcing in areas such as finance, supply chain, customer service and talent transformation.

Within GBS, cloud revenue of $1.9 billion grew 35 percent as reported (30 percent adjusted for currency) in the second quarter of 2021 compared to the same prior-year period. For the first six months of 2021, cloud revenue of $3.6 billion grew 34 percent as reported (29 percent adjusted for currency) compared to the same period in 2020.

Yr. to Yr.

Percent/

(Dollars in millions)





Margin

For the three months ended June 30:

2021

2020

Change

Global Business Services:







External gross profit

$
1,210

$
1,107

9.3
%
External gross profit margin

27.9
%

28.4
%
(0.6)
pts.
Pre-tax income

$
371

$
362

2.5
%
Pre-tax margin

8.4
%

9.2
%
(0.7)
pts.

Yr. to Yr.

Percent/

(Dollars in millions)





Margin

For the six months ended June 30:

2021

2020

Change

Global Business Services:







External gross profit

$
2,404

$
2,231

7.7
%
External gross profit margin

28.0
%

27.8
%
0.2
pts.
Pre-tax income

$
761

$
633

20.3
%
Pre-tax margin

8.8
%

7.8
%
1.0
pts.

GBS second-quarter gross profit margin of 27.9 percent decreased 0.6 points on a year-to-year basis, primarily driven by a decline in our Consulting margin, partially offset by increased margins in Application Management and Global Process Services. Our gross margin performance reflects the higher level of investments we are making to expand our skills and practices to continue to capture the market opportunity. We are expanding our delivery resources and adding skilled practitioners in high demand areas. In addition, we are investing to integrate and scale our recently announced acquisitions.

Pre-tax income of $371 million increased 2.5 percent and pre-tax margin of 8.4 percent decreased 0.7 points in the second quarter of 2021 compared to the prior-year period. The pre-tax income and margin performance reflects the higher level of investments described above, and in our go-to-market resources. For the first six months of 2021, pre-tax income of $761 million increased 20.3 percent and pre-tax margin of 8.8 percent increased 1.0 points compared to the prior-year period, driven primarily by gross profit margin expansion due to lower costs in the current year as a result of prior workforce rebalancing actions and lower workforce rebalancing charges year to year.

~~Global Technology Services~~

Yr. to Yr.

Percent

Yr. to Yr.

Change

(Dollars in millions)

Percent

Adjusted For

For the three months ended June 30:

2021

2020

Change

Currency

Global Technology Services external revenue:

$
6,342

$
6,316

0.4
%
(4.1)
%
Infrastructure & Cloud Services

$
4,836

$
4,813

0.5
%
(4.2)
%
Technology Support Services

1,506

1,503

0.2

(4.1)

~~Table of Contents~~

~~Management Discussion – (continued)~~

Yr. to Yr.

Percent

Yr. to Yr.

Change

(Dollars in millions)

Percent

Adjusted For

For the six months ended June 30:

2021

2020

Change

Currency

Global Technology Services external revenue:

$
12,712

$
12,783

(0.6)
%
(4.7)
%
Infrastructure & Cloud Services

$
9,689

$
9,729

(0.4)
%
(4.8)
%
Technology Support Services

3,023

3,054

(1.0)

(4.4)

Global Technology Services revenue of $6,342 million increased 0.4 percent as reported, but declined 4 percent adjusted for currency in the second quarter of 2021 compared to the same prior-year period. This reflects a modest improvement in year-to-year performance compared to the first-quarter 2021, driven by improving trends in client-based business volumes and project activity. For the first six months of 2021, GTS revenue of $12,712 million decreased 0.6 percent as reported and 5 percent adjusted for currency as compared to the prior-year period, driven by declines in both Infrastructure & Cloud Services and Technology Support Services.

In the second-quarter 2021, Infrastructure & Cloud Services revenue of $4,836 million increased 0.5 percent as reported, but declined 4 percent adjusted for currency compared to the prior-year period. Our current clients continue to value partnering with Kyndryl to modernize and manage their mission-critical workloads and services, as reflected in our strong renewal rate. The renewals this quarter included six deals with a contract value greater than $100 million. While our performance with existing clients remains strong, the sales cycle for new logo clients is elongating, as they await additional information related to Kyndryl.

Technology Support Services (TSS) second-quarter revenue of $1,506 million was flat year to year as reported and declined 4 percent adjusted for currency compared to the prior-year period, reflecting the Systems hardware product cycles.

Within GTS, cloud revenue of $2.4 billion decreased 1 percent as reported and 5 percent adjusted for currency in the second quarter of 2021 compared to the same period in the prior year. For the first six months of 2021, cloud revenue of $4.8 billion grew 2 percent as reported, but declined 214 percent adjusted for currency compared to the first ~~six months~~quarter of ~~2020.~~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.								Yr. to Yr.
							Percent/								Percent/
(Dollars in millions)							Margin								Margin
For the three months ended June 30:	2021			2020			Change
Global Technology Services:
External gross profit	$	2,237		$	2,158		3.7	%
External gross profit margin		35.3	%		34.2	%	1.1	pts.
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	$	381		$	250		52.3	%	$	348		$	277		25.8	%
Pre-tax margin		5.7	%		3.8	%	1.9	pts.		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/

(Dollars in millions)

Margin

For the six months ended June 30:

2021

2020

Change

Global Technology Services:








External gross profit

$
4,437

$
4,354

1.9
%
External gross profit margin

34.9
%

34.1
%
0.8
pts.
Pre-tax income

$
520

$
72

624.6
%
Pre-tax margin

3.9
%

0.5
%
3.4
pts.


							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	%

Global Technology Services gross profit margin increased 1.1 points to 35.3 percent in the second quarter of 2021 as compared to the prior-year period, driven primarily by margin expansion in Infrastructure & Cloud Services which

~~Table of Contents~~

~~Management Discussion – (continued)~~

~~reflects the benefits from the productivity actions taken in 2020 to improve the profit and margin profile of the business in advance of the Kyndryl separation.~~

Pre-tax income of $381 million increased 52.3 percent and pre-tax margin of 5.7 percent increased 1.9 points in the second quarter of 2021 compared to the same period in 2020, driven primarily by the gross profit margin expansion due to lower costs in the current year as a result of workforce rebalancing actions taken in the prior year. For the first six months of 2021, pre-tax income increased $448 million to $520 million and pre-tax margin of 3.9 percent increased 3.4 points compared to the prior-year period, driven primarily by gross profit margin expansion and lower workforce rebalancing charges in the current year.

~~Services Backlog and~~ Signings

Yr. to Yr.

Percent

Yr. to Yr.

Change

At June 30,

At June 30,

Percent

Adjusted For

(Dollars in billions)

2021

2020

Change

Currency

Total backlog

$
103.7

$
107.1

(3.2)
%
(6.4)
%

~~The estimated total services backlog at June 30, 2021 was $103.7 billion, a decrease of 3.2 percent as reported (6 percent adjusted for currency) on a year-to-year basis.~~

Total services backlog includes Infrastructure & Cloud Services, Security Services, Consulting, Global Process Services, Application Management and TSS. Total backlog is intended to be a statement 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 to the company’s clients. Total backlog does not include as-a-Service arrangements that allow for termination under contractual commitment terms. Backlog estimates are subject to change and are affected by several factors, including terminations, changes in the scope of contracts, periodic revalidations, adjustments for revenue not materialized and adjustments for currency.

~~Services signings~~ are management’s initial estimate of the value of a client’s commitment under a services ~~contract.~~contract within IBM Consulting. There are no third-party standards or requirements governing the calculation of signings. The calculation used by management involves estimates and judgments to gauge the extent of a client’s commitment, including the type and duration of the agreement, and the presence of termination charges or wind-down costs.

~~Signings include Infrastructure & 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~~contracts. Signings associated with an acquisition will be recognized on a prospective basis.

Management believes the estimated values of signings disclosed provide an indication of our forward-looking revenue. Signings are used to monitor the performance of the business and viewed as useful information for management and shareholders. The conversion of signings into revenue may vary based on the types of services and solutions, contract duration, customer decisions, and other factors, which may include, but are not limited to, the macroeconomic 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 ~~Infrastructure & Cloud Services or Global Process Services. TSS is generally not included in~~conjunction with the signings ~~as the maintenance contracts tend to be more steady state,~~definition noted above.

6353

Table of Contents

Management Discussion – (continued)

~~where revenues equal renewals. Certain longer-term TSS contracts that have characteristics similar~~Infrastructure


							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
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 ~~outsourcing contracts are included in signings.~~reflect segment change.

Contract portfolios purchased in 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 if a new services agreement is signed incidental or coincidental to an acquisition or divestiture.

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

~~Systems~~

Yr. to Yr.

Percent

Yr. to Yr.

Change

(Dollars in millions)

Percent

Adjusted For

For the three months ended June 30:

2021

2020

Change

Currency

Systems external revenue:

$
1,717

$
1,852

(7.3)
%
(10.2)
%
Systems Hardware

$
1,384

$
1,488

(7.0)
%
(9.9)
%
IBM Z





(10.6)

(13.3)

Power Systems





(1.6)

(4.6)

Storage Systems





(6.7)

(9.7)

Operating Systems Software

333

365

(8.7)

(11.7)

Yr. to Yr.

Percent

Yr. to Yr.

Change

(Dollars in millions)

Percent

Adjusted For

For the six months ended June 30:

2021

2020

Change

Currency

Systems external revenue:

$
3,144

$
3,220

(2.4)
%
(5.0)
%
Systems Hardware

$
2,498

$
2,484

0.5
%
(2.0)
%
IBM Z





10.2

7.8

Power Systems





(5.2)

(7.9)

Storage Systems





(8.9)

(11.7)

Operating Systems Software

646

736

(12.2)

(14.8)

~~Systems~~Infrastructure revenue of ~~$1,717~~$3,219 million decreased ~~7.3~~2.3 percent as reported and ~~10 percent~~was flat adjusted for currency in the ~~second~~first quarter of ~~2021~~2022 compared to the prior-year period. ~~Systems Hardware~~This includes incremental sales to Kyndryl which contributed over 8 points to the revenue growth. Within Infrastructure, hybrid cloud revenue of ~~$1,384~~$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 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 ~~7.0~~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 reflecting product cycle dynamics across IBM Z,~~currency. Revenue growth in Power ~~Systems and Storage Systems. Operating Systems Software~~reflects clients’ demand for SAP S/4HANA data intensive workloads on our newest Power10 high-end system.

Infrastructure Support revenue of ~~$333~~$1,519 million ~~decreased 8.7~~increased 0.4 percent as reported and 12 percent adjusted for currency, driven primarily by a decline in IBM Z operating systems software due to higher transactional revenue in the prior-year second quarter. For the first six months of 2021, Systems revenue of $3,144 million decreased 2.4 percent as reported and 54 percent adjusted for currency compared to the prior-year period. ~~The decline was primarily driven by Storage Systems and Power Systems and a decline in Operating Systems Software, partially offset by~~This includes incremental sales to Kyndryl which contributed over 8 points of revenue growth ~~in IBM Z.~~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.

~~IBM Z revenue~~Infrastructure gross profit margin decreased ~~10.6~~5.9 points to 50.5 percent ~~as reported and 13 percent adjusted for currency~~ in the ~~second~~first quarter of 2022 compared to ~~very strong performance~~the prior year, driven primarily by mix due to product cycle dynamics. Pre-tax income decreased 31.7 percent to $199 million in the first quarter of 2022 compared to the prior-year period. ~~Financial services continued~~Pre-tax margin decreased 2.7 points to ~~drive IBM Z performance due~~6.2 points compared to capacity requirements to address robust market volatility. With focus on security, purchases were also driven by clients seeking capabilities such as pervasive encryption and Hyper Protect to secure mission-critical applications and data, both on premises and in the ~~cloud. During~~prior-year first quarter, reflecting the ~~last eight quarters, the z15 client value proposition has been~~zSystems product cycle.

Financing

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

6454

Table of Contents

Management Discussion – (continued)

~~apparent. The z15 is secure, scalable and reliable, and the z15 program continues to outpace the strong z14 program providing further proof of IBM Z as an enduring platform.~~

Power Systems revenue decreased 1.6 percent as reported and 5 percent adjusted for currency in the second quarter of 2021 compared to the prior-year period, reflecting a sequential year-to-year improvement compared to the first-quarter 2021. The decline in revenue in the second quarter reflects the product cycle dynamics and was driven primarily by declines in low-end systems, partially offset by growth in high-end systems.

Storage Systems revenue declined 6.7 percent as reported and 10 percent adjusted for currency in the second-quarter 2021 compared to the prior-year period, driven primarily by a decline in high-end storage systems tied to the IBM Z product cycle.

Within Systems, cloud revenue of $0.7 billion decreased 16 percent as reported (19 percent adjusted for currency) in the second quarter of 2021 compared to the same quarter in 2020. For the first six months of 2021, cloud revenue of $1.2 billion decreased 3 percent as reported (5 percent adjusted for currency) compared to the same prior-year period.

Yr. to Yr.

Percent/

(Dollars in millions)

Margin

For the three months ended June 30:

2021

2020

Change

Systems:







External Systems Hardware gross profit

$
679

$
772

(12.0)
%
External Systems Hardware gross profit margin

49.1
%

51.9
%
(2.8)
pts.
External Operating Systems Software gross profit

$
267

$
299

(10.7)
%
External Operating Systems Software gross profit margin

80.2
%

82.0
%
(1.8)
pts.
External total gross profit

$
946

$
1,071

(11.7)
%
External total gross profit margin

55.1
%

57.8
%
(2.7)
pts.
Pre-tax income

$
176

$
248

(28.8)
%
Pre-tax margin

9.0
%

11.8
%
(2.8)
pts.

Yr. to Yr.

Percent/

(Dollars in millions)

Margin

For the six months ended June 30:

2021

2020

Change

Systems:







External Systems Hardware gross profit

$
1,207

$
1,151

4.8
%
External Systems Hardware gross profit margin

48.3
%

46.3
%
2.0
pts.
External Operating Systems Software gross profit

$
517

$
607

(14.8)
%
External Operating Systems Software gross profit margin

80.0
%

82.5
%
(2.4)
pts.
External total gross profit

$
1,724

$
1,758

(1.9)
%
External total gross profit margin

54.8
%

54.6
%
0.2
pts.
Pre-tax income

$
174

$
31

466.3
%
Pre-tax margin

4.9
%

0.9
%
4.0
pts.

Systems gross profit margin decreased 2.7 points to 55.1 percent in the second-quarter 2021 compared to the prior-year period. Systems margin performance was driven by declines in Storage Systems and Operating Systems Software margins and a revenue mix to Power Systems, partially offset by margin expansion in Power Systems and IBM Z. For the first six months of 2021, Systems gross profit margin increased 0.2 points to 54.8 percent compared to the same period in 2020, primarily driven by a mix to IBM Z and margin expansion in IBM Z and Power Systems, partially offset by a decline in Storage Systems margin.

In the second quarter of 2021, Systems pre-tax income of $176 million decreased 28.8 percent and pre-tax margin of 9.0 percent decreased 2.8 points compared to the prior-year period, driven primarily by the portfolio mix and the z15

~~Table of Contents~~

~~Management Discussion – (continued)~~

product cycle, partially offset by lower costs in the current year as a result of prior workforce rebalancing actions. For the first six months of 2021, pre-tax income increased $143 million to $174 million and pre-tax margin of 4.9 percent increased 4.0 points compared to the prior-year period, driven primarily by lower costs in the current year as a result of prior workforce rebalancing actions and lower workforce rebalancing charges in the current year.

~~Global Financing~~

~~See pages 85 through 88 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 June 30:	2021		2020		Change		Currency		Currency
For the three months ended March 31:											2022		2021		Change		Currency
Total Revenue	$	18,745	$	18,123	3.4	%	(0.6)	%	(0.5)	%	$	14,197	$	13,187	7.7	%	10.9	%
Americas	$	8,820	$	8,450	4.4	%	2.9	%	3.0	%	$	7,056	$	6,477	8.9	%	8.9	%
Europe/Middle East/Africa (EMEA)		6,038		5,695	6.0		(3.0)		(2.9)			4,231		3,928	7.7		13.9
Asia Pacific		3,887		3,977	(2.3)		(4.5)		(4.5)			2,910		2,781	4.6		11.3

Yr. to Yr.

Yr. to Yr.

Percent Change

Percent

Excluding Divested

Yr. to Yr.

Change

Businesses And

(Dollars in millions)

Percent

Adjusted For

Adjusted For

For the six months ended June 30:

2021

2020

Change

Currency

Currency

Total Revenue

$
36,474

$
35,694

2.2
%
(1.5)
%
(1.4)
%
Americas

$
16,999

$
16,617

2.3
%
1.6
%
1.7
%
Europe/Middle East/Africa (EMEA)

11,679

11,212

4.2

(4.3)

(4.2)

Asia Pacific

7,797

7,865

(0.9)

(4.1)

(4.1)

Total revenue of ~~$18,745~~$14,197 million increased ~~3.4~~7.7 percent as reported ~~and was flat excluding divested businesses and~~(11 percent adjusted for ~~currency~~currency) in the ~~second~~first quarter of ~~2021~~2022 compared to the ~~prior-year period.~~prior year, which includes approximately 5 points of revenue growth from incremental sales to Kyndryl.

Americas revenue of ~~$8,820~~$7,056 million increased ~~4.4~~8.9 percent as reported ~~and 3~~(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 ~~1.5~~7.0 percent compared to the prior ~~year.~~year and Canada increased ~~34.7~~8.2 percent as reported ~~and 20~~(8 percent adjusted for ~~currency.~~currency). Latin America ~~decreased 1.7~~increased 25.5 percent as reported ~~and 2~~(25 percent adjusted for ~~currency,~~currency), with Brazil increasing 24.8 percent as reported (20 percent adjusted for currency).

In EMEA, total revenue ~~flat~~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 Germany 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 ~~declining 1~~increased 3 percent adjusted for currency.

~~In EMEA, total~~Asia Pacific revenue of ~~$6,038~~$2,910 million increased ~~6.0~~4.6 percent as reported ~~but decreased 3~~(11 percent adjusted for ~~currency. Within EMEA, Germany~~currency), which includes approximately 6 points of revenue growth from incremental sales to Kyndryl. Japan increased ~~4.2~~4.0 percent as reported ~~but declined 4~~(14 percent adjusted for ~~currency. As reported, France, the UK~~currency). India and ~~Italy~~Australia increased ~~18.4 percent, 13.9~~25.9 percent and ~~11.1~~11.4 percent, respectively, as reported and ~~grew 9 percent, 2~~30 percent and 219 percent, respectively, adjusted for currency.

~~Asia Pacific revenue of $3,887 million~~ China decreased ~~2.3~~11.2 percent as reported ~~and 5~~(13 percent adjusted for currency. Within Asia Pacific, Japan decreased 2.8 percent as reported and 1 percent adjusted for currency. As reported, India, Australia and China decreased 5.1 percent, 4.7 percent and 3.3 percent, respectively, and declined 8 percent, 18 percent and 10 percent, respectively, adjusted for currency.currency).

6655

Table of Contents

Management Discussion – (continued)

For the first six months of 2021, total revenue of $36,474 million increased 2.2 percent as reported, but declined 1 percent excluding divested businesses and adjusted for currency compared to the prior-year period.

Americas revenue of $16,999 million increased 2.3 percent as reported and 2 percent adjusted for currency. Within Americas, the U.S. increased 1.1 percent compared to the prior year. Canada increased 20.7 percent as reported and 10 percent adjusted for currency. Latin America decreased 5.6 percent as reported and 2 percent adjusted for currency, with Brazil revenue declining 7.2 percent as reported and 1 percent adjusted for currency.

In EMEA, total revenue of $11,679 million increased 4.2 percent as reported, but declined 4 percent adjusted for currency. Within EMEA, the UK increased 10.4 percent as reported and grew slightly adjusted for currency. As reported, France, Italy and Germany increased 6.9 percent, 6.8 percent and 3.8 percent, respectively, but declined 2 percent, 2 percent and 5 percent, respectively, adjusted for currency.

Asia Pacific revenue of $7,797 million decreased 0.9 percent as reported and 4 percent adjusted for currency. Within Asia Pacific, Japan decreased 1.4 percent as reported and 2 percent adjusted for currency. India decreased 8.6 percent as reported and 10 percent adjusted for currency and China decreased 7.0 percent as reported and 12 percent adjusted for currency. Australia grew 4.4 percent as reported, but declined 11 percent adjusted for currency.

Expense

Total Expense and Other (Income)


							Yr. to Yr.								Yr. to Yr.
(Dollars in millions)							Percent								Percent
For the three months ended June 30:	2021			2020			Change
Total consolidated expense and other (income)	$	7,451		$	7,129		4.5	%
For the three months ended March 31:									2022			2021			Change
Total expense and other (income)									$	6,712		$	6,784		(1.1)	%
Non-operating adjustments:
Amortization of acquired intangible assets	$	(281)		$	(284)		(1.2)	%	$	(280)		$	(273)		2.5	%
Acquisition-related charges		(18)			(1)		nm			(7)			(16)		(57.4)
Non-operating retirement-related (costs)/income		(328)			(273)		19.8			(202)			(332)		(39.2)
Separation-related charges		(117)			—		nm
Kyndryl-related impacts										(222)			—		nm
Operating (non-GAAP) expense and other (income)	$	6,708		$	6,570		2.1	%	$	6,001		$	6,162		(2.6)	%
Total consolidated expense-to-revenue ratio		39.8	%		39.3	%	0.4	pts.
Total expense-to-revenue ratio										47.3	%		51.4	%	(4.2)	pts.
Operating (non-GAAP) expense-to-revenue ratio		35.8	%		36.3	%	(0.5)	pts.		42.3	%		46.7	%	(4.5)	pts.

nm -— not meaningful

Yr. to Yr.

(Dollars in millions)

Percent

For the six months ended June 30:

2021

2020

Change

Total consolidated expense and other (income)

$
14,751

$
15,101

(2.3)
%
Non-operating adjustments:







Amortization of acquired intangible assets

$
(559)

$
(569)

(1.9)
%
Acquisition-related charges

(34)

(2)

nm

Non-operating retirement-related (costs)/income

(670)

(538)

24.6

Separation-related charges

(175)

—

nm

Operating (non-GAAP) expense and other (income)

$
13,313

$
13,992

(4.9)
%
Total consolidated expense-to-revenue ratio

40.4
%

42.3
%
(1.9)
pts.
Operating (non-GAAP) expense-to-revenue ratio

36.5
%

39.2
%
(2.7)
pts.

~~nm - not meaningful~~

~~Table of Contents~~

~~Management Discussion – (continued)~~

Total expense and other (income) ~~increased 4.5~~decreased 1.1 percent in the ~~second~~first quarter of ~~2021~~2022 versus the prior year. Our expense dynamics reflect a higher level of investment in innovation, skills and our ecosystem as we execute our hybrid cloud and AI strategy. We are aggressively hiring, scaling our garage footprint, increasing our research spend in areas including quantum, hybrid cloud and AI, and expanding our ecosystem. The year-to-year increase in expense was alsoprior-year period

primarily driven by the effects of currency, ~~separation-related charges in the current-year period,~~ lower ~~IP income and higher~~ non-operating retirement-related costs, ~~partially offset by a benefit from expected credit loss expense,~~ lower workforce rebalancing charges and lower ~~interest expense~~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 ~~the current-year period.~~innovation, our ecosystem 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 emerging areas such as quantum. Total operating (non-GAAP) expense and other (income) ~~increased 2.1~~decreased 2.6 percent year to year, driven primarily by the factors described above excluding the ~~separation-related charges and higher~~lower non-operating retirement-related ~~costs.~~costs and 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 June 30:	2021		2020		Change
For the three months ended March 31:							2022		2021		Change
Selling, general and administrative expense:
Selling, general and administrative — other	$	4,451	$	4,239	5.0	%	$	3,824	$	3,890	(1.7)	%
Advertising and promotional expense		399		363	9.9			336		345	(2.4)
Workforce rebalancing charges		95		137	(30.6)			5		94	(94.4)
Amortization of acquired intangible assets		281		284	(1.2)			279		272	2.6
Stock-based compensation		152		155	(2.1)			136		115	18.6
Provision for/(benefit from) expected credit loss expense		(43)		70	nm			16		(28)	nm
Total consolidated selling, general and administrative expense	$	5,334	$	5,248	1.6	%
Total selling, general and administrative expense							$	4,597	$	4,688	(1.9)	%
Non-operating adjustments:
Amortization of acquired intangible assets	$	(281)	$	(284)	(1.2)	%	$	(279)	$	(272)	2.6	%
Acquisition-related charges		(18)		(1)	nm			(7)		(16)	(57.4)
Separation-related charges		(116)		—	nm
Kyndryl-related impacts								0		—	nm
Operating (non-GAAP) selling, general and administrative expense	$	4,919	$	4,962	(0.9)	%	$	4,311	$	4,399	(2.0)	%

nm -— not meaningful

Yr. to Yr.

(Dollars in millions)

Percent

For the six months ended June 30:

2021

2020

Change

Selling, general and administrative expense:







Selling, general and administrative — other

$
8,757

$
8,580

2.1
%
Advertising and promotional expense

750

791

(5.1)

Workforce rebalancing charges

241

865

(72.1)

Amortization of acquired intangible assets

558

568

(1.9)

Stock-based compensation

275

272

1.2

Provision for/(benefit from) expected credit loss expense

(73)

126

nm

Total consolidated selling, general and administrative expense

$
10,508

$
11,203

(6.2)
%
Non-operating adjustments:







Amortization of acquired intangible assets

$
(558)

$
(568)

(1.9)
%
Acquisition-related charges

(34)

(2)

nm

Separation-related charges

(175)

—

nm

Operating (non-GAAP) selling, general and administrative expense

$
9,742

$
10,633

(8.4)
%

~~nm - not meaningful~~Total selling, general and administrative (SG&A) expense decreased 1.9 percent in the first quarter of 2022 versus the prior-year period driven primarily by the following factors:

6856

Table of Contents

Management Discussion – (continued)

Total selling, general and administrative (SG&A) expense increased 1.6 percent in the second quarter of 2021 versus the prior year driven by the higher level of investments we are making to execute our hybrid cloud and AI strategy, as well as the following factors:

●

Lower workforce rebalancing charges (2 points); and

●

The effects of currency ~~(3 points); and~~

●

~~Separation-related charges in the current-year period~~ (2 points); partially offset by

●

A ~~benefit from~~provision for expected credit loss expense compared to a ~~provision~~benefit in the prior-year period ~~(2 points)~~(1 point); and

●

~~Lower workforce rebalancing charges~~Higher spending (1 point). reflecting our continuing investment in innovation, our ecosystem and talent, partially offset by lower spending for shared services transferred to Kyndryl.

Operating (non-GAAP) expense decreased ~~0.9~~2.0 percent year to year primarily driven by the same ~~factors excluding the separation-related charges.~~factors.

~~SG&A expense decreased 6.2 percent in the first six months of 2021 versus the prior year driven primarily by the following factors:~~

●

~~Lower workforce rebalancing charges (6 points);~~

●

~~A benefit from expected credit loss expense compared to a~~The provision ~~in the prior-year period (2 points); and~~

●

~~Lower spending (1 point) including reductions in travel; partially offset by~~

●

~~The effects of currency (2 points); and~~

●

~~Separation-related charges in the current-year period (2 points).~~

~~Operating (non-GAAP) expense decreased 8.4 percent year to year, primarily driven by the same factors excluding the separation-related charges.~~

~~Provisions~~ for expected credit loss expense ~~decreased $199~~increased $44 million year to year in the first ~~six~~three months of ~~2021,~~2022 primarily driven by ~~decreases~~higher expense for specific reserves in ~~both specific~~the current-year period and a decrease in general reserves in the ~~current year compared with increases in the~~ prior-year period. In the prior year, the global pandemic resulted in some deterioration in customer credit quality and/or bankruptcies which had an impact to provisions in the first half of 2020. We have started to see improvement in credit quality and some emergence from bankruptcies in the current year as the economy begins to reopen in many parts of the world. The receivables provision coverage was ~~2.5~~2.3 percent at ~~June 30, 2021,~~March 31, 2022, excluding receivables classified as held for sale, an increase of 1020 basis points ~~from both~~compared to December 31, ~~2020 and June 30, 2020.~~2021. The increase was primarily driven by the overall decline in total receivables.

Research, Development and Engineering

Yr. to Yr.

(Dollars in millions)

Percent

For the three months ended June 30:

2021

2020

Change

Research, development and engineering expense

$
1,657

$
1,582

4.7
%
Non-operating adjustment:







Separation-related charges

$
0

$
—

nm

Operating (non-GAAP) research, development and engineering expense

$
1,656

$
1,582

4.7
%


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

~~nm - not meaningful~~

~~Table of Contents~~

~~Management Discussion – (continued)~~

Yr. to Yr.

(Dollars in millions)

Percent

For the six months ended June 30:

2021

2020

Change

Research, development and engineering expense

$
3,286

$
3,207

2.5
%
Non-operating adjustment:







Separation-related charges

$
0

$
—

nm

Operating (non-GAAP) research, development and engineering expense

$
3,286

$
3,207

2.5
%

~~nm - not meaningful~~

Research, development and engineering (RD&E) expense ~~was 8.8 percent and 9.0 percent of revenue~~ in the ~~second~~first quarter ~~and first six months~~ of ~~2021, respectively, compared~~2022 increased 3.9 percent year to ~~8.7 percent and 9.0 percent in the prior-year periods, respectively,~~year reflecting our continuing investment to deliver innovation in ~~innovation as we increase spending in areas including quantum,~~AI, hybrid cloud and ~~AI.~~

~~RD&E expense~~emerging areas such as quantum. Higher spending (5 points) in the ~~second quarter of 2021 increased 4.7 percent year to year, primarily driven by higher spending (3 points) and the effects of currency (2 points).~~

~~RD&E expense in the first six months of 2021 increased 2.5 percent year to year, primarily driven~~current-year period was partially offset by the effects of currency ~~(2 points) and higher spending~~ (1 point).

Intellectual Property and Custom Development Income

Yr. to Yr.

(Dollars in millions)

Percent

For the three months ended June 30:

2021

2020

Change

Intellectual Property and Custom Development Income:







Licensing of intellectual property including royalty-based fees

$
64

$
128

(49.9)
%
Custom development income

67

74

(9.0)

Sales/other transfers of intellectual property

4

1

192.3

Total

$
135

$
203

(33.5)
%


					Yr. to Yr.						Yr. to Yr.
(Dollars in millions)					Percent						Percent
For the six months ended June 30:	2021		2020		Change
For the three months ended March 31:							2022		2021		Change
Intellectual Property and Custom Development Income:
Licensing of intellectual property including royalty-based fees	$	136	$	162	(16.0)	%	$	71	$	74	(4.0)	%
Custom development income		136		149	(9.1)			48		65	(26.2)
Sales/other transfers of intellectual property		10		8	28.2			2		6	(73.3)
Total	$	282	$	319	(11.7)	%	$	121	$	146	(16.9)	%

Total intellectual property and custom development income in the first quarter of 2022 decreased ~~33.5 percent and 11.7~~16.9 percent year to ~~year in the second quarter and first six months of 2021, respectively. These decreases were primarily driven by 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.

7057

Table of Contents

Management Discussion – (continued)

Other (Income) and Expense

Yr. to Yr.

(Dollars in millions)

Percent

For the three months ended June 30:

2021

2020

Change

Other (income) and expense:







Foreign currency transaction losses/(gains)

$
(14)

$
62

nm

(Gains)/losses on derivative instruments

79

(92)

nm

Interest income

(11)

(23)

(50.6)
%
Net (gains)/losses from securities and investment assets

0

0

(29.3)

Retirement-related costs/(income)

328

273

19.8

Other

(67)

(43)

56.0

Total consolidated other (income) and expense

$
315

$
179

76.1
%
Non-operating adjustments:







Amortization of acquired intangible assets

$
(1)

$
(1)

—

Non-operating retirement-related (costs)/income

(328)

(273)

19.8
%
Operating (non-GAAP) other (income) and expense

$
(14)

$
(95)

(85.7)
%

~~nm - not meaningful~~


					Yr. to Yr.						Yr. to Yr.
(Dollars in millions)					Percent						Percent
For the six months ended June 30:	2021		2020		Change
For the three months ended March 31:							2022		2021		Change
Other (income) and expense:
Foreign currency transaction losses/(gains)	$	(123)	$	(64)	92.2	%	$	(176)	$	(109)	61.0	%
(Gains)/losses on derivative instruments		239		9	nm			102		160	(36.1)
Interest income		(25)		(74)	(66.4)			(17)		(14)	27.5
Net (gains)/losses from securities and investment assets		(6)		(5)	10.9			218		(6)	nm
Retirement-related costs/(income)		670		538	24.6			202		332	(39.2)
Other		(79)		(42)	87.0			(83)		(18)	356.9
Total consolidated other (income) and expense	$	676	$	361	87.3	%
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		(670)		(538)	24.6	%		(202)		(332)	(39.2)	%
Kyndryl-related impacts								(222)		—	nm
Operating (non-GAAP) other (income) and expense	$	5	$	(178)	nm		$	(179)	$	13	nm

nm - not meaningful

Total ~~consolidated~~ other (income) and expense was ~~$315~~expense of $246 million ~~of expense~~ in the ~~second~~first quarter of ~~2021~~2022 compared to ~~$179~~expense of $346 million in the prior-year period. The year-to-year ~~increase~~change was primarily driven by:

●

~~Net exchange losses (including derivative instruments) in the current year versus net exchange gains (including derivative instruments) in the prior year ($94 million); and~~

●

~~Higher~~Lower non-operating retirement-related costs ($~~54 million). Refer to “Retirement-Related Plans” for additional information.~~

Operating (non-GAAP) other (income) and expense was $14 million of income in the second quarter of 2021 and decreased $82 million compared to the prior-year period. The year-to-year change was driven primarily by the effects of currency described above.

~~Table of Contents~~

~~Management Discussion – (continued)~~

~~Total consolidated other (income) and expense was $676 million of expense in the first six months of 2021 compared to $361 million in the prior year. The year-to-year increase was primarily driven by:~~

●

~~Net exchange losses (including derivative instruments) in the current year versus net exchange gains (including derivative instruments) in the prior year ($171 million);~~

●

~~Higher non-operating retirement-related costs ($132~~130 million). Refer to “Retirement-Related Plans” for additional information; and

●

~~Lower interest income ($49 million) primarily due to lower interest rates~~Net exchange gains (including derivative instruments) in the current-year ~~period.~~period versus net exchange losses in the prior-year period ($124 million); partially offset by

●

An unrealized loss on the Kyndryl retained shares ($222 million).

Operating (non-GAAP) other (income) and expense was $5income of $179 million ~~of expense~~ in the first ~~six months~~quarter of ~~2021~~2022 compared to ~~income~~expense of ~~$178~~$13 million in the prior-year period. The year-to-year change was driven primarily by the ~~effects of currency and lower interest income~~foreign exchange dynamics described above.

Interest Expense

Yr. to Yr.

(Dollars in millions)

Percent

For the three months ended June 30:

2021

2020

Change

Interest expense

$
281

$
323

(12.9)
%


					Yr. to Yr.						Yr. to Yr.
(Dollars in millions)					Percent						Percent
For the six months ended June 30:	2021		2020		Change
For the three months ended March 31:							2022		2021		Change
Interest expense	$	562	$	649	(13.4)	%	$	311	$	280	10.9	%

Interest expense ~~decreased $42~~increased $31 million ~~and $87 million year to year~~ in the ~~second~~first quarter ~~and first six months~~ of ~~2021, respectively.~~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 ~~second~~first quarter ~~and first six months~~ of ~~2021~~2022 was ~~$386~~$393 million, ~~and $772 million, respectively, a decrease~~an increase of ~~$55 million and $113~~$7 million versus the ~~comparable~~ prior-year ~~periods. The decrease for the second quarter was~~period, primarily driven by higher average interest rates, partially offset by a lower average debt balance ~~compared to the prior-year period. The year-to-year decrease for the first six months of 2021 was primarily driven by a lower average debt balance and lower average interest rates~~ in the ~~current-year period.~~current year.

7258

Table of Contents

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 June 30:

2021

2020

Change

Retirement-related plans — cost:







Service cost

$
98

$
98

(0.2)
%
Multi-employer plans

7

7

(1.5)

Cost of defined contribution plans

265

267

(0.6)

Total operating costs

$
370

$
372

(0.5)
%
Interest cost

$
414

$
546

(24.2)
%
Expected return on plan assets

(742)

(854)

(13.1)

Recognized actuarial losses

636

559

13.7

Amortization of prior service costs/(credits)

1

0

124.0

Curtailments/settlements

16

13

24.9

Other costs

3

9

(61.5)

Total non-operating costs/(income)

$
328

$
273

19.8
%
Total retirement-related plans — cost

$
698

$
645

8.1
%

Yr. to Yr.

(Dollars in millions)

Percent

For the six months ended June 30:

2021

2020

Change

Retirement-related plans — cost:







Service cost

$
193

$
197

(1.7)
%
Multi-employer plans

15

14

1.1

Cost of defined contribution plans

536

532

0.8

Total operating costs

$
744

$
743

0.1
%
Interest cost

$
826

$
1,086

(23.9)
%
Expected return on plan assets

(1,484)

(1,706)

(13.0)

Recognized actuarial losses

1,276

1,122

13.7

Amortization of prior service costs/(credits)

4

1

398.9

Curtailments/settlements

34

21

56.8

Other costs

15

14

0.9

Total non-operating costs/(income)

$
670

$
538

24.6
%
Total retirement-related plans — cost

$
1,414

$
1,281

10.4
%


					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 ~~$52~~$152 million compared to the ~~second~~first quarter of ~~2020,~~2021, primarily driven by ~~lower~~a decrease in recognized actuarial losses ($162 million), higher expected return on plan assets ($~~112~~18 million), and ~~an increase in recognized actuarial losses~~lower cost of defined contribution plans ($7617 million), partially offset by ~~lower~~higher interest costs ($~~132~~58 million). Total cost for the first six months of 2021 increased $133 million versus the first six months of 2020, primarily driven by lower expected return on plan assets ($222 million) and an increase in recognized actuarial losses ($154 million), partially offset by lower interest costs ($259 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 ~~second~~first quarter of ~~2021~~2022 were ~~$370~~$309 million, a decrease of $2$22 million compared to the ~~second~~first quarter of ~~2020. For the first six months~~2021, primarily driven by lower cost of ~~2021, operating retirement-related costs were $744 million, an increase of $1 million compared to the prior-year period.~~defined contribution plans ($17 million). Non-operating costs of ~~$328~~$202 million in the ~~second~~first quarter of ~~2021 increased $54~~2022 decreased $130 million year to year,

~~Table of Contents~~ driven by

~~Management Discussion – (continued)~~

a decrease in recognized actuarial losses ($162 million), and ~~for the first six months of 2021 were $670 million, an increase of $132 million compared to the prior-year period. These non-operating cost increases were driven primarily~~higher expected return on plan assets ($18 million), partially offset by ~~the same factors as described above.~~higher interest costs ($58 million).

Taxes

The provision for income taxes for the second quarter of 2021 was $227 million, compared to $209 million in the second quarter of 2020. The operating (non-GAAP) provision for income taxes for the second quarter of 2021 was $431 million, compared to $369 million in the second quarter of 2020.

~~The provision for~~continuing operations benefit from income taxes for the first ~~six months~~quarter of ~~2021~~2022 was ~~$177~~$39 million, compared to a benefit from income taxes of ~~$1,017~~$160 million in the first quarter of 2021. The operating (non-GAAP) income tax provision for the first ~~six months~~quarter of ~~2020. The operating (non-GAAP)~~2022 was $244 million, compared to a provision for income taxes ~~for~~of $25 million in the first ~~six months~~quarter of ~~2021 was $610 million, compared to a~~2021.

The continuing operations benefit from income taxes ~~of $592 million for~~in the first ~~six months~~quarter of ~~2020.~~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 ~~for~~in the first ~~six months~~quarter of ~~2020~~2021 was primarily related to the tax impacts ~~of an intra-entity sale~~from the resolution of certain oftax audits. The increase in the ~~company’s intellectual property. The~~ operating (non-GAAP) ~~benefit from~~ income ~~taxes~~tax provision in the first quarter of 2022, compared to the prior year was primarily driven by tax impacts from the ~~same factor.~~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

Table of Contents

Management Discussion – (continued)

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.~~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 ~~returns~~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 June 30, 2021,~~At March 31, 2022, the company had recorded ~~$731~~$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 ~~June 30, 2021~~March 31, 2022 is ~~$8,019~~$8,699 million which can be reduced by ~~$580~~$548 million associated with timing adjustments, U.S. tax credits, potential transfer pricing adjustments, and state income taxes. The net amount of ~~$7,439~~$8,151 million, if recognized, would favorably affect the company’s effective tax rate.

~~Table of Contents~~

~~Management Discussion – (continued)~~

Earnings Per Share

Basic earnings per share is computed on the basis of the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share is computed on the basis of the weighted-average number of shares of common stock outstanding plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options and stock awards.

Yr. to Yr.

Percent

For the three months ended June 30:

2021

2020

Change

Earnings per share of common stock from continuing operations:







Assuming dilution

$
1.47

$
1.52

(3.3)
%
Basic

$
1.48

$
1.53

(3.3)
%
Diluted operating (non-GAAP)

$
2.33

$
2.18

6.9
%
Weighted-average shares outstanding: (in millions)







Assuming dilution

904.2

894.9

1.0
%
Basic

895.0

889.4

0.6
%


					Yr. to Yr.						Yr. to Yr.
					Percent						Percent
For the six months ended June 30:	2021		2020		Change
For the three months ended March 31:							2022		2021		Change
Earnings per share of common stock from continuing operations:
Assuming dilution	$	2.52	$	2.83	(11.0)	%	$	0.73	$	0.45	62.2	%
Basic	$	2.55	$	2.85	(10.5)	%	$	0.74	$	0.45	64.4	%
Diluted operating (non-GAAP)	$	4.10	$	4.02	2.0	%	$	1.40	$	1.12	25.0	%
Weighted-average shares outstanding: (in millions)
Assuming dilution		903.0		895.0	0.9	%		909.2		901.7	0.8	%
Basic		894.3		888.7	0.6	%		899.3		893.6	0.6	%

Actual shares outstanding at ~~June 30, 2021~~March 31, 2022 were ~~896.3~~ 899.4 million. The weighted-average number of common shares outstanding assuming dilution during the ~~second~~first quarter ~~and first six months~~ of ~~2021 were 9.3~~2022 was 7.5 million ~~(1.0~~shares (0.8 percent) ~~and 8.0 million (0.9 percent) shares~~ higher ~~respectively,~~ than the same ~~periods~~period of ~~2020.~~

~~Financial Position~~

~~Dynamics~~

At June 30, 2021, our balance sheet remained strong 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 June 30, 2021 were $8,165 million, a decrease of $6,110 million from December 31, 2020, primarily due to debt reduction payments and acquisitions. Financing receivables declined $4,111 million to $13,868 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. Total debt of $55,176 million at June 30, 2021 decreased $6,362 million from December 31, 2020, and $17,863 million since the end of the second quarter 2019 (immediately preceding the Red Hat acquisition). We have made good progress in deleveraging while being acquisitive and without sacrificing investments in our business or our solid dividend policy. In the first six months of 2021, we generated $7,539 million in net cash from operations, compared to $8,052 million in the first six months of 2020. We have consistently generated strong cash flow from operations and continue to have access to additional sources of liquidity through the capital markets and our unused credit facilities.2021.

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Management Discussion – (continued)

Financial Position

Dynamics

Our balance sheet at March 31, 2022 continues to provide us with flexibility to support the business.

Cash, restricted cash and marketable securities at March 31, 2022 were $10,769 million, an increase of $3,213 million from December 31, 2021. Total debt of $54,234 million at March 31, 2022 increased $2,531 million from December 31, 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 without sacrificing investments in our business or our solid dividend policy.

Our cash flow is presented on a consolidated basis and includes discontinued operations. Refer to note 3, “Separation of Kyndryl,” for additional information. In the first three months of 2022, we generated $3,248 million in cash from operating activities, compared to $4,914 million in the first three months of 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 ~~June~~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 85, are supplementary data presented to facilitate an understanding of the Global Financing business.2022.

IBM Working Capital


	At June 30,		At December 31,		At March 31,		At December 31,
(Dollars in millions)	2021		2020		2022		2021
Current assets	$	30,774	$	39,165	$	31,330	$	29,539
Current liabilities		36,616		39,869		34,056		33,619
Working capital	$	(5,842)	$	(705)	$	(2,726)	$	(4,080)
Current ratio		0.84:1		0.98:1		0.92:1		0.88:1

Working capital ~~decreased $5,137~~increased $1,354 million from the year-end ~~2020~~2021 position. The key changes are described below:

Current assets ~~decreased $8,390~~increased $1,791 million ($~~7,987~~1,926 million adjusted for currency) due to:

●

~~A decrease~~An increase of ~~$6,110~~$3,213 million ($~~6,016~~3,261 million adjusted for currency) in cash and cash equivalents, restricted cash, and marketable securities; ~~and~~

●

~~A decrease in financing receivables of $2,698 million ($2,557 million adjusted for currency) primarily due to collections of higher year-end balances and sales of financing receivables;~~ partially offset by

●

~~An increase~~A decline in ~~prepaid expenses and other current assets~~receivables of ~~$562~~$1,635 million ($~~590~~1,547 million adjusted for currency) ~~primarily driven by an increase in derivative assets.~~mainly due to collections of higher year-end balances.

Current liabilities ~~decreased $3,253~~increased $437 million ($~~2,618~~767 million adjusted for currency) as a result of:

●

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

●

An increase in short-term debt of ~~$1,598~~$903 million ($~~1,346~~883 million adjusted for currency) primarily due to ~~payments of $1,059 million for workforce rebalancing actions;~~

●

~~A decrease in taxes payable of $1,042 million ($967 million adjusted for currency) primarily driven by tax payments and decline in reserves as a result of resolution of certain tax audit matters;~~

●

~~A decrease in short-term debt of $741 million due to maturities of $4,622 million, including a $500 million early redemption of IBM Credit debt; partially offset by~~ reclassifications of ~~$3,932~~$2,014 million from long-term debt to reflect upcoming maturities; ~~and~~partially offset by maturities of $1,087 million; partially offset by

●

A decrease in accounts payable of ~~$694~~$502 million ($~~642~~474 million adjusted for currency) ~~reflecting~~primarily due to declines from seasonally higher year-end balances; ~~partially offset by~~

●

~~An increase in deferred income of $439 million ($614 million adjusted for currency) driven by annual customer billings and an increase in software renewal rates.~~

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Management Discussion – (continued)

●

A decrease in taxes payable of $492 million ($476 million adjusted for currency) primarily due to indirect tax payments; and

●

A decrease of $461 million ($243 million adjusted for currency) in compensation and benefits and other accrued expenses and liabilities.

Receivables and Allowances

Roll Forward of Total IBM Receivables Allowance for Credit Losses


(Dollars in millions)	(Dollars in millions)									(Dollars in millions)
January 1, 2021		Additions / (Releases) *		Write-offs **		Other +		June 30, 2021
January 1, 2022										January 1, 2022	Additions / (Releases) *		Write-offs **		Foreign currency and other		March 31, 2022
$	644	$	(67)	$	(28)	$	1	$	550	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 ~~2.5~~2.3 percent at ~~June 30, 2021,~~March 31, 2022, an increase of 1020 basis points compared to December 31, ~~2020.~~2021. The increase ~~in coverage~~ was primarily driven by the overall ~~decrease~~decline in total receivables, partially offset by a decrease in customer specific provisions. In the prior year, the global pandemic resulted in some deterioration in customer credit quality and/or bankruptcies which had an impact to provisions in the first half of 2020. We have started to see improvement in credit quality and some emergence from bankruptcies in the current year as the economy begins to reopen in many parts of the world.receivables. The majority of the write-offs during the ~~six~~three months ended ~~June 30, 2021~~March 31, 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 June 30,			At December 31,			At March 31,			At December 31,
(Dollars in millions)	2021			2020			2022			2021
Amortized cost *	$	14,111		$	18,264		$	11,563		$	12,859
Specific allowance for credit losses		173			184			141			159
Unallocated allowance for credit losses		54			79			37			42
Total allowance for credit losses		228			263			179			201
Net financing receivables	$	13,883		$	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 ~~June 30, 2021,~~March 31, 2022, primarily driven by write-offs of previously reserved receivables, partially offset by the decline in amortized cost.

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


(Dollars in millions)	(Dollars in millions)									(Dollars in millions)
January 1, 2021		Additions / (Releases)*		Write-offs **		Other +		June 30, 2021
January 1, 2022										January 1, 2022	Additions / (Releases)*		Write-offs **		Foreign currency and other		March 31, 2022
$	263	$	(23)	$	(12)	$	0	$	228	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 2021 Annual Report for additional information regarding allowance for credit loss write-offs.

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

**Refer to note A, “Significant Accounting Policies,” in our 2020 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 ~~$12 million and $29~~$10 million for the three ~~and six~~ months ended ~~June 30, 2021, respectively,~~March 31, 2022, compared to ~~an addition of $28 million and $39 million for the three and six months ended June 30,~~a net

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Management Discussion – (continued)

~~2020, respectively.~~release of $18 million for the same period in 2021. The ~~decreases~~decrease in ~~both periods in 2021 were~~net releases was primarily driven by lower unallocated reserve requirements in the prior year in Americas due to sales of receivables, partially offset by specific reserve releases in the current year in Americas and ~~unallocated reserves in Americas.~~EMEA.

Noncurrent Assets and Liabilities


	At June 30,		At December 31,		At March 31,		At December 31,
(Dollars in millions)	2021		2020		2022		2021
Noncurrent assets	$	116,039	$	116,806	$	101,945	$	102,462
Long-term debt	$	48,735	$	54,355	$	46,545	$	44,917
Noncurrent liabilities (excluding debt)	$	39,396	$	41,020	$	33,562	$	34,469

~~Noncurrent~~The decrease in noncurrent assets ~~decreased $767~~of $517 million ~~(increased $80~~($146 million adjusted for currency) ~~due to:~~was driven by:

●

A decrease in long-term financing receivables of ~~$1,412~~$815 million ($~~1,298~~793 million adjusted for currency) ~~as a result of reductions~~due to reclasses to short-term receivables and declines from seasonally higher year-end ~~balances and sales of receivables;~~

●

~~A decrease in net property, plant and equipment of $617 million ($505 million adjusted for currency); and~~

●

~~A decrease of $857 million ($628 million adjusted for currency) in total operating right-of-use assets, deferred taxes and investments and sundry assets;~~balances; partially offset by

●

An increase in goodwill and net intangible assets of ~~$1,772~~$265 million ($~~2,122~~460 million adjusted for currency) due to additions from new ~~acquisitions,~~acquisitions; partially offset by intangibles ~~amortization;~~amortization and

●

~~An increase in prepaid pension assets of $436 million ($448 million adjusted for currency).~~ currency impacts.

Long-term debt ~~decreased $5,620~~increased $1,628 million ($~~5,089~~1,972 million adjusted for currency) ~~due to:~~primarily driven by:

●

Issuances of $4,063 million; partially offset by

●

Reclassifications to short-term debt of ~~$3,932~~$2,014 million to reflect upcoming ~~maturities; and~~

●

~~Early redemption of IBM Credit debt of $1,250 million.~~maturities.

Noncurrent liabilities (excluding debt) decreased ~~$1,624~~$907 million ($~~958~~616 million adjusted for currency) ~~due to:~~primarily driven by:

●

A decrease in retirement and ~~nonpension~~ postretirement benefit obligations of ~~$983~~$498 million ($~~596~~324 million adjusted for currency); and

●

A decrease ~~in long-term operating lease liabilities~~ of ~~$296~~$410 million ($~~230~~292 million adjusted for currency) ~~related primarily to real estate leases.~~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 June 30,		At December 31,		At March 31,		At December 31,
(Dollars in millions)	2021		2020		2022		2021
Total company debt	$	55,176	$	61,538	$	54,234	$	51,703
Total Global Financing segment debt	$	17,470	$	21,167
Debt to support external clients		14,234		17,819
Debt to support internal clients		3,236		3,348
Non-Global Financing debt	$	37,706	$	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 ~~$55,176~~$54,234 million ~~decreased $6,362~~increased $2,531 million ($~~5,831~~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 ~~$5,954~~$1,111 million. ~~Total debt has decreased $17,863 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 ~~$37,706~~$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 ~~$2,665~~$1,761 million ($~~2,330~~1,727 million adjusted for currency) from December 31, ~~2020 due to scheduled debt maturities in the first six months of 2021.~~

~~Global Financing debt of $17,470 million decreased $3,696 million ($3,500 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 ~~the company’s~~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 Kyndryl as Global Financing refocuses its portfolio to support IBM's hybrid cloud platform and AI capabilities.

~~The~~ debt used to fund ~~Global~~ Financing assets is primarily composed 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 ~~June 30, 2021.~~March 31, 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” ~~on page 85~~ and in note 4,5, “Segments.” In the Consolidated Income Statement, the external debt-related interest expense supporting ~~Global~~ Financing’s internal financing to ~~the company~~IBM is ~~reclassified from cost of financing to~~classified as interest expense.

Equity

Total equity increased ~~$1,341~~$116 million from December 31, ~~2020,~~2021, primarily due to an increase from net income of ~~$2,280~~$733 million, ~~an increase~~a decrease in accumulated other comprehensive ~~income~~losses of ~~$1,685~~$703 million ~~mainly due to~~driven by retirement-related benefit plans of ~~$991 million~~($352 million) and ~~an increase in~~ foreign currency translation ~~gains~~adjustments ($306 million), and common stock of ~~$393 million,~~$221 million; partially offset by dividends paid of ~~$2,924~~$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 six months ended June 30:	2021		2020
Net cash provided by/(used in) continuing operations:
For the three months ended March 31:					2022		2021
Net cash provided by/(used in):
Operating activities	$	7,539	$	8,052	$	3,248	$	4,914
Investing activities		(4,671)		(2,138)		(1,358)		(2,000)
Financing activities		(8,914)		(1,739)		1,377		(5,783)
Effect of exchange rate changes on cash, cash equivalents and restricted cash		(65)		(301)		(5)		(134)
Net change in cash, cash equivalents and restricted cash	$	(6,110)	$	3,874	$	3,263	$	(3,002)

Net cash provided by operating activities decreased ~~$513~~$1,666 million as compared to the first ~~six~~three months of ~~2020~~2021 driven primarily by:

●

A decrease ~~in payroll tax and value-added tax deferrals~~ of ~~approximately $660~~cash provided by financing receivables of $1,232 million primarily driven by higher prior year sales of financing receivables;

●

A decrease in deferred income of $605 million due to strong performance in the prior-year ~~tax relief under the U.S. CARES Act and other non-U.S. government assistance programs related to COVID-19;~~period; and

●

An increase in ~~workforce rebalancing payments~~inventory to mitigate supply chain disruption and in anticipation of ~~$623 million; partially offset by~~

●

~~Performance-related improvements within net income;~~

●

~~A net decrease in cash payments for income taxes of $240 million primarily due to a withholding tax payment on intercompany dividends in~~ the ~~second quarter of 2020; and~~

●

~~A decrease in interest payments on debt of approximately $230 million.~~

~~Net cash used in investing activities increased $2,533 million as compared to the first six months of 2020 driven by:~~

●

~~An increase in cash used for acquisitions of $2,847 million to enhance our hybrid cloud and AI software capabilities and to add skills in strategic GBS ecosystem partners; and~~

●

~~A decrease in cash provided by divestitures of $782 million;~~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 and other investments of $959~~$422 million; and

●

A decrease in cash used for net capital expenditures of ~~$216~~$152 million.

~~Net~~Financing activities were a net source of cash ~~used~~of $1,377 million in ~~financing activities increased $7,175~~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 ~~$7,118~~$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.

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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

~~Across every industry, enterprises are using~~The hybrid cloud platform we have built is open, secure and flexible and at its core is based on Red Hat, which gives clients powerful software capabilities based on open-source innovation. Our software has been optimized for the platform and helps our clients apply AI, automation and 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 ~~redesign business processes, whether through automation in manufacturing, telemedicine in healthcare or omnichannel in retail. These~~accelerate their digital ~~transformations are enabled by a~~transformation journeys. Our infrastructure allows clients to take full advantage of an extended hybrid cloud environment. ~~The technology and services we provide to our clients enable their business growth and productivity increases and improve customer experiences.~~

This ~~is why our~~platform-centric strategy is ~~focused on hybrid cloud and AI. Hybrid cloud is the reality for our clients today. They~~producing solid results. We have ~~multiple public clouds, private clouds, on-premise workloads and are dealing with stringent regulatory and security requirements. Our~~more than 4,000 hybrid cloud platform ~~gives~~ clients, including 200 added in the ability to flexibly deploy and manage data and applications across any environment. With hybrid cloud, clients can derive 2.5 times more value in comparison to other approaches. This is what we have built our platform for and why we have such confidence in our strategy.

To execute our strategy, we continue to take decisive steps and make the necessary investments to strengthen our portfolio, both organic and inorganic, in skills, ecosystem and innovation. During the secondfirst quarter of ~~2021,~~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 ~~continued to make progress in the execution of~~help our ~~strategy. We announced a series of products to further differentiate our hybrid cloud~~clients digitally transform and ~~AI capabilities. To complement these organic investments, we completed several acquisitions, adding hybrid cloud~~build new and ~~AI software capabilities~~differentiated experiences and skills in strategic GBS ecosystem partners. We are adding delivery capabilities in GBS, technical skills in Red Hat and go-to-market capabilities across the company. We are building a more client-centric culture through our ecosystem of partners and our garage model which provides clients with a more technical and experiential approach, and we are increasing research and development in quantum, hybrid cloud and AI to drive innovation.services.

We have ~~also~~ taken actions to streamline our operations and simplify our ~~operating~~go-to-market model, consistent with our more focused, platform-centric business. We are making significant changes to 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 today while shaping the technologies of tomorrow through increased investments in R&D to deliver innovation in AI, hybrid cloud and emerging areas like quantum. In the first quarter of 2022, we announced a new AIOps solution in 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 the only company to have an operational computer that is available on our cloud. We made three acquisitions in first quarter 2022 to further strengthen our portfolio and add value to 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 also investing through acquisition, for example Neudesic, which was acquired in the first quarter of 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 most of their IBM solutions and expanding our technical talent across the business.

The fundamentals of our business model remain solid. ~~We executed the structural actions initiated in the fourth quarter of 2020 to improve the profit profile of Kyndryl and to create financial flexibility to reinvest in our business.~~ Our balance sheet and liquidity position remain strong. At ~~June 30, 2021,~~March 31, 2022, we had ~~$8.2~~$10.8 billion of cash and cash equivalents, restricted cash and marketable ~~securities. We have made good progress in deleveraging,~~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, ~~reduced~~in effect, changed our ~~debt~~company’s trajectory. Our business reflects a higher growth, higher value mix with a significant recurring base, led by ~~$17.9 billion from our peak level at June 30, 2019 (immediately preceding the Red Hat acquisition).~~

Looking forward, there is tremendous opportunity for us to help our clients become digital businesses. At the same time, the overall spending environment has continued to improve, and with the economy opening up in many parts of the world, many markets and industries are getting back on track. We continue to take prudent actions to improve our operating model and accelerate our strategy.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.

~~Table of Contents~~Retirement-Related Plans

~~Management Discussion – (continued)~~

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 $0.2 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.~~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 ~~June 30, 2021,~~March 31, 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 ~~six~~three months of ~~2021.~~2022. Based on the currency rate movements in the first ~~six~~three months of ~~2021,~~2022, total revenue increased ~~2.2~~7.7 percent as reported ~~but decreased 1.5~~and 10.9 percent at constant currency versus the first ~~six~~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) ~~increase~~decrease of approximately ~~$170~~$30 million in the first ~~six~~three months of ~~2021~~2022 on an as-reported basis and ~~an increase~~a decrease of approximately ~~$210~~$50 million on an operating (non-GAAP) basis. The same mathematical exercise resulted in an increase of approximately ~~$160~~$50 million in the first ~~six~~three months of ~~2020~~2021 on an as-reported basis and an increase of approximately ~~$150~~$70 million on an operating (non-GAAP) basis. We view these amounts as a theoretical maximum impact to 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, 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 ~~six~~three months ended, or at, as applicable, ~~June 30, 2021,~~March 31, 2022, those amounts are ~~$7.5~~$3.2 billion of consolidated net cash from operating activities, ~~$8.2~~$10.8 billion of cash and cash equivalents, restricted cash and short-term marketable

~~Table of Contents~~

~~Management Discussion – (continued)~~

securities and $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 June 22, 2021, the company entered into a new $2.5 billion Three-Year Credit Agreement and $7.5 billion Five-Year Credit Agreement to replace the existing $2.5 billion Three-Year and $10.25 billion Five-Year Credit Agreements and terminated its $2.5 billion 364-Day Credit Agreement. Refer to note 11, “Borrowings” for additional details on these credit agreements.

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

The major rating agencies’ ratings on our debt securities at ~~June 30, 2021~~March 31, 2022 appear in the following ~~table. In May 2021, Standard~~table and ~~Poor’s downgraded our long-term debt rating~~remain unchanged from ~~A to A- and our commercial paper rating from A-1 to A-2.~~December 31, 2021.


	STANDARD	MOODY’S
	AND	INVESTORS
IBM RATINGS:	POOR’S	SERVICE
Senior long-term debt	A-	A2A3
Commercial paper	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 $6.4~~increased $2.5 billion from December 31, ~~2020 and $17.9~~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 ~~June 30, 2021,~~March 31, 2022, the fair value of those instruments that were in a liability position was ~~$142~~$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 have evaluated the replacement of the LIBOR benchmark ~~interest rate, including~~within the company’s risk management and internal operational readiness and we are 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 80.~~pages 64 and 65. For the purpose of running its business, IBM manages, monitors and analyzes cash flows in a different manner.

~~Table of Contents~~

~~Management Discussion – (continued)~~

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.

The following is management’s view of cash flows for the first ~~six~~three months of ~~2021~~2022 and ~~2020~~2021 prepared in a manner consistent with the description ~~above.~~

~~Net~~above and is presented on a consolidated basis, including cash ~~from operating activities and free~~flows of discontinued operations.


(Dollars in millions)
For the three months ended March 31:	2022		2021
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		(378)		(529)
Free cash flow	$	1,240	$	1,522
Acquisitions		(698)		(1,120)
Divestitures		61		(15)
Common stock repurchases for tax withholdings		(80)		(41)
Dividends		(1,475)		(1,457)
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	$	3,213	$	(3,002)

* Includes cash ~~flow in 2021 include significant cash impacts from the workforce rebalancing actions we initiated in the fourth quarter~~flows of ~~2020 and~~discontinued operations. See note 3, “Separation of Kyndryl, ~~separation-related charges.~~” for additional information.

(Dollars in millions)

For the six months ended June 30:

2021

2020
Net cash from operating activities per GAAP

$
7,539

$
8,052
Less: change in Global Financing receivables

3,763

2,971
Net cash from operating activities, excluding Global Financing receivables

$
3,776

$
5,081
Capital expenditures, net

(1,217)

(1,434)
Free cash flow

$
2,559

$
3,647
Acquisitions

(2,866)

(19)
Divestitures

(25)

757
Common stock repurchases for tax withholdings

(234)

(211)
Dividends

(2,924)

(2,890)
Non-Global Financing debt

(2,331)

3,958
Other (includes Global Financing net receivables and Global Financing debt)

(288)

(1)
Change in cash, cash equivalents, restricted cash and short-term marketable securities

$
(6,110)

$
5,241

In the first ~~six~~three months of ~~2021,~~2022, we generated free cash flow of ~~$2.6~~$1.2 billion, a decrease of ~~$1.1~~$0.3 billion versus the ~~prior year. The current-year period includes cash impacts from structural actions we initiated in the fourth quarter of 2020 and separation-related charges in the amount of $1.2 billion.~~prior-year period. In the first ~~six months~~quarter of ~~2021,~~2022, we also continued to return value to shareholders with ~~$2.9~~$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 $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 ~~changes in~~ 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 ~~acquisitions,~~ dividends and debt service. When additional requirements arise, we have several liquidity

~~Table of Contents~~

~~Management Discussion – (continued)~~

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.

Table of Contents

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/						Yr. to Yr.
(Dollars in millions)					Margin						Percent/
For the three months ended June 30:	2021		2020		Change
External revenue	$	242	$	265	(8.6)	%
Internal revenue		260		241	7.9
Total revenue	$	502	$	506	(0.7)	%
For the three months ended March 31:							2022		2021*		Change
Revenue							$	154	$	208	(26.2)	%
Pre-tax income	$	246	$	176	39.3	%	$	84	$	98	(14.3)	%

* Recast to reflect 2021 segment changes.

Yr. to Yr.

Percent/

(Dollars in millions)

Margin

For the six months ended June 30:

2021

2020

Change

External revenue

$
482

$
564

(14.7)
%
Internal revenue

428

453

(5.4)

Total revenue

$
910

$
1,017

(10.5)
%
Pre-tax income

$
412

$
370

11.3
%

~~We have refocused our Global~~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 began entering 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~~ impact ~~external~~ 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 ~~0.7~~14.3 percent ~~in the second 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 8.6 percent (12 percent adjusted for currency),~~The decrease in pre-tax income was driven by ~~external financing (down 23.1 percent to $160 million),~~a decrease in gross profit, partially offset by ~~external used equipment sales (up 43.8 percent to $82 million). Internal revenue was up 7.9 percent due to increases~~a decrease in ~~internal used equipment sales (up 23.5 percent to $230 million), partially offset by declines in internal financing (down 45.7 percent to $29 million).~~

~~Global Financing~~ total ~~revenue decreased 10.5 percent in the first six months~~expense, primarily as a result of 2021 compared to the same period in 2020. External revenue decreased 14.7 percent (17 percent adjusted for currency), driven by a decline in external financing (down 22.2 percent to $344 million), partially offset by an increase in external used equipment sales (up 12.8 percent to $137 million). Internal revenue decreased 5.4 percent, driven by a decline in internal financing (down 51.6 percent to $66 million), partially offset by an increase in internal used equipment sales (up 14.6 percent to $362 million).

~~For both the three and six months ended June 30, 2021, the decreases in external financing were due to a lower average asset balance, partially driven by~~ the strategic actions ~~and the decreases in internal financing were due to lower yields and a lower average asset balance. Internal used equipment sales were up due to increased sales to GTS.~~described above.

8570

Table of Contents

Management Discussion – (continued)

~~Global Financing pre-tax income increased 39.3~~Financial Position


	At March 31,		At December 31,
(Dollars in millions)	2022		2021
Cash and cash equivalents	$	825	$	1,359
Client financing receivables:
Net investment in sales-type and direct financing leases ⁽¹⁾		3,285		3,396
Client loans		7,908		8,818
Total client financing receivables	$	11,193	$	12,215
Commercial financing receivables
Held for investment		192		444
Held for sale		410		793
Other receivables		49		61
Total external receivables ⁽²⁾	$	11,843	$	13,512
Intercompany financing receivables ^(3) (4)		727		778
Other assets⁽⁵⁾		1,076		1,231
Total assets	$	14,471	$	16,880

Intercompany payables ⁽³⁾	$	163	$	467
Debt ⁽⁶⁾		12,168		13,929
Other liabilities		788		937
Total liabilities	$	13,119	$	15,333
Total equity	$	1,352	$	1,547
Total liabilities and equity	$	14,471	$	16,880

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

(2)

The difference between the decrease in total external receivables of $1.7 billion (from $13.5 billion in December 2021 to $11.8 billion in March 2022) and the $1.6 billion change in Financing segment’s receivables disclosed in the free cash flow presentation on page 69 is primarily attributable to currency impacts.

(3)	This entire amount is eliminated for purposes of IBM’s consolidated financial results and therefore does not appear in the Consolidated Balance Sheet.

(4)	These assets, along with all other financing assets in this table, are leveraged at the value in the table using Financing segment debt.

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

(6)	Financing segment debt is 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, 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 ~~$246 million~~consumers, an increase of 4 points year to year and an increase of 1 point compared to December 31, 2021. This investment grade percentage is based on the credit ratings of the companies in the ~~second~~portfolio and reflects certain mitigating actions taken to reduce the risk to IBM.

We have a long-standing practice of taking mitigation actions, in certain circumstances, to transfer credit risk to third parties. These actions may include credit insurance, financial guarantees, nonrecourse borrowings, transfers of receivables recorded as true sales in accordance with accounting guidance or sales of equipment under operating lease. Sale of receivables arrangements are also utilized in the normal course of business as part of our cash and liquidity management.

Throughout 2021, sales of client financing receivables were utilized as part of the company’s cash and liquidity management as well as for credit mitigation. In the first quarter of ~~2021~~2022, sales of client financing receivables were largely focused on credit mitigation. In addition, the company has an existing agreement with a third-party investor to sell IBM short-term commercial financing receivables on a revolving basis. The company has expanded this agreement to other countries and ~~11.3 percent to $412 million~~geographies since commencement in the ~~first six months~~U.S. and Canada in 2020.

Table of ~~2021, compared~~Contents

Management Discussion – (continued)

The following table presents the total amount of client and commercial financing receivables 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 ~~the same periods in 2020. The increase in the second quarter was primarily driven by improvements in provisions~~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 an increase in gross profit reflecting higher sales of internal used equipment. The increase in pre-tax income for the first six months of 2021 was primarily driven by improvements in provisions for credit losses, partially offset by a decrease in gross profit due to lower revenue as a result of the declining asset base.debt.

Return on Equity Calculation



	For Three Months Ended						For Six Months Ended
	June 30,						June 30,
(Dollars in millions)	2021			2020			2021			2020
For the three months ended March 31:													2022			2021*
Numerator
Global Financing after-tax income*	$	179		$	147		$	302		$	339
Financing after-tax income**													$	69		$	73
Annualized after-tax income (1)	$	714		$	588		$	603		$	677		$	275		$	290
Denominator
Average Global Financing equity (2)**	$	1,986		$	2,453		$	2,108		$	2,551
Global Financing return on equity (1)/(2)		36.0	%		24.0	%		28.6	%		26.5	%
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 ~~Global~~ Financing’s geographic mix of earnings as IBM’s provision for income taxes is determined on a consolidated basis.

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

** Average of the ending equity for Global Financing for the last two quarters and three quarters, for the three months ended June 30 and for the six months ended June 30, respectively.

~~Global Financing return~~Return on equity was ~~36.0~~19.0 percent compared to 13.3 percent for the three months ended ~~June 30,~~March 31, 2022 and 2021, ~~compared to 24.0 percent for the three months ended June 30, 2020.~~respectively. The increase was primarily driven by a lower average equity balance, ~~and an increase in net income. Return on equity was 28.6 percent for~~which reflects the six months ended June 30, 2021, compared to 26.5 percent for the six months ended June 30, 2020. The increase was driven by a lower average equity balance, partially offset by a decrease in net income, which included a discrete tax benefit of $40 millionstrategic actions taken in the ~~first quarter of 2020.~~

~~Table of Contents~~

~~Management Discussion – (continued)~~

~~Financial Position~~

At June 30,

At December 31,
(Dollars in millions)

2021

2020
Cash and cash equivalents

$
1,403

$
1,862
Client financing receivables:

Net investment in sales-type and direct financing leases ⁽¹⁾

3,647

4,092
Client loans

9,225

11,498
Total client financing receivables

12,871

15,590
Commercial financing receivables

1,012

2,411
Other receivables

52

91
Total external receivables ⁽²⁾

13,936

18,092
Intercompany financing receivables ^(3) (4)

3,869

3,959
Other assets

1,729

1,162
Total assets

$
20,937

$
25,075

Intercompany payables ⁽³⁾

$
387

$
303
Debt ⁽⁵⁾

17,470

21,167
Other liabilities

1,139

1,254
Total liabilities

18,996

22,723
Total equity

1,941

2,352
Total liabilities and equity

$
20,937

$
25,075

~~(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 $4.2 billion (from $18.1 billion in 2020 to $13.9 billion in 2021) and the $3.8 billion change in Global Financing receivables disclosed in the free cash flow presentation on page 84 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 debt.~~

~~(5)~~

~~Global Financing debt is primarily composed of intercompany loans.~~

~~At June 30, 2021, approximately 64 percent of the total external portfolio was with investment-grade clients with no direct exposure to consumers, an increase of 7 points~~prior year to ~~year and relatively flat compared to March 31, 2021. We continue to apply our rigorous credit policies, particularly in industries and countries disrupted by COVID-19, as it relates to~~reposition the ~~origination of new~~Financing business. ~~This investment grade percentage is based on the credit ratings of the companies in the portfolio and reflects 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. 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.

For the six months ended June 30, 2021, we sold $2,091 million of client financing receivables to third parties, consisting of loan and lease receivables of $1,359 million and $732 million, respectively. More than half of the receivables sold were classified as current assets at the time of sale. For the six months ended June 30, 2020, we sold $711 million of client financing receivables to third parties, consisting of loan and lease receivables of $294 million and $417 million, respectively.

In addition, we sold $2,621 million of commercial financing receivables for the six months ended June 30, 2021, to a third-party investor. we also classified $467 million and $383 million of IBM commercial financing receivables as held for sale at June 30, 2021 and December 31, 2020, respectively, in short-term financing receivables in the Consolidated

~~Table of Contents~~

~~Management Discussion – (continued)~~

Balance Sheet. Payment terms for commercial financing receivables generally range from 30 to 90 days and sales are made to the investor on a revolving basis. We did not have any sales of commercial financing receivables for the six months ended June 30, 2020.

The transfers of these receivables qualified as true sales and therefore reduced financing receivables. The cash proceeds from the sales are included in cash flows from operating activities, with no impact to free cash flow, and the impacts to the Consolidated Income Statement, including fees and net gain or loss associated with the transfers of these receivables for the six months ended June 30, 2021 and June 30, 2020, were not material. For additional information relating to the sales of financing receivables refer to note 8, “Financing Receivables.”

~~Refer to pages 77 through 79 for additional information related to Global Financing receivables, allowance for credit losses and debt.~~

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 ~~June 30, 2021~~March 31, 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 ~~June 30, 2021 and December~~March 31, ~~2020,~~2022 is expected to be returned to the company.

~~Unguaranteed Residual Value~~

At

At

Estimated Run Out of June 30, 2021 Balance

December 31,

June 30,

2024 and
(Dollars in millions)

2020

2021

2021

2022

2023

Beyond
Sales-type and direct financing leases

$
469

$
387

$
50

$
113

$
133

$
92
Operating leases

48

30

23

4

1

2
Total unguaranteed residual value

$
516

$
417

$
72

$
117

$
133

$
95

8872

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 management’s rationale for presenting operating earnings information.


				Acquisition-			Retirement-			U.S.			Separation-									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 June 30, 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	$	9,004		$	180		$	—		$	—		$	58		$	9,242		$	7,335		$	181		$	—		$	—		$	—		$	7,516
Gross profit margin		48.0	%		1.0	pts.		—	pts.		—	pts.		0.3	pts.		49.3	%		51.7	%		1.3	pts.		—	pts.		—	pts.		—	pts.		52.9	%
S,G&A	$	5,334		$	(298)		$	—		$	—		$	(116)		$	4,919		$	4,597		$	(286)		$	—		$	—		$	0		$	4,311
R,D&E		1,657			—			—			—			0			1,656
Other (income) and expense		315			(1)			(328)			—			—			(14)			246			(1)			(202)			—			(222)			(179)
Total expense and other (income)		7,451			(299)			(328)			—			(117)			6,708			6,712			(287)			(202)			—			(222)			6,001
Pre-tax income from continuing operations		1,552			479			328			—			175			2,534			623			468			202			—			222			1,515
Pre-tax margin from continuing operations		8.3	%		2.6	pts.		1.7	pts.		—	pts.		0.9	pts.		13.5	%		4.4	%		3.3	pts.		1.4	pts.		—	pts.		1.6	pts.		10.7	%
Provision for income taxes*	$	227		$	107		$	67		$	(14)		$	44		$	431
Provision for (benefit from) income taxes*																			$	(39)		$	109		$	58		$	116		$	—		$	244
Effective tax rate		14.7	%		1.4	pts.		0.7	pts.		(0.5)	pts.		0.7	pts.		17.0	%		(6.3)	%		9.1	pts.		4.6	pts.		7.7	pts.		0.9	pts.		16.1	%
Income from continuing operations	$	1,325		$	373		$	261		$	14		$	131		$	2,103		$	662		$	359		$	144		$	(116)		$	222		$	1,271
Income margin from continuing operations		7.1	%		2.0	pts.		1.4	pts.		0.1	pts.		0.7	pts.		11.2	%		4.7	%		2.5	pts.		1.0	pts.		(0.8)	pts.		1.6	pts.		9.0	%
Diluted earnings per share from continuing operations	$	1.47		$	0.41		$	0.29		$	0.01		$	0.15		$	2.33		$	0.73		$	0.39		$	0.16		$	(0.13)		$	0.24		$	1.40

Acquisition-

Retirement-

U.S.

Separation-

(Dollars in millions except per share amounts)

Related

Related

Tax Reform

Related

Operating

For the three months ended June 30, 2020:

GAAP

Adjustments

Adjustments

Impacts

Charges

(non-GAAP)

Gross profit

$
8,700

$
187

$
—

$
—

$
—

$
8,887

Gross profit margin

48.0
%

1.0
pts.

—
pts.

—
pts.

—
pts.

49.0
%
S,G&A

$
5,248

$
(285)

$
—

$
—

$
—

$
4,962

R,D&E

1,582

—

—

—

—

1,582

Other (income) and expense

179

(1)

(273)

—

—

(95)

Total expense and other (income)

7,129

(286)

(273)

—

—

6,570

Pre-tax income from continuing operations

1,571

473

273

—

—

2,318

Pre-tax margin from continuing operations

8.7
%

2.6
pts.

1.5
pts.

—
pts.

—
pts.

12.8
%
Provision for income taxes*

$
209

$
108

$
52

$
—

$
—

$
369

Effective tax rate

13.3
%

1.9
pts.

0.7
pts.

—
pts.

—
pts.

15.9
%
Income from continuing operations

$
1,362

$
365

$
222

$
—

$
—

$
1,949

Income margin from continuing operations

7.5
%

2.0
pts.

1.2
pts.

—
pts.

—
pts.

10.8
%
Diluted earnings per share from continuing operations

$
1.52

$
0.41

$
0.25

$
—

$
—

$
2.18


				Acquisition-			Retirement-			U.S.			Kyndryl-
(Dollars in millions except per share amounts)				Related			Related			Tax Reform			Related			Operating
For the three months ended March 31, 2021:	GAAP			Adjustments			Adjustments			Impacts			Impacts			(non-GAAP)
Gross profit	$	7,027		$	174		$	—		$	—		$	—		$	7,201
Gross profit margin		53.3	%		1.3	pts.		—	pts.		—	pts.		—	pts.		54.6	%
S,G&A	$	4,688		$	(288)		$	—		$	—		$	—		$	4,399
Other (income) and expense		346			(1)			(332)			—			—			13
Total expense and other (income)		6,784			(289)			(332)			—			—			6,162
Pre-tax income from continuing operations		244			463			332			—			—			1,039
Pre-tax margin from continuing operations		1.8	%		3.5	pts.		2.5	pts.		—	pts.		—	pts.		7.9	%
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	$	403		$	330		$	299		$	(19)		$	—		$	1,013
Income margin from continuing operations		3.1	%		2.5	pts.		2.3	pts.		(0.1)	pts.		—	pts.		7.7	%
Diluted earnings per share from continuing operations	$	0.45		$	0.37		$	0.33		$	(0.02)		$	—		$	1.12

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

~~Table of Contents~~

~~Management Discussion – (continued)~~

Acquisition-

Retirement-

U.S.

Separation-

(Dollars in millions except per share amounts)

Related

Related

Tax Reform

Related

Operating

For the six months ended June 30, 2021:

GAAP

Adjustments

Adjustments

Impacts

Charges

(non-GAAP)

Gross profit

$
17,208

$
355

$
—

$
—

$
61

$
17,624

Gross profit margin

47.2
%

1.0
pts.

—
pts.

—
pts.

0.2
pts.

48.3
%
S,G&A

$
10,508

$
(591)

$
—

$
—

$
(175)

$
9,742

R,D&E

3,286

—

—

—

0

3,286

Other (income) and expense

676

(1)

(670)

—

—

5

Total expense and other (income)

14,751

(593)

(670)

—

(175)

13,313

Pre-tax income from continuing operations

2,457

948

670

—

236

4,312

Pre-tax margin from continuing operations

6.7
%

2.6
pts.

1.8
pts.

—
pts.

0.6
pts.

11.8
%
Provision for income taxes*

$
177

$
240

$
128

$
6

$
59

$
610

Effective tax rate

7.2
%

4.0
pts.

1.9
pts.

0.1
pts.

1.0
pts.

14.1
%
Income from continuing operations

$
2,281

$
707

$
542

$
(6)

$
177

$
3,702

Income margin from continuing operations

6.3
%

1.9
pts.

1.5
pts.

0.0
pts.

0.5
pts.

10.1
%
Diluted earnings per share from continuing operations

$
2.52

$
0.79

$
0.60

$
(0.01)

$
0.20

$
4.10

Acquisition-

Retirement-

U.S.

Separation-

(Dollars in millions except per share amounts)

Related

Related

Tax Reform

Related

Operating

For the six months ended June 30, 2020:

GAAP

Adjustments

Adjustments

Impacts

Charges

(non-GAAP)

Gross profit

$
16,622

$
375

$
—

$
—

$
—

$
16,998

Gross profit margin

46.6
%

1.1
pts.

—
pts.

—
pts.

—
pts.

47.6
%
S,G&A

$
11,203

$
(570)

$
—

$
—

$
—

$
10,633

R,D&E

3,207

—

—

—

—

3,207

Other (income) and expense

361

(1)

(538)

—

—

(178)

Total expense and other (income)

15,101

(571)

(538)

—

—

13,992

Pre-tax income from continuing operations

1,522

946

538

—

—

3,006

Pre-tax margin from continuing operations

4.3
%

2.7
pts.

1.5
pts.

—
pts.

—
pts.

8.4
%
Provision for (benefit from) income taxes*

$
(1,017)

$
210

$
65

$
149

$
—

$
(592)

Effective tax rate

(66.8)
%

28.0
pts.

14.1
pts.

5.0
pts.

—
pts.

(19.7)
%
Income from continuing operations

$
2,538

$
736

$
472

$
(149)

$
—

$
3,598

Income margin from continuing operations

7.1
%

2.1
pts.

1.3
pts.

(0.4)
pts.

—
pts.

10.1
%
Diluted earnings per share from continuing operations

$
2.83

$
0.83

$
0.53

$
(0.17)

$
—

$
4.02

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

9074

Table of Contents

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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Table of Contents

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 ~~second~~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*
April 1, 2021 - April 30, 2021	—	$	—	—	$	2,007,611,768
January 1, 2022 - January 31, 2022							—	$	—	—	$	2,007,611,768

May 1, 2021 - May 31, 2021	—	$	—	—	$	2,007,611,768
February 1, 2022 - February 28, 2022							—	$	—	—	$	2,007,611,768

June 1, 2021 - June 30, 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 ~~June 30, 2021~~March 31, 2022 there was approximately $2.0 billion in authorized funds remaining for purchases under this program.

Item 5. Other Information

~~Disclosure pursuant~~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 ~~13(r)~~2 of the ~~Securities Exchange Act~~company’s By-Laws was amended to decrease the number of ~~1934~~

~~On March 2, 2021, the U.S. government designated the Russian Federal Security Service (FSB)~~directors to twelve, effective April 26, 2022. The full text of IBM’s By-Laws, as a blocked party under Executive Order 13382. On the same day, the U.S. Department of the Treasury’s Office of Foreign Assets Control issued Cyber-related General License 1B “Authorizing Certain Transactions with the Federal Security Service” (GL 1B), which generally authorizes U.S. companiesamended effective April 26, 2022, is included as Exhibit 3.2 to engage in certain licensing, permitting, certification, notification and related transactions with the FSB to the extent such activities are required for the importation, distribution or use of information technology products in the Russian Federation, though the fact of such activities are now to be disclosed under the Securities Exchange Act of 1934 in companies’ periodic filings.this report.

During the quarter ended June 30, 2021, as permitted under GL 1B, IBM filed notifications with the FSB as required in connection with the importation and distribution of our products in the Russian Federation. No payments were issued or received, and no gross revenue or net profits were generated in connection with these filing activities. IBM and its subsidiaries do not sell products or provide services to the FSB. To the extent permitted by applicable law, IBM and its subsidiaries expect to continue to file notifications with the FSB and may apply for import licenses and permits from the FSB in connection the importation and distribution of our products in the Russian Federation.

9276

Table of Contents

Item 6. Exhibits


Exhibit Number

~~10.1~~3.2		~~Forms~~The By-Laws of LTPP equity award agreements for (i) stock options, restricted stock, restricted stock units, cash-settled restricted stock units, SARS, (ii) performance share units and (iii) retention restricted stock unit awards, effective June 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.

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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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Table of Contents

SIGNATURE

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


		International Business Machines Corporation
		(Registrant)

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

9478

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

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

~~Consolidated Income Statement for the three and six months ended June 30, 2021 and 2020~~	3

~~Consolidated Statement of Comprehensive Income for the three and six months ended June 30, 2021 and 2020~~	4

~~Consolidated Balance Sheet at June 30, 2021 and December 31, 2020~~	5

~~Consolidated Statement of Cash Flows for the six months ended June 30, 2021 and 2020~~	7

~~Consolidated Statement of Equity for the three and six months ended June 30, 2021 and 2020~~	8

~~Notes to Consolidated Financial Statements~~	10

~~Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition~~	48

~~Item 4. Controls and Procedures~~	91

~~Part II - Other Information~~:

~~Item 1. Legal Proceedings~~	92

~~Item 2. Unregistered Sales of Equity Securities and Use of Proceeds and Issuer Repurchases of Equity Securities~~	92

~~Item 5. Other Information~~	92

~~Item 6. Exhibits~~	93


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 June 30, 2021:
External revenue	$	6,098		$	4,341		$	6,342		$	1,717		$	242		$	18,740
Internal revenue		726			58			326			241			260			1,611
Total revenue	$	6,824		$	4,399		$	6,668		$	1,958		$	502		$	20,351
Pre-tax income from continuing operations	$	1,720		$	371		$	381		$	176		$	246		$	2,894
Revenue year-to-year change		5.1	%		11.5	%		0.7	%		(6.4)	%		(0.7)	%		3.5	%
Pre-tax income year-to-year change		0.7	%		2.5	%		52.3	%		(28.8)	%		39.3	%		5.5	%
Pre-tax income margin		25.2	%		8.4	%		5.7	%		9.0	%		48.9	%		14.2	%

For the three months ended June 30, 2020:
External revenue	$	5,748		$	3,890		$	6,316		$	1,852		$	265		$	18,072
Internal revenue		743			55			304			240			241			1,582
Total revenue	$	6,491		$	3,945		$	6,621		$	2,092		$	506		$	19,655
Pre-tax income from continuing operations	$	1,708		$	362		$	250		$	248		$	176		$	2,744
Pre-tax income margin		26.3	%		9.2	%		3.8	%		11.8	%		34.9	%		14.0	%


	At		At		Estimated Run Out of June 30, 2021 Balance
	December 31,		June 30,								2024 and
(Dollars in millions)	2020		2021		2021		2022		2023		Beyond
Sales-type and direct financing leases	$	469	$	387	$	50	$	113	$	133	$	92
Operating leases		48		30		23		4		1		2
Total unguaranteed residual value	$	516	$	417	$	72	$	117	$	133	$	95