UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTER ENDED ~~MARCH 31,~~JUNE 30, 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(s)	Name of each exchange on which registered
Capital stock, par value $.20 per share	IBM	New York Stock Exchange
		NYSE Chicago
2.625% Notes due 2022	IBM 22A	New York Stock Exchange
1.250% Notes due 2023	IBM 23A	New York Stock Exchange
0.375% Notes due 2023	IBM 23B	New York Stock Exchange
1.125% Notes due 2024	IBM 24A	New York Stock Exchange
2.875% Notes due 2025	IBM 25A	New York Stock Exchange
0.950% Notes due 2025	IBM 25B	New York Stock Exchange
0.875% Notes due 2025	IBM 25C	New York Stock Exchange
0.300% Notes due 2026	IBM 26B	New York Stock Exchange
1.250% Notes due 2027	IBM 27B	New York Stock Exchange
0.300% Notes due 2028	IBM 28B	New York Stock Exchange
1.750% Notes due 2028	IBM 28A	New York Stock Exchange
1.500% Notes due 2029	IBM 29	New York Stock Exchange
0.875% Notes due 2030	IBM 30	New York Stock Exchange
1.750% Notes due 2031	IBM 31	New York Stock Exchange
0.650% Notes due 2032	IBM 32A	New York Stock Exchange
1.250% Notes due 2034	IBM 34	New York Stock Exchange
1.200% Notes due 2040	IBM 40	New York Stock Exchange
7.00% Debentures due 2025	IBM 25	New York Stock Exchange
6.22% Debentures due 2027	IBM 27	New York Stock Exchange
6.50% Debentures due 2028	IBM 28	New York Stock Exchange
7.00% Debentures due 2045	IBM 45	New York Stock Exchange
7.125% Debentures due 2096	IBM 96	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section l3 or l5(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ 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 ~~899,435,325~~903,180,353 shares of common stock outstanding at ~~March 31,~~June 30, 2022.

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. As a result, actual results may be different from these estimates.

On November 3, 2021, the company completed the separation of its managed infrastructure services unit into a new public company with the distribution of 80.1 percent of the outstanding common stock of Kyndryl Holdings, Inc. (Kyndryl) to IBM stockholders on a pro rata basis. To effect the 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 company retained 19.9 percent of the shares of Kyndryl common stock immediately following the separation with the intent to dispose of such shares within twelve months after the distribution. The company accounts for the retained Kyndryl common stock as a fair value equity investment included within prepaid expenses and other current assets in the Consolidated Balance Sheet with subsequent fair value changes included in other (income) and expense in the Consolidated Income Statement. On May 23, 2022, the company transferred 22,301,536 (22.3 million) shares of Kyndryl common stock, equal to 9.95 percent or half of the company’s 19.9 percent retained interest, to a third-party financial institution pursuant to an exchange agreement. Refer to note 8, “Financial Assets & Liabilities,” for additional information.

The accounting requirements for reporting the separation of Kyndryl as a discontinued operation were met when the separation was completed. Accordingly, the historical results of Kyndryl are presented as discontinued operations and, as such, have been excluded from continuing operations and segment results for all periods presented. 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.~~software assets which was completed in the second quarter of 2022. This change impacted the company’s Software segment and ~~Other-divested~~Other–divested businesses category. In the fourth quarter of 2021, immediately prior to the separation of Kyndryl, the company made a number of changes to its organizational structure and management system. These changes impacted the company’s reportable segments but did not impact the Consolidated Financial Statements. Refer to note 5, “Segments,” for additional information on the company’s reportable segments. The segments are reported on a comparable basis for all periods.

For the three and six months ended ~~March 31,~~June 30, 2022, the company ~~recorded~~reported a ~~benefit from~~provision for income taxes of ~~$39~~$257 million and $218 million, respectively, and its effective tax rate was ~~(6.3) percent.~~14.9 percent and 9.3 percent, respectively. The ~~rate was driven by many factors including~~company reported a tax benefit in the first quarter of 2022 primarily due to the impacts of ~~recently published~~ foreign tax credit regulations, geographical mix of income, incentives and changes in unrecognized tax benefits. For the three and six months ended ~~March 31,~~June 30, 2021, the company reported a provision for income taxes of $101 million and a benefit from income taxes of ~~$160~~$58 million, respectively, and its effective tax rate was ~~(65.5) percent. This~~11.1 percent and (5.0) percent, respectively. The company reported a tax benefit in the first quarter of 2021 which was primarily ~~related to~~driven by the resolution of certain tax audits.

Noncontrolling interest amounts of ~~$4.9~~$5.5 million and $4.2 million, net of tax, for ~~both~~ the three months ended ~~March 31,~~June 30, 2022 and 2021, respectively, and $10.5 million and $9.1 million, net of tax, for the six months ended June 30, 2022 and 2021, respectively, are included as a reduction within other (income) and expense in the Consolidated Income Statement.

10

Table of Contents

Notes to Consolidated Financial Statements — (continued)

Interim results are not necessarily indicative of financial results for a full year. The information included in this Form 10-Q should be read in conjunction with the company’s 2021 Annual Report.

9

Table of Contents

Notes to Consolidated Financial Statements — (continued)

Revenue Contracts with Customers Acquired in a Business Combination

Standard/Description–Issuance date: October 2021. This guidance requires that an acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with revenue guidance, as if it

10

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~~income/(loss) from discontinued ~~operations:~~operations, net of tax:


					Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in millions)					2022		2021*		2022		2021*
For the three months ended March 31:	2022		2021*
Revenue	$	17	$	4,543	$	(11)	$	4,527	$	7	$	9,070
Cost of sales		21		3,365		(4)		3,375		17		6,741
Selling, general and administrative expense		(6)		488		73		485		66		972
RD&E and Other (income) and expense		(69)		29		0		26		(69)		55
Income from discontinued operations before income taxes	$	73	$	661
Provision for income taxes		2		109
Income from discontinued operations, net of tax	$	71	$	552
Income/(loss) from discontinued operations before income taxes					$	(80)	$	641	$	(7)	$	1,302
Provision for/(benefit from) income taxes						(7)		126		(5)		235
Income/(loss) from discontinued operations, net of tax					$	(73)	$	515	$	(2)	$	1,067

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

~~Income~~Loss from discontinued operations, net of tax, for the three months ended ~~March 31,~~June 30, 2022 primarily ~~relates to~~reflects the net impact of changes in separation-related estimates and the settlement of assets and liabilities in accordance with the separation and distribution agreement. Loss from discontinued operations, net of tax, for the six months ended June 30, 2022 reflects the same drivers as above and also includes a joint venture historically managed by Kyndryl, which did not transfer at separation due to the transfer being subject to regulatory approval. Upon receiving regulatory approval in the first quarter of 2022, the company sold its majority shares in the joint venture to Kyndryl, resulting in a pre-tax gain on sale of $68 million. ~~Also reflected~~

Separation costs of $2 million and $146 million incurred during the three months ended June 30, 2022 and 2021, respectively, and $5 million and $196 million incurred during the six months ended June 30, 2022 and 2021, respectively, are included in income/(loss) from discontinued operations, net of tax, in the ~~discontinued operations results are~~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 ~~to the settlement of assets and liabilities in accordance with the Separation and Distribution Agreement.~~tax charges.

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


						Six Months Ended June 30,
(Dollars in millions)						2022		2021
For the three months ended March 31:	2022		2021
Net cash provided by/(used in) operating activities	$	0	$	702	*	$	—	$	1,465	*
Net cash provided by/(used in) investing activities		48		(104)			48		(321)

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

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.~~

1213

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Notes to Consolidated Financial Statements — (continued)

4. Revenue Recognition:

Disaggregation of Revenue

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

Revenue by Major Products/Service Offerings

(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



	Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in millions)	2022		2021*		2022		2021*
Hybrid Platform & Solutions	$	4,390	$	4,208	$	8,470	$	8,008
Transaction Processing		1,776		1,587		3,468		2,925
Total Software	$	6,166	$	5,795	$	11,938	$	10,933
Business Transformation		2,227		2,049		4,482		4,002
Application Operations		1,653		1,514		3,272		2,989
Technology Consulting		928		814		1,884		1,649
Total Consulting	$	4,809	$	4,378	$	9,637	$	8,641
Hybrid Infrastructure		2,760		2,059		4,461		3,841
Infrastructure Support		1,474		1,501		2,993		3,012
Total Infrastructure	$	4,235	$	3,560	$	7,453	$	6,853
Financing**		146		209		300		417
Other		180		277		404		561
Total revenue	$	15,535	$	14,218	$	29,732	$	27,405

*	Recast to reflect segment changes.

** Contains lease and loan/working capital financing arrangements which are not subject to the guidance on revenue from contracts with customers.

Hybrid Cloud Revenue by Segment


					Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in millions)					2022		2021*		2022		2021*
For the three months ended March 31:	2022		2021*
Software	$	2,130	$	1,744	$	2,288	$	2,015	$	4,418	$	3,760
Consulting		2,135		1,722		2,286		1,901		4,421		3,623
Infrastructure		672		837		1,220		981		1,892		1,818
Other		72		87		69		82		141		169
Total	$	5,009	$	4,390	$	5,863	$	4,979	$	10,872	$	9,369

*

* Recast to reflect segment changes.

~~Recast to reflect segment changes.~~

Revenue by Geography


					Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in millions)					2022		2021		2022		2021
For the three months ended March 31:	2022		2021
Americas	$	7,056	$	6,477	$	8,142	$	7,122	$	15,198	$	13,599
Europe/Middle East/Africa		4,231		3,928		4,526		4,314		8,757		8,242
Asia Pacific		2,910		2,781		2,868		2,782		5,778		5,563
Total	$	14,197	$	13,187	$	15,535	$	14,218	$	29,732	$	27,405

Remaining Performance Obligations

The remaining performance obligation (RPO) disclosure provides the aggregate amount of the transaction price yet to be recognized as of the end of the reporting period and an explanation as to when the company expects to recognize

14

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Notes to Consolidated Financial Statements — (continued)

these amounts in revenue. It is intended to be a statement of overall work under contract that has not yet been performed and does not include contracts in which the customer is not committed, such as certain as-a-Service, governmental, term software license and services offerings. The customer is not considered committed when they are able to terminate for convenience without payment of a substantive penalty. The disclosure includes estimates of variable consideration, except when the variable consideration is a sales-based or usage-based royalty promised in exchange for a license of intellectual property. Additionally, as a practical expedient, the company does not include contracts that have an original duration of one year or less. RPO estimates are subject to change and are affected by several factors, including

13

Table of Contents

Notes to Consolidated Financial Statements — (continued)

5. Segments:

In January 2022, IBM announced the divestiture of its healthcare ~~data and analytics~~software assets which ~~is expected to close~~closed in the second quarter of 2022. Refer to note 6, “Acquisitions & Divestitures,” for additional information. The company re-aligned its management structure to manage these assets outside of the Software segment prior to the divestiture. InBeginning 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, and the prior-year periods 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 by the chief operating decision maker, both in evaluating the performance of, and in allocating resources to, each of the segments.

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Notes to Consolidated Financial Statements — (continued)

SEGMENT INFORMATION


													Total															Total
(Dollars in millions)	Software			Consulting			Infrastructure			Financing			Segments			Software			Consulting			Infrastructure			Financing			Segments
For the three months ended March 31, 2022:
For the three months ended June 30, 2022:
Revenue	$	5,772		$	4,829		$	3,219		$	154		$	13,973		$	6,166		$	4,809		$	4,235		$	146		$	15,355
Pre-tax income from continuing operations	$	1,134		$	348		$	199		$	84		$	1,766		$	1,375		$	343		$	757		$	102		$	2,577
Revenue year-to-year change		12.3	%		13.3	%		(2.3)	%		(26.2)	%		8.3	%		6.4	%		9.8	%		19.0	%		(29.9)	%		10.1	%
Pre-tax income year-to-year change		72.3	%		25.8	%		(31.7)	%		(14.3)	%		33.3	%		29.9	%		26.9	%		54.8	%		(22.4)	%		32.2	%
Pre-tax income margin		19.7	%		7.2	%		6.2	%		54.6	%		12.6	%		22.3	%		7.1	%		17.9	%		69.7	%		16.8	%

*For the three months ended March 31, 2021:**
*For the three months ended June 30, 2021:**
Revenue	$	5,138		$	4,262		$	3,293		$	208		$	12,902		$	5,795		$	4,378		$	3,560		$	209		$	13,941
Pre-tax income from continuing operations	$	658		$	277		$	292		$	98		$	1,325		$	1,059		$	270		$	489		$	131		$	1,949
Pre-tax income margin		12.8	%		6.5	%		8.9	%		47.0	%		10.3	%		18.3	%		6.2	%		13.7	%		63.0	%		14.0	%

Reconciliations to IBM as Reported:


(Dollars in millions)
For the three months ended March 31:	2022		2021*
For the three months ended June 30:					2022			2021*
Revenue:
Total reportable segments	$	13,973	$	12,902	$	15,355		$	13,941
Other ‒ divested businesses		154		197		162			197
Other revenue		70		87		18			80
Total consolidated revenue	$	14,197	$	13,187	$	15,535		$	14,218

Pre-tax income from continuing operations:
Total reportable segments	$	1,766	$	1,325	$	2,577		$	1,949
Amortization of acquired intangible assets		(461)		(447)		(458)			(456)
Acquisition-related (charges)/income		(7)		(16)		(2)			(18)
Non-operating retirement-related (costs)/income		(202)		(332)		(192)			(317)
Kyndryl-related impacts**		(222)		—		(145)			—
Eliminations of internal transactions		(11)		(9)		(4)			5
Other ‒ divested businesses		(52)		(15)		160	+		(50)
Unallocated corporate amounts and other		(188)		(262)		(215)			(202)
Total pre-tax income from continuing operations	$	623	$	244	$	1,722		$	912

*	Recast to conform to current year presentation.

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

+ Includes a gain from the sale of the company’s healthcare software assets. Refer to note 6, “Acquisitions & Divestitures.”

~~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.

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Notes to Consolidated Financial Statements — (continued)

SEGMENT INFORMATION


													Total
(Dollars in millions)	Software			Consulting			Infrastructure			Financing			Segments
For the six months ended June 30, 2022:
Revenue	$	11,938		$	9,637		$	7,453		$	300		$	29,328
Pre-tax income from continuing operations	$	2,509		$	691		$	956		$	186		$	4,342
Revenue year-to-year change		9.2	%		11.5	%		8.8	%		(28.0)	%		9.3	%
Pre-tax income year-to-year change		46.2	%		26.3	%		22.5	%		(18.9)	%		32.6	%
Pre-tax income margin		21.0	%		7.2	%		12.8	%		62.0	%		14.8	%

*For the six months ended June 30, 2021:**
Revenue	$	10,933		$	8,641		$	6,853		$	417		$	26,843
Pre-tax income from continuing operations	$	1,717		$	547		$	780		$	229		$	3,274
Pre-tax income margin		15.7	%		6.3	%		11.4	%		55.0	%		12.2	%

Reconciliations to IBM as Reported:


(Dollars in millions)
For the six months ended June 30:	2022			2021*
Revenue:
Total reportable segments	$	29,328		$	26,843
Other‒divested businesses		316			394
Other revenue		88			167
Total consolidated revenue	$	29,732		$	27,405

Pre-tax income from continuing operations:
Total reportable segments	$	4,342		$	3,274
Amortization of acquired intangible assets		(919)			(903)
Acquisition-related charges		(9)			(34)
Non-operating retirement-related (costs)/income		(394)			(649)
Kyndryl-related impacts**		(367)			—
Eliminations of internal transactions		(15)			(4)
Other‒divested businesses		109	+		(65)
Unallocated corporate amounts		(403)			(464)
Total pre-tax income from continuing operations	$	2,345		$	1,155

*	Recast to conform to current year presentation.

**

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

+ Includes a gain from the sale of the company’s healthcare software assets. Refer to note 6, “Acquisitions & Divestitures.”

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Notes to Consolidated Financial Statements — (continued)

6. Acquisitions & Divestitures:

Acquisitions

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

During the six months ended June 30, 2022, the company completed 5 acquisitions at an aggregate cost of $1,101 million. Each acquisition is expected to enhance the company’s portfolio of products and services capabilities and further advance IBM’s hybrid cloud and AI strategy.

Acquisition		Segment	Description of Acquired Business
First Quarter

Envizi		Software	Data and analytics software provider for environmental performance management
~~Sentaca~~		~~Consulting~~
Sentaca	Consulting	Telco consulting services and solutions provider specializing in automation, cloud migration, and future networks for telecommunication providers
~~Neudesic~~		~~Consulting~~
Neudesic	Consulting	Application development and cloud computing services company
Second Quarter

Randori	Software	Leading attack surface management (ASM) and cybersecurity provider

Databand.ai	Software	Proactive data observability platform that isolates data errors and issues to alert relevant stakeholders

At ~~March 31,~~June 30, 2022, the remaining cash to be remitted by the company related to certain first and second quarter ~~2022~~ acquisitions was ~~$113~~$147 million, most of which is expected to be paid by the ~~first~~second quarter of 2023.

The following table reflects the purchase price related to these acquisitions and the resulting purchase price ~~allocation~~allocations as of ~~March 31,~~June 30, 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

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Notes to Consolidated Financial Statements — (continued)


	Amortization	Total
(Dollars in millions)	Life (in years)	Acquisitions
Current assets		$	60
Property, plant and equipment/noncurrent assets			3
Intangible assets:
Goodwill	N/A		903
Client relationships	7		151
Completed technology	4-7		87
Trademarks	2-3		8
Total assets acquired		$	1,210
Current liabilities			59
Noncurrent liabilities			50
Total liabilities assumed		$	110
Total purchase price		$	1,101

N/A -– not applicable

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

The overall weighted-average useful life of the identified amortizable intangible assets acquired was 6.7 years. Goodwill of $461 million and ~~$188~~$442 million was assigned to the Consulting and Software segments, respectively. It is expected that ~~0ne~~NaN of the goodwill will be deductible for tax purposes.

The identified intangible assets will be amortized on a straight-line basis over their useful lives, which approximates the pattern that the assets’ economic benefits are expected to be consumed over time.

The valuation of the assets acquired and liabilities assumed is subject to revision. If additional information becomes available, the company may further revise the purchase price allocation as soon as practical, but no later than one year from the acquisition date; however, material changes are not expected.

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Divestitures

~~In first quarter of 2022, the Infrastructure segment completed 1 divestiture. The financial terms related to this transaction were not material.~~

~~Transactions Announced~~Healthcare Software Assets — In January 2022, ~~the company~~IBM and Francisco Partners (Francisco) signed a definitive agreement in which Francisco ~~Partners will~~would acquire IBM’s healthcare ~~data and analytics~~software assets reported within ~~Other -~~ Other–divested ~~business~~businesses (Other) for $1,065 million. Refer to note 5, “Segments,” for additional information. The assets include Health Insights, MarketScan, Clinical Development, Social Program Management, Micromedex, and imaging software offerings. In addition, IBM is providing Francisco with transition services including IT and other services. The ~~transaction is expected to close in phases with the initial~~ closing ofcompleted for the U.S. and Canada ~~expected~~on June 30, 2022. The company expects subsequent closings for the remaining countries to be completed by the first quarter of 2023.

On June 30, 2022, the company received a cash payment of $1,065 million and recognized a $232 million pre-tax gain on sale in other (income) and expense in the ~~second~~Consolidated Income Statement. The cash proceeds from the sale were included primarily in cash from investing activities in the Consolidated Statement of Cash Flows. Any pre-tax gains related to the subsequent wave closings are not expected to be material. The total gain on sale may change in the future due to changes in transaction estimates, however, such changes are not expected to be material.

Other Divestitures — In the first quarter of 2022, ~~and subsequent closings expected in~~ the ~~second half of 2022, subject~~Infrastructure segment completed 1 divestiture. The financial terms related 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~~this transaction were not ~~yet determinable.~~material.

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

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7. Earnings Per Share of Common Stock:

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


(Dollars in millions except per share amounts)
For the three months ended March 31:	2022		2021
For the three months ended June 30:					2022		2021
Number of shares on which basic earnings per share is calculated:
Weighted-average shares outstanding during period		899,316,026		893,630,916		901,470,793		895,043,024
Add — Incremental shares under stock-based compensation plans		8,375,246		6,622,441		7,518,749		7,431,661
Add — Incremental shares associated with contingently issuable shares		1,534,864		1,492,709		1,760,192		1,758,754
Number of shares on which diluted earnings per share is calculated		909,226,136		901,746,065		910,749,734		904,233,439

Income from continuing operations	$	662	$	403	$	1,465	$	810
Income from discontinued operations, net of tax		71		552
Income/(loss) from discontinued operations, net of tax						(73)		515
Net income on which basic earnings per share is calculated	$	733	$	955	$	1,392	$	1,325

Income from continuing operations	$	662	$	403	$	1,465	$	810
Net income applicable to contingently issuable shares		—		—		—		—
Income from continuing operations on which diluted earnings per share is calculated	$	662	$	403	$	1,465	$	810
Income from discontinued operations, net of tax, on which basic and diluted earnings per share is calculated		71		552
Income/(loss) from discontinued operations, net of tax, on which diluted earnings per share is calculated						(73)		515
Net income on which diluted earnings per share is calculated	$	733	$	955	$	1,392	$	1,325

Earnings/(loss) per share of common stock:
Assuming dilution
Continuing operations	$	0.73	$	0.45	$	1.61	$	0.90
Discontinued operations		0.08		0.61		(0.08)		0.57
Total	$	0.81	$	1.06	$	1.53	$	1.47
Basic
Continuing operations	$	0.74	$	0.45	$	1.62	$	0.91
Discontinued operations		0.08		0.62		(0.08)		0.57
Total	$	0.82	$	1.07	$	1.54	$	1.48

Stock options to purchase ~~1,163,321~~788,500 shares and ~~1,510,886~~375,990 shares were outstanding as of ~~March 31,~~June 30, 2022 and 2021, respectively, but were not included in the computation of diluted earnings per share because the exercise price of the options during the respective period was greater than the average market price of the common shares, and therefore, the effect would have been antidilutive.

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Notes to Consolidated Financial Statements — (continued)


(Dollars in millions except per share amounts)
For the six months ended June 30:	2022		2021
Number of shares on which basic earnings per share is calculated:
Weighted-average shares outstanding during period		900,393,410		894,336,970
Add — Incremental shares under stock-based compensation plans		7,946,998		7,027,051
Add — Incremental shares associated with contingently issuable shares		1,647,528		1,625,732
Number of shares on which diluted earnings per share is calculated		909,987,935		902,989,752

Income from continuing operations	$	2,127	$	1,213
Income/(loss) from discontinued operations, net of tax		(2)		1,067
Net income on which basic earnings per share is calculated	$	2,125	$	2,280

Income from continuing operations	$	2,127	$	1,213
Net income applicable to contingently issuable shares		—		—
Income from continuing operations on which diluted earnings per share is calculated	$	2,127	$	1,213
Income/(loss) from discontinued operations, net of tax, on which diluted earnings per share is calculated		(2)		1,067
Net income on which diluted earnings per share is calculated	$	2,125	$	2,280

Earnings/(loss) per share of common stock:
Assuming dilution
Continuing operations	$	2.34	$	1.34
Discontinued operations		0.00		1.18
Total	$	2.34	$	2.52
Basic
Continuing operations	$	2.36	$	1.36
Discontinued operations		0.00		1.19
Total	$	2.36	$	2.55

Stock options to purchase 975,911 shares and 943,438 shares (average of first and second quarter share amounts) were outstanding as of June 30, 2022 and 2021, respectively, but were not included in the computation of diluted earnings per share because the exercise price of the options during the respective period was greater than the average market price of the common shares, and therefore, the effect would have been antidilutive.

8. Financial Assets & Liabilities:

Fair Value Measurements

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;

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●

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.

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

Certain non-financial assets such as property, plant and equipment, operating right-of-use assets, land, goodwill and intangible assets are also subject to nonrecurring fair value measurements if they are deemed to be impaired. The impairment models used for non-financial assets depend on the type of asset. There were no material impairments of non-financial assets for the three and six months ended ~~March 31,~~June 30, 2022 and 2021, respectively.

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Notes to Consolidated Financial Statements — (continued)

The following table presents the company’s financial assets and financial liabilities that are measured at fair value on a recurring basis at ~~March 31,~~June 30, 2022 and December 31, 2021.


	Fair Value									Fair Value
	Hierarchy	At March 31, 2022				At December 31, 2021				Hierarchy	At June 30, 2022				At December 31, 2021
(Dollars in millions)	Level	Assets (7)		Liabilities (8)		Assets (7)		Liabilities (8)		Level	Assets (8)		Liabilities (9)		Assets (8)		Liabilities (9)
Cash equivalents: (1)
Time deposits and certificates of deposit (2)	2	$	3,875	$	N/A	$	1,903	$	N/A	2	$	2,602	$	N/A	$	1,903	$	N/A
Money market funds	1		2,393		N/A		263		N/A	1		933		N/A		263		N/A
U.S. government securities (2)	2		—		N/A		599		N/A	2		—		N/A		599		N/A
Total cash equivalents		$	6,268	$	N/A	$	2,766	$	N/A		$	3,535	$	N/A	$	2,766	$	N/A
Equity investments (3)	1		—		N/A		0		N/A	1		—		N/A		0		N/A
Kyndryl common stock(4)	1		585		N/A		807		N/A	1		436		N/A		807		N/A
Debt securities-current (2)(4)	2		550		N/A		600		N/A
Debt securities-noncurrent (2)(5)	2,3		36		N/A		37		N/A
Secured borrowing (4)										2		N/A		218		N/A		—
Debt securities-current (2)(5)										2		524		N/A		600		N/A
Debt securities-noncurrent (2)(6)										2,3		31		N/A		37		N/A
Derivatives designated as hedging instruments:
Interest rate contracts	2		11		6		12		—	2		2		82		12		—
Foreign exchange contracts	2		505		179		359		117	2		717		348		359		117
Derivatives not designated as hedging instruments:
Foreign exchange contracts	2		19		30		21		42	2		11		26		21		42
Equity contracts (6)	1,2		5		17		6		4
Equity contracts (7)										1,2		5		95		6		4
Total		$	7,980	$	231	$	4,608	$	162		$	5,261	$	769	$	4,608	$	162

(1)	Included within cash and cash equivalents in the Consolidated Balance Sheet.

(2)	Available-for-sale debt securities with carrying values that approximate fair value.

(3)	Included within investments and sundry assets in the Consolidated Balance Sheet.

(4)	Refer to “Kyndryl Common Stock” below for additional information.

(5)	U.S. treasury bills that are reported within marketable securities in the Consolidated Balance Sheet.

~~(5)~~(6)

Includes corporate and government debt securities that are reported within investments and sundry assets in the Consolidated Balance Sheet.

~~(6)~~(7)

Level 1 includes immaterial amounts related to equity futures contracts.

~~(7)~~(8)

The gross balances of derivative assets contained within prepaid expenses and other current assets, and investments and sundry assets in the Consolidated Balance Sheet at ~~March 31,~~June 30, 2022 were ~~$511~~$723 million and ~~$29~~$11 million, respectively, and at December 31, 2021 were $358 million and $40 million, respectively.

~~(8)~~(9)

The gross balances of derivative liabilities contained within other accrued expenses and liabilities, and other liabilities in the Consolidated Balance Sheet at ~~March 31,~~June 30, 2022 were ~~$117~~$266 million and ~~$114~~$285 million, respectively, and at December 31, 2021 were $60 million and $103 million, respectively.

N/A -– not applicable

Kyndryl Common Stock

On November 3, 2021, IBM completed the separation of Kyndryl and retained 19.9 percent of the shares of Kyndryl common stock with the intent to dispose of the shares within twelve months of the separation.

On May 18, 2022, the company borrowed an aggregate principal amount of $357 million under a short-term credit facility with a third-party financial institution, the proceeds of which will be used to repay certain of the company’s existing indebtedness. On May 23, 2022, the company completed a debt-for-equity exchange where 22.3 million shares of Kyndryl common stock, equal to 9.95 percent or half of the company’s 19.9 percent retained interest (the Shares), were exchanged at a strike price of $13.95 per share to extinguish $311 million of the company’s indebtedness under the short-term credit facility (the Exchange). The remaining portion of the short-term credit facility was repaid with $46 million of cash.

In connection with the Exchange, the company ~~accounts for~~entered into a cash-settled swap with the lender of the short-term credit facility as the counterparty that maintained IBM’s continued economic exposure in the Shares. Upon settlement of

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Notes to Consolidated Financial Statements — (continued)

the swap, which will occur no later than November 2, 2022, IBM will either receive or pay an amount derived from the difference between the volume-weighted average price (VWAP) of the Kyndryl shares asover the outstanding term of the swap and the strike price of $13.95 per share. As a ~~fair value investment.~~ result, the most significant input into the valuation of the swap is the price of Kyndryl shares.The fair value of the swap at June 30, 2022 was $88 million and is included within other accrued expenses and liabilities in the Consolidated Balance Sheet. For the three and six months ended June 30, 2022, an unrealized loss of $88 million was recorded in other (income) and expense in the Consolidated Income Statement.

As a result of the swap, the transfer of the Shares pursuant to the Exchange does not qualify as a true sale, and therefore the Shares remain on the company’s Consolidated Balance Sheet at June 30, 2022. Relatedly, the portion of the company’s indebtedness under the short-term credit facility that was extinguished pursuant to the Exchange has been classified as a secured borrowing within short-term debt in the Consolidated Balance Sheet. The company has elected to record the debt at fair value based on changes in the value of the Shares underlying the debt. The fair value of the debt was $218 million at June 30, 2022. In electing the fair value option, the company recognizes changes in fair value of the debt in other (income) and expense, which amounted to $93 million for the three and six months ended June 30, 2022. The contractual principal balance of the debt was $311 million at June 30, 2022. Both the Shares and the debt are expected to be entirely derecognized from the company’s Consolidated Balance Sheet upon settlement of the swap, which will occur no later than November 2, 2022.

The 19.9 percent retained interest in the Kyndryl shares ~~was $585~~is accounted for at fair value which amounted to $436 million and $807 million at ~~March 31,~~June 30, 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~~$56 million and $278 million, net of adjustment for the mark-to-market on the related debt as described above was recorded in other (income) and expense in the Consolidated Income Statement for the three and six months ended ~~March 31, 2022. Refer to note 3, “Separation of Kyndryl,” for additional information.~~

June 30, 2022, respectively.

Financial Assets and Liabilities Not Measured at Fair Value

Short-Term Receivables and Payables

Notes and other accounts receivable and other investments are financial assets with carrying values that approximate fair value. Accounts payable, other accrued expenses and short-term debt (excluding the current portion of long-term debt and including short-term finance lease liabilities) are financial liabilities with carrying values that approximate fair

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

value. If measured at fair value in the financial statements, these financial instruments would be classified as Level 3 in the fair value hierarchy, except for short-term debt which would be classified as Level 2.

Loans and Long-Term Receivables

Fair values are based on discounted future cash flows using current interest rates offered for similar loans to clients with similar credit ratings for the same remaining maturities. At ~~March 31,~~June 30, 2022 and December 31, 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.

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 ~~$46,545~~$44,328 million and $44,917 million, and the estimated fair value was ~~$47,896~~$42,143 million and $49,465 million at ~~March 31,~~June 30, 2022 and December 31, 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.

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Notes to Consolidated Financial Statements — (continued)

9. Financing Receivables:

Financing receivables primarily consist of client loan and installment payment receivables (loans) and investment in sales-type and direct financing leases (collectively referred to as client financing receivables) and commercial financing receivables. Loans are provided primarily to clients to finance the purchase of hardware, software and services. Payment terms on these financing arrangements are generally for terms up to seven years. Investment in sales-type and direct financing leases relate principally to the company’s Infrastructure products and are for terms ranging generally from two to six years. Commercial financing receivables, which consist of both held-for-investment and held-for-sale receivables, relate primarily to working capital financing for dealers and remarketers of IBM products. Payment terms for working capital financing generally range from 30 to 90 days.

A summary of the components of the company’s financing receivables is presented as follows:


	Client Financing Receivables										Client Financing Receivables
	Client Loan and		Investment in								Client Loan and		Investment in
	Installment Payment		Sales-Type and		Commercial Financing Receivables						Installment Payment		Sales-Type and		Commercial Financing Receivables
(Dollars in millions)	Receivables		Direct Financing		Held for		Held for				Receivables		Direct Financing		Held for		Held for
At March 31, 2022:	(Loans)		Leases		Investment		Sale*		Total
At June 30, 2022:											(Loans)		Leases		Investment		Sale*		Total
Financing receivables, gross	$	8,342	$	3,213	$	198	$	410	$	12,164	$	8,343	$	3,851	$	177	$	614	$	12,985
Unearned income		(321)		(211)		—		—		(532)		(341)		(305)		—		—		(646)
Unguaranteed residual value		—		325		—		—		325		—		383		—		—		383
Amortized cost	$	8,022	$	3,328	$	198	$	410	$	11,957	$	8,002	$	3,929	$	177	$	614	$	12,721
Allowance for credit losses		(114)		(59)		(6)		—		(179)		(110)		(56)		(6)		—		(172)
Total financing receivables, net	$	7,908	$	3,269	$	192	$	410	$	11,779	$	7,891	$	3,872	$	171	$	614	$	12,549
Current portion	$	5,133	$	1,434	$	192	$	410	$	7,169	$	5,010	$	1,438	$	171	$	614	$	7,233
Noncurrent portion	$	2,775	$	1,835	$	—	$	—	$	4,610	$	2,881	$	2,435	$	—	$	—	$	5,316

* The carrying value of the receivables classified as held for sale approximates fair value.

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


	Client Financing Receivables
	Client Loan and		Investment in
	Installment Payment		Sales-Type and		Commercial Financing Receivables
(Dollars in millions)	Receivables		Direct Financing		Held for		Held for
At December 31, 2021:	(Loans)		Leases		Investment		Sale*		Total
Financing receivables, gross	$	9,303	$	3,336	$	450	$	793	$	13,881
Unearned income		(353)		(223)		—		—		(576)
Unguaranteed residual value		—		335		—		—		335
Amortized cost	$	8,949	$	3,448	$	450	$	793	$	13,640
Allowance for credit losses		(131)		(64)		(6)		—		(201)
Total financing receivables, net	$	8,818	$	3,384	$	444	$	793	$	13,439
Current portion	$	5,371	$	1,406	$	444	$	793	$	8,014
Noncurrent portion	$	3,447	$	1,978	$	—	$	—	$	5,425

* The carrying value of the receivables classified as held for sale approximates fair value.

The company has a long-standing practice of taking mitigation actions, in certain circumstances, to transfer credit risk to third parties. 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 ~~$386~~$313 million and $408 million at ~~March 31,~~June 30, 2022 and December 31, 2021, respectively. These borrowings are included in note 12, “Borrowings.”

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Notes to Consolidated Financial Statements — (continued)

Transfer of Financial Assets

The company enters into agreements with third-party financial institutions to sell certain of its client financing receivables, including both loan and lease receivables, for cash proceeds. Throughout 2021, sales of client financing receivables were utilized as part of the company’s cash and liquidity management as well as for credit mitigation. In the first ~~quarter~~half of 2022, sales of client financing receivables were largely focused on credit mitigation. In addition, the company has an existing agreement with a third-party investor to sell IBM short-term commercial financing receivables on a revolving basis. The company has expanded this agreement to other countries and geographies since commencement in the U.S. and Canada in 2020.

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


(Dollars in millions)
For the three months ended March 31:	2022		2021
For the six months ended June 30:					2022		2021
Client financing receivables
Lease receivables	$	15	$	342	$	15	$	732
Loan receivables		2		653		2		1,359
Total client financing receivables transferred	$	17	$	995	$	17	$	2,091
Commercial financing receivables
Receivables transferred during the period	$	1,989	$	1,167	$	3,914	$	2,621
Receivables uncollected at end of period*		724		724	$	815	$	821

*	Of the total amount of commercial financing receivables sold and derecognized from the Consolidated Balance Sheet, the amounts presented remained uncollected from ~~the~~ business partners as of ~~March 31,~~June 30, 2022 and 2021.

The transfer of these receivables qualified as true sales and therefore reduced financing receivables. The cash proceeds from the sales are included in cash flows from operating activities and the impacts to the Consolidated Income Statement, including fees and net gain or loss associated with the transfers of these receivables for the six months ended June 30, 2022 and 2021 were not material.

Financing Receivables by Portfolio Segment

The following tables present the amortized cost basis for client financing receivables at June 30, 2022 and December 31, 2021, further segmented by 3 classes: Americas, Europe/Middle East/Africa (EMEA) and Asia Pacific. The commercial financing receivables portfolio segment is excluded from the tables in the sections below as the receivables are short term in nature and the current estimated risk of loss and resulting impact to the company’s financial results are not material.

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Notes to Consolidated Financial Statements — (continued)

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

~~Financing Receivables by Portfolio Segment~~

The following tables present the amortized cost basis for client financing receivables at March 31, 2022 and December 31, 2021, further segmented by 3 classes: Americas, Europe/Middle East/Africa (EMEA) and Asia Pacific. The commercial financing receivables portfolio segment is excluded from the tables in the sections below as the receivables are short term in nature and the current estimated risk of loss and resulting impact to the company’s financial results are not material.


(Dollars in millions)
At March 31, 2022:	Americas		EMEA		Asia Pacific		Total
At June 30, 2022:									Americas		EMEA		Asia Pacific		Total
Amortized cost	$	6,116	$	3,333	$	1,900	$	11,349	$	7,092	$	3,173	$	1,666	$	11,930
Allowance for credit losses:
Beginning balance at January 1, 2022	$	111	$	61	$	23	$	195	$	111	$	61	$	23	$	195
Write-offs	$	(15)	$	0	$	(2)	$	(17)	$	(16)	$	(1)	$	(2)	$	(18)
Recoveries		1		0		0		1		1		0		4		5
Additions/(releases)		(5)		(3)		(1)		(8)		(2)		(3)		(5)		(10)
Other*		3		(1)		0		2		2		(5)		(1)		(5)
Ending balance at March 31, 2022	$	95	$	56	$	21	$	172
Ending balance at June 30, 2022									$	96	$	51	$	19	$	166


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

* Primarily represents translation adjustments.

When determining the allowances, financing receivables are evaluated either on an individual or a collective basis. For the company’s policy on determining allowances for credit losses, refer to note A, “Significant Accounting Policies,” in the company’s 2021 Annual Report. Any changes to economic models that occurred after the balance sheet date will be reflected in future periods.

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Notes to Consolidated Financial Statements — (continued)

Past Due Financing Receivables

The company summarizes information about the amortized cost basis for client financing receivables, including amortized cost aged over 90 days and still accruing, billed invoices aged over 90 days and still accruing, and amortized cost not accruing.


					Amortized		Billed		Amortized						Amortized		Billed		Amortized
	Total		Amortized		Cost		Invoices		Cost		Total		Amortized		Cost		Invoices		Cost
(Dollars in millions)	Amortized		Cost		> 90 Days and		> 90 Days and		Not		Amortized		Cost		> 90 Days and		> 90 Days and		Not
At March 31, 2022:	Cost		> 90 Days (1)		Accruing (1)		Accruing		Accruing (2)
At June 30, 2022:											Cost		> 90 Days*		Accruing*		Accruing		Accruing**
Americas	$	6,116	$	356	$	282	$	8	$	77	$	7,092	$	216	$	141	$	11	$	76
EMEA		3,333		97		7		2		90		3,173		85		4		1		83
Asia Pacific		1,900		45		26		2		19		1,666		23		5		2		18
Total client financing receivables	$	11,349	$	498	$	315	$	12	$	186	$	11,930	$	324	$	150	$	15	$	177


					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, 2021:	Cost		> 90 Days (1)		Accruing (1)		Accruing		Accruing (2)		Cost		> 90 Days*		Accruing*		Accruing		Accruing**
Americas	$	6,573	$	188	$	100	$	6	$	90	$	6,573	$	188	$	100	$	6	$	90
EMEA		3,793		99		7		2		95		3,793		99		7		2		95
Asia Pacific		2,031		25		5		2		20		2,031		25		5		2		20
Total client financing receivables	$	12,397	$	312	$	112	$	10	$	205	$	12,397	$	312	$	112	$	10	$	205

~~(1)~~

*

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

~~(2)~~

**

Of the amortized cost not accruing, there was a related allowance of ~~$135~~$129 million and $153 million at ~~March 31,~~June 30, 2022 and December 31, 2021, respectively. Financing income recognized on these receivables was immaterial for the three and six months ended ~~March 31,~~June 30, 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 for client financing receivables by credit quality indicator at ~~March 31,~~June 30, 2022 and December 31, 2021, respectively. Receivables with a credit quality indicator ranging from Aaa to Baa3 are considered investment grade. All others are considered non-investment grade. The credit quality indicators reflect mitigating credit enhancement actions taken by customers which reduce the risk to IBM.


(Dollars in millions)	Americas				EMEA				Asia Pacific				Americas				EMEA				Asia Pacific
At March 31, 2022:	Aaa – Baa3		Ba1 – D		Aaa – Baa3		Ba1 – D		Aaa – Baa3		Ba1 – D
At June 30, 2022:													Aaa – Baa3		Ba1 – D		Aaa – Baa3		Ba1 – D		Aaa – Baa3		Ba1 – D
Vintage year:
2022	$	512	$	314	$	290	$	178	$	177	$	48	$	1,987	$	799	$	614	$	431	$	393	$	86
2021		2,110		869		914		544		444		175		1,750		584		645		349		290		108
2020		845		363		404		282		338		78		761		306		337		221		268		60
2019		450		194		206		241		256		41		382		151		190		166		190		30
2018		223		91		104		65		182		52		186		72		86		51		141		35
2017 and prior		81		64		23		82		79		29		61		52		19		65		44		22
Total	$	4,221	$	1,896	$	1,940	$	1,393	$	1,477	$	423	$	5,128	$	1,964	$	1,891	$	1,282	$	1,326	$	340

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Notes to Consolidated Financial Statements — (continued)


(Dollars in millions)	Americas				EMEA				Asia Pacific
At December 31, 2021:	Aaa – Baa3		Ba1 – D		Aaa – Baa3		Ba1 – D		Aaa – Baa3		Ba1 – D
Vintage year:
2021	$	2,556	$	1,147	$	1,181	$	778	$	565	$	226
2020		1,013		392		506		342		381		86
2019		544		236		287		291		297		51
2018		338		117		189		85		211		64
2017		108		50		15		52		74		17
2016 and prior		20		53		21		46		38		20
Total	$	4,579	$	1,994	$	2,198	$	1,595	$	1,567	$	464

Troubled Debt Restructurings

The company did not have any significant troubled debt restructurings during the ~~three~~six months ended ~~March 31,~~June 30, 2022 or for the year ended December 31, 2021.

10. Leases:

Accounting for Leases as a Lessor

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


					Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in millions)					2022		2021		2022		2021
For the three months ended March 31:	2022		2021
Lease income — sales-type and direct financing leases:
Sales-type lease selling price	$	54	$	360	$	735	$	390	$	789	$	751
Less: Carrying value of underlying assets*		(19)		(57)		(120)		(100)		(139)		(157)
Gross profit	$	36	$	304	$	615	$	290	$	651	$	594
Interest income on lease receivables		45		51		45		47		90		98
Total sales-type and direct financing lease income	$	81	$	354	$	660	$	337	$	741	$	692
Lease income — operating leases		30		51		27		47		56		98
Variable lease income		28		57		28		22		56		79
Total lease income	$	138	$	463	$	715	$	406	$	853	$	869

* Excludes unguaranteed residual value.

Sales-type lease revenue was ~~$54~~$735 million and $789 million for the three and six months ended ~~March 31,~~June 30, 2022, respectively, compared to $390 million and ~~$360~~$751 million for the three and six months ended ~~March 31, 2021.~~June 30, 2021, respectively. The ~~decrease was~~increases in both the three and six month periods were predominantly due to the zSystems product cycle dynamics.

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Notes to Consolidated Financial Statements — (continued)

11. Intangible Assets Including Goodwill:

Intangible Assets

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

At March 31, 2022


Gross Carrying

Accumulated

Net Carrying
(Dollars in millions)

Amount

Amortization

Amount*
Intangible asset class:

Capitalized software

$
1,805

$
(729)

$
1,076
Client relationships

9,013

(3,017)

5,996
Completed technology

6,092

(2,427)

3,665
Patents/trademarks

2,192

(624)

1,567
Other**

38

(30)

8
Total

$
19,140

$
(6,828)

$
12,312


	At June 30, 2022
	Gross Carrying		Accumulated		Net Carrying
(Dollars in millions)	Amount		Amortization		Amount*
Intangible asset class:
Capitalized software	$	1,705	$	(692)	$	1,013
Client relationships		8,187		(2,591)		5,596
Completed technology		5,562		(2,113)		3,449
Patents/trademarks		2,117		(610)		1,507
Other**		32		(25)		6
Total	$	17,604	$	(6,032)	$	11,571


	At December 31, 2021
	Gross Carrying		Accumulated		Net Carrying
(Dollars in millions)	Amount		Amortization		Amount*
Intangible asset class:
Capitalized software	$	1,696	$	(751)	$	945
Client relationships		9,021		(2,889)		6,132
Completed technology		6,074		(2,259)		3,815
Patents/trademarks		2,196		(586)		1,610
Other**		44		(35)		9
Total	$	19,031	$	(6,520)	$	12,511

* Amounts as of ~~March 31,~~June 30, 2022 and December 31, 2021 ~~include~~included a decrease in net intangible asset balances of ~~$60~~$235 million and $221 million, respectively, due to foreign currency translation.

**	Other intangibles are primarily acquired proprietary and non-proprietary business processes, methodologies and systems.

The net carrying amount of intangible assets decreased ~~$199~~$940 million during the first ~~three~~six months of 2022, primarily due to intangible asset amortization, partially offset by additions of acquired intangibles and capitalized software. The aggregate intangible asset amortization expense was $625 million and ~~$614~~$1,251 million for the ~~quarters ended March 31,~~second quarter and first six months of 2022, respectively, compared to $625 million and $1,239 million for the second quarter and first six months of 2021, respectively. In the first ~~three~~six months of 2022, the company retired ~~$297~~$501 million of fully amortized intangible assets, impacting both the gross carrying amount and accumulated amortization by this amount.

The ~~future amortization expense relating to~~company also derecognized intangible assets ~~currently recorded in~~with a gross carrying amount of $1,312 million and $1,149 million of accumulated amortization as part of the ~~Consolidated Balance Sheet is estimated to be the following at March 31, 2022:~~

Capitalized

Acquired



(Dollars in millions)

Software

Intangibles

Total
Remainder of 2022

$
459

$
1,377

$
1,836
2023

404

1,535

1,938
2024

203

1,487

1,690
2025

10

1,470

1,480
2026

0

1,453

1,453
Thereafter

0

3,915

3,915

divestiture of its healthcare software assets on June 30, 2022.

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Notes to Consolidated Financial Statements — (continued)

The future amortization expense relating to intangible assets currently recorded in the Consolidated Balance Sheet was estimated to be the following at June 30, 2022:


	Capitalized		Acquired
(Dollars in millions)	Software		Intangibles		Total
Remainder of 2022	$	304	$	832	$	1,136
2023		431		1,490		1,922
2024		245		1,473		1,718
2025		32		1,455		1,487
2026		0		1,438		1,438
Thereafter		0		3,871		3,871

Goodwill

The changes in the goodwill balances by segment for the ~~three~~six months ended ~~March 31,~~June 30, 2022 and for the year ended December 31, 2021 ~~are~~were as follows:

Foreign



Currency

Purchase

Translation

(Dollars in millions)

Balance

Goodwill

Price

and Other

Balance
Segment

1/1/2022

Additions

Adjustments

Divestitures

Adjustments*

3/31/2022
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

$
55,643

$
649

$
(31)

$
(1)

$
(153)

$
56,106

Foreign



Currency

Purchase

Translation

(Dollars in millions)

Balance

Goodwill

Price

and Other

Balance
Segment

1/1/2022

Additions

Adjustments

Divestitures

Adjustments*

6/30/2022
Software

$
43,966

$
442

$
(108)

$
—

$
(674)

$
43,626
Consulting

6,797

461

(13)

—

(200)

7,044
Infrastructure

4,396

—

—

(1)

(27)

4,368
Other**

484

—

—

(484)

—

—
Total

$
55,643

$
903

$
(121)

$
(485)

$
(901)

$
55,039

*	Primarily driven by foreign currency translation.

**	The company derecognized $484 million of goodwill related to the divestiture of its healthcare software assets. Refer to note 6, “Acquisitions & Divestitures,” for additional information.


									Foreign
									Currency
					Purchase				Translation
(Dollars in millions)	Balance		Goodwill		Price				and Other		Balance
Segment	1/1/2021		Additions		Adjustments		Divestitures		Adjustments*		12/31/2021
Software**	$	42,665	$	1,836	$	23	$	(13)	$	(545)	$	43,966
Consulting		6,145		713		(21)		—		(40)		6,797
Infrastructure		4,436		—		0		—		(39)		4,396
Other**		520		—		—		(37)		1		484
Total	$	53,765	$	2,549	$	2	$	(50)	$	(623)	$	55,643

*	Primarily driven by foreign currency translation.

**	Recast to conform to current year ~~presentation due to segment change.~~presentation.

There were 0 goodwill impairment losses recorded during the first ~~three~~six months of 2022 or full-year 2021 and the company has 0 accumulated impairment losses. Purchase price adjustments recorded in the first ~~three~~six months of 2022 and full-year 2021 were related to acquisitions that were still subject to the measurement period that ends at the earlier of 12 months from the acquisition date or when information becomes available. Net purchase price adjustments recorded ~~during~~in the first ~~three~~six months of 2022 primarily relate to deferred tax assets and ~~2021 were not material.~~liabilities associated with the Turbonomic acquisition.

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Notes to Consolidated Financial Statements — (continued)

12. Borrowings:

Short-Term Debt


	At March 31,		At December 31,		At June 30,		At December 31,
(Dollars in millions)	2022		2021		2022		2021
Short-term loans	$	13	$	22	$	230	$	22
Long-term debt — current maturities		7,676		6,764		5,752		6,764
Total	$	7,690	$	6,787	$	5,981	$	6,787

Included within short-term debt in the company’s Consolidated Balance Sheet at June 30, 2022 is $218 million of secured borrowings recorded at fair value from the short-term credit facility and the Exchange as described in note 8, “Financial Assets & Liabilities.”

The weighted-average interest rate for short-term loans excluding the aforementioned secured borrowings was ~~4.4~~1.9 percent and 6.7 percent at ~~March 31,~~June 30, 2022 and December 31, 2021, respectively.

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Notes to Consolidated Financial Statements — (continued)

Long-Term Debt

Pre-Swap Borrowing


		Balance		Balance			Balance		Balance
(Dollars in millions)	Maturities	3/31/2022		12/31/2021		Maturities	6/30/2022		12/31/2021
U.S. dollar debt (weighted-average interest rate at March 31, 2022):*
2.7%	2022	$	4,661	$	5,673
U.S. dollar debt (weighted-average interest rate at June 30, 2022):*
2.4%						2022	$	1,904	$	5,673
3.4%	2023		1,563		1,573	2023		1,552		1,573
3.3%	2024		5,014		5,016	2024		5,013		5,016
6.9%	2025		607		608
7.0%						2025		605		608
3.3%	2026		4,354		4,356	2026		4,352		4,356
2.8%	2027		2,871		2,221	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
4.4%	2032		1,100		600	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		—	2052		650		—
7.1%	2096		316		316	2096		316		316
		$	35,062	$	34,290		$	32,288	$	34,290
Other currencies (weighted-average interest rate at March 31, 2022, in parentheses):*
Other currencies (weighted-average interest rate at June 30, 2022, in parentheses):*
Euro (1.1%)	2023–2040	$	17,783	$	15,903	2023–2040	$	16,718	$	15,903
Pound sterling (2.6%)	2022		395		406	2022		364		406
Japanese yen (0.3%)	2022–2026		1,198		1,263	2022–2026		1,070		1,263
Other (13.8%)	2022–2025		384		378
Other (15.7%)						2022–2025		315		378
		$	54,821	$	52,240		$	50,755	$	52,240
Finance lease obligations (1.9%)	2022–2030		100		99
Finance lease obligations (2.0%)						2022–2030		108		99
		$	54,921	$	52,339		$	50,863	$	52,339
Less: net unamortized discount			849		839			837		839
Less: net unamortized debt issuance costs			142		130			134		130
Add: fair value adjustment**			291		311			187		311
		$	54,221	$	51,681		$	50,079	$	51,681
Less: current maturities			7,676		6,764			5,752		6,764
Total		$	46,545	$	44,917		$	44,328	$	44,917

* Includes notes, debentures, bank loans and secured borrowings.

** The portion of the company’s fixed-rate debt obligations that is hedged is reflected in the Consolidated Balance Sheet as an amount equal to the sum of the debt’s carrying value and a fair value adjustment representing changes in the fair value of the hedged debt obligations attributable to movements in benchmark interest rates.
**
The portion of the company’s fixed-rate debt obligations that is hedged is reflected in the Consolidated Balance Sheet as an amount equal to the sum of the debt’s carrying value and a fair value adjustment representing changes in the fair value of the hedged debt obligations attributable to movements in benchmark interest rates.

The company’s indenture governing its debt securities and its various credit facilities each contain significant covenants which obligate the company to promptly pay principal and interest, limit the aggregate amount of secured indebtedness and sale and leaseback transactions to 10 percent of the company’s consolidated net tangible assets, and restrict the company’s ability to merge or consolidate unless certain conditions are met. The credit facilities also include

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Notes to Consolidated Financial Statements — (continued)

a covenant on the company’s consolidated net interest expense ratio, which cannot be less than 2.20 to 1.0, as well as a cross default provision with respect to other defaulted indebtedness of at least $500 million.

The company is in compliance with its debt covenants and provides periodic certifications to its lenders. The failure to comply with its debt covenants could constitute an event of default with respect to the debt to which such provisions apply. If certain events of default were to occur, the principal and interest on the debt to which such event of default applied would become immediately due and payable.

In the first quarter of 2022, the company issued $2.3 billion of Euro fixed-rate notes in tranches with maturities ranging from 8 to 12 years and coupons ranging from 0.875 to 1.25 percent, and $1.8 billion of U.S. dollar fixed-rate notes with maturities ranging from 5 to 30 years and coupons ranging from 2.20 to 3.43 percent. In the first quarter of 2021, IBM Credit LLC early redeemed all of its outstanding fixed-rate debt in the aggregate amount of $1.75 billion with maturity dates ranging from 2021 to 2023 and deregistered with the U.S. Securities and Exchange Commission. The notes were redeemed at a price equal to 100 percent of the aggregate principal plus a make-whole premium and accrued interest. The company incurred a loss of approximately $22 million upon redemption that was recorded in other (income) and expense in the Consolidated Income Statement.

Pre-swap annual contractual obligations of long-term debt outstanding at ~~March 31,~~June 30, 2022, ~~are~~were as follows:


(Dollars in millions)	Total		Total
Remainder of 2022	$	5,668	$	2,778
2023		4,807		4,607
2024		6,364		6,262
2025		3,943		3,745
2026		4,700		4,664
Thereafter		29,440		28,807
Total	$	54,921	$	50,863

Interest on Debt


(Dollars in millions)
For the three months ended March 31:	2022		2021
For the six months ended June 30:					2022		2021
Cost of financing	$	82	$	106	$	165	$	210
Interest expense		311		280		607		561
Interest capitalized		2		2		2		2
Total interest paid and accrued	$	395	$	388	$	775	$	774

Lines of Credit

~~The~~On June 30, 2022, the company ~~has a~~amended its existing $2.5 billion Three-Year Credit Agreement and a $7.5 billion Five-Year Credit Agreement ~~with~~(the Credit Agreements) to extend the maturity dates ofto June ~~21, 2024~~20, 2025 and June 22, ~~2026, respectively.~~ 2027, respectively, and to replace the London Interbank Offered Rate (LIBOR) interest rate provisions with customary provisions based on the Secured Overnight Financing Rate (SOFR). The Credit Agreements permit the company and its subsidiary borrowers to borrow up to $10 billion on a revolving basis.

At ~~March 31,~~June 30, 2022, there were 0 borrowings by the company, or its subsidiaries, under these credit facilities.

13. Commitments:

The company’s extended lines of credit to third-party entities include unused amounts of $1.3 billion and $1.7 billion at ~~March 31,~~June 30, 2022 and December 31, ~~2021.~~2021, respectively. A portion of these amounts was available to the company’s business partners to support their working capital needs. In addition, the company has committed to provide future financing to its clients in connection with client purchase agreements for ~~$2.9~~$2.7 billion and $3.2 billion at ~~March 31,~~June 30, 2022 and December 31, 2021,

30

~~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,” in the company’s 2021 Annual Report for additional information. The allowance for these commitments is recorded in other liabilities in the Consolidated Balance Sheet and was not material at ~~March 31,~~June 30, 2022.

35

Table of Contents

Notes to Consolidated Financial Statements — (continued)

The company has applied the guidance requiring a guarantor to disclose certain types of guarantees, even if the likelihood of requiring the guarantor’s performance is remote. The following is a description of arrangements in which the company is the guarantor.

The company is a party to a variety of agreements pursuant to which it may be obligated to indemnify the other party with respect to certain matters. Typically, these obligations arise in the context of contracts entered into by the company, under which the company customarily agrees to hold the party harmless against losses arising from a breach of representations and covenants related to such matters as title to the assets sold, certain intellectual property rights, specified environmental matters, third-party performance of nonfinancial contractual obligations and certain income taxes. In each of these circumstances, payment by the company is conditioned on the other party making a claim pursuant to the procedures specified in the particular contract, the procedures of which typically allow the company to challenge the other party’s claims. While indemnification provisions typically do not include a contractual maximum on the company’s payment, the company’s obligations under these agreements may be limited in terms of time and/or nature of claim, and in some instances, the company may have recourse against third parties for certain payments made by the company.

It is not possible to predict the maximum potential amount of future payments under these or similar agreements due to the conditional nature of the company’s obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made by the company under these agreements have not had a material effect on the company’s business, financial condition or results of operations.

In addition, the company guarantees certain loans and financial commitments. The maximum potential future payment under these financial guarantees and the fair value of these guarantees recognized in the Consolidated Balance Sheet at ~~March 31,~~June 30, 2022 and December 31, 2021 was not material.

Changes in the company’s warranty liability for standard warranties, which are included in other accrued expenses and liabilities and other liabilities in the Consolidated Balance Sheet, and for extended warranty contracts, which are included in deferred income in the Consolidated Balance Sheet, are presented in the following tables.

Standard Warranty Liability


(Dollars in millions)	2022		2021		2022		2021
Balance at January 1	$	77	$	83	$	77	$	83
Current period accruals		14		16		39		36
Accrual adjustments to reflect actual experience		(2)		(4)		(1)		(2)
Charges incurred		(20)		(23)		(41)		(45)
Balance at March 31	$	69	$	72
Balance at June 30					$	74	$	73

Extended Warranty Liability


(Dollars in millions)	2022		2021
Balance at January 1	$	350	$	425
Revenue deferred for new extended warranty contracts		84		50
Amortization of deferred revenue		(83)		(104)
Other*		(12)		(5)
Balance at June 30	$	339	$	367
Current portion	$	172	$	184
Noncurrent portion	$	167	$	183

* Other primarily consists of foreign currency translation adjustments.

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Notes to Consolidated Financial Statements — (continued)

~~Extended Warranty Liability (Deferred Income)~~

(Dollars in millions)

2022

2021
Balance at January 1

$
350

$
425
Revenue deferred for new extended warranty contracts

18

18
Amortization of deferred revenue

(44)

(53)
Other*

(1)

(6)
Balance at March 31

$
323

$
383
Current portion

$
155

$
199
Noncurrent portion

$
168

$
185

* Other primarily consists of foreign currency translation adjustments.

14. Contingencies:

As a company with a substantial employee population and with clients in more than 175 countries, IBM is involved, either as plaintiff or defendant, in a variety of ongoing claims, demands, suits, investigations, tax matters and proceedings that arise from time to time in the ordinary course of its business. The company is a leader in the information technology industry and, as such, has been and will continue to be subject to claims challenging its IP rights and associated products and offerings, including claims of copyright and patent infringement and violations of trade secrets and other IP rights. In addition, the company enforces its own IP against infringement, through license negotiations, lawsuits or otherwise. Further, given the rapidly evolving external landscape of cybersecurity, privacy and data protection laws, regulations and threat actors, the company and its clients have been and will continue to be subject to actions or proceedings in various jurisdictions. Also, as is typical for companies of IBM’s scope and scale, the company is party to actions and proceedings in various jurisdictions involving a wide range of labor and employment issues (including matters related to contested employment decisions, country-specific labor and employment laws, and the company’s pension, retirement and other benefit plans), as well as actions with respect to contracts, product liability, securities, foreign operations, competition law and environmental matters. These actions may be commenced by a number of different parties, including competitors, clients, current or former employees, government and regulatory agencies, stockholders and representatives of the locations in which the company does business. Some of the actions to which the company is party may involve particularly complex technical issues, and some actions may raise novel questions under the laws of the various jurisdictions in which these matters arise.

The company records a provision with respect to a claim, suit, investigation or proceeding when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Any recorded liabilities, including any changes to such liabilities for the quarter ended ~~March 31,~~June 30, 2022 were not material to the Consolidated Financial Statements.

In accordance with the relevant accounting guidance, the company provides disclosures of matters for which the likelihood of material loss is at least reasonably possible. In addition, the company also discloses matters based on its consideration of other matters and qualitative factors, including the experience of other companies in the industry, and investor, customer and employee relations considerations.

With respect to certain of the claims, suits, investigations and proceedings discussed herein, the company believes at this time that the likelihood of any material loss is remote, given, for example, the procedural status, court rulings, and/or the strength of the company’s defenses in those matters. With respect to the remaining claims, suits, investigations and proceedings discussed in this note, except as specifically discussed herein, the company is unable to provide estimates of reasonably possible losses or range of losses, including losses in excess of amounts accrued, if any, for the following reasons. Claims, suits, investigations and proceedings are inherently uncertain, and it is not possible to predict the ultimate outcome of these matters. It is the company’s experience that damage amounts claimed in litigation against it are unreliable and unrelated to possible outcomes, and as such are not meaningful indicators of the company’s potential liability. Further, the company is unable to provide such an estimate due to a number of other factors with respect to

32

~~Table of Contents~~

~~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

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Notes to Consolidated Financial Statements — (continued)

condition, results of operations or cash flows could be affected in any particular period by the resolution of one or more of these matters.

The following is a summary of the more significant legal matters involving the company.

In December 2017, CIS General Insurance Limited (CISGIL) sued IBM UK regarding a contract entered into by IBM UK and CISGIL in 2015 to implement and operate an IT insurance platform. The contract was terminated by IBM UK in July 2017 for non-payment by CISGIL. CISGIL alleges wrongful termination, breach of contract and breach of warranty. In February 2021, the Technology & Construction Court in London rejected the majority of CISGIL’s claims and ruled in IBM’s favor on its counterclaim. The court’s decision required IBM to pay approximately $20 million in damages, plus interest and litigation costs. In April 2022, the Court of Appeal awarded CISGIL additional damages of approximately $89 million, plus interest and litigation costs. IBM ~~intends~~filed an application for permission to ~~seek~~ appeal ofwith the ~~judgment.~~UK Supreme Court.

On June 8, 2021, IBM sued GlobalFoundries U.S. Inc. (GF) in New York State Supreme Court for claims including fraud and breach of contract relating to a long-term strategic relationship between IBM and GF for researching, developing, and manufacturing advanced semiconductor chips for IBM. GF walked away from its obligations and IBM is now suing to recover amounts paid to GF, and other compensatory and punitive damages, totaling more than $1.5 billion. On September 14, 2021, the court ruled on GF’s motion to dismiss. On April 7, 2022, the Appellate Division unanimously reversed the lower court’s dismissal of IBM’s fraud claim. IBM’s claims for breaches of contract, promissory estoppel, and fraud are proceeding.

On April 5, 2022, a putative securities law class action was commenced in the United States District Court for the Southern District of New York alleging that during the period from April 4, 2017 through October 20, 2021, certain strategic imperatives revenues were misclassified. The company, 2 current IBM senior executives, and 2 former IBM senior executives are named as defendants. On June 23, 2022, the court entered an order appointing Iron Workers Local 580 Joint Funds as lead plaintiff. On March 25, 2022, the Board of Directors received a shareholder demand letter making similar allegations and demanding that the company’s Board of Directors take action to assert the company’s rights. A special committee of independent directors has been formed to investigate the issues raised in the letter.

On June 2, 2022, a putative class action lawsuit was filed in the United States District Court for the Southern District of New York alleging that the IBM Pension Plan miscalculated certain joint and survivor annuity pension benefits by using outdated actuarial tables in violation of the Employee Retirement Income Security Act of 1974. IBM, the Plan Administrator Committee, and the IBM Pension Plan are named as defendants.

As disclosed in the Kyndryl Form 10 and subsequent Kyndryl public filings, in 2017 BMC Software, Inc. (BMC) filed suit against IBM in the United States District Court for the Southern District of Texas in a dispute involving IBM’s former managed infrastructure services business. On May 30, 2022, the trial court awarded BMC $718 million in direct damages and $718 million in punitive damages, plus interest and fees. The judgment will be appealed. IBM does not believe it has any material exposure relating to this litigation. No material liability or related indemnification asset has been recorded by IBM.

The company is party to, or otherwise involved in, proceedings brought by U.S. federal or state environmental agencies under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), known as “Superfund,” or laws similar to CERCLA. Such statutes require potentially responsible parties to participate in remediation activities regardless of fault or ownership of sites. The company is also conducting environmental investigations, assessments or remediations at or in the vicinity of several current or former operating sites globally pursuant to permits, administrative orders or agreements with country, state or local environmental agencies, and is involved in lawsuits and claims concerning certain current or former operating sites.

The company is also subject to ongoing tax examinations and governmental assessments in various jurisdictions. Along with many other U.S. companies doing business in Brazil, the company is involved in various challenges with

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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 ~~$450~~$400 million. The company believes it will prevail on these matters and that this amount is not a meaningful indicator of liability.

15. Equity Activity:

Reclassifications and Taxes Related to Items of Other Comprehensive Income


(Dollars in millions)	Before Tax		Tax (Expense)/		Net of Tax		Before Tax		Tax (Expense)/		Net of Tax
For the three months ended March 31, 2022:	Amount		Benefit		Amount
For the three months ended June 30, 2022:							Amount		Benefit		Amount
Other comprehensive income/(loss):
Foreign currency translation adjustments	$	442	$	(136)	$	306	$	213	$	(347)	$	(134)
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	$	60	$	(16)	$	44	$	200	$	(53)	$	147
Reclassification of (gains)/losses to:
Cost of services		(15)		4		(11)		(13)		3		(10)
Cost of sales		(12)		4		(9)		(23)		7		(17)
Cost of financing		5		(1)		4		6		(2)		5
SG&A expense		(6)		2		(4)		(14)		4		(10)
Other (income) and expense		7		(2)		5		38		(10)		29
Interest expense		21		(5)		15		22		(6)		16
Total unrealized gains/(losses) on cash flow hedges	$	59	$	(15)	$	44	$	217	$	(56)	$	161
Retirement-related benefit plans (1):
*Retirement-related benefit plans:**
Prior service costs/(credits)	$	(5)	$	5	$	0	$	—	$	0	$	0
Net (losses)/gains arising during the period		9		(4)		5		1		(3)		(2)
Curtailments and settlements		8		(2)		6		11		(3)		8
Amortization of prior service (credits)/costs		7		(2)		5		6		(2)		5
Amortization of net (gains)/losses		468		(131)		337		450		(125)		325
Total retirement-related benefit plans	$	486	$	(134)	$	352	$	468	$	(132)	$	336
Other comprehensive income/(loss)	$	987	$	(285)	$	703	$	897	$	(534)	$	363

~~(1)~~

*

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

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Notes to Consolidated Financial Statements — (continued)

Reclassifications and Taxes Related to Items of Other Comprehensive Income


(Dollars in millions)	Before Tax		Tax (Expense)/		Net of Tax		Before Tax		Tax (Expense)/		Net of Tax
For the three months ended March 31, 2021:	Amount		Benefit		Amount
For the three months ended June 30, 2021:							Amount		Benefit		Amount
Other comprehensive income/(loss):
Foreign currency translation adjustments	$	549	$	(228)	$	321	$	28	$	44	$	72
Net changes related to available-for-sale securities:
Unrealized gains/(losses) arising during the period	$	0	$	0	$	0	$	0	$	0	$	0
Reclassification of (gains)/losses to other (income) and expense		—		—		—		—		—		—
Total net changes related to available-for-sale securities	$	0	$	0	$	0	$	0	$	0	$	0
Unrealized gains/(losses) on cash flow hedges:
Unrealized gains/(losses) arising during the period	$	187	$	(47)	$	140	$	(34)	$	9	$	(26)
Reclassification of (gains)/losses to:
Cost of services		(14)		3		(10)		(7)		2		(5)
Cost of sales		22		(6)		16		10		(3)		8
Cost of financing		6		(2)		4		6		(1)		4
SG&A expense		15		(4)		11		16		(4)		12
Other (income) and expense		116		(29)		87		49		(12)		37
Interest expense		16		(4)		12		16		(4)		12
Total unrealized gains/(losses) on cash flow hedges	$	347	$	(88)	$	259	$	56	$	(14)	$	42
Retirement-related benefit plans (1):
*Retirement-related benefit plans:**
Prior service costs/(credits)	$	0	$	0	$	0	$	0	$	0	$	0
Net (losses)/gains arising during the period		20		(6)		14		2		10		11
Curtailments and settlements		17		(5)		12		16		(5)		11
Amortization of prior service (credits)/costs		3		0		3		1		1		1
Amortization of net (gains)/losses		648		(177)		471		643		(175)		467
Total retirement-related benefit plans	$	689	$	(189)	$	500	$	661	$	(170)	$	491
Other comprehensive income/(loss)	$	1,586	$	(505)	$	1,080	$	745	$	(140)	$	605

~~(1)~~

*

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

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Notes to Consolidated Financial Statements — (continued)

Reclassifications and Taxes Related to Items of Other Comprehensive Income


(Dollars in millions)	Before Tax		Tax (Expense)/		Net of Tax
For the six months ended June 30, 2022:	Amount		Benefit		Amount
Other comprehensive income/(loss):
Foreign currency translation adjustments	$	655	$	(483)	$	172
Net changes related to available-for-sale securities:
Unrealized gains/(losses) arising during the period	$	(1)	$	0	$	0
Reclassification of (gains)/losses to other (income) and expense		—		—		—
Total net changes related to available-for-sale securities	$	(1)	$	0	$	0
Unrealized gains/(losses) on cash flow hedges:
Unrealized gains/(losses) arising during the period	$	260	$	(69)	$	191
Reclassification of (gains)/losses to:
Cost of services		(28)		7		(21)
Cost of sales		(35)		10		(25)
Cost of financing		12		(3)		9
SG&A expense		(20)		5		(14)
Other (income) and expense		45		(11)		34
Interest expense		43		(11)		32
Total unrealized gains/(losses) on cash flow hedges	$	276	$	(71)	$	205
*Retirement-related benefit plans:**
Prior service costs/(credits)	$	(5)	$	5	$	0
Net (losses)/gains arising during the period		10		(7)		3
Curtailments and settlements		19		(5)		14
Amortization of prior service (credits)/costs		13		(3)		10
Amortization of net (gains)/losses		917		(256)		662
Total retirement-related benefit plans	$	954	$	(266)	$	689
Other comprehensive income/(loss)	$	1,885	$	(819)	$	1,066

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

41

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, 2021:	Amount		Benefit		Amount
Other comprehensive income/(loss):
Foreign currency translation adjustments	$	577	$	(184)	$	393
Net changes related to available-for-sale securities:
Unrealized gains/(losses) arising during the period	$	0	$	0	$	0
Reclassification of (gains)/losses to other (income) and expense		—		—		—
Total net changes related to available-for-sale securities	$	0	$	0	$	0
Unrealized gains/(losses) on cash flow hedges:
Unrealized gains/(losses) arising during the period	$	153	$	(39)	$	114
Reclassification of (gains)/losses to:
Cost of services		(21)		5		(16)
Cost of sales		32		(8)		24
Cost of financing		12		(3)		9
SG&A expense		31		(8)		23
Other (income) and expense		165		(41)		123
Interest expense		31		(8)		24
Total unrealized gains/(losses) on cash flow hedges	$	404	$	(102)	$	301
*Retirement-related benefit plans:**
Prior service costs/(credits)	$	0	$	0	$	0
Net (losses)/gains arising during the period		22		4		25
Curtailments and settlements		34		(10)		23
Amortization of prior service (credits)/costs		4		0		4
Amortization of net (gains)/losses		1,291		(352)		938
Total retirement-related benefit plans	$	1,350	$	(359)	$	991
Other comprehensive income/(loss)	$	2,330	$	(645)	$	1,685

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

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


					Net Change		Net Unrealized								Net 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, 2022	$	(18)	$	(3,362)	$	(19,854)	$	(1)	$	(23,234)	$	(18)	$	(3,362)	$	(19,854)	$	(1)	$	(23,234)
Other comprehensive income before reclassifications		44		306		5		0		355		191		172		3		0		366
Amount reclassified from accumulated other comprehensive income		0		—		348		—		348		14		—		686		—		699
Total change for the period	$	44	$	306	$	352	$	0	$	703	$	205	$	172	$	689	$	0	$	1,066
March 31, 2022	$	26	$	(3,056)	$	(19,502)	$	(1)	$	(22,532)
June 30, 2022											$	187	$	(3,189)	$	(19,165)	$	(1)	$	(22,169)

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

42

Table of Contents

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)

Notes to Consolidated Financial Statements — (continued)


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

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

16. Derivative Financial Instruments:

The company operates in multiple functional currencies and is a significant lender and borrower in the global markets. In the normal course of business, the company is exposed to the impact of interest rate changes and foreign currency fluctuations, and to a lesser extent equity and commodity price changes and client credit risk. The company limits these risks by following established risk management policies and procedures, including the use of derivatives, and, where cost effective, financing with debt in the currencies in which assets are denominated. For interest rate exposures, derivatives are used to better align rate movements between the interest rates associated with the company’s lease and other financial assets and the interest rates associated with its financing debt. Derivatives are also used to manage the related cost of debt. For foreign currency exposures, derivatives are used to better manage the cash flow volatility arising from foreign exchange rate fluctuations.

In the Consolidated Balance Sheet, the company does not offset derivative assets against liabilities in master netting arrangements nor does it offset receivables or payables recognized upon payment or receipt of cash collateral against the fair values of the related derivative instruments. At ~~March 31,~~June 30, 2022 and December 31, 2021, the amount recognized in other accounts ~~receivable~~receivables for the right to reclaim cash collateral was $3$52 million and $2 million, respectively. At ~~March 31,~~June 30, 2022 and December 31, 2021, the amount recognized in accounts payable for the obligation to return cash collateral was ~~$25~~$14 million and $38 million, respectively. The company restricts the use of cash collateral received to rehypothecation, and therefore reports it in restricted cash in the Consolidated Balance Sheet. At ~~March 31,~~June 30, 2022 and December 31, 2021, the amount rehypothecated was $3$12 million and $2 million, respectively. Additionally, if derivative exposures covered by a qualifying master netting agreement had been netted in the Consolidated Balance Sheet at ~~March 31~~June 30, , 2022 and December 31,, 2021, the total derivative asset and liability positions each would have been reduced by ~~$95~~$187 million and $60 million, respectively.

36

~~Table~~On May 19, 2022, in connection with the disposition of ~~Contents~~22.3 million shares of Kyndryl common stock, the company entered into a cash-settled swap with the lender of the short-term credit facility as the counterparty that maintained IBM’s continued economic exposure in those shares pursuant to the Exchange. Refer to note 8, “Financial Assets & Liabilities,” for additional information. The notional value of the swap is $311 million. Upon settlement of the swap, no later than November 2, 2022, IBM will receive or pay an amount derived from the difference between the VWAP of the Kyndryl shares over the outstanding term of the swap and the strike price as of May 19, 2022. The fair value of the swap at June 30, 2022 was $88 million and is included within other accrued expenses and liabilities in the Consolidated Balance Sheet. For the three and six months ended June 30, 2022, an unrealized loss of $88 million was recorded in other (income) and expense in the Consolidated Income Statement.

~~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.

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Notes to Consolidated Financial Statements — (continued)

A brief description of the major hedging programs, categorized by underlying risk, follows.

Interest Rate Risk

Fixed and Variable Rate Borrowings

The company issues debt in the global capital markets to fund its operations and financing business. Access to cost-effective financing can result in interest rate mismatches with the underlying assets. To manage these mismatches and to reduce overall interest cost, the company may use interest-rate swaps to convert specific fixed-rate debt issuances into variable-rate debt (i.e., fair value hedges) and to convert specific variable-rate debt issuances into fixed-rate debt (i.e., cash flow hedges). At ~~March 31,~~June 30, 2022 and December 31, 2021, the total notional amount of the company’s interest-rate swaps was ~~$2.4~~$4.4 billion and $0.4 billion, respectively. The weighted-average remaining maturity of these instruments at ~~March 31,~~June 30, 2022 and December 31, 2021 was approximately ~~5.0~~5.4 years and 1.2 years, respectively. These interest-rate contracts were accounted for as fair value hedges. The company did ~~not~~0t have any cash flow hedges relating to this program outstanding at ~~March 31,~~June 30, 2022 and December 31, 2021.

Forecasted Debt Issuance

The company is exposed to interest rate volatility on future debt issuances. To manage this risk, the company may use instruments such as forward starting interest-rate swaps to lock in the rate on the interest payments related to the forecasted debt issuances. There were 0 instruments outstanding at ~~March 31,~~June 30, 2022 and December 31, 2021.

In connection with cash flow hedges of forecasted interest payments related to the company's borrowings, the company recorded net losses (before taxes) of ~~$152~~$148 million and $157 million at ~~March 31,~~June 30, 2022 and December 31, 2021, respectively, in AOCI. The company estimates that $18 million of the deferred net losses (before taxes) on derivatives in AOCI at ~~March 31,~~June 30, 2022 will be reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying interest payments.

Foreign Exchange Risk

Long-Term Investments in Foreign Subsidiaries (Net Investment)

A large portion of the company’s foreign currency denominated debt portfolio is designated as a hedge of net investment in foreign subsidiaries to reduce the volatility in stockholders’ equity caused by changes in foreign currency exchange rates in the functional currency of major foreign subsidiaries with respect to the U.S. dollar. At ~~March 31,~~June 30, 2022 and December 31, 2021, the carrying value of debt designated as hedging instruments was ~~$15.0~~$14.0 billion and $14.1 billion, respectively. The company also uses cross-currency swaps and foreign exchange forward contracts for this risk management purpose. At ~~March 31,~~June 30, 2022 and December 31, 2021, the total notional amount of derivative instruments designated as net investment hedges was ~~$5.7~~$4.7 billion and $6.8 billion, respectively. At both ~~March 31,~~June 30, 2022 and December 31, 2021, the weighted-average remaining maturity of these instruments was approximately 0.1 ~~years.~~year.

Anticipated Royalties and Cost Transactions

The company’s operations generate significant nonfunctional currency, third-party vendor payments and intercompany payments for royalties and goods and services among the company’s non-U.S. subsidiaries and with the company. In anticipation of these foreign currency cash flows and in view of the volatility of the currency markets, the company selectively employs foreign exchange forward contracts to manage its currency risk. These forward contracts are accounted for as cash flow hedges. At ~~March 31,~~June 30, 2022, the maximum remaining length of time over which the

37

~~Table of Contents~~

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

company hedged its exposure is approximately two years. At ~~March 31,~~June 30, 2022 and December 31, 2021, the total notional amount of forward contracts designated as cash flow hedges of forecasted royalty and cost transactions was ~~$7.9~~$8.2 billion and $7.2 billion, respectively. At both ~~March 31,~~June 30, 2022 and December 31, 2021, the weighted-average remaining maturity of these instruments was approximately 0.6 years.

44

Table of Contents

Notes to Consolidated Financial Statements — (continued)

At ~~March 31,~~June 30, 2022 and December 31, 2021, in connection with cash flow hedges of anticipated royalties and cost transactions, the company recorded net gains (before taxes) of ~~$338~~$537 million and $315 million, respectively, in AOCI. The company estimates that ~~$263~~$471 million of deferred net gains (before taxes) on derivatives in AOCI at ~~March 31,~~June 30, 2022 will be reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying anticipated transactions.

Foreign Currency Denominated Borrowings

The company is exposed to exchange rate volatility on foreign currency denominated debt. To manage this risk, the company employs cross-currency swaps to convert fixed-rate foreign currency denominated debt to fixed-rate debt denominated in the functional currency of the borrowing entity. These swaps are accounted for as cash flow hedges. At ~~March 31,~~June 30, 2022, the maximum length of time remaining over which the company hedged its exposure is approximately six years. At ~~March 31,~~June 30, 2022 and December 31, 2021, the total notional amount of cross-currency swaps designated as cash flow hedges of foreign currency denominated debt was $3.0 billion and $2.0 billion, respectively.

At ~~March 31,~~June 30, 2022 and December 31, 2021, in connection with cash flow hedges of foreign currency denominated borrowings, the company recorded net losses (before taxes) of ~~$141~~$128 million and $174 million, respectively, in AOCI. The company estimates that ~~$25~~$31 million of deferred net gains (before taxes) on derivatives in AOCI at ~~March 31,~~June 30, 2022 will be reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying exposure.

Subsidiary Cash and Foreign Currency Asset/Liability Management

The company uses its Global Treasury Centers to manage the cash of its subsidiaries. These centers principally use currency swaps to convert cash flows in a cost-effective manner. In addition, the company uses foreign exchange forward contracts to economically hedge, on a net basis, the foreign currency exposure of a portion of the company’s nonfunctional currency assets and liabilities. The terms of these forward and swap contracts are generally less than one year. The changes in the fair values of these contracts and of the underlying hedged exposures are generally offsetting and are recorded in other (income) and expense in the Consolidated Income Statement. At ~~March 31,~~June 30, 2022 and December 31, 2021, the total notional amount of derivative instruments in economic hedges of foreign currency exposure was ~~$5.9~~$5.6 billion and $6.8 billion, respectively.

Equity Risk Management

The company is exposed to market price changes in certain broad market indices and in the company’s own stock primarily related to certain obligations to employees. Changes in the overall value of these employee compensation obligations are recorded in SG&A expense in the Consolidated Income Statement. Although not designated as accounting hedges, the company utilizes derivatives, including equity swaps and futures, to economically hedge the exposures related to its employee compensation obligations. The derivatives are linked to the total return on certain broad market indices or the total return on the company’s common stock, and are recorded at fair value with gains or losses also reported in SG&A expense in the Consolidated Income Statement. At ~~March 31,~~June 30, 2022 and December 31, 2021, the total notional amount of derivative instruments in economic hedges of these compensation obligations was ~~$1.3~~$1.1 billion and $1.4 billion, respectively.

3845

Table of Contents

Notes to Consolidated Financial Statements — (continued)

Cumulative Basis Adjustments for Fair Value Hedges

At ~~March 31,~~June 30, 2022 and December 31, 2021, the following amounts were recorded in the Consolidated Balance Sheet related to cumulative basis adjustments for fair value hedges:


	March 31,		December 31,		June 30,		December 31,
(Dollars in millions)	2022		2021		2022		2021
Short-term debt:
Carrying amount of the hedged item	$	(225)	$	(227)	$	(224)	$	(227)
Cumulative hedging adjustments included in the carrying amount — assets/(liabilities)		0		(2)
Cumulative hedging adjustments included in the carrying amount — assets/(liabilities)*						1		(2)
Long-term debt:
Carrying amount of the hedged item	$	(2,480)	$	(508)	$	(4,366)	$	(508)
Cumulative hedging adjustments included in the carrying amount — assets/(liabilities)*		(290)		(309)		(188)		(309)

* Includes ($~~289)~~276) million and ($302) million of hedging adjustments on discontinued hedging relationships at ~~March 31,~~June 30, 2022 and December 31, 2021, respectively.

The Effect of Derivative Instruments in the Consolidated Income Statement

The total amounts of income and expense line items presented in the Consolidated Income Statement in which the effects of fair value hedges, cash flow hedges, net investment hedges and derivatives not designated as hedging instruments are recorded and the total effect of hedge activity on these income and expense line items are as follows:


						Gains/(Losses) of									Gains/(Losses) of
(Dollars in millions)	Total					Total Hedge Activity				Total					Total Hedge Activity
For the three months ended March 31:	2022		2021			2022		2021
For the three months ended June 30:										2022		2021			2022		2021
Cost of services	$	5,349	$	4,644		$	15	$	14	$	5,399	$	4,720		$	13	$	7
Cost of sales		1,415		1,379	*		12		(22)		1,750		1,499	*		23		(10)
Cost of financing		98		137	*		(2)		2		96		146	*		1		0
SG&A expense		4,597		4,688			(70)		34		4,855		4,849			(152)		67
Other (income) and expense		246		346			(102)		(160)		(81)		302			(439)		(79)
Interest expense		311		280			(6)		5		297		281			3		(1)

* Reclassified to conform to current year presentation.

3946

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 three months ended March 31:

Line Item

2022

2021

2022

2021
Derivative instruments in fair value hedges (1):










Interest rate contracts

Cost of financing

$
(1)

$
(1)

$
4

$
7

Interest expense

(4)

(1)

16

18
Derivative instruments not designated as hedging instruments:










Foreign exchange contracts

Other (income) and expense

(95)

(44)

N/A

N/A
Equity contracts

SG&A expense

(76)

49

N/A

N/A
Total



$
(176)

$
3

$
20

$
25


	Gain (Loss) Recognized in Consolidated Income Statement
	Consolidated	Recognized on				Attributable to Risk
(Dollars in millions)	Income Statement	Derivatives				Being Hedged (2)
For the three months ended June 30:	Line Item	2022		2021		2022		2021
Derivative instruments in fair value hedges (1):
Interest rate contracts	Cost of financing	$	(17)	$	0	$	23	$	4
	Interest expense		(61)		0		81		11
Derivative instruments not designated as hedging instruments:
Foreign exchange contracts	Other (income) and expense		(313)		(30)		N/A		N/A
Equity contracts	SG&A expense		(166)		83		N/A		N/A
	Other (income) and expense		(88)		—		N/A		N/A
Total		$	(645)	$	54	$	104	$	15


	Gain (Loss) Recognized in Consolidated Income Statement and Other Comprehensive Income													Gain (Loss) Recognized in Consolidated Income Statement and Other Comprehensive Income
(Dollars in millions)					Consolidated	Reclassified				Amounts Excluded from								Consolidated	Reclassified				Amounts Excluded from
For the three months	Recognized in OCI				Income Statement	from AOCI				Effectiveness Testing (3)				Recognized in OCI				Income Statement	from AOCI				Effectiveness Testing (3)
ended March 31:	2022		2021		Line Item	2022		2021		2022		2021
ended June 30:														2022		2021		Line Item	2022		2021		2022		2021
Derivative instruments in cash flow hedges:
Interest rate contracts	$	—	$	—	Cost of financing	$	(1)	$	(1)	$	—	$	—	$	—	$	—	Cost of financing	$	(1)	$	(1)	$	—	$	—
					Interest expense		(3)		(3)		—		—					Interest expense		(3)		(3)		—		—
Foreign exchange contracts		60		187	Cost of services		15		14		—		—		200		(34)	Cost of services		13		7		—		—
					Cost of sales		12		(22)		—		—					Cost of sales		23		(10)		—		—
					Cost of financing		(5)		(5)		—		—					Cost of financing		(5)		(5)		—		—
					SG&A expense		6		(15)		—		—					SG&A expense		14		(16)		—		—
					Other (income) and expense		(7)		(116)		—		—					Other (income) and expense		(38)		(49)		—		—
					Interest expense		(17)		(13)		—		—					Interest expense		(19)		(12)		—		—
Instruments in net investment hedges (4):
Foreign exchange contracts		541		907	Cost of financing		—		—		1		2		1,379		(177)	Cost of financing		—		—		1		1
					Interest expense		—		—		2		4					Interest expense		—		—		5		4
Total	$	601	$	1,094		$	1	$	(160)	$	3	$	6	$	1,579	$	(211)		$	(16)	$	(90)	$	6	$	5

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

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

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

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

N/A - not applicable


						Gains/(Losses) of
(Dollars in millions)	Total					Total Hedge Activity
For the six months ended June 30:	2022		2021			2022		2021
Cost of services	$	10,747	$	9,364		$	28	$	21
Cost of sales		3,165		2,878	*		35		(32)
Cost of financing		194		283	*		(1)		2
SG&A expense		9,452		9,536			(223)		101
Other (income) and expense		166		647			(541)		(239)
Interest expense		607		561			(3)		4

* Reclassified to conform to current year presentation.

47

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	2022		2021		2022		2021
Derivative instruments in fair value hedges (1):
Interest rate contracts	Cost of financing	$	(18)	$	0	$	26	$	11
	Interest expense		(65)		(1)		97		29
Derivative instruments not designated as hedging instruments:
Foreign exchange contracts	Other (income) and expense		(409)		(74)		N/A		N/A
Equity contracts	SG&A expense		(243)		133		N/A		N/A
	Other (income) and expense		(88)		—		N/A		N/A
Total		$	(821)	$	57	$	123	$	40


	Gain (Loss) Recognized in Consolidated Income Statement and Other Comprehensive Income
(Dollars in millions)					Consolidated	Reclassified				Amounts Excluded from
For the six months	Recognized in OCI				Income Statement	from AOCI				Effectiveness Testing (3)
ended June 30:	2022		2021		Line Item	2022		2021		2022		2021
Derivative instruments in cash flow hedges:
Interest rate contracts	$	—	$	—	Cost of financing	$	(2)	$	(2)	$	—	$	—
					Interest expense		(7)		(6)		—		—
Foreign exchange contracts		260		153	Cost of services		28		21		—		—
					Cost of sales		35		(32)		—		—
					Cost of financing		(10)		(9)		—		—
					SG&A expense		20		(31)		—		—
					Other (income) and expense		(45)		(165)		—		—
					Interest expense		(36)		(25)		—		—
Instruments in net investment hedges (4):
Foreign exchange contracts		1,920		730	Cost of financing		—		—		2		3
					Interest expense		—		—		7		8
Total	$	2,180	$	883		$	(16)	$	(251)	$	9	$	11

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

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

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

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

N/A - not applicable

For the three and six months ~~ending March 31,~~ended June 30, 2022 and 2021, there were no material gains or losses excluded from the assessment of hedge effectiveness (for fair value or cash flow hedges), or associated with an underlying exposure that did not or was not expected to occur (for cash flow hedges); nor are there any anticipated in the normal course of business.

4048

Table of Contents

Notes to Consolidated Financial Statements — (continued)

17. Stock-Based Compensation:

Stock-based compensation cost for stock awards and stock options is measured at grant date, based on the fair value of the award, and is recognized over the employee requisite service period. The following table presents total stock-based compensation cost included in income from continuing operations.


					Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in millions)					2022		2021		2022		2021
For the three months ended March 31:	2022		2021
Cost	$	40	$	34	$	43	$	35	$	84	$	68
Selling, general and administrative		136		115		153		141		289		256
Research, development and engineering		57		49		58		50		115		99
Pre-tax stock-based compensation cost	$	234	$	198	$	254	$	225	$	488	$	423
Income tax benefits		(57)		(48)		(82)		(64)		(139)		(112)
Total net stock-based compensation cost	$	177	$	149	$	172	$	162	$	348	$	311

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.

Pre-tax stock-based compensation cost for the three months ended June 30, 2022 increased $29 million compared to the corresponding period in the prior year, including increases in ESPP ($14 million), performance share units ($8 million), stock options ($5 million) and restricted stock units ($2 million). The increases primarily relate to the ESPP being considered compensatory and a change in the timing of the company’s executive grant cycle in 2022.

Pre-tax stock-based compensation cost for the six months ended June 30, 2022 increased $64 million compared to the corresponding period in the prior year, including increases in restricted stock units ($29 million), ESPP ($14 million), performance share units ($10 million) and stock options ($10 million). The increases are driven by the same factors described above.

Total unrecognized compensation cost related to non-vested awards at June 30, 2022 was $1.4 billion and is expected to be recognized over a weighted-average period of approximately 2.5 years.

Capitalized stock-based compensation cost was not material at June 30, 2022 and 2021.

18. Retirement-Related Benefits:

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


					Yr. to Yr.
(Dollars in millions)					Percent
For the three months ended June 30:	2022		2021		Change
Retirement-related plans — cost:
Defined benefit and contribution pension plans — cost	$	456	$	600	(24.0)	%
Nonpension postretirement plans — cost		33		44	(25.0)
Total	$	489	$	644	(24.1)	%

4149

Table of Contents

Notes to Consolidated Financial Statements — (continued)

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

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

Yr. to Yr.

(Dollars in millions)

Percent

For the three months ended March 31:

2022

2021

Change

Retirement-related plans — cost:







Defined benefit and contribution pension plans — cost

$
478

$
619

(22.8)
%
Nonpension postretirement plans — cost

33

44

(25.0)

Total

$
510

$
663

(23.0)
%


					Yr. to Yr.
(Dollars in millions)					Percent
For the six months ended June 30:	2022		2021		Change
Retirement-related plans — cost:
Defined benefit and contribution pension plans — cost	$	934	$	1,219	(23.4)	%
Nonpension postretirement plans — cost		66		88	(25.0)
Total	$	1,000	$	1,307	(23.5)	%

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

Cost/(Income) of Pension Plans


(Dollars in millions)	U.S. Plans				Non-U.S. Plans				U.S. Plans				Non-U.S. Plans
For the three months ended March 31:	2022		2021		2022		2021
For the three months ended June 30:									2022		2021		2022		2021
Service cost	$	—	$	—	$	64	$	65	$	—	$	—	$	59	$	68
Interest cost (1)		302		277		139		108
Expected return on plan assets (1)		(475)		(451)		(274)		(279)
Amortization of prior service costs/(credits) (1)		2		4		4		(2)
Recognized actuarial losses (1)		179		249		278		356
Curtailments and settlements (1)		—		—		8		17
Interest cost*										302		277		131		108
Expected return on plan assets*										(475)		(451)		(259)		(279)
Amortization of prior service costs/(credits)*										2		4		3		(5)
Recognized actuarial losses*										179		249		260		352
Curtailments and settlements*										—		—		11		16
Multi-employer plans		—		—		4		6		—		—		3		5
Other costs/(credits) (1)		—		—		9		11
Other costs/(credits)*										—		—		6		3
Total net periodic pension (income)/cost of defined benefit plans	$	8	$	80	$	231	$	283	$	8	$	80	$	215	$	268
Cost of defined contribution plans		141		151		98		105		141		151		92		101
Total defined benefit and contribution pension plans cost recognized in the Consolidated Income Statement	$	149	$	231	$	328	$	388	$	149	$	231	$	307	$	369


(Dollars in millions)	U.S. Plans				Non-U.S. Plans
For the six months ended June 30:	2022		2021		2022		2021
Service cost	$	—	$	—	$	123	$	133
Interest cost*		603		555		270		216
Expected return on plan assets*		(950)		(901)		(532)		(559)
Amortization of prior service costs/(credits)*		4		8		7		(7)
Recognized actuarial losses*		359		498		537		708
Curtailments and settlements*		—		—		19		34
Multi-employer plans		—		—		7		11
Other costs/(credits)*		—		—		15		15
Total net periodic pension (income)/cost of defined benefit plans	$	15	$	160	$	446	$	551
Cost of defined contribution plans		282		302		190		206
Total defined benefit and contribution pension plans cost recognized in the Consolidated Income Statement	$	298	$	462	$	636	$	757

~~(1)~~

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

~~The following table provides the components of the cost for the company’s nonpension postretirement plans.~~

~~Cost of Nonpension Postretirement Plans~~

(Dollars in millions)

U.S. Plan

Non-U.S. Plans
For the three months ended March 31:

2022

2021

2022

2021
Service cost

$
1

$
2

$
1

$
1
Interest cost (1)

18

16

9

8
Expected return on plan assets (1)

—

—

0

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

1

1

0

0
Recognized actuarial losses (1)

2

13

1

4
Curtailments and settlements (1)

—

—

—

—
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.~~

4250

Table of Contents

Notes to Consolidated Financial Statements — (continued)

The following tables provide the components of the cost for the company’s nonpension postretirement plans.

Cost of Nonpension Postretirement Plans


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


(Dollars in millions)	U.S. Plan				Non-U.S. Plans
For the six months ended June 30:	2022		2021		2022		2021
Service cost	$	2	$	4	$	2	$	2
Interest cost*		37		32		18		16
Expected return on plan assets*		—		—		(1)		(2)
Amortization of prior service costs/(credits)*		2		2		0		0
Recognized actuarial losses*		4		26		2		8
Curtailments and settlements*		—		—		—		0
Total nonpension postretirement plans cost recognized in the Consolidated Income Statement	$	46	$	64	$	20	$	25

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

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

The table below includes contributions to the following plans:


(Dollars in millions)	Plan Contributions				Plan Contributions
For the three months ended March 31:		2022	2021
For the six months ended June 30:						2022	2021
U.S. and non-U.S. nonpension postretirement benefit plans	$	120	$	106	$	202	$	191
Non-U.S. DB and multi-employer plans*		35		64		43		42
Total plan contributions	$	154	$	170	$	245	$	233

*

* Amounts reported net of refunds.

~~Amounts reported net of refunds.~~

During the ~~three~~six months ended ~~March 31,~~June 30, 2022 and 2021, the company contributed ~~$105~~$182 million and ~~$150~~$235 million of ~~U.S~~U.S. Treasury Securities, respectively, to the non-U.S. DB plans and nonpension postretirement benefit plans. Additionally, during the ~~three~~six months ended ~~March 31,~~June 30, 2022 and 2021, the company contributed ~~$156~~$261 million and ~~$129~~$249 million ofin U.S. Treasury ~~Securities,~~securities, respectively, to the Active Medical Trust. Contributions made with U.S. Treasury securities are considered a non-cash transaction.

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Notes to Consolidated Financial Statements — (continued)

19. Subsequent Events:

On ~~April 26,~~July 20, 2022, the company issued $3.25 billion of fixed-rate notes in tranches with maturities ranging from 3 to 30 years and coupons ranging from 4.00 to 4.90 percent.

On July 25, 2022, the company announced that the Board of Directors approved ~~an increase in the~~a quarterly dividend toof $1.65 per common share. The dividend is payable ~~June~~September 10, 2022 to shareholders of record on ~~May~~August 10, 2022.

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Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

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

Snapshot

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


							Yr. to Yr.								Yr. to Yr.
							Percent/								Percent/
(Dollars and shares in millions except per share amounts)							Margin								Margin
For the three months ended March 31:	2022			2021			Change
For the three months ended June 30:									2022			2021			Change
Revenue	$	14,197		$	13,187		7.7	%*	$	15,535		$	14,218		9.3	%*
Gross profit margin		51.7	%		53.3	%	(1.6)	pts.		53.4	%		55.2	%	(1.9)	pts.
Total expense and other (income)	$	6,712		$	6,784		(1.1)	%	$	6,568		$	6,940		(5.4)	%
Income from continuing operations before income taxes	$	623		$	244		156.0	%	$	1,722		$	912		88.8	%
Provision for/(benefit from) income taxes from continuing operations	$	(39)		$	(160)		(75.5)	%
Provision for income taxes from continuing operations									$	257		$	101		153.2	%
Income from continuing operations	$	662		$	403		64.3	%	$	1,465		$	810		80.8	%
Income from continuing operations margin		4.7	%		3.1	%	1.6	pts.		9.4	%		5.7	%	3.7	pts.
Income from discontinued operations, net of tax	$	71		$	552		(87.2)	%
Income/(loss) from discontinued operations, net of tax									$	(73)		$	515		nm
Net income	$	733		$	955		(23.3)	%	$	1,392		$	1,325		5.1	%
Earnings per share from continuing operations - assuming dilution	$	0.73		$	0.45		62.2	%	$	1.61		$	0.90		78.9	%
Consolidated earnings per share - assuming dilution	$	0.81		$	1.06		(23.6)	%	$	1.53		$	1.47		4.1	%
Weighted-average shares outstanding - assuming dilution		909.2			901.7		0.8	%		910.7			904.2		0.7	%

	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	%

* ~~10.9~~15.6 percent adjusted for currency.

nm - not meaningful

Organization of Information:

On November 3, 2021, ~~the company~~we completed the separation of ~~its~~our managed infrastructure services unit into a new public company with the distribution of 80.1 percent of the outstanding common stock of Kyndryl Holdings, Inc. (Kyndryl) to IBM stockholders on a pro rata basis. To ~~effect~~affect the separation, IBM stockholders received one share of Kyndryl common stock for every five shares of IBM common stock held at the close of business on October 25, 2021, the record date for the distribution. ~~The company~~IBM retained 19.9 percent of the shares of Kyndryl common stock immediately following the separation with the intent to dispose of such shares within twelve months after the distribution. The company accounts for the retained Kyndryl common stock as a fair value investment included within prepaid expenses and other current assets in the Consolidated Balance Sheet with subsequent fair value changes included in other (income) and expense in the Consolidated Income Statement. On May 23, 2022, the company transferred 22,301,536 (22.3 million) shares of Kyndryl common stock, equal to 9.95 percent or half of the company’s 19.9 percent retained interest, to a third-party financial institution pursuant to an exchange agreement. Refer to note 8, “Financial Assets & Liabilities,” for additional information.

The accounting requirements for reporting the separation of Kyndryl as a discontinued operation were met when the separation was completed. Accordingly, the historical results of Kyndryl are presented as discontinued operations and, as such, have been excluded from continuing operations and segment results for all periods presented. Consolidated diluted earnings per share includes the results of discontinued operations. Refer to note 3, “Separation of Kyndryl,” for additional information.

In the first quarter of 2022, the company realigned its management structure to reflect the planned divestiture of its healthcare ~~data and analytics assets.~~software assets which was completed in the second quarter of 2022. This change impacted the company’s Software segment and Other–divested businesses category. In the fourth quarter of 2021, immediately prior to the separation of Kyndryl, the company made a number of changes to its organizational structure and management system.

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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.

Within the tables presented, certain columns and rows may not add due to the use of rounded numbers for disclosure purposes. Percentages presented are calculated from the underlying whole-dollar amounts. Certain prior-period amounts have been reclassified to conform to the current-period presentation. This is annotated where applicable.

Currency:

The references to “adjusted for currency” or “at constant currency” in the Management Discussion do not include operational impacts that could result from fluctuations in foreign currency rates. When 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.

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, certain impacts from the Kyndryl separation and their related tax impacts. Due to the unique, non-recurring nature of the enactment of the U.S. Tax Cuts and Jobs Act (U.S. tax reform), management characterizes the one-time provisional charge recorded in the fourth quarter of 2017 and adjustments to that charge as non-operating. Adjustments include true-ups, accounting elections and any changes to regulations, laws, audit adjustments, etc. that affect the recorded one-time charge. Management also characterizes direct and incremental charges incurred related to the Kyndryl separation as non-operating given their unique and non-recurring nature. These charges primarily relate to any net unrealized gains or losses on the Kyndryl common stock and the related cash-settled swap with a third-party financial institution, which are recorded in other (income) and expense in the Consolidated Income Statement. The ~~unrealized gains or losses reflect fair value changes in the~~Kyndryl shares ~~that~~ were retained by the company immediately following the separation, with the intent to dispose of such shares within twelve months after the distribution. For acquisitions, operating (non-GAAP) earnings exclude the amortization of purchased intangible assets and acquisition-related charges such as in-process research and development, transaction costs, applicable retention, restructuring and related expenses, 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 period may be a driver of higher expense year to year. For retirement-related costs, management characterizes certain items as operating and others as

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Management Discussion – (continued)

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

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~~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. 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~~second quarter of 2022 and 2021.


					Yr. to Yr.						Yr. to Yr.
(Dollars in millions except per share amounts)					Percent						Percent
For the three months ended March 31:	2022		2021		Change
For the three months ended June 30:							2022		2021		Change
Net income as reported	$	733	$	955	(23.3)	%	$	1,392	$	1,325	5.1	%
Income from discontinued operations, net of tax		71		552	(87.2)
Income/(loss) from discontinued operations, net of tax								(73)		515	nm
Income from continuing operations	$	662	$	403	64.3	%	$	1,465	$	810	80.8	%
Non-operating adjustments (net of tax):
Acquisition-related charges	$	359	$	330	8.5	%	$	345	$	368	(6.2)	%
Non-operating retirement-related costs/(income)		144		299	(51.8)			146		264	(44.8)
U.S. tax reform impacts		(116)		(19)	nm			4		14	(70.4)
Kyndryl-related impacts		222		—	nm			145		—	nm
Operating (non-GAAP) earnings*	$	1,271	$	1,013	25.5	%	$	2,105	$	1,456	44.6	%
Diluted operating (non-GAAP) earnings per share*	$	1.40	$	1.12	25.0	%	$	2.31	$	1.61	43.5	%

* Refer to page 7491 for a more detailed reconciliation of net income to operating ~~earnings.~~earnings and operating earnings per share.

nm - not meaningful

Macroeconomic Environment:

The geopolitical situation in Eastern Europe intensified in February 2022, with Russia’s invasion of Ukraine. The safety and security of our employees and their families in the impacted regions ~~remains~~has been our primary focus. ~~Since February 2022, we~~We have ~~been providing~~provided our employees with relocation assistance, financial support and other forms of direct ~~engagement.~~engagement and IBM employees from around the world have mobilized and ~~are participating~~participated in multiple volunteer initiatives, showcasing the best of IBM values and culture.

The Russian war in Ukraine resulted in the U.S., UK, and the European Union member governments, among others, placing economic sanctions on numerous Russian entities, specific Russian-controlled entities, as well as Belarus. OnIn March 7, 2022, IBM announced the suspension of its business activities in Russia. As the uncertainty about the long-term ramifications of the war grew, in May 2022, IBM made the decision to carry out an orderly wind-down of its Russian operations. For the period ended ~~March 31,~~June 30, 2022, we assessed certain accounting-related matters that generally require consideration of current information reasonably available to us and forecasted financial data in the context of unknown future impacts to IBM as a result of the ~~suspension of this business.~~wind-down. These assessments ~~did not result~~resulted in ~~any material impacts to our consolidated financial results as of~~certain immaterial asset and restructuring charges for the quarter ended ~~March 31,~~June 30, 2022. ~~We will continue~~These charges, together with the year-to-year lost business due to ~~assess these matters in future periods.~~the wind-down, impacted our pre-tax income by approximately $100 million for the three months ended June 30,

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Management Discussion – (continued)

2022. The long-term impacts of the Russian war in Ukraine remain uncertain; however, we do not expect a significant impact on the company’s future results of operations or financial position. For full year 2021, Russia, Ukraine and Belarus made up less than one percent of the company’s full year revenue. While the revenue impact is not expected to be material to total consolidated IBM revenue for the full year 2022, the business in Russia has historically been high margin and therefore, ~~would result in~~will continue to be a headwind to our profit and cash flows.

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~~Management Discussion – (continued)~~

In the third year of the COVID-19 pandemic, our priority continues to be the health of IBM employees, our clients, business partners and community. The pandemic has reinforced the need for clients to modernize their businesses to succeed in this new normal, with hybrid cloud and AI at the core of their digital transformations. The spending environment continues to ~~improve,~~be strong, and we remain focused on providing the technology and consulting services that our clients need to accelerate their digital organizations and emerge from the pandemic even stronger.

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

In the ~~first~~second quarter of 2022, we reported ~~$14.2~~$15.5 billion in revenue, income from continuing operations of ~~$0.7~~$1.5 billion and operating (non-GAAP) earnings of ~~$1.3~~$2.1 billion. Diluted earnings per share from continuing operations was ~~$0.73~~$1.61 as reported and ~~$1.40~~$2.31 on an operating (non-GAAP) basis. On a consolidated basis, we generated ~~$3.2~~$1.3 billion in cash from operations and ~~$1.2~~$2.1 billion in free cash ~~flow and~~flow. We delivered shareholder returns of $1.5 billion in dividends. These results reflect ~~progress in~~the investments, portfolio actions and operational changes we have made to execute our ~~key growth areas as we continue to see a~~hybrid cloud and AI strategy and the strong demand ~~environment~~ for ~~both~~ our ~~technology and consulting. We continued to increase investments in innovation, our ecosystem and talent and our~~solutions. Our balance sheet ~~provides~~continues to provide us with the flexibility to support our business needs.

Total revenue grew ~~7.7~~9.3 percent as reported and 1116 percent adjusted for currency compared to the prior-year period. This includes incremental sales to Kyndryl which contributed ~~over~~approximately 5 points to the revenue growth. Software delivered ~~strong~~ revenue growth of ~~12.3~~6.4 percent as reported and 1512 percent adjusted for currency, including ~~over 8~~approximately 7 points of growth from incremental sales to Kyndryl. Within Software, Hybrid Platform & Solutions increased ~~7.4~~4.3 percent as reported and 109 percent adjusted for currency, with incremental sales to Kyndryl contributing approximately 1.5 points of this growth. ~~Revenue growth~~There was solid performance across all business areas, led by continued strong double-digit growth in Red Hat. Transaction Processing grew ~~26.5~~11.9 percent as reported and 3119 percent adjusted for currency, including approximately 2822 points of growth from incremental Kyndryl sales. Consulting revenue increased ~~13.3~~9.8 percent as reported and 1718 percent adjusted for currency, with a strong ~~demand profile and~~ growth across all three business ~~areas.~~lines and geographies. Infrastructure revenue ~~decreased 2.3~~increased 19.0 percent year to year as reported and ~~was flat~~25 percent adjusted for currency ~~with~~reflecting the ~~overall decline in~~solid execution around our new z16 program. The Infrastructure revenue ~~reflecting our product cycle dynamics. This~~ performance also includes ~~over 8~~approximately 7 points of growth from incremental sales to Kyndryl. Across the segments, total hybrid cloud revenue of ~~$5.0~~$5.9 billion in the ~~first~~second quarter of 2022 grew 1418 percent as reported and 1724 percent adjusted for currency. Over the trailing 12 months, total hybrid cloud revenue was $21.7 billion, up 16 percent as reported (19 percent adjusted for currency) year to year.

From a geographic perspective, Americas revenue grew ~~8.9~~14.3 percent year to year as reported (9(15 percent adjusted for currency). Europe/Middle East/Africa (EMEA) increased ~~7.7~~4.9 percent ~~(14~~(17 percent adjusted for currency). Asia Pacific grew ~~4.6~~3.1 percent ~~(11~~(15 percent adjusted for currency).

Gross margin of ~~51.7~~53.4 percent decreased ~~1.6~~1.9 points year to year, however, gross profit dollars grew compared to the prior-year period driven by strong revenue performance in our high-value businesses. Overall, gross margin was impacted by escalating labor and component costs. These higher costs are being addressed through our pricing, however, it will take some time for these actions to be reflected in our margin profile. Operating (non-GAAP) gross margin of 54.5 percent decreased 2.0 points compared to the prior year for similar reasons.

Total expense and other (income) decreased 5.4 percent in the second quarter of 2022 versus the prior-year period primarily driven by the effects of currency, a gain from the divestiture of our healthcare software assets, lower non-operating retirement-related costs and benefits from the actions taken to streamline operations and simplify our go-to-market model. This was partially offset by impacts related to the Kyndryl retained shares and higher spending reflecting our continuing investment in innovation, talent and our ecosystem. Total operating (non-GAAP) expense and other

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Management Discussion – (continued)

(income) decreased 6.0 percent year to year, driven primarily by the factors described above excluding the lower non-operating retirement-related costs and the impacts related to the Kyndryl retained shares.

Pre-tax income from continuing operations of $1.7 billion increased 88.8 percent and pre-tax margin was 11.1 percent, an increase of 4.7 points versus the second quarter of 2021. Our pre-tax income includes a gain from the sale of our healthcare software assets of $232 million, which was partially offset by charges from stranded costs associated with the divestiture and losses related to the health business of approximately $75 million. In addition, the orderly wind-down of our Russian operations also had an impact on our pre-tax income in the current-year period. The continuing operations provision for income taxes in the second quarter of 2022 was $257 million compared to $101 million in the second quarter of 2021. The current-year and prior-year tax provisions were driven by many factors including the impacts of the geographical mix of income, incentives and changes in unrecognized tax benefits. Net income from continuing operations of $1.5 billion increased 80.8 percent and the net income from continuing operations margin was 9.4 percent, up 3.7 points year to year.

Operating (non-GAAP) pre-tax income from continuing operations of $2.5 billion increased 47.9 percent and the operating (non-GAAP) pre-tax margin from continuing operations increased 4.2 points to 16.2 percent. The operating (non-GAAP) income tax provision for the second quarter of 2022 was $413 million, compared to $246 million in the second quarter of 2021. The current-year and prior-year tax provisions were driven by the same factors described above. Operating (non-GAAP) income from continuing operations of $2.1 billion increased 44.6 percent and the operating (non-GAAP) income margin from continuing operations of 13.5 percent was up 3.3 points year to year.

Diluted earnings per share from continuing operations was $1.61 in the second quarter of 2022 compared to $0.90 in the prior year, an increase of 78.9 percent and operating (non-GAAP) diluted earnings per share of $2.31 increased 43.5 percent versus the prior-year period.

Consolidated diluted earnings per share in the second quarter of 2022 was $1.53 compared to $1.47 in the prior-year period. This includes a year-to-year reduction of $0.65 from discontinued operations due to the separation of Kyndryl.

Our cash flows from operating, investing and financing activities, as reflected in the Consolidated Statement of Cash Flows, include the cash flows of discontinued operations. On a consolidated basis, cash provided by operating activities was $1.3 billion in the second quarter of 2022, a decrease of $1.3 billion compared to the second quarter of 2021, primarily driven by a decrease in cash provided by financing receivables. Investing activities were a net source of cash of $0.2 billion in the current quarter, compared to a net use of cash of $2.7 billion in the prior-year period, with the year-to-year change primarily driven by a decrease in net cash used in acquisitions and an increase in cash provided by divestitures. Net cash used in financing activities of $4.2 billion in the second quarter of 2022 increased $1.1 billion compared to the prior-year period.

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Management Discussion – (continued)

Financial Results Summary —Six Months Ended June 30:


							Yr. to Yr.
							Percent/
(Dollars and shares in millions except per share amounts)							Margin
For the six months ended June 30:	2022			2021			Change
Revenue	$	29,732		$	27,405		8.5	%*
Gross profit margin		52.6	%		54.3	%	(1.7)	pts.
Total expense and other (income)	$	13,280		$	13,724		(3.2)	%
Income from continuing operations before income taxes	$	2,345		$	1,155		103.0	%
Provision for/(benefit from) income taxes from continuing operations	$	218		$	(58)		nm
Income from continuing operations	$	2,127		$	1,213		75.3	%
Income from continuing operations margin		7.2	%		4.4	%	2.7	pts.
Income/(loss) from discontinued operations, net of tax	$	(2)		$	1,067		nm
Net income	$	2,125		$	2,280		(6.8)	%
Earnings per share from continuing operations - assuming dilution	$	2.34		$	1.34		74.6	%
Consolidated earnings per share - assuming dilution	$	2.34		$	2.52		(7.1)	%
Weighted-average shares outstanding - assuming dilution		910.0			903.0		0.8	%

	At 6/30/2022			At 12/31/2021
Assets	$	127,503		$	132,001		(3.4)	%
Liabilities	$	108,026		$	113,005		(4.4)	%
Equity	$	19,476		$	18,996		2.5	%

* 13.3 percent adjusted for currency.

nm - not meaningful

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


					Yr. to Yr.
(Dollars in millions except per share amounts)					Percent
For the six months ended June 30:	2022		2021		Change
Net income as reported	$	2,125	$	2,280	(6.8)	%
Income/(loss) from discontinued operations, net of tax		(2)		1,067	nm
Income from continuing operations	$	2,127	$	1,213	75.3	%
Non-operating adjustments (net of tax):
Acquisition-related charges	$	704	$	699	0.8	%
Non-operating retirement-related costs/(income)		290		563	(48.5)
U.S. tax reform impacts		(112)		(6)	nm
Kyndryl-related impacts		367		—	nm
Operating (non-GAAP) earnings*	$	3,376	$	2,469	36.7	%
Diluted operating (non-GAAP) earnings per share*	$	3.71	$	2.73	35.9	%

* Refer to page 92 for a more detailed reconciliation of net income to operating earnings and operating earnings per share.

nm - not meaningful

Financial Performance Summary —Six Months Ended June 30:

In the first six months of 2022, we reported $29.7 billion in revenue, income from continuing operations of $2.1 billion and operating (non-GAAP) earnings of $3.4 billion. Diluted earnings per share from continuing operations was $2.34 as reported and $3.71 on an operating (non-GAAP) basis. On a consolidated basis, we generated $4.6 billion in cash from operations and $3.3 billion in free cash flow. We delivered shareholder returns of $3.0 billion in dividends.

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Management Discussion – (continued)

Total revenue grew 8.5 percent as reported and 13 percent adjusted for currency compared to the prior-year period. This includes incremental sales to Kyndryl which contributed 5 points to the revenue growth. Software delivered revenue growth of 9.2 percent as reported and 13 percent adjusted for currency, with growth in both Hybrid Platform & Solutions and Transaction Processing. The Software revenue performance includes approximately 8 points of growth from incremental sales to Kyndryl. Consulting revenue increased 11.5 percent as reported and 18 percent adjusted for currency, with growth across all three business areas. Infrastructure revenue increased 8.8 percent year to year as reported and 13 percent adjusted for currency, with approximately 8 points of growth from incremental sales to Kyndryl.

From a geographic perspective, Americas revenue grew 11.8 percent year to year as reported (12 percent adjusted for currency). EMEA increased 6.3 percent (16 percent adjusted for currency). Asia Pacific grew 3.9 percent (13 percent adjusted for currency).

Gross margin of 52.6 percent decreased 1.7 points year to year, however, gross profit dollars grew compared to the prior-year period. Overall, gross margin was impacted by the significant investments we are making to drive our hybrid cloud and AI strategy and ~~due to mix from our Infrastructure product cycles. These impacts were partially offset~~ by ~~improvement in the Software gross margin.~~higher labor and component costs. Operating (non-GAAP) gross margin of ~~52.9~~53.8 percent decreased ~~1.7~~1.8 points versus the prior year for similar reasons.

Total expense and other (income) decreased ~~1.1~~3.2 percent in the first ~~quarter~~six months of 2022 versus the prior-year period primarily driven by the effects of currency, a gain from the divestiture of our healthcare software assets, lower non-operating retirement-related costs, benefits from the actions taken to streamline operations and simplify our go-to-market model and lower ~~workforce rebalancing charges,~~spending for shared services transferred to Kyndryl. This was partially offset by ~~an unrealized loss on~~impacts related to the 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 quantum.talent. Total operating (non-GAAP) expense and other (income) decreased ~~2.6~~4.3 percent year to year, driven primarily by the factors described above excluding the lower non-operating retirement-related costs and the ~~unrealized loss on~~impacts related to the Kyndryl retained shares.

Pre-tax income from continuing operations of ~~$0.6~~$2.3 billion increased ~~156.0~~103.0 percent and pre-tax margin was ~~4.4~~7.9 percent, an increase of ~~2.5~~3.7 points versus the first ~~quarter~~six months of 2021. The continuing operations ~~benefit from~~provision for income taxes in the first ~~quarter~~six months of 2022 was ~~$39~~$218 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,~~

47

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~~Management Discussion – (continued)~~

~~geographical mix of income, incentives and changes in unrecognized tax benefits. The prior-year benefit was primarily related to the tax impacts~~ from the resolution of certain tax audits. Net income from continuing operations of $0.7 billion increased 64.3 percent and the net income from continuing operations margin was 4.7 percent, up 1.6 points year to 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 10.7 percent. The operating (non-GAAP) income tax provision for the first quarter of 2022 was $244 million, compared to a provision for income taxes of ~~$25~~$58 million in the first ~~quarter~~six months of 2021. The increase in the ~~operating (non-GAAP) income~~continuing operations tax provision in the first ~~quarter~~six months of 2022 compared to the prior year was primarily driven by tax impacts from the resolution of certain tax audits in the first quarter of 2021. Net income from continuing operations of $2.1 billion increased 75.3 percent and the net income from continuing operations margin was 7.2 percent, up 2.7 points year to year.

Operating (non-GAAP) pre-tax income from continuing operations of $4.0 billion increased 47.2 percent and the operating (non-GAAP) pre-tax margin from continuing operations increased 3.6 points to 13.6 percent. The operating (non-GAAP) provision for income taxes was $657 million in the first six months of 2022, compared to $272 million in the first six months of 2021. The increase in the operating (non-GAAP) income tax provision in the first six months of 2022 compared to the prior year was primarily driven by the same factor described above. Operating (non-GAAP) income from continuing operations of ~~$1.3~~$3.4 billion increased ~~25.5~~36.7 percent and the operating (non-GAAP) income margin from continuing operations of ~~9.0~~11.4 percent was up ~~1.3~~2.3 points year to year.

Diluted earnings per share from continuing operations ~~of $0.73~~was $2.34 in the first ~~quarter~~six months of 2022 ~~increased 62.2~~compared to $1.34 in the prior year, an increase of 74.6 percent and operating (non-GAAP) diluted earnings per share of ~~$1.40~~$3.71 increased ~~25.0~~35.9 percent versus the prior-year period.

Consolidated diluted earnings per share in the first ~~quarter~~six months of 2022 was ~~$0.81~~$2.34 compared to ~~$1.06~~$2.52 in the prior-year period. This includes a year-to-year reduction of ~~$0.53~~$1.18 from discontinued operations due to the separation of Kyndryl.

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Management Discussion – (continued)

Our balance sheet at ~~March 31,~~June 30, 2022 continues to provide us with the flexibility to support the business. Cash and cash equivalents, restricted cash and marketable securities at ~~March 31,~~June 30, 2022 were ~~$10.8~~$7.8 billion, an increase of ~~$3.2~~$0.2 billion from December 31, 2021. Total debt of ~~$54.2~~$50.3 billion at ~~March 31,~~June 30, 2022 ~~increased $2.5~~decreased $1.4 billion primarily ~~due to new debt issuances.~~driven by currency impacts.

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

Total assets ~~increased $1.3~~decreased $4.5 billion ($~~1.8~~1.0 billion adjusted for currency) from December 31, 2021 driven by:

●

A decrease in receivables of $1.9 billion ($1.0 billion adjusted for currency) primarily due to collections of higher year-end balances;

●

A decrease in goodwill and net intangible assets of $1.5 billion ($0.4 billion adjusted for currency) primarily driven by currency impacts, intangibles amortization and derecognition of goodwill and intangible assets of $0.6 billion related to the divestiture of our healthcare software assets; and

●

A decrease in net property, plant and equipment and operating right-of-use assets of $0.8 billion ($0.5 billion adjusted for currency); partially offset by

●

An increase in cash and cash equivalents, restricted cash and marketable securities of ~~$3.2~~$0.2 billion ($~~3.3~~0.6 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~~decreased $5.0 billion ($~~2.1~~0.6 billion adjusted for currency) from December 31, 2021 driven by:

●

~~An increase~~A decrease in total debt of ~~$2.5~~$1.4 billion ($~~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~~0.1 billion adjusted for currency) primarily driven by ~~annual customer billings~~maturities and ~~continued growth in software renewal rates;~~currency impacts, partially offset by issuances;

●

~~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~~$1.3 billion ($~~0.3~~0.6 billion adjusted for currency); and

48

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~~Management Discussion – (continued)~~

●

A decrease in taxes payable of $0.5 billion ($0.4 billion adjusted for currency) primarily due to indirect tax payments.

Total equity of ~~$19.1~~$19.5 billion increased ~~$0.1~~$0.5 billion from December 31, 2021 as a result of:

●

Net income of ~~$0.7~~$2.1 billion;

●

A decrease in accumulated other comprehensive losses of ~~$0.7~~$1.1 billion driven by retirement-related benefit plans, cash flow hedges and foreign currency translation adjustments; and

●

Common stock of ~~$0.2~~$0.4 billion; partially offset by

●

Dividends paid of ~~$1.5~~$3.0 billion.

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

On a consolidated basis, cash provided by operating activities was ~~$3.2~~$4.6 billion in the first ~~three~~six months of 2022, a decrease of ~~$1.7~~$3.0 billion compared to the first ~~three~~six months of ~~2021.~~2021, primarily driven by a decrease in cash provided by financing receivables. Net cash used in investing activities of ~~$1.4~~$1.2 billion decreased ~~$0.6~~$3.5 billion compared to the prior-year period. Financing activities were a net ~~source~~use of cash of ~~$1.4~~$2.8 billion in the first ~~three~~six months of 2022 compared to ~~a net use of cash of $5.8~~$8.9 billion in the first ~~three~~six months of 2021.

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Management Discussion – (continued)

Second Quarter and First ~~Quarter~~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 ~~table below presents~~following tables present each reportable segment’s revenue and gross margin results, followed by an analysis of the second quarter and first ~~quarter~~six months of 2022 versus the second quarter and first ~~quarter~~six months of 2021 reportable segments results. Prior-year results have been recast to conform with the changes as described in the “Organization of Information” section.


									Yr. to Yr.										Yr. to Yr.
									Percent										Percent
							Yr. to Yr.		Change								Yr. to Yr.		Change
(Dollars in millions)							Percent/Margin		Adjusted For								Percent/Margin		Adjusted For
For the three months ended March 31:	2022			2021*			Change		Currency
For the three months ended June 30:											2022			2021*			Change		Currency
Revenue:
Software	$	5,772		$	5,138		12.3	%	15.4	%	$	6,166		$	5,795		6.4	%	11.6	%
Gross margin		78.8	%		77.8	%	1.1	pts.				79.2	%		79.7	%	(0.5)	pts.
Consulting		4,829			4,262		13.3	%	17.4	%		4,809			4,378		9.8	%	17.8	%
Gross margin		24.3	%		27.8	%	(3.5)	pts.				24.2	%		27.6	%	(3.4)	pts.
Infrastructure		3,219			3,293		(2.3)	%	0.3	%		4,235			3,560		19.0	%	25.4	%
Gross margin		50.5	%		56.3	%	(5.9)	pts.				53.8	%		57.1	%	(3.3)	pts.
Financing		154			208		(26.2)	%	(24.5)	%		146			209		(29.9)	%	(26.6)	%
Gross margin		37.7	%		35.5	%	2.2	pts.				35.3	%		29.9	%	5.3	pts.
Other		224			284		(21.3)	%	(18.9)	%		180			277		(34.9)	%	(31.1)	%
Gross margin		(32.9)	%		(29.6)	%	(3.3)	pts.				(49.3)	%		(25.2)	%	(24.1)	pts.
Total revenue	$	14,197		$	13,187		7.7	%	10.9	%	$	15,535		$	14,218		9.3	%	15.6	%
Total gross profit	$	7,335		$	7,027		4.4	%			$	8,290		$	7,852		5.6	%
Total gross margin		51.7	%		53.3	%	(1.6)	pts.				53.4	%		55.2	%	(1.9)	pts.
Non-operating adjustments:
Amortization of acquired intangible assets		181			174		4.0	%				180			179		0.6	%
Operating (non-GAAP) gross profit	$	7,516		$	7,201		4.4	%			$	8,470		$	8,031		5.5	%
Operating (non-GAAP) gross margin		52.9	%		54.6	%	(1.7)	pts.				54.5	%		56.5	%	(2.0)	pts.

*	* Recast to reflect segment changes.

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Management Discussion – (continued)


									Yr. to Yr.
									Percent
							Yr. to Yr.		Change
(Dollars in millions)							Percent/Margin		Adjusted For
For the six months ended June 30:	2022			2021*			Change		Currency
Revenue:
Software	$	11,938		$	10,933		9.2	%	13.4	%
Gross margin		79.0	%		78.8	%	0.3	pts.
Consulting		9,637			8,641		11.5	%	17.6	%
Gross margin		24.3	%		27.7	%	(3.5)	pts.
Infrastructure		7,453			6,853		8.8	%	13.4	%
Gross margin		52.4	%		56.7	%	(4.4)	pts.
Financing		300			417		(28.0)	%	(25.5)	%
Gross margin		36.5	%		32.7	%	3.8	pts.
Other		404			561		(28.0)	%	(25.0)	%
Gross margin		(40.2)	%		(27.4)	%	(12.8)	pts.
Total revenue	$	29,732		$	27,405		8.5	%	13.3	%
Total gross profit	$	15,625		$	14,879		5.0	%
Total gross margin		52.6	%		54.3	%	(1.7)	pts.
Non-operating adjustments:
Amortization of acquired intangible assets		361			353		2.3	%
Operating (non-GAAP) gross profit	$	15,986		$	15,232		5.0	%
Operating (non-GAAP) gross margin		53.8	%		55.6	%	(1.8)	pts.

* Recast to reflect segment changes.

Software


							Yr. to Yr.								Yr. to Yr.
							Percent								Percent
					Yr. to Yr.		Change						Yr. to Yr.		Change
(Dollars in millions)					Percent		Adjusted For						Percent		Adjusted For
For the three months ended March 31:	2022		2021*		Change		Currency
For the three months ended June 30:									2022		2021*		Change		Currency
Software revenue:	$	5,772	$	5,138	12.3	%	15.4	%	$	6,166	$	5,795	6.4	%	11.6	%
Hybrid Platform & Solutions	$	4,080	$	3,800	7.4	%	10.0	%	$	4,390	$	4,208	4.3	%	9.0	%
Red Hat					18.0		21.1						11.9		16.9
Automation					3.0		5.4						3.6		8.4
Data & AI					2.1		4.4						0.4		4.5
Security					5.4		8.2						0.0		5.0
Transaction Processing		1,692		1,338	26.5		30.6			1,776		1,587	11.9		18.7

* Recast to reflect segment changes.

62

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:	2022		2021*		Change		Currency
Software revenue:	$	11,938	$	10,933	9.2	%	13.4	%
Hybrid Platform & Solutions	$	8,470	$	8,008	5.8	%	9.5	%
Red Hat					14.9		18.9
Automation					3.3		7.0
Data & AI					1.2		4.4
Security					2.5		6.5
Transaction Processing		3,468		2,925	18.6		24.1

* Recast to reflect segment changes.

Software revenue of ~~$5,772~~$6,166 million increased ~~12.3~~6.4 percent as reported ~~(15~~(12 percent adjusted for currency) in the ~~first~~second quarter of 2022 compared to the prior-year period. This includes incremental sales to Kyndryl which contributed ~~over 8~~approximately 7 points to the revenue growth. ~~Both Hybrid Platform & Solutions~~Software subscription and ~~Transaction Processing grew, with Transaction Processing benefitting significantly from sales~~support renewal rates continued to ~~Kyndryl.~~grow this quarter, contributing to our solid and growing recurring revenue base. Within Software, over the trailing 12 months, hybrid cloud revenue of ~~$2.1 billion~~$9,044 million grew 2220 percent as reported ~~(25~~(23 percent adjusted for currency) year to year, driven by ~~strong~~ growth in ~~Hybrid Platform & Solutions. In addition, we had continued year-to-year growth this quarter in~~ our ~~software subscription~~hybrid cloud and ~~support renewal rates.~~AI capabilities.

Hybrid Platform & Solutions revenue of ~~$4,080~~$4,390 million increased ~~7.4~~4.3 percent as reported ~~(10~~(9 percent adjusted for currency) in the ~~first~~second 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.~~had solid performance across all business areas. Red Hat revenue grew ~~18.0~~11.9 percent as reported ~~(21~~(17 percent adjusted for currency) in the ~~first~~second quarter of 2022, ~~driven by strong performance across the Red Hat portfolio. Our foundational hybrid cloud offerings,~~reflecting new adoption and expansion of RHEL and ~~OpenShift, each gained market share this quarter. Red Hat’s hybrid cloud offerings continue to transform enterprise IT, and we continue to deliver new innovations.~~OpenShift. Automation revenue grew ~~3.0~~3.6 percent as reported (5(8 percent adjusted for currency), ~~led by~~reflecting solid performance in AIOps and Management and ~~Integration.~~Integration, which demonstrates the importance of automation in the IT journeys of our clients. We ~~have invested~~had strength in ~~an AI-powered approach to Automation~~offerings, such as Turbonomic and Instana for observability, Cloud Pak for Watson AIOps, and our ~~solutions are resonating with clients as they address growing complexity, digital shifts, and skill shortages across their businesses.~~modern integration platform, Cloud Pak for Integration. Data & AI revenue increased ~~2.1~~0.4 percent as reported (4 percent adjusted for currency), ~~driven~~led by ~~good performance across the portfolio, including continued adoption of~~demand for Data Fabric, ~~expansion of our~~ Data Management, ~~footprint, a focus on sustainable operations with~~and Asset & Supply Chain Management ~~and the need for reliable data sharing with Information Exchange.~~solutions. Security revenue ~~grew 5.4 percent~~was flat as reported, (8but grew 5 percent adjusted for ~~currency) compared to strong performance in the prior-year first quarter. We had~~currency, driven by growth ~~in the first quarter of 2022~~ in Threat Management and ~~Data Security due to the evolving cybersecurity environment. We also~~Identity, as enterprises continue to ~~have good client demand for Cloud Pak for Security~~adopt a zero-trust security strategy and ~~continue to invest in security innovation including our ReaQta acquisition in 2021.~~implement additional identity controls.

For the ~~first~~second quarter of 2022, Hybrid Platform & Solutions grew annual recurring revenue (ARR) by 98 percent compared to the prior-year period. ARR is a key performance metric management uses to assess the health and growth trajectory of our Hybrid Platform & Solutions business within the Software segment. ARR is calculated by estimating the current quarter’s recurring, committed value for certain types of active contracts as of the period-end date and then multiplying that value by four. This value is based on each arrangement’s contract value and start date, mitigating fluctuations during the contract term, and includes the following consumption models: (1) software subscription agreements, including committed term licenses, (2) as-a-service arrangements such as SaaS and PaaS, (3) maintenance and support contracts, and (4) security managed services contracts. ARR should be viewed independently of revenue as this performance metric and its inputs may not represent the amount of revenue recognized in the period and therefore is not intended to represent current period revenue or revenue that will be recognized in future periods. ARR is calculated at estimated constant currency.

Transaction Processing revenue of $1,776 million increased 11.9 percent as reported (19 percent adjusted for currency) in the second quarter of 2022 compared to the prior-year period. Incremental sales to Kyndryl contributed approximately 22 points to the revenue growth. We continued to have strong renewal rates for this mission-critical software.

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Management Discussion – (continued)

~~Transaction Processing~~For the first six months of 2022, Software revenue of ~~$1,692~~$11,938 million ~~grew 26.5~~increased 9.2 percent as reported ~~(31~~(13 percent adjusted for currency) ~~in the first quarter~~ compared to the ~~prior-year period.~~same period in 2021. Incremental sales to Kyndryl contributed approximately 288 points to the revenue growth. We ~~also continued~~had growth in Hybrid Platform & Solutions and Transaction Processing during the first six months of 2022, with all of the Transaction Processing revenue growth driven by sales to ~~have strong renewals of these critical software offerings which build on the expanded zSystems capacity and traction throughout the strong z15 program.~~Kyndryl.

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.


							Yr. to Yr.
							Percent/
(Dollars in millions)							Margin
For the three months ended June 30:	2022			2021*			Change
Software:
Gross profit	$	4,884		$	4,617		5.8	%
Gross profit margin		79.2	%		79.7	%	(0.5)	pts.
Pre-tax income	$	1,375		$	1,059		29.9	%
Pre-tax margin		22.3	%		18.3	%	4.0	pts.

* Recast to reflect segment changes.


							Yr. to Yr.
							Percent/
(Dollars in millions)							Margin
For the six months ended June 30:	2022			2021*			Change
Software:
Gross profit	$	9,434		$	8,612		9.5	%
Gross profit margin		79.0	%		78.8	%	0.3	pts.
Pre-tax income	$	2,509		$	1,717		46.2	%
Pre-tax margin		21.0	%		15.7	%	5.3	pts.

* Recast to reflect segment changes.

Software gross profit margin ~~increased 1.1~~decreased 0.5 points to ~~78.8~~79.2 percent in the ~~first~~second quarter of 2022 compared to the prior-year period, ~~reflecting~~driven primarily by profit margin declines in software and services. For the ~~broad-based revenue performance~~first six months of 2022, gross profit margin increased 0.3 points to 79.0 percent, driven primarily by a mix to software, partially offset by a margin decline in services.

In the ~~quarter. Pre-tax~~second quarter, pre-tax income of ~~$1,134~~$1,375 million increased ~~72.3~~29.9 percent ~~year to year~~ and pre-tax margin of 22.3 percent increased ~~6.8~~4.0 points ~~to 19.7 percent in the first quarter of 2022~~ compared to the prior year. ~~The~~We continued to expand our pre-tax margin ~~improvement was~~given the solid revenue growth and new Kyndryl commercial relationship. For the first six months of 2022, pre-tax income of $2,509 million increased 46.2 percent and pre-tax margin increased 5.3 points to 21.0 percent compared to the prior-year period, driven ~~primarily~~ by ~~higher~~the year-to-year increase in gross profit ~~contribution.~~

contribution reflecting our solid revenue growth.

Consulting


							Yr. to Yr.								Yr. to Yr.
							Percent								Percent
					Yr. to Yr.		Change						Yr. to Yr.		Change
(Dollars in millions)					Percent		Adjusted For						Percent		Adjusted For
For the three months ended March 31:	2022		2021*		Change		Currency
For the three months ended June 30:									2022		2021*		Change		Currency
Consulting revenue:	$	4,829	$	4,262	13.3	%	17.4	%	$	4,809	$	4,378	9.8	%	17.8	%
Business Transformation	$	2,255	$	1,953	15.5	%	19.3	%	$	2,227	$	2,049	8.7	%	16.1	%
Technology Consulting		955		835	14.4		18.9			928		814	14.0		22.6
Application Operations		1,619		1,474	9.8		14.2			1,653		1,514	9.2		17.4

* Recast to reflect segment change.

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

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

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

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Management Discussion – (continued)


							Yr. to Yr.
							Percent
					Yr. to Yr.		Change
(Dollars in millions)					Percent		Adjusted For
For the six months ended June 30:	2022		2021*		Change		Currency
Consulting revenue:	$	9,637	$	8,641	11.5	%	17.6	%
Business Transformation	$	4,482	$	4,002	12.0	%	17.7	%
Technology Consulting		1,884		1,649	14.2		20.7
Application Operations		3,272		2,989	9.5		15.8

* Recast to reflect segment change.

Consulting revenue of $4,809 million grew 9.8 percent as reported (18 percent adjusted for currency) in the second quarter of 2022 compared to the prior-year period, with strong revenue growth across all business areas and geographies. We maintained a solid book-to-bill ratio of 1.1 on a trailing twelve-month basis, as clients continued to choose to co-create with IBM, trusting our deep industry expertise. The expansion of our skills, capabilities, and ecosystems are enabling us to capture demand as we drive adoption of our hybrid cloud platform and help clients with their digital transformations. Within Consulting, over the trailing 12 months, hybrid cloud revenue of $8,650 million grew 28 percent as reported (32 percent adjusted for currency) year to year. The momentum behind our Red Hat practice remains strong, as we nearly doubled our Red Hat consulting revenue in the second quarter and continued to have solid growth in Red Hat consulting signings. Our strategic partnerships also contributed to our performance in the second quarter, with solid double-digit revenue growth from these partnerships, led by Azure, AWS, SAP and Salesforce.

In the second quarter of 2022, Business Transformation revenue of $2,227 million increased 8.7 percent as reported (16 percent adjusted for currency) on a year-to-year basis, as clients looked to IBM to help them transform critical workflows at scale. This growth was led by our offerings focused on customer experience transformation, data transformation and our SAP practices.

Technology Consulting revenue of $928 million increased 14.0 percent as reported (23 percent adjusted for currency) in the second quarter of 2022 compared to the prior-year period, led by our cloud modernization and cloud application development offerings, as well as on-prem modernization, which also contributed to the strong revenue performance in the quarter.

Application Operations revenue of ~~$1,619~~$1,653 million increased ~~9.8~~9.2 percent as reported ~~and 14~~(17 percent adjusted for ~~currency~~currency) compared to the ~~first~~second quarter of 2021, ~~led~~with solid growth across our cloud offerings, partially offset by ~~growth~~declines in ~~cloud application management.~~on-prem offerings. We ~~had growth in areas that focus on~~are providing the ~~management of applications and~~ cloud platform and application management services ~~required~~our clients require to run their hybrid cloud environments.

Yr. to Yr.

Percent/

(Dollars in millions)





Margin

For the three months ended March 31:

2022

2021*

Change

Consulting:







Gross profit

$
1,176

$
1,187

(0.9)
%
Gross profit margin

24.3
%

27.8
%
(3.5)
pts.
Pre-tax income

$
348

$
277

25.8
%
Pre-tax margin

7.2
%

6.5
%
0.7
pts.

For the first six months of 2022, Consulting revenue of $9,637 million increased 11.5 percent as reported (18 percent adjusted for currency) reflecting strong year-to-year growth across all three business areas.


							Yr. to Yr.
							Percent/
(Dollars in millions)							Margin
For the three months ended June 30:	2022			2021*			Change
Consulting:
Gross profit	$	1,163		$	1,209		(3.8)	%
Gross profit margin		24.2	%		27.6	%	(3.4)	pts.
Pre-tax income	$	343		$	270		26.9	%
Pre-tax margin		7.1	%		6.2	%	1.0	pts.

* Recast to reflect segment change.

65

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Management Discussion – (continued)


							Yr. to Yr.
							Percent/
(Dollars in millions)							Margin
For the six months ended June 30:	2022			2021*			Change
Consulting:
Gross profit	$	2,339		$	2,396		(2.4)	%
Gross profit margin		24.3	%		27.7	%	(3.5)	pts.
Pre-tax income	$	691		$	547		26.3	%
Pre-tax margin		7.2	%		6.3	%	0.8	pts.

* Recast to reflect segment change.

Consulting ~~first-quarter~~ gross profit margin of ~~24.3~~24.2 percent decreased ~~3.5~~3.4 points ~~on a year-to-year basis,~~in the second quarter of 2022 compared to the same period in 2021, reflecting the significant investments we have ~~made~~been making to ~~enable~~capture demand and fuel our revenue growth. We continued to invest in our partner ecosystem, ~~to expand our reach~~scale acquisitions 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.add skills. Our Consulting ~~continues to be~~business is most impacted by the ~~competitive and~~ inflationary labor market ~~which exerts pressure on the profitability of our existing contracts.~~and increasing labor costs to acquire new talent and increase capacity. We ~~expect~~are starting to capture ~~this increased resource cost through price~~these higher costs in our ~~engagements~~pricing, however, given the timing between contract signing and ~~recognize this will take a few quarters~~revenue recognition, it takes time to ~~be reflected~~realize the impacts in our margin ~~profile. Pre-tax income increased 25.8~~performance. For the first six months of 2022, Consulting gross profit margin of 24.3 percent ~~to $348 million~~decreased 3.5 points compared to the ~~prior year.~~ prior-year period, reflecting the same dynamics described above.

Pre-tax income of $343 million increased 26.9 percent and pre-tax margin of 7.1 percent increased ~~0.7~~1.0 points ~~to 7.2 percent~~ in the ~~first-quarter~~second quarter of 2022 compared to the ~~prior year. We~~prior-year period as a result of the actions we have taken ~~actions~~ to streamline our operations and go-to-market ~~structure which have contributed~~structure. For the first six months of 2022, pre-tax income of $691 million increased 26.3 percent and pre-tax margin of 7.2 percent increased 0.8 points compared to the ~~pre-tax margin expansion.~~prior-year period, reflecting the benefits of the actions described above.

Consulting Signings and Book-to-Bill


							Yr. to Yr.								Yr. to Yr.
							Percent								Percent
					Yr. to Yr.		Change						Yr. to Yr.		Change
(Dollars in millions)					Percent		Adjusted For						Percent		Adjusted For
For the three months ended March 31:	2022		2021		Change		Currency
For the three months ended June 30:									2022		2021		Change		Currency
Total Consulting signings	$	5,136	$	3,796	35.3	%	40.9	%	$	4,654	$	4,655	0.0	%	7.4	%


							Yr. to Yr.
							Percent
					Yr. to Yr.		Change
(Dollars in millions)					Percent		Adjusted For
For the six months ended June 30:	2022		2021		Change		Currency
Total Consulting signings	$	9,791	$	8,451	15.9	%	22.4	%

Signings are management’s initial estimate of the value of a client’s commitment under a services 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.

Contract extensions and increases in scope are treated as signings only to the extent of the incremental new value. Total 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. 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,

66

Table of Contents

Management Discussion – (continued)

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 conjunction with the signings definition noted above.

Infrastructure


							Yr. to Yr.
							Percent
					Yr. to Yr.		Change
(Dollars in millions)					Percent		Adjusted For
For the three months ended June 30:	2022		2021*		Change		Currency
Infrastructure revenue:	$	4,235	$	3,560	19.0	%	25.4	%
Hybrid Infrastructure	$	2,760	$	2,059	34.1	%	40.7	%
zSystems					69.1		76.9
Distributed Infrastructure					11.5		17.4
Infrastructure Support		1,474		1,501	(1.8)		4.5

* Recast to reflect segment change.


							Yr. to Yr.
							Percent
					Yr. to Yr.		Change
(Dollars in millions)					Percent		Adjusted For
For the six months ended June 30:	2022		2021*		Change		Currency
Infrastructure revenue:	$	7,453	$	6,853	8.8	%	13.4	%
Hybrid Infrastructure	$	4,461	$	3,841	16.1	%	20.7	%
zSystems					27.6		32.4
Distributed Infrastructure					8.6		13.0
Infrastructure Support		2,993		3,012	(0.7)		4.1

* Recast to reflect segment change.

Infrastructure revenue of $4,235 million increased 19.0 percent as reported (25 percent adjusted for currency) in the second quarter of 2022 compared to the prior-year period. This includes incremental sales to Kyndryl which contributed approximately 7 points to the revenue growth. The revenue growth in the quarter was driven primarily by strong client acceptance of the new IBM z16 mainframe and aligned storage systems. Within Infrastructure, over the trailing 12 months, hybrid cloud revenue of $3,719 million decreased 7 percent as reported (5 percent adjusted for currency) year to year, driven primarily by product cycle dynamics.

Hybrid Infrastructure revenue of $2,760 million increased 34.1 percent as reported (41 percent adjusted for currency) in the second quarter of 2022 compared to the prior-year period. Incremental sales to Kyndryl contributed approximately 7 points to the revenue growth. Within Hybrid Infrastructure, zSystems revenue grew 69.1 percent as reported (77 percent adjusted for currency) on a year-to-year basis, reflecting solid execution around our z16 program, building on the momentum from the z15 program. The z16 brings the power of embedded AI at scale, cyber-resilient security and cloud-native development for hybrid cloud to our clients. We saw growth in new workloads, such as Linux, and demand for the z16 AI capabilities including real-time fraud detection that leverages the on-chip AI accelerator. Clients are investing in the zSystems platform as an essential part of their hybrid cloud infrastructure. Distributed Infrastructure revenue grew 11.5 percent as reported (17 percent adjusted for currency), led by Storage, including high-end storage which is tied to the z16, and distributed storage. Power revenue declined year to year as reported, but grew adjusted for currency, driven primarily by growth in high-end Power10, partially offset by declines in the low-end and midrange systems. Recently, we announced the expansion of our Power10 server platform designed to deliver flexible and secured infrastructure for hybrid cloud environments.

5367

Table of Contents

Management Discussion – (continued)

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 reflect segment change.

~~Infrastructure~~ Support revenue of ~~$3,219~~$1,474 million decreased ~~2.3~~1.8 percent as reported, ~~and was flat~~but grew 5 percent adjusted for currency in the ~~first~~second quarter of 2022 compared to the prior-year period. This includes incremental sales to Kyndryl which contributed ~~over 8 points to the revenue growth. Within Infrastructure, hybrid cloud revenue of $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 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 8 percent adjusted for currency. Revenue growth in Power reflects clients’ demand for SAP S/4HANA data intensive workloads on our newest Power10 high-end system.

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

Yr. to Yr.

Percent/

(Dollars in millions)

Margin

For the three months ended March 31:

2022

2021*

Change

Infrastructure:







Gross profit

$
1,625

$
1,856

(12.4)
%
Gross profit margin

50.5
%

56.3
%
(5.9)
pts.
Pre-tax income

$
199

$
292

(31.7)
%
Pre-tax margin

6.2
%

8.9
%
(2.7)
pts.

For the first six months of 2022, Infrastructure revenue of $7,453 million increased 8.8 percent as reported (13 percent adjusted for currency) compared to the prior-year period. Incremental sales to Kyndryl contributed approximately 8 points of revenue growth in the first six months of 2022.


							Yr. to Yr.
							Percent/
(Dollars in millions)							Margin
For the three months ended June 30:	2022			2021*			Change
Infrastructure:
Gross profit	$	2,280		$	2,033		12.1	%
Gross profit margin		53.8	%		57.1	%	(3.3)	pts.
Pre-tax income	$	757		$	489		54.8	%
Pre-tax margin		17.9	%		13.7	%	4.1	pts.

* Recast to reflect segment change.


							Yr. to Yr.
							Percent/
(Dollars in millions)							Margin
For the six months ended June 30:	2022			2021*			Change
Infrastructure:
Gross profit	$	3,905		$	3,889		0.4	%
Gross profit margin		52.4	%		56.7	%	(4.4)	pts.
Pre-tax income	$	956		$	780		22.5	%
Pre-tax margin		12.8	%		11.4	%	1.4	pts.

* Recast to reflect segment change.

Infrastructure gross profit margin decreased ~~5.9~~3.3 points to ~~50.5~~53.8 percent in the ~~first quarter of 2022 compared to 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~~second quarter of 2022 compared to the prior-year ~~period. Pre-tax~~period, driven primarily by profit margin declines and product mix across Hybrid Infrastructure and Infrastructure Support. For the first six months of 2022, gross profit margin decreased ~~2.7~~4.4 points to ~~6.2 points~~52.4 percent compared to the prior-year ~~first quarter, reflecting~~period, driven by the ~~zSystems product cycle.~~

~~Financing~~same factors as the second quarter.

In the second quarter of 2022, Infrastructure pre-tax income of $757 million increased 54.8 percent and pre-tax margin increased 4.1 points to 17.9 percent compared to the prior-year period, reflecting mix benefits from the growth in zSystems, partially offset by the impact of increased component costs and supplier premiums. For the first six months of 2022, Infrastructure pre-tax income of $956 million increased 22.5 percent and pre-tax margin increased 1.4 points to 12.8 percent compared to the prior-year period, driven primarily by the same factors described above.

Financing

See pages 7087 through 7390 for a discussion of Financing’s segment results.

5468

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Management Discussion – (continued)

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								Percent
					Yr. to Yr.		Change						Yr. to Yr.		Change
(Dollars in millions)					Percent		Adjusted For						Percent		Adjusted For
For the three months ended March 31:	2022		2021		Change		Currency
For the three months ended June 30:									2022		2021		Change		Currency
Total Revenue	$	14,197	$	13,187	7.7	%	10.9	%	$	15,535	$	14,218	9.3	%	15.6	%
Americas	$	7,056	$	6,477	8.9	%	8.9	%	$	8,142	$	7,122	14.3	%	14.7	%
Europe/Middle East/Africa (EMEA)		4,231		3,928	7.7		13.9			4,526		4,314	4.9		17.4
Asia Pacific		2,910		2,781	4.6		11.3			2,868		2,782	3.1		15.1



							Yr. to Yr.
							Percent
					Yr. to Yr.		Change
(Dollars in millions)					Percent		Adjusted For
For the six months ended June 30:	2022		2021		Change		Currency
Total Revenue	$	29,732	$	27,405	8.5	%	13.3	%
Americas	$	15,198	$	13,599	11.8	%	12.0	%
Europe/Middle East/Africa (EMEA)		8,757		8,242	6.3		15.7
Asia Pacific		5,778		5,563	3.9		13.2

Total revenue of ~~$14,197~~$15,535 million increased ~~7.7~~9.3 percent as reported ~~(11~~(16 percent adjusted for currency) in the ~~first~~second quarter of 2022 compared to the ~~prior year,~~prior-year period, which includes approximately 5 points of revenue growth from incremental sales to Kyndryl.

Americas revenue of ~~$7,056~~$8,142 million increased ~~8.9~~14.3 percent as reported (9(15 percent adjusted for currency), which includes approximately 3 points of revenue growth from incremental sales to Kyndryl. Within North America, the U.S. increased 13.6 percent and Canada increased 4.3 percent as reported (8 percent adjusted for currency). Latin America increased 33.0 percent as reported (32 percent adjusted for currency), with Brazil increasing 43.2 percent as reported (38 percent adjusted for currency).

In EMEA, total revenue of $4,526 million increased 4.9 percent as reported (17 percent adjusted for currency), which includes approximately 6 points of revenue growth from incremental sales to Kyndryl. Germany, the UK, Italy and France increased 6.5 percent, 6.3 percent, 1.5 percent and 0.8 percent, respectively, as reported, and increased 20 percent, 18 percent, 14 percent and 13 percent, respectively, adjusted for currency. The suspension and orderly wind-down of our Russian operations impacted the revenue growth rate in EMEA by 2.0 points as reported (2 points adjusted for currency).

Asia Pacific revenue of $2,868 million increased 3.1 percent as reported (15 percent adjusted for currency), which includes approximately 6 points of revenue growth from incremental sales to Kyndryl. Japan decreased 0.4 percent as reported, but grew 18 percent adjusted for currency. India and Australia increased 31.7 percent and 9.5 percent, respectively, as reported, and increased 38 percent and 18 percent, respectively, adjusted for currency. China decreased 12.8 percent as reported (11 percent adjusted for currency).

For the first six months of 2022, total revenue of $29,732 million increased 8.5 percent as reported (13 percent adjusted for currency) compared to the prior-year period, which includes approximately 5 points of revenue growth from incremental sales to Kyndryl.

69

Table of Contents

Management Discussion – (continued)

Americas revenue of $15,198 million increased 11.8 percent as reported (12 percent adjusted for currency), which includes approximately 4 points of revenue growth from incremental sales to Kyndryl. Within North America, the U.S. increased ~~7.0~~10.4 percent ~~compared to the prior year~~ and Canada increased ~~8.2~~6.0 percent as reported (8 percent adjusted for currency). Latin America increased ~~25.5~~29.6 percent as reported ~~(25~~(29 percent adjusted for currency), with Brazil increasing ~~24.8~~35.2 percent as reported ~~(20~~(30 percent adjusted for currency).

In EMEA, total revenue of ~~$4,231~~$8,757 million increased ~~7.7~~6.3 percent as reported ~~(14~~(16 percent adjusted for currency), which includes approximately 7 points of revenue growth from incremental sales to Kyndryl. The UK, Germany and France ~~and Germany~~ increased ~~14.4~~10.4 percent, ~~12.6~~7.4 percent and ~~8.5~~5.7 percent, respectively, as reported, and increased 18 percent, 2018 percent and 16 percent, respectively, adjusted for currency. Italy ~~decreased 3.7~~declined 1.0 percent as reported, but ~~increased 3~~grew 9 percent adjusted for currency. The suspension and orderly wind-down of our Russian operations impacted the revenue growth rate in EMEA by 1.6 points as reported (2 points adjusted for currency).

Asia Pacific revenue of ~~$2,910~~$5,778 million increased ~~4.6~~3.9 percent as reported ~~(11~~(13 percent adjusted for currency), which includes approximately 6 points of revenue growth from incremental sales to Kyndryl. Japan increased ~~4.0~~1.8 percent as reported ~~(14~~(16 percent adjusted for currency). India and Australia increased ~~25.9~~28.7 percent and ~~11.4~~10.4 percent, respectively, as reported, and 30increased 34 percent and 19 percent, respectively, adjusted for currency. China decreased ~~11.2~~12 percent as reported ~~(13 percent~~and adjusted for ~~currency).~~currency.

Expense

Total Expense and Other (Income)


							Yr. to Yr.
(Dollars in millions)							Percent
For the three months ended June 30:	2022			2021			Change
Total expense and other (income)	$	6,568		$	6,940		(5.4)	%
Non-operating adjustments:
Amortization of acquired intangible assets	$	(278)		$	(276)		0.6	%
Acquisition-related charges		(2)			(18)		(90.8)
Non-operating retirement-related (costs)/income		(192)			(317)		(39.5)
Kyndryl-related impacts		(145)			—		nm
Operating (non-GAAP) expense and other (income)	$	5,952		$	6,329		(6.0)	%
Total expense-to-revenue ratio		42.3	%		48.8	%	(6.5)	pts.
Operating (non-GAAP) expense-to-revenue ratio		38.3	%		44.5	%	(6.2)	pts.

nm - not meaningful


							Yr. to Yr.
(Dollars in millions)							Percent
For the six months ended June 30:	2022			2021			Change
Total expense and other (income)	$	13,280		$	13,724		(3.2)	%
Non-operating adjustments:			��
Amortization of acquired intangible assets	$	(558)		$	(549)		1.5	%
Acquisition-related charges		(9)			(34)		(74.8)
Non-operating retirement-related (costs)/income		(394)			(649)		(39.4)
Kyndryl-related impacts		(367)			—		nm
Operating (non-GAAP) expense and other (income)	$	11,953		$	12,491		(4.3)	%
Total expense-to-revenue ratio		44.7	%		50.1	%	(5.4)	pts.
Operating (non-GAAP) expense-to-revenue ratio		40.2	%		45.6	%	(5.4)	pts.

nm - not meaningful

5570

Table of Contents

Management Discussion – (continued)

~~Expense~~

~~Total Expense and Other (Income)~~

Yr. to Yr.

(Dollars in millions)

Percent

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

$
(280)

$
(273)

2.5
%
Acquisition-related charges

(7)

(16)

(57.4)

Non-operating retirement-related (costs)/income

(202)

(332)

(39.2)

Kyndryl-related impacts

(222)

—

nm

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

$
6,001

$
6,162

(2.6)
%
Total expense-to-revenue ratio

47.3
%

51.4
%
(4.2)
pts.
Operating (non-GAAP) expense-to-revenue ratio

42.3
%

46.7
%
(4.5)
pts.

~~nm — not meaningful~~

Total expense and other (income) decreased ~~1.1~~5.4 percent in the ~~first~~second quarter of 2022 versus the prior-year period

primarily driven by the effects of currency, a gain from the divestiture of our healthcare software assets, lower non-operating retirement-related costs ~~lower workforce rebalancing charges~~ and ~~lower spending for shared services transferred~~benefits from the actions taken to ~~Kyndryl,~~streamline operations and simplify our go-to-market model, partially offset by ~~an unrealized loss from~~impacts related to the 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 quantum.talent. Total operating (non-GAAP) expense and other (income) decreased ~~2.6~~6.0 percent year to year, driven primarily by the factors described above excluding the lower non-operating retirement-related costs and the ~~unrealized loss on~~impacts related to the Kyndryl ~~stock.~~retained shares.

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

Selling, General and Administrative Expense


					Yr. to Yr.						Yr. to Yr.
(Dollars in millions)					Percent						Percent
For the three months ended March 31:	2022		2021		Change
For the three months ended June 30:							2022		2021		Change
Selling, general and administrative expense:
Selling, general and administrative — other	$	3,824	$	3,890	(1.7)	%	$	3,996	$	3,954	1.1	%
Advertising and promotional expense		336		345	(2.4)			395		393	0.7
Workforce rebalancing charges		5		94	(94.4)			28		107	(74.3)
Amortization of acquired intangible assets		279		272	2.6			277		276	0.6
Stock-based compensation		136		115	18.6			153		141	8.2
Provision for/(benefit from) expected credit loss expense		16		(28)	nm			6		(22)	nm
Total selling, general and administrative expense	$	4,597	$	4,688	(1.9)	%	$	4,855	$	4,849	0.1	%
Non-operating adjustments:
Amortization of acquired intangible assets	$	(279)	$	(272)	2.6	%	$	(277)	$	(276)	0.6	%
Acquisition-related charges		(7)		(16)	(57.4)			(2)		(18)	(90.8)
Kyndryl-related impacts		0		—	nm			0		—	nm
Operating (non-GAAP) selling, general and administrative expense	$	4,311	$	4,399	(2.0)	%	$	4,576	$	4,555	0.4	%

nm —- not meaningful


					Yr. to Yr.
(Dollars in millions)					Percent
For the six months ended June 30:	2022		2021		Change
Selling, general and administrative expense:
Selling, general and administrative — other	$	7,820	$	7,844	(0.3)	%
Advertising and promotional expense		732		737	(0.8)
Workforce rebalancing charges		33		201	(83.7)
Amortization of acquired intangible assets		557		548	1.5
Stock-based compensation		289		256	12.9
Provision for/(benefit from) expected credit loss expense		22		(49)	nm
Total selling, general and administrative expense	$	9,452	$	9,536	(0.9)	%
Non-operating adjustments:
Amortization of acquired intangible assets	$	(557)	$	(548)	1.5	%
Acquisition-related charges		(9)		(34)	(74.8)
Kyndryl-related impacts		0		—	nm
Operating (non-GAAP) selling, general and administrative expense	$	8,887	$	8,954	(0.8)	%

~~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:~~nm - not meaningful

5671

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Management Discussion – (continued)

Total selling, general and administrative (SG&A) expense increased 0.1 percent in the second quarter of 2022 versus the prior-year period driven primarily by the following factors:

●

Higher spending (7 points) reflecting our continuing investment to drive our hybrid cloud and AI strategy, expenses of acquired businesses and higher travel and commission expense, partially offset by benefits from the actions taken to streamline operations and simplify our go-to-market model and lower spending for shared services transferred to Kyndryl; partially offset by

●

The effects of currency (4 points); and

●

Lower workforce rebalancing charges (2 points).

Operating (non-GAAP) expense increased 0.4 percent year to year primarily driven by the same factors.

SG&A expense decreased 0.9 percent in the first six months of 2022 versus the prior-year period driven primarily by the following factors:

●

The effects of currency (3 points); and

●

~~The effects of currency~~Lower workforce rebalancing charges (2 points); partially offset by

●

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

●

Higher spending ~~(1 point) reflecting our continuing investment in innovation, our ecosystem and talent, partially offset~~(4 points) driven primarily by ~~lower spending for shared services transferred to Kyndryl.~~the same factors described above.

Operating (non-GAAP) expense decreased ~~2.0~~0.8 percent year to year, primarily driven by the same factors.

~~The provision~~Provisions for expected credit loss expense increased ~~$44~~$71 million ~~year to year~~ in the first ~~three~~six months of 2022 compared to the prior-year period, primarily driven by ~~higher expense for~~an increase in specific reserves in the ~~current-year period~~current year compared to decreases in both general and ~~a decrease in general~~specific reserves in the prior-year period. The receivables provision coverage was ~~2.3~~2.2 percent at ~~March~~June 30, 2022, an increase of 10 basis points from December 31, ~~2022, excluding~~2021, due to the decline in total receivables ~~classified as held for sale, an increase~~balance, and a decrease of 20 basis points ~~compared to December 31,~~from June 30, 2021. ~~The increase was primarily driven by the overall decline in total receivables.~~

Research, Development and Engineering


					Yr. to Yr.						Yr. to Yr.
(Dollars in millions)					Percent						Percent
For the three months ended March 31:	2022		2021		Change
For the three months ended June 30:							2022		2021		Change
Research, development and engineering expense	$	1,679	$	1,616	3.9	%	$	1,673	$	1,641	1.9	%


					Yr. to Yr.
(Dollars in millions)					Percent
For the six months ended June 30:	2022		2021		Change
Research, development and engineering expense	$	3,352	$	3,257	2.9	%

Research, development and engineering (RD&E) expense in the ~~first~~second quarter of 2022 increased ~~3.9~~1.9 percent year to year reflecting our continuing investment to deliver innovation in AI, hybrid cloud and emerging areas such as quantum. Higher spending (5(4 points) in the current-year period was partially offset by the effects of currency (2 points).

RD&E expense in the first six months of 2022 increased 2.9 percent year to year, primarily driven by higher spending (4 points) partially offset by the effects of currency (1 point).

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Management Discussion – (continued)

Intellectual Property and Custom Development Income


					Yr. to Yr.						Yr. to Yr.
(Dollars in millions)					Percent						Percent
For the three months ended March 31:	2022		2021		Change
Intellectual Property and Custom Development Income:
For the three months ended June 30:							2022		2021		Change
Intellectual property and custom development income:
Licensing of intellectual property including royalty-based fees	$	71	$	74	(4.0)	%	$	113	$	66	71.7	%
Custom development income		48		65	(26.2)			57		64	(10.9)
Sales/other transfers of intellectual property		2		6	(73.3)			6		4	70.4
Total	$	121	$	146	(16.9)	%	$	176	$	133	32.2	%


					Yr. to Yr.
(Dollars in millions)					Percent
For the six months ended June 30:	2022		2021		Change
Intellectual property and custom development income:
Licensing of intellectual property including royalty-based fees	$	184	$	140	31.6	%
Custom development income		105		129	(18.7)
Sales/other transfers of intellectual property		8		10	(20.5)
Total	$	297	$	278	6.5	%

Total intellectual property and custom development income increased 32.2 percent year to year in the second quarter, and 6.5 percent in the first ~~quarter~~six months of 2022 ~~decreased 16.9 percent year~~compared to ~~year.~~the prior-year period. 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.

Other (Income) and Expense


					Yr. to Yr.
(Dollars in millions)					Percent
For the three months ended June 30:	2022		2021		Change
Other (income) and expense:
Foreign currency transaction losses/(gains)	$	(494)	$	(15)	nm
(Gains)/losses on derivative instruments		439		79	454.6	%
Interest income		(28)		(11)	147.9
Net (gains)/losses from securities and investment assets		54		0	nm
Retirement-related costs/(income)		192		317	(39.5)
Other		(243)		(68)	255.4
Total other (income) and expense	$	(81)	$	302	nm
Non-operating adjustments:
Amortization of acquired intangible assets	$	(1)	$	(1)	—
Non-operating retirement-related (costs)/income		(192)		(317)	(39.5)	%
Kyndryl-related impacts		(145)		—	nm
Operating (non-GAAP) other (income) and expense	$	(418)	$	(16)	nm

nm - not meaningful

5773

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Management Discussion – (continued)

~~Other (Income) and Expense~~


					Yr. to Yr.						Yr. to Yr.
(Dollars in millions)					Percent						Percent
For the three months ended March 31:	2022		2021		Change
For the six months ended June 30:							2022		2021		Change
Other (income) and expense:
Foreign currency transaction losses/(gains)	$	(176)	$	(109)	61.0	%	$	(670)	$	(124)	441.1	%
(Gains)/losses on derivative instruments		102		160	(36.1)			541		239	126.3
Interest income		(17)		(14)	27.5			(46)		(25)	82.6
Net (gains)/losses from securities and investment assets		218		(6)	nm			273		(6)	nm
Retirement-related costs/(income)		202		332	(39.2)			394		649	(39.4)
Other		(83)		(18)	356.9			(327)		(87)	276.7
Total other (income) and expense	$	246	$	346	(28.8)	%	$	166	$	647	(74.4)	%
Non-operating adjustments:
Amortization of acquired intangible assets	$	(1)	$	(1)	—		$	(1)	$	(1)	—
Non-operating retirement-related (costs)/income		(202)		(332)	(39.2)	%		(394)		(649)	(39.4)	%
Kyndryl-related impacts		(222)		—	nm			(367)		—	nm
Operating (non-GAAP) other (income) and expense	$	(179)	$	13	nm		$	(596)	$	(3)	nm

nm - not meaningful

Total other (income) and expense was ~~expense~~income of ~~$246~~$81 million in the ~~first~~second quarter of 2022 compared to expense of ~~$346~~$302 million in the prior-year period. The year-to-year change was primarily driven by:

●

~~Lower non-operating retirement-related costs~~Higher gains on divestitures ($~~130~~243 million)~~. Refer to “Retirement-Related Plans” for additional information; and~~ primarily driven by the divestiture of our healthcare software assets (included in “Other”);

●

Net exchange gains (including derivative instruments) in the ~~current-year period~~current year versus net exchange losses in the ~~prior-year period~~prior year ($~~124~~120 million). The current year includes a loss on the cash-settled swap related to the Kyndryl retained shares ($88 million); and

●

Lower non-operating retirement-related costs ($125 million). Refer to “Retirement-Related Plans” for additional information; partially offset by

●

AnNet unrealized ~~loss on~~losses related to the Kyndryl retained shares ($~~222~~56 million).

Operating (non-GAAP) other (income) and expense was ~~income~~$418 million of ~~$179 million~~income in the ~~first~~second quarter of 2022 andincreased $402 million compared to ~~expense of $13 million in~~ the prior-year period. The year-to-year change was driven primarily by the ~~foreign exchange dynamics~~factors described above, excluding the higher non-operating retirement-related costs and impacts related to the Kyndryl retained shares.

Total other (income) and expense was $166 million of expense in the first six months of 2022 compared to $647 million in the prior-year period. The year-to-year decrease was primarily driven by:

●

Lower non-operating retirement-related costs ($256 million). Refer to “Retirement-Related Plans” for additional information;

●

Net exchange gains (including derivative instruments) in the current year versus net exchange losses in the prior year ($244 million). The current year includes a loss on the cash-settled swap related to the Kyndryl retained shares ($88 million); and

●

Higher gains on divestitures ($275 million) primarily driven by the divestiture of our healthcare software assets (included in “Other”); partially offset by

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Management Discussion – (continued)

●

Net unrealized losses related to the Kyndryl retained shares ($278 million).

Operating (non-GAAP) other (income) and expense was $596 million of income in the first six months of 2022 and increased $593 million compared to the prior-year period. The year-to-year increase was driven primarily by the effects of currency and higher gains on divestitures described above.

Interest Expense


					Yr. to Yr.						Yr. to Yr.
(Dollars in millions)					Percent						Percent
For the three months ended March 31:	2022		2021		Change
For the three months ended June 30:							2022		2021		Change
Interest expense	$	311	$	280	10.9	%	$	297	$	281	5.5	%


					Yr. to Yr.
(Dollars in millions)					Percent
For the six months ended June 30:	2022		2021		Change
Interest expense	$	607	$	561	8.2	%

Interest expense increased ~~$31~~$15 million and $46 million year to year in the second quarter and first ~~quarter~~six months of 2022, ~~compared to the prior-year period.~~respectively. Interest expense is presented in cost of financing in the Consolidated Income Statement if the related external borrowings are to support the Financing external business. Overall interest expense (excluding capitalized interest) for the second quarter and first ~~quarter~~six months of 2022 was ~~$393~~$379 million and $772 million, respectively, a decrease of $6 million and an increase of $7$1 million, ~~versus~~respectively, compared to the prior-year ~~period,~~periods. The year-to-year dynamics for both the second quarter and first six months of 2022 were primarily driven ~~by higher average interest rates, partially offset~~ by a lower average debt balance, inoffset by higher average interest rates compared to the ~~current year.~~prior-year periods.

58

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~~Management Discussion – (continued)~~

Retirement-Related Plans

The following ~~table provides~~tables provide 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.						Yr. to Yr.
(Dollars in millions)					Percent						Percent
For the three months ended March 31:	2022		2021		Change
For the three months ended June 30:							2022		2021		Change
Retirement-related plans — cost:
Service cost	$	66	$	68	(3.8)	%	$	61	$	71	(13.3)	%
Multi-employer plans		4		6	(32.9)			3		5	(29.7)
Cost of defined contribution plans		239		256	(6.8)			233		252	(7.5)
Total operating costs	$	309	$	330	(6.6)	%	$	298	$	327	(9.1)	%
Interest cost	$	467	$	410	14.1	%	$	460	$	410	12.2	%
Expected return on plan assets		(749)		(731)	2.5			(734)		(731)	0.4
Recognized actuarial losses		460		622	(26.0)			442		617	(28.4)
Amortization of prior service costs/(credits)		7		3	106.8			6		0	nm
Curtailments/settlements		8		17	(55.0)			11		16	(32.1)
Other costs		9		11	(15.4)			6		3	72.0
Total non-operating costs/(income)	$	202	$	332	(39.2)	%	$	192	$	317	(39.5)	%
Total retirement-related plans — cost	$	510	$	663	(23.0)	%	$	489	$	644	(24.1)	%

nm - not meaningful

75

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Management Discussion – (continued)


					Yr. to Yr.
(Dollars in millions)					Percent
For the six months ended June 30:	2022		2021		Change
Retirement-related plans — cost:
Service cost	$	127	$	139	(8.6)	%
Multi-employer plans		7		11	(31.5)
Cost of defined contribution plans		472		508	(7.1)
Total operating costs	$	606	$	658	(7.8)	%
Interest cost	$	927	$	820	13.1	%
Expected return on plan assets		(1,483)		(1,461)	1.5
Recognized actuarial losses		902		1,239	(27.2)
Amortization of prior service costs/(credits)		13		4	257.5
Curtailments/settlements		19		34	(43.9)
Other costs		15		15	5.6
Total non-operating costs/(income)	$	394	$	649	(39.4)	%
Total retirement-related plans — cost	$	1,000	$	1,307	(23.5)	%

Total pre-tax retirement-related plan cost decreased by ~~$152~~$155 million compared to the ~~first~~second quarter of 2021 primarily driven by a decrease in recognized actuarial losses ($~~162~~175 million)~~, higher expected return on plan assets ($18 million),~~ and lower cost of defined contribution plans ($1719 million), partially offset by higher interest costs ($5850 million). Total cost for the first six months of 2022 decreased $307 million compared to the first six months of 2021, primarily driven by a decrease in recognized actuarial losses ($337 million), lower cost of defined contribution plans ($36 million) and higher expected return on plan assets ($22 million) partially offset by higher interest costs ($108 million).

As described in the “Operating (non-GAAP) Earnings” section, management characterizes certain retirement-related costs as operating and others as non-operating. Utilizing this characterization, operating retirement-related costs in the ~~first~~second quarter of 2022 were ~~$309~~$298 million, a decrease of ~~$22~~$30 million compared to the ~~first~~second quarter of ~~2021,~~2021. For the first six months of 2022, operating retirement-related costs were $606 million, a decrease of $52 million compared to the prior-year period. These operating cost decreases were primarily driven by lower cost of defined contribution ~~plans ($17 million).~~plans. Non-operating costs of ~~$202~~$192 million in the ~~first~~second quarter of 2022 decreased ~~$130~~$125 million year to year and for the first six months of 2022 were $394 million, a decrease of $256 million compared to the prior-year period. These non-operating cost decreases were driven primarily by a decrease in recognized actuarial losses, ~~($162 million), and higher expected return on plan assets ($18 million),~~ partially offset by higher interest ~~costs ($58 million).~~costs.

Taxes

The continuing operations ~~benefit from~~provision for income taxes for the ~~first~~second quarter of 2022 was ~~$39~~$257 million, compared to ~~a benefit from income taxes of $160~~$101 million in the ~~first~~second quarter of 2021. The operating (non-GAAP) income tax provision for the ~~first~~second quarter of 2022 was ~~$244~~$413 million, compared to $246 million in the second quarter of 2021.

The continuing operations provision for income taxes for the first six months of 2022 was $218 million, compared to a benefit from income taxes of $58 million for the first six months of 2021. The operating (non-GAAP) provision for income taxes ~~of $25 million in~~for the first ~~quarter~~six months of 2022 was $657 million, compared to $272 million for the first six months of 2021.

The continuing operations ~~benefit from~~provision for income taxes infor the first ~~quarter~~six months of 2022 was primarily 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 infor the first ~~quarter~~six months of 2021 was primarily related to the tax impacts from the resolution of certain tax ~~audits.~~audits in the first quarter of 2021. The increase in the operating (non-GAAP) income tax provision in the first ~~quarter~~six months of 2022, compared to the prior year was primarily driven by tax impacts from the resolution of certain tax audits in the first quarter of 2021.

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Management Discussion – (continued)

IBM’s full-year tax provision and effective tax rate are impacted by recurring factors including the geographic mix of income before taxes, incentives, changes in unrecognized tax 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

59

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~~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 (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 2022. In the fourth quarter of 2021, the IRS commenced its audit of the company’s U.S. tax returns for 2017 and 2018. With respect to major U.S. state and foreign taxing jurisdictions, the company is generally no longer subject to tax examinations for years prior to 2015. The company is no longer subject to income tax examination of its U.S. federal tax return for years prior to 2013. The open years contain matters that could be subject to differing interpretations of applicable tax laws and regulations as it relates to the amount and/or timing of income, deductions, and tax credits. Although the outcome of tax audits is always uncertain, the company believes that adequate amounts of tax, interest and penalties have been provided for any adjustments that are expected to result for these years.

The company is involved in a number of income tax-related matters in India ~~for having challenged~~as a result of tax assessments issued by the India Tax Authorities. At ~~March 31,~~June 30, 2022, the company had recorded ~~$709~~$676 million as prepaid income taxes in India. A significant portion of this balance represents cash tax deposits paid over time to protect the company’s right to appeal various income tax assessments made by the India Tax Authorities. Although the outcome of tax audits ~~are~~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 amount of unrecognized tax benefits at ~~March 31,~~June 30, 2022 is ~~$8,699~~$8,597 million which can be reduced by ~~$548~~$540 million associated with timing adjustments, U.S. tax credits, potential transfer pricing adjustments, and state income taxes. The net amount of ~~$8,151~~$8,057 million, if recognized, would favorably affect the company’s effective tax rate.

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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.						Yr. to Yr.
					Percent						Percent
For the three months ended March 31:	2022		2021		Change
For the three months ended June 30:							2022		2021		Change
Earnings per share of common stock from continuing operations:
Assuming dilution	$	0.73	$	0.45	62.2	%	$	1.61	$	0.90	78.9	%
Basic	$	0.74	$	0.45	64.4	%	$	1.62	$	0.91	78.0	%
Diluted operating (non-GAAP)	$	1.40	$	1.12	25.0	%	$	2.31	$	1.61	43.5	%
Weighted-average shares outstanding: (in millions)
Assuming dilution		909.2		901.7	0.8	%		910.7		904.2	0.7	%
Basic		899.3		893.6	0.6	%		901.5		895.0	0.7	%


					Yr. to Yr.
					Percent
For the six months ended June 30:	2022		2021		Change
Earnings per share of common stock from continuing operations:
Assuming dilution	$	2.34	$	1.34	74.6	%
Basic	$	2.36	$	1.36	73.5	%
Diluted operating (non-GAAP)	$	3.71	$	2.73	35.9	%
Weighted-average shares outstanding: (in millions)
Assuming dilution		910.0		903.0	0.8	%
Basic		900.4		894.3	0.7	%

Actual shares outstanding at ~~March 31,~~ June 30, 2022 were ~~899.4~~903.2 million. The weighted-average number of common shares outstanding assuming dilution during the second quarter and first ~~quarter~~six months of 2022 ~~was 7.5~~were 6.5 million ~~shares~~(0.7 percent) and 7.0 million (0.8 percent) shares higher, respectively, than the same ~~period~~periods of 2021.

60

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~~Management Discussion – (continued)~~

Financial Position

Dynamics

Our balance sheet at ~~March 31,~~June 30, 2022 continues to provide us with flexibility to support the business.

Cash, restricted cash and marketable securities at ~~March 31,~~June 30, 2022 were ~~$10,769~~$7,778 million, an increase of ~~$3,213~~$222 million from December 31, 2021. Total debt of ~~$54,234~~$50,309 million at ~~March 31,~~June 30, 2022 ~~increased $2,531~~decreased $1,394 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.~~driven by currency impacts. 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~~six months of 2022, we generated ~~$3,248~~$4,569 million in cash from operating activities, compared to ~~$4,914~~$7,539 million in the first ~~three~~six months of ~~2021.~~2021, primarily due to financing receivables. We also invested ~~$698~~$958 million in acquisitions and returned ~~$1,475~~$2,963 million to shareholders through dividends in the first ~~quarter~~six months of 2022. Our cash generation permits us to invest and deploy capital to areas with the most attractive long-term opportunities.

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Management Discussion – (continued)

Our pension plans were well funded at the end of 2021, with worldwide qualified plans funded at 107 percent. Overall pension funded status as of the end of ~~March~~June 2022 ~~was fairly consistent with~~has increased from year-end 2021, ~~and we~~mainly due to higher interest rates. We currently have no change to expected plan contributions in 2022.

IBM Working Capital


	At March 31,		At December 31,		At June 30,		At December 31,
(Dollars in millions)	2022		2021		2022		2021
Current assets	$	31,330	$	29,539	$	27,896	$	29,539
Current liabilities		34,056		33,619		31,844		33,619
Working capital	$	(2,726)	$	(4,080)	$	(3,948)	$	(4,080)
Current ratio		0.92:1		0.88:1		0.88:1		0.88:1

Working capital increased ~~$1,354~~$132 million from the year-end 2021 position. The key changes are described below:

Current assets ~~increased $1,791~~decreased $1,643 million ($~~1,926~~556 million adjusted for currency) due to:

●

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

●

A decline in receivables of ~~$1,635~~$1,760 million ($~~1,547~~1,120 million adjusted for currency) mainly due to collections of higher year-end ~~balances.~~balances; partially offset by

●

An increase of $222 million ($555 million adjusted for currency) in cash, restricted cash and marketable securities.

Current liabilities ~~increased $437~~decreased $1,775 million ($~~767~~151 million adjusted for currency) as a result of:

●

~~An increase~~A decrease in ~~deferred income~~short-term debt of ~~$1,008~~$805 million ($~~1,086~~812 million adjusted for currency) ~~primarily driven~~due to maturities of $3,891 million; partially offset by ~~annual customer billings and continued growth in software renewal rates; and~~reclassifications of $3,120 million from long-term debt to reflect upcoming maturities;

●

~~An increase~~A decrease in ~~short-term debt~~taxes payable of ~~$903~~$547 million ($~~883~~428 million adjusted for currency) primarily due to ~~reclassifications of $2,014 million from long-term debt to reflect upcoming maturities; partially offset by maturities of $1,087 million; partially offset by~~indirect tax payments;

●

A decrease in accounts payable of ~~$502~~$248 million ($~~474~~121 million adjusted for currency) primarily due to declines from seasonally higher year-end balances;

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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 in other accrued expenses and liabilities of ~~$461~~$211 million ~~($243~~(an increase of $490 million adjusted for currency) primarily due to payments of $374 million for workforce rebalancing actions, partially offset by an increase in ~~compensation~~derivatives of $206 million; partially offset by

●

An increase in deferred income of $4 million or $523 million adjusted for currency primarily driven by annual customer billings and ~~benefits and other accrued expenses and liabilities.~~an increase in software renewal rates.

Receivables and Allowances

Roll Forward of Total IBM Receivables Allowance for Credit Losses


(Dollars in millions)	(Dollars in millions)									(Dollars in millions)
January 1, 2022	January 1, 2022	Additions / (Releases) *		Write-offs **		Foreign currency and other		March 31, 2022		January 1, 2022	Additions / (Releases) *		Write-offs **		Foreign currency and other		June 30, 2022
$	443	$	17	$	(24)	$	(5)	$	432	443	$	29	$	(40)	$	(12)	$	420

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

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

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**Refer to note A, “Significant Accounting Policies,” in our 2021 Annual Report for additional information regarding allowance for credit loss write-offs.Management Discussion – (continued)

Excluding receivables classified as held for sale, the total IBM receivables provision coverage was ~~2.3~~2.2 percent at ~~March 31~~, June 30, 2022, an increase of 2010 basis points compared to December 31, 2021. The increase was primarily driven by the ~~overall~~ decline in total receivables. The majority of the write-offs during the ~~three~~six months ended ~~March 31,~~June 30, 2022 related to receivables which had been previously reserved.

Financing Segment Receivables and Allowances

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


	At March 31,			At December 31,			At June 30,			At December 31,
(Dollars in millions)	2022			2021			2022			2021
Amortized cost *	$	11,563		$	12,859		$	12,123		$	12,859
Specific allowance for credit losses		141			159			135			159
Unallocated allowance for credit losses		37			42			37			42
Total allowance for credit losses		179			201			172			201
Net financing receivables	$	11,385		$	12,658		$	11,951		$	12,658
Allowance for credit losses coverage		1.5	%		1.6	%		1.4	%		1.6	%

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

The percentage of Financing segment receivables reserved decreased from 1.6 percent at December 31, 2021, to ~~1.5~~1.4 percent at ~~March 31,~~June 30, 2022, primarily driven by write-offs of previously reserved ~~receivables, partially offset by the decline in amortized cost.~~receivables.

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


(Dollars in millions)	(Dollars in millions)									(Dollars in millions)
January 1, 2022	January 1, 2022	Additions / (Releases)*		Write-offs **		Foreign currency and other		March 31, 2022		January 1, 2022	Additions / (Releases)*		Write-offs **		Foreign currency and other		June 30, 2022
$	201	$	(8)	$	(17)	$	3	$	179	201	$	(10)	$	(18)	$	0	$	172

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

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

Financing’s expected credit loss expense (including reserves for off-balance sheet commitments which are recorded in other liabilities) was a net release of ~~$10~~$2 million and $12 million for the three and six months ended ~~March 31,~~June 30, 2022, respectively, compared to a net

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~~Management Discussion – (continued)~~

release of ~~$18~~$12 million and $29 million for the ~~same period in 2021.~~three and six months ended June 30, 2021, respectively. The ~~decrease~~declines in net releases ~~was~~in both periods of 2022 were 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 EMEA.~~receivables.

Noncurrent Assets and Liabilities


	At March 31,		At December 31,		At June 30,		At December 31,
(Dollars in millions)	2022		2021		2022		2021
Noncurrent assets	$	101,945	$	102,462	$	99,607	$	102,462
Long-term debt	$	46,545	$	44,917	$	44,328	$	44,917
Noncurrent liabilities (excluding debt)	$	33,562	$	34,469	$	31,855	$	34,469

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The decrease in noncurrent assets of ~~$517~~$2,855 million ($~~146~~472 million adjusted for currency) was driven by:

●

A decrease in ~~long-term financing receivables~~goodwill and net intangible assets of ~~$815~~$1,544 million ($~~793~~426 million adjusted for currency) ~~due~~primarily driven by currency impacts, intangibles amortization and derecognition of goodwill and intangible assets of $647 million related to ~~reclasses~~the divestiture of our healthcare software assets, partially offset by additions from new acquisitions; and

●

A decrease in net property, plant and equipment and operating right-of-use assets of $793 million ($500 million adjusted for currency).

Long-term debt decreased $589 million (an increase of $740 million adjusted for currency) due to:

●

Reclassifications to short-term ~~receivables~~debt of $3,120 million to reflect upcoming maturities and ~~declines from seasonally higher year-end balances;~~currency impacts; partially offset by

●

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

~~Long-term debt increased $1,628 million ($1,972 million adjusted for currency) primarily driven by:~~

●

Issuances of ~~$4,063 million; partially offset by~~

●

~~Reclassifications to short-term debt of $2,014 million to reflect upcoming maturities.~~$4,085 million.

Noncurrent liabilities (excluding debt) decreased ~~$907~~$2,615 million ($~~616~~1,189 million adjusted for currency) ~~primarily driven by:~~due to:

●

A decrease in retirement and postretirement benefit obligations of ~~$498~~$1,317 million ($~~324~~550 million adjusted for currency);

●

A decrease of $510 million in other liabilities primarily due to currency impacts of $391 million;

●

A decrease of $508 million ($348 million adjusted for currency) in deferred income reflecting seasonal reductions from higher year-end balances; and

●

A decrease in long-term operating lease liabilities of ~~$410~~$280 million ($~~292~~172 million adjusted for currency) ~~in deferred income, operating lease liabilities and other liabilities.~~related primarily to real estate leases.

Debt

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


	At March 31,		At December 31,		At June 30,		At December 31,
(Dollars in millions)	2022		2021		2022		2021
Total company debt	$	54,234	$	51,703	$	50,309	$	51,703
Financing segment debt*	$	12,168	$	13,929	$	12,265	$	13,929
Non-Financing debt	$	42,067	$	37,775	$	38,044	$	37,775

* Financing segment debt includes debt of ~~$1,183~~$1,140 million at ~~March 31,~~June 30, 2022 and $1,345 million at December 31, 2021 to support intercompany financing receivables and other intercompany assets. Refer to Financing’s “Financial Position” on page 7188 for additional details.

Total debt of ~~$54,234~~$50,309 million ~~increased $2,531~~decreased $1,394 million ($~~2,855~~72 million adjusted for currency) from December 31, 2021, primarily driven by ~~issuances~~maturities of ~~$4,080~~$3,941 million and currency impacts, partially offset by ~~maturities~~issuances of ~~$1,111~~$4,419 million.

Non-Financing debt of $38,044 million increased $269 million ($1,235 million adjusted for currency) from December 31, 2021 primarily due to new debt issuances.

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Management Discussion – (continued)

~~Non-Financing debt of $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~~$12,265 million decreased ~~$1,761~~$1,664 million ($~~1,727~~1,307 million adjusted for currency) from December 31, 2021 primarily due to lower funding requirements associated with financing receivables.

Financing provides financing solutions predominantly for IBM’s external client assets, and the debt used to fund 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 Financing debt-to-equity ratio remained at 9.0 to 1 at ~~March 31,~~June 30, 2022.

We measure Financing as a stand-alone entity, and accordingly, interest expense relating to debt supporting Financing’s external client and internal business is included in the “Financing Results of Operations” and in note 5, “Segments.” In the Consolidated Income Statement, the external debt-related interest expense supporting Financing’s internal financing to IBM is classified as interest expense.

Equity

Total equity increased ~~$116~~by $480 million from December 31, 2021, primarily due to an increase from net income of ~~$733~~$2,125 million, a decrease in accumulated other comprehensive losses of ~~$703~~$1,066 million driven by retirement-related benefit plans of ($~~352~~689 million), cash flow hedges ($205 million) and foreign currency translation adjustments ($~~306~~172 million), and common stock of ~~$221~~$420 million; partially offset by dividends paid of ~~$1,475~~$2,963 million.

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 table below and include the cash flows of discontinued operations. These amounts also include the cash flows associated with the Financing business.


(Dollars in millions)
For the three months ended March 31:	2022		2021
For the six months ended June 30:					2022		2021
Net cash provided by/(used in):
Operating activities	$	3,248	$	4,914	$	4,569	$	7,539
Investing activities		(1,358)		(2,000)		(1,186)		(4,671)
Financing activities		1,377		(5,783)		(2,819)		(8,914)
Effect of exchange rate changes on cash, cash equivalents and restricted cash		(5)		(134)		(267)		(65)
Net change in cash, cash equivalents and restricted cash	$	3,263	$	(3,002)	$	297	$	(6,110)

Net cash provided by operating activities decreased ~~$1,666~~$2,970 million as compared to the first ~~three~~six months of 2021 driven primarily by:

●

A decrease of cash provided by financing receivables of ~~$1,232~~$3,396 million primarily driven by higher ~~prior year~~prior-year sales of ~~financing receivables;~~

●

~~A decrease in deferred income of $605 million due to strong performance in the prior-year period;~~receivables and

●

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

●

A decrease in workforce rebalancing payments of ~~$401~~$685 million; and

●

An increase in cash from working capital improvements of $484 million.

Net cash used in investing activities decreased $3,485 million driven primarily by:

●

A decrease in cash used in acquisitions of $1,909 million;

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Management Discussion – (continued)

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

●

~~A decrease~~An increase in cash ~~used for acquisitions~~provided by divestitures of ~~$422~~$1,293 million; and

●

A decrease in cash used ~~for~~in net capital expenditures of ~~$152~~$346 million.

~~Financing~~Net cash used in financing activities ~~were a net source of cash of $1,377~~decreased $6,094 million ~~in 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:

●

~~An increase~~A decrease in net cash ~~provided by~~used in debt transactions of ~~$7,247~~$6,233 million primarily driven by a higher ~~level of~~ maturities in the prior year and net issuances in the current ~~year net additions.~~year.

Results of Discontinued Operations

~~Income~~Loss from discontinued operations, net of tax was ~~$71~~$73 million in the ~~first~~second quarter of 2022 compared to ~~$552~~income of $515 million in the prior-year period. For the first six months of 2022, loss from discontinued operations, net of tax was $2 million compared to income of $1,067 million in the prior-year period. As the separation of Kyndryl occurred on November 3, 2021, the first ~~quarter~~half of 2021 included a full ~~quarter~~six months of Kyndryl operations. The ~~current-year~~loss in the second quarter of 2022 primarily reflects the net impact of changes in separation-related estimates and the settlement of assets and liabilities in accordance with the separation and distribution agreement. The loss in the first six months of 2022 reflects the same drivers as above and also includes income primarily ~~relates~~ related to a joint venture historically managed by Kyndryl, which did not transfer at separation due to the transfer being subject to regulatory approval. Upon receiving regulatory approval in the first quarter of 2022, the company sold its majority shares in the joint venture to Kyndryl. See note 3, “Separation of Kyndryl,” for additional information.

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Looking Forward

~~Our first quarter results reflect the changes we have made to position~~Technology serves as a fundamental source of competitive advantage for our ~~company for the future. This solid start to 2022 reinforces the confidence we have in our strategy. Harnessing the power of technologies such as hybrid cloud~~clients and ~~AI remains essential~~is especially critical as our clients ~~face~~continue to navigate several strategic challenges and opportunities including competition for talent, supply chain issues, inflation, cybersecurity and geopolitical instability. Organizations are also under intense pressure to fast-track their digital transformation and harness the power of their data, which is growing exponentially. We continue to see a strong demand environment for ~~both~~our technology and consulting solutions as we help our clients respond to these challenges and opportunities. ~~Over the last two years, we~~We have taken a series of significant steps to capture this demand, including changes to our portfolio, and focused investments in our offerings, technical talent, our ecosystem and go-to-market model. Our first half results reflect these investments and ~~actions are paying off.~~changes we have made to execute a platform-centric, hybrid cloud and AI strategy and continue to reinforce our confidence in the strategy.

Hybrid Cloud and AI Progress

The hybrid cloud platform we have built is open, secure and flexible and at its core is based on Red Hat, which gives clients powerful software capabilities based on open-source innovation. Our software has been optimized ~~for the~~to run on that platform and ~~helps our clients apply~~includes advanced data and AI, automation and the security ~~to make their businesses work better.~~capabilities our clients need. Our global team of consultants offers deep business expertise ~~by co-creating~~and co-creates with clients ~~and finding ways to harness the power of technology~~ to accelerate their digital transformation journeys. Our infrastructure allows clients to take full advantage of an extended hybrid cloud environment.

~~This platform-centric strategy is producing solid results.~~Clients are choosing our hybrid cloud capabilities to unlock more business value and meet their rapidly changing demands. We have more than 4,000 hybrid cloud platform clients, including ~~200~~more than 250 added in the ~~first~~second quarter of 2022. This platform adoption provides two avenues for growth - from the incremental number of clients, but more importantly it allows us to expand our software, consulting and infrastructure footprint as we help our clients digitally ~~transform and build new and differentiated experiences and services.~~transform.

~~We have taken actions~~Critical to ~~streamline~~ our ~~operations and simplify our 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,strategy is ~~strongly resonating with our clients. We are accelerating our strategy with continued investment in innovation,~~ our ecosystem ~~and talent.~~

~~Innovation~~ ~~– we~~of partners. We continue to ~~meet~~expand and extend our partnerships, through strategic collaboration agreements and in 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~~second 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. revenue from these partnerships grew solid double digits.

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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, to deliver innovation for our clients. Our ability to deliver next generation technologies remains essential. Quantum is an example of our commitment to advance the future of technology. We continue to build on our progress toward our roadmap to deliver a 1,000+ qubit system in 2023 and ~~gain momentum with~~a 4,000+ qubit system in 2025. In addition, technology developed by IBM and our ~~partner ecosystem. Consulting signings with~~collaborators has been selected by the National Institute of Standards and Technology (NIST) as the basis of the next generation of quantum-safe encryption protocols. Another example of innovation is our ~~ecosystem partners were up more than 50 percent to approximately $2 billion~~z16 system which became generally available in the ~~first~~second quarter of 2022. The z16 brings to our clients the power of embedded AI at scale, cyber-resilient security and cloud-native development for hybrid cloud. We ~~are~~ also ~~investing through acquisition, for example Neudesic, which was acquired~~made another two acquisitions in the ~~first~~second quarter of 2022 ~~adds key hyperscaler capabilities~~ to ~~address hybrid multi-cloud demand.~~strengthen our portfolio, including Randori, a leading attack surface management (ASM) and cybersecurity provider, building on the recent acquisitions of ReaQta and launch of QRadar XDR.

~~Talent~~ –We are confident in the strategy that we are ~~investing~~executing and 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.~~business. Our balance sheet and liquidity position remain strong. At ~~March 31,~~June 30, 2022 we had ~~$10.8~~$7.8 billion of cash and cash equivalents, restricted cash and marketable securities and we continue to manage our debt levels while being acquisitive and without sacrificing investments in our business or our solid dividend policy.

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~~Management Discussion – (continued)~~

IBM is now a ~~very different~~more focused, faster-growing and higher-value company. We have, in effect, changed our company’s trajectory. Our business reflects a higher growth, higher value mix with a significant recurring base, led by software. We are managing for the long-term and are confident in the direction and focus of our business. We expect to continue our progress as a leading hybrid cloud and AI company with a focus on revenue growth and cash generation while maintaining our solid and modestly growing dividend policy. Our ~~expectations for 2022 continue to be aligned with our~~ mid-term financial model ~~which~~ was previously communicated at our investor briefing on October 4, 2021.

Retirement-Related Plans

Our pension plans are well funded. Contributions for all retirement-related plans are expected to be approximately $2.1 billion in 2022, approximately flat compared to 2021, of which $0.2 billion generally relates to legally required contributions to non-U.S. defined benefit and multi-employer plans. We expect 2022 pre-tax retirement-related plan cost to be approximately $2.1 billion, a decrease of approximately $500 million compared to 2021. This estimate reflects current pension plan assumptions at December 31, 2021. Within total retirement-related plan cost, operating retirement-related plan cost is expected to be approximately $1.2 billion, a decrease of approximately $100 million versus 2021. Non-operating retirement-related plan cost is expected to be approximately $0.9 billion, a decrease of approximately $400 million compared to 2021, primarily driven by lower recognized actuarial losses and higher income from expected return on assets.

Currency Rate Fluctuations

In the second quarter of 2022, there has been significant movement of the U.S. dollar (USD) as compared to many other currencies. Changes in the relative values of non-U.S. currencies to the ~~U.S. dollar (USD)~~USD affect our financial results and financial position. At ~~March 31,~~June 30, 2022, currency changes resulted in assets and liabilities denominated in local currencies being translated into fewer dollars than at year-end 2021. We use financial hedging instruments to limit specific currency risks related to financing transactions and other foreign currency-based transactions.

~~During periods~~The combination of ~~sustained~~the rate and velocity of movements in currency, and the ~~marketplace and competition adjust to the changing rates. For example, when pricing offerings~~fact that we do not hedge 100 percent of our currency exposures, will result 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~~impact to our ~~customers. Competition will frequently take the same action. Consequently, we believe that some of the currency-based changes~~profit and cash flows in ~~cost impact the prices charged to clients.~~2022. 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. During periods of sustained movements in currency, the marketplace and competition adjust to the changing rates over time.

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.~~rates, such as updates to pricing and sourcing. Currency movements impacted our year-to-year revenue and earnings per share growth in the first ~~three~~six months of 2022. Based on the currency rate movements in the first ~~three~~six months of 2022, total revenue increased ~~7.7~~8.5 percent as reported and ~~10.9~~13.3 percent at constant currency versus the first ~~three~~six months of 2021. On an income from continuing

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Management Discussion – (continued)

operations before income taxes basis, these translation impacts, mitigated by the net impact of hedging activities, resulted in a theoretical maximum (assuming no pricing or sourcing actions) decrease of approximately ~~$30~~$200 million in the first ~~three~~six months of 2022 on an as-reported basis and a decrease of approximately ~~$50~~$160 million on an operating (non-GAAP) basis. The same mathematical exercise resulted in an increase of approximately ~~$50~~$65 million in the first ~~three~~six months of 2021 on an as-reported basis and an increase of ~~approximately $70~~$100 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.~~period.

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~~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 2021 Annual Report, on pages 47 to 49, there is a discussion of our liquidity including two tables that present three years of data. The table presented on page 47 includes ~~consolidated~~ net cash from operating activities, cash and cash equivalents, restricted cash and short-term marketable securities, and the size of our global credit facilities for each of the past three years. For the ~~three~~six months ended, or at, as applicable, ~~March 31,~~June 30, 2022, those amounts are ~~$3.2~~$4.6 billion of ~~consolidated~~ net cash from operating activities, ~~$10.8~~$7.8 billion of cash and cash equivalents, restricted cash and short-term marketable 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 30, 2022, the company amended its existing $2.5 billion Three-Year Credit Agreement and $7.5 billion Five-Year Credit Agreement (the Credit Agreements) to extend the maturity dates to June 20, 2025 and June 22, 2027, respectively, and to replace the London Interbank Offered Rate (LIBOR) interest rate provisions with customary provisions based on the Secured Overnight Financing Rate (SOFR). Refer to note 12, “Borrowings,” for additional details on these credit facilities.

The major rating ~~agencies’~~agencies' ratings on our debt securities at ~~March 31,~~June 30, 2022 appear in the following table and remain unchanged from ~~December~~March 31, ~~2021.~~2022.


	STANDARD	MOODY’S
	AND	INVESTORS
IBM RATINGS:	POOR’S	SERVICE
Senior long-term debt	A-	A3
Commercial paper	A-2	Prime-2

IBM has ample financial flexibility, supported by our strong liquidity position and cash flows, to operate at a single A credit rating. ~~While debt~~Debt levels have ~~increased $2.5~~decreased $1.4 billion from December 31, 2021, primarily ~~due to new debt issuances in the first quarter of 2022, debt levels have decreased $18.8~~driven by currency, and $22.7 billion from our peak levels at June 30, 2019 (immediately preceding the Red Hat acquisition).

We do not have “ratings trigger” provisions in our debt covenants or documentation, which would allow the holders to declare an event of default and seek to accelerate payments thereunder in the event of a change in credit rating. Our debt covenants are well within the required levels. Our contractual agreements governing derivative instruments contain standard market clauses which can trigger the termination of the agreement if our credit rating were to fall below investment grade. At ~~March 31,~~June 30, 2022, the fair value of those instruments that were in a liability position was ~~$231~~$551 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 its intent to phase out LIBOR by the end of 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 extended the phase out in the case of U.S. dollar settings for certain tenors until the end of June 2023. Effective December 31, 2021, the use of LIBOR was substantially eliminated for purposes of any new financial contract executions. The UK’s Financial Conduct Authority (FCA) extended the phase out of LIBOR in the case of U.S. dollar settings for certain tenors until the end of June 2023. Any legacy USD LIBOR based financial contracts are

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Management Discussion – (continued)

expected to be addressed using the LIBOR rates published through the June 2023 extension period. The replacement of the LIBOR benchmark within the company’s risk management activities did not have a material impact in the consolidated financial results.

We prepare our Consolidated Statement of Cash Flows in accordance with applicable accounting standards for cash flow presentation on page 7 of this Form 10-Q and highlight causes and events underlying sources and uses of cash in that format on pages 6482 and ~~65.~~83. For the purpose of running its business, IBM manages, monitors and analyzes cash flows in a different manner.

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

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~~Management Discussion – (continued)~~

necessarily available for discretionary expenditures. We define free cash flow as net cash from operating activities less the change in Financing receivables and net capital expenditures, including the investment in software. A key objective of the Financing business is to generate strong returns on equity, and our Financing receivables are the basis for that growth. Accordingly, management considers 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 Financing receivables.

The following is management’s view of cash flows for the first ~~three~~six months of 2022 and 2021 prepared in a manner consistent with the description above and is presented on a consolidated basis, including cash flows of discontinued operations.


(Dollars in millions)
For the three months ended March 31:	2022		2021
For the six months ended June 30:					2022		2021
Net cash from operating activities per GAAP*	$	3,248	$	4,914	$	4,569	$	7,539
Less: change in Financing receivables		1,631		2,863		367		3,763
Net cash from operating activities, excluding Financing receivables	$	1,618	$	2,052	$	4,202	$	3,776
Capital expenditures, net		(378)		(529)		(871)		(1,217)
Free cash flow	$	1,240	$	1,522	$	3,331	$	2,559
Acquisitions		(698)		(1,120)		(958)		(2,866)
Divestitures		61		(15)		1,268		(25)
Common stock repurchases for tax withholdings		(80)		(41)		(315)		(234)
Dividends		(1,475)		(1,457)		(2,963)		(2,924)
Non-Financing debt		4,675		(1,725)		1,740		(2,331)
Other (includes Financing net receivables and Financing debt)		(510)		(166)		(1,882)		(288)
Change in cash, cash equivalents, restricted cash and short-term marketable securities	$	3,213	$	(3,002)	$	221	$	(6,110)

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

In the first ~~three~~six months of 2022, we generated free cash flow of ~~$1.2~~$3.3 billion, ~~a decrease~~an increase of ~~$0.3~~$0.8 billion versus the prior-year period. In the first ~~quarter~~six months of 2022, we also continued to return value to shareholders with ~~$1.5~~$3.0 billion in dividends and invested ~~$0.7~~$1.0 billion in acquisitions.

Events that could temporarily change the historical cash flow dynamics discussed previously and in our 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 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 2022. Contributions related to all retirement-related plans are expected to be approximately $2.1 billion in 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

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quantifying any further impact from pension funding because it is not possible to predict future movements in the capital markets or changes in pension plan funding regulations.

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

Our cash flows are sufficient to fund our current operations and obligations, including investing and financing activities such as dividends and debt service. When additional requirements arise, we have several liquidity options available. These options may include the ability to borrow additional funds at reasonable interest rates and utilizing our committed global credit facilities. With our share repurchase program suspended since the close of the Red Hat acquisition, our overall shareholder payout remains at a comfortable level and we remain fully committed to our long-standing dividend policy.

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~~Management Discussion – (continued)~~

Financing

Financing is a reportable segment that is measured as a stand-alone entity. 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.						Yr. to Yr.
(Dollars in millions)					Percent/						Percent
For the three months ended March 31:	2022		2021*		Change
For the three months ended June 30:							2022		2021*		Change
Revenue	$	154	$	208	(26.2)	%	$	146	$	209	(29.9)	%
Pre-tax income	$	84	$	98	(14.3)	%	$	102	$	131	(22.4)	%

* Recast to reflect 2021 segment changes.


					Yr. to Yr.
(Dollars in millions)					Percent
For the six months ended June 30:	2022		2021*		Change
Revenue	$	300	$	417	(28.0)	%
Pre-tax income	$	186	$	229	(18.9)	%

* Recast to reflect 2021 segment changes.

Our Financing business ~~remains~~is focused on IBM’s products and services. For the three months ended ~~March 31,~~June 30, 2022, financing revenue decreased ~~26.2~~29.9 percent ~~(24~~as reported (27 percent adjusted for currency) compared to the prior year, driven by client financing down ~~$53~~$61 million to ~~$152~~$145 million. For the six months ended June 30, 2022, financing revenue decreased 28.0 percent as reported (26 percent adjusted for currency) compared to the prior year, driven by client financing down $114 million to $297 million. The ~~decrease~~decreases in client financing revenue ~~was due to a lower average asset balance,~~in both periods in 2022 were primarily driven by the strategic actions taken in the prior year including selling certain client lease and loan financing receivables to third parties. While these strategic actions impact revenue and pre-tax income on a year-to-year basis, our repositioning of the Financing business has strengthened our liquidity position, improved the quality of our portfolio, and lowered our debt needs.

Financing pre-tax income decreased ~~14.3~~22.4 percent to ~~$84~~$102 million in the second quarter of 2022, compared to the prior year and the pre-tax margin of 69.7 percent increased 6.8 points year to year. For the six months ended June 30, 2022, Financing pre-tax income decreased 18.9 percent to $186 million compared to the prior year and the pre-tax margin of ~~54.6~~62.0 percent increased ~~7.6~~7.0 points year to year. The ~~decrease~~decreases in pre-tax income ~~was~~in both periods in 2022 were primarily driven by ~~a decrease in gross profit, partially offset by a decrease in total expense, primarily as a result of~~ the strategic actions described above.

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Financial Position


	At March 31,		At December 31,			At June 30,		At December 31,
(Dollars in millions)	2022		2021			2022		2021
Cash and cash equivalents	$	825	$	1,359		$	700	$	1,359
Client financing receivables:
Net investment in sales-type and direct financing leases ⁽¹⁾		3,285		3,396			3,888		3,396
Client loans		7,908		8,818			7,891		8,818
Total client financing receivables	$	11,193	$	12,215		$	11,779	$	12,215
Commercial financing receivables
Commercial financing receivables:
Held for investment		192		444			171		444
Held for sale		410		793			614		793
Other receivables		49		61			53		61
Total external receivables ⁽²⁾	$	11,843	$	13,512		$	12,618	$	13,512
Intercompany financing receivables ^{(3) (4)}		727		778			664		778
Other assets⁽⁵⁾		1,076		1,231			1,046		1,231
Total assets	$	14,471	$	16,880		$	15,028	$	16,880

Intercompany payables ⁽³⁾	$	163	$	467		$	394	$	467
Debt ⁽⁶⁾		12,168		13,929			12,265		13,929
Other liabilities		788		937			1,006		937
Total liabilities	$	13,119	$	15,333		$	13,665	$	15,333
Total equity	$	1,352	$	1,547		$	1,363	$	1,547
Total liabilities and equity	$	14,471	$	16,880	��	$	15,028	$	16,880

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

(2)

The difference between the decrease in total external receivables of ~~$1.7~~$0.9 billion (from $13.5 billion in December 2021 to ~~$11.8~~$12.6 billion in ~~March~~June 2022) and the ~~$1.6~~$0.4 billion change in Financing segment’s receivables disclosed in the free cash flow presentation on page 6986 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~~June 2022 and $0.7 billion in December 2021.

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

Total external receivables decreased ~~$1,669~~$894 million primarily ~~due to~~driven by collections of higher year-end balances partially offset by an increase in volumes in the second quarter of 2022 reflecting the z16 product cycle, with corresponding ~~reductions~~changes in debt funding.

At ~~March 31,~~June 30, 2022, we continue to apply our rigorous credit policies. Approximately 6871 percent of the total external portfolio was with investment-grade clients with no direct exposure to consumers, an increase of 47 points year to year and an increase of ~~1 point~~3 points compared to ~~December~~March 31, ~~2021.~~2022. This investment grade percentage is based on the credit ratings of the companies in the 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~~half of 2022, sales of client financing receivables were largely focused on credit mitigation. In addition, the company has an existing agreement with a third-party investor to sell IBM

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Management Discussion – (continued)

short-term commercial financing receivables on a revolving basis. The company has expanded this agreement to other countries and geographies since commencement in the U.S. and Canada in 2020.

71

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~~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
For the six months ended June 30:					2022		2021
Client financing receivables:
Lease receivables	$	15	$	342	$	15	$	732
Loan receivables		2		653		2		1,359
Total client financing receivables transferred	$	17	$	995	$	17	$	2,091
Commercial financing receivables
Commercial financing receivables:
Receivables transferred during the period	$	1,989	$	1,167	$	3,914	$	2,621
Receivables uncollected at end of period*		724		724	$	815	$	821

*	Of the total amount of commercial financing receivables sold and derecognized from the Consolidated Balance Sheet, the amounts presented remained uncollected from the business partners as of ~~March 31,~~June 30, 2022 and 2021.

For additional information relating to financing receivables refer to note 9, “Financing Receivables.” Refer to pages 2226 through 2630 for additional information related to Financing segment receivables, allowance for credit losses and debt.

Return on Equity Calculation


							For Three Months Ended						For Six Months Ended
							June 30,						June 30,
(Dollars in millions)							2022			2021*			2022			2021*
For the three months ended March 31:	2022			2021*
Numerator
Financing after-tax income**	$	69		$	73		$	84		$	97		$	153		$	169
Annualized after-tax income (1)	$	275		$	290		$	336		$	388		$	305		$	339
Denominator
Average Financing equity (2)^È	$	1,450		$	2,184
Average Financing equity (2)⁺							$	1,358		$	1,978		$	1,421		$	2,100
Financing return on equity (1)/(2)		19.0	%		13.3	%		24.8	%		19.6	%		21.5	%		16.1	%

*	Recast to reflect 2021 segment changes.

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

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

Return on equity was ~~19.0~~24.8 percent ~~compared to 13.3~~and 21.5 percent for the three and six months ended ~~March 31,~~June 30, 2022, respectively, compared to 19.6 percent and ~~2021, respectively.~~16.1 percent for the same periods in 2021. The ~~increase was~~increases in both periods in 2022 were primarily driven by a lower average equity balance, partially offset by a decrease in net income, which reflects the strategic actions taken in the prior year to reposition the Financing business.

Residual Value

Residual value is a risk unique to the financing business, and management of this risk is dependent upon the ability to accurately project future equipment values at lease inception. Financing has insight into product plans and cycles for IBM products. Based upon this product information, Financing continually monitors projections of future equipment values and compares them with the residual values reflected in the portfolio.

Financing optimizes the recovery of residual values by selling assets sourced from end of lease, leasing used equipment to new clients, or extending lease arrangements with current clients.

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Management Discussion – (continued)

The following table presents the recorded amount of unguaranteed residual value for sales-type and direct financing leases, as well as operating leases at ~~March 31,~~June 30, 2022 and December 31, 2021. In addition, the table presents the run out of when the unguaranteed residual value assigned to equipment on leases at ~~March 31,~~June 30, 2022 is expected to be returned to the company.

Unguaranteed Residual Value


	At		At		Estimated Run Out of June 30, 2022 Balance
	December 31,		June 30,								2025 and
(Dollars in millions)	2021		2022		2022		2023		2024		Beyond
Sales-type and direct financing leases	$	335	$	383	$	59	$	112	$	72	$	140
Operating leases		13		8		5		2		0		0
Total unguaranteed residual value	$	348	$	390	$	64	$	114	$	72	$	141

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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

73

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~~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. ~~Please refer~~Refer to the “Operating (non-GAAP) Earnings” section for management’s rationale for presenting operating earnings information.


				Acquisition-			Retirement-			U.S.			Kyndryl-									Acquisition-			Retirement-			U.S.			Kyndryl-
(Dollars in millions except per share amounts)				Related			Related			Tax Reform			Related			Operating						Related			Related			Tax Reform			Related			Operating
For the three months ended March 31, 2022:	GAAP			Adjustments			Adjustments			Impacts			Impacts			(non-GAAP)
For the three months ended June 30, 2022:																			GAAP			Adjustments			Adjustments			Impacts			Impacts			(non-GAAP)
Gross profit	$	7,335		$	181		$	—		$	—		$	—		$	7,516		$	8,290		$	180		$	—		$	—		$	—		$	8,470
Gross profit margin		51.7	%		1.3	pts.		—	pts.		—	pts.		—	pts.		52.9	%		53.4	%		1.2	pts.		—	pts.		—	pts.		—	pts.		54.5	%
S,G&A	$	4,597		$	(286)		$	—		$	—		$	0		$	4,311		$	4,855		$	(279)		$	—		$	—		$	0		$	4,576
Other (income) and expense		246			(1)			(202)			—			(222)			(179)			(81)			(1)			(192)			—			(145)			(418)
Total expense and other (income)		6,712			(287)			(202)			—			(222)			6,001			6,568			(280)			(192)			—			(145)			5,952
Pre-tax income from continuing operations		623			468			202			—			222			1,515			1,722			460			192			—			145			2,518
Pre-tax margin from continuing operations		4.4	%		3.3	pts.		1.4	pts.		—	pts.		1.6	pts.		10.7	%		11.1	%		3.0	pts.		1.2	pts.		—	pts.		0.9	pts.		16.2	%
Provision for (benefit from) income taxes*	$	(39)		$	109		$	58		$	116		$	—		$	244		$	257		$	115		$	46		$	(4)		$	—		$	413
Effective tax rate		(6.3)	%		9.1	pts.		4.6	pts.		7.7	pts.		0.9	pts.		16.1	%		14.9	%		1.8	pts.		0.7	pts.		(0.2)	pts.		(0.9)	pts.		16.4	%
Income from continuing operations	$	662		$	359		$	144		$	(116)		$	222		$	1,271		$	1,465		$	345		$	146		$	4		$	145		$	2,105
Income margin from continuing operations		4.7	%		2.5	pts.		1.0	pts.		(0.8)	pts.		1.6	pts.		9.0	%		9.4	%		2.2	pts.		0.9	pts.		0.0	pts.		0.9	pts.		13.5	%
Diluted earnings per share from continuing operations	$	0.73		$	0.39		$	0.16		$	(0.13)		$	0.24		$	1.40		$	1.61		$	0.38		$	0.16		$	0.00		$	0.16		$	2.31


				Acquisition-			Retirement-			U.S.			Kyndryl-									Acquisition-			Retirement-			U.S.			Kyndryl-
(Dollars in millions except per share amounts)				Related			Related			Tax Reform			Related			Operating						Related			Related			Tax Reform			Related			Operating
For the three months ended March 31, 2021:	GAAP			Adjustments			Adjustments			Impacts			Impacts			(non-GAAP)
For the three months ended June 30, 2021:																			GAAP			Adjustments			Adjustments			Impacts			Impacts			(non-GAAP)
Gross profit	$	7,027		$	174		$	—		$	—		$	—		$	7,201		$	7,852		$	179		$	—		$	—		$	—		$	8,031
Gross profit margin		53.3	%		1.3	pts.		—	pts.		—	pts.		—	pts.		54.6	%		55.2	%		1.3	pts.		—	pts.		—	pts.		—	pts.		56.5	%
S,G&A	$	4,688		$	(288)		$	—		$	—		$	—		$	4,399		$	4,849		$	(294)		$	—		$	—		$	—		$	4,555
Other (income) and expense		346			(1)			(332)			—			—			13			302			(1)			(317)			—			—			(16)
Total expense and other (income)		6,784			(289)			(332)			—			—			6,162			6,940			(294)			(317)			—			—			6,329
Pre-tax income from continuing operations		244			463			332			—			—			1,039			912			474			317			—			—			1,702
Pre-tax margin from continuing operations		1.8	%		3.5	pts.		2.5	pts.		—	pts.		—	pts.		7.9	%		6.4	%		3.3	pts.		2.2	pts.		—	pts.		—	pts.		12.0	%
Provision for (benefit from) income taxes*	$	(160)		$	132		$	33		$	19		$	—		$	25		$	101		$	105		$	53		$	(14)		$	—		$	246
Effective tax rate		(65.5)	%		41.9	pts.		24.2	pts.		1.8	pts.		—	pts.		2.4	%		11.1	%		3.1	pts.		1.0	pts.		(0.8)	pts.		—	pts.		14.5	%
Income from continuing operations	$	403		$	330		$	299		$	(19)		$	—		$	1,013		$	810		$	368		$	264		$	14		$	—		$	1,456
Income margin from continuing operations		3.1	%		2.5	pts.		2.3	pts.		(0.1)	pts.		—	pts.		7.7	%		5.7	%		2.6	pts.		1.9	pts.		0.1	pts.		—	pts.		10.2	%
Diluted earnings per share from continuing operations	$	0.45		$	0.37		$	0.33		$	(0.02)		$	—		$	1.12		$	0.90		$	0.41		$	0.29		$	0.01		$	—		$	1.61

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

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Management Discussion – (continued)


				Acquisition-			Retirement-			U.S.			Kyndryl-
(Dollars in millions except per share amounts)				Related			Related			Tax Reform			Related			Operating
For the six months ended June 30, 2022:	GAAP			Adjustments			Adjustments			Impacts			Impacts			(non-GAAP)
Gross profit	$	15,625		$	361		$	—		$	—		$	—		$	15,986
Gross profit margin		52.6	%		1.2	pts.		—	pts.		—	pts.		—	pts.		53.8	%
S,G&A	$	9,452		$	(565)		$	—		$	—		$	0		$	8,887
Other (income) and expense		166			(1)			(394)			—			(367)			(596)
Total expense and other (income)		13,280			(566)			(394)			—			(367)			11,953
Pre-tax income from continuing operations		2,345			928			394			—			367			4,033
Pre-tax margin from continuing operations		7.9	%		3.1	pts.		1.3	pts.		—	pts.		1.2	pts.		13.6	%
Provision for income taxes*	$	218		$	224		$	104		$	112		$	—		$	657
Effective tax rate		9.3	%		3.4	pts.		1.7	pts.		2.8	pts.		(0.8)	pts.		16.3	%
Income from continuing operations	$	2,127		$	704		$	290		$	(112)		$	367		$	3,376
Income margin from continuing operations		7.2	%		2.4	pts.		1.0	pts.		(0.4)	pts.		1.2	pts.		11.4	%
Diluted earnings per share from continuing operations	$	2.34		$	0.77		$	0.32		$	(0.12)		$	0.40		$	3.71


				Acquisition-			Retirement-			U.S.			Kyndryl-
(Dollars in millions except per share amounts)				Related			Related			Tax Reform			Related			Operating
For the six months ended June 30, 2021:	GAAP			Adjustments			Adjustments			Impacts			Impacts			(non-GAAP)
Gross profit	$	14,879		$	353		$	—		$	—		$	—		$	15,232
Gross profit margin		54.3	%		1.3	pts.		—	pts. ��		—	pts.		—	pts.		55.6	%
S,G&A	$	9,536		$	(582)		$	—		$	—		$	—		$	8,954
Other (income) and expense		647			(1)			(649)			—			—			(3)
Total expense and other (income)		13,724			(583)			(649)			—			—			12,491
Pre-tax income from continuing operations		1,155			936			649			—			—			2,741
Pre-tax margin from continuing operations		4.2	%		3.4	pts.		2.4	pts.		—	pts.		—	pts.		10.0	%
Provision for (benefit from) income taxes*	$	(58)		$	238		$	86		$	6		$	—		$	272
Effective tax rate		(5.0)	%		10.4	pts.		4.3	pts.		0.2	pts.		—	pts.		9.9	%
Income from continuing operations	$	1,213		$	699		$	563		$	(6)		$	—		$	2,469
Income margin from continuing operations		4.4	%		2.5	pts.		2.1	pts.		0.0	pts.		—	pts.		9.0	%
Diluted earnings per share from continuing operations	$	1.34		$	0.77		$	0.62		$	(0.01)		$	—		$	2.73

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

7492

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Management Discussion – (continued)

Forward-Looking and Cautionary Statements

Except for the historical information and discussions contained herein, statements contained in this Form 10-Q may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on the company’s current assumptions regarding future business and financial performance. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, including, but not limited to, the following: a downturn in economic environment and client spending budgets; a failure of the company’s innovation initiatives; damage to the company’s reputation; risks from investing in growth opportunities; failure of the company’s intellectual property portfolio to prevent competitive offerings and the failure of the company to obtain necessary licenses; the 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 related to climate change and environmental matters, tax matters; legal proceedings and investigatory risks; the company’s pension plans; currency fluctuations and customer financing risks; impact of changes in market liquidity conditions and customer credit risk on receivables; potential failure of the separation of Kyndryl to qualify for tax-free treatment; risk factors related to IBM securities; and other risks, uncertainties and factors discussed in the company’s Form 10-Qs, Form 10-K and in the company’s other filings with the U.S. Securities and Exchange Commission or in materials incorporated therein by reference. Any forward-looking statement in this Form 10-Q speaks only as of the date on which it is made. Except as required by law, the company assumes no obligation to update or revise any forward-looking statements.

Item 4. Controls and Procedures

The company’s management evaluated, with the participation of the Chief Executive Officer and Chief Financial Officer, the effectiveness of the company’s disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the company’s disclosure controls and procedures were effective as of the end of the period covered by this report. There has been no change in the company’s internal control over financial reporting that occurred during the quarter covered by this report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting.

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Part II — Other Information

Item 1. Legal Proceedings

Refer to note 14, “Contingencies,” in this Form 10-Q.

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

The following table provides information relating to the company’s repurchase of common stock for the ~~first~~second quarter of 2022.


				Total Number	Approximate					Total Number	Approximate
				of Shares	Dollar Value					of Shares	Dollar Value
				Purchased as	of Shares that					Purchased as	of Shares that
	Total Number	Average		Part of Publicly	May Yet Be		Total Number	Average		Part of Publicly	May Yet Be
	of Shares	Price Paid		Announced	Purchased Under		of Shares	Price Paid		Announced	Purchased Under
Period	Purchased	per Share		Program	The Program*		Purchased	per Share		Program	The Program*
January 1, 2022 - January 31, 2022	—	$	—	—	$	2,007,611,768
April 1, 2022 - April 30, 2022							—	$	—	—	$	2,007,611,768

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

March 1, 2022 - March 31, 2022	—	$	—	—	$	2,007,611,768
June 1, 2022 - June 30, 2022							—	$	—	—	$	2,007,611,768

Total	—	$	—	—			—	$	—	—

* On October 30, 2018, the Board of Directors authorized $4.0 billion in funds for use in the company’s common stock repurchase program. The company stated that it would repurchase shares on the open market or in private transactions depending on market conditions. The common stock repurchase program does not have an expiration date. This table does not include shares tendered to satisfy the exercise price in connection with cashless exercises of employee stock options or shares tendered to satisfy tax withholding obligations in connection with employee equity awards.

The company suspended its share repurchase program at the time of the Red Hat closing. At ~~March 31,~~June 30, 2022 there was approximately $2.0 billion in authorized funds remaining for purchases under this program.

~~Item 5. Other Information~~

~~Amendment to By-Laws~~

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

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Item 6. Exhibits


Exhibit Number

~~3.2~~		~~The By-Laws of IBM, as amended through April 26, 2022.~~

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

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

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

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

101.INS		XBRL Instance Document – the instance document does not appear on the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

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

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SIGNATURE

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


		International Business Machines Corporation
		(Registrant)

Date:	~~April 26,~~July 25, 2022
		By:	/s/ Robert F. Del Bene
			Robert F. Del Bene
			Vice President and Controller

7896

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

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

~~Consolidated Income Statement for the three months ended March 31, 2022 and 2021~~	3

~~Consolidated Statement of Comprehensive Income for the three months ended March 31, 2022 and 2021~~	4

~~Consolidated Balance Sheet at March 31, 2022 and December 31, 2021~~	5

~~Consolidated Statement of Cash Flows for the three months ended March 31, 2022 and 2021~~	7

~~Consolidated Statement of Equity for the three months ended March 31, 2022 and 2021~~	8

~~Notes to Consolidated Financial Statements~~	9

~~Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition~~	44

~~Item 4. Controls and Procedures~~	75

~~Part II - Other Information~~:

~~Item 1. Legal Proceedings~~	76

~~Item 2. Unregistered Sales of Equity Securities and Use of Proceeds and Issuer Repurchases of Equity Securities~~	76

~~Item 5.~~ ~~Other~~ ~~Information~~	76

~~Item 6. Exhibits~~	77


	At March 31,		At December 31,		At June 30,		At December 31,
(Dollars in millions)	2022		2021		2022		2021
Assets:
Current assets:
Cash and cash equivalents	$	9,934	$	6,650	$	7,034	$	6,650
Restricted cash		286		307		220		307
Marketable securities		550		600		524		600
Notes and accounts receivable — trade (net of allowances of $225 in 2022 and $218 in 2021)		5,963		6,754
Notes and accounts receivable — trade (net of allowances of $213 in 2022 and $218 in 2021)						5,867		6,754
Short-term financing receivables:
Held for investment (net of allowances of $157 in 2022 and $176 in 2021)		6,759		7,221
Held for investment (net of allowances of $150 in 2022 and $176 in 2021)						6,619		7,221
Held for sale		410		793		614		793
Other accounts receivable (net of allowances of $28 in 2022 and $24 in 2021)		1,003		1,002
Other accounts receivable (net of allowances of $35 in 2022 and $24 in 2021)						909		1,002
Inventory, at lower of average cost or net realizable value:
Finished goods		269		208		184		208
Work in process and raw materials		1,507		1,442		1,499		1,442
Total inventory		1,776		1,649		1,684		1,649
Deferred costs		1,103		1,097		1,010		1,097
Prepaid expenses and other current assets		3,548		3,466		3,414		3,466
Total current assets		31,330		29,539		27,896		29,539
Property, plant and equipment		20,006		20,085		19,079		20,085
Less: Accumulated depreciation		14,448		14,390		13,804		14,390
Property, plant and equipment — net		5,559		5,694		5,275		5,694
Operating right-of-use assets — net		3,108		3,222		2,848		3,222
Long-term financing receivables (net of allowances of $21 in 2022 and $25 in 2021)		4,610		5,425
Long-term financing receivables (net of allowances of $22 in 2022 and $25 in 2021)						5,316		5,425
Prepaid pension assets		9,995		9,850		9,930		9,850
Deferred costs		916		924		865		924
Deferred taxes		7,567		7,370		7,073		7,370
Goodwill		56,106		55,643		55,039		55,643
Intangible assets — net		12,312		12,511		11,571		12,511
Investments and sundry assets		1,771		1,823		1,689		1,823
Total assets	$	133,275	$	132,001	$	127,503	$	132,001


	At March 31,		At December 31,		At June 30,		At December 31,
(Dollars in millions except per share amounts)	2022		2021		2022		2021
Liabilities:
Current liabilities:
Taxes	$	1,798	$	2,289	$	1,742	$	2,289
Short-term debt		7,690		6,787		5,981		6,787
Accounts payable		3,453		3,955		3,707		3,955
Compensation and benefits		2,937		3,204		3,327		3,204
Deferred income		13,526		12,518		12,522		12,518
Operating lease liabilities		954		974		884		974
Other accrued expenses and liabilities		3,699		3,892		3,682		3,892
Total current liabilities		34,056		33,619		31,844		33,619
Long-term debt		46,545		44,917		44,328		44,917
Retirement and nonpension postretirement benefit obligations		13,937		14,435		13,118		14,435
Deferred income		3,423		3,577		3,069		3,577
Operating lease liabilities		2,358		2,462		2,182		2,462
Other liabilities		13,844		13,996		13,486		13,996
Total liabilities		114,162		113,005		108,026		113,005
Equity:
IBM stockholders’ equity:
Common stock, par value $0.20 per share, and additional paid-in capital		57,603		57,319		57,802		57,319
Shares authorized: 4,687,500,000
Shares issued: 2022 - 2,250,139,983
Shares issued: 2022 - 2,254,538,572
2021 - 2,248,577,848
Retained earnings		153,401		154,209		153,298		154,209
Treasury stock - at cost		(169,422)		(169,392)		(169,522)		(169,392)
Shares: 2022 - 1,350,704,659
Shares: 2022 - 1,351,358,219
2021 - 1,350,509,249
Accumulated other comprehensive income/(loss)		(22,532)		(23,234)		(22,169)		(23,234)
Total IBM stockholders’ equity		19,050		18,901		19,409		18,901
Noncontrolling interests		62		95		67		95
Total equity		19,112		18,996		19,476		18,996
Total liabilities and equity	$	133,275	$	132,001	$	127,503	$	132,001


	Common
	Stock and						Accumulated
	Additional						Other		Total IBM		Non-
	Paid-in		Retained		Treasury		Comprehensive		Stockholders’		Controlling		Total
(Dollars in millions except per share amounts)	Capital		Earnings		Stock		Income/(Loss)		Equity		Interests		Equity
Equity - April 1, 2022	$	57,603	$	153,401	$	(169,422)	$	(22,532)	$	19,050	$	62	$	19,112
Net income plus other comprehensive income/(loss):
Net income				1,392						1,392				1,392
Other comprehensive income/(loss)								363		363				363
Total comprehensive income/(loss)									$	1,755			$	1,755
Cash dividends paid — common stock ($1.65 per share)				(1,488)						(1,488)				(1,488)
Common stock issued under employee plans (4,398,589 shares)		199								199				199
Purchases (1,723,774 shares) and sales (1,070,214 shares) of treasury stock under employee plans — net				(7)		(100)				(107)				(107)
Changes in noncontrolling interests												6		6
Equity – June 30, 2022	$	57,802	$	153,298	$	(169,522)	$	(22,169)	$	19,409	$	67	$	19,476


	Common
	Stock and						Accumulated
	Additional						Other		Total IBM		Non-
	Paid-in		Retained		Treasury		Comprehensive		Stockholders’		Controlling		Total
(Dollars in millions except per share amounts)	Capital		Earnings		Stock		Income/(Loss)		Equity		Interests		Equity
Equity - January 1, 2022	$	57,319	$	154,209	$	(169,392)	$	(23,234)	$	18,901	$	95	$	18,996
Net income plus other comprehensive income/(loss):
Net income				733						733				733
Other comprehensive income/(loss)								703		703				703
Total comprehensive income/(loss)									$	1,436			$	1,436
Cash dividends paid — common stock ($1.64 per share)				(1,475)						(1,475)				(1,475)
Common stock issued under employee plans (1,562,135 shares)		221								221				221
Purchases (595,710 shares) and sales (400,300 shares) of treasury stock under employee plans — net				(3)		(30)				(34)				(34)
Other equity		63		(63)						0				0
Changes in noncontrolling interests												(33)		(33)
Equity – March 31, 2022	$	57,603	$	153,401	$	(169,422)	$	(22,532)	$	19,050	$	62	$	19,112


	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


January 1, 2021		Additions / (Releases)		Write-offs		Foreign currency and other		December 31, 2021
$	260	$	(15)	$	(28)	$	1	$	218