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,SEPTEMBER 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 |
Capital stock, par value $.20 per share |
| IBM |
| New York Stock Exchange |
|
|
|
| NYSE Chicago |
|
|
| ||
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 |
5.875% Debentures due 2032 | | IBM 32D | | 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 899,435,325904,126,363 shares of common stock outstanding at March 31,September 30, 2022.
Index
2
Part I - Financial Information:
Item 1. Consolidated Financial Statements:Statements (Unaudited):
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED INCOME STATEMENT
(UNAUDITED)
| | | | | | | |
|
| Three Months Ended 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 | |
Consolidated Income Statement for the three and nine months ended September 30, 2022 and 2021
3
4
Consolidated Balance Sheet at September 30, 2022 and December 31, 2021
5
Consolidated Statement of Cash Flows for the nine months ended September 30, 2022 and 2021
7
Consolidated Statement of Equity for the three and nine months ended September 30, 2022 and 2021
8
10
Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition
54
97
98
98
99
2
Part I - Financial Information
Item 1. Consolidated Financial Statements:
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED INCOME STATEMENT
(UNAUDITED)
| | | | | | | | | | | | | |
| | Three Months Ended September 30, |
| Nine Months Ended September 30, | | ||||||||
(Dollars in millions except per share amounts) |
| 2022 |
| 2021* |
| 2022 |
| 2021* | | ||||
Revenue: |
| |
|
| |
| | |
|
| |
| |
Services | | $ | 7,365 | | $ | 7,251 | | $ | 22,708 | | $ | 21,549 | |
Sales | |
| 6,565 | |
| 5,814 | ** |
| 20,652 | |
| 18,502 | ** |
Financing | |
| 176 | |
| 186 | ** |
| 479 | |
| 606 | ** |
Total revenue | |
| 14,107 | |
| 13,251 | |
| 43,840 | |
| 40,656 | |
Cost: | |
|
| |
|
| |
|
| |
|
| |
Services | |
| 5,168 | |
| 4,650 | |
| 15,915 | |
| 14,014 | |
Sales | |
| 1,389 | |
| 1,363 | ** |
| 4,555 | |
| 4,241 | ** |
Financing | |
| 120 | |
| 132 | ** |
| 314 | |
| 416 | ** |
Total cost | |
| 6,677 | |
| 6,145 | |
| 20,784 | |
| 18,670 | |
Gross profit | |
| 7,430 | |
| 7,106 | |
| 23,055 | |
| 21,985 | |
Expense and other (income): | |
|
| |
|
| |
|
| |
|
| |
Selling, general and administrative | |
| 4,391 | |
| 4,306 | |
| 13,843 | |
| 13,842 | |
Research, development and engineering | |
| 1,611 | |
| 1,606 | |
| 4,963 | |
| 4,863 | |
Intellectual property and custom development income | |
| (121) | |
| (153) | |
| (418) | |
| (431) | |
Other (income) and expense | |
| 5,755 | |
| 244 | |
| 5,921 | |
| 891 | |
Interest expense | |
| 295 | |
| 290 | |
| 903 | |
| 852 | |
Total expense and other (income) | |
| 11,931 | |
| 6,293 | |
| 25,212 | |
| 20,017 | |
Income/(loss) from continuing operations before income taxes | |
| (4,501) | |
| 813 | |
| (2,156) | |
| 1,968 | |
Provision for/(benefit from) income taxes | |
| (1,287) | |
| (224) | |
| (1,070) | |
| (282) | |
Income/(loss) from continuing operations | | $ | (3,214) | | $ | 1,037 | | $ | (1,087) | | $ | 2,250 | |
Income from discontinued operations, net of tax | |
| 18 | |
| 93 | |
| 16 | |
| 1,160 | |
Net income/(loss) | | $ | (3,196) | + | $ | 1,130 | | $ | (1,071) | + | $ | 3,410 | |
| | | | | | | | | | | | | |
Earnings/(loss) per share of common stock: | |
|
| |
|
| |
|
| |
|
| |
Assuming dilution: | |
|
| |
|
| |
|
| |
|
| |
Continuing operations | | $ | (3.55) | | $ | 1.14 | | $ | (1.21) | | $ | 2.49 | |
Discontinued operations | |
| 0.02 | |
| 0.10 | |
| 0.02 | |
| 1.28 | |
Total | | $ | (3.54) | | $ | 1.25 | | $ | (1.19) | | $ | 3.77 | |
Basic: | |
|
| |
|
| |
|
| |
|
| |
Continuing operations | | $ | (3.55) | | $ | 1.16 | | $ | (1.21) | | $ | 2.51 | |
Discontinued operations | |
| 0.02 | |
| 0.10 | |
| 0.02 | |
| 1.30 | |
Total | | $ | (3.54) | | $ | 1.26 | | $ | (1.19) | | $ | 3.81 | |
| | | | | | | | | | | | | |
Weighted-average number of common shares outstanding: (millions) | |
|
| |
|
| |
|
| |
|
| |
Assuming dilution | |
| 904.1 | |
| 906.0 | |
| 901.6 | |
| 904.0 | |
Basic | |
| 904.1 | |
| 897.1 | |
| 901.6 | |
| 895.3 | |
* | Reclassified to reflect discontinued operations presentation. |
** | Reclassified to conform to current year presentation.
|
+ Includes the impact of a one-time, non-cash pension settlement charge. Refer to note 18, "Retirement-Related Benefits," for additional information.
(Amounts may not add due to rounding.)
(The accompanying notes are an integral part of the financialstatements.)
(Amounts may not add due to rounding.)
(The accompanying notes are an integral part of the financial statements.)
3
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
| | | | | | |
|
| Three Months Ended March 31, | ||||
(Dollars in millions) |
| 2022 |
| 2021* | ||
Net income | | $ | 733 | | $ | 955 |
Other comprehensive income/(loss), before tax: | |
|
| |
|
|
Foreign currency translation adjustments | |
| 442 | |
| 549 |
Net changes related to available-for-sale securities: | |
|
| |
|
|
Unrealized gains/(losses) arising during the period | |
| 0 | |
| 0 |
Reclassification of (gains)/losses to net income | |
| — | |
| — |
Total net changes related to available-for-sale securities | |
| 0 | |
| 0 |
Unrealized gains/(losses) on cash flow hedges: | |
|
| |
|
|
Unrealized gains/(losses) arising during the period | |
| 60 | |
| 187 |
Reclassification of (gains)/losses to net income | |
| (1) | |
| 160 |
Total unrealized gains/(losses) on cash flow hedges | |
| 59 | |
| 347 |
Retirement-related benefit plans: | |
|
| |
|
|
Prior service costs/(credits) | |
| (5) | |
| 0 |
Net (losses)/gains arising during the period | |
| 9 | |
| 20 |
Curtailments and settlements | |
| 8 | |
| 17 |
Amortization of prior service (credits)/costs | |
| 7 | |
| 3 |
Amortization of net (gains)/losses | | | 468 | | | 648 |
Total retirement-related benefit plans | |
| 486 | |
| 689 |
Other comprehensive income/(loss), before tax | |
| 987 | |
| 1,586 |
Income tax (expense)/benefit related to items of other comprehensive income | |
| (285) | |
| (505) |
Other comprehensive income/(loss), net of tax | |
| 703 | |
| 1,080 |
Total comprehensive income | | $ | 1,436 | | $ | 2,036 |
| | | | | | | | | | | | |
| | Three Months Ended September 30, |
| Nine Months Ended September 30, | ||||||||
(Dollars in millions) |
| 2022 |
| 2021* |
| 2022 |
| 2021* | ||||
Net income/(loss) | | $ | (3,196) | | $ | 1,130 | | $ | (1,071) | | $ | 3,410 |
Other comprehensive income/(loss), before tax: | |
|
| |
|
| |
|
| |
|
|
Foreign currency translation adjustments | |
| 143 | |
| (114) | |
| 799 | |
| 463 |
Net changes related to available-for-sale securities: | |
|
| |
|
| |
|
| |
|
|
Unrealized gains/(losses) arising during the period | |
| 0 | |
| 0 | |
| (1) | |
| 0 |
Reclassification of (gains)/losses to net income | |
| — | |
| — | |
| — | |
| — |
Total net changes related to available-for-sale securities | |
| 0 | |
| 0 | |
| (1) | |
| 0 |
Unrealized gains/(losses) on cash flow hedges: | |
|
| |
|
| |
|
| |
|
|
Unrealized gains/(losses) arising during the period | |
| 189 | |
| 109 | |
| 449 | |
| 262 |
Reclassification of (gains)/losses to net income | |
| (12) | |
| 32 | |
| 4 | |
| 282 |
Total unrealized gains/(losses) on cash flow hedges | |
| 178 | |
| 141 | |
| 453 | |
| 545 |
Retirement-related benefit plans: | |
|
| |
|
| |
|
| |
|
|
Prior service costs/(credits) | |
| 412 | |
| 0 | |
| 408 | |
| 0 |
Net (losses)/gains arising during the period | |
| 53 | |
| 1 | |
| 63 | |
| 23 |
Curtailments and settlements | |
| 5,913 | |
| 13 | |
| 5,931 | |
| 46 |
Amortization of prior service (credits)/costs | |
| 3 | |
| 3 | |
| 16 | |
| 8 |
Amortization of net (gains)/losses | | | 388 | | | 638 | | | 1,305 | | | 1,929 |
Total retirement-related benefit plans | |
| 6,768 | |
| 656 | |
| 7,722 | |
| 2,006 |
Other comprehensive income/(loss), before tax | |
| 7,089 | |
| 683 | |
| 8,973 | |
| 3,014 |
Income tax (expense)/benefit related to items of other comprehensive income | |
| (2,058) | |
| (333) | |
| (2,877) | |
| (978) |
Other comprehensive income/(loss), net of tax | |
| 5,030 | |
| 350 | |
| 6,096 | |
| 2,035 |
Total comprehensive income | | $ | 1,834 | | $ | 1,480 | | $ | 5,025 | | $ | 5,446 |
* Amounts presented have not been recast to exclude discontinued operations.
(Amounts may not add due to rounding.)
(The accompanying notes are an integral part of the financial statements.)
4
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
ASSETS
| | | | | | | | | | | | | | |
|
| At March 31, |
| At December 31, |
|
| At September 30, |
| At December 31, |
| ||||
(Dollars in millions) | | 2022 |
| 2021 |
| | 2022 |
| 2021 |
| ||||
Assets: |
| |
|
| |
| |
| |
|
| |
| |
Current assets: |
| |
|
| |
| |
| |
|
| |
| |
Cash and cash equivalents | | $ | 9,934 | | $ | 6,650 | | | $ | 7,816 | | $ | 6,650 | |
Restricted cash | |
| 286 | |
| 307 | | |
| 159 | |
| 307 | |
Marketable securities | |
| 550 | |
| 600 | | |
| 1,753 | |
| 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 $214 in 2022 and $218 in 2021) | |
| 5,526 | |
| 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 $139 in 2022 and $176 in 2021) | |
| 6,280 | |
| 7,221 | | |||||||
Held for sale | |
| 410 | |
| 793 | | |
| 395 | |
| 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 $48 in 2022 and $24 in 2021) | |
| 902 | |
| 1,002 | | |||||||
Inventory, at lower of average cost or net realizable value: | |
| | |
| | | |
| | |
| | |
Finished goods | |
| 269 | |
| 208 | | |
| 209 | |
| 208 | |
Work in process and raw materials | |
| 1,507 | |
| 1,442 | | |
| 1,585 | |
| 1,442 | |
Total inventory | |
| 1,776 | |
| 1,649 | | |
| 1,794 | |
| 1,649 | |
Deferred costs | |
| 1,103 | |
| 1,097 | | |
| 921 | |
| 1,097 | |
Prepaid expenses and other current assets | |
| 3,548 | |
| 3,466 | | |
| 3,452 | |
| 3,466 | |
Total current assets | |
| 31,330 | |
| 29,539 | | |
| 28,999 | |
| 29,539 | |
Property, plant and equipment | |
| 20,006 | |
| 20,085 | | |
| 18,675 | |
| 20,085 | |
Less: Accumulated depreciation | |
| 14,448 | |
| 14,390 | | |
| 13,525 | |
| 14,390 | |
Property, plant and equipment — net | |
| 5,559 | |
| 5,694 | | |
| 5,150 | |
| 5,694 | |
Operating right-of-use assets — net | |
| 3,108 | |
| 3,222 | | |
| 2,740 | |
| 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 $20 in 2022 and $25 in 2021) | |
| 4,781 | |
| 5,425 | | |||||||
Prepaid pension assets | |
| 9,995 | |
| 9,850 | | |
| 9,695 | |
| 9,850 | |
Deferred costs | |
| 916 | |
| 924 | | |
| 818 | |
| 924 | |
Deferred taxes | |
| 7,567 | |
| 7,370 | | |
| 6,868 | |
| 7,370 | |
Goodwill | |
| 56,106 | |
| 55,643 | | |
| 54,218 | |
| 55,643 | |
Intangible assets — net | |
| 12,312 | |
| 12,511 | | |
| 10,967 | |
| 12,511 | |
Investments and sundry assets | |
| 1,771 | |
| 1,823 | | |
| 1,614 | |
| 1,823 | |
Total assets | | $ | 133,275 | | $ | 132,001 | | | $ | 125,850 | | $ | 132,001 | |
(Amounts may not add due to rounding.)
(The accompanying notes are an integral part of the financial statements.)
5
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET – (CONTINUED)
(UNAUDITED)
LIABILITIES AND EQUITY
| | | | | | | | | | | | |
|
| At March 31, |
| At December 31, |
| At September 30, |
| At December 31, | ||||
(Dollars in millions except per share amounts) | | 2022 |
| 2021 | | 2022 |
| 2021 | ||||
Liabilities: | | | | | | | | | | | | |
Current liabilities: |
| |
|
| |
|
| |
|
| |
|
Taxes | | $ | 1,798 | | $ | 2,289 | | $ | 1,667 | | $ | 2,289 |
Short-term debt | |
| 7,690 | |
| 6,787 | |
| 5,937 | |
| 6,787 |
Accounts payable | |
| 3,453 | |
| 3,955 | |
| 3,806 | |
| 3,955 |
Compensation and benefits | |
| 2,937 | |
| 3,204 | |
| 3,369 | |
| 3,204 |
Deferred income | |
| 13,526 | |
| 12,518 | |
| 11,139 | |
| 12,518 |
Operating lease liabilities | |
| 954 | |
| 974 | |
| 844 | |
| 974 |
Other accrued expenses and liabilities | |
| 3,699 | |
| 3,892 | |
| 3,702 | |
| 3,892 |
Total current liabilities | |
| 34,056 | |
| 33,619 | |
| 30,466 | |
| 33,619 |
Long-term debt | |
| 46,545 | |
| 44,917 | |
| 44,942 | |
| 44,917 |
Retirement and nonpension postretirement benefit obligations | |
| 13,937 | |
| 14,435 | |
| 11,760 | |
| 14,435 |
Deferred income | |
| 3,423 | |
| 3,577 | |
| 3,018 | |
| 3,577 |
Operating lease liabilities | |
| 2,358 | |
| 2,462 | |
| 2,103 | |
| 2,462 |
Other liabilities | |
| 13,844 | |
| 13,996 | |
| 13,413 | |
| 13,996 |
Total liabilities | |
| 114,162 | |
| 113,005 | |
| 105,703 | |
| 113,005 |
Equity: | |
| | |
| | |
| | |
| |
IBM stockholders’ equity: | |
| | |
| | |
| | |
| |
Common stock, par value $0.20 per share, and additional paid-in capital | |
| 57,603 | |
| 57,319 | |
| 58,117 | |
| 57,319 |
Shares authorized: 4,687,500,000 | |
| | |
| | |
| | |
| |
Shares issued: 2022 - 2,250,139,983 | |
| | |
| | ||||||
Shares issued: 2022 - 2,255,410,248 | |
| | |
| | ||||||
2021 - 2,248,577,848 | |
| | |
| | |
| | |
| |
Retained earnings | |
| 153,401 | |
| 154,209 | |
| 148,611 | |
| 154,209 |
Treasury stock - at cost | |
| (169,422) | |
| (169,392) | |
| (169,514) | |
| (169,392) |
Shares: 2022 - 1,350,704,659 | |
| | |
| | ||||||
Shares: 2022 - 1,351,283,886 | |
| | |
| | ||||||
2021 - 1,350,509,249 | |
| | |
| | |
| | |
| |
Accumulated other comprehensive income/(loss) | |
| (22,532) | |
| (23,234) | |
| (17,138) | |
| (23,234) |
Total IBM stockholders’ equity | |
| 19,050 | |
| 18,901 | |
| 20,076 | |
| 18,901 |
Noncontrolling interests | |
| 62 | |
| 95 | |
| 71 | |
| 95 |
Total equity | |
| 19,112 | |
| 18,996 | |
| 20,147 | |
| 18,996 |
Total liabilities and equity | | $ | 133,275 | | $ | 132,001 | | $ | 125,850 | | $ | 132,001 |
(Amounts may not add due to rounding.)
(The accompanying notes are an integral part of the financial statements.)
6
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
| | | | | | |
| | Three Months Ended March 31, | ||||
(Dollars in millions) |
| 2022 |
| 2021 | ||
Cash flows from operating activities: |
| |
|
| |
|
Net income | | $ | 733 | | $ | 955 |
Adjustments to reconcile net income to cash provided by operating activities | |
|
| |
|
|
Depreciation | |
| 631 | |
| 1,052 |
Amortization of intangibles | |
| 625 | |
| 620 |
Stock-based compensation | |
| 234 | |
| 213 |
Net (gain)/loss on asset sales and other | |
| (51) | |
| 7 |
Changes in operating assets and liabilities, net of acquisitions/divestitures | |
| 1,076 | |
| 2,066 |
Net cash provided by operating activities | |
| 3,248 | |
| 4,914 |
| | | | | | |
Cash flows from investing activities: | |
|
| |
|
|
Payments for property, plant and equipment | |
| (281) | |
| (494) |
Proceeds from disposition of property, plant and equipment | |
| 72 | |
| 139 |
Investment in software | |
| (169) | |
| (175) |
Acquisition of businesses, net of cash acquired | |
| (698) | |
| (1,120) |
Divestitures of businesses, net of cash transferred | |
| 61 | |
| (15) |
Non-operating finance receivables — net | |
| 0 | |
| (9) |
Purchases of marketable securities and other investments | |
| (1,025) | |
| (875) |
Proceeds from disposition of marketable securities and other investments | |
| 682 | |
| 549 |
Net cash provided by/(used in) investing activities | |
| (1,358) | |
| (2,000) |
| | | | | | |
Cash flows from financing activities: | |
|
| |
|
|
Proceeds from new debt | |
| 4,084 | |
| 51 |
Payments to settle debt | |
| (1,129) | |
| (4,261) |
Short-term borrowings/(repayments) less than 90 days — net | |
| (8) | |
| (89) |
Common stock repurchases for tax withholdings | |
| (80) | |
| (41) |
Financing — other | |
| (15) | |
| 15 |
Cash dividends paid | |
| (1,475) | |
| (1,457) |
Net cash provided by/(used in) financing activities | |
| 1,377 | |
| (5,783) |
| | | | | | |
Effect of exchange rate changes on cash, cash equivalents and restricted cash | |
| (5) | |
| (134) |
Net change in cash, cash equivalents and restricted cash | |
| 3,263 | |
| (3,002) |
| | | | | | |
Cash, cash equivalents and restricted cash at January 1 | |
| 6,957 | |
| 13,675 |
Cash, cash equivalents and restricted cash at March 31 | | $ | 10,219 | | $ | 10,673 |
| | | | | | |
| | Nine Months Ended September 30, | ||||
(Dollars in millions) |
| 2022 |
| 2021 | ||
Cash flows from operating activities: |
| |
|
| |
|
Net income/(loss) | | $ | (1,071) | | $ | 3,410 |
Adjustments to reconcile net income/(loss) to cash provided by operating activities: | |
|
| |
|
|
Pension settlement charge | | | 5,894 | | | — |
Depreciation | |
| 1,837 | |
| 3,139 |
Amortization of intangibles | |
| 1,828 | |
| 1,897 |
Stock-based compensation | |
| 739 | |
| 719 |
Net (gain)/loss on asset sales and other | |
| (60) | |
| (150) |
Changes in operating assets and liabilities, net of acquisitions/divestitures | |
| (2,695) | |
| 1,238 |
Net cash provided by operating activities | |
| 6,470 | |
| 10,252 |
| | | | | | |
Cash flows from investing activities: | |
|
| |
|
|
Payments for property, plant and equipment | |
| (937) | |
| (1,612) |
Proceeds from disposition of property, plant and equipment | |
| 98 | |
| 312 |
Investment in software | |
| (479) | |
| (555) |
Acquisition of businesses, net of cash acquired | |
| (1,020) | |
| (3,018) |
Divestitures of businesses, net of cash transferred | |
| 1,271 | |
| 26 |
Purchases of marketable securities and other investments | |
| (4,474) | |
| (2,655) |
Proceeds from disposition of marketable securities and other investments | |
| 2,655 | |
| 2,202 |
Net cash provided by/(used in) investing activities | |
| (2,883) | |
| (5,300) |
| | | | | | |
Cash flows from financing activities: | |
|
| |
|
|
Proceeds from new debt | |
| 7,797 | |
| 394 |
Payments to settle debt | |
| (5,446) | |
| (7,321) |
Short-term borrowings/(repayments) less than 90 days — net | |
| 221 | |
| 840 |
Common stock repurchases for tax withholdings | |
| (329) | |
| (252) |
Financing — other | |
| 106 | |
| 71 |
Cash dividends paid | |
| (4,454) | |
| (4,395) |
Net cash provided by/(used in) financing activities | |
| (2,106) | |
| (10,662) |
| | | | | | |
Effect of exchange rate changes on cash, cash equivalents and restricted cash | |
| (463) | |
| (159) |
Net change in cash, cash equivalents and restricted cash | |
| 1,018 | |
| (5,868) |
| | | | | | |
Cash, cash equivalents and restricted cash at January 1 | |
| 6,957 | |
| 13,675 |
Cash, cash equivalents and restricted cash at September 30 | | $ | 7,975 | | $ | 7,806 |
Cash flows are presented on an IBM consolidated basis. Refer to note 3, “Separation of Kyndryl,” for additional information related to cash flows from Kyndryl discontinued operations.
(Amounts may not add due to rounding.)
(The accompanying notes are an integral part of the financial statements.)
7
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF EQUITY
(UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | |
|
| Common | | | | | | | | | | | | | | | | | | ||
| | Stock and | | | | | | | | Accumulated | | | | | | | | | | ||
| | Additional | | | | | | | | Other | | Total IBM | | Non- | | | | ||||
| | Paid-in | | Retained | | Treasury | | Comprehensive | | Stockholders’ | | Controlling | | Total | |||||||
(Dollars in millions except per share amounts) |
| Capital |
| Earnings |
| Stock |
| Income/(Loss) |
| Equity |
| Interests |
| Equity | |||||||
Equity - July 1, 2022 | | $ | 57,802 | | $ | 153,298 | | $ | (169,522) | | $ | (22,169) | | $ | 19,409 | | $ | 67 | | $ | 19,476 |
Net income/(loss) plus other comprehensive income/(loss): | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Net income/(loss) | |
|
| |
| (3,196) | |
|
| |
|
| |
| (3,196) | |
|
| |
| (3,196) |
Other comprehensive income/(loss) | |
|
| |
|
| |
|
| |
| 5,030 | |
| 5,030 | |
|
| |
| 5,030 |
Total comprehensive income/(loss) | |
|
| |
|
| |
|
| |
|
| | $ | 1,834 | |
|
| | $ | 1,834 |
Cash dividends paid — common stock ($1.65 per share) | |
|
| |
| (1,491) | |
|
| |
|
| |
| (1,491) | |
|
| |
| (1,491) |
Common stock issued under employee plans (871,676 shares) | |
| 315 | |
|
| |
|
| |
|
| |
| 315 | |
|
| |
| 315 |
Purchases (103,736 shares) and sales (178,069 shares) of treasury stock under employee plans — net | |
|
| |
| 0 | |
| 8 | |
|
| |
| 8 | |
|
| |
| 8 |
Changes in noncontrolling interests | |
|
| |
|
| |
|
| |
|
| |
|
| |
| 4 | |
| 4 |
Equity – September 30, 2022 | | $ | 58,117 | | $ | 148,611 | | $ | (169,514) | | $ | (17,138) | | $ | 20,076 | | $ | 71 | | $ | 20,147 |
| | | | | | | | | | | | | | | | | | | | | |
|
| Common | | | | | | | | | | | | | | | | | | ||
| | Stock and | | | | | | | | Accumulated | | | | | | | | | | ||
| | Additional | | | | | | | | Other | | Total IBM | | Non- | | | | ||||
| | Paid-in | | Retained | | Treasury | | Comprehensive | | Stockholders’ | | Controlling | | Total | |||||||
(Dollars in millions except per share amounts) |
| Capital |
| Earnings |
| Stock |
| Income/(Loss) |
| Equity |
| Interests |
| Equity | |||||||
Equity - January 1, 2022 | | $ | 57,319 | | $ | 154,209 | | $ | (169,392) | | $ | (23,234) | | $ | 18,901 | | $ | 95 | | $ | 18,996 |
Net income plus other comprehensive income/(loss): | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Net income | |
|
| |
| 733 | |
|
| |
|
| |
| 733 | |
|
| |
| 733 |
Other comprehensive income/(loss) | |
|
| |
|
| |
|
| |
| 703 | |
| 703 | |
|
| |
| 703 |
Total comprehensive income/(loss) | |
|
| |
|
| |
|
| |
|
| | $ | 1,436 | |
|
| | $ | 1,436 |
Cash dividends paid — common stock ($1.64 per share) | |
|
| |
| (1,475) | |
|
| |
|
| |
| (1,475) | |
|
| |
| (1,475) |
Common stock issued under employee plans (1,562,135 shares) | |
| 221 | |
| | |
|
| |
|
| |
| 221 | |
|
| |
| 221 |
Purchases (595,710 shares) and sales (400,300 shares) of treasury stock under employee plans — net | |
|
| |
| (3) | |
| (30) | |
|
| |
| (34) | |
|
| |
| (34) |
Other equity | |
| 63 | |
| (63) | |
|
| |
|
| |
| 0 | |
|
| |
| 0 |
Changes in noncontrolling interests | |
|
| |
|
| |
|
| |
|
| |
|
| |
| (33) | |
| (33) |
Equity – March 31, 2022 | | $ | 57,603 | | $ | 153,401 | | $ | (169,422) | | $ | (22,532) | | $ | 19,050 | | $ | 62 | | $ | 19,112 |
| | | | | | | | | | | | | | | | | | | | | |
|
| Common |
| | |
| | |
| |
| | |
| | |
| | | ||
| | Stock and | | | | | | | | Accumulated | | | | | | | | | | ||
| | Additional | | | | | | | | Other | | Total IBM | | Non- | | | | ||||
| | Paid-in | | Retained | | Treasury | | Comprehensive | | Stockholders’ | | Controlling | | Total | |||||||
(Dollars in millions except per share amounts) | | Capital | | Earnings | | Stock | | Income/(Loss) | | Equity | | Interests | | Equity | |||||||
Equity - July 1, 2021 | | $ | 56,912 | | $ | 162,086 | | $ | (169,404) | | $ | (27,652) | | $ | 21,942 | | $ | 125 | | $ | 22,067 |
Net income plus other comprehensive income/(loss): | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Net income | |
|
| |
| 1,130 | |
|
| |
|
| |
| 1,130 | |
|
| |
| 1,130 |
Other comprehensive income/(loss) | |
|
| |
|
| |
|
| |
| 350 | |
| 350 | |
|
| |
| 350 |
Total comprehensive income/(loss) | |
|
| |
|
| |
|
| |
|
| | $ | 1,480 | |
|
| | $ | 1,480 |
Cash dividends paid — common stock ($1.64 per share) | |
|
| |
| (1,471) | |
|
| |
|
| |
| (1,471) | |
|
| |
| (1,471) |
Common stock issued under employee plans (482,632 shares) | |
| 277 | |
|
| |
|
| |
|
| |
| 277 | |
|
| |
| 277 |
Purchases (124,146 shares) and sales (121,792 shares) of treasury stock under employee plans — net | |
|
| |
| 1 | |
| (2) | |
|
| |
| 0 | |
|
| |
| 0 |
Changes in noncontrolling interests | |
|
| |
|
| |
|
| |
|
| |
|
| |
| 4 | |
| 4 |
Equity - September 30, 2021 | | $ | 57,189 | | $ | 161,747 | | $ | (169,406) | | $ | (27,302) | | $ | 22,228 | | $ | 129 | | $ | 22,357 |
(Amounts may not add due to rounding.)
(The accompanying notes are an integral part of the financial statements.)
8
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF EQUITY – (CONTINUED)
(UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | |
| | Common | | | | | | | | | | | | | | | | | | ||
| | Stock and | | | | | | | | Accumulated | | | | | | | | | | ||
| | Additional | | | | | | | | Other | | Total IBM | | Non- | | | | ||||
| | Paid-in | | Retained | | Treasury | | Comprehensive | | Stockholders’ | | Controlling | | Total | |||||||
(Dollars in millions except per share amounts) |
| Capital |
| Earnings |
| Stock |
| Income/(Loss) |
| Equity |
| Interests |
| Equity | |||||||
Equity - January 1, 2022 | | $ | 57,319 | | $ | 154,209 | | $ | (169,392) | | $ | (23,234) | | $ | 18,901 | | $ | 95 | | $ | 18,996 |
Net income/(loss) plus other comprehensive income/(loss): | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Net income/(loss) | |
|
| |
| (1,071) | |
|
| |
|
| |
| (1,071) | |
|
| |
| (1,071) |
Other comprehensive income/(loss) | |
|
| |
|
| |
|
| |
| 6,096 | |
| 6,096 | |
|
| |
| 6,096 |
Total comprehensive income/(loss) | |
|
| |
|
| |
|
| |
|
| | $ | 5,025 | |
|
| | $ | 5,025 |
Cash dividends paid — common stock ($4.94 per share) | |
|
| |
| (4,454) | |
|
| |
|
| |
| (4,454) | |
|
| |
| (4,454) |
Common stock issued under employee plans (6,832,400 shares) | |
| 736 | |
|
| |
|
| |
|
| |
| 736 | |
|
| |
| 736 |
Purchases (2,423,220 shares) and sales (1,648,583 shares) of treasury stock under employee plans — net | |
|
| |
| (10) | |
| (122) | |
|
| |
| (133) | |
|
| |
| (133) |
Other equity | |
| 63 | |
| (63) | |
|
| |
|
| |
| 0 | |
|
| |
| 0 |
Changes in noncontrolling interests | |
|
| |
|
| |
|
| |
|
| |
|
| |
| (23) | |
| (23) |
Equity - September 30, 2022 | | $ | 58,117 | | $ | 148,611 | | $ | (169,514) | | $ | (17,138) | | $ | 20,076 | | $ | 71 | | $ | 20,147 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| Common |
| | |
| | |
| |
| | |
| | |
| | |
| Common |
| | |
| | |
| |
| | |
| | |
| | | ||||
| | Stock and | | | | | | | | Accumulated | | | | | | | | | | | Stock and | | | | | | | | Accumulated | | | | | | | | | | ||||
| | Additional | | | | | | | | Other | | Total IBM | | Non- | | | | | Additional | | | | | | | | Other | | Total IBM | | Non- | | | | ||||||||
| | Paid-in | | Retained | | Treasury | | Comprehensive | | Stockholders’ | | Controlling | | Total | | Paid-in | | Retained | | Treasury | | Comprehensive | | Stockholders’ | | Controlling | | Total | ||||||||||||||
(Dollars in millions except per share amounts) | | Capital | | Earnings | | Stock | | Income/(Loss) | | Equity | | Interests | | Equity | | Capital | | Earnings | | Stock | | Income/(Loss) | | Equity | | Interests | | Equity | ||||||||||||||
Equity - January 1, 2021 | | $ | 56,556 | | $ | 162,717 | | $ | (169,339) | | $ | (29,337) | | $ | 20,597 | | $ | 129 | | $ | 20,727 | | $ | 56,556 | | $ | 162,717 | | $ | (169,339) | | $ | (29,337) | | $ | 20,597 | | $ | 129 | | $ | 20,727 |
Net income plus other comprehensive income/(loss): | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Net income | |
|
| |
| 955 | |
|
| |
|
| |
| 955 | |
|
| |
| 955 | |
|
| |
| 3,410 | |
|
| |
|
| |
| 3,410 | |
|
| |
| 3,410 |
Other comprehensive income/(loss) | |
|
| |
|
| |
|
| |
| 1,080 | |
| 1,080 | |
|
| |
| 1,080 | |
|
| |
|
| |
|
| |
| 2,035 | |
| 2,035 | |
|
| |
| 2,035 |
Total comprehensive income/(loss) | |
|
| |
|
| |
|
| |
|
| | $ | 2,036 | |
|
| | $ | 2,036 | |
|
| |
|
| |
|
| |
|
| | $ | 5,446 | |
|
| | $ | 5,446 |
Cash dividends paid — common stock ($1.63 per share) | |
|
| |
| (1,457) | |
|
| |
|
| |
| (1,457) | |
|
| |
| (1,457) | |||||||||||||||||||||
Common stock issued under employee plans (1,046,184 shares) | |
| 232 | |
|
| |
|
| |
|
| |
| 232 | |
|
| |
| 232 | |||||||||||||||||||||
Purchases (339,506 shares) and sales (162,726 shares) of treasury stock under employee plans — net | |
|
| |
| 2 | |
| (21) | |
|
| |
| (18) | |
|
| |
| (18) | |||||||||||||||||||||
Cash dividends paid — common stock ($4.91 per share) | |
|
| |
| (4,395) | |
|
| |
|
| |
| (4,395) | |
|
| |
| (4,395) | |||||||||||||||||||||
Common stock issued under employee plans (4,496,470 shares) | |
| 632 | |
|
| |
|
| |
|
| |
| 632 | |
|
| |
| 632 | |||||||||||||||||||||
Purchases (1,797,733 shares) and sales (1,448,189 shares) of treasury stock under employee plans — net | |
|
| |
| 15 | |
| (66) | |
|
| |
| (52) | |
|
| |
| (52) | |||||||||||||||||||||
Changes in noncontrolling interests | |
|
| |
|
| |
|
| |
|
| |
|
| |
| (6) | |
| (6) | |
|
| |
|
| |
|
| |
|
| |
|
| |
| (1) | |
| (1) |
Equity - March 31, 2021 | | $ | 56,788 | | $ | 162,218 | | $ | (169,360) | | $ | (28,257) | | $ | 21,389 | | $ | 124 | | $ | 21,513 | |||||||||||||||||||||
Equity - September 30, 2021 | | $ | 57,189 | | $ | 161,747 | | $ | (169,406) | | $ | (27,302) | | $ | 22,228 | | $ | 129 | | $ | 22,357 |
(Amounts may not add due to rounding.)
(The accompanying notes are an integral part of the financial statements.)
89
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. As of September 30, 2022, the company transferred all of its 19.9 percent retained interest in Kyndryl common stock pursuant to exchange agreements with a third-party financial institution. 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-divestedOther–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.
In September 2022, the IBM Qualified Personal Pension Plan (Qualified PPP) purchased two separate nonparticipating single premium group annuity contracts from The Prudential Insurance Company of America and Metropolitan Life Insurance Company (collectively, the Insurers) and irrevocably transferred to the Insurers approximately $16 billion of the Qualified PPP’s defined benefit pension obligations and related plan assets, thereby reducing the company’s pension obligations and assets by the same amount. The group annuity contracts were purchased using assets of the Qualified PPP and no additional funding contribution was required from the company. As a result of this transaction the company recognized a one-time, non-cash, pre-tax pension settlement charge of $5.9 billion ($4.4 billion net of tax) in the third quarter of 2022, primarily related to the accelerated recognition of accumulated actuarial losses of the Qualified PPP. Refer to note 18, “Retirement-Related Benefits,” for additional information.
For the three and nine months ended March 31,September 30, 2022, the company recordedreported a benefit from income taxes of $39$1,287 million and its effective$1,070 million, respectively. The tax rate was (6.3) percent. The rate was driven by many factors includingbenefits were primarily due to the impactstransfer of recently published foreign tax credit regulations, geographical mixa portion of income, incentives,the
10
Notes to Consolidated Financial Statements — (continued)
Qualified PPP’s defined benefit pension obligations and changes in unrecognized tax benefits.related plan assets, as described above. For the three and nine months ended March 31,September 30, 2021, the company reported a benefit from income taxes of $160$224 million and its effective$282 million, respectively. The tax rate was (65.5) percent. This tax benefit wasbenefits were primarily related todriven by the resolution of certain tax audits.audits in the first quarter of 2021 as well as third-quarter 2021 events that resulted in additional anticipated utilization of U.S. foreign tax credits.
Noncontrolling interest amounts of $4.9$3.7 million and $5.5 million, net of tax, for both the three months ended March 31,September 30, 2022 and 2021, respectively, and $14.2 million and $14.5 million, net of tax, for the nine months ended September 30, 2022 and 2021, respectively, are included as a reduction within other (income) and expense in the Consolidated Income Statement.
Interim results are not necessarily indicative of financial results for a full year. The information included in this Form 10-Q should be read in conjunction with the company’s 2021 Annual Report.
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Notes to Consolidated Financial Statements — (continued)
Within the financial statements and tables presented, certain columns and rows may not add due to the use of rounded numbers for disclosure purposes. Percentages presented are calculated from the underlying whole-dollar amounts. Certain prior periodprior-period amounts have been reclassified to conform to the current periodcurrent-period presentation. This is annotated where applicable.In addition, in the first quarter of 2022, an adjustment of $63 million was recorded between common stock and retained earnings related to the issuance of treasury stock in connection with certain previously issued stock-based compensation awards has beenand is reflected in the Consolidated Balance Sheet and Consolidated Statement of Equity at March 31,September 30, 2022.
2. Accounting Changes:
New Standards to be Implemented
Disclosures of Supplier Finance Program Obligations
Standard/Description–Issuance date: September 2022. This guidance requires an entity to provide certain interim and annual disclosures about the use of supplier finance programs in connection with the purchase of goods or services.
Effective Date and Adoption Considerations–The guidance is effective January 1, 2023 with certain annual disclosures required beginning in 2024 and early adoption is permitted. The company will adopt the guidance as of the effective date.
Effect on Financial Statements or Other Significant Matters–As the guidance is a change to disclosures only, the company does not expect it to have a material impact in the consolidated financial results. The company’s use of supplier finance programs as of September 30, 2022 was not material.
Disclosures about Government Assistance
Standard/Description–Issuance date: November 2021. This guidance requires an entity to provide certain annual disclosures about government assistance received and accounted for by applying a grant or contribution accounting model by analogy.
Effective Date and Adoption Considerations–The guidance is effective for annual disclosures beginning in 2022 and early adoption was permitted. The company will adopt the guidance as of the effective date.
Effect on Financial Statements or Other Significant Matters–As the guidance is a change to disclosures only, the company does not expect it to have a material impact in the consolidated financial results.
Troubled Debt Restructurings and Vintage Disclosures
Standard/Description–Issuance date: March 2022. This eliminates the accounting guidance for troubled debt restructurings and requires an entity to apply the general loan modification guidance to all loan modifications, including those made to customers experiencing financial difficulty, to determine whether the modification results in a new loan or
11
Notes to Consolidated Financial Statements — (continued)
a continuation of an existing loan. The guidance also requires presenting current period gross write-offs by year of origination for financing receivables and net investment in leases.
Effective Date and Adoption Considerations–The amendment is effective January 1, 2023 and early adoption is permitted. The company will adopt the guidance as of the effective date.
Effect on Financial Statements or Other Significant Matters–The guidance is not expected to have a material impact in the consolidated financial results.
Standards Implemented
Lessors–Certain Leases with Variable Lease Payments
Standard/Description–Issuance date: July 2021. This guidance modifies a lessor’s accounting for certain leases with variable lease payments that resulted in the recognition of a day-one loss even if the lessor expected the arrangement to be profitable overall. The amendment requires these types of lease contracts to be classified as operating leases which eliminates any recognition of a day-one loss.
Effective Date and Adoption Considerations–The amendment was effective January 1, 2022 and early adoption was permitted. The company adopted the guidance on a prospective basis as of the effective date.
Effect on Financial Statements or Other Significant Matters–The guidance did not have a material impact in the consolidated financial results.
Revenue Contracts with Customers Acquired in a Business Combination
Standard/Description–Issuance date: October 2021. This guidance requires that an acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with revenue guidance, as if it
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Notes to Consolidated Financial Statements — (continued)
had originated the contracts. Deferred revenue acquired in a business combination is no longer required to be measured at its fair value, but rather will generally be recognized at the same basis as the acquiree.
Effective Date and Adoption Considerations–The amendment is effective January 1, 2023 and early adoption is permitted including adoption in an interim period. The company adopted the guidance as of October 1, 2021 using the retrospective transition method whereby the new guidance was applied to all business combinations that occurred on or after January 1, 2021.
Effect on Financial Statements or Other Significant Matters–The guidance did not have a material impact in the consolidated financial results. The impact of the guidance in IBM’s future financial results will be dependent on the nature and size of its acquisitions.
Simplifying the Accounting for Income Taxes
Standard/Description–Issuance date: December 2019. This guidance simplifies various aspects of income tax accounting by removing certain exceptions to the general principle of the guidance and also clarifies and amends existing guidance to improve consistency in application.
Effective Date and Adoption Considerations–The guidance was effective January 1, 2021 and early adoption was permitted. The company adopted the guidance on a prospective basis as of the effective date.
Effect on Financial Statements or Other Significant Matters–The guidance did not have a material impact in the consolidated financial results.
3. Separation of Kyndryl:
On November 3, 2021, the company completed the separation of its managed infrastructure services unit into a new public company with the distribution of 80.1 percent of the outstanding shares of Kyndryl to IBM stockholders on a pro rata basis. The company retained 19.9 percent of the shares of Kyndryl common stock. For additional information onAs of September 30, 2022, the retained shares, refer to note 8, “Financial Assets & Liabilities.” The historical results of Kyndryl have been presented as discontinued operations and, as such, have been excluded from continuing operations and segment results for all periods presented.
The company’s presentation of discontinued operations excludes general corporate overhead costs which were historically allocated to Kyndryl, consistent with the company’s management system, that do not meet the requirements to be presented in discontinued operations. Such allocations include labor and non-labor expenses related to IBM’s corporate support functions (e.g. finance, accounting, tax, treasury, IT, HR, legal, among others) that historically provided support to Kyndryl and transferred to Kyndryl at separation. In addition, discontinued operations excludes the historical intercompany purchases and sales between IBM and Kyndryl that were eliminated in consolidation.
Separation costs of $3 million and $50 million incurred during the three months ended March 31, 2022 and 2021, respectively, are included in income from discontinued operations, net of tax, in the Consolidated Income Statement. These charges primarily relate to transaction and third-party support costs, business separation and applicable employee retention fees, pension settlement charges and related tax charges.
IBM will provide transition services to Kyndryl predominantly consisting of information technology services for a period no longer than two years after the separation. The impact of these transition services on the company’s Consolidated Financial Statements for the three months ended March 31, 2022 was not material.
IBM and Kyndryl entered into various commercial agreements pursuant to which Kyndryl will purchase hardware, software and services from IBM for use in the delivery of Kyndryl services agreements and under which IBM will receive services from Kyndryl, related to hosting data centers and servicing IBM’s information infrastructure. As part of the separation, IBM has also committed to provide Kyndryl upgraded hardware at no cost to Kyndryl over a two-year period after the separation. The total estimate of IBM’s obligation under the agreement at both March 31, 2022 and
1112
Notes to Consolidated Financial Statements — (continued)
December 31, 2021company transferred all of its 19.9 percent retained interest in Kyndryl common stock pursuant to exchange agreements with a third-party financial institution. Refer to note 8, “Financial Assets & Liabilities,” for additional information.
The historical results of Kyndryl have been presented as discontinued operations and, as such, have been excluded from continuing operations and segment results for all periods presented. The company’s presentation of discontinued operations excludes general corporate overhead costs which were historically allocated to Kyndryl, consistent with the company’s management system, that did not meet the requirements to be presented in discontinued operations in 2021. Such allocations include labor and non-labor expenses related to IBM’s corporate support functions (e.g., finance, accounting, tax, treasury, IT, HR, legal, among others) that historically provided support to Kyndryl and transferred to Kyndryl at separation. In addition, discontinued operations excludes the historical intercompany purchases and sales between IBM and Kyndryl that were eliminated in consolidation.
IBM will provide transition services to Kyndryl predominantly consisting of information technology services for a period no longer than two years after the separation. The impact of these transition services on the company’s Consolidated Financial Statements for the three and nine months ended September 30, 2022 was $265 millionnot material.
IBM and Kyndryl entered into various commercial agreements pursuant to which Kyndryl will purchase hardware, software and services from IBM and under which IBM will receive hosting and information infrastructure services from Kyndryl. As part of the separation, IBM has also committed to provide upgraded hardware at no cost to Kyndryl over a two-year period after the separation. An estimate of the remaining obligation under the agreement is includedrecorded in other accrued expenses and liabilities in the Consolidated Balance Sheet.
The following table presents the major categories of incomeincome/(loss) from discontinued operations:operations, net of tax.
| | | | | | | | | | | | | |||||||
| | | | | | | | Three Months Ended September 30, | | Nine Months Ended September 30, | |||||||||
(Dollars in millions) | | | | | | | |
| 2022 |
| 2021* | | 2022 |
| 2021* | ||||
For the three months ended March 31: |
| 2022 |
| 2021* | | ||||||||||||||
Revenue | | $ | 17 | | $ | 4,543 | | | $ | 1 | | $ | 4,367 | | $ | 7 | | $ | 13,437 |
Cost of sales | | | 21 | | | 3,365 | | | | 2 | | | 3,303 | | | 19 | | | 10,043 |
Selling, general and administrative expense | | | (6) | | | 488 | | | | (24) | | | 554 | | | 42 | | | 1,527 |
RD&E and Other (income) and expense | | | (69) | | | 29 | | | | 0 | | | 4 | | | (70) | | | 59 |
Income from discontinued operations before income taxes | | $ | 73 | | $ | 661 | | | $ | 24 | | $ | 506 | | $ | 16 | | $ | 1,807 |
Provision for income taxes | | | 2 | | | 109 | | | | 6 | | | 413 | | | 1 | | | 648 |
Income from discontinued operations, net of tax | | $ | 71 | | $ | 552 | | | $ | 18 | | $ | 93 | | $ | 16 | | $ | 1,160 |
* | Excludes intercompany transactions between IBM and Kyndryl and general corporate overhead costs transferred to Kyndryl as discussed above. |
Income from discontinued operations, net of tax, for the three months ended March 31,September 30, 2022 primarily relates toreflects the net impact of changes in separation-related estimates and the settlement of assets and liabilities in accordance with the separation and distribution agreement. Income from discontinued operations, net of tax, for the nine months ended September 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
The company did not incur any separation costs during the three months ended September 30, 2022. Separation costs of $543 million incurred during the three months ended September 30, 2021, and $5 million and $739 million incurred during the nine months ended September 30, 2022 and 2021, respectively, are included in income/(loss) from discontinued operations, net of tax, in the discontinued operations results areConsolidated Income Statement. These charges primarily relate to transaction and third-party support costs, business separation and applicable employee retention fees, pension settlement charges and related tax charges.
13
Notes to the settlement of assets and liabilities in accordance with the Separation and Distribution Agreement.Consolidated Financial Statements — (continued)
The following table presents selected financial information related to cash flows from discontinued operations:operations.
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| Nine Months Ended September 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 | * | | $ | — | | $ | 2,167 | * |
Net cash provided by/(used in) investing activities | | | 48 | | | (104) | | | $ | 48 | | $ | (363) | |
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* 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.
Revenue by Major Products/Service Offerings
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| | Three Months Ended September 30, | | Nine Months Ended September 30, |
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(Dollars in millions) | | 2022 | | 2021* | | 2022 | | 2021* | | ||||
Hybrid Platform & Solutions | | $ | 4,172 | | $ | 4,074 | | $ | 12,641 | | $ | 12,082 | |
Transaction Processing | | | 1,640 | | | 1,332 | | | 5,107 | | | 4,257 | |
Total Software | | $ | 5,811 | | $ | 5,406 | | $ | 17,749 | | $ | 16,339 | |
Business Transformation | |
| 2,165 | |
| 2,068 | |
| 6,646 | |
| 6,070 | |
Application Operations | |
| 1,593 | |
| 1,501 | |
| 4,865 | |
| 4,489 | |
Technology Consulting | |
| 943 | |
| 889 | |
| 2,826 | |
| 2,538 | |
Total Consulting | | $ | 4,700 | | $ | 4,457 | | $ | 14,337 | | $ | 13,098 | |
Hybrid Infrastructure | |
| 1,931 | |
| 1,453 | |
| 6,392 | |
| 5,294 | |
Infrastructure Support | |
| 1,421 | |
| 1,468 | |
| 4,413 | |
| 4,480 | |
Total Infrastructure | | $ | 3,352 | | $ | 2,921 | | $ | 10,805 | | $ | 9,774 | |
Financing** | |
| 174 | |
| 184 | |
| 474 | |
| 601 | |
Other | |
| 70 | |
| 282 | |
| 475 | |
| 844 | |
Total revenue | | $ | 14,107 | | $ | 13,251 | | $ | 43,840 | | $ | 40,656 | |
* | 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
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| Nine Months Ended September 30, | ||||||||
(Dollars in millions) | | 2022 | | 2021* |
| 2022 | | 2021* | ||||
Software | | $ | 2,186 | | $ | 2,038 | | $ | 6,604 | | $ | 5,797 |
Consulting | |
| 2,221 | |
| 1,982 | |
| 6,642 | |
| 5,605 |
Infrastructure | | | 768 | | | 558 | | | 2,661 | | | 2,376 |
Other | |
| 2 | |
| 77 | |
| 143 | |
| 246 |
Total | | $ | 5,176 | | $ | 4,655 | | $ | 16,049 | | $ | 14,024 |
* Recast to reflect segment changes.
1214
Notes to Consolidated Financial Statements — (continued)
Revenue by Major Products/Service Offerings
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(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 |
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** 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
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(Dollars in millions) |
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For the three months ended March 31: | | 2022 | | 2021* | ||
Software | | $ | 2,130 | | $ | 1,744 |
Consulting | |
| 2,135 | |
| 1,722 |
Infrastructure | | | 672 | | | 837 |
Other | |
| 72 | |
| 87 |
Total | | $ | 5,009 | | $ | 4,390 |
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Revenue by Geography
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| Three Months Ended September 30, |
| Nine Months Ended September 30, | ||||||||
(Dollars in millions) |
| | | 2022 | | 2021 |
| 2022 | | 2021 | ||||||||
For the three months ended March 31: | | 2022 | | 2021 | ||||||||||||||
Americas | | $ | 7,056 | | $ | 6,477 | | $ | 7,416 | | $ | 6,579 | | $ | 22,614 | | $ | 20,178 |
Europe/Middle East/Africa | |
| 4,231 | |
| 3,928 | |
| 3,959 | |
| 3,939 | |
| 12,716 | |
| 12,181 |
Asia Pacific | |
| 2,910 | |
| 2,781 | |
| 2,732 | |
| 2,734 | |
| 8,509 | |
| 8,297 |
Total | | $ | 14,197 | | $ | 13,187 | | $ | 14,107 | | $ | 13,251 | | $ | 43,840 | | $ | 40,656 |
Remaining Performance Obligations
The remaining performance obligation (RPO) disclosure provides the aggregate amount of the transaction price yet to be recognized as of the end of the reporting period and an explanation as to when the company expects to recognize these amounts in revenue. It is intended to be a statement of overall work under contract that has not yet been performed and does not include contracts in which the customer is not committed, such as certain as-a-Service, governmental, term software license and services offerings. The customer is not considered committed when they are able to terminate for convenience without payment of a substantive penalty. The disclosure includes estimates of variable consideration, except when the variable consideration is a sales-based or usage-based royalty promised in exchange for a license of intellectual property. Additionally, as a practical expedient, the company does not include contracts that have an original duration of one year or less. RPO estimates are subject to change and are affected by several factors, including
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Notes to Consolidated Financial Statements — (continued)
terminations, changes in the scope of contracts, periodic revalidations, adjustment for revenue that has not materialized and adjustments for currency.
At March 31,September 30, 2022, the aggregate amount of the transaction price allocated to RPO related to customer contracts that are unsatisfied or partially unsatisfied was $58$53 billion. Approximately 7073 percent of the amount is expected to be recognized as revenue in the subsequent two years, approximately 2625 percent in the subsequent three to five years and the balance thereafter.
Revenue Recognized for Performance Obligations Satisfied (or Partially Satisfied) in Prior Periods
For the three and nine months ended March 31,September 30, 2022, revenue was reduced by $29$36 million and $60 million, respectively, for performance obligations satisfied (or partially satisfied) in previous periods mainly due to changes in estimates on contracts with cost-to-cost measures of progress.
Reconciliation of Contract Balances
The following table provides information about notes and accounts receivable–trade, contract assets and deferred income balances:balances.
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| At March 31, |
| At December 31, |
| At September 30, |
| At December 31, | ||||
(Dollars in millions) | | 2022 | | 2021 | | 2022 | | 2021 | ||||
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 $214 in 2022 and $218 in 2021) | | $ | 5,526 | | $ | 6,754 | ||||||
Contract assets* | |
| 517 | |
| 471 | | $ | 522 | | $ | 471 |
Deferred income (current) | |
| 13,526 | |
| 12,518 | | $ | 11,139 | | $ | 12,518 |
Deferred income (noncurrent) | |
| 3,423 | |
| 3,577 | | $ | 3,018 | | $ | 3,577 |
* Included within prepaid expenses and other current assets in the Consolidated Balance Sheet. |
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The amount of revenue recognized during the three and nine months ended March 31,September 30, 2022 that was included within the deferred income balance at June 30, 2022 and December 31, 2021 was $4.0$4.3 billion and $8.8 billion, respectively, and was primarily related to services and software.
15
Notes to Consolidated Financial Statements — (continued)
The following table provides roll forwards of the notes and accounts receivable–trade allowance for expected credit losses for the threenine months ended March 31,September 30, 2022 and the year ended December 31, 2021:2021.
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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 | | September 30, 2022 | ||||||||
$ | 218 | | $ | 23 | | $ | (7) | | $ | (9) | | $ | 225 | 218 | | $ | 43 | | $ | (28) | | $ | (19) | | $ | 214 |
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January 1, 2021 | | Additions / (Releases) | | Write-offs | | Foreign currency and other | | December 31, 2021 | |||||
$ | 260 | | $ | (15) | | $ | (28) | | $ | 1 | | $ | 218 |
The contract assets allowance for expected credit losses was not material in any of the periods presented.
14
Notes to Consolidated Financial Statements — (continued)
5. Segments:
In January 2022, IBM announced the divestiture of its healthcare data and analyticssoftware assets which is expected to closeclosed 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.
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(1) Does not include minor mission moves.
(2) IBM completed the separation of its managed infrastructure services business to Kyndryl on November 3, 2021.
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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.
1516
Notes to Consolidated Financial Statements — (continued)
SEGMENT INFORMATION
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Revenue | | $ | 5,772 | | $ | 4,829 | | $ | 3,219 | | $ | 154 | | $ | 13,973 | | | $ | 5,811 | | $ | 4,700 | | $ | 3,352 | | $ | 174 | | $ | 14,037 | |
Pre-tax income from continuing operations | | $ | 1,134 | | $ | 348 | | $ | 199 | | $ | 84 | | $ | 1,766 | | | $ | 1,306 | | $ | 462 | | $ | 280 | | $ | 79 | | $ | 2,128 | |
Revenue year-to-year change | |
| 12.3 | % |
| 13.3 | % |
| (2.3) | % |
| (26.2) | % |
| 8.3 | % | |
| 7.5 | % |
| 5.4 | % |
| 14.8 | % |
| (5.7) | % |
| 8.2 | % |
Pre-tax income year-to-year change | |
| 72.3 | % |
| 25.8 | % |
| (31.7) | % |
| (14.3) | % |
| 33.3 | % | |
| 31.9 | % |
| (0.8) | % |
| 34.1 | % |
| (40.4) | % |
| 18.4 | % |
Pre-tax income margin | |
| 19.7 | % |
| 7.2 | % |
| 6.2 | % |
| 54.6 | % |
| 12.6 | % | |
| 22.5 | % |
| 9.8 | % |
| 8.3 | % |
| 45.4 | % |
| 15.2 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
For the three months ended March 31, 2021*: | |
|
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For the three months ended September 30, 2021*: | |
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| |
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Revenue | | $ | 5,138 | | $ | 4,262 | | $ | 3,293 | | $ | 208 | | $ | 12,902 | | | $ | 5,406 | | $ | 4,457 | | $ | 2,921 | | $ | 184 | | $ | 12,969 | |
Pre-tax income from continuing operations | | $ | 658 | | $ | 277 | | $ | 292 | | $ | 98 | | $ | 1,325 | | | $ | 990 | | $ | 466 | | $ | 209 | | $ | 132 | | $ | 1,797 | |
Pre-tax income margin | |
| 12.8 | % |
| 6.5 | % |
| 8.9 | % |
| 47.0 | % |
| 10.3 | % | |
| 18.3 | % |
| 10.5 | % |
| 7.1 | % |
| 71.7 | % |
| 13.9 | % |
Reconciliations to IBM as Reported:
| | | | | | | | | | | | | | |
(Dollars in millions) |
|
| |
|
| |
|
|
| |
|
| |
|
For the three months ended March 31: | | 2022 | | 2021* |
| |||||||||
For the three months ended September 30: | | 2022 | | 2021* |
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Revenue: |
| |
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| |
| |
| |
|
| |
| |
Total reportable segments | | $ | 13,973 | | $ | 12,902 | | | $ | 14,037 | | $ | 12,969 | |
Other ‒ divested businesses | |
| 154 | |
| 197 | | |
| 3 | |
| 189 | |
Other revenue | |
| 70 | |
| 87 | | |
| 68 | |
| 93 | |
Total consolidated revenue | | $ | 14,197 | | $ | 13,187 | | | $ | 14,107 | | $ | 13,251 | |
| | | | | | | | | | | | | | |
Pre-tax income from continuing operations: | |
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| |
|
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Pre-tax income/(loss) from continuing operations: | |
|
| |
|
| | |||||||
Total reportable segments | | $ | 1,766 | | $ | 1,325 | | | $ | 2,128 | | $ | 1,797 | |
Amortization of acquired intangible assets | |
| (461) | |
| (447) | | |
| (417) | |
| (469) | |
Acquisition-related (charges)/income | |
| (7) | |
| (16) | | |
| (1) | |
| (4) | |
Non-operating retirement-related (costs)/income | |
| (202) | |
| (332) | | |
| (6,062) | ** |
| (318) | |
Kyndryl-related impacts** | | | (222) | |
| — | | |||||||
Kyndryl-related impacts+ | | | 14 | |
| — | | |||||||
Eliminations of internal transactions | |
| (11) | |
| (9) | | |
| 0 | |
| 1 | |
Other ‒ divested businesses | |
| (52) | |
| (15) | | |
| 0 | |
| (41) | |
Unallocated corporate amounts and other | |
| (188) | |
| (262) | | |
| (163) | |
| (155) | |
Total pre-tax income from continuing operations | | $ | 623 | | $ | 244 | | |||||||
Total pre-tax income/(loss) from continuing operations | | $ | (4,501) | | $ | 813 | |
* | Recast to conform to current year presentation. |
** Includes a one-time, non-cash, pre-tax pension settlement charge of $5.9 billion. See note 18, “Retirement-Related Benefits,” for additional information. | + 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.
1617
Notes to Consolidated Financial Statements — (continued)
SEGMENT INFORMATION
Reconciliations to IBM as Reported:
++ Includes a gain from the sale of the company’s healthcare software assets. Refer to note 6, “Acquisitions & Divestitures.” 18 Notes to Consolidated Financial Statements — (continued) 6. Acquisitions & Divestitures: Acquisitions Purchase price consideration for all acquisitions was paid primarily in cash. All acquisitions, except as otherwise stated, were for 100 percent of the acquired business and are reported in the Consolidated Statement of Cash Flows, net of acquired cash and cash equivalents. During the nine months ended September 30, 2022, the company completed six acquisitions at an aggregate cost of $1,102 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.
At
The following table reflects the purchase price related to these acquisitions and the resulting purchase price
19 Notes to Consolidated Financial Statements — (continued)
N/A 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 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.
Healthcare Software Assets — In January 2022,
20 Notes to Consolidated Financial Statements — (continued) Other Divestitures — In the first quarter of 2022, the Infrastructure segment completed one divestiture. The financial terms related to this transaction were not material. 7. Earnings/(Loss) Per Share of Common Stock: The following tables provide the computation of basic and diluted earnings/(loss) per share of common stock for
Stock options to purchase 840,544 shares and 750,990 shares were outstanding as of Due to the net loss for the three months ended September 30, 2022, otherwise dilutive potential shares of common stock under stock-based compensation plans and contingently issuable shares of 6,696,350 and 2,069,742, respectively, have been excluded from the computation of diluted earnings/(loss) per share as the effect would have been antidilutive.
Notes to Consolidated Financial Statements — (continued)
Stock options to purchase Due to the net loss for the nine months ended September 30, 2022, otherwise dilutive potential shares of common stock under stock-based compensation plans and contingently issuable shares of 7,530,115 and 1,899,113, respectively, have been excluded from the computation of diluted earnings/(loss) per share as 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:
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:
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.
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 nine months ended
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
N/A 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 were 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 May 2022 Exchange). The remaining portion of the short-term credit facility was repaid with $46 million of cash. In connection with the May 2022 Exchange, the company 24 Notes to Consolidated Financial Statements — (continued) settlement of 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 As a result of the swap, the transfer of the Shares pursuant to the May 2022 Exchange did not qualify as a true sale, and therefore the Shares remain on the company’s Consolidated Balance Sheet at September 30, 2022. Relatedly, the portion of the company’s indebtedness under the short-term credit facility that was extinguished pursuant to the May 2022 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 $184 million at September 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 $34 million and $127 million for the three and nine months ended September 30, 2022, respectively. The contractual principal balance of the debt was $311 million at September 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. On August 5, 2022, the company borrowed an aggregate principal amount of $300 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 August 11, 2022, the company completed a debt-for-equity exchange through the transfer of the remaining 22.3 million shares of Kyndryl common stock to extinguish $229 million of the company’s indebtedness under the short-term credit facility (the August 2022 Exchange). The remaining portion of the short-term credit facility was The retained interest in the Kyndryl common stock of $184 million and $807 million at
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
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. 25 Notes to Consolidated Financial Statements — (continued) 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
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 9. Financing Receivables: Financing receivables primarily consist of client loan and installment payment receivables (loans) A summary of the components of the company’s financing receivables is presented as follows:
* The carrying value of the receivables classified as held for sale approximates fair value.
Notes to Consolidated Financial Statements — (continued)
* 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 million and $408 million at Transfer of Financial Assets The The following table presents the total amount of client and commercial financing receivables
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
Notes to Consolidated Financial Statements — (continued) Statement, including fees and net gain or loss associated with the transfers of these receivables for the Financing Receivables by Portfolio Segment The following tables present the amortized cost basis for client financing receivables at
* 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.
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.
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
Notes to Consolidated Financial Statements — (continued)
Troubled Debt Restructurings
The company did not have any significant troubled debt restructurings during the 10. Leases: Accounting for Leases as a Lessor The following table presents amounts included in the Consolidated Income Statement related to lessor
* Excludes unguaranteed residual value.
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.
* Amounts as of
The net carrying amount of intangible assets decreased The future amortization expense relating to intangible assets currently recorded in the Consolidated Balance Sheet
Notes to Consolidated Financial Statements — (continued) Goodwill The changes in the goodwill balances by segment for the
Foreign Currency Purchase Translation (Dollars in millions) Balance Goodwill Price and Other Balance Segment 1/1/2022 Additions Adjustments Divestitures Adjustments* 9/30/2022 Software $ 43,966 $ 442 $ (118) $ — $ (1,290) $ 43,001 Consulting 6,797 461 (42) — (343) 6,872 Infrastructure 4,396 — — (1) (50) 4,345 Other** 484 — — (484) — — Total $ 55,643 $ 903 $ (160) $ (485) $ (1,683) $ 54,218 * 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 There were 12. Borrowings: Short-Term Debt At March 31, At December 31, At September 30, At December 31, (Dollars in millions) 2022 2021 2022 2021 Short-term loans $ 13 $ 22 $ 196 $ 22 Long-term debt — current maturities 7,676 6,764 5,741 6,764 Total $ 7,690 $ 6,787 $ 5,937 $ 6,787
Notes to Consolidated Financial Statements — (continued) The weighted-average interest rate for short-term loans excluding the aforementioned secured borrowings was 8.2 percent and 6.7 percent at September 30, 2022 and December 31, 2021, respectively. Long-Term Debt Pre-Swap Borrowing
* Includes notes, debentures, bank loans and secured borrowings.
33 Table of Notes to Consolidated 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
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. On July 20, 2022, the Pre-swap annual contractual obligations of long-term debt outstanding at
Interest on Debt
Lines of Credit The company has a $2.5 billion Three-Year Credit Agreement and a $7.5 billion Five-Year Credit Agreement with maturity dates of June
At 34 Notes to Consolidated Financial Statements — (continued) 13. Commitments: The company’s extended lines of credit to third-party entities include unused amounts of $1.5 billion and $1.7 billion at
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 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 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
Notes to Consolidated Financial Statements — (continued) Extended Warranty Liability
* 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 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
Notes to Consolidated Financial Statements — (continued) these claims, suits, investigations and proceedings, including considerations of the procedural status of the matter in question, the presence of complex or novel legal theories, and/or the ongoing discovery and development of information important to the matters. The company reviews claims, suits, investigations and proceedings at least quarterly, and decisions are made with respect to recording or adjusting provisions and disclosing reasonably possible losses or range of losses (individually or in the aggregate), to reflect the impact and status of settlement discussions, discovery, procedural and substantive rulings, reviews by counsel and other information pertinent to a particular matter. Whether any losses, damages or remedies finally determined in any claim, suit, investigation or proceeding could reasonably have a material effect on the company’s business, financial condition, results of operations or cash flows will depend on a number of variables, including: the timing and amount of such losses or damages; the structure and type of any such remedies; the significance of the impact any such losses, damages or remedies may have in the Consolidated Financial Statements; and the unique facts and circumstances of the particular matter that may give rise to additional factors. While the company will continue to defend itself vigorously, it is possible that the company’s business, financial condition, results of operations or cash flows could be affected in any particular period by the resolution of one or more of these matters. The following is a summary of the more significant legal matters involving the company. 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 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, 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 37 Notes to Consolidated Financial Statements — (continued) damages and $718 million in punitive damages, plus interest and fees. IBM filed a notice of appeal, and BMC cross 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
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 15. Equity Activity: Reclassifications and Taxes Related to Items of Other Comprehensive Income
Notes to Consolidated Financial Statements — (continued) Reclassifications and Taxes Related to Items of Other Comprehensive Income
39 Notes to Consolidated Financial Statements — (continued) Reclassifications and Taxes Related to Items of Other Comprehensive Income
Notes to Consolidated Financial Statements — (continued) Reclassifications and Taxes Related to Items of Other Comprehensive Income
Accumulated Other Comprehensive Income/(Loss) (net of tax)
41
Notes to Consolidated Financial Statements — (continued)
* 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
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. 42 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 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 In connection with cash flow hedges of forecasted interest payments related to the company's borrowings, the company recorded net losses (before taxes) of 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 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
company hedged its exposure is approximately two years. At 43 Notes to Consolidated Financial Statements — (continued) $8.2 billion and $7.2 billion, respectively. At both At 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 At 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 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
Notes to Consolidated Financial Statements — (continued) Cumulative Basis Adjustments for Fair Value Hedges At
* Includes ($ 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:
* Reclassified to conform to current year presentation.
Notes to Consolidated Financial Statements — (continued)
N/A - not applicable
* Reclassified to conform to current year presentation. 46 Notes to Consolidated Financial Statements — (continued)
N/A - not applicable For the three and nine months
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.
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 September 30, 2022 increased $10 million compared to the corresponding period in the prior year, including increases in ESPP ($15 million) as a result of the change described above and performance share units ($5 million), partially offset by decreases in stock options ($10 million) primarily due to the conversion of stock options of acquired entities in the prior year. Pre-tax stock-based compensation cost for the nine months ended September 30, 2022 increased $74 million compared to the corresponding period in the prior year, including increases in restricted stock units ($32 million), ESPP ($30 million) and performance share units ($16 million). The increases are driven by the change in ESPP described above and a change in the timing of the company’s executive grant cycle in 2022. Total unrecognized compensation cost related to non-vested awards at September 30, 2022 was $1.6 billion and is expected to be recognized over a weighted-average period of approximately 2.7 years. Capitalized stock-based compensation cost was not material at September 30, 2022 and 2021. 18. Retirement-Related Benefits: Pre-Tax Cost of Retirement-Related Plans 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.
Notes to Consolidated Financial Statements — (continued)
nm - not meaningful
nm – not meaningful Cost/(Income) of Pension Plans The following tables provide the components of the cost/(income) for the company’s pension plans.
49 Notes to Consolidated Financial Statements — (continued)
* These components of net periodic pension cost are included in other (income) and expense in the Consolidated Income Statement.
* These components of net periodic pension cost are included in other (income) and expense in the Consolidated Income Statement. 50 Notes to Consolidated Financial Statements — (continued) IBM U.S. Pension and Nonpension Postretirement Plan Changes Over the past several years, the company has taken actions to reduce the risk profile of its worldwide retirement-related plans, while at the same time increasing the funded status of the plans. As described in note 1, “Basis of Presentation,” in September 2022, the Qualified PPP irrevocably transferred to the Insurers approximately $16 billion of the Qualified PPP’s defined benefit pension obligations and related plan assets, thereby reducing the company’s pension obligations and assets by the same amount. This transaction further de-risks the company’s retirement-related plans by eliminating the potential for the company to make future cash contributions to fund this portion of pension obligations being transferred to the Insurers. After the transaction, the Qualified PPP remained in an overfunded position as of September 30, 2022. Upon issuance of the group annuity contracts, the Qualified PPP’s benefit obligations and administration for approximately 100,000 of the company’s retirees and beneficiaries (the Transferred Participants) were transferred to the Insurers. Under the group annuity contracts, each Insurer has made an irrevocable commitment, and will be solely responsible, to pay 50 percent of the pension benefits of each Transferred Participant that are due on and after January 1, 2023. The transaction resulted in no changes to the benefits to be received by the Transferred Participants. The company recognized a one-time, non-cash, pre-tax pension settlement charge of $5.9 billion ($4.4 billion net of tax) in the third quarter of 2022 primarily related to the accelerated recognition of actuarial losses included within AOCI in the Consolidated Statement of Equity. As a result of this transaction, the company was required to remeasure the benefit obligations and plan assets of the Qualified PPP. The remeasurement reflects the use of an updated discount rate and actual return on plan assets as of August 31, 2022, applying the practical expedient to remeasure plan assets and obligations as of the nearest calendar month-end date. In September 2022, the company amended its U.S. Nonpension Postretirement Plan to transition coverage for Medicare-eligible participants to a new IBM-sponsored group Medicare Advantage program administered by UnitedHealthcare, starting January 1, 2023. The changes are intended to provide an enhanced member experience, better value and more comprehensive benefits to IBM participants. As a result of this amendment, the company was required to remeasure the benefit obligation of this plan. The amendment and remeasurement resulted in a decrease in nonpension postretirement benefit obligations and a corresponding decrease in accumulated other comprehensive loss, which is reflected in the changes in benefit obligations from actuarial losses/(gains) in the table below. The remeasurement reflects the use of an updated discount rate and actual return on plan assets as of July 31, 2022, applying the practical expedient to remeasure plan assets and obligations as of the nearest calendar month-end date. The following table presents the changes in benefit obligations and plan assets of the company’s retirement related benefit plans affected by the interim remeasurements described above for the nine months ended September 30, 2022.
Notes to Consolidated Financial Statements — (continued)
** Primarily represents the transfer of Qualified PPP pension obligations and related plan assets to the Insurers pursuant to group annuity contracts and lump sum payments to plan participants.
Plan Contributions The table below includes contributions to the following plans:
* Amounts reported net of refunds. During the nine months ended September 30, 2022 and 2021, the company contributed $247 million and $307 million of U.S. Treasury Securities, respectively, to the non-U.S. DB plans and nonpension postretirement benefit plans. Additionally, during the nine months ended September 30, 2022 and 2021, the company contributed $366 million and $311 million in U.S. Treasury securities, respectively, to the Active Medical Trust. Contributions made with U.S. Treasury securities are considered a non-cash transaction. The company does not anticipate any significant changes to the expected plan contributions in 2022 from the amounts disclosed in the 2021 Annual Report.
Notes to
19. Subsequent Events: On
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION FOR THE THREE AND NINE MONTHS ENDED Snapshot Financial Results Summary — Three Months Ended
* ** 14.6 percent adjusted for currency. nm - not meaningful Organization of Information: On November 3, 2021, 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 In the first quarter of 2022, the company realigned its management structure to reflect the planned divestiture of its healthcare
Management Discussion – (continued) 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. In September 2022, the IBM Qualified Personal Pension Plan (Qualified PPP) purchased two separate nonparticipating single premium group annuity contracts from The Prudential Insurance Company of America and Metropolitan Life Insurance Company (collectively, the Insurers) and irrevocably transferred to the Insurers approximately $16 billion of the Qualified PPP’s defined benefit pension obligations and related plan assets, thereby reducing our pension obligations and assets by the same amount. The group annuity contracts were purchased using assets of the Qualified PPP and no additional funding contribution was required from the company. As a result of this transaction, we recognized a one-time, non-cash, pre-tax pension settlement charge of $5.9 billion ($4.4 billion net of tax) in the third quarter of 2022, primarily related to the accelerated recognition of accumulated actuarial losses of the Qualified PPP. The company was also required to remeasure the benefit obligation and plan assets of the Qualified PPP. Refer to note 18, “Retirement-Related Benefits,” for additional information. 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 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 55 Management Discussion – (continued) operating given their unique and non-recurring nature. These charges primarily relate to any
service costs, interest cost, expected return on plan assets, amortized actuarial gains/losses, the impacts of any plan curtailments/settlements including a one-time, non-cash, pre-tax settlement charge of $5.9 billion ($4.4 billion, net of tax) in the third quarter of 2022 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
* Includes a one-time, non-cash pension settlement charge of $4.4 billion net of tax. ** Refer to page nm - not meaningful 56 Management Discussion – (continued) Macroeconomic Environment: Throughout 2022, we have seen escalating labor and component costs and a strengthening of the U.S. dollar. Consulting, which makes up well over half of IBM’s workforce, is most impacted by the labor cost inflation. While those dynamics continue to put pressure on our margin profile, we are seeing progress in the actions we have taken to mitigate the impacts of these higher costs. We have begun to see improved utilization, acquisitions progressing toward margin accretion and priced margin improvements year over year that will benefit our margin profile going forward. Additionally, across all of our product-based businesses, we have executed price increases above our historical level of increases to be more reflective of the labor and component costs we are incurring due to the inflationary environment and to mitigate the impacts of currency. This includes price increases in our support and maintenance agreements for our hardware and software portfolios. The strengthening of the U.S. dollar impacted our reported revenue and gross profit dollars. We execute hedging programs which defer but do not eliminate the impact of currency. The gains from these hedging programs are reflected primarily in other income and expense. With the rate and magnitude of movements, and because we do not hedge all currencies, we do have a currency impact to our overall profit and cash flows. See “Currency Rate Fluctuations,” for additional information. 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
The
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. Our objective in returning to the workplace is to allow IBM locations to safely accommodate in-person working during pandemic conditions that are constantly changing. Our approach has enabled hundreds of locations to safely reopen, adhering to IBM protocols and adjusting capacity levels through periods where conditions may be improving or worsening over time. 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 57 Management Discussion – (continued) Financial Performance Summary — Three Months Ended In the Total revenue grew From a geographic perspective, Americas revenue grew Gross margin of Total expense and other (income) Pre-tax
Management Discussion – (continued) tax benefit was primarily driven by events that resulted in additional anticipated utilization of U.S. foreign tax credits. Net loss from continuing operations was $3.2 billion compared with net income of $1.0 billion in the prior-year period and the net income/(loss) from continuing operations margin of (22.8) percent was down 30.6 points year to year. Operating (non-GAAP) pre-tax income from continuing operations of $2.0 billion increased 22.6 percent compared to the prior-year period and the operating (non-GAAP) pre-tax margin from continuing operations increased 1.8 points to 13.9 percent. These profit dynamics reflect our portfolio shift toward higher value, led by software. Our pre-tax profit includes the contribution from incremental sales to Kyndryl and the negative impacts of currency primarily due to the strengthening of the U.S. dollar. The operating (non-GAAP) income tax provision for the third quarter of 2022 was $312 million, compared to a benefit from income taxes of $67 million in the third quarter of 2021. The current-year tax provision was driven by many factors including the impacts of the geographical mix of income, incentives and changes in unrecognized tax
Diluted Consolidated diluted loss per share in the third quarter of 2022 was $3.54 compared to diluted earnings per share
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, in the third quarter of 2022, we generated $1.9 billion in cash flow provided by operating activities,
Management Discussion – (continued) Financial Results Summary —Nine Months Ended September 30:
* Includes a one-time, non-cash, pre-tax pension settlement charge of $5.9 billion ($4.4 billion net of tax) resulting in an impact of ($4.86) to diluted earnings/(loss) per share from continuing operations and consolidated diluted earnings/(loss) per share. See note 18, “Retirement-Related Benefits,” for additional information. ** 13.8 percent adjusted for currency. nm - not meaningful The following table provides the company’s operating (non-GAAP) earnings for the first nine months of 2022 and 2021.
* Includes a one-time, non-cash pension settlement charge of $4.4 billion net of tax. ** Refer to page 96 for a more detailed reconciliation of net loss to operating earnings and operating earnings per share. nm - not meaningful 60 Management Discussion – (continued) Financial Performance Summary —Nine Months Ended September 30: In the first nine months of 2022, we reported $43.8 billion in revenue, a loss from continuing operations of $1.1 billion, including a one-time, non-cash, pre-tax pension settlement charge of $5.9 billion ($4.4 billion net of tax), and operating (non-GAAP) earnings of $5.0 billion, which excludes the impact of the settlement charge. Diluted loss per share from continuing operations was $1.21 as reported, including an impact of $4.86 from the pension settlement charge, and diluted earnings per share was $5.52 on an operating (non-GAAP) basis. On a consolidated basis, we generated $6.5 billion in cash from operations and $4.1 billion in free cash flow. We delivered shareholder returns of $4.5 billion in dividends. Total revenue grew 7.8 percent as reported and 14 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 8.6 percent as reported and 14 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 9.5 percent as reported and 17 percent adjusted for currency, with growth across all three business areas. Infrastructure revenue increased 10.6 percent year to year as reported and 16 percent adjusted for currency, with approximately 8 points of growth from incremental sales to Kyndryl. As the separation of Kyndryl occurred in early November 2021, the impact of these incremental sales to growth was largely in the first three quarters of this year. From a geographic perspective, Americas revenue grew 12.1 percent year to year as reported (12 percent adjusted for currency). EMEA increased 4.4 percent (16 percent adjusted for currency). Asia Pacific grew 2.6 percent (14 percent adjusted for currency). Gross margin of 52.6 percent decreased 1.5 points year to year, however, gross profit dollars grew 4.9 percent compared to the prior-year period. Overall gross margin was impacted by the investments we are making to drive our hybrid cloud and AI strategy, higher labor and component costs and the impacts of currency, while the mitigating hedging benefits and operational productivity and efficiency we have realized are primarily reflected in expense. Operating (non-GAAP) gross margin of 53.8 percent decreased 1.6 points versus the prior year for similar reasons. Total expense and other (income) increased 25.9 percent in the first nine months of 2022 versus the prior-year period primarily driven by the pension settlement charge of $5.9 billion, impacts of $0.4 billion related to the Kyndryl retained shares and higher spending reflecting continuing investment in our hybrid cloud and AI strategy, partially offset by the effects of currency, a gain from the divestiture of our healthcare software assets, lower workforce rebalancing charges and benefits from the actions taken to streamline operations and our go-to-market model. Total operating (non-GAAP) expense and other (income) decreased 3.3 percent year to year, driven primarily by the factors described above excluding the pension settlement charge and the impacts related to the Kyndryl retained shares. Pre-tax loss from continuing operations was $2.2 billion in the first nine months of 2022 compared with pre-tax income of $2.0 billion in the prior-year period with the year-to-year decline driven by the $5.9 billion pension settlement charge. Pre-tax margin was down 9.8 points year to year to (4.9) percent reflecting the impact of the charge. The continuing operations benefit from income taxes in the first nine months of 2022 was $1.1 billion, compared to a benefit of $0.3 billion in the first nine months of 2021. The increase compared to the prior year was primarily due to the pension settlement charge in the third quarter of 2022. Net loss from continuing operations was $1.1 billion compared with net income of $2.3 billion in the prior-year period and the net income/(loss) from continuing operations margin of (2.5) percent was down 8.0 points year to year. Operating (non-GAAP) pre-tax income from continuing operations of $6.0 billion increased 38.1 percent compared to the prior-year period and the operating (non-GAAP) pre-tax margin from continuing operations increased 3.0 points to 13.7 percent. These profit dynamics reflect our portfolio shift toward higher value, led by software. Our pre-tax profit includes the contribution from incremental sales to Kyndryl and the negative impacts of currency primarily due to the strengthening of the U.S. dollar. The operating (non-GAAP) provision for income taxes was $969 million in the first 61 Management Discussion – (continued) nine months of 2022, compared to $204 million in the first nine months of 2021. The increase compared to the prior year was primarily driven by the resolution of certain tax audits in the first quarter of 2021 as well as third-quarter 2021 events that resulted in additional anticipated utilization of U.S. foreign tax credits. Operating (non-GAAP) income from continuing operations of $5.0 billion increased 21.5 percent and the operating (non-GAAP) income margin from continuing operations of 11.5 percent was up 1.3 points year to year. Diluted loss per share from continuing operations was $1.21 in the first nine months of 2022, including an impact of $4.86 from the pension settlement charge, compared to diluted earnings per share of $2.49 in the prior-year period. Operating (non-GAAP) diluted earnings per share of $5.52 increased 20.5 percent versus the prior-year period. Consolidated diluted loss per share in the first nine months of 2022 was $1.19 compared to diluted earnings per share of $3.77 in the prior-year period. This includes the impact from the pension settlement charge and a year-to-year reduction of $1.26 from discontinued operations due to the separation of Kyndryl. Our balance sheet at September 30, 2022 continues to provide us with the flexibility to support the business. Cash and cash equivalents, restricted cash and marketable securities at September 30, 2022 were $9.7 billion, an increase of $2.2 billion from December 31, 2021. Total debt of $50.9 billion at September 30, 2022 decreased $0.8 billion driven by currency impacts, partially offset by net debt issuances. Key drivers in the balance sheet and total cash flows were: Total assets decreased $6.2 billion (flat adjusted for currency) from December 31, 2021 driven by:
Total liabilities decreased $7.3 billion ($0.9 billion adjusted for currency) from December 31, 2021 driven by:
62 Management Discussion – (continued) Total equity of $20.1 billion increased $1.2 billion from December 31, 2021 as a result of:
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 $6.5 billion in the first nine months of 2022, a decrease of $3.8 billion compared to the first nine months of 2021, primarily due to a decrease in cash provided by financing receivables driven by higher prior-year sales of receivables. Net cash used in investing activities of $2.9 billion decreased $2.4 billion compared to the prior-year period. Financing activities were a net use of cash of $2.1 billion in the first nine months of 2022 compared to $10.7 billion in the first nine months of 2021. 63 Management Discussion – (continued) Third Quarter and First
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
Management Discussion – (continued)
* Recast to reflect segment changes. Software
* Recast to reflect segment changes. 65 Management Discussion – (continued)
* Recast to reflect segment changes. Software revenue of Hybrid Platform & Solutions revenue of
Management Discussion – (continued) Transaction Processing revenue of For the first nine months of 2022, Software revenue of $17,749 million increased 8.6 percent as reported (14 percent adjusted for currency) compared to the same period in 2021. Incremental sales to Kyndryl contributed approximately
* Recast to reflect segment changes.
* Recast to reflect segment changes. Software gross profit margin increased In the third quarter, pre-tax income of
Management Discussion – (continued) Consulting
* Recast to reflect segment change.
* Recast to reflect segment change. Consulting revenue of $4,700 million increased 5.4 percent as reported (16 percent adjusted for currency) in the third quarter of 2022 compared to the prior-year period, with growth across all business areas. Over the trailing 12 months, our book-to-bill ratio was 1.05, reflecting clients’ trust in our deep industry expertise and co-creation approach throughout their hybrid cloud and digital transformation journeys. Within Consulting, over the trailing 12 months, hybrid cloud revenue of $8,889 million grew 21 percent as reported (28 percent adjusted for currency) year to year, as we help clients design and enable enterprise hybrid cloud strategies. Our Red Hat consulting practice continued to be a meaningful contributor to revenue with strong double-digit growth as we continued to add new engagements. Since acquiring Red Hat just over three years ago, Consulting has led nearly 1,400 Red Had engagements with more than $6.5 billion in aggregate bookings. Our strategic partnerships also contributed to our performance in the third quarter, with continued revenue growth at a double-digit rate from these partnerships. In the third quarter of 2022, Business Transformation revenue of $2,165 million increased 4.7 percent as reported (14 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 pervasive, driven by supply chain, finance, data and client experience transformations. Working with our partners such as SAP, Salesforce and Adobe, we help our clients optimize their operations and improve the way they engage with their customers. Technology Consulting revenue of $943 million increased 6.1 percent as reported (17 percent adjusted for currency) in the third quarter of 2022 compared to the prior-year period, led by our cloud application development and cloud modernization offerings, including our Red Hat consulting practice. Application Operations revenue of For the first nine months of 2022, Consulting revenue of $14,337 million increased 9.5 percent as reported (17 percent adjusted for currency) reflecting strong year-to-year growth as reported and adjusted for currency across all three business areas. Within Business Transformation, year-to-year revenue grew as we brought technology and strategic 68 Management Discussion – (continued) consulting together to help clients transform critical workflows at scale. In our Technology Consulting business, we led client engagements around cloud modernization and cloud development. Through our Application Operations offerings, we continued to provide cloud platform and application management services
* Recast to reflect segment change.
* Recast to reflect segment change. Consulting Pre-tax income Consulting Signings and Book-to-Bill
69 Management Discussion – (continued)
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, 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
* Recast to reflect segment change.
* Recast to reflect segment change. Infrastructure revenue of $3,352 million increased 14.8 percent as reported (23 percent adjusted for currency) in the third quarter of 2022 compared to the prior-year period. This includes incremental sales to Kyndryl which contributed
Management Discussion – (continued)
Hybrid Infrastructure revenue of Infrastructure Support revenue of $1,421 million decreased 3.2 percent as reported, but grew 5 percent adjusted for currency in the
For the first nine months of 2022, Infrastructure revenue of $10,805 million increased 10.6 percent as reported (16 percent adjusted for currency) compared to the prior-year period. Incremental sales to Kyndryl contributed approximately 8 points of revenue growth. Infrastructure revenue performance was driven by double-digit growth in Hybrid Infrastructure, with zSystems revenue growth driven by the new z16, and growth in Distributed Infrastructure driven by strong performance in high-end disk and flash storage solutions as well as high-end Power10 systems.
* Recast to reflect segment change.
* Recast to reflect segment change. Infrastructure gross profit margin of 50.8 percent decreased
Management Discussion – (continued) expansion in Hybrid Infrastructure driven primarily by a product mix benefit from the revenue growth in zSystems. For the first nine months of 2022, gross profit margin of 51.9 percent decreased 3.7 points compared to the prior-year period, driven primarily by profit margin declines in Distributed Infrastructure, which reflects increased component costs and supplier premiums, as well as margin declines in Infrastructure Support, driven by portfolio mix. These declines are partially offset by a product mix benefit from the revenue growth in zSystems. In the third quarter of 2022, Infrastructure pre-tax income of $280 million increased 34.1 percent and pre-tax margin of 8.3 percent increased 1.2 points compared to the prior-year period, reflecting product mix benefits from the revenue growth in zSystems. For the first nine months of 2022, Infrastructure pre-tax income of $1,236 million increased 25.0 percent and pre-tax margin of 11.4 percent increased 1.3 points compared to the prior-year period, driven primarily by the same factor described above. Financing See pages 91 through 94 for a discussion of Financing’s segment results. Geographic Revenue In addition to the revenue presentation by reportable segment, we also measure revenue performance on a geographic basis.
Total revenue of Americas revenue of In EMEA, total revenue of $3,959 million increased 0.5 percent as reported (16 percent adjusted for currency), which includes approximately 6 points of revenue growth from incremental sales to Kyndryl. France and the UK increased 4.5 percent and 3.3 percent, respectively, as reported, and increased 21 percent and 20 percent, respectively, 72 Management Discussion – (continued) adjusted for currency. Germany and Italy decreased 8.1 percent and 1.3 percent, respectively, as reported, but increased 7 percent and 15 percent, respectively, adjusted for currency. The suspension and orderly wind-down of our Russian operations in the second quarter impacted the revenue growth rate in EMEA by 1.7 points as reported (2 points adjusted for currency). Asia Pacific revenue of $2,732 million was flat as reported, but increased 16 percent adjusted for currency, which includes approximately 5 points of revenue growth from incremental sales to Kyndryl. Japan decreased 3.4 percent as reported, but increased 22 percent adjusted for currency. India and Australia increased 6.7 percent and 2.6 percent, respectively, as reported, and increased 15 percent and 10 percent, respectively, adjusted for currency. China decreased 15.3 percent as reported (12 percent adjusted for currency). For the first nine months of 2022, total revenue of $43,840 million increased 7.8 percent as reported (14 percent adjusted for currency) compared to the Americas revenue of $22,614 million increased 12.1 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 10.8 percent and Canada increased In EMEA, total revenue of
Asia Pacific revenue of
Management Discussion – (continued) Expense Total Expense and Other (Income)
* Includes a one-time, non-cash pension settlement charge of $5.9 billion. See note 18, “Retirement-Related Benefits,” for additional information. nm
nm - not meaningful Total expense and other (income) primarily driven by the For additional information regarding total expense and other (income) for both expense presentations, see the following analyses by category.
Management Discussion – (continued) Selling, General and Administrative Expense
nm - not meaningful
nm - not meaningful Total selling, general and administrative (SG&A) expense increased 2.0 percent in the third quarter of 2022 versus the prior-year period driven primarily by the following factors:
75 Management Discussion – (continued) Operating (non-GAAP) expense
Operating (non-GAAP) expense increased 0.4 percent year to year, primarily driven by the same factors. Provisions for expected credit loss expense increased Research, Development and Engineering
Research, development and engineering (RD&E) expense in the
Intellectual Property and Custom Development Income
76 Management Discussion – (continued)
Total intellectual property and custom development income decreased 20.5 percent year to year in the third quarter, and 3.0 percent in the first Other (Income) and Expense
* Includes a one-time, non-cash pension settlement charge of $5.9 billion. nm - not meaningful
* Includes a one-time, non-cash pension settlement charge of $5.9 billion. nm - not meaningful
Management Discussion – (continued)
Total other (income) and expense was expense of
Operating (non-GAAP) other (income) and expense was $293 million of income in the third quarter of 2022 andincreased $219 million compared to the prior-year period. The year-to-year change was driven primarily by the higher net exchange gains and higher interest income. Total other (income) and expense was $5,921 million of expense in the first nine months of 2022 compared to $891 million in the prior-year period. The year-to-year decrease was primarily driven by:
Operating (non-GAAP) other (income) and expense was Interest Expense
Interest expense increased
Management Discussion – (continued) both the third quarter and first nine months of 2022 were primarily driven by higher average interest rates, offset by a lower average debt balance. Retirement-Related Plans The following
* Includes a one-time, non-cash pension settlement charge of $5.9 billion. See note 18, “Retirement-Related Benefits,” for additional information. nm - not meaningful
* Includes a one-time, non-cash pension settlement charge of $5.9 billion. See note 18, “Retirement-Related Benefits,” for additional information. nm - not meaningful Total pre-tax retirement-related plan cost 79 Management Discussion – (continued) million). Total cost for the first nine months of 2022 increased $5,401 million compared to the first nine months of 2021, primarily due to an increase in curtailments/settlements ($5,885 million) driven by the pension settlement charge, higher interest costs ($136 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
Taxes
The continuing operations benefit from income taxes for the first
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
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. federal 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. federal income tax returns for 2015 and 2016. The company anticipates that this audit will be completed in 80 Management Discussion – (continued) 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 The amount of unrecognized tax benefits at
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.
Operating (non-GAAP) earnings per share for the three and nine months ended September 30, 2022
* The $5.9 billion one-time, non-cash, pre-tax pension settlement charge resulted in an impact of nm - not meaningful
Management Discussion – (continued)
* The $5.9 billion one-time, non-cash, pre-tax pension settlement charge resulted in an impact of ($4.86) to diluted earnings/(loss) per share from continuing operations and an impact of ($4.90) to basic earnings/(loss) per share. nm - not meaningful Actual shares outstanding at September 30, 2022 were 904.1 million. The weighted-average number of common shares outstanding assuming dilution during the third quarter and first nine months of 2022 were 1.9 million (0.2 percent) and 2.4 million (0.3 percent) shares lower, respectively, than the same periods of 2021, driven by the exclusion of dilutive potential common shares in the current-year computation. The weighted-average number of common shares outstanding assuming dilution used in the non-GAAP diluted earnings per share calculation for the third quarter and first nine months of 2022 were 6.9 million (0.8 percent) and 7.1 million (0.8 percent) shares higher, respectively, than the same periods of 2021. Financial Position Dynamics Our balance sheet at Cash, restricted cash and marketable securities at 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 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
Management Discussion – (continued) IBM Working Capital
Working capital increased $2,613 million from the year-end 2021 position. The key changes are described below: Current assets decreased $540 million (an increase of $1,329 million adjusted for currency) due to:
Current liabilities decreased $3,153 million ($1,401 million adjusted for currency) as a result of:
Receivables and Allowances Roll Forward of Total IBM Receivables Allowance for Credit
*
+ Refer to note A, “Significant Accounting Policies,” in our 2021 Annual Report for additional information regarding allowance for credit loss write-offs.
Excluding receivables classified as held for sale, the total IBM receivables provision coverage was 2.3 percent at 83 Management Discussion – (continued) Financing Segment Receivables and Allowances The following table presents external Financing segment receivables excluding receivables classified as held for sale, and immaterial miscellaneous receivables.
* 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 Roll Forward of Financing Segment Receivables Allowance for Credit Losses (included in Total IBM)
Financing’s expected credit loss expense (including reserves for off-balance sheet commitments which are recorded in other liabilities) was a net release of Noncurrent Assets and Liabilities
Noncurrent assets decreased $5,611 million ($1,355 million adjusted for currency) driven by:
Management Discussion – (continued)
Long-term debt increased
Noncurrent liabilities (excluding debt) decreased
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.
* Financing segment debt includes debt of Total debt of
Non-Financing debt of
Financing segment debt of $11,198 million decreased $2,730 million ($2,114 million adjusted for currency) from December 31, 2021 primarily due to lower funding requirements associated with financing 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 85 Management Discussion – (continued) 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 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 of $20,147 million increased
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.
Net cash provided by operating activities decreased
Net cash used in investing activities decreased $2,417 million driven primarily by:
Management Discussion – (continued)
Net cash used in financing activities decreased $8,556 million driven primarily by:
Results of Discontinued Operations Income from discontinued operations, net of tax was
Looking Forward
Hybrid Cloud and AI Progress
Our partner ecosystem is a crucial element of our strategy. We
87 We continue to invest,
We are confident in the
“today’s IBM”. Since the separation of Kyndryl, IBM is Retirement-Related Plans Our pension plans are well funded. Contributions for all retirement-related plans are expected to be approximately Currency Rate Fluctuations Throughout 2022, there has been significant strengthening of the U.S. dollar (USD) as compared to most other currencies. Changes in the relative values of non-U.S. currencies to the The combination of the rate, breadth and magnitude of movements in currency, and the fact that we do not hedge 100 percent of our currency exposures, will result in a currency impact to our profit and cash flows in 2022. We execute a hedging program which defers, versus eliminates, the volatility of currency impacts on our financial results. During periods of sustained movements in currency, the marketplace and competition adjust to the changing 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 88 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)
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 The major rating
IBM has ample financial flexibility, supported by our strong liquidity position and cash flows, to operate at a single A credit rating.
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
89 Management Discussion – (continued) 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 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
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
* Includes cash flows of discontinued operations. See note 3, “Separation of Kyndryl,” for additional information. In the first 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 90 Management Discussion – (continued) 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.
Financing Financing is a reportable segment that is measured as a stand-alone entity. Financing facilitates IBM Results of Operations
* Recast to reflect 2021 segment changes.
* Recast to reflect 2021 segment changes. Our Financing business Financing pre-tax income decreased
Management Discussion – (continued) Financial Position
Total external receivables decreased At 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.
Management Discussion – (continued) During 2021, sales of client financing receivables were utilized as part of the company’s cash and liquidity management as well as for credit mitigation. The following table presents the total amount of client and commercial financing receivables
For additional information relating to financing receivables refer to note 9, “Financing Receivables.” Refer to pages Return on Equity Calculation
** 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.
Return on equity was 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. 93 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 Unguaranteed Residual Value
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.
* Retirement-Related Adjustments includes a one-time, non-cash, pre-tax pension settlement charge of $5.9 billion ($4.4 billion after tax). See note 18 “Retirement-Related Benefits,” for additional information. ** The tax impact on operating (non-GAAP) pre-tax + Operating (non-GAAP) earnings per share was calculated using 912.8 million shares, which includes 8.8 million dilutive potential shares under our stock-based compensation plans and contingently issuable shares. Due to the GAAP net loss for the three months ended September 30, 2022, these dilutive potential shares were excluded from the GAAP loss per share calculation as the effect would have been antidilutive. The difference in share count resulted in an additional ($0.02) reconciling item.
* 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. 95 Management Discussion – (continued)
* Retirement-Related Adjustments includes a one-time, non-cash, pre-tax pension settlement charge of $5.9 billion ($4.4 billion after tax). See note 18 “Retirement-Related Benefits,” for additional information.
+ Operating (non-GAAP) earnings per share was calculated using 911.1 million shares, which includes 9.4 million dilutive potential shares under our stock-based compensation plans and contingently issuable shares. Due to the GAAP net loss for the nine months ended September 30, 2022, these dilutive potential shares were excluded from the GAAP loss per share calculation as the effect would have been antidilutive. The difference in share count resulted in an additional ($0.06) reconciling item.
* The tax impact on operating (non-GAAP) pre-tax income from continuing operations is calculated under the same accounting principles applied to the GAAP pre-tax income which employs an annual effective tax rate method to the results.
Management Discussion – (continued) Forward-Looking and Cautionary Statements Except for the historical information and discussions contained herein, statements contained in this Form 10-Q may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on the company’s current assumptions regarding future business and financial performance. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, including, but not limited to, the following: a downturn in 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.
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
* 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
Item 6. Exhibits
SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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