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, 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 |
|
|
|
| |
2.625% Notes due 2022 |
| IBM 22A |
| New York Stock Exchange |
1.250% Notes due 2023 |
| IBM 23A |
| New York Stock Exchange |
0.375% Notes due 2023 |
| IBM 23B |
| New York Stock Exchange |
1.125% Notes due 2024 |
| IBM 24A |
| New York Stock Exchange |
2.875% Notes due 2025 |
| IBM 25A |
| New York Stock Exchange |
0.950% Notes due 2025 |
| IBM 25B |
| New York Stock Exchange |
0.875% Notes due 2025 |
| IBM 25C |
| New York Stock Exchange |
0.300% Notes due 2026 |
| IBM 26B |
| New York Stock Exchange |
1.250% Notes due 2027 |
| IBM 27B |
| New York Stock Exchange |
0.300% Notes due 2028 | IBM 28B | New York Stock Exchange | ||
1.750% Notes due 2028 |
| IBM 28A |
| New York Stock Exchange |
1.500% Notes due 2029 |
| IBM 29 |
| New York Stock Exchange |
0.875% Notes due 2030 | IBM 30 | New York Stock Exchange | ||
1.750% Notes due 2031 |
| IBM 31 |
| New York Stock Exchange |
0.650% Notes due 2032 | IBM 32A | New York Stock Exchange | ||
1.250% Notes due 2034 | IBM 34 | New York Stock Exchange | ||
1.200% Notes due 2040 | IBM 40 | New York Stock Exchange | ||
7.00% Debentures due 2025 |
| IBM 25 |
| New York Stock Exchange |
6.22% Debentures due 2027 |
| IBM 27 |
| New York Stock Exchange |
6.50% Debentures due 2028 |
| IBM 28 |
| New York Stock Exchange |
7.00% Debentures due 2045 |
| IBM 45 |
| New York Stock Exchange |
7.125% Debentures due 2096 |
| IBM 96 |
| New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section l3 or l5(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒ | Accelerated filer ☐ |
Non-accelerated filer ☐ | Smaller reporting company ☐ |
Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The registrant had 899,435,325 shares of common stock outstanding at March 31, 2022.
Index
2
Part I - Financial Information
Item 1. Consolidated Financial Statements:
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED INCOME STATEMENT
(UNAUDITED)
| Three Months Ended March 31, | ||||||
(Dollars in millions except per share amounts) |
| 2022 |
| 2021* | |||
Revenue: |
|
|
| ||||
Services | $ | 7,703 | $ | 7,096 | |||
Sales |
| 6,339 |
| 5,880 | ** | ||
Financing |
| 155 |
| 211 | ** | ||
Total revenue |
| 14,197 |
| 13,187 | |||
Cost: |
|
|
|
| |||
Services |
| 5,349 |
| 4,644 | |||
Sales |
| 1,415 |
| 1,379 | ** | ||
Financing |
| 98 |
| 137 | ** | ||
Total cost |
| 6,862 |
| 6,160 | |||
Gross profit |
| 7,335 |
| 7,027 | |||
Expense and other (income): |
|
|
|
| |||
Selling, general and administrative |
| 4,597 |
| 4,688 | |||
Research, development and engineering |
| 1,679 |
| 1,616 | |||
Intellectual property and custom development income |
| (121) |
| (146) | |||
Other (income) and expense |
| 246 |
| 346 | |||
Interest expense |
| 311 |
| 280 | |||
Total expense and other (income) |
| 6,712 |
| 6,784 | |||
Income from continuing operations before income taxes |
| 623 |
| 244 | |||
Provision for/(benefit from) income taxes |
| (39) |
| (160) | |||
Income from continuing operations | $ | 662 | $ | 403 | |||
Income from discontinued operations, net of tax |
| 71 |
| 552 | |||
Net income | $ | 733 | $ | 955 | |||
Earnings/(loss) per share of common stock: |
|
|
|
| |||
Assuming dilution: |
|
|
|
| |||
Continuing operations | $ | 0.73 | $ | 0.45 | |||
Discontinued operations |
| 0.08 |
| 0.61 | |||
Total | $ | 0.81 | $ | 1.06 | |||
Basic: |
|
|
|
| |||
Continuing operations | $ | 0.74 | $ | 0.45 | |||
Discontinued operations |
| 0.08 |
| 0.62 | |||
Total | $ | 0.82 | $ | 1.07 | |||
Weighted-average number of common shares outstanding: (millions) |
|
|
|
| |||
Assuming dilution |
| 909.2 |
| 901.7 | |||
Basic |
| 899.3 |
| 893.6 | |||
* | Reclassified to reflect discontinued operations presentation. |
** Reclassified to conform to current year presentation.
(Amounts may not add due to rounding.)
(The accompanying notes are an integral part of the 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 | ||
* 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, |
| |||
(Dollars in millions) | 2022 |
| 2021 |
| |||
Assets: |
|
|
|
| |||
Current assets: |
|
|
|
| |||
Cash and cash equivalents | $ | 9,934 | $ | 6,650 | |||
Restricted cash |
| 286 |
| 307 | |||
Marketable securities |
| 550 |
| 600 | |||
Notes and accounts receivable — trade (net of allowances of $225 in 2022 and $218 in 2021) |
| 5,963 |
| 6,754 | |||
Short-term financing receivables: |
|
| |||||
Held for investment (net of allowances of $157 in 2022 and $176 in 2021) |
| 6,759 |
| 7,221 | |||
Held for sale |
| 410 |
| 793 | |||
Other accounts receivable (net of allowances of $28 in 2022 and $24 in 2021) |
| 1,003 |
| 1,002 | |||
Inventory, at lower of average cost or net realizable value: |
|
| |||||
Finished goods |
| 269 |
| 208 | |||
Work in process and raw materials |
| 1,507 |
| 1,442 | |||
Total inventory |
| 1,776 |
| 1,649 | |||
Deferred costs |
| 1,103 |
| 1,097 | |||
Prepaid expenses and other current assets |
| 3,548 |
| 3,466 | |||
Total current assets |
| 31,330 |
| 29,539 | |||
Property, plant and equipment |
| 20,006 |
| 20,085 | |||
Less: Accumulated depreciation |
| 14,448 |
| 14,390 | |||
Property, plant and equipment — net |
| 5,559 |
| 5,694 | |||
Operating right-of-use assets — net |
| 3,108 |
| 3,222 | |||
Long-term financing receivables (net of allowances of $21 in 2022 and $25 in 2021) |
| 4,610 |
| 5,425 | |||
Prepaid pension assets |
| 9,995 |
| 9,850 | |||
Deferred costs |
| 916 |
| 924 | |||
Deferred taxes |
| 7,567 |
| 7,370 | |||
Goodwill |
| 56,106 |
| 55,643 | |||
Intangible assets — net |
| 12,312 |
| 12,511 | |||
Investments and sundry assets |
| 1,771 |
| 1,823 | |||
Total assets | $ | 133,275 | $ | 132,001 | |||
(Amounts may not add due to rounding.)
(The accompanying notes are an integral part of the financial statements.)
5
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET – (CONTINUED)
(UNAUDITED)
LIABILITIES AND EQUITY
| At March 31, |
| At December 31, | |||
(Dollars in millions except per share amounts) | 2022 |
| 2021 | |||
Liabilities: | ||||||
Current liabilities: |
|
|
|
| ||
Taxes | $ | 1,798 | $ | 2,289 | ||
Short-term debt |
| 7,690 |
| 6,787 | ||
Accounts payable |
| 3,453 |
| 3,955 | ||
Compensation and benefits |
| 2,937 |
| 3,204 | ||
Deferred income |
| 13,526 |
| 12,518 | ||
Operating lease liabilities |
| 954 |
| 974 | ||
Other accrued expenses and liabilities |
| 3,699 |
| 3,892 | ||
Total current liabilities |
| 34,056 |
| 33,619 | ||
Long-term debt |
| 46,545 |
| 44,917 | ||
Retirement and nonpension postretirement benefit obligations |
| 13,937 |
| 14,435 | ||
Deferred income |
| 3,423 |
| 3,577 | ||
Operating lease liabilities |
| 2,358 |
| 2,462 | ||
Other liabilities |
| 13,844 |
| 13,996 | ||
Total liabilities |
| 114,162 |
| 113,005 | ||
Equity: |
|
| ||||
IBM stockholders’ equity: |
|
| ||||
Common stock, par value $0.20 per share, and additional paid-in capital |
| 57,603 |
| 57,319 | ||
Shares authorized: 4,687,500,000 |
|
| ||||
Shares issued: 2022 - 2,250,139,983 |
|
| ||||
2021 - 2,248,577,848 |
|
| ||||
Retained earnings |
| 153,401 |
| 154,209 | ||
Treasury stock - at cost |
| (169,422) |
| (169,392) | ||
Shares: 2022 - 1,350,704,659 |
|
| ||||
2021 - 1,350,509,249 |
|
| ||||
Accumulated other comprehensive income/(loss) |
| (22,532) |
| (23,234) | ||
Total IBM stockholders’ equity |
| 19,050 |
| 18,901 | ||
Noncontrolling interests |
| 62 |
| 95 | ||
Total equity |
| 19,112 |
| 18,996 | ||
Total liabilities and equity | $ | 133,275 | $ | 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 | ||
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 - January 1, 2022 | $ | 57,319 | $ | 154,209 | $ | (169,392) | $ | (23,234) | $ | 18,901 | $ | 95 | $ | 18,996 | |||||||
Net income plus other comprehensive income/(loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Net income |
|
|
| 733 |
|
|
|
|
| 733 |
|
|
| 733 | |||||||
Other comprehensive income/(loss) |
|
|
|
|
|
|
| 703 |
| 703 |
|
|
| 703 | |||||||
Total comprehensive income/(loss) |
|
|
|
|
|
|
|
| $ | 1,436 |
|
| $ | 1,436 | |||||||
Cash dividends paid — common stock ($1.64 per share) |
|
|
| (1,475) |
|
|
|
|
| (1,475) |
|
|
| (1,475) | |||||||
Common stock issued under employee plans (1,562,135 shares) |
| 221 |
|
|
|
|
|
| 221 |
|
|
| 221 | ||||||||
Purchases (595,710 shares) and sales (400,300 shares) of treasury stock under employee plans — net |
|
|
| (3) |
| (30) |
|
|
| (34) |
|
|
| (34) | |||||||
Other equity |
| 63 |
| (63) |
|
|
|
|
| 0 |
|
|
| 0 | |||||||
Changes in noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
| (33) |
| (33) | |||||||
Equity – March 31, 2022 | $ | 57,603 | $ | 153,401 | $ | (169,422) | $ | (22,532) | $ | 19,050 | $ | 62 | $ | 19,112 | |||||||
| Common |
|
|
|
|
|
| ||||||||||||||
Stock and | Accumulated | ||||||||||||||||||||
Additional | Other | Total IBM | Non- | ||||||||||||||||||
Paid-in | Retained | Treasury | Comprehensive | Stockholders’ | Controlling | Total | |||||||||||||||
(Dollars in millions except per share amounts) | Capital | Earnings | Stock | Income/(Loss) | Equity | Interests | Equity | ||||||||||||||
Equity - January 1, 2021 | $ | 56,556 | $ | 162,717 | $ | (169,339) | $ | (29,337) | $ | 20,597 | $ | 129 | $ | 20,727 | |||||||
Net income plus other comprehensive income/(loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Net income |
|
|
| 955 |
|
|
|
|
| 955 |
|
|
| 955 | |||||||
Other comprehensive income/(loss) |
|
|
|
|
|
|
| 1,080 |
| 1,080 |
|
|
| 1,080 | |||||||
Total comprehensive income/(loss) |
|
|
|
|
|
|
|
| $ | 2,036 |
|
| $ | 2,036 | |||||||
Cash dividends paid — common stock ($1.63 per share) |
|
|
| (1,457) |
|
|
|
|
| (1,457) |
|
|
| (1,457) | |||||||
Common stock issued under employee plans (1,046,184 shares) |
| 232 |
|
|
|
|
|
|
| 232 |
|
|
| 232 | |||||||
Purchases (339,506 shares) and sales (162,726 shares) of treasury stock under employee plans — net |
|
|
| 2 |
| (21) |
|
|
| (18) |
|
|
| (18) | |||||||
Changes in noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
| (6) |
| (6) | |||||||
Equity - March 31, 2021 | $ | 56,788 | $ | 162,218 | $ | (169,360) | $ | (28,257) | $ | 21,389 | $ | 124 | $ | 21,513 | |||||||
(Amounts may not add due to rounding.)
(The accompanying notes are an integral part of the financial statements.)
8
1. Basis of Presentation:
The accompanying Consolidated Financial Statements and footnotes of the International Business Machines Corporation (IBM or the company) have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The financial statements and footnotes are unaudited. In the opinion of the company’s management, these statements include all adjustments, which are only of a normal recurring nature, necessary to present a fair statement of the company’s results of operations, financial position and cash flows.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amount of assets, liabilities, revenue, costs, expenses and other comprehensive income/(loss) that are reported in the Consolidated Financial Statements and accompanying disclosures. These estimates are based on management’s best knowledge of current events, historical experience, actions that the company may undertake in the future and on various other assumptions that are believed to be reasonable under the circumstances. As a result, actual results may be different from these estimates.
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 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 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. 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. This change impacted the company’s Software segment and Other-divested businesses category. In the fourth quarter of 2021, immediately prior to the separation of Kyndryl, the company made a number of changes to its organizational structure and management system. These changes impacted the company’s reportable segments but did not impact the Consolidated Financial Statements. Refer to note 5, “Segments,” for additional information on the company’s reportable segments. The segments are reported on a comparable basis for all periods.
For the three months ended March 31, 2022, the company recorded a benefit from income taxes of $39 million and its effective tax rate was (6.3) percent. The rate was driven by many factors including the impacts of recently published foreign tax credit regulations, geographical mix of income, incentives, and changes in unrecognized tax benefits. For the three months ended March 31, 2021, the company reported a benefit from income taxes of $160 million and its effective tax rate was (65.5) percent. This tax benefit was primarily related to the resolution of certain tax audits.
Noncontrolling interest amounts of $4.9 million, net of tax, for both the three months ended March 31, 2022 and 2021 are included as a reduction within other (income) and expense in the Consolidated Income Statement.
Interim results are not necessarily indicative of financial results for a full year. The information included in this Form 10-Q should be read in conjunction with the company’s 2021 Annual Report.
9
Notes to Consolidated Financial Statements — (continued)
Within the financial statements and tables presented, certain columns and rows may not add due to the use of rounded numbers for disclosure purposes. Percentages presented are calculated from the underlying whole-dollar amounts. Certain prior period amounts have been reclassified to conform to the current period presentation. This is annotated where applicable. In addition, an adjustment of $63 million between common stock and retained earnings related to the issuance of treasury stock in connection with certain previously stock-based compensation awards has been reflected in the Consolidated Balance Sheet and Consolidated Statement of Equity at March 31, 2022.
2. Accounting Changes:
New Standards to be Implemented
Disclosures about Government Assistance
Standard/Description–Issuance date: November 2021. This guidance requires an entity to provide certain annual disclosures about government assistance received and accounted for by applying a grant or contribution accounting model by analogy.
Effective Date and Adoption Considerations–The guidance is effective for annual disclosures beginning in 2022 and early adoption was permitted. The company will adopt the guidance as of the effective date.
Effect on Financial Statements or Other Significant Matters–As the guidance is a change to disclosures only, the company does not expect it to have a material impact in the consolidated financial results.
Troubled Debt Restructurings and Vintage Disclosures
Standard/Description–Issuance date: March 2022. This eliminates the accounting guidance for troubled debt restructurings and requires an entity to apply the general loan modification guidance to all loan modifications, including those made to customers experiencing financial difficulty, to determine whether the modification results in a new loan or a continuation of an existing loan. The guidance also requires presenting current period gross write-offs by year of origination for financing receivables and net investment in leases.
Effective Date and Adoption Considerations–The amendment is effective January 1, 2023 and early adoption is permitted. The company will adopt the guidance as of the effective date.
Effect on Financial Statements or Other Significant Matters–The guidance is not expected to have a material impact in the consolidated financial results.
Standards Implemented
Lessors–Certain Leases with Variable Lease Payments
Standard/Description–Issuance date: July 2021. This guidance modifies a lessor’s accounting for certain leases with variable lease payments that resulted in the recognition of a day-one loss even if the lessor expected the arrangement to be profitable overall. The amendment requires these types of lease contracts to be classified as operating leases which eliminates any recognition of a day-one loss.
Effective Date and Adoption Considerations–The amendment was effective January 1, 2022 and early adoption was permitted. The company adopted the guidance on a prospective basis as of the effective date.
Effect on Financial Statements or Other Significant Matters–The guidance did not have a material impact in the consolidated financial results.
Revenue Contracts with Customers Acquired in a Business Combination
Standard/Description–Issuance date: October 2021. This guidance requires that an acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with revenue guidance, as if it
10
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 on the retained shares, refer to note 8, “Financial Assets & Liabilities.” The historical results of Kyndryl have been presented as discontinued operations and, as such, have been excluded from continuing operations and segment results for all periods presented.
The company’s presentation of discontinued operations excludes general corporate overhead costs which were historically allocated to Kyndryl, consistent with the company’s management system, that do not meet the requirements to be presented in discontinued operations. Such allocations include labor and non-labor expenses related to IBM’s corporate support functions (e.g. finance, accounting, tax, treasury, IT, HR, legal, among others) that historically provided support to Kyndryl and transferred to Kyndryl at separation. In addition, discontinued operations excludes the historical intercompany purchases and sales between IBM and Kyndryl that were eliminated in consolidation.
Separation costs of $3 million and $50 million incurred during the three months ended March 31, 2022 and 2021, respectively, are included in income from discontinued operations, net of tax, in the Consolidated Income Statement. These charges primarily relate to transaction and third-party support costs, business separation and applicable employee retention fees, pension settlement charges and related tax charges.
IBM will provide transition services to Kyndryl predominantly consisting of information technology services for a period no longer than two years after the separation. The impact of these transition services on the company’s Consolidated Financial Statements for the three months ended March 31, 2022 was not material.
IBM and Kyndryl entered into various commercial agreements pursuant to which Kyndryl will purchase hardware, software and services from IBM for use in the delivery of Kyndryl services agreements and under which IBM will receive services from Kyndryl, related to hosting data centers and servicing IBM’s information infrastructure. As part of the separation, IBM has also committed to provide Kyndryl upgraded hardware at no cost to Kyndryl over a two-year period after the separation. The total estimate of IBM’s obligation under the agreement at both March 31, 2022 and
11
December 31, 2021 was $265 million and is included in other accrued expenses and liabilities in the Consolidated Balance Sheet.
The following table presents the major categories of income from discontinued operations:
(Dollars in millions) | |||||||
For the three months ended March 31: |
| 2022 |
| 2021* | |||
Revenue | $ | 17 | $ | 4,543 | |||
Cost of sales |
| 21 |
| 3,365 | |||
Selling, general and administrative expense |
| (6) |
| 488 | |||
RD&E and Other (income) and expense |
| (69) |
| 29 | |||
Income from discontinued operations before income taxes | $ | 73 | $ | 661 | |||
Provision for income taxes |
| 2 |
| 109 | |||
Income from discontinued operations, net of tax | $ | 71 | $ | 552 | |||
* | Excludes intercompany transactions between IBM and Kyndryl and general corporate overhead costs transferred to Kyndryl as discussed above. |
Income from discontinued operations, net of tax, for the three months ended March 31, 2022 primarily relates to a joint venture historically managed by Kyndryl, which did not transfer at separation due to the transfer being subject to regulatory approval. Upon receiving regulatory approval in the first quarter of 2022, the company sold its majority shares in the joint venture to Kyndryl, resulting in a pre-tax gain on sale of $68 million. Also reflected in the discontinued operations results are charges related to the settlement of assets and liabilities in accordance with the Separation and Distribution Agreement.
The following table presents selected financial information related to cash flows from discontinued operations:
(Dollars in millions) |
|
| |||||
For the three months ended March 31: | 2022 | 2021 | |||||
Net cash provided by/(used in) operating activities | $ | 0 | $ | 702 | * | ||
Net cash provided by/(used in) investing activities |
| 48 |
| (104) | |||
* | Excludes intercompany transactions between IBM and Kyndryl and general corporate overhead costs transferred to Kyndryl as discussed above. |
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.
12
Revenue by Major Products/Service Offerings
(Dollars in millions) | ||||||
For the three months ended March 31: | 2022 | 2021* | ||||
Hybrid Platform & Solutions | $ | 4,080 | $ | 3,800 | ||
Transaction Processing | 1,692 | 1,338 | ||||
Total Software | $ | 5,772 | $ | 5,138 | ||
Business Transformation |
| 2,255 |
| 1,953 | ||
Application Operations |
| 1,619 |
| 1,474 | ||
Technology Consulting |
| 955 |
| 835 | ||
Total Consulting | $ | 4,829 | $ | 4,262 | ||
Hybrid Infrastructure |
| 1,700 |
| 1,782 | ||
Infrastructure Support |
| 1,519 |
| 1,512 | ||
Total Infrastructure | $ | 3,219 | $ | 3,293 | ||
Financing** |
| 154 |
| 208 | ||
Other |
| 224 |
| 284 | ||
Total revenue | $ | 14,197 | $ | 13,187 | ||
* | Recast to reflect segment changes. |
** Contains lease and loan/working capital financing arrangements which are not subject to the guidance on revenue from contracts with customers.
Hybrid Cloud Revenue by Segment
(Dollars in millions) |
| |||||
For the three months ended March 31: | 2022 | 2021* | ||||
Software | $ | 2,130 | $ | 1,744 | ||
Consulting |
| 2,135 |
| 1,722 | ||
Infrastructure | 672 | 837 | ||||
Other |
| 72 |
| 87 | ||
Total | $ | 5,009 | $ | 4,390 | ||
* | Recast to reflect segment changes. |
Revenue by Geography
(Dollars in millions) |
| |||||
For the three months ended March 31: | 2022 | 2021 | ||||
Americas | $ | 7,056 | $ | 6,477 | ||
Europe/Middle East/Africa |
| 4,231 |
| 3,928 | ||
Asia Pacific |
| 2,910 |
| 2,781 | ||
Total | $ | 14,197 | $ | 13,187 | ||
Remaining Performance Obligations
The remaining performance obligation (RPO) disclosure provides the aggregate amount of the transaction price yet to be recognized as of the end of the reporting period and an explanation as to when the company expects to recognize these amounts in revenue. It is intended to be a statement of overall work under contract that has not yet been performed and does not include contracts in which the customer is not committed, such as certain as-a-Service, governmental, term software license and services offerings. The customer is not considered committed when they are able to terminate for convenience without payment of a substantive penalty. The disclosure includes estimates of variable consideration, except when the variable consideration is a sales-based or usage-based royalty promised in exchange for a license of intellectual property. Additionally, as a practical expedient, the company does not include contracts that have an original duration of one year or less. RPO estimates are subject to change and are affected by several factors, including
13
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, 2022, the aggregate amount of the transaction price allocated to RPO related to customer contracts that are unsatisfied or partially unsatisfied was $58 billion. Approximately 70 percent of the amount is expected to be recognized as revenue in the subsequent two years, approximately 26 percent in the subsequent to five years and the balance thereafter.
Revenue Recognized for Performance Obligations Satisfied (or Partially Satisfied) in Prior Periods
For the three months ended March 31, 2022, revenue was reduced by $29 million for performance obligations satisfied (or partially satisfied) in previous periods mainly due to changes in estimates on contracts with cost-to-cost measures of progress.
Reconciliation of Contract Balances
The following table provides information about notes and accounts receivable–trade, contract assets and deferred income balances:
| At March 31, |
| At December 31, | |||
(Dollars in millions) | 2022 | 2021 | ||||
Notes and accounts receivable — trade (net of allowances of $225 in 2022 and $218 in 2021) | $ | 5,963 | $ | 6,754 | ||
Contract assets* |
| 517 |
| 471 | ||
Deferred income (current) |
| 13,526 |
| 12,518 | ||
Deferred income (noncurrent) |
| 3,423 |
| 3,577 | ||
* | Included within prepaid expenses and other current assets in the Consolidated Balance Sheet. |
The amount of revenue recognized during the three months ended March 31, 2022 that was included within the deferred income balance at December 31, 2021 was $4.0 billion and was primarily related to services and software.
The following table provides roll forwards of the notes and accounts receivable–trade allowance for expected credit losses for the three months ended March 31, 2022 and the year ended December 31, 2021:
(Dollars in millions) |
|
|
|
|
|
|
|
| |||||
January 1, 2022 | Additions / (Releases) | Write-offs | Foreign currency and other | March 31, 2022 | |||||||||
$ | 218 | $ | 23 | $ | (7) | $ | (9) | $ | 225 | ||||
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 analytics assets which is expected to close in the second quarter of 2022. Refer to note 6, “Acquisitions & Divestitures,” for additional information. The company re-aligned its management structure to manage these assets outside of the Software segment prior to the divestiture. In the first quarter of 2022, the financial results of these assets are presented in Other–divested businesses. This change did not impact IBM’s Consolidated Financial Statements.
In the fourth quarter of 2021, immediately prior to the separation of Kyndryl, the company made a number of changes to its organizational structure and management system to align the company’s operating model to its platform-centric approach to hybrid cloud and AI. With these changes, the company revised its reportable segments, but did not impact its Consolidated Financial Statements. The below table displays the segment updates in the fourth quarter of 2021.
(1) Does not include minor mission moves.
(2) IBM completed the separation of its managed infrastructure services business to Kyndryl on November 3, 2021.
(3) | Represents a joint venture relationship that was historically managed by the managed infrastructure services business that was not transferred to Kyndryl as part of the separation. |
The following tables reflect the results of continuing operations of the company’s segments consistent with the management and measurement system utilized within the company and 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.
15
SEGMENT INFORMATION
Total |
| |||||||||||||||
(Dollars in millions) | Software | Consulting | Infrastructure | Financing | Segments |
| ||||||||||
For the three months ended March 31, 2022: |
|
|
|
|
|
|
|
|
|
| ||||||
Revenue | $ | 5,772 | $ | 4,829 | $ | 3,219 | $ | 154 | $ | 13,973 | ||||||
Pre-tax income from continuing operations | $ | 1,134 | $ | 348 | $ | 199 | $ | 84 | $ | 1,766 | ||||||
Revenue year-to-year change |
| 12.3 | % |
| 13.3 | % |
| (2.3) | % |
| (26.2) | % |
| 8.3 | % | |
Pre-tax income year-to-year change |
| 72.3 | % |
| 25.8 | % |
| (31.7) | % |
| (14.3) | % |
| 33.3 | % | |
Pre-tax income margin |
| 19.7 | % |
| 7.2 | % |
| 6.2 | % |
| 54.6 | % |
| 12.6 | % | |
For the three months ended March 31, 2021*: |
|
|
|
|
|
|
|
|
|
| ||||||
Revenue | $ | 5,138 | $ | 4,262 | $ | 3,293 | $ | 208 | $ | 12,902 | ||||||
Pre-tax income from continuing operations | $ | 658 | $ | 277 | $ | 292 | $ | 98 | $ | 1,325 | ||||||
Pre-tax income margin |
| 12.8 | % |
| 6.5 | % |
| 8.9 | % |
| 47.0 | % |
| 10.3 | % | |
Reconciliations to IBM as Reported:
(Dollars in millions) |
|
|
|
|
| ||
For the three months ended March 31: | 2022 | 2021* |
| ||||
Revenue: |
|
|
|
| |||
Total reportable segments | $ | 13,973 | $ | 12,902 | |||
Other ‒ divested businesses |
| 154 |
| 197 | |||
Other revenue |
| 70 |
| 87 | |||
Total consolidated revenue | $ | 14,197 | $ | 13,187 | |||
Pre-tax income from continuing operations: |
|
|
|
| |||
Total reportable segments | $ | 1,766 | $ | 1,325 | |||
Amortization of acquired intangible assets |
| (461) |
| (447) | |||
Acquisition-related (charges)/income |
| (7) |
| (16) | |||
Non-operating retirement-related (costs)/income |
| (202) |
| (332) | |||
Kyndryl-related impacts** | (222) |
| — | ||||
Eliminations of internal transactions |
| (11) |
| (9) | |||
Other ‒ divested businesses |
| (52) |
| (15) | |||
Unallocated corporate amounts and other |
| (188) |
| (262) | |||
Total pre-tax income from continuing operations | $ | 623 | $ | 244 | |||
* | Recast to conform to current year presentation. |
** | Refer to note 8, “Financial Assets & Liabilities,” for additional information. |
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 three 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.
16
Acquisition |
| Segment |
| Description of Acquired Business |
Envizi | Software | Data and analytics software provider for environmental performance management | ||
Sentaca | Consulting | Telco consulting services and solutions provider specializing in automation, cloud migration, and future networks for telecommunication providers | ||
Neudesic | Consulting | Application development and cloud computing services company |
At March 31, 2022, the remaining cash to be remitted by the company related to certain first quarter 2022 acquisitions was $113 million, most of which is expected to be paid by the first quarter of 2023.
The following table reflects the purchase price related to these acquisitions and the resulting purchase price allocation as of March 31, 2022.
N/A - not applicable
The goodwill generated is primarily attributable to the assembled workforce of the acquired businesses and the increased synergies expected to be achieved from the integration of the acquired businesses into the company’s various integrated solutions and services, neither of which qualifies as an amortizable intangible asset.
The overall weighted-average useful life of the identified amortizable intangible assets acquired was 6.7 years. Goodwill of $461 million and $188 million was assigned to the Consulting and Software segments, respectively. It is expected that none of the goodwill will be deductible for tax purposes.
The identified intangible assets will be amortized on a straight-line basis over their useful lives, which approximates the pattern that the assets’ economic benefits are expected to be consumed over time.
The valuation of the assets acquired and liabilities assumed is subject to revision. If additional information becomes available, the company may further revise the purchase price allocation as soon as practical, but no later than one year from the acquisition date; however, material changes are not expected.
17
Notes to Consolidated Financial Statements — (continued)
Divestitures
In first quarter of 2022, the Infrastructure segment completed one divestiture. The financial terms related to this transaction were not material.
Transactions Announced — In January 2022, the company signed a definitive agreement in which Francisco Partners will acquire IBM’s healthcare data and analytics assets reported within Other - divested business (Other) for $1,065 million. Refer to note 5, “Segments,” for additional information. The assets include Health Insights, MarketScan, Clinical Development, Social Program Management, Micromedex, and imaging software offerings. The transaction is expected to close in phases with the initial closing of the U.S. and Canada expected in the second quarter of 2022, and subsequent closings expected in the second half of 2022, subject to customary regulatory clearances and closing conditions. The company expects to recognize a pre-tax gain on the sale, the final amount of which is not yet determinable.
At March 31, 2022, the business met the criteria for held for sale classification. Held for sale assets of approximately $727 million, which consist primarily of goodwill, intangible assets-net and property, plant, and equipment-net of approximately $484 million, $165 million and $45 million, respectively, and held for sale liabilities of $123 million, which consist primarily of deferred income, were included in the company’s Consolidated Balance Sheet at March 31, 2022.
18
7. Earnings Per Share of Common Stock:
The following table provides the computation of basic and diluted earnings per share of common stock for the three months ended March 31, 2022 and 2021.
(Dollars in millions except per share amounts) | ||||||
For the three months ended March 31: |
| 2022 |
| 2021 | ||
Number of shares on which basic earnings per share is calculated: |
|
|
|
| ||
Weighted-average shares outstanding during period |
| 899,316,026 |
| 893,630,916 | ||
Add — Incremental shares under stock-based compensation plans |
| 8,375,246 |
| 6,622,441 | ||
Add — Incremental shares associated with contingently issuable shares |
| 1,534,864 |
| 1,492,709 | ||
Number of shares on which diluted earnings per share is calculated |
| 909,226,136 |
| 901,746,065 | ||
Income from continuing operations | $ | 662 | $ | 403 | ||
Income from discontinued operations, net of tax |
| 71 |
| 552 | ||
Net income on which basic earnings per share is calculated | $ | 733 | $ | 955 | ||
Income from continuing operations | $ | 662 | $ | 403 | ||
Net income applicable to contingently issuable shares |
| — |
| — | ||
Income from continuing operations on which diluted earnings per share is calculated | $ | 662 | $ | 403 | ||
Income from discontinued operations, net of tax, on which basic and diluted earnings per share is calculated |
| 71 |
| 552 | ||
Net income on which diluted earnings per share is calculated | $ | 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 | ||
Stock options to purchase 1,163,321 shares and 1,510,886 shares were outstanding as of March 31, 2022 and 2021, respectively, but were not included in the computation of diluted earnings per share because the exercise price of the options during the respective period was greater than the average market price of the common shares, and, therefore, the effect would have been antidilutive.
8. Financial Assets & Liabilities:
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The company classifies certain assets and liabilities based on the following fair value hierarchy:
| ● | Level 1—Quoted prices (unadjusted) in active markets for identical assets or liabilities that can be accessed at the measurement date; |
19
Notes to Consolidated Financial Statements — (continued)
| ● | Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and |
| ● | Level 3—Unobservable inputs for the asset or liability. |
When available, the company uses unadjusted quoted market prices in active markets to measure the fair value and classifies such items as Level 1. If quoted market prices are not available, fair value is based upon internally developed models that use current market-based or independently sourced market parameters such as interest rates and currency rates. Items valued using internally generated models are classified according to the lowest level input or value driver that is significant to the valuation.
The determination of fair value considers various factors including interest rate yield curves and time value underlying the financial instruments. For derivatives and debt securities, the company uses a discounted cash flow analysis using discount rates commensurate with the duration of the instrument.
In determining the fair value of financial instruments, the company considers certain market valuation adjustments to the “base valuations” calculated using the methodologies described below for several parameters that market participants would consider in determining fair value:
| ● | Counterparty credit risk adjustments are applied to financial instruments, taking into account the actual credit risk of a counterparty as observed in the credit default swap market to determine the true fair value of such an instrument. |
| ● | Credit risk adjustments are applied to reflect the company’s own credit risk when valuing all liabilities measured at fair value. The methodology is consistent with that applied in developing counterparty credit risk adjustments, but incorporates the company’s own credit risk as observed in the credit default swap market. |
The company holds investments primarily in time deposits, certificates of deposit, and U.S. government debt that are designated as available-for-sale. The primary objective of the company’s cash and debt investment portfolio is to maintain principal by investing in very liquid and highly rated investment grade securities.
The company’s standard practice is to hold all of its debt security investments classified as available-for-sale until maturity. No impairment for credit losses and no material non-credit impairments were recorded for the three months ended March 31, 2022 and 2021, respectively.
Certain non-financial assets such as property, plant and equipment, operating right-of-use assets, land, goodwill and intangible assets are also subject to nonrecurring fair value measurements if they are deemed to be impaired. The impairment models used for non-financial assets depend on the type of asset. There were no material impairments of non-financial assets for the three months ended March 31, 2022 and 2021, respectively.
20
The following table presents the company’s financial assets and financial liabilities that are measured at fair value on a recurring basis at March 31, 2022 and December 31, 2021.
Fair Value | ||||||||||||||
Hierarchy | At March 31, 2022 | At December 31, 2021 | ||||||||||||
(Dollars in millions) |
| Level |
| Assets (7) |
| Liabilities (8) |
| Assets (7) |
| Liabilities (8) | ||||
Cash equivalents: (1) | ||||||||||||||
Time deposits and certificates of deposit (2) | 2 | $ | 3,875 | $ | N/A | $ | 1,903 | $ | N/A | |||||
Money market funds | 1 | 2,393 | N/A | 263 | N/A | |||||||||
U.S. government securities (2) | 2 | — | N/A | 599 | N/A | |||||||||
Total cash equivalents | $ | 6,268 | $ | N/A | $ | 2,766 | $ | N/A | ||||||
Equity investments (3) | 1 | — | N/A | 0 | N/A | |||||||||
Kyndryl common stock | 1 | 585 | N/A | 807 | N/A | |||||||||
Debt securities-current (2)(4) | 2 | 550 | N/A | 600 | N/A | |||||||||
Debt securities-noncurrent (2)(5) | 2,3 | 36 | N/A | 37 | N/A | |||||||||
Derivatives designated as hedging instruments: | ||||||||||||||
Interest rate contracts | 2 | 11 | 6 | 12 | — | |||||||||
Foreign exchange contracts | 2 | 505 | 179 | 359 | 117 | |||||||||
Derivatives not designated as hedging instruments: | ||||||||||||||
Foreign exchange contracts | 2 | 19 | 30 | 21 | 42 | |||||||||
Equity contracts (6) | 1,2 | 5 | 17 | 6 | 4 | |||||||||
Total | $ | 7,980 | $ | 231 | $ | 4,608 | $ | 162 | ||||||
| (1) | Included within cash and cash equivalents in the Consolidated Balance Sheet. |
| (2) | Available-for-sale debt securities with carrying values that approximate fair value. |
| (3) | Included within investments and sundry assets in the Consolidated Balance Sheet. |
| (4) | U.S. treasury bills that are reported within marketable securities in the Consolidated Balance Sheet. |
| (5) | Includes corporate and government debt securities that are reported within investments and sundry assets in the Consolidated Balance Sheet. |
| (6) | Level 1 includes immaterial amounts related to equity futures contracts. |
| (7) | The gross balances of derivative assets contained within prepaid expenses and other current assets, and investments and sundry assets in the Consolidated Balance Sheet at March 31, 2022 were $511 million and $29 million, respectively, and at December 31, 2021 were $358 million and $40 million, respectively. |
| (8) | The gross balances of derivative liabilities contained within other accrued expenses and liabilities, and other liabilities in the Consolidated Balance Sheet at March 31, 2022 were $117 million and $114 million, respectively, and at December 31, 2021 were $60 million and $103 million, respectively. |
N/A - not applicable
Kyndryl Common Stock
On November 3, 2021, IBM completed the separation of Kyndryl and retained 19.9 percent of the shares of Kyndryl common stock with the intent to dispose of the shares within twelve months of the separation. The company accounts for the Kyndryl shares as a fair value investment. The fair value of the shares was $585 million and $807 million at March 31, 2022 and December 31, 2021, respectively, and is included within prepaid expenses and other current assets in the Consolidated Balance Sheet. An unrealized loss of $222 million was recorded in other (income) and expense in the Consolidated Income Statement for the three months ended March 31, 2022. Refer to note 3, “Separation of Kyndryl,” for additional information.
Financial Assets and Liabilities Not Measured at Fair Value
Short-Term Receivables and Payables
Notes and other accounts receivable and other investments are financial assets with carrying values that approximate fair value. Accounts payable, other accrued expenses and short-term debt (excluding the current portion of long-term debt and including short-term finance lease liabilities) are financial liabilities with carrying values that approximate fair
21
Notes to Consolidated Financial Statements — (continued)
value. If measured at fair value in the financial statements, these financial instruments would be classified as Level 3 in the fair value hierarchy, except for short-term debt which would be classified as Level 2.
Loans and Long-Term Receivables
Fair values are based on discounted future cash flows using current interest rates offered for similar loans to clients with similar credit ratings for the same remaining maturities. At March 31, 2022 and December 31, 2021, the difference between the carrying amount and estimated fair value for loans and long-term receivables was immaterial. If measured at fair value in the financial statements, these financial instruments would be classified as Level 3 in the fair value hierarchy.
Long-Term Debt
Fair value of publicly traded long-term debt is based on quoted market prices for the identical liability when traded as an asset in an active market. For other long-term debt (including long-term finance lease liabilities) for which a quoted market price is not available, an expected present value technique that uses rates currently available to the company for debt with similar terms and remaining maturities is used to estimate fair value. The carrying amount of long-term debt was $46,545 million and $44,917 million, and the estimated fair value was $47,896 million and $49,465 million at March 31, 2022 and December 31, 2021, respectively. If measured at fair value in the financial statements, long-term debt (including the current portion) would be classified as Level 2 in the fair value hierarchy.
9. Financing Receivables:
Financing receivables primarily consist of client loan and installment payment receivables (loans) and investment in sales-type and direct financing leases (collectively referred to as client financing receivables) and commercial financing receivables. Loans are provided primarily to clients to finance the purchase of hardware, software and services. Payment terms on these financing arrangements are generally for terms up to seven years. Investment in sales-type and direct financing leases relate principally to the company’s Infrastructure products and are for terms ranging generally from to six years. Commercial financing receivables, which consist of both held-for-investment and held-for-sale receivables, relate primarily to working capital financing for dealers and remarketers of IBM products. Payment terms for working capital financing generally range from 30 to 90 days.
A summary of the components of the company’s financing receivables is presented as follows:
* The carrying value of the receivables classified as held for sale approximates fair value.
22
Client Financing Receivables | |||||||||||||||
| Client Loan and |
| Investment in |
|
|
|
|
| |||||||
Installment Payment | Sales-Type and | Commercial Financing Receivables | |||||||||||||
(Dollars in millions) | Receivables | Direct Financing | Held for | Held for | |||||||||||
At December 31, 2021: | (Loans) | Leases | Investment | Sale* | Total | ||||||||||
Financing receivables, gross | $ | 9,303 | $ | 3,336 | $ | 450 | $ | 793 | $ | 13,881 | |||||
Unearned income | (353) | (223) | — | — | (576) | ||||||||||
Unguaranteed residual value | — |
| 335 | — | — | 335 | |||||||||
Amortized cost | $ | 8,949 | $ | 3,448 | $ | 450 | $ | 793 | $ | 13,640 | |||||
Allowance for credit losses | (131) |
| (64) | (6) | — | (201) | |||||||||
Total financing receivables, net | $ | 8,818 | $ | 3,384 | $ | 444 | $ | 793 | $ | 13,439 | |||||
Current portion | $ | 5,371 | $ | 1,406 | $ | 444 | $ | 793 | $ | 8,014 | |||||
Noncurrent portion | $ | 3,447 | $ | 1,978 | $ | — | $ | — | $ | 5,425 | |||||
* The carrying value of the receivables classified as held for sale approximates fair value.
The company has a long-standing practice of taking mitigation actions, in certain circumstances, to transfer credit risk to third parties. These actions may include credit insurance, financial guarantees, nonrecourse borrowings, transfers of receivables recorded as true sales in accordance with accounting guidance or sales of equipment under operating lease. Sale of receivables arrangements are also utilized in the normal course of business as part of the company’s cash and liquidity management.
Financing receivables pledged as collateral for nonrecourse borrowings were $386 million and $408 million at March 31, 2022 and December 31, 2021, respectively. These borrowings are included in note 12, “Borrowings.”
Transfer of Financial Assets
The company enters into agreements with third-party financial institutions to sell certain of its client financing receivables, including both loan and lease receivables, for cash proceeds. Throughout 2021, sales of client financing receivables were utilized as part of the company’s cash and liquidity management as well as for credit mitigation. In the first quarter of 2022, sales of client financing receivables were largely focused on credit mitigation. In addition, the company has an existing agreement with a third-party investor to sell IBM short-term commercial financing receivables on a revolving basis. The company has expanded this agreement to other countries and geographies since commencement in the U.S. and Canada in 2020.
The following table presents the total amount of client and commercial financing receivables transferred:
* | Of the total amount of commercial financing receivables sold and derecognized from the Consolidated Balance Sheet, the amounts presented remained uncollected from the business partners as of March 31, 2022 and 2021. |
The 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
23
Notes to Consolidated Financial Statements — (continued)
Statement, including fees and net gain or loss associated with the transfers of these receivables for the three months ending March 31, 2022 and 2021 were not material.
Financing Receivables by Portfolio Segment
The following tables present the amortized cost basis for client financing receivables at March 31, 2022 and December 31, 2021, further segmented by three classes: Americas, Europe/Middle East/Africa (EMEA) and Asia Pacific. The commercial financing receivables portfolio segment is excluded from the tables in the sections below as the receivables are short term in nature and the current estimated risk of loss and resulting impact to the company’s financial results are not material.
(Dollars in millions) |
|
|
|
|
|
|
|
| ||||
At March 31, 2022: | Americas | EMEA | Asia Pacific | Total | ||||||||
Amortized cost |
| $ | 6,116 | $ | 3,333 | $ | 1,900 | $ | 11,349 | |||
Allowance for credit losses: |
|
|
|
|
|
|
| |||||
Beginning balance at January 1, 2022 | $ | 111 | $ | 61 | $ | 23 | $ | 195 | ||||
Write-offs | $ | (15) | $ | 0 | $ | (2) | $ | (17) | ||||
Recoveries |
| 1 |
| 0 | 0 | 1 | ||||||
Additions/(releases) |
| (5) |
| (3) | (1) | (8) | ||||||
Other* |
| 3 |
| (1) | 0 | 2 | ||||||
Ending balance at March 31, 2022 | $ | 95 | $ | 56 | $ | 21 | $ | 172 | ||||
(Dollars in millions) |
|
|
|
|
|
|
|
| ||||
At December 31, 2021: | Americas | EMEA | Asia Pacific | Total | ||||||||
Amortized cost |
| $ | 6,573 | $ | 3,793 | $ | 2,031 | $ | 12,397 | |||
Allowance for credit losses: |
|
|
|
|
|
|
|
| ||||
Beginning balance at January 1, 2021 | $ | 141 | $ | 77 | $ | 37 | $ | 255 | ||||
Write-offs | $ | (8) | $ | (2) | $ | (7) | $ | (17) | ||||
Recoveries |
| 0 |
| 0 | 1 | 1 | ||||||
Additions/(releases) |
| (19) |
| (11) | (7) | (38) | ||||||
Other* |
| (3) |
| (3) | 0 | (7) | ||||||
Ending balance at December 31, 2021 | $ | 111 | $ | 61 | $ | 23 | $ | 195 | ||||
* Primarily represents translation adjustments.
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.
24
Past Due Financing Receivables
The company summarizes information about the amortized cost basis for client financing receivables, including amortized cost aged over 90 days and still accruing, billed invoices aged over 90 days and still accruing, and amortized cost not accruing.
|
|
|
|
| Amortized |
| Billed |
| Amortized | ||||||
Total | Amortized | Cost | Invoices | Cost | |||||||||||
(Dollars in millions) | Amortized | Cost | > 90 Days and | > 90 Days and | Not | ||||||||||
At March 31, 2022: | Cost | > 90 Days (1) | Accruing (1) | Accruing | Accruing (2) | ||||||||||
Americas | $ | 6,116 | $ | 356 | $ | 282 | $ | 8 | $ | 77 | |||||
EMEA |
| 3,333 | 97 | 7 | 2 | 90 | |||||||||
Asia Pacific |
| 1,900 | 45 | 26 | 2 | 19 | |||||||||
Total client financing receivables | $ | 11,349 | $ | 498 | $ | 315 | $ | 12 | $ | 186 | |||||
|
|
|
|
| Amortized |
| Billed |
| Amortized | ||||||
Total | Amortized | Cost | Invoices | Cost | |||||||||||
(Dollars in millions) | Amortized | Cost | > 90 Days and | > 90 Days and | Not | ||||||||||
At December 31, 2021: | Cost | > 90 Days (1) | Accruing (1) | Accruing | Accruing (2) | ||||||||||
Americas | $ | 6,573 | $ | 188 | $ | 100 | $ | 6 | $ | 90 | |||||
EMEA |
| 3,793 | 99 | 7 | 2 | 95 | |||||||||
Asia Pacific |
| 2,031 | 25 | 5 | 2 | 20 | |||||||||
Total client financing receivables | $ | 12,397 | $ | 312 | $ | 112 | $ | 10 | $ | 205 | |||||
| (1) | At a contract level, which includes total billed and unbilled amounts for financing receivables aged greater than 90 days. |
| (2) | Of the amortized cost not accruing, there was a related allowance of $135 million and $153 million at March 31, 2022 and December 31, 2021, respectively. Financing income recognized on these receivables was immaterial for the three months ended March 31, 2022 and 2021, respectively. |
Credit Quality Indicators
The company’s credit quality indicators, which are based on rating agency data, publicly available information and information provided by customers, are reviewed periodically based on the relative level of risk. The resulting indicators are a numerical rating system that maps to Moody’s Investors Service credit ratings as shown below. The company uses information provided by Moody’s, where available, as one of many inputs in its determination of customer credit ratings. The credit quality of the customer is evaluated based on these indicators and is assigned the same risk rating whether the receivable is a lease or a loan.
The following tables present the amortized cost basis for client financing receivables by credit quality indicator at March 31, 2022 and December 31, 2021, respectively. Receivables with a credit quality indicator ranging from Aaa to Baa3 are considered investment grade. All others are considered non-investment grade. The credit quality indicators reflect mitigating credit enhancement actions taken by customers which reduce the risk to IBM.
25
(Dollars in millions) | Americas | EMEA | Asia Pacific | |||||||||||||||
At December 31, 2021: |
| Aaa – Baa3 |
| Ba1 – D |
| Aaa – Baa3 |
| Ba1 – D |
| Aaa – Baa3 |
| Ba1 – D | ||||||
Vintage year: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
2021 | $ | 2,556 | $ | 1,147 | $ | 1,181 | $ | 778 | $ | 565 | $ | 226 | ||||||
2020 |
| 1,013 | 392 | 506 | 342 | 381 | 86 | |||||||||||
2019 |
| 544 | 236 | 287 | 291 | 297 | 51 | |||||||||||
2018 |
| 338 | 117 | 189 | 85 | 211 | 64 | |||||||||||
2017 |
| 108 | 50 | 15 | 52 | 74 | 17 | |||||||||||
2016 and prior |
| 20 | 53 | 21 | 46 | 38 | 20 | |||||||||||
Total | $ | 4,579 | $ | 1,994 | $ | 2,198 | $ | 1,595 | $ | 1,567 | $ | 464 | ||||||
Troubled Debt Restructurings
The company did not have any significant troubled debt restructurings during the three months ended March 31, 2022 or for the year ended December 31, 2021.
10. Leases:
Accounting for Leases as a Lessor
The following table presents amounts included in the Consolidated Income Statement related to lessor activity:
(Dollars in millions) |
| |||||
For the three months ended March 31: | 2022 |
| 2021 | |||
Lease income — sales-type and direct financing leases: |
|
|
| |||
Sales-type lease selling price | $ | 54 | $ | 360 | ||
Less: Carrying value of underlying assets* |
| (19) |
| (57) | ||
Gross profit | $ | 36 | $ | 304 | ||
Interest income on lease receivables |
| 45 |
| 51 | ||
Total sales-type and direct financing lease income | $ | 81 | $ | 354 | ||
Lease income — operating leases |
| 30 |
| 51 | ||
Variable lease income |
| 28 |
| 57 | ||
Total lease income | $ | 138 | $ | 463 | ||
* Excludes unguaranteed residual value.
Sales-type lease revenue was $54 million for the three months ended March 31, 2022 and $360 million for the three months ended March 31, 2021. The decrease was predominantly due to the zSystems product cycle dynamics.
26
11. Intangible Assets Including Goodwill:
Intangible Assets
The following tables present the company's intangible asset balances by major asset class.
At March 31, 2022 | |||||||||
| Gross Carrying |
| Accumulated |
| Net Carrying | ||||
(Dollars in millions) | Amount | Amortization | Amount* | ||||||
Intangible asset class: | |||||||||
Capitalized software | $ | 1,805 | $ | (729) | $ | 1,076 | |||
Client relationships |
| 9,013 |
| (3,017) |
| 5,996 | |||
Completed technology |
| 6,092 |
| (2,427) |
| 3,665 | |||
Patents/trademarks |
| 2,192 |
| (624) |
| 1,567 | |||
Other** |
| 38 |
| (30) |
| 8 | |||
Total | $ | 19,140 | $ | (6,828) | $ | 12,312 | |||
At December 31, 2021 | |||||||||
| Gross Carrying |
| Accumulated |
| Net Carrying | ||||
(Dollars in millions) | Amount | Amortization | Amount* | ||||||
Intangible asset class: | |||||||||
Capitalized software | $ | 1,696 | $ | (751) | $ | 945 | |||
Client relationships |
| 9,021 |
| (2,889) |
| 6,132 | |||
Completed technology |
| 6,074 |
| (2,259) |
| 3,815 | |||
Patents/trademarks |
| 2,196 |
| (586) |
| 1,610 | |||
Other** |
| 44 |
| (35) |
| 9 | |||
Total | $ | 19,031 | $ | (6,520) | $ | 12,511 | |||
* Amounts as of March 31, 2022 and December 31, 2021 include a decrease in net intangible asset balances of $60 million and $221 million, respectively, due to foreign currency translation.
** | Other intangibles are primarily acquired proprietary and non-proprietary business processes, methodologies and systems. |
The net carrying amount of intangible assets decreased $199 million during the first three months of 2022, primarily due to intangible asset amortization, partially offset by additions of acquired intangibles and capitalized software. The aggregate intangible amortization expense was $625 million and $614 million for the quarters ended March 31, 2022 and 2021, respectively. In the first three months of 2022, the company retired $297 million of fully amortized intangible assets, impacting both the gross carrying amount and accumulated amortization by this amount.
The future amortization expense relating to intangible assets currently recorded in the Consolidated Balance Sheet is estimated to be the following at March 31, 2022:
27
Goodwill
The changes in the goodwill balances by segment for the three months ended March 31, 2022 and for the year ended December 31, 2021 are as follows:
|
|
|
|
|
| Foreign |
|
| ||||||||||
Currency | ||||||||||||||||||
Purchase | Translation | |||||||||||||||||
(Dollars in millions) | Balance | Goodwill | Price | and Other | Balance | |||||||||||||
Segment | 1/1/2022 | Additions | Adjustments | Divestitures | Adjustments* | 3/31/2022 | ||||||||||||
Software | $ | 43,966 | $ | 188 | $ | (27) | $ | — | $ | (99) | $ | 44,027 | ||||||
Consulting |
| 6,797 |
| 461 |
| (3) |
| — |
| (49) |
| 7,205 | ||||||
Infrastructure | 4,396 | — | — | (1) | (5) | 4,390 | ||||||||||||
Other |
| 484 |
| — |
| — |
| — |
| — |
| 484 | ||||||
Total | $ | 55,643 | $ | 649 | $ | (31) | $ | (1) | $ | (153) | $ | 56,106 | ||||||
|
|
|
|
|
| Foreign |
|
| ||||||||||
Currency | ||||||||||||||||||
Purchase | Translation | |||||||||||||||||
(Dollars in millions) | Balance | Goodwill | Price | and Other | Balance | |||||||||||||
Segment | 1/1/2021 | Additions | Adjustments | Divestitures | Adjustments* | 12/31/2021 | ||||||||||||
Software** | $ | 42,665 | $ | 1,836 | $ | 23 | $ | (13) | $ | (545) | $ | 43,966 | ||||||
Consulting |
| 6,145 |
| 713 |
| (21) |
| — |
| (40) |
| 6,797 | ||||||
Infrastructure |
| 4,436 |
| — |
| 0 |
| — |
| (39) |
| 4,396 | ||||||
Other** |
| 520 |
| — |
| — |
| (37) |
| 1 |
| 484 | ||||||
Total | $ | 53,765 | $ | 2,549 | $ | 2 | $ | (50) | $ | (623) | $ | 55,643 | ||||||
* | Primarily driven by foreign currency translation. |
** | Recast to conform to current year presentation due to segment change. |
There were no goodwill impairment losses recorded during the first three months of 2022 or full-year 2021 and the company has no accumulated impairment losses. Purchase price adjustments recorded in the first three months of 2022 and full-year 2021 were related to acquisitions that were still subject to the measurement period that ends at the earlier of 12 months from the acquisition date or when information becomes available. Net purchase price adjustments recorded during the first three months of 2022 and 2021 were not material.
12. Borrowings:
Short-Term Debt
| At March 31, |
| At December 31, | |||
(Dollars in millions) | 2022 | 2021 | ||||
Short-term loans | $ | 13 | $ | 22 | ||
Long-term debt — current maturities |
| 7,676 |
| 6,764 | ||
Total | $ | 7,690 | $ | 6,787 | ||
The weighted-average interest rate for short-term loans was 4.4 percent and 6.7 percent at March 31, 2022 and December 31, 2021, respectively.
28
Long-Term Debt
Pre-Swap Borrowing
|
|
| Balance |
| Balance | |||
(Dollars in millions) | Maturities | 3/31/2022 | 12/31/2021 | |||||
U.S. dollar debt (weighted-average interest rate at March 31, 2022):* |
|
|
|
|
|
| ||
2.7% |
| 2022 | $ | 4,661 | $ | 5,673 | ||
3.4% |
| 2023 |
| 1,563 |
| 1,573 | ||
3.3% |
| 2024 |
| 5,014 |
| 5,016 | ||
6.9% |
| 2025 |
| 607 |
| 608 | ||
3.3% |
| 2026 |
| 4,354 |
| 4,356 | ||
2.8% |
| 2027 |
| 2,871 |
| 2,221 | ||
6.5% |
| 2028 | 313 |
| 313 | |||
3.5% | 2029 | 3,250 | 3,250 | |||||
2.0% | 2030 | 1,350 | 1,350 | |||||
4.4% |
| 2032 |
| 1,100 |
| 600 | ||
8.0% |
| 2038 |
| 83 |
| 83 | ||
4.5% |
| 2039 |
| 2,745 |
| 2,745 | ||
2.9% | 2040 | 650 |
| 650 | ||||
4.0% |
| 2042 |
| 1,107 | 1,107 | |||
7.0% |
| 2045 |
| 27 |
| 27 | ||
4.7% |
| 2046 |
| 650 |
| 650 | ||
4.3% | 2049 | 3,000 |
| 3,000 | ||||
3.0% | 2050 | 750 | 750 | |||||
3.4% | 2052 | 650 | — | |||||
7.1% |
| 2096 |
| 316 |
| 316 | ||
$ | 35,062 | $ | 34,290 | |||||
Other currencies (weighted-average interest rate at March 31, 2022, in parentheses):* |
|
|
|
|
|
| ||
Euro (1.1%) |
| 2023–2040 | $ | 17,783 | $ | 15,903 | ||
Pound sterling (2.6%) |
| 2022 |
| 395 |
| 406 | ||
Japanese yen (0.3%) |
| 2022–2026 |
| 1,198 |
| 1,263 | ||
Other (13.8%) |
| 2022–2025 |
| 384 |
| 378 | ||
$ | 54,821 | $ | 52,240 | |||||
Finance lease obligations (1.9%) | 2022–2030 | 100 | 99 | |||||
$ | 54,921 | $ | 52,339 | |||||
Less: net unamortized discount |
|
|
| 849 |
| 839 | ||
Less: net unamortized debt issuance costs |
|
|
| 142 |
| 130 | ||
Add: fair value adjustment** |
|
|
| 291 |
| 311 | ||
$ | 54,221 | $ | 51,681 | |||||
Less: current maturities |
|
|
| 7,676 |
| 6,764 | ||
Total |
|
| $ | 46,545 | $ | 44,917 | ||
* Includes notes, debentures, bank loans and secured borrowings.
** The portion of the company’s fixed-rate debt obligations that is hedged is reflected in the Consolidated Balance Sheet as an amount equal to the sum of the debt’s carrying value and a fair value adjustment representing changes in the fair value of the hedged debt obligations attributable to movements in benchmark interest rates.
The company’s indenture governing its debt securities and its various credit facilities each contain significant covenants which obligate the company to promptly pay principal and interest, limit the aggregate amount of secured indebtedness and sale and leaseback transactions to 10 percent of the company’s consolidated net tangible assets, and restrict the company’s ability to merge or consolidate unless certain conditions are met. The credit facilities also include
29
Notes to Consolidated Financial Statements — (continued)
a covenant on the company’s consolidated net interest expense ratio, which cannot be less than 2.20 to 1.0, as well as a cross default provision with respect to other defaulted indebtedness of at least $500 million.
The company is in compliance with its debt covenants and provides periodic certifications to its lenders. The failure to comply with its debt covenants could constitute an event of default with respect to the debt to which such provisions apply. If certain events of default were to occur, the principal and interest on the debt to which such event of default applied would become immediately due and payable.
In the first quarter of 2022, the company issued $2.3 billion of Euro fixed-rate notes in tranches with maturities ranging from 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 to 30 years and coupons ranging from 2.20 to 3.43 percent. In the first quarter of 2021, IBM Credit LLC early redeemed all of its outstanding fixed-rate debt in the aggregate amount of $1.75 billion with maturity dates ranging from 2021 to 2023 and deregistered with the U.S. Securities and Exchange Commission. The notes were redeemed at a price equal to 100 percent of the aggregate principal plus a make-whole premium and accrued interest. The company incurred a loss of approximately $22 million upon redemption that was recorded in other (income) and expense in the Consolidated Income Statement.
Pre-swap annual contractual obligations of long-term debt outstanding at March 31, 2022, are as follows:
(Dollars in millions) |
| Total | |
Remainder of 2022 | $ | 5,668 | |
2023 |
| 4,807 | |
2024 |
| 6,364 | |
2025 |
| 3,943 | |
2026 |
| 4,700 | |
Thereafter |
| 29,440 | |
Total | $ | 54,921 | |
Interest on Debt
(Dollars in millions) |
|
|
|
| ||
For the three months ended March 31: | 2022 | 2021 | ||||
Cost of financing | $ | 82 | $ | 106 | ||
Interest expense |
| 311 |
| 280 | ||
Interest capitalized |
| 2 |
| 2 | ||
Total interest paid and accrued | $ | 395 | $ | 388 | ||
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 21, 2024 and June 22, 2026, respectively. The Credit Agreements permit the company and its subsidiary borrowers to borrow up to $10 billion on a revolving basis.
At March 31, 2022, there were no borrowings by the company, or its subsidiaries, under these credit facilities.
13. Commitments:
The company’s extended lines of credit to third-party entities include unused amounts of $1.7 billion at March 31, 2022 and December 31, 2021. A portion of these amounts was available to the company’s business partners to support their working capital needs. In addition, the company has committed to provide future financing to its clients in connection with client purchase agreements for $2.9 billion and $3.2 billion at March 31, 2022 and December 31, 2021,
30
Notes to Consolidated Financial Statements — (continued)
respectively. The company collectively evaluates the allowance for these arrangements using a provision methodology consistent with the portfolio of the commitments. Refer to note A, “Significant Accounting Policies,” in the company’s 2021 Annual Report for additional information. The allowance for these commitments is recorded in other liabilities in the Consolidated Balance Sheet and was not material at March 31, 2022.
The company has applied the guidance requiring a guarantor to disclose certain types of guarantees, even if the likelihood of requiring the guarantor’s performance is remote. The following is a description of arrangements in which the company is the guarantor.
The company is a party to a variety of agreements pursuant to which it may be obligated to indemnify the other party with respect to certain matters. Typically, these obligations arise in the context of contracts entered into by the company, under which the company customarily agrees to hold the party harmless against losses arising from a breach of representations and covenants related to such matters as title to the assets sold, certain intellectual property rights, specified environmental matters, third-party performance of nonfinancial contractual obligations and certain income taxes. In each of these circumstances, payment by the company is conditioned on the other party making a claim pursuant to the procedures specified in the particular contract, the procedures of which typically allow the company to challenge the other party’s claims. While indemnification provisions typically do not include a contractual maximum on the company’s payment, the company’s obligations under these agreements may be limited in terms of time and/or nature of claim, and in some instances, the company may have recourse against third parties for certain payments made by the company.
It is not possible to predict the maximum potential amount of future payments under these or similar agreements due to the conditional nature of the company’s obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made by the company under these agreements have not had a material effect on the company’s business, financial condition or results of operations.
In addition, the company guarantees certain loans and financial commitments. The maximum potential future payment under these financial guarantees and the fair value of these guarantees recognized in the Consolidated Balance Sheet at March 31, 2022 and December 31, 2021 was not material.
Changes in the company’s warranty liability for standard warranties, which are included in other accrued expenses and liabilities and other liabilities in the Consolidated Balance Sheet, and for extended warranty contracts, which are included in deferred income in the Consolidated Balance Sheet, are presented in the following tables.
Standard Warranty Liability
(Dollars in millions) |
| 2022 |
| 2021 | ||
Balance at January 1 | $ | 77 | $ | 83 | ||
Current period accruals |
| 14 |
| 16 | ||
Accrual adjustments to reflect actual experience |
| (2) |
| (4) | ||
Charges incurred |
| (20) |
| (23) | ||
Balance at March 31 | $ | 69 | $ | 72 | ||
31
Extended Warranty Liability (Deferred Income)
(Dollars in millions) |
| 2022 |
| 2021 | ||
Balance at January 1 | $ | 350 | $ | 425 | ||
Revenue deferred for new extended warranty contracts |
| 18 |
| 18 | ||
Amortization of deferred revenue |
| (44) |
| (53) | ||
Other* |
| (1) |
| (6) | ||
Balance at March 31 | $ | 323 | $ | 383 | ||
Current portion | $ | 155 | $ | 199 | ||
Noncurrent portion | $ | 168 | $ | 185 | ||
* Other primarily consists of foreign currency translation adjustments.
14. Contingencies:
As a company with a substantial employee population and with clients in more than 175 countries, IBM is involved, either as plaintiff or defendant, in a variety of ongoing claims, demands, suits, investigations, tax matters and proceedings that arise from time to time in the ordinary course of its business. The company is a leader in the information technology industry and, as such, has been and will continue to be subject to claims challenging its IP rights and associated products and offerings, including claims of copyright and patent infringement and violations of trade secrets and other IP rights. In addition, the company enforces its own IP against infringement, through license negotiations, lawsuits or otherwise. Further, given the rapidly evolving external landscape of cybersecurity, privacy and data protection laws, regulations and threat actors, the company and its clients have been and will continue to be subject to actions or proceedings in various jurisdictions. Also, as is typical for companies of IBM’s scope and scale, the company is party to actions and proceedings in various jurisdictions involving a wide range of labor and employment issues (including matters related to contested employment decisions, country-specific labor and employment laws, and the company’s pension, retirement and other benefit plans), as well as actions with respect to contracts, product liability, securities, foreign operations, competition law and environmental matters. These actions may be commenced by a number of different parties, including competitors, clients, current or former employees, government and regulatory agencies, stockholders and representatives of the locations in which the company does business. Some of the actions to which the company is party may involve particularly complex technical issues, and some actions may raise novel questions under the laws of the various jurisdictions in which these matters arise.
The company records a provision with respect to a claim, suit, investigation or proceeding when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Any recorded liabilities, including any changes to such liabilities for the quarter ended March 31, 2022 were not material to the Consolidated Financial Statements.
In accordance with the relevant accounting guidance, the company provides disclosures of matters for which the likelihood of material loss is at least reasonably possible. In addition, the company also discloses matters based on its consideration of other matters and qualitative factors, including the experience of other companies in the industry, and investor, customer and employee relations considerations.
With respect to certain of the claims, suits, investigations and proceedings discussed herein, the company believes at this time that the likelihood of any material loss is remote, given, for example, the procedural status, court rulings, and/or the strength of the company’s defenses in those matters. With respect to the remaining claims, suits, investigations and proceedings discussed in this note, except as specifically discussed herein, the company is unable to provide estimates of reasonably possible losses or range of losses, including losses in excess of amounts accrued, if any, for the following reasons. Claims, suits, investigations and proceedings are inherently uncertain, and it is not possible to predict the ultimate outcome of these matters. It is the company’s experience that damage amounts claimed in litigation against it are unreliable and unrelated to possible outcomes, and as such are not meaningful indicators of the company’s potential liability. Further, the company is unable to provide such an estimate due to a number of other factors with respect to
32
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 intends to seek appeal of the judgment.
On June 8, 2021, IBM sued GlobalFoundries U.S. Inc. (GF) in New York State Supreme Court for claims including fraud and breach of contract relating to a long-term strategic relationship between IBM and GF for researching, developing, and manufacturing advanced semiconductor chips for IBM. GF walked away from its obligations and IBM is now suing to recover amounts paid to GF, and other compensatory and punitive damages, totaling more than $1.5 billion. On September 14, 2021, the court ruled on GF’s motion to dismiss. On April 7, 2022, the Appellate Division unanimously reversed the lower court’s dismissal of IBM’s fraud claim. IBM’s claims for breaches of contract, promissory estoppel, and fraud are proceeding.
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, two current IBM senior executives, and two former IBM senior executives are named as defendants. On March 25, 2022, the Board of Directors received a shareholder demand letter making similar allegations and demanding that the company’s Board of Directors take action to assert the company’s rights. A special committee of independent directors has been formed to investigate the issues raised in the letter.
The company is party to, or otherwise involved in, proceedings brought by U.S. federal or state environmental agencies under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), known as “Superfund,” or laws similar to CERCLA. Such statutes require potentially responsible parties to participate in remediation activities regardless of fault or ownership of sites. The company is also conducting environmental investigations, assessments or remediations at or in the vicinity of several current or former operating sites globally pursuant to permits, administrative orders or agreements with country, state or local environmental agencies, and is involved in lawsuits and claims concerning certain current or former operating sites.
The company is also subject to ongoing tax examinations and governmental assessments in various jurisdictions. Along with many other U.S. companies doing business in Brazil, the company is involved in various challenges with
33
Notes to Consolidated Financial Statements — (continued)
Brazilian tax authorities regarding non-income tax assessments and non-income tax litigation matters. The total potential amount related to all these matters for all applicable years is approximately $450 million. The company believes it will prevail on these matters and that this amount is not a meaningful indicator of liability.
15. Equity Activity:
Reclassifications and Taxes Related to Items of Other Comprehensive Income
(Dollars in millions) |
| Before Tax |
| Tax (Expense)/ |
| Net of Tax | |||
For the three months ended March 31, 2022: | Amount | Benefit | Amount | ||||||
Other comprehensive income/(loss): |
|
|
|
|
|
| |||
Foreign currency translation adjustments | $ | 442 | $ | (136) | $ | 306 | |||
Net changes related to available-for-sale securities: |
|
|
|
|
|
| |||
Unrealized gains/(losses) arising during the period | $ | 0 | $ | 0 | $ | 0 | |||
Reclassification of (gains)/losses to other (income) and expense |
| — | — | — | |||||
Total net changes related to available-for-sale securities | $ | 0 | $ | 0 | $ | 0 | |||
Unrealized gains/(losses) on cash flow hedges: |
|
|
|
|
|
| |||
Unrealized gains/(losses) arising during the period | $ | 60 | $ | (16) | $ | 44 | |||
Reclassification of (gains)/losses to: |
|
|
|
|
|
| |||
Cost of services |
| (15) |
| 4 |
| (11) | |||
Cost of sales |
| (12) |
| 4 |
| (9) | |||
Cost of financing |
| 5 |
| (1) |
| 4 | |||
SG&A expense |
| (6) |
| 2 |
| (4) | |||
Other (income) and expense |
| 7 |
| (2) |
| 5 | |||
Interest expense |
| 21 |
| (5) |
| 15 | |||
Total unrealized gains/(losses) on cash flow hedges | $ | 59 | $ | (15) | $ | 44 | |||
Retirement-related benefit plans (1): |
|
|
|
|
|
| |||
Prior service costs/(credits) | $ | (5) | $ | 5 | $ | 0 | |||
Net (losses)/gains arising during the period | 9 | (4) | 5 | ||||||
Curtailments and settlements |
| 8 | (2) | 6 | |||||
Amortization of prior service (credits)/costs |
| 7 | (2) | 5 | |||||
Amortization of net (gains)/losses |
| 468 | (131) | 337 | |||||
Total retirement-related benefit plans | $ | 486 | $ | (134) | $ | 352 | |||
Other comprehensive income/(loss) | $ | 987 | $ | (285) | $ | 703 | |||
| (1) | These accumulated other comprehensive income (AOCI) components are included in the computation of net periodic pension cost. Refer to note 18, “Retirement-Related Benefits,” for additional information. |
34
Reclassifications and Taxes Related to Items of Other Comprehensive Income
(Dollars in millions) |
| Before Tax |
| Tax (Expense)/ |
| Net of Tax | |||
For the three months ended March 31, 2021: | Amount | Benefit | Amount | ||||||
Other comprehensive income/(loss): |
|
|
|
|
|
| |||
Foreign currency translation adjustments | $ | 549 | $ | (228) | $ | 321 | |||
Net changes related to available-for-sale securities: |
|
|
|
|
|
| |||
Unrealized gains/(losses) arising during the period | $ | 0 | $ | 0 | $ | 0 | |||
Reclassification of (gains)/losses to other (income) and expense |
| — | — | — | |||||
Total net changes related to available-for-sale securities | $ | 0 | $ | 0 | $ | 0 | |||
Unrealized gains/(losses) on cash flow hedges: |
|
|
|
|
|
| |||
Unrealized gains/(losses) arising during the period | $ | 187 | $ | (47) | $ | 140 | |||
Reclassification of (gains)/losses to: |
|
|
| ||||||
Cost of services |
| (14) |
| 3 |
| (10) | |||
Cost of sales |
| 22 |
| (6) |
| 16 | |||
Cost of financing |
| 6 |
| (2) |
| 4 | |||
SG&A expense |
| 15 |
| (4) |
| 11 | |||
Other (income) and expense |
| 116 |
| (29) |
| 87 | |||
Interest expense |
| 16 |
| (4) |
| 12 | |||
Total unrealized gains/(losses) on cash flow hedges | $ | 347 | $ | (88) | $ | 259 | |||
Retirement-related benefit plans (1): |
|
|
|
|
|
| |||
Prior service costs/(credits) | $ | 0 | $ | 0 | $ | 0 | |||
Net (losses)/gains arising during the period | 20 | (6) | 14 | ||||||
Curtailments and settlements |
| 17 | (5) | 12 | |||||
Amortization of prior service (credits)/costs |
| 3 | 0 | 3 | |||||
Amortization of net (gains)/losses |
| 648 | (177) | 471 | |||||
Total retirement-related benefit plans | $ | 689 | $ | (189) | $ | 500 | |||
Other comprehensive income/(loss) | $ | 1,586 | $ | (505) | $ | 1,080 | |||
| (1) | These AOCI components are included in the computation of net periodic pension cost. Refer to note 18, “Retirement-Related Benefits,” for additional information. |
35
Accumulated Other Comprehensive Income/(Loss) (net of tax)
|
|
|
|
| Net Change |
| Net Unrealized |
|
| ||||||
Net Unrealized | Foreign | Retirement- | Gains/(Losses) | Accumulated | |||||||||||
Gains/(Losses) | Currency | Related | on Available- | Other | |||||||||||
on Cash Flow | Translation | Benefit | For-Sale | Comprehensive | |||||||||||
(Dollars in millions) | Hedges | Adjustments* | Plans | Securities | Income/(Loss) | ||||||||||
January 1, 2022 | $ | (18) | $ | (3,362) | $ | (19,854) | $ | (1) | $ | (23,234) | |||||
Other comprehensive income before reclassifications |
| 44 |
| 306 |
| 5 |
| 0 |
| 355 | |||||
Amount reclassified from accumulated other comprehensive income |
| 0 |
| — |
| 348 |
| — |
| 348 | |||||
Total change for the period | $ | 44 | $ | 306 | $ | 352 | $ | 0 | $ | 703 | |||||
March 31, 2022 | $ | 26 | $ | (3,056) | $ | (19,502) | $ | (1) | $ | (22,532) | |||||
|
|
|
|
| Net Change |
| Net Unrealized |
|
| ||||||
Net Unrealized | Foreign | Retirement- | Gains/(Losses) | Accumulated | |||||||||||
Gains/(Losses) | Currency | Related | on Available- | Other | |||||||||||
on Cash Flow | Translation | Benefit | For-Sale | Comprehensive | |||||||||||
(Dollars in millions) | Hedges | Adjustments* | Plans | Securities | Income/(Loss) | ||||||||||
January 1, 2021 | $ | (456) | $ | (4,665) | $ | (24,216) | $ | 0 | $ | (29,337) | |||||
Other comprehensive income before reclassifications |
| 140 |
| 321 |
| 14 |
| 0 |
| 475 | |||||
Amount reclassified from accumulated other comprehensive income |
| 119 |
| — |
| 486 |
| — |
| 606 | |||||
Total change for the period | $ | 259 | $ | 321 | $ | 500 | $ | 0 | $ | 1,080 | |||||
March 31, 2021 | $ | (197) | $ | (4,343) | $ | (23,716) | $ | (1) | $ | (28,257) | |||||
* Foreign currency translation adjustments are presented gross except for any associated hedges which are presented net of tax.
16. Derivative Financial Instruments:
The company operates in multiple functional currencies and is a significant lender and borrower in the global markets. In the normal course of business, the company is exposed to the impact of interest rate changes and foreign currency fluctuations, and to a lesser extent equity and commodity price changes and client credit risk. The company limits these risks by following established risk management policies and procedures, including the use of derivatives, and, where cost effective, financing with debt in the currencies in which assets are denominated. For interest rate exposures, derivatives are used to better align rate movements between the interest rates associated with the company’s lease and other financial assets and the interest rates associated with its financing debt. Derivatives are also used to manage the related cost of debt. For foreign currency exposures, derivatives are used to better manage the cash flow volatility arising from foreign exchange rate fluctuations.
In the Consolidated Balance Sheet, the company does not offset derivative assets against liabilities in master netting arrangements nor does it offset receivables or payables recognized upon payment or receipt of cash collateral against the fair values of the related derivative instruments. At March 31, 2022 and December 31, 2021, the amount recognized in other accounts receivable for the right to reclaim cash collateral was $3 million and $2 million, respectively. At March 31, 2022 and December 31, 2021, the amount recognized in accounts payable for the obligation to return cash collateral was $25 million and $38 million, respectively. The company restricts the use of cash collateral received to rehypothecation, and therefore reports it in restricted cash in the Consolidated Balance Sheet. At March 31, 2022 and December 31, 2021, the amount rehypothecated was $3 million and $2 million, respectively. Additionally, if derivative exposures covered by a qualifying master netting agreement had been netted in the Consolidated Balance Sheet at , 2022 and , 2021, the total derivative asset and liability positions each would have been reduced by $95 million and $60 million, respectively.
36
Notes to Consolidated Financial Statements — (continued)
In its hedging programs, the company may use forward contracts, futures contracts, interest-rate swaps, cross-currency swaps, equity swaps, and options depending upon the underlying exposure. The company is not a party to leveraged derivative instruments.
A brief description of the major hedging programs, categorized by underlying risk, follows.
Interest Rate Risk
Fixed and Variable Rate Borrowings
The company issues debt in the global capital markets to fund its operations and financing business. Access to cost-effective financing can result in interest rate mismatches with the underlying assets. To manage these mismatches and to reduce overall interest cost, the company may use interest-rate swaps to convert specific fixed-rate debt issuances into variable-rate debt (i.e., fair value hedges) and to convert specific variable-rate debt issuances into fixed-rate debt (i.e., cash flow hedges). At March 31, 2022 and December 31, 2021, the total notional amount of the company’s interest-rate swaps was $2.4 billion and $0.4 billion, respectively. The weighted-average remaining maturity of these instruments at March 31, 2022 and December 31, 2021 was approximately 5.0 years and 1.2 years, respectively. These interest-rate contracts were accounted for as fair value hedges. The company did not have any cash flow hedges relating to this program outstanding at March 31, 2022 and December 31, 2021.
Forecasted Debt Issuance
The company is exposed to interest rate volatility on future debt issuances. To manage this risk, the company may use instruments such as forward starting interest-rate swaps to lock in the rate on the interest payments related to the forecasted debt issuances. There were no instruments outstanding at March 31, 2022 and December 31, 2021.
In connection with cash flow hedges of forecasted interest payments related to the company's borrowings, the company recorded net losses (before taxes) of $152 million and $157 million at March 31, 2022 and December 31, 2021, respectively, in AOCI. The company estimates that $18 million of the deferred net losses (before taxes) on derivatives in AOCI at March 31, 2022 will be reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying interest payments.
Foreign Exchange Risk
Long-Term Investments in Foreign Subsidiaries (Net Investment)
A large portion of the company’s foreign currency denominated debt portfolio is designated as a hedge of net investment in foreign subsidiaries to reduce the volatility in stockholders’ equity caused by changes in foreign currency exchange rates in the functional currency of major foreign subsidiaries with respect to the U.S. dollar. At March 31, 2022 and December 31, 2021, the carrying value of debt designated as hedging instruments was $15.0 billion and $14.1 billion, respectively. The company also uses cross-currency swaps and foreign exchange forward contracts for this risk management purpose. At March 31, 2022 and December 31, 2021, the total notional amount of derivative instruments designated as net investment hedges was $5.7 billion and $6.8 billion, respectively. At both March 31, 2022 and December 31, 2021, the weighted-average remaining maturity of these instruments was approximately 0.1 years.
Anticipated Royalties and Cost Transactions
The company’s operations generate significant nonfunctional currency, third-party vendor payments and intercompany payments for royalties and goods and services among the company’s non-U.S. subsidiaries and with the company. In anticipation of these foreign currency cash flows and in view of the volatility of the currency markets, the company selectively employs foreign exchange forward contracts to manage its currency risk. These forward contracts are accounted for as cash flow hedges. At March 31, 2022, the maximum remaining length of time over which the
37
Notes to Consolidated Financial Statements — (continued)
company hedged its exposure is approximately two years. At March 31, 2022 and December 31, 2021, the total notional amount of forward contracts designated as cash flow hedges of forecasted royalty and cost transactions was $7.9 billion and $7.2 billion, respectively. At both March 31, 2022 and December 31, 2021, the weighted-average remaining maturity of these instruments was approximately 0.6 years.
At March 31, 2022 and December 31, 2021, in connection with cash flow hedges of anticipated royalties and cost transactions, the company recorded net gains (before taxes) of $338 million and $315 million, respectively, in AOCI. The company estimates that $263 million of deferred net gains (before taxes) on derivatives in AOCI at March 31, 2022 will be reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying anticipated transactions.
Foreign Currency Denominated Borrowings
The company is exposed to exchange rate volatility on foreign currency denominated debt. To manage this risk, the company employs cross-currency swaps to convert fixed-rate foreign currency denominated debt to fixed-rate debt denominated in the functional currency of the borrowing entity. These swaps are accounted for as cash flow hedges. At March 31, 2022, the maximum length of time remaining over which the company hedged its exposure is approximately six years. At March 31, 2022 and December 31, 2021, the total notional amount of cross-currency swaps designated as cash flow hedges of foreign currency denominated debt was $3.0 billion and $2.0 billion, respectively.
At March 31, 2022 and December 31, 2021, in connection with cash flow hedges of foreign currency denominated borrowings, the company recorded net losses (before taxes) of $141 million and $174 million, respectively, in AOCI. The company estimates that $25 million of deferred net gains (before taxes) on derivatives in AOCI at March 31, 2022 will be reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying exposure.
Subsidiary Cash and Foreign Currency Asset/Liability Management
The company uses its Global Treasury Centers to manage the cash of its subsidiaries. These centers principally use currency swaps to convert cash flows in a cost-effective manner. In addition, the company uses foreign exchange forward contracts to economically hedge, on a net basis, the foreign currency exposure of a portion of the company’s nonfunctional currency assets and liabilities. The terms of these forward and swap contracts are generally less than one year. The changes in the fair values of these contracts and of the underlying hedged exposures are generally offsetting and are recorded in other (income) and expense in the Consolidated Income Statement. At March 31, 2022 and December 31, 2021, the total notional amount of derivative instruments in economic hedges of foreign currency exposure was $5.9 billion and $6.8 billion, respectively.
Equity Risk Management
The company is exposed to market price changes in certain broad market indices and in the company’s own stock primarily related to certain obligations to employees. Changes in the overall value of these employee compensation obligations are recorded in SG&A expense in the Consolidated Income Statement. Although not designated as accounting hedges, the company utilizes derivatives, including equity swaps and futures, to economically hedge the exposures related to its employee compensation obligations. The derivatives are linked to the total return on certain broad market indices or the total return on the company’s common stock, and are recorded at fair value with gains or losses also reported in SG&A expense in the Consolidated Income Statement. At March 31, 2022 and December 31, 2021, the total notional amount of derivative instruments in economic hedges of these compensation obligations was $1.3 billion and $1.4 billion, respectively.
38
Cumulative Basis Adjustments for Fair Value Hedges
At March 31, 2022 and December 31, 2021, the following amounts were recorded in the Consolidated Balance Sheet related to cumulative basis adjustments for fair value hedges:
| March 31, |
| December 31, |
| |||
(Dollars in millions) | 2022 | 2021 |
| ||||
Short-term debt: |
|
|
|
| |||
Carrying amount of the hedged item | $ | (225) | $ | (227) | |||
Cumulative hedging adjustments included in the carrying amount — assets/(liabilities) |
| 0 |
| (2) | |||
Long-term debt: |
|
|
|
| |||
Carrying amount of the hedged item | $ | (2,480) | $ | (508) | |||
Cumulative hedging adjustments included in the carrying amount — assets/(liabilities)* |
| (290) |
| (309) | |||
* Includes ($289) million and ($302) million of hedging adjustments on discontinued hedging relationships at March 31, 2022 and December 31, 2021, respectively.
The Effect of Derivative Instruments in the Consolidated Income Statement
The total amounts of income and expense line items presented in the Consolidated Income Statement in which the effects of fair value hedges, cash flow hedges, net investment hedges and derivatives not designated as hedging instruments are recorded and the total effect of hedge activity on these income and expense line items are as follows:
Gains/(Losses) of |
| ||||||||||||
(Dollars in millions) | Total | Total Hedge Activity |
| ||||||||||
For the three months ended March 31: |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||||
Cost of services | $ | 5,349 | $ | 4,644 | $ | 15 | $ | 14 | |||||
Cost of sales |
| 1,415 |
| 1,379 | * |
| 12 |
| (22) | ||||
Cost of financing |
| 98 |
| 137 | * |
| (2) |
| 2 | ||||
SG&A expense |
| 4,597 |
| 4,688 |
| (70) |
| 34 | |||||
Other (income) and expense |
| 246 |
| 346 |
| (102) |
| (160) | |||||
Interest expense |
| 311 |
| 280 |
| (6) |
| 5 | |||||
* Reclassified to conform to current year presentation.
39
Gain (Loss) Recognized in Consolidated Income Statement | ||||||||||||||
Consolidated | Recognized on | Attributable to Risk | ||||||||||||
(Dollars in millions) | Income Statement | Derivatives | Being Hedged (2) | |||||||||||
For the three months ended March 31: |
| Line Item |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Derivative instruments in fair value hedges (1): |
|
|
|
|
|
|
|
|
|
| ||||
Interest rate contracts |
| Cost of financing | $ | (1) | $ | (1) | $ | 4 | $ | 7 | ||||
| Interest expense |
| (4) |
| (1) |
| 16 |
| 18 | |||||
Derivative instruments not designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
| ||||
Foreign exchange contracts |
| Other (income) and expense |
| (95) |
| (44) |
| N/A |
| N/A | ||||
Equity contracts |
| SG&A expense |
| (76) |
| 49 |
| N/A |
| N/A | ||||
Total |
|
| $ | (176) | $ | 3 | $ | 20 | $ | 25 | ||||
Gain (Loss) Recognized in Consolidated Income Statement and Other Comprehensive Income |
| ||||||||||||||||||||
(Dollars in millions) | Consolidated | Reclassified | Amounts Excluded from |
| |||||||||||||||||
For the three months | Recognized in OCI | Income Statement | from AOCI | Effectiveness Testing (3) |
| ||||||||||||||||
ended March 31: |
| 2022 |
| 2021 |
| Line Item |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||||||
Derivative instruments in cash flow hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Interest rate contracts | $ | — | $ | — |
| Cost of financing | $ | (1) | $ | (1) | $ | — | $ | — | |||||||
| Interest expense |
| (3) |
| (3) |
| — |
| — | ||||||||||||
Foreign exchange contracts |
| 60 |
| 187 |
| Cost of services |
| 15 |
| 14 |
| — |
| — | |||||||
| Cost of sales |
| 12 |
| (22) |
| — |
| — | ||||||||||||
| Cost of financing |
| (5) |
| (5) | — | — | ||||||||||||||
| SG&A expense |
| 6 |
| (15) |
| — |
| — | ||||||||||||
| Other (income) and expense |
| (7) |
| (116) |
| — |
| — | ||||||||||||
| Interest expense |
| (17) |
| (13) | — | — | ||||||||||||||
Instruments in net investment hedges (4): |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Foreign exchange contracts |
| 541 |
| 907 |
| Cost of financing |
| — |
| — |
| 1 |
| 2 | |||||||
|
|
| Interest expense |
| — |
| — |
| 2 |
| 4 | ||||||||||
Total | $ | 601 | $ | 1,094 |
|
| $ | 1 | $ | (160) | $ | 3 | $ | 6 | |||||||
| (1) | The amount includes changes in clean fair values of the derivative instruments in fair value hedging relationships and the periodic accrual for coupon payments required under these derivative contracts. |
| (2) | The amount includes basis adjustments to the carrying value of the hedged item recorded during the period and amortization of basis adjustments recorded on de-designated hedging relationships during the period. |
| (3) | The company’s policy is to recognize all fair value changes in amounts excluded from effectiveness testing in net income each period. |
| (4) | Instruments in net investment hedges include derivative and non-derivative instruments with the amounts recognized in OCI providing an offset to the translation of foreign subsidiaries. |
N/A - not applicable
For the three months ending March 31, 2022 and 2021, there were no material gains or losses excluded from the assessment of hedge effectiveness (for fair value or cash flow hedges), or associated with an underlying exposure that did not or was not expected to occur (for cash flow hedges); nor are there any anticipated in the normal course of business.
40
17. Stock-Based Compensation:
Stock-based compensation cost is measured at grant date, based on the fair value of the award, and is recognized over the employee requisite service period. The following table presents total stock-based compensation cost included in income from continuing operations.
(Dollars in millions) | ||||||
For the three months ended March 31: | 2022 | 2021 | ||||
Cost | $ | 40 | $ | 34 | ||
Selling, general and administrative |
| 136 |
| 115 | ||
Research, development and engineering |
| 57 |
| 49 | ||
Pre-tax stock-based compensation cost | $ | 234 | $ | 198 | ||
Income tax benefits |
| (57) |
| (48) | ||
Total net stock-based compensation cost | $ | 177 | $ | 149 | ||
Pre-tax stock-based compensation cost for the three months ended March 31, 2022 increased $36 million compared to the corresponding period in the prior year, including increases in stock options ($5 million), performance share units ($3 million) and restricted stock units ($28 million). The increases primarily relate to a change in the timing of the company’s executive grant cycle in 2022.
Total unrecognized compensation cost related to non-vested awards at March 31, 2022 was $1.5 billion and is expected to be recognized over a weighted-average period of approximately 2.6 years.
Capitalized stock-based compensation cost was not material at March 31, 2022 and 2021.
Effective April 1, 2022, the company increased the discount for eligible participants under its Employees Stock Purchase Plan (ESPP) from 5 percent to 15 percent off the average market price on the date of purchase. With this change, the ESPP is considered compensatory under the accounting requirements for stock-based compensation.
41
18. Retirement-Related Benefits:
The company offers defined benefit (DB) pension plans, defined contribution pension plans, as well as nonpension postretirement plans primarily consisting of retiree medical benefits. The following tables provide the pre-tax cost for all retirement-related plans.
|
|
|
| Yr. to Yr. |
| ||||
(Dollars in millions) | Percent |
| |||||||
For the three months ended March 31: | 2022 | 2021 | Change |
| |||||
Retirement-related plans — cost: |
|
|
|
|
|
| |||
Defined benefit and contribution pension plans — cost | $ | 478 | $ | 619 |
| (22.8) | % | ||
Nonpension postretirement plans — cost |
| 33 |
| 44 |
| (25.0) | |||
Total | $ | 510 | $ | 663 |
| (23.0) | % | ||
The following table provides the components of the cost/(income) for the company’s pension plans.
Cost/(Income) of Pension Plans
(Dollars in millions) | U.S. Plans | Non-U.S. Plans | ||||||||||
For the three months ended March 31: |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Service cost | $ | — | $ | — | $ | 64 | $ | 65 | ||||
| 302 |
| 277 |
| 139 |
| 108 | |||||
| (475) |
| (451) |
| (274) |
| (279) | |||||
| 2 |
| 4 |
| 4 |
|
| (2) | ||||
| 179 |
| 249 |
| 278 |
|
| 356 | ||||
| — |
| — |
| 8 |
| 17 | |||||
Multi-employer plans |
| — |
| — |
| 4 |
| 6 | ||||
| — |
| — |
| 9 |
| 11 | |||||
Total net periodic pension (income)/cost of defined benefit plans | $ | 8 | $ | 80 | $ | 231 | $ | 283 | ||||
Cost of defined contribution plans |
| 141 |
| 151 |
| 98 |
| 105 | ||||
Total defined benefit and contribution pension plans cost recognized in the Consolidated Income Statement | $ | 149 | $ | 231 | $ | 328 | $ | 388 | ||||
The following table provides the components of the cost for the company’s nonpension postretirement plans.
Cost of Nonpension Postretirement Plans
(Dollars in millions) | U.S. Plan | Non-U.S. Plans | ||||||||||
For the three months ended March 31: |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Service cost | $ | 1 | $ | 2 | $ | 1 | $ | 1 | ||||
| 18 |
| 16 |
| 9 |
| 8 | |||||
| — |
| — |
| 0 |
| (1) | |||||
| 1 |
| 1 |
| 0 |
| 0 | |||||
| 2 |
| 13 |
| 1 |
|
| 4 | ||||
| — |
| — |
| — |
| — | |||||
Total nonpension postretirement plans cost recognized in the Consolidated Income Statement | $ | 23 | $ | 32 | $ | 10 | $ | 12 | ||||
42
The company does not anticipate any significant changes to the expected plan contributions in 2022 from the amounts disclosed in the 2021 Annual Report.
The table below includes contributions to the following plans:
(Dollars in millions) | Plan Contributions | |||||
For the three months ended March 31: | 2022 | 2021 | ||||
U.S. and non-U.S. nonpension postretirement benefit plans | $ | 120 | $ | 106 | ||
Non-U.S. DB and multi-employer plans* |
| 35 |
| 64 | ||
Total plan contributions | $ | 154 |
| $ | 170 | |
* | Amounts reported net of refunds. |
During the three months ended March 31, 2022 and 2021, the company contributed $105 million and $150 million of U.S Treasury Securities, respectively, to the non-U.S. DB plans and nonpension postretirement benefit plans. Additionally, during the three months ended March 31, 2022 and 2021, the company contributed $156 million and $129 million of U.S. Treasury Securities, respectively, to the Active Medical Trust. Contributions made with U.S. Treasury securities are considered a non-cash transaction.
19. Subsequent Events:
On April 26, 2022, the company announced that the Board of Directors approved an increase in the quarterly dividend to $1.65 per common share. The dividend is payable June 10, 2022 to shareholders of record on May 10, 2022.
43
Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FOR THE THREE MONTHS ENDED MARCH 31, 2022
Snapshot
Financial Results Summary — Three Months Ended March 31:
|
|
|
|
| Yr. to Yr. |
| |||
Percent/ |
| ||||||||
(Dollars and shares in millions except per share amounts) | Margin |
| |||||||
For the three months ended March 31: | 2022 | 2021 | Change |
| |||||
Revenue | $ | 14,197 | $ | 13,187 |
| 7.7 | %* | ||
Gross profit margin |
| 51.7 | % |
| 53.3 | % | (1.6) | pts. | |
Total expense and other (income) | $ | 6,712 | $ | 6,784 |
| (1.1) | % | ||
Income from continuing operations before income taxes | $ | 623 | $ | 244 |
| 156.0 | % | ||
Provision for/(benefit from) income taxes from continuing operations | $ | (39) | $ | (160) |
| (75.5) | % | ||
Income from continuing operations | $ | 662 | $ | 403 |
| 64.3 | % | ||
Income from continuing operations margin |
| 4.7 | % |
| 3.1 | % | 1.6 | pts. | |
Income from discontinued operations, net of tax | $ | 71 | $ | 552 | (87.2) | % | |||
Net income | $ | 733 | $ | 955 |
| (23.3) | % | ||
Earnings per share from continuing operations - assuming dilution | $ | 0.73 | $ | 0.45 |
| 62.2 | % | ||
Consolidated earnings per share - assuming dilution | $ | 0.81 | $ | 1.06 | (23.6) | % | |||
Weighted-average shares outstanding - assuming dilution |
| 909.2 |
| 901.7 |
| 0.8 | % | ||
At 3/31/2022 | At 12/31/2021 | ||||||||
Assets | $ | 133,275 | $ | 132,001 |
| 1.0 | % | ||
Liabilities | $ | 114,162 | $ | 113,005 |
| 1.0 | % | ||
Equity | $ | 19,112 | $ | 18,996 |
| 0.6 | % | ||
* 10.9 percent adjusted for currency.
Organization of Information:
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 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.
The accounting requirements for reporting the separation of Kyndryl as a discontinued operation were met when the separation was completed. Accordingly, the historical results of Kyndryl are presented as discontinued operations and, as such, have been excluded from continuing operations and segment results for all periods presented. Consolidated diluted earnings per share includes the results of discontinued operations. Refer to note 3, “Separation of Kyndryl,” for additional information.
In the first quarter of 2022, the company realigned its management structure to reflect the planned divestiture of its healthcare data and analytics assets. This change impacted the company’s Software segment and Other–divested businesses category. In the fourth quarter of 2021, immediately prior to the separation of Kyndryl, the company made a
44
Management Discussion – (continued)
number of changes to its organizational structure and management system. These changes impacted the company’s reportable segments but did not impact the Consolidated Financial Statements. Refer to note 5, “Segments,” for additional information on the company’s reportable segments. The segments are reported on a comparable basis for all periods.
To provide useful decision-making information for management and shareholders, the company defines and measures hybrid cloud revenue as end-to-end cloud capabilities within hybrid cloud environments, which includes technology (software and hardware), services and solutions to enable clients to implement cloud solutions across public, private and multi-clouds. The definition of hybrid cloud revenue is consistent with the prior methodology for cloud revenue historically presented. This spans across IBM’s Consulting, Software and Infrastructure segments. Examples include (but are not limited to) Red Hat Enterprise Linux (RHEL), Red Hat OpenShift, Cloud Paks, as-a-service offerings, service engagements related to cloud deployment of technology and applications, and infrastructure used in cloud deployments.
Currency:
The references to “adjusted for currency” or “at constant currency” in the Management Discussion do not include operational impacts that could result from fluctuations in foreign currency rates. When we refer to growth rates at constant currency or adjust such growth rates for currency, it is done so that certain financial results can be viewed without the impact of fluctuations in foreign currency exchange rates, thereby facilitating period-to-period comparisons of its business performance. Financial results adjusted for currency are calculated by translating current period activity in local currency using the comparable prior-year period’s currency conversion rate. This approach is used for countries where the functional currency is the local currency. Generally, when the dollar either strengthens or weakens against other currencies, the growth at constant currency rates or adjusting for currency will be higher or lower than growth reported at actual exchange rates. Refer to “Currency Rate Fluctuations” for additional information.
Operating (non-GAAP) Earnings:
In an effort to provide better transparency into the operational results of the business, supplementally, management separates business results into operating and non-operating categories. Operating earnings from continuing operations is a non-GAAP measure that excludes the effects of certain acquisition-related charges, intangible asset amortization, expense resulting from basis differences on equity method investments, retirement-related costs, certain impacts from the Kyndryl separation and their related tax impacts. Due to the unique, non-recurring nature of the enactment of the U.S. Tax Cuts and Jobs Act (U.S. tax reform), management characterizes the one-time provisional charge recorded in the fourth quarter of 2017 and adjustments to that charge as non-operating. Adjustments include true-ups, accounting elections and any changes to regulations, laws, audit adjustments, etc. that affect the recorded one-time charge. Management also characterizes direct and incremental charges incurred related to the Kyndryl separation as non-operating given their unique and non-recurring nature. These charges primarily relate to any unrealized gains or losses on Kyndryl common stock which are recorded in other (income) and expense in the Consolidated Income Statement. The unrealized gains or losses reflect fair value changes in the shares that were retained by the company immediately following the separation, with the intent to dispose of such shares within twelve months after the distribution. For acquisitions, operating (non-GAAP) earnings exclude the amortization of purchased intangible assets and acquisition-related charges such as in-process research and development, transaction costs, applicable retention, restructuring and related expenses, tax charges related to acquisition integration and pre-closing charges, such as financing costs. These charges are excluded as they may be inconsistent in amount and timing from period to period and are significantly impacted by the size, type and frequency of the company’s acquisitions. All other spending for acquired companies is included in both earnings from continuing operations and in operating (non-GAAP) earnings. Throughout the Management Discussion, the impact of acquisitions over the prior 12 month period may be a driver of higher expense year to year. For retirement-related costs, management characterizes certain items as operating and others as non-operating, consistent with GAAP. We include defined benefit plan and nonpension postretirement benefit plan service costs, multi-employer plan costs and the cost of defined contribution plans in operating earnings. Non-operating retirement-related costs include defined benefit plan and nonpension postretirement benefit plan amortization of prior
45
Management Discussion – (continued)
service costs, interest cost, expected return on plan assets, amortized actuarial gains/losses, the impacts of any plan curtailments/settlements and pension insolvency costs and other costs. Non-operating retirement-related costs are primarily related to changes in pension plan assets and liabilities which are tied to financial market performance, and the company considers these costs to be outside of the operational performance of the business.
Overall, management believes that supplementally providing investors with a view of operating earnings as described above provides increased transparency and clarity into both the operational results of the business and the performance of the company’s pension plans; improves visibility to management decisions and their impacts on operational performance; enables better comparison to peer companies; and allows the company to provide a long-term strategic view of the business going forward. In addition, these non-GAAP measures provide a perspective consistent with areas of interest we routinely receive from investors and analysts. Our reportable segment financial results reflect pre-tax operating earnings from continuing operations, consistent with our management and measurement system.
The following table provides the company’s operating (non-GAAP) earnings for the first quarter of 2022 and 2021.
* Refer to page 74 for a more detailed reconciliation of net income to operating earnings.
nm - not meaningful
Macroeconomic Environment:
The geopolitical situation in Eastern Europe intensified in February 2022, with Russia’s invasion of Ukraine. The safety and security of our employees and their families in the impacted regions remains our primary focus. Since February 2022, we have been providing our employees with relocation assistance, financial support and other forms of direct engagement. IBM employees from around the world have mobilized and are participating in multiple volunteer initiatives, showcasing the best of IBM values and culture.
The Russian war in Ukraine resulted in the U.S., UK, and the European Union member governments, among others, placing economic sanctions on numerous Russian entities, specific Russian-controlled entities, as well as Belarus. On March 7, 2022, IBM announced the suspension of business activities in Russia. For the period ended March 31, 2022, we assessed certain accounting-related matters that generally require consideration of current information reasonably available to us and forecasted financial data in the context of unknown future impacts to IBM as a result of the suspension of this business. These assessments did not result in any material impacts to our consolidated financial results as of and for the quarter ended March 31, 2022. We will continue to assess these matters in future periods. The long-term impacts of the Russian war in Ukraine remain uncertain; however, we do not expect a significant impact on the company’s future results of operations or financial position. For full year 2021, Russia, Ukraine and Belarus made up less than one percent of the company’s full year revenue. While the revenue impact is not expected to be material to total consolidated IBM revenue for the full year 2022, the business in Russia has historically been high margin and therefore, would result in a headwind to our profit and cash flows.
46
Management Discussion – (continued)
In the third year of the COVID-19 pandemic, our priority continues to be the health of IBM employees, our clients, business partners and community. The pandemic has reinforced the need for clients to modernize their businesses to succeed in this new normal, with hybrid cloud and AI at the core of their digital transformations. The spending environment continues to improve, and we remain focused on providing the technology and consulting services that our clients need to accelerate their digital organizations and emerge from the pandemic even stronger.
Financial Performance Summary — Three Months Ended March 31:
In the first quarter of 2022, we reported $14.2 billion in revenue, income from continuing operations of $0.7 billion and operating (non-GAAP) earnings of $1.3 billion. Diluted earnings per share from continuing operations was $0.73 as reported and $1.40 on an operating (non-GAAP) basis. On a consolidated basis, we generated $3.2 billion in cash from operations and $1.2 billion in free cash flow and delivered shareholder returns of $1.5 billion in dividends. These results reflect progress in our key growth areas as we continue to see a strong demand environment for both our technology and consulting. We continued to increase investments in innovation, our ecosystem and talent and our balance sheet provides us with the flexibility to support our business needs.
Total revenue grew 7.7 percent as reported and 11 percent adjusted for currency compared to the prior-year period. This includes incremental sales to Kyndryl which contributed over 5 points to the revenue growth. Software delivered strong revenue growth of 12.3 percent as reported and 15 percent adjusted for currency, including over 8 points of growth from incremental sales to Kyndryl. Hybrid Platform & Solutions increased 7.4 percent as reported and 10 percent adjusted for currency, with incremental sales to Kyndryl contributing approximately 1.5 points of this growth. Revenue growth was led by strong double-digit growth in Red Hat. Transaction Processing grew 26.5 percent as reported and 31 percent adjusted for currency, including approximately 28 points of growth from incremental Kyndryl sales. Consulting revenue increased 13.3 percent as reported and 17 percent adjusted for currency, with a strong demand profile and growth across all three business areas. Infrastructure revenue decreased 2.3 percent year to year as reported and was flat adjusted for currency, with the overall decline in revenue reflecting our product cycle dynamics. This performance also includes over 8 points of growth from incremental sales to Kyndryl. Across the segments, total hybrid cloud revenue of $5.0 billion in the first quarter of 2022 grew 14 percent as reported and 17 percent adjusted for currency.
From a geographic perspective, Americas revenue grew 8.9 percent year to year as reported (9 percent adjusted for currency). Europe/Middle East/Africa (EMEA) increased 7.7 percent (14 percent adjusted for currency). Asia Pacific grew 4.6 percent (11 percent adjusted for currency).
Gross margin of 51.7 percent decreased 1.6 points year to year, however, gross profit dollars grew compared to the prior-year period. Overall, gross margin was impacted by the significant investments we are making to drive our hybrid cloud and AI strategy and due to mix from our Infrastructure product cycles. These impacts were partially offset by improvement in the Software gross margin. Operating (non-GAAP) gross margin of 52.9 percent decreased 1.7 points versus the prior year for similar reasons.
Total expense and other (income) decreased 1.1 percent in the first quarter of 2022 versus the prior-year period primarily driven by the effects of currency, lower non-operating retirement-related costs and lower workforce rebalancing charges, partially offset by an unrealized loss on Kyndryl retained shares and higher spending reflecting our continuing investment in innovation, our ecosystem and talent, both organically and through acquisitions. We are aggressively hiring to better serve clients, while increasing our research spend to deliver innovation in AI, hybrid cloud and emerging areas such as quantum. Total operating (non-GAAP) expense and other (income) decreased 2.6 percent year to year, driven primarily by the factors described above excluding the lower non-operating retirement-related costs and the unrealized loss on Kyndryl shares.
Pre-tax income from continuing operations of $0.6 billion increased 156.0 percent and pre-tax margin was 4.4 percent, an increase of 2.5 points versus the first quarter of 2021. The continuing operations benefit from income taxes in the first quarter of 2022 was $39 million compared to a $160 million benefit in the first quarter of 2021. The current-year benefit was driven by many factors including the impacts of recently published foreign tax credit regulations,
47
Management Discussion – (continued)
geographical mix of income, incentives and changes in unrecognized tax benefits. The prior-year benefit was primarily related to the tax impacts from the resolution of certain tax audits. Net income from continuing operations of $0.7 billion increased 64.3 percent and the net income from continuing operations margin was 4.7 percent, up 1.6 points year to year.
Operating (non-GAAP) pre-tax income from continuing operations of $1.5 billion increased 45.9 percent and the operating (non-GAAP) pre-tax margin from continuing operations increased 2.8 points to 10.7 percent. The operating (non-GAAP) income tax provision for the first quarter of 2022 was $244 million, compared to a provision for income taxes of $25 million in the first quarter of 2021. The increase in the operating (non-GAAP) income tax provision in the first quarter of 2022, compared to the prior year was primarily driven by tax impacts from the resolution of certain tax audits in the first quarter of 2021. Operating (non-GAAP) income from continuing operations of $1.3 billion increased 25.5 percent and the operating (non-GAAP) income margin from continuing operations of 9.0 percent was up 1.3 points year to year.
Diluted earnings per share from continuing operations of $0.73 in the first quarter of 2022 increased 62.2 percent and operating (non-GAAP) diluted earnings per share of $1.40 increased 25.0 percent versus the prior-year period.
Consolidated diluted earnings per share in the first quarter of 2022 was $0.81 compared to $1.06 in the prior-year period. This includes a year-to-year reduction of $0.53 from discontinued operations due to the separation of Kyndryl.
Our balance sheet at March 31, 2022 continues to provide us with the flexibility to support the business. Cash and cash equivalents, restricted cash and marketable securities at March 31, 2022 were $10.8 billion, an increase of $3.2 billion from December 31, 2021. Total debt of $54.2 billion at March 31, 2022 increased $2.5 billion primarily due to new debt issuances.
Key drivers in the balance sheet and total cash flows were:
Total assets increased $1.3 billion ($1.8 billion adjusted for currency) from December 31, 2021 driven by:
| ● | An increase in cash and cash equivalents, restricted cash and marketable securities of $3.2 billion ($3.3 billion adjusted for currency); and |
| ● | An increase in goodwill and net intangible assets of $0.3 billion ($0.5 billion adjusted for currency) due to additions from new acquisitions; partially offset by intangibles amortization and currency impacts; partially offset by |
| ● | A decrease in receivables of $2.5 billion ($2.4 billion adjusted for currency) primarily due to collections of higher year-end balances. |
Total liabilities increased $1.2 billion ($2.1 billion adjusted for currency) from December 31, 2021 driven by:
| ● | An increase in total debt of $2.5 billion ($2.9 billion adjusted for currency) primarily due to issuances of $4.1 billion, partially offset by maturities of $1.1 billion; and |
| ● | An increase in deferred income of $0.9 billion ($1.0 billion adjusted for currency) primarily driven by annual customer billings and continued growth in software renewal rates; partially offset by |
| ● | A decrease in accounts payable of $0.5 billion primarily due to declines from seasonally higher year-end balances; |
| ● | A decrease in retirement and nonpension postretirement benefit obligations of $0.5 billion ($0.3 billion adjusted for currency); and |
48
Management Discussion – (continued)
| ● | A decrease in taxes payable of $0.5 billion primarily due to indirect tax payments. |
Total equity of $19.1 billion increased $0.1 billion from December 31, 2021 as a result of:
| ● | Net income of $0.7 billion; |
| ● | A decrease in accumulated other comprehensive losses of $0.7 billion driven by retirement-related benefit plans and foreign currency translation adjustments; and |
| ● | Common stock of $0.2 billion; partially offset by |
| ● | Dividends paid of $1.5 billion. |
Our cash flows from operating, investing and financing activities, as reflected in the Consolidated Statement of Cash Flows, include the cash flows of discontinued operations.
On a consolidated basis, cash provided by operating activities was $3.2 billion in the first three months of 2022, a decrease of $1.7 billion compared to the first three months of 2021. Net cash used in investing activities of $1.4 billion decreased $0.6 billion compared to the prior-year period. Financing activities were a net source of cash of $1.4 billion in the first three months of 2022 compared to a net use of cash of $5.8 billion in the first three months of 2021.
49
Management Discussion – (continued)
First Quarter in Review
Results of Continuing Operations
As discussed in the “Organization of Information” section, with the completion of the separation on November 3, 2021, results of Kyndryl are reported as discontinued operations. Prior periods have been reclassified to conform to this presentation in the Management Discussion to allow for a meaningful comparison of continuing operations.
Segment Details
The table below presents each reportable segment’s revenue and gross margin results, followed by an analysis of the first quarter of 2022 versus the first quarter of 2021 reportable segments results. Prior-year results have been recast to conform with the changes as described in the “Organization of Information” section.
|
|
|
|
|
|
| Yr. to Yr. |
| |||
Percent |
| ||||||||||
Yr. to Yr. | Change |
| |||||||||
(Dollars in millions) |
|
| Percent/Margin | Adjusted For |
| ||||||
For the three months ended March 31: | 2022 | 2021* | Change | Currency |
| ||||||
Revenue: |
|
|
|
|
|
|
|
| |||
Software | $ | 5,772 | $ | 5,138 | 12.3 | % | 15.4 | % | |||
Gross margin |
| 78.8 | % |
| 77.8 | % | 1.1 | pts. |
| ||
Consulting |
| 4,829 |
| 4,262 | 13.3 | % | 17.4 | % | |||
Gross margin |
| 24.3 | % |
| 27.8 | % | (3.5) | pts. |
| ||
Infrastructure |
| 3,219 |
| 3,293 |
| (2.3) | % | 0.3 | % | ||
Gross margin |
| 50.5 | % |
| 56.3 | % | (5.9) | pts. |
| ||
Financing |
| 154 |
| 208 |
| (26.2) | % | (24.5) | % | ||
Gross margin |
| 37.7 | % |
| 35.5 | % | 2.2 | pts. |
| ||
Other |
| 224 |
| 284 | (21.3) | % | (18.9) | % | |||
Gross margin |
| (32.9) | % |
| (29.6) | % | (3.3) | pts. |
| ||
Total revenue | $ | 14,197 | $ | 13,187 |
| 7.7 | % | 10.9 | % | ||
Total gross profit | $ | 7,335 | $ | 7,027 |
| 4.4 | % |
| |||
Total gross margin |
| 51.7 | % |
| 53.3 | % | (1.6) | pts. |
| ||
Non-operating adjustments: |
|
|
|
|
|
|
|
| |||
Amortization of acquired intangible assets | 181 |
| 174 |
| 4.0 | % |
| ||||
Operating (non-GAAP) gross profit | $ | 7,516 | $ | 7,201 |
| 4.4 | % |
| |||
Operating (non-GAAP) gross margin |
| 52.9 | % |
| 54.6 | % | (1.7) | pts. |
| ||
* | Recast to reflect segment changes. |
50
Software
|
|
|
|
|
|
| Yr. to Yr. |
| |||
Percent |
| ||||||||||
Yr. to Yr. | Change |
| |||||||||
(Dollars in millions) |
|
| Percent | Adjusted For |
| ||||||
For the three months ended March 31: | 2022 | 2021* | Change | Currency |
| ||||||
Software revenue: | $ | 5,772 | $ | 5,138 |
| 12.3 | % | 15.4 | % | ||
Hybrid Platform & Solutions | $ | 4,080 | $ | 3,800 |
| 7.4 | % | 10.0 | % | ||
Red Hat | 18.0 | 21.1 | |||||||||
Automation | 3.0 | 5.4 | |||||||||
Data & AI | 2.1 | 4.4 | |||||||||
Security | 5.4 | 8.2 | |||||||||
Transaction Processing | 1,692 |
| 1,338 |
| 26.5 |
| 30.6 | ||||
* Recast to reflect segment changes.
Software revenue of $5,772 million increased 12.3 percent as reported (15 percent adjusted for currency) in the first quarter of 2022 compared to the prior-year period. This includes incremental sales to Kyndryl which contributed over 8 points to the revenue growth. Both Hybrid Platform & Solutions and Transaction Processing grew, with Transaction Processing benefitting significantly from sales to Kyndryl. Within Software, hybrid cloud revenue of $2.1 billion grew 22 percent as reported (25 percent adjusted for currency) driven by strong growth in Hybrid Platform & Solutions. In addition, we had continued year-to-year growth this quarter in our software subscription and support renewal rates.
Hybrid Platform & Solutions revenue of $4,080 million increased 7.4 percent as reported (10 percent adjusted for currency) in the first quarter of 2022 compared to the prior-year period. Incremental sales to Kyndryl contributed approximately 1.5 points to the revenue growth. We continue to drive focus around the strategic hybrid cloud and AI needs of our clients, including Red Hat, Data & AI, Automation and Security. Red Hat revenue grew 18.0 percent as reported (21 percent adjusted for currency) in the first quarter of 2022, driven by strong performance across the Red Hat portfolio. Our foundational hybrid cloud offerings, RHEL and OpenShift, each gained market share this quarter. Red Hat’s hybrid cloud offerings continue to transform enterprise IT, and we continue to deliver new innovations. Automation revenue grew 3.0 percent as reported (5 percent adjusted for currency), led by AIOps and Management and Integration. We have invested in an AI-powered approach to Automation and our solutions are resonating with clients as they address growing complexity, digital shifts, and skill shortages across their businesses. Data & AI revenue increased 2.1 percent as reported (4 percent adjusted for currency), driven by good performance across the portfolio, including continued adoption of Data Fabric, expansion of our Data Management footprint, a focus on sustainable operations with Asset & Supply Chain Management and the need for reliable data sharing with Information Exchange. Security revenue grew 5.4 percent as reported (8 percent adjusted for currency) compared to strong performance in the prior-year first quarter. We had growth in the first quarter of 2022 in Threat Management and Data Security due to the evolving cybersecurity environment. We also continue to have good client demand for Cloud Pak for Security and continue to invest in security innovation including our ReaQta acquisition in 2021.
For the first quarter of 2022, Hybrid Platform & Solutions grew annual recurring revenue (ARR) by 9 percent compared to the prior-year period. ARR is a key performance metric management uses to assess the health and growth trajectory of our Hybrid Platform & Solutions business within the Software segment. ARR is calculated by estimating the current quarter’s recurring, committed value for certain types of active contracts as of the period-end date and then multiplying that value by four. This value is based on each arrangement’s contract value and start date, mitigating fluctuations during the contract term, and includes the following consumption models: (1) software subscription agreements, including committed term licenses, (2) as-a-service arrangements such as SaaS and PaaS, (3) maintenance and support contracts, and (4) security managed services contracts. ARR should be viewed independently of revenue as this performance metric and its inputs may not represent the amount of revenue recognized in the period and therefore is not intended to represent current period revenue or revenue that will be recognized in future periods. ARR is calculated at estimated constant currency.
51
Transaction Processing revenue of $1,692 million grew 26.5 percent as reported (31 percent adjusted for currency) in the first quarter compared to the prior-year period. Incremental sales to Kyndryl contributed approximately 28 points to the revenue growth. We also continued to have strong renewals of these critical software offerings which build on the expanded zSystems capacity and traction throughout the strong z15 program.
|
|
|
|
| Yr. to Yr. |
| |||
Percent/ |
| ||||||||
(Dollars in millions) |
|
| Margin |
| |||||
For the three months ended March 31: | 2022 | 2021* | Change |
| |||||
Software: |
|
|
|
|
|
| |||
Gross profit | $ | 4,550 | $ | 3,995 |
| 13.9 | % | ||
Gross profit margin |
| 78.8 | % |
| 77.8 | % | 1.1 | pts. | |
Pre-tax income | $ | 1,134 | $ | 658 |
| 72.3 | % | ||
Pre-tax margin |
| 19.7 | % |
| 12.8 | % | 6.8 | pts. | |
* Recast to reflect segment changes.
Software gross profit margin increased 1.1 points to 78.8 percent in the first quarter of 2022 compared to the prior-year period, reflecting the broad-based revenue performance in the quarter. Pre-tax income of $1,134 million increased 72.3 percent year to year and pre-tax margin increased 6.8 points to 19.7 percent in the first quarter of 2022 compared to the prior year. The pre-tax margin improvement was driven primarily by higher gross profit contribution.
Consulting
|
|
|
|
|
|
| Yr. to Yr. |
| |||
Percent |
| ||||||||||
Yr. to Yr. | Change |
| |||||||||
(Dollars in millions) |
|
| Percent | Adjusted For |
| ||||||
For the three months ended March 31: | 2022 | 2021* | Change | Currency |
| ||||||
Consulting revenue: | $ | 4,829 | $ | 4,262 | 13.3 | % | 17.4 | % | |||
Business Transformation | $ | 2,255 | $ | 1,953 | 15.5 | % | 19.3 | % | |||
Technology Consulting |
| 955 |
| 835 | 14.4 |
| 18.9 | ||||
Application Operations |
| 1,619 |
| 1,474 | 9.8 |
| 14.2 | ||||
* Recast to reflect segment change.
Consulting revenue of $4,829 million increased 13.3 percent as reported and 17 percent adjusted for currency in the first quarter of 2022 compared to the prior-year period, with strong growth in revenue and signings across all three business areas. Our book-to-bill remains solid at 1.1 for the first quarter of 2022 as clients continue to trust IBM to execute their complex business transformations by leveraging our skills, deep industry expertise and our ecosystem. Within Consulting, hybrid cloud revenue of $2.1 billion grew 24 percent as reported (29 percent adjusted for currency), with continued strong demand and momentum in our Red Hat practice which added over 130 new clients this quarter. In the first quarter of 2022, Red Hat related signings nearly doubled year to year. Our strategic partnerships also contributed to our performance with solid double-digit revenue growth in the quarter from these partnerships, led by Salesforce, SAP, AWS and Azure.
Business Transformation revenue of $2,255 million increased 15.5 percent as reported and 19 percent adjusted for currency on a year-to-year basis. We had broad-based growth with strength in our practices centered on customer experience, talent and data transformations as well as supply chain and finance application deployments. We continued to bring together technology and strategic consulting to transform critical workflows at scale.
Technology Consulting revenue of $955 million increased 14.4 percent as reported and 19 percent adjusted for currency in the first quarter of 2022 compared to the prior-year period, led by growth in our engagements around developing and modernizing applications for cloud deployments.
52
Application Operations revenue of $1,619 million increased 9.8 percent as reported and 14 percent adjusted for currency compared to the first quarter of 2021, led by growth in cloud application management. We had growth in areas that focus on the management of applications and cloud platform services required to run hybrid cloud environments.
|
|
|
|
| Yr. to Yr. |
| |||
Percent/ |
| ||||||||
(Dollars in millions) |
|
| Margin |
| |||||
For the three months ended March 31: | 2022 | 2021* | Change |
| |||||
Consulting: |
|
|
|
|
|
| |||
Gross profit | $ | 1,176 | $ | 1,187 |
| (0.9) | % | ||
Gross profit margin |
| 24.3 | % |
| 27.8 | % | (3.5) | pts. | |
Pre-tax income | $ | 348 | $ | 277 |
| 25.8 | % | ||
Pre-tax margin |
| 7.2 | % |
| 6.5 | % | 0.7 | pts. | |
* Recast to reflect segment change.
Consulting first-quarter gross profit margin of 24.3 percent decreased 3.5 points on a year-to-year basis, reflecting the significant investments we have made to enable revenue growth. We continued to invest in our partner ecosystem to expand our reach and continue to scale our recent acquisitions. We are also investing in talent across our workforce, by further developing skills in existing resources, adding certifications and bringing in technical skills in areas of hybrid cloud and AI. Consulting continues to be impacted by the competitive and inflationary labor market which exerts pressure on the profitability of our existing contracts. We expect to capture this increased resource cost through price in our engagements and recognize this will take a few quarters to be reflected in our margin profile. Pre-tax income increased 25.8 percent to $348 million compared to the prior year. Pre-tax margin increased 0.7 points to 7.2 percent in the first-quarter 2022 compared to the prior year. We have taken actions to streamline our operations and go-to-market structure which have contributed to the pre-tax margin expansion.
Consulting Signings and Book-to-Bill
Yr. to Yr. |
| ||||||||||
Percent |
| ||||||||||
Yr. to Yr. | Change |
| |||||||||
(Dollars in millions) | Percent | Adjusted For |
| ||||||||
For the three months ended March 31: |
| 2022 |
| 2021 |
| Change |
| Currency |
| ||
Total Consulting signings | $ | 5,136 | $ | 3,796 |
| 35.3 | % | 40.9 | % | ||
Signings are management’s initial estimate of the value of a client’s commitment under a services contract 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.
53
Infrastructure
Yr. to Yr. |
| ||||||||||
Percent |
| ||||||||||
Yr. to Yr. | Change |
| |||||||||
(Dollars in millions) | Percent | Adjusted For |
| ||||||||
For the three months ended March 31: |
| 2022 |
| 2021* |
| Change |
| Currency |
| ||
Infrastructure revenue: | $ | 3,219 | $ | 3,293 |
| (2.3) | % | 0.3 | % | ||
Hybrid Infrastructure | $ | 1,700 | $ | 1,782 |
| (4.6) | % | (2.5) | % | ||
zSystems |
|
|
|
| (19.0) |
| (17.6) | ||||
Distributed Infrastructure |
|
|
|
|
| 5.2 |
| 7.8 | |||
Infrastructure Support |
| 1,519 |
| 1,512 |
| 0.4 |
| 3.7 | |||
* Recast to reflect segment change.
Infrastructure revenue of $3,219 million decreased 2.3 percent as reported and was flat adjusted for currency in the first quarter of 2022 compared to the prior-year period. This includes incremental sales to Kyndryl which contributed over 8 points to the revenue growth. Within Infrastructure, hybrid cloud revenue of $0.7 billion decreased 20 percent as reported (18 percent adjusted for currency), driven by product cycle dynamics.
Hybrid Infrastructure revenue of $1,700 million decreased 4.6 percent as reported (2 percent adjusted for currency) compared to first quarter of 2021. Incremental sales to Kyndryl contributed over 8 points to the revenue growth. Within Hybrid Infrastructure, zSystems revenue declined 19.0 percent as reported (18 percent adjusted for currency) year to year. This was the eleventh quarter of availability of the z15 program, which has been a very strong program in both revenue performance and capacity, with more z15 MIPs shipped than in any other previous program. In April 2022, we announced the newest solution, IBM z16, which provides differentiated capabilities including embedded AI at scale, cyber-resilient security and cloud-native development for hybrid cloud. Distributed Infrastructure revenue grew 5.2 percent as reported and 8 percent adjusted for currency. Revenue growth in Power reflects clients’ demand for SAP S/4HANA data intensive workloads on our newest Power10 high-end system.
Infrastructure Support revenue of $1,519 million increased 0.4 percent as reported and 4 percent adjusted for currency compared to the prior-year period. This includes incremental sales to Kyndryl which contributed over 8 points of revenue growth for the quarter.
* Recast to reflect segment change.
Infrastructure gross profit margin decreased 5.9 points to 50.5 percent in the first quarter of 2022 compared to the prior year, driven primarily by mix due to product cycle dynamics. Pre-tax income decreased 31.7 percent to $199 million in the first quarter of 2022 compared to the prior-year period. Pre-tax margin decreased 2.7 points to 6.2 points compared to the prior-year first quarter, reflecting the zSystems product cycle.
Financing
See pages 70 through 73 for a discussion of Financing’s segment results.
54
Geographic Revenue
In addition to the revenue presentation by reportable segment, we also measure revenue performance on a geographic basis.
| |||||||||||
Yr. to Yr. | |||||||||||
Percent |
| ||||||||||
Yr. to Yr. | Change |
| |||||||||
(Dollars in millions) | Percent | Adjusted For |
| ||||||||
For the three months ended March 31: |
| 2022 |
| 2021 |
| Change |
| Currency |
| ||
Total Revenue | $ | 14,197 | $ | 13,187 |
| 7.7 | % | 10.9 | % | ||
Americas | $ | 7,056 | $ | 6,477 |
| 8.9 | % | 8.9 | % | ||
Europe/Middle East/Africa (EMEA) |
| 4,231 |
| 3,928 |
| 7.7 |
| 13.9 | |||
Asia Pacific |
| 2,910 |
| 2,781 |
| 4.6 |
| 11.3 | |||
Total revenue of $14,197 million increased 7.7 percent as reported (11 percent adjusted for currency) in the first quarter of 2022 compared to the prior year, which includes approximately 5 points of revenue growth from incremental sales to Kyndryl.
Americas revenue of $7,056 million increased 8.9 percent as reported (9 percent adjusted for currency), which includes approximately 4 points of revenue growth from incremental sales to Kyndryl. Within North America, the U.S. increased 7.0 percent compared to the prior year and Canada increased 8.2 percent as reported (8 percent adjusted for currency). Latin America increased 25.5 percent as reported (25 percent adjusted for currency), with Brazil increasing 24.8 percent as reported (20 percent adjusted for currency).
In EMEA, total revenue of $4,231 million increased 7.7 percent as reported (14 percent adjusted for currency), which includes approximately 7 points of revenue growth from incremental sales to Kyndryl. The UK, France and Germany increased 14.4 percent, 12.6 percent and 8.5 percent, respectively, as reported, and increased 18 percent, 20 percent and 16 percent, respectively, adjusted for currency. Italy decreased 3.7 percent as reported, but increased 3 percent adjusted for currency.
Asia Pacific revenue of $2,910 million increased 4.6 percent as reported (11 percent adjusted for currency), which includes approximately 6 points of revenue growth from incremental sales to Kyndryl. Japan increased 4.0 percent as reported (14 percent adjusted for currency). India and Australia increased 25.9 percent and 11.4 percent, respectively, as reported and 30 percent and 19 percent, respectively, adjusted for currency. China decreased 11.2 percent as reported (13 percent adjusted for currency).
55
Expense
Total Expense and Other (Income)
Yr. to Yr. |
| ||||||||
(Dollars in millions) | Percent |
| |||||||
For the three months ended March 31: |
| 2022 |
| 2021 |
| Change |
| ||
Total expense and other (income) | $ | 6,712 | $ | 6,784 |
| (1.1) | % | ||
Non-operating adjustments: |
|
|
|
|
|
| |||
Amortization of acquired intangible assets | $ | (280) | $ | (273) | 2.5 | % | |||
Acquisition-related charges |
| (7) | (16) | (57.4) | |||||
Non-operating retirement-related (costs)/income | (202) | (332) | (39.2) | ||||||
Kyndryl-related impacts |
| (222) | — | nm | |||||
Operating (non-GAAP) expense and other (income) | $ | 6,001 | $ | 6,162 | (2.6) | % | |||
Total expense-to-revenue ratio |
| 47.3 | % | 51.4 | % | (4.2) | pts. | ||
Operating (non-GAAP) expense-to-revenue ratio |
| 42.3 | % | 46.7 | % | (4.5) | pts. | ||
nm — not meaningful
Total expense and other (income) decreased 1.1 percent in the first quarter of 2022 versus the prior-year period
primarily driven by the effects of currency, lower non-operating retirement-related costs, lower workforce rebalancing charges and lower spending for shared services transferred to Kyndryl, partially offset by an unrealized loss from Kyndryl retained shares and higher spending reflecting our continuing investment in innovation, our ecosystem and talent, both organically and through acquisitions. We are aggressively hiring to better serve clients, while increasing our research spend to deliver innovation in AI, hybrid cloud and emerging areas such as quantum. Total operating (non-GAAP) expense and other (income) decreased 2.6 percent year to year, driven primarily by the factors described above excluding the lower non-operating retirement-related costs and the unrealized loss on Kyndryl stock.
For additional information regarding total expense and other (income) for both expense presentations, see the following analyses by category.
Selling, General and Administrative Expense
Yr. to Yr. |
| ||||||||
(Dollars in millions) | Percent |
| |||||||
For the three months ended March 31: |
| 2022 |
| 2021 |
| Change |
| ||
Selling, general and administrative expense: |
|
|
|
|
|
| |||
Selling, general and administrative — other | $ | 3,824 | $ | 3,890 |
| (1.7) | % | ||
Advertising and promotional expense |
| 336 |
| 345 |
| (2.4) | |||
Workforce rebalancing charges |
| 5 |
| 94 |
| (94.4) | |||
Amortization of acquired intangible assets |
| 279 |
| 272 |
| 2.6 | |||
Stock-based compensation |
| 136 |
| 115 |
| 18.6 | |||
Provision for/(benefit from) expected credit loss expense |
| 16 |
| (28) |
| nm | |||
Total selling, general and administrative expense | $ | 4,597 | $ | 4,688 |
| (1.9) | % | ||
Non-operating adjustments: |
|
|
|
|
|
| |||
Amortization of acquired intangible assets | $ | (279) | $ | (272) |
| 2.6 | % | ||
Acquisition-related charges | (7) |
| (16) |
| (57.4) | ||||
Kyndryl-related impacts |
| 0 | — | nm | |||||
Operating (non-GAAP) selling, general and administrative expense | $ | 4,311 | $ | 4,399 |
| (2.0) | % | ||
nm — not meaningful
Total selling, general and administrative (SG&A) expense decreased 1.9 percent in the first quarter of 2022 versus the prior-year period driven primarily by the following factors:
56
Management Discussion – (continued)
| ● | Lower workforce rebalancing charges (2 points); and |
| ● | The effects of currency (2 points); partially offset by |
| ● | A provision for expected credit loss expense compared to a benefit in the prior-year period (1 point); and |
| ● | Higher spending (1 point) reflecting our continuing investment in innovation, our ecosystem and talent, partially offset by lower spending for shared services transferred to Kyndryl. |
Operating (non-GAAP) expense decreased 2.0 percent year to year primarily driven by the same factors.
The provision for expected credit loss expense increased $44 million year to year in the first three months of 2022 primarily driven by higher expense for specific reserves in the current-year period and a decrease in general reserves in the prior-year period. The receivables provision coverage was 2.3 percent at March 31, 2022, excluding receivables classified as held for sale, an increase of 20 basis points compared to December 31, 2021. The increase was primarily driven by the overall decline in total receivables.
Research, Development and Engineering
Yr. to Yr. |
| ||||||||
(Dollars in millions) | Percent |
| |||||||
For the three months ended March 31: |
| 2022 |
| 2021 |
| Change |
| ||
Research, development and engineering expense | $ | 1,679 | $ | 1,616 |
| 3.9 | % | ||
Research, development and engineering (RD&E) expense in the first quarter of 2022 increased 3.9 percent year to year reflecting our continuing investment to deliver innovation in AI, hybrid cloud and emerging areas such as quantum. Higher spending (5 points) in the current-year period was partially offset by the effects of currency (1 point).
Intellectual Property and Custom Development Income
Yr. to Yr. |
| ||||||||
(Dollars in millions) | Percent |
| |||||||
For the three months ended March 31: |
| 2022 |
| 2021 |
| Change |
| ||
Intellectual Property and Custom Development Income: |
|
|
|
|
|
| |||
Licensing of intellectual property including royalty-based fees | $ | 71 | $ | 74 |
| (4.0) | % | ||
Custom development income |
| 48 |
| 65 |
| (26.2) | |||
Sales/other transfers of intellectual property |
| 2 |
| 6 |
| (73.3) | |||
Total | $ | 121 | $ | 146 |
| (16.9) | % | ||
Total intellectual property and custom development income in the first quarter of 2022 decreased 16.9 percent year to year. The timing and amount of licensing, sales or other transfers of IP may vary significantly from period to period depending upon the timing of licensing agreements, economic conditions, industry consolidation and the timing of new patents and know-how development.
57
Other (Income) and Expense
Yr. to Yr. |
| ||||||||
(Dollars in millions) | Percent |
| |||||||
For the three months ended March 31: |
| 2022 |
| 2021 |
| Change |
| ||
Other (income) and expense: |
|
|
|
|
|
| |||
Foreign currency transaction losses/(gains) | $ | (176) | $ | (109) |
| 61.0 | % | ||
(Gains)/losses on derivative instruments |
| 102 |
| 160 |
| (36.1) | |||
Interest income |
| (17) |
| (14) |
| 27.5 | |||
Net (gains)/losses from securities and investment assets |
| 218 |
| (6) |
| nm | |||
Retirement-related costs/(income) |
| 202 |
| 332 |
| (39.2) | |||
Other |
| (83) |
| (18) |
| 356.9 | |||
Total other (income) and expense | $ | 246 | $ | 346 |
| (28.8) | % | ||
Non-operating adjustments: |
|
|
|
|
|
| |||
Amortization of acquired intangible assets | $ | (1) | $ | (1) |
| — | |||
Non-operating retirement-related (costs)/income | (202) | (332) | (39.2) | % | |||||
Kyndryl-related impacts |
| (222) |
| — |
| nm | |||
Operating (non-GAAP) other (income) and expense | $ | (179) | $ | 13 |
| nm | |||
nm - not meaningful
Total other (income) and expense was expense of $246 million in the first quarter of 2022 compared to expense of $346 million in the prior-year period. The year-to-year change was primarily driven by:
| ● | Lower non-operating retirement-related costs ($130 million). Refer to “Retirement-Related Plans” for additional information; and |
| ● | Net exchange gains (including derivative instruments) in the current-year period versus net exchange losses in the prior-year period ($124 million); partially offset by |
| ● | An unrealized loss on the Kyndryl retained shares ($222 million). |
Operating (non-GAAP) other (income) and expense was income of $179 million in the first quarter of 2022 compared to expense of $13 million in the prior-year period. The year-to-year change was driven primarily by the foreign exchange dynamics described above.
Interest Expense
Yr. to Yr. |
| ||||||||
(Dollars in millions) | Percent |
| |||||||
For the three months ended March 31: |
| 2022 |
| 2021 |
| Change |
| ||
Interest expense | $ | 311 | $ | 280 |
| 10.9 | % | ||
Interest expense increased $31 million in the first quarter of 2022 compared to the prior-year period. Interest expense is presented in cost of financing in the Consolidated Income Statement if the related external borrowings are to support the Financing external business. Overall interest expense (excluding capitalized interest) for the first quarter of 2022 was $393 million, an increase of $7 million versus the prior-year period, primarily driven by higher average interest rates, partially offset by a lower average debt balance in the current year.
58
Retirement-Related Plans
The following table provides the total pre-tax cost for all retirement-related plans. The operating cost amounts are included in the Consolidated Income Statement within the caption (e.g., Cost, SG&A, RD&E) relating to the job function of the plan participants. The non-operating cost amounts are included in other (income) and expense.
Yr. to Yr. |
| ||||||||
(Dollars in millions) | Percent |
| |||||||
For the three months ended March 31: |
| 2022 |
| 2021 |
| Change |
| ||
Retirement-related plans — cost: |
|
|
|
|
|
| |||
Service cost | $ | 66 | $ | 68 |
| (3.8) | % | ||
Multi-employer plans |
| 4 |
| 6 |
| (32.9) | |||
Cost of defined contribution plans |
| 239 |
| 256 |
| (6.8) | |||
Total operating costs | $ | 309 | $ | 330 |
| (6.6) | % | ||
Interest cost | $ | 467 | $ | 410 |
| 14.1 | % | ||
Expected return on plan assets |
| (749) |
| (731) |
| 2.5 | |||
Recognized actuarial losses |
| 460 |
| 622 |
| (26.0) | |||
Amortization of prior service costs/(credits) |
| 7 |
| 3 |
| 106.8 | |||
Curtailments/settlements |
| 8 |
| 17 |
| (55.0) | |||
Other costs |
| 9 |
| 11 |
| (15.4) | |||
Total non-operating costs/(income) | $ | 202 | $ | 332 |
| (39.2) | % | ||
Total retirement-related plans — cost | $ | 510 | $ | 663 |
| (23.0) | % | ||
Total pre-tax retirement-related plan cost decreased by $152 million compared to the first quarter of 2021, primarily driven by a decrease in recognized actuarial losses ($162 million), higher expected return on plan assets ($18 million), and lower cost of defined contribution plans ($17 million), partially offset by higher interest costs ($58 million).
As described in the “Operating (non-GAAP) Earnings” section, management characterizes certain retirement-related costs as operating and others as non-operating. Utilizing this characterization, operating retirement-related costs in the first quarter of 2022 were $309 million, a decrease of $22 million compared to the first quarter of 2021, primarily driven by lower cost of defined contribution plans ($17 million). Non-operating costs of $202 million in the first quarter of 2022 decreased $130 million year to year, driven by a decrease in recognized actuarial losses ($162 million), and higher expected return on plan assets ($18 million), partially offset by higher interest costs ($58 million).
Taxes
The continuing operations benefit from income taxes for the first quarter of 2022 was $39 million, compared to a benefit from income taxes of $160 million in the first quarter of 2021. The operating (non-GAAP) income tax provision for the first quarter of 2022 was $244 million, compared to a provision for income taxes of $25 million in the first quarter of 2021.
The continuing operations benefit from income taxes in the first quarter of 2022 was driven by many factors including the impacts of recently published foreign tax credit regulations, geographical mix of income, incentives and changes in unrecognized tax benefits. The continuing operations benefit from income taxes in the first quarter of 2021 was primarily related to the tax impacts from the resolution of certain tax audits. The increase in the operating (non-GAAP) income tax provision in the first quarter of 2022, compared to the prior year was primarily driven by tax impacts from the resolution of certain tax audits in the first quarter of 2021.
IBM’s full-year tax provision and effective tax rate are impacted by recurring factors including the geographic mix of income before taxes, incentives, changes in unrecognized tax benefits and any discrete tax events, such as the settlement of income tax audits and changes in or new interpretations of tax laws. The GAAP tax provision and effective
59
Management Discussion – (continued)
tax rate could also be affected by adjustments to the previously recorded charges for U.S. tax reform attributable to any changes in law, new regulations and guidance, and audit adjustments, among others.
During the fourth quarter of 2020, the U.S. Internal Revenue Service (IRS) concluded its examination of the company’s U.S. income tax returns for 2013 and 2014, which had a specific focus on certain cross-border transactions that occurred in 2013 and issued a final Revenue Agent’s Report (RAR). The IRS’ proposed adjustments relative to these cross-border transactions, if sustained, would result in additional taxable income of approximately $4.5 billion. The company strongly disagrees with the IRS on these specific matters and filed its IRS Appeals protest in the first quarter of 2021. In the third quarter of 2018, the IRS commenced its audit of the company’s U.S. tax returns for 2015 and 2016. The company anticipates that this audit will be completed in 2022. In the fourth quarter of 2021, the IRS commenced its audit of the company’s U.S. tax returns for 2017 and 2018. With respect to major U.S. state and foreign taxing jurisdictions, the company is generally no longer subject to tax examinations for years prior to 2015. The company is no longer subject to income tax examination of its U.S. federal tax return for years prior to 2013. The open years contain matters that could be subject to differing interpretations of applicable tax laws and regulations as it relates to the amount and/or timing of income, deductions, and tax credits. Although the outcome of tax audits is always uncertain, the company believes that adequate amounts of tax, interest and penalties have been provided for any adjustments that are expected to result for these years.
The company is involved in a number of income tax-related matters in India for having challenged tax assessments issued by the India Tax Authorities. At March 31, 2022, the company had recorded $709 million as prepaid income taxes in India. A significant portion of this balance represents cash tax deposits paid over time to protect the company’s right to appeal various income tax assessments made by the India Tax Authorities. Although the outcome of tax audits are always uncertain, the company believes that adequate amounts of tax, interest and penalties have been provided for any adjustments that are expected to result for these years.
The amount of unrecognized tax benefits at March 31, 2022 is $8,699 million which can be reduced by $548 million associated with timing adjustments, U.S. tax credits, potential transfer pricing adjustments, and state income taxes. The net amount of $8,151 million, if recognized, would favorably affect the company’s effective tax rate.
Earnings Per Share
Basic earnings per share is computed on the basis of the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share is computed on the basis of the weighted-average number of shares of common stock outstanding plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options and stock awards.
Yr. to Yr. |
| ||||||||
Percent |
| ||||||||
For the three months ended March 31: |
| 2022 |
| 2021 |
| Change |
| ||
Earnings per share of common stock from continuing operations: |
|
|
|
|
|
| |||
Assuming dilution | $ | 0.73 | $ | 0.45 |
| 62.2 | % | ||
Basic | $ | 0.74 | $ | 0.45 |
| 64.4 | % | ||
Diluted operating (non-GAAP) | $ | 1.40 | $ | 1.12 |
| 25.0 | % | ||
Weighted-average shares outstanding: (in millions) |
|
|
|
|
|
| |||
Assuming dilution |
| 909.2 |
| 901.7 |
| 0.8 | % | ||
Basic |
| 899.3 |
| 893.6 |
| 0.6 | % | ||
Actual shares outstanding at March 31, 2022 were 899.4 million. The weighted-average number of common shares outstanding assuming dilution during the first quarter of 2022 was 7.5 million shares (0.8 percent) higher than the same period of 2021.
60
Management Discussion – (continued)
Financial Position
Dynamics
Our balance sheet at March 31, 2022 continues to provide us with flexibility to support the business.
Cash, restricted cash and marketable securities at March 31, 2022 were $10,769 million, an increase of $3,213 million from December 31, 2021. Total debt of $54,234 million at March 31, 2022 increased $2,531 million from December 31, 2021 primarily due to new debt issuances. We issued $4,080 million of debt in February 2022 which will support maturities later in the year. We continue to manage our debt levels while being acquisitive and without sacrificing investments in our business or our solid dividend policy.
Our cash flow is presented on a consolidated basis and includes discontinued operations. Refer to note 3, “Separation of Kyndryl,” for additional information. In the first three months of 2022, we generated $3,248 million in cash from operating activities, compared to $4,914 million in the first three months of 2021. We invested $698 million in acquisitions and returned $1,475 million to shareholders through dividends in the first quarter of 2022. Our cash generation permits us to invest and deploy capital to areas with the most attractive long-term opportunities.
Our pension plans were well funded at the end of 2021, with worldwide qualified plans funded at 107 percent. Overall pension funded status as of the end of March 2022 was fairly consistent with year-end 2021, and we currently have no change to expected plan contributions in 2022.
IBM Working Capital
At March 31, | At December 31, | |||||
(Dollars in millions) |
| 2022 |
| 2021 | ||
Current assets | $ | 31,330 | $ | 29,539 | ||
Current liabilities |
| 34,056 |
| 33,619 | ||
Working capital | $ | (2,726) | $ | (4,080) | ||
Current ratio |
| 0.92:1 |
| 0.88:1 | ||
Working capital increased $1,354 million from the year-end 2021 position. The key changes are described below:
Current assets increased $1,791 million ($1,926 million adjusted for currency) due to:
| ● | An increase of $3,213 million ($3,261 million adjusted for currency) in cash and cash equivalents, restricted cash, and marketable securities; partially offset by |
| ● | A decline in receivables of $1,635 million ($1,547 million adjusted for currency) mainly due to collections of higher year-end balances. |
Current liabilities increased $437 million ($767 million adjusted for currency) as a result of:
| ● | An increase in deferred income of $1,008 million ($1,086 million adjusted for currency) primarily driven by annual customer billings and continued growth in software renewal rates; and |
| ● | An increase in short-term debt of $903 million ($883 million adjusted for currency) primarily due to reclassifications of $2,014 million from long-term debt to reflect upcoming maturities; partially offset by maturities of $1,087 million; partially offset by |
| ● | A decrease in accounts payable of $502 million ($474 million adjusted for currency) primarily due to declines from seasonally higher year-end balances; |
61
Management Discussion – (continued)
| ● | A decrease in taxes payable of $492 million ($476 million adjusted for currency) primarily due to indirect tax payments; and |
| ● | A decrease of $461 million ($243 million adjusted for currency) in compensation and benefits and other accrued expenses and liabilities. |
Receivables and Allowances
Roll Forward of Total IBM Receivables Allowance for Credit Losses
(Dollars in millions) | |||||||||||||
January 1, 2022 |
| Additions / (Releases) * |
| Write-offs ** |
| Foreign currency and other |
| March 31, 2022 | |||||
$ | 443 | $ | 17 | $ | (24) | $ | (5) | $ | 432 | ||||
* Additions/(Releases) for Allowance for Credit Losses are recorded in expense.
**Refer to note A, “Significant Accounting Policies,” in our 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 March 31, 2022, an increase of 20 basis points compared to December 31, 2021. The increase was primarily driven by the overall decline in total receivables. The majority of the write-offs during the three months ended March 31, 2022 related to receivables which had been previously reserved.
Financing Segment Receivables and Allowances
The following table presents external Financing segment receivables excluding receivables classified as held for sale, and immaterial miscellaneous receivables.
At March 31, | At December 31, |
| |||||
(Dollars in millions) |
| 2022 |
| 2021 |
| ||
Amortized cost * | $ | 11,563 | $ | 12,859 | |||
Specific allowance for credit losses |
| 141 |
| 159 | |||
Unallocated allowance for credit losses |
| 37 |
| 42 | |||
Total allowance for credit losses |
| 179 |
| 201 | |||
Net financing receivables | $ | 11,385 | $ | 12,658 | |||
Allowance for credit losses coverage |
| 1.5 | % |
| 1.6 | % | |
* Includes deferred initial direct costs which are expensed in IBM’s consolidated financial results.
The percentage of Financing segment receivables reserved decreased from 1.6 percent at December 31, 2021, to 1.5 percent at March 31, 2022, primarily driven by write-offs of previously reserved receivables, partially offset by the decline in amortized cost.
Roll Forward of Financing Segment Receivables Allowance for Credit Losses (included in Total IBM)
(Dollars in millions) |
|
|
|
|
|
|
|
| |||||
January 1, 2022 | Additions / (Releases)* | Write-offs ** | Foreign currency and other | March 31, 2022 | |||||||||
$ | 201 | $ | (8) | $ | (17) | $ | 3 | $ | 179 | ||||
* | Additions/(Releases) for Allowance for Credit Losses are recorded in expense. |
** | Refer to note A, “Significant Accounting Policies,” in our 2021 Annual Report for additional information regarding allowance for credit loss write-offs. |
Financing’s expected credit loss expense (including reserves for off-balance sheet commitments which are recorded in other liabilities) was a net release of $10 million for the three months ended March 31, 2022, compared to a net
62
release of $18 million for the same period in 2021. The decrease in net releases was primarily driven by lower unallocated reserve requirements in the prior year in Americas due to sales of receivables, partially offset by specific reserve releases in the current year in Americas and EMEA.
Noncurrent Assets and Liabilities
At March 31, | At December 31, | |||||
(Dollars in millions) |
| 2022 |
| 2021 | ||
Noncurrent assets | $ | 101,945 | $ | 102,462 | ||
Long-term debt | $ | 46,545 | $ | 44,917 | ||
Noncurrent liabilities (excluding debt) | $ | 33,562 | $ | 34,469 | ||
The decrease in noncurrent assets of $517 million ($146 million adjusted for currency) was driven by:
| ● | A decrease in long-term financing receivables of $815 million ($793 million adjusted for currency) due to reclasses to short-term receivables and declines from seasonally higher year-end balances; partially offset by |
| ● | An increase in goodwill and net intangible assets of $265 million ($460 million adjusted for currency) due to additions from new acquisitions; partially offset by intangibles amortization and currency impacts. |
Long-term debt increased $1,628 million ($1,972 million adjusted for currency) primarily driven by:
| ● | Issuances of $4,063 million; partially offset by |
| ● | Reclassifications to short-term debt of $2,014 million to reflect upcoming maturities. |
Noncurrent liabilities (excluding debt) decreased $907 million ($616 million adjusted for currency) primarily driven by:
| ● | A decrease in retirement and postretirement benefit obligations of $498 million ($324 million adjusted for currency); and |
| ● | A decrease of $410 million ($292 million adjusted for currency) in deferred income, operating lease liabilities and other liabilities. |
Debt
Our funding requirements are continually monitored and we execute our strategies to manage the overall asset and liability profile. Additionally, we maintain sufficient flexibility to access global funding sources as needed.
At March 31, | At December 31, | |||||
(Dollars in millions) |
| 2022 |
| 2021 | ||
Total company debt | $ | 54,234 | $ | 51,703 | ||
Financing segment debt* | $ | 12,168 | $ | 13,929 | ||
Non-Financing debt | $ | 42,067 | $ | 37,775 | ||
* Financing segment debt includes debt of $1,183 million at March 31, 2022 and $1,345 million at December 31, 2021 to support intercompany financing receivables and other intercompany assets. Refer to Financing’s “Financial Position” on page 71 for additional details.
Total debt of $54,234 million increased $2,531 million ($2,855 million adjusted for currency) from December 31, 2021, primarily driven by issuances of $4,080 million, partially offset by maturities of $1,111 million.
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Management Discussion – (continued)
Non-Financing debt of $42,067 million increased $4,292 million ($4,582 million adjusted for currency) from December 31, 2021 primarily due to new debt issuances.
Financing segment debt of $12,168 million decreased $1,761 million ($1,727 million adjusted for currency) from December 31, 2021 primarily due to lower funding requirements associated with financing receivables.
Financing provides financing solutions predominantly for IBM’s external client assets, and the debt used to fund Financing assets is primarily composed of intercompany loans. Total debt changes generally correspond with the level of client and commercial financing receivables, the level of cash and cash equivalents, the change in intercompany and external payables and the change in intercompany investment from IBM. The terms of the intercompany loans are set by the company to substantially match the term, currency and interest rate variability underlying the financing receivable and are based on arm’s-length pricing. The Financing debt-to-equity ratio remained at 9.0 to 1 at March 31, 2022.
We measure Financing as a stand-alone entity, and accordingly, interest expense relating to debt supporting Financing’s external client and internal business is included in the “Financing Results of Operations” and in note 5, “Segments.” In the Consolidated Income Statement, the external debt-related interest expense supporting Financing’s internal financing to IBM is classified as interest expense.
Equity
Total equity increased $116 million from December 31, 2021, primarily due to an increase from net income of $733 million, a decrease in accumulated other comprehensive losses of $703 million driven by retirement-related benefit plans of ($352 million) and foreign currency translation adjustments ($306 million), and common stock of $221 million; partially offset by dividends paid of $1,475 million.
Cash Flow
Our cash flows from operating, investing and financing activities, as reflected in the Consolidated Statement of Cash Flows on page 7, are summarized in the table below and include the cash flows of discontinued operations. These amounts also include the cash flows associated with the Financing business.
(Dollars in millions) | ||||||
For the three months ended March 31: |
| 2022 |
| 2021 | ||
Net cash provided by/(used in): |
|
|
|
| ||
Operating activities | $ | 3,248 | $ | 4,914 | ||
Investing activities |
| (1,358) |
| (2,000) | ||
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) | ||
Net cash provided by operating activities decreased $1,666 million as compared to the first three months of 2021 driven primarily by:
| ● | A decrease of cash provided by financing receivables of $1,232 million primarily driven by higher prior year sales of financing receivables; |
| ● | A decrease in deferred income of $605 million due to strong performance in the prior-year period; and |
| ● | An increase in inventory to mitigate supply chain disruption and in anticipation of the z16 cycle; partially offset by |
| ● | A decrease in workforce rebalancing payments of $401 million. |
64
Management Discussion – (continued)
Net cash used in investing activities decreased $642 million driven by:
| ● | A decrease in cash used for acquisitions of $422 million; and |
| ● | A decrease in cash used for net capital expenditures of $152 million. |
Financing activities were a net source of cash of $1,377 million in the first three months of 2022 compared to a net use of cash of $5,783 million in the first three months of 2021. The year-to-year change of $7,160 million was driven by:
| ● | An increase in net cash provided by debt transactions of $7,247 million primarily driven by a higher level of maturities in the prior year, and current year net additions. |
Results of Discontinued Operations
Income from discontinued operations, net of tax was $71 million in the first quarter of 2022 compared to $552 million in the prior-year period. As the separation of Kyndryl occurred on November 3, 2021, the first quarter of 2021 included a full quarter of Kyndryl operations. The current-year income primarily relates to a joint venture historically managed by Kyndryl, which did not transfer at separation due to the transfer being subject to regulatory approval. Upon receiving regulatory approval in the first quarter of 2022, the company sold its majority shares in the joint venture to Kyndryl. See note 3, “Separation of Kyndryl,” for additional information.
65
Management Discussion – (continued)
Looking Forward
Our first quarter results reflect the changes we have made to position our company for the future. This solid start to 2022 reinforces the confidence we have in our strategy. Harnessing the power of technologies such as hybrid cloud and AI remains essential as our clients face several strategic challenges and opportunities including competition for talent, supply chain issues, inflation, cybersecurity and geopolitical instability. We continue to see a strong demand environment for both technology and consulting as we help our clients respond to these challenges and opportunities. Over the last two years, we have taken a series of significant steps to capture this demand, and our investments and actions are paying off.
Hybrid Cloud and AI Progress
The hybrid cloud platform we have built is open, secure and flexible and at its core is based on Red Hat, which gives clients powerful software capabilities based on open-source innovation. Our software has been optimized for the platform and helps our clients apply AI, automation and security to make their businesses work better. Our global team of consultants offers deep business expertise by co-creating with clients and finding ways to harness the power of technology to accelerate their digital transformation journeys. Our infrastructure allows clients to take full advantage of an extended hybrid cloud environment.
This platform-centric strategy is producing solid results. We have more than 4,000 hybrid cloud platform clients, including 200 added in the first quarter of 2022. This provides two avenues for growth - from the incremental number of clients, but more importantly it allows us to expand our software, consulting and infrastructure footprint as we help our clients digitally transform and build new and differentiated experiences and services.
We have taken actions to streamline our operations and simplify our go-to-market model, consistent with our more focused, platform-centric business. We are making significant changes to the way we work to build a client-centric culture based on technical experience. Our new client engagement model, based on experiential selling, client engineering, and co-creation, is strongly resonating with our clients. We are accelerating our strategy with continued investment in innovation, our ecosystem and talent.
Innovation – we continue to meet the needs of our clients today while shaping the technologies of tomorrow through increased investments in R&D to deliver innovation in AI, hybrid cloud and emerging areas like quantum. In the first quarter of 2022, we announced a new AIOps solution in collaboration with Flexera that is designed to automate software license compliance, and in April 2022, we announced the IBM z16 platform which is designed for cloud-native development and cybersecurity resilience. We continue to invest in quantum and we are the only company to have an operational computer that is available on our cloud. We made three acquisitions in first quarter 2022 to further strengthen our portfolio and add value to our clients.
Ecosystem – we continue to invest in our ecosystem, both organically and inorganically, and gain momentum with our partner ecosystem. Consulting signings with our ecosystem partners were up more than 50 percent to approximately $2 billion in the first quarter of 2022. We are also investing through acquisition, for example Neudesic, which was acquired in the first quarter of 2022, adds key hyperscaler capabilities to address hybrid multi-cloud demand.
Talent – we are investing in talent across our workforce. We are upskilling existing resources, adding capabilities and skills to support our garages and client engineering centers, adding client success managers to help clients get the most of their IBM solutions and expanding our technical talent across the business.
The fundamentals of our business model remain solid. Our balance sheet and liquidity position remain strong. At March 31, 2022, we had $10.8 billion of cash and cash equivalents, restricted cash and marketable securities and we continue to manage our debt levels while being acquisitive and without sacrificing investments in our business or our solid dividend policy.
66
Management Discussion – (continued)
IBM is now a very different company. We have, in effect, changed our company’s trajectory. Our business reflects a higher growth, higher value mix with a significant recurring base, led by software. We are managing for the long-term and are confident in the direction and focus of our business. We expect to continue our progress as a leading hybrid cloud and AI company with a focus on revenue growth and cash generation while maintaining our solid and modestly growing dividend policy. Our expectations for 2022 continue to be aligned with our mid-term financial model which was previously communicated at our investor briefing on October 4, 2021.
Retirement-Related Plans
Our pension plans are well funded. Contributions for all retirement-related plans are expected to be approximately $2.1 billion in 2022, approximately flat compared to 2021, of which $0.2 billion generally relates to legally required contributions to non-U.S. defined benefit and multi-employer plans. We expect 2022 pre-tax retirement-related plan cost to be approximately $2.1 billion, a decrease of approximately $500 million compared to 2021. This estimate reflects current pension plan assumptions at December 31, 2021. Within total retirement-related plan cost, operating retirement-related plan cost is expected to be approximately $1.2 billion, a decrease of approximately $100 million versus 2021. Non-operating retirement-related plan cost is expected to be approximately $0.9 billion, a decrease of approximately $400 million compared to 2021, primarily driven by lower recognized actuarial losses and higher income from expected return on assets.
Currency Rate Fluctuations
Changes in the relative values of non-U.S. currencies to the U.S. dollar (USD) affect our financial results and financial position. At March 31, 2022, currency changes resulted in assets and liabilities denominated in local currencies being translated into fewer dollars than at year-end 2021. We use financial hedging instruments to limit specific currency risks related to financing transactions and other foreign currency-based transactions.
During periods of sustained movements in currency, the marketplace and competition adjust to the changing rates. For example, when pricing offerings in the marketplace, we may use some of the advantage from a weakening U.S. dollar to improve our position competitively, and price more aggressively to win the business, essentially passing on a portion of the currency advantage to our customers. Competition will frequently take the same action. Consequently, we believe that some of the currency-based changes in cost impact the prices charged to clients. We also maintain currency hedging programs for cash management purposes which temporarily mitigate, but do not eliminate, the volatility of currency impacts on our financial results.
We translate revenue, cost and expense in our non-U.S. operations at current exchange rates in the reported period. References to “adjusted for currency” or “constant currency” reflect adjustments based upon a simple mathematical formula. However, this constant currency methodology that we utilize to disclose this information does not incorporate any operational actions that management could take to mitigate fluctuating currency rates. Currency movements impacted our year-to-year revenue and earnings per share growth in the first three months of 2022. Based on the currency rate movements in the first three months of 2022, total revenue increased 7.7 percent as reported and 10.9 percent at constant currency versus the first three months of 2021. On an income from continuing operations before income taxes basis, these translation impacts, mitigated by the net impact of hedging activities, resulted in a theoretical maximum (assuming no pricing or sourcing actions) decrease of approximately $30 million in the first three months of 2022 on an as-reported basis and a decrease of approximately $50 million on an operating (non-GAAP) basis. The same mathematical exercise resulted in an increase of approximately $50 million in the first three months of 2021 on an as-reported basis and an increase of approximately $70 million on an operating (non-GAAP) basis. We view these amounts as a theoretical maximum impact to our as-reported financial results. Considering the operational responses mentioned above, movements of exchange rates, and the nature and timing of hedging instruments, it is difficult to predict future currency impacts on any particular period, but we believe it could be substantially less than the theoretical maximum given the competitive pressure in the marketplace.
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Management Discussion – (continued)
For non-U.S. subsidiaries and branches that operate in U.S. dollars or whose economic environment is highly inflationary, translation adjustments are reflected in results of operations. Generally, we manage currency risk in these entities by linking prices and contracts to U.S. dollars.
Liquidity and Capital Resources
In our 2021 Annual Report, on pages 47 to 49, there is a discussion of our liquidity including two tables that present three years of data. The table presented on page 47 includes consolidated net cash from operating activities, cash and cash equivalents, restricted cash and short-term marketable securities, and the size of our global credit facilities for each of the past three years. For the three months ended, or at, as applicable, March 31, 2022, those amounts are $3.2 billion of consolidated net cash from operating activities, $10.8 billion of cash and cash equivalents, restricted cash and short-term marketable securities and $10.0 billion in global credit facilities, respectively. While we have no current plans to draw on these credit facilities, they are available as back-up liquidity.
The major rating agencies’ ratings on our debt securities at March 31, 2022 appear in the following table and remain unchanged from December 31, 2021.
STANDARD | MOODY’S | |||
AND | INVESTORS | |||
IBM RATINGS: |
| POOR’S |
| SERVICE |
Senior long-term debt |
| A- |
| A3 |
Commercial paper |
| A-2 |
| Prime-2 |
IBM has ample financial flexibility, supported by our strong liquidity position and cash flows, to operate at a single A credit rating. While debt levels have increased $2.5 billion from December 31, 2021 primarily due to new debt issuances in the first quarter of 2022, debt levels have decreased $18.8 billion from our peak levels at June 30, 2019 (immediately preceding the Red Hat acquisition).
We do not have “ratings trigger” provisions in our debt covenants or documentation, which would allow the holders to declare an event of default and seek to accelerate payments thereunder in the event of a change in credit rating. Our debt covenants are well within the required levels. Our contractual agreements governing derivative instruments contain standard market clauses which can trigger the termination of the agreement if our credit rating were to fall below investment grade. At March 31, 2022, the fair value of those instruments that were in a liability position was $231 million, before any applicable netting, and this position is subject to fluctuations in fair value period to period based on the level of our outstanding instruments and market conditions. We have no other contractual arrangements that, in the event of a change in credit rating, would result in a material adverse effect on our financial position or liquidity.
In July 2017, the UK's Financial Conduct Authority (FCA), which regulates the London Interbank Offered Rate (LIBOR), had announced its intent to phase out LIBOR by the end of 2021 and the Alternative Reference Rates Committee identified the Secured Overnight Financing Rate (SOFR) as its preferred alternative rate for USD LIBOR. In March 2021, the FCA extended the phase out in the case of U.S. dollar settings for certain tenors until the end of June 2023. Effective December 31, 2021, the use of LIBOR was substantially eliminated for purposes of any new financial contract executions. Any legacy USD LIBOR based financial contracts are expected to be addressed using the LIBOR rates published through the June 2023 extension period. The replacement of the LIBOR benchmark within the company’s risk management activities did not have a material impact in the consolidated financial results.
We prepare our Consolidated Statement of Cash Flows in accordance with applicable accounting standards for cash flow presentation on page 7 of this Form 10-Q and highlight causes and events underlying sources and uses of cash in that format on pages 64 and 65. For the purpose of running its business, IBM manages, monitors and analyzes cash flows in a different manner.
Management uses free cash flow as a measure to evaluate its operating results, plan shareholder return levels, strategic investments and assess its ability and need to incur and service debt. The entire free cash flow amount is not
68
Management Discussion – (continued)
necessarily available for discretionary expenditures. We define free cash flow as net cash from operating activities less the change in Financing receivables and net capital expenditures, including the investment in software. A key objective of the Financing business is to generate strong returns on equity, and our Financing receivables are the basis for that growth. Accordingly, management considers Financing receivables as a profit-generating investment, not as working capital that should be minimized for efficiency. Therefore, management includes presentations of both free cash flow and net cash from operating activities that exclude the effect of Financing receivables.
The following is management’s view of cash flows for the first three months of 2022 and 2021 prepared in a manner consistent with the description above and is presented on a consolidated basis, including cash flows of discontinued operations.
* Includes cash flows of discontinued operations. See note 3, “Separation of Kyndryl,” for additional information.
In the first three months of 2022, we generated free cash flow of $1.2 billion, a decrease of $0.3 billion versus the prior-year period. In the first quarter of 2022, we also continued to return value to shareholders with $1.5 billion in dividends and invested $0.7 billion in acquisitions.
Events that could temporarily change the historical cash flow dynamics discussed previously and in our 2021 Annual Report include significant changes in operating results, material changes in geographic sources of cash, unexpected adverse impacts from litigation, future pension funding requirements, periods of severe downturn in the capital markets or the timing of tax payments. Whether any litigation has such an adverse impact will depend on a number of variables, which are more completely described in note 14, “Contingencies,” in this Form 10-Q. With respect to pension funding, we expect to make legally mandated pension plan contributions to certain non-U.S. defined benefit plans of approximately $200 million in 2022. Contributions related to all retirement-related plans are expected to be approximately $2.1 billion in 2022. Financial market performance could increase the legally mandated minimum contributions in certain non-U.S. countries that require more frequent remeasurement of the funded status. We are not quantifying any further impact from pension funding because it is not possible to predict future movements in the capital markets or pension plan funding regulations.
In 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.
69
Financing
Financing is a reportable segment that is measured as a stand-alone entity. Financing facilitates IBM clients' acquisition of information technology systems, software and services by providing financing solutions in the areas where the company has the expertise, while generating solid returns on equity.
Results of Operations
Yr. to Yr. | |||||||||
(Dollars in millions) | Percent/ | ||||||||
For the three months ended March 31: |
| 2022 |
| 2021* |
| Change | |||
Revenue | $ | 154 | $ | 208 |
| (26.2) | % | ||
Pre-tax income | $ | 84 | $ | 98 |
| (14.3) | % | ||
* Recast to reflect 2021 segment changes.
Our Financing business remains focused on IBM’s products and services. For the three months ended March 31, 2022, financing revenue decreased 26.2 percent (24 percent adjusted for currency) compared to the prior year, driven by client financing down $53 million to $152 million. The decrease in client financing revenue was due to a lower average asset balance, primarily driven by the strategic actions taken in the prior year including selling certain client financing receivables to third parties. While these strategic actions impact revenue and pre-tax income on a year-to-year basis, our repositioning of the Financing business has strengthened our liquidity position, improved the quality of our portfolio, and lowered our debt needs.
Financing pre-tax income decreased 14.3 percent to $84 million compared to the prior year and the pre-tax margin of 54.6 percent increased 7.6 points year to year. The decrease in pre-tax income was driven by a decrease in gross profit, partially offset by a decrease in total expense, primarily as a result of the strategic actions described above.
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Financial Position
At March 31, | At December 31, | |||||
(Dollars in millions) |
| 2022 |
| 2021 | ||
Cash and cash equivalents | $ | 825 | $ | 1,359 | ||
Client financing receivables: | ||||||
Net investment in sales-type and direct financing leases (1) |
| 3,285 |
| 3,396 | ||
Client loans |
| 7,908 |
| 8,818 | ||
Total client financing receivables | $ | 11,193 | $ | 12,215 | ||
Commercial financing receivables |
|
| ||||
Held for investment | 192 | 444 | ||||
Held for sale | 410 | 793 | ||||
Other receivables | 49 | 61 | ||||
Total external receivables (2) | $ | 11,843 | $ | 13,512 | ||
Intercompany financing receivables (3) (4) |
| 727 |
| 778 | ||
Other assets (5) | 1,076 | 1,231 | ||||
Total assets | $ | 14,471 | $ | 16,880 | ||
Intercompany payables (3) | $ | 163 | $ | 467 | ||
Debt (6) | 12,168 | 13,929 | ||||
Other liabilities | 788 | 937 | ||||
Total liabilities | $ | 13,119 | $ | 15,333 | ||
Total equity | $ | 1,352 | $ | 1,547 | ||
Total liabilities and equity | $ | 14,471 | $ | 16,880 | ||
| (1) | Includes deferred initial direct costs which are expensed in IBM’s consolidated financial results. |
| (2) | The difference between the decrease in total external receivables of $1.7 billion (from $13.5 billion in December 2021 to $11.8 billion in March 2022) and the $1.6 billion change in Financing segment’s receivables disclosed in the free cash flow presentation on page 69 is primarily attributable to currency impacts. |
| (3) | This entire amount is eliminated for purposes of IBM’s consolidated financial results and therefore does not appear in the Consolidated Balance Sheet. |
| (4) | These assets, along with all other financing assets in this table, are leveraged at the value in the table using Financing segment debt. |
| (5) | Includes $0.6 billion of other intercompany assets in March 2022 and $0.7 billion in December 2021. |
| (6) | Financing segment debt is primarily composed of intercompany loans. |
Total external receivables decreased $1,669 million primarily due to collections of higher year-end balances, with corresponding reductions in debt funding.
At March 31, 2022, we continue to apply our rigorous credit policies. Approximately 68 percent of the total external portfolio was with investment-grade clients with no direct exposure to consumers, an increase of 4 points year to year and an increase of 1 point compared to December 31, 2021. This investment grade percentage is based on the credit ratings of the companies in the portfolio and reflects certain mitigating actions taken to reduce the risk to IBM.
We have a long-standing practice of taking mitigation actions, in certain circumstances, to transfer credit risk to third parties. These actions may include credit insurance, financial guarantees, nonrecourse borrowings, transfers of receivables recorded as true sales in accordance with accounting guidance or sales of equipment under operating lease. Sale of receivables arrangements are also utilized in the normal course of business as part of our cash and liquidity management.
Throughout 2021, sales of client financing receivables were utilized as part of the company’s cash and liquidity management as well as for credit mitigation. In the first quarter of 2022, sales of client financing receivables were largely focused on credit mitigation. In addition, the company has an existing agreement with a third-party investor to sell IBM short-term commercial financing receivables on a revolving basis. The company has expanded this agreement to other countries and geographies since commencement in the U.S. and Canada in 2020.
71
The following table presents the total amount of client and commercial financing receivables transferred:
(Dollars in millions) |
| |||||
For the three months ended March 31: | 2022 | 2021 | ||||
Client financing receivables | ||||||
Lease receivables | $ | 15 | $ | 342 | ||
Loan receivables |
| 2 |
| 653 | ||
Total client financing receivables transferred | $ | 17 | $ | 995 | ||
Commercial financing receivables | ||||||
Receivables transferred during the period | $ | 1,989 | $ | 1,167 | ||
Receivables uncollected at end of period* | 724 | 724 | ||||
* | Of the total amount of commercial financing receivables sold and derecognized from the Consolidated Balance Sheet, the amounts presented remained uncollected from the business partners as of March 31, 2022 and 2021. |
For additional information relating to financing receivables refer to note 9, “Financing Receivables.” Refer to pages 22 through 26 for additional information related to Financing segment receivables, allowance for credit losses and debt.
Return on Equity Calculation
(Dollars in millions) | |||||||
For the three months ended March 31: |
| 2022 |
| 2021* | |||
Numerator |
| ||||||
Financing after-tax income** | $ | 69 | $ | 73 | |||
Annualized after-tax income (1) | $ | 275 | $ | 290 | |||
Denominator | |||||||
Average Financing equity (2)È | $ | 1,450 | $ | 2,184 | |||
Financing return on equity (1)/(2) | 19.0 | % | 13.3 | % | |||
* | Recast to reflect 2021 segment changes. |
** Calculated based upon an estimated tax rate principally based on Financing’s geographic mix of earnings as IBM’s provision for income taxes is determined on a consolidated basis.
È | Average of the ending equity for Financing for the last two quarters. |
Return on equity was 19.0 percent compared to 13.3 percent for the three months ended March 31, 2022 and 2021, respectively. The increase was primarily driven by a lower average equity balance, which reflects the strategic actions taken in the prior year to reposition the Financing business.
Residual Value
Residual value is a risk unique to the financing business, and management of this risk is dependent upon the ability to accurately project future equipment values at lease inception. Financing has insight into product plans and cycles for IBM products. Based upon this product information, Financing continually monitors projections of future equipment values and compares them with the residual values reflected in the portfolio.
Financing optimizes the recovery of residual values by selling assets sourced from end of lease, leasing used equipment to new clients, or extending lease arrangements with current clients.
The following table presents the recorded amount of unguaranteed residual value for sales-type and direct financing leases, as well as operating leases at March 31, 2022 and December 31, 2021. In addition, the table presents the run out of when the unguaranteed residual value assigned to equipment on leases at March 31, 2022 is expected to be returned to the company.
72
Unguaranteed Residual Value
At | At | Estimated Run Out of March 31, 2022 Balance | ||||||||||||||||
December 31, | March 31, | 2025 and | ||||||||||||||||
(Dollars in millions) |
| 2021 |
| 2022 |
| 2022 |
| 2023 |
| 2024 |
| Beyond | ||||||
Sales-type and direct financing leases | $ | 335 | $ | 325 | $ | 72 | $ | 128 | $ | 65 | $ | 60 | ||||||
Operating leases |
| 13 |
| 10 |
| 6 |
| 2 |
| 0 |
| 2 | ||||||
Total unguaranteed residual value | $ | 348 | $ | 335 | $ | 78 | $ | 130 | $ | 65 | $ | 62 | ||||||
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GAAP Reconciliation
The tables below provide a reconciliation of our income statement results as reported under GAAP to our operating earnings presentation which is a non-GAAP measure. Management’s calculation of operating (non-GAAP) earnings, as presented, may differ from similarly titled measures reported by other companies. Please refer to the “Operating (non-GAAP) Earnings” section for management’s rationale for presenting operating earnings information.
Acquisition- | Retirement- | U.S. | Kyndryl- |
| |||||||||||||||
(Dollars in millions except per share amounts) | Related | Related | Tax Reform | Related | Operating |
| |||||||||||||
For the three months ended March 31, 2022: |
| GAAP |
| Adjustments |
| Adjustments |
| Impacts |
| Impacts | (non-GAAP) |
| |||||||
Gross profit | $ | 7,335 | $ | 181 | $ | — | $ | — | $ | — | $ | 7,516 | |||||||
Gross profit margin |
| 51.7 | % |
| 1.3 | pts. |
| — | pts. |
| — | pts. | — | pts. |
| 52.9 | % | ||
S,G&A | $ | 4,597 | $ | (286) | $ | — | $ | — | $ | 0 | $ | 4,311 | |||||||
Other (income) and expense |
| 246 |
| (1) |
| (202) |
| — | (222) |
| (179) | ||||||||
Total expense and other (income) |
| 6,712 |
| (287) |
| (202) |
| — | (222) |
| 6,001 | ||||||||
Pre-tax income from continuing operations |
| 623 |
| 468 |
| 202 |
| — | 222 |
| 1,515 | ||||||||
Pre-tax margin from continuing operations |
| 4.4 | % |
| 3.3 | pts. |
| 1.4 | pts. |
| — | pts. | 1.6 | pts. |
| 10.7 | % | ||
Provision for (benefit from) income taxes* | $ | (39) | $ | 109 | $ | 58 | $ | 116 | $ | — | $ | 244 | |||||||
Effective tax rate |
| (6.3) | % |
| 9.1 | pts. |
| 4.6 | pts. |
| 7.7 | pts. | 0.9 | pts. |
| 16.1 | % | ||
Income from continuing operations | $ | 662 | $ | 359 | $ | 144 | $ | (116) | $ | 222 | $ | 1,271 | |||||||
Income margin from continuing operations |
| 4.7 | % |
| 2.5 | pts. |
| 1.0 | pts. |
| (0.8) | pts. | 1.6 | pts. |
| 9.0 | % | ||
Diluted earnings per share from continuing operations | $ | 0.73 | $ | 0.39 | $ | 0.16 | $ | (0.13) | $ | 0.24 | $ | 1.40 | |||||||
Acquisition- | Retirement- | U.S. | Kyndryl- |
| |||||||||||||||
(Dollars in millions except per share amounts) | Related | Related | Tax Reform | Related | Operating |
| |||||||||||||
For the three months ended March 31, 2021: |
| GAAP |
| Adjustments |
| Adjustments |
| Impacts |
| Impacts | (non-GAAP) |
| |||||||
Gross profit | $ | 7,027 | $ | 174 | $ | — | $ | — | $ | — | $ | 7,201 | |||||||
Gross profit margin |
| 53.3 | % |
| 1.3 | pts. |
| — | pts. |
| — | pts. | — | pts. |
| 54.6 | % | ||
S,G&A | $ | 4,688 | $ | (288) | $ | — | $ | — | $ | — | $ | 4,399 | |||||||
Other (income) and expense |
| 346 |
| (1) |
| (332) |
| — | — |
| 13 | ||||||||
Total expense and other (income) |
| 6,784 |
| (289) |
| (332) |
| — | — |
| 6,162 | ||||||||
Pre-tax income from continuing operations |
| 244 |
| 463 |
| 332 |
| — | — |
| 1,039 | ||||||||
Pre-tax margin from continuing operations |
| 1.8 | % |
| 3.5 | pts. |
| 2.5 | pts. |
| — | pts. | — | pts. |
| 7.9 | % | ||
Provision for (benefit from) income taxes* | $ | (160) | $ | 132 | $ | 33 | $ | 19 | $ | — | $ | 25 | |||||||
Effective tax rate |
| (65.5) | % |
| 41.9 | pts. |
| 24.2 | pts. |
| 1.8 | pts. | — | pts. |
| 2.4 | % | ||
Income from continuing operations | $ | 403 | $ | 330 | $ | 299 | $ | (19) | $ | — | $ | 1,013 | |||||||
Income margin from continuing operations |
| 3.1 | % |
| 2.5 | pts. |
| 2.3 | pts. |
| (0.1) | pts. | — | pts. |
| 7.7 | % | ||
Diluted earnings per share from continuing operations | $ | 0.45 | $ | 0.37 | $ | 0.33 | $ | (0.02) | $ | — | $ | 1.12 | |||||||
* The tax impact on operating (non-GAAP) pre-tax income/(loss) from continuing operations is calculated under the same accounting principles applied to the GAAP pre-tax income/(loss) which employs an annual effective tax rate method to the results.
74
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.
75
Part II — Other Information
Item 1. Legal Proceedings
Refer to note 14, “Contingencies,” in this Form 10-Q.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds and Issuer Repurchases of Equity Securities
The following table provides information relating to the company’s repurchase of common stock for the first quarter of 2022.
Total Number | Approximate | |||||||||
of Shares | Dollar Value | |||||||||
Purchased as | of Shares that | |||||||||
Total Number | Average | Part of Publicly | May Yet Be | |||||||
of Shares | Price Paid | Announced | Purchased Under | |||||||
Period |
| Purchased |
| per Share |
| Program |
| The Program* | ||
January 1, 2022 - January 31, 2022 |
| — | $ | — |
| — | $ | 2,007,611,768 | ||
February 1, 2022 - February 28, 2022 |
| — | $ | — |
| — | $ | 2,007,611,768 | ||
March 1, 2022 - March 31, 2022 |
| — | $ | — |
| — | $ | 2,007,611,768 | ||
Total |
| — | $ | — |
| — |
|
| ||
* On October 30, 2018, the Board of Directors authorized $4.0 billion in funds for use in the company’s common stock repurchase program. The company stated that it would repurchase shares on the open market or in private transactions depending on market conditions. The common stock repurchase program does not have an expiration date. This table does not include shares tendered to satisfy the exercise price in connection with cashless exercises of employee stock options or shares tendered to satisfy tax withholding obligations in connection with employee equity awards.
The company suspended its share repurchase program at the time of the Red Hat closing. At March 31, 2022 there was approximately $2.0 billion in authorized funds remaining for purchases under this program.
Item 5. Other Information
Amendment to By-Laws
As disclosed in the company’s 2022 Proxy Statement filed on March 7, 2022, Michael L. Eskew was not a nominee for election at the company’s annual meeting of stockholders held on April 26, 2022, and his term on the Board of Directors ended. As a result, Article III, Section 2 of the company’s By-Laws was amended to decrease the number of directors to twelve, effective April 26, 2022. The full text of IBM’s By-Laws, as amended effective April 26, 2022, is included as Exhibit 3.2 to this report.
76
Item 6. Exhibits
77
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
International Business Machines Corporation | ||||
(Registrant) | ||||
Date: | April 26, 2022 | |||
By: | /s/ Robert F. Del Bene | |||
Robert F. Del Bene | ||||
Vice President and Controller | ||||
78
Exhibit 3.2
BY-LAWS
of
INTERNATIONAL BUSINESS MACHINES CORPORATION
Adopted April 29,1958
As Amended Through
April 26, 2022
TABLE OF CONTENTS
ARTICLE I | DEFINITIONS | 1 |
| | |
ARTICLE II | MEETINGS OF STOCKHOLDERS | |
| | |
SECTION 1. | Place of Meetings | 1 |
SECTION 2. | Annual Meetings | 1 |
SECTION 3. | Special Meetings | 2 |
SECTION 4. | Notice of Meetings | 2 |
SECTION 5. | Quorum | 2 |
SECTION 6. | Organization | 3 |
SECTION 7. | Items of Business | 3 |
SECTION 8. | Voting | 5 |
SECTION 9. | List of Stockholders | 5 |
SECTION 10. | Inspectors of Election | 6 |
SECTION 11. | Proxy Access | 6 |
| | |
BOARD OF DIRECTORS | | |
| | |
SECTION 1. | General Powers | 13 |
SECTION 2. | Number; Qualifications; Election; Term of Office | 13 |
SECTION 3. | Place of Meetings | 14 |
SECTION 4. | First Meeting | 14 |
SECTION 5. | Regular Meetings | 14 |
SECTION 6. | Special Meetings | 14 |
SECTION 7. | Notice of Meetings | 14 |
SECTION 8. | Quorum and Manner of Acting | 14 |
SECTION 9. | Organization | 15 |
SECTION 10. | Resignations | 15 |
SECTION 11. | Removal of Directors | 15 |
SECTION 12. | Vacancies | 15 |
SECTION 13. | Retirement of Directors | 15 |
| | |
ARTICLE IV | EXECUTIVE AND OTHER COMMITTEES | |
| | |
SECTION 1. | Executive Committee | 16 |
SECTION 2. | Powers of the Executive Committee | 16 |
SECTION 3. | Meetings of the Executive Committee | 16 |
SECTION 4. | Quorum and Manner of Acting of the Executive Committee | 17 |
SECTION 5. | Other Committees | 17 |
SECTION 6. | Changes in Committees; Resignations; Removals; Vacancies | 17 |
| | |
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ARTICLE V | OFFICERS | |
| | |
SECTION 1. | Number and Qualifications | 18 |
SECTION 2. | Resignations | 18 |
SECTION 3. | Removal | 18 |
SECTION 4. | Vacancies | 18 |
SECTION 5. | Chairman of the Board | 18 |
SECTION 6. | Vice Chairman | 19 |
SECTION 7. | President | 19 |
SECTION 8. | Designated Officers | 19 |
SECTION 9. | Executive Vice Presidents, Senior Vice Presidents and Vice Presidents | 20 |
SECTION 10. | Treasurer | 20 |
SECTION 11. | Secretary | 21 |
SECTION 12. | Controller | 21 |
SECTION 13. | Compensation | 21 |
| | |
ARTICLE VI | CONTRACTS, CHECKS, DRAFTS, BANK ACCOUNTS, ETC. | |
| | |
SECTION 1. | Execution of Contracts | 22 |
SECTION 2. | Loans | 22 |
SECTION 3. | Checks, Drafts, etc. | 22 |
SECTION 4. | Deposits | 22 |
SECTION 5. | General and Special Bank Accounts | 22 |
SECTION 6. | Indemnification | 23 |
| | |
SHARES | | |
| | |
SECTION 1. | Stock Certificates | 23 |
SECTION 2. | Book of Account and Record of Stockholders | 24 |
SECTION 3. | Transfers of Stock | 24 |
SECTION 4. | Regulations | 24 |
SECTION 5. | Fixing of Record Date | 24 |
SECTION 6. | Lost, Destroyed or Mutilated Certificates | 25 |
SECTION 7. | Inspection of Records | 25 |
SECTION 8. | Auditors | 25 |
| | |
ARTICLE VIII | OFFICES | |
| | |
SECTION 1. | Principal Office | 26 |
SECTION 2. | Other Offices | 26 |
| | |
ARTICLE IX | WAIVER OF NOTICE | 26 |
| | |
ARTICLE X | FISCAL YEAR | 26 |
| | |
ARTICLE XI | SEAL | 26 |
| | |
ARTICLE XII | AMENDMENTS | 27 |
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BY-LAWS
OF
INTERNATIONAL BUSINESS MACHINES CORPORATION
ARTICLE I
DEFINITIONS
In these By-laws, and for all purposes hereof, unless there be something in the subject or context inconsistent therewith:
(a) ‘Board' shall mean the Board of Directors of the Corporation.
(b) 'Certificate of Incorporation' shall mean the restated Certificate of Incorporation as filed on May 27, 1992, together with any and all amendments and subsequent restatements thereto.
(c) 'Chairman of the Board', 'Vice Chairman, 'Chairman of the Executive Committee', 'Chief Executive Officer,' 'Chief Financial Officer', 'Chief Accounting Officer', 'President', 'Executive Vice President', 'Senior Vice President', 'Vice President', 'Treasurer', 'Secretary', or 'Controller', as the case may be, shall mean the person at any given time occupying the particular office with the Corporation.
(d) 'Corporation' shall mean International Business Machines Corporation.
(e) ‘Exchange Act’ shall mean the Securities Exchange Act of 1934, as amended.
(f) ‘Lead Director’ shall mean, at any given time, the lead, independent member of the Board of Directors of the Corporation occupying such position.
(g) 'stockholders' shall mean the stockholders of the Corporation.
ARTICLE II
MEETINGS OF STOCKHOLDERS
SECTION 1. Place of Meetings. Meetings of the stockholders of the Corporation shall be held at such place either within or outside the State of New York as may from time to time be fixed by the Board or specified or fixed in the notice of any such meeting.
SECTION 2. Annual Meetings. The annual meeting of the stockholders of the Corporation for the election of directors and for the transaction of such other business as may properly come before the meeting shall be held on the last Tuesday of April of each year, if not a legal holiday, or, if such day shall be a legal holiday, then on the next
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succeeding day not a legal holiday, or any other day as determined by the Board. If the directors to be elected at such annual meeting shall not have been elected thereat or at any adjournment thereof, the Board shall forthwith call a special meeting of the stockholders for the election of directors to be held as soon thereafter as convenient and give notice thereof as provided in these By-laws in respect of the notice of an annual meeting of the stockholders. At such special meeting the stockholders may elect the directors and transact other business with the same force and effect as at an annual meeting of the stockholders duly called and held.
SECTION 3. Special Meetings. Special meetings of the stockholders, unless otherwise provided by law, may be called at any time by the Chairman of the Board or by the Board, and shall be called by the Board upon written request delivered to the Secretary of the Corporation by the holder(s) with the power to vote and dispose of at least 25% of the outstanding shares of the Corporation. Such request shall be signed by each such holder, stating the number of shares owned by each holder, and shall indicate the purpose of the requested meeting and provide the other information required for the submission of business at an annual meeting pursuant to Section 7 of this Article II. In addition, any stockholder(s) requesting a special meeting shall promptly provide any other information reasonably requested by the Corporation. Business conducted at a special meeting shall be limited to that specified in the notice of meeting.
SECTION 4. Notice of Meetings. Notice of each meeting of the stockholders, annual or special, shall be given in the name of the Chairman of the Board, a Vice Chairman or the President or a Vice President or the Secretary. Such notice shall state the purpose or purposes for which the meeting is called and the date and hour when and the place where it is to be held. A copy thereof shall be duly delivered or transmitted to all stockholders of record entitled to vote at such meeting, and all stockholders of record who, by reason of any action proposed to be taken at such meeting, would be entitled to have their stock appraised if such action were taken, not less than ten or more than sixty days before the day on which the meeting is called to be held. If mailed, such copy shall be directed to each stockholder at the address listed on the record of stockholders of the Corporation, or if the stockholder shall have filed with the Secretary a written request that notices be mailed to some other address, it shall be mailed to the address designated in such request. Nevertheless, notice of any meeting of the stockholders shall not be required to be given to any stockholder who shall waive notice thereof as hereinafter provided in Article IX of these By-laws. Except when expressly required by law, notice of any adjourned meeting of the stockholders need not be given nor shall publication of notice of any annual or special meeting thereof be required.
SECTION 5. Quorum. Except as otherwise provided by law, at all meetings of the stockholders, the presence of holders of record of a majority of the outstanding shares of stock of the Corporation having voting power, in person or represented by proxy and entitled to vote thereat, shall be necessary to constitute a quorum for the transaction of business. In the absence of a quorum at any such meeting or any
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adjournment or adjournments thereof, a majority in voting interest of those present in person or represented by proxy and entitled to vote thereat, or, in the absence of all the stockholders, any officer entitled to preside at, or to act as secretary of, such meeting, may adjourn such meeting from time to time without further notice, other than by announcement at the meeting at which such adjournment shall be taken, until a quorum shall be present thereat. At any adjourned meeting at which a quorum shall be present any business may be transacted which might have been transacted at the meeting as originally called.
SECTION 6. Organization. At each meeting of the stockholders, the Chairman of the Board, or in the absence of the Chairman of the Board, the President, or in the absence of the Chairman of the Board and the President, a Vice Chairman, or if the Chairman of the Board, the President, and all Vice Chairmen shall be absent therefrom, an Executive Vice President, or if the Chairman of the Board, the President, all Vice Chairmen and all Executive Vice Presidents shall be absent therefrom, a Senior Vice President shall act as chairman. The Secretary, or, if the Secretary shall be absent from such meeting or unable to act, the person whom the Chairman of such meeting shall appoint secretary of such meeting shall act as secretary of such meeting and keep the minutes thereof.
SECTION 7. Items of Business. The items of business at all meetings of the stockholders shall be, insofar as applicable, as follows:
-- Call to order.
-- Proof of notice of meeting or of waiver thereof.
-- Appointment of inspectors of election, if necessary.
-- A quorum being present.
-- Reports.
-- Election of directors
-- Other business specified in the notice of the meeting.
-- Adjournment.
Any items of business not referred to in the foregoing may be taken up at the meeting as the chairman of the meeting shall determine.
No business shall be transacted at any annual meeting of stockholders, except business as may be: (i) specified in the notice of meeting (including stockholder proposals included in the Corporation’s proxy materials under Rule 14a-8 of Regulation 14A under the Exchange Act), (ii) otherwise brought before the meeting by or at the
- 3 -
direction of the Board of Directors, (iii) a proper subject for the meeting which is timely submitted by a stockholder of the Corporation entitled to vote at such meeting who complies fully with the notice requirements set forth below or (iv) a director nomination submitted by a stockholder in accordance with Section 11 of this Article II.
For (a) business to be properly submitted by a stockholder before any annual meeting under subparagraph (iii) above, or (b) any stockholder to properly nominate any person for election as a director of the Corporation (other than director nominations submitted in accordance with Section 11 of this Article II), a stockholder must give timely notice in writing of such business or nomination to the Secretary of the Corporation in accordance with this Section 7. To be considered timely, a stockholder's notice must be received by the Secretary at the principal executive offices of the Corporation not less than 120 calendar days nor more than 150 calendar days before the anniversary date of the Corporation's proxy statement released to stockholders in connection with the prior year’s annual meeting.
However, if no annual meeting was held in the previous year, or if the date of the applicable annual meeting has been changed by more than 30 days from the anniversary date of the prior year’s annual meeting, a stockholder’s notice must be received by the Secretary not later than the 10th calendar day following the date on which the Corporation publicly announces the date of the applicable annual meeting.
A stockholder's notice to the Secretary to submit business or nominate directors (other than director nominations submitted in accordance with Section 11 of this Article II) at an annual meeting of stockholders shall set forth: (i) the name and address of the stockholder, (ii) the number of shares of stock held of record and beneficially by such stockholder, (iii) the name in which all such shares of stock are registered on the stock transfer books of the Corporation, (iv) a representation that the stockholder intends to appear at the meeting in person or by proxy to submit the business specified in such notice, (v) a brief description of the business desired to be submitted to the annual meeting, including the complete text of any resolutions intended to be presented at the annual meeting, and the reasons for conducting such nomination or business at the annual meeting, (vi) any personal or other material interest of the stockholder in the nomination or business to be submitted, and (vii) all other information which may be required to be disclosed under applicable law, including in connection with a solicitation of proxies, with respect to such nomination or business. Such notice shall include a true, complete and signed questionnaire with respect to such stockholder and, if applicable, with respect to each nominee of such stockholder for election as a director of the Corporation, in a form which shall be provided by the Secretary of the Corporation upon written request. In addition, a stockholder submitting such notice shall promptly provide any other information reasonably requested by the Corporation.
The stockholder submitting such notice shall, no later than five (5) business days following the record date for the applicable meeting, deliver to the Secretary at the principal executive offices of the Corporation, a written notice disclosing any changes to the information so submitted, as of such record date.
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The chairman of the meeting shall determine all matters relating to the efficient conduct of the meeting, including, but not limited to, the items of business, as well as the maintenance of order and decorum. The chairman shall, if the facts warrant, determine and declare that any putative nomination or business was not properly brought before the meeting in accordance with the procedures prescribed by this Section 7, in which case such nomination shall not be considered or such business shall not be transacted. The order in which items of business will be considered will be determined by the chairman.
Notwithstanding the foregoing provisions of this Section 7, a stockholder who seeks to have any proposal included in the Corporation's proxy materials shall comply with the requirements of Rule 14a-8 under Regulation 14A of the Exchange Act.
SECTION 8. Voting. Except as otherwise provided by law, each holder of record of shares of stock of the Corporation having voting power shall be entitled at each meeting of the stockholders to one vote for every share of such stock standing in the stockholder's name on the record of stockholders of the Corporation:
(a) on the date fixed pursuant to the provisions of Section 5 of Article VII of these By-laws as the record date for the determination of the stockholders who shall be entitled to vote at such meeting, or
(b) if such record date shall not have been so fixed, then at the close of business on the day next preceding the day on which notice of such meeting shall have been given, or
(c) if such record date shall not have been so fixed and if no notice of such meeting shall have been given, then at the time of the call to order of such meeting.
Any vote on stock of the Corporation at any meeting of the stockholders may be given by the stockholder of record entitled thereto in person or by proxy appointed by such stockholder or by the stockholder's attorney thereunto duly authorized and delivered or transmitted to the secretary of such meeting at or prior to the time designated in the order of business for turning in proxies. At all meetings of the stockholders at which a quorum shall be present, all matters (except where otherwise provided by law, the Certificate of Incorporation or these By-laws) shall be decided by the vote of a majority in voting interest of the stockholders present in person or represented by proxy and entitled to vote thereat. Unless required by law, or determined by the chairman of the meeting to be advisable, the vote on any question need not be by ballot. On a vote by ballot, each ballot shall be signed by the stockholder voting, or by the stockholder's proxy as such, if there be such proxy.
SECTION 9. List of Stockholders. A list, certified by the Secretary, of the stockholders of the Corporation entitled to vote shall be produced at any meeting of the
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stockholders upon the request of any stockholder of the Corporation pursuant to the provisions of applicable law, the Certificate of Incorporation or these By-laws.
SECTION 10. Inspectors of Election. Prior to the holding of each annual or special meeting of the stockholders, two inspectors of election to serve thereat shall be appointed by the Board, or, if the Board shall not have made such appointment, by the Chairman of the Board. If there shall be a failure to appoint inspectors, or if, at any such meeting, any inspector so appointed shall be absent or shall fail to act or the office shall become vacant, the chairman of the meeting may, and at the request of a stockholder present in person and entitled to vote at such meeting shall, appoint such inspector or inspectors of election, as the case may be, to act thereat. The inspectors of election so appointed to act at any meeting of the stockholders, before entering upon the discharge of their duties, shall be sworn faithfully to execute the duties of inspectors at such meeting, with strict impartiality and according to the best of their ability, and the oath so taken shall be subscribed by them. Such inspectors of election shall take charge of the polls, and, after the voting on any question, shall make a certificate of the results of the vote taken. No director or candidate for the office of director shall act as an inspector of an election of directors. Inspectors need not be stockholders.
SECTION 11. Proxy Access.
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For purposes of this Section 11, the information that the Corporation will be required to include in its proxy statement is: (i) the information concerning the nominee and the stockholder or group of stockholders who nominated such nominee that is required to be disclosed in the Corporation’s proxy statement by the regulations promulgated under the Exchange Act; and (ii) if such stockholder or group of stockholders so elects, a statement pursuant to paragraph (j) of this Section 11. To be timely, this required information must be included in the notice required to be submitted to the Secretary of the Corporation pursuant to paragraph (b) of this Section 11. Nothing in this Section 11 shall limit the Corporation’s ability to solicit against or for, and include in its proxy materials its own statements relating to, any nominee or any nominating stockholder or group of stockholders.
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The inspector of elections shall not give effect to the stockholder or group of stockholders’ votes with respect to the election of directors if such stockholder or group of stockholders does not comply with the undertaking) above.
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The Corporation may request such additional information as necessary to permit the Board to determine if each stockholder nominee is independent under the listing standards of the principal U.S. securities exchange upon which the common stock of the Corporation is listed (including any additional independence standards that are applicable to audit, compensation or other board committees), any applicable rules of the Securities and Exchange Commission (including under the definition of a “non-employee director” under Exchange Act Rule 16b-3), the definition of “outside director” under Section 162(m) of the Internal Revenue Code of 1986, as amended (or any successor provision) and any publicly disclosed standards used by the Board in determining and disclosing the independence of the Corporation’s directors. If the Board determines that a stockholder nominee is not independent under any of the foregoing standards, the stockholder nominee will be ineligible for inclusion in the Corporation’s proxy materials.
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ARTICLE III
BOARD OF DIRECTORS
SECTION 1. General Powers. The business and affairs of the Corporation shall be managed by the Board. The Board may exercise all such authority and powers of the Corporation and do all such lawful acts and things as are not by law, the Certificate of Incorporation or these By-laws, directed or required to be exercised or done by the stockholders.
SECTION 2. Number; Qualifications; Election; Term of Office. The number of directors of the Corporation shall be twelve, but the number thereof may be increased to not more than twenty-five, or decreased to not less than nine, by amendment of these By-laws. The directors shall be elected at the annual meeting of the stockholders. At each meeting of the stockholders for the election of directors at which a quorum is present, the vote required for election of a director shall, except in a contested election, be the affirmative vote of a majority of the votes cast in favor of or against such nominee. In a contested election, a nominee receiving a plurality of the votes cast at such election shall be elected. An election shall be considered to be contested if, as of the record date for such meeting, there are more nominees for election than positions on the Board to be filled by election at the meeting. Each director shall hold office until the annual meeting of the stockholders which shall be held next after the election of such director and until a successor shall have been duly elected and qualified, or until death, or until the director shall have resigned as hereinafter provided in Section 10 of this Article III, or until the director shall have been removed as hereinafter provided in Section 11 of this Article III.
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SECTION 3. Place of Meetings. Meetings of the Board shall be held at such place either within or outside State of New York as may from time to time be fixed by the Board or specified or fixed in the notice of any such meeting.
SECTION 4. First Meeting. The Board shall meet for the purpose of organization and the transaction of other business following each annual meeting of stockholders at such time and place as shall be specified in a notice thereof given as hereinafter provided in Section 7 of this Article III.
SECTION 5. Regular Meetings. Regular meetings of the Board shall be held at times and dates fixed by the Board or at such other times and dates as the Chairman of the Board shall determine and as shall be specified in the notice of such meetings. Notice of regular meetings of the Board need not be given except as otherwise required by law or these By-laws.
SECTION 6. Special Meetings. Special meetings of the Board may be called by the Chairman of the Board, provided, however, that if the Chairman of the Board is unavailable, a special meeting of the Board may be called by agreement of each of the remaining members of the Executive Committee.
SECTION 7. Notice of Meetings. Notice of each special meeting of the Board (and of each regular meeting for which notice shall be required) shall be given by the Secretary as hereinafter provided in this Section 7, in which notice shall be stated the time, place and, if required by law or these By-laws, the purposes of such meeting. Notice of each such meeting shall be mailed, postage prepaid, to each director, by first-class mail, at least four days before the day on which such meeting is to be held, or shall be sent by facsimile transmission or comparable medium, or be delivered personally or by telephone, before the time at which such meeting is to be held. Notice of any such meeting need not be given to any director who shall waive notice thereof as provided in Article IX of these By-laws. Any meeting of the Board shall be a legal meeting without notice thereof having been given, if all the directors of the Corporation then holding office shall be present thereat.
SECTION 8. Quorum and Manner of Acting. A majority of the Board shall be present in person at any meeting of the Board in order to constitute a quorum for the transaction of business at such meeting. Participation in a meeting by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other shall constitute presence in person at a meeting. Except as otherwise expressly required by law or the Certificate of Incorporation and except also as specified in Section 1, Section 5, and Section 6 of Article IV, in Section 3 of Article V and in Article XII of these By-laws, the act of a majority of the directors present at any meeting at which a quorum is present shall be the act of the Board. In the absence of a quorum at any meeting of the Board, a majority of the directors present thereat may adjourn such meeting from time to time until a quorum shall be present thereat. Notice of any adjourned meeting need not be given. At any adjourned meeting at which a quorum is present, any business may be transacted
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which might have been transacted at the meeting as originally called. The directors shall act only as a Board and the individual directors shall have no power as such.
SECTION 9. Organization. At each meeting of the Board, the Chairman of the Board, or in the case of the Chairman's absence therefrom, the Lead Director, or in the case of the Lead Director’s absence therefrom, the President, or in the case of the President's absence therefrom, a Vice Chairman, or in the case of the absence of all such persons, another director chosen by a majority of directors present, shall act as chairman of the meeting and preside thereat. The Secretary, or if the Secretary shall be absent from such meeting, any person appointed by the chairman, shall act as secretary of the meeting and keep the minutes thereof.
SECTION 10. Resignations.
(a) Any director of the Corporation may resign at any time by giving written notice of resignation to the Board or the Chairman of the Board or the Secretary. Subject to Section 10(b), any such resignation shall take effect at the time specified therein, or if the time when it shall become effective shall not be specified therein, then it shall take effect immediately upon its receipt; and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective.
(b) In an uncontested election, any incumbent nominee for director who does not receive an affirmative vote of a majority of the votes cast in favor of or against such nominee shall promptly tender his or her resignation after such election. The independent directors of the Board, giving due consideration to the best interests of the Corporation and its stockholders, shall evaluate the relevant facts and circumstances, and shall make a decision, within 90 days after the election, on whether to accept the tendered resignation. Any director who tenders a resignation pursuant to this provision shall not participate in the Board's decision. The Board will promptly disclose publicly its decision and, if applicable, the reasons for rejecting the tendered resignation.
SECTION 11. Removal of Directors. Any director may be removed, either with or without cause, at any time, by a vote of the stockholders.
SECTION 12. Vacancies. Any vacancy in the Board, whether arising from death, resignation, removal, an increase in the number of directors or any other cause, may be filled by the Board.
SECTION 13. Retirement of Directors. The Board may prescribe a retirement policy for directors on or after reaching a certain age, provided, however, that such retirement shall not cut short the annual term for which any director shall have been elected by the stockholders.
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ARTICLE IV
EXECUTIVE AND OTHER COMMITTEES
SECTION 1. Executive Committee. The Executive Committee shall be comprised of the Chairman of the Board, and each of the respective chairs of the (i) Audit Committee, (ii) Executive Compensation and Management Resources Committee, (iii) Directors and Corporate Governance Committee, in each case including any successor committee, and (iv) the Lead Director, if such person is does not fall within one of the roles set forth in clause (i), (ii) or (iii) above. The Chairman of the Board shall serve as the Chairman of the Executive Committee to preside at all meetings of such Committee. The Secretary, or if the Secretary shall be absent from such meeting, any person appointed by the chairman, shall act as secretary of the meeting and keep the minutes thereof.
SECTION 2. Powers of the Executive Committee. To the extent permitted by law, the Executive Committee may exercise all the powers of the Board in the management of specified matters where such authority is delegated to it by the Board, and also, to the extent permitted by law, the Executive Committee shall have, and may exercise, all the powers of the Board in the management of the business and affairs of the Corporation (including the power to authorize the seal of the Corporation to be affixed to all papers which may require it; but excluding the power to appoint a member of the Executive Committee) in such manner as the Executive Committee shall deem to be in the best interests of the Corporation and not inconsistent with any prior specific action of the Board. An act of the Executive Committee taken within the scope of its authority shall be an act of the Board. The Executive Committee shall render in the form of minutes a report of its several acts at each regular meeting of the Board and at any other time when so directed by the Board.
SECTION 3. Meetings of the Executive Committee. Regular meetings of the Executive Committee shall be held at such times, on such dates and at such places as shall be fixed by resolution adopted by a majority of the Executive Committee, of which regular meetings notice need not be given, or as shall be fixed by the Chairman of the Executive Committee or in the absence of the Chairman of the Executive Committee the Chief Executive Officer and specified in the notice of such meeting. Special meetings of the Executive Committee may be called by the Chairman of the Executive Committee or by the Chief Executive Officer. Notice of each such special meeting of the Executive Committee (and of each regular meeting for which notice shall be required), stating the time and place thereof shall be mailed, postage prepaid, to each member of the Executive Committee, by first-class mail, at least four days before the day on which such meeting is to be held, or shall be sent by facsimile transmission or comparable medium, or be delivered personally or by telephone, at least twenty-four hours before the time at which such meeting is to be held; but notice need not be given to a member of the Executive Committee who shall waive notice thereof as provided in Article IX of these By-laws, and any meeting of the Executive Committee shall be a legal meeting
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without any notice thereof having been given, if all the members of such Committee shall be present thereat.
SECTION 4. Quorum and Manner of Acting of the Executive Committee. Four members of the Executive Committee or, if the Lead Director does not fall within one of the roles set forth in clause (i), (ii) or (iii) of Section 1 of this Article V, five members of the Executive Committee, shall constitute a quorum for the transaction of business, and the act of a majority of the members of the Executive Committee present at a meeting at which a quorum shall be present shall be the act of the Executive Committee. Participating in a meeting by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other shall constitute presence at a meeting of the Executive Committee. The members of the Executive Committee shall act only as a committee and individual members shall have no power as such.
SECTION 5. Other Committees. The Board may, by resolution adopted by a majority of the Board, designate members of the Board to constitute other committees, which shall have, and may exercise, such powers as the Board may by resolution delegate to them, and shall in each case consist of such number of directors as the Board may determine; provided, however, that each such committee shall have at least three directors as members thereof. Such a committee may either be constituted for a specified term or may be constituted as a standing committee which does not require annual or periodic reconstitution. A majority of all the members of any such committee may determine its action and its quorum requirements and may fix the time and place of its meetings, unless the Board shall otherwise provide. Participating in a meeting by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other shall constitute presence at a meeting of such other committees.
In addition to the foregoing, the Board may, by resolution adopted by a majority of the Board, create a committee of indeterminate membership and duration and not subject to the limitations as to the membership, quorum and manner of meeting and acting prescribed in these By-laws, which committee, in the event of a major disaster or catastrophe or national emergency which renders the Board incapable of action by reason of the death, physical incapacity or inability to meet of some or all of its members, shall have, and may exercise all the powers of the Board in the management of the business and affairs of the Corporation (including, without limitation, the power to authorize the seal of the Corporation to be affixed to all papers which may require it and the power to fill vacancies in the Board). An act of such committee taken within the scope of its authority shall be an act of the Board.
SECTION 6. Changes in Committees; Resignations; Removals; Vacancies. The Board shall have power, by resolution adopted by a majority of the Board, at any time to change or remove the members of, to fill vacancies in, and to discharge any committee created pursuant to these By-laws, either with or without cause. Any member of any such committee may resign at any time by giving written notice to the Board or the
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Chairman of the Board or the Secretary. Such resignation shall take effect upon receipt of such notice or at any later time specified therein; and, unless otherwise specified therein, acceptance of such resignation shall not be necessary to make it effective. Any vacancy in any committee, whether arising from death, resignation, an increase in the number of committee members or any other cause, shall be filled by the Board in the manner prescribed in these By-laws for the original appointment of the members of such committee.
ARTICLE V
OFFICERS
SECTION 1. Number and Qualifications. The officers of the Corporation shall include the Chairman of the Board, and may include one or more Vice Chairmen, the President, one or more Vice Presidents (one or more of whom may be designated as Executive Vice Presidents or as Senior Vice Presidents or by other designations), the Treasurer, the Secretary and the Controller. Officers shall be elected from time to time by the Board, each to hold office until a successor shall have been duly elected and shall have qualified, or until death, or until resignation as hereinafter provided in Section 2 of this Article V, or until removed as hereinafter provided in Section 3 of this Article V.
SECTION 2. Resignations. Any officer of the Corporation may resign at any time by giving written notice of resignation to the Board, the Chairman of the Board, the Chief Executive Officer or the Secretary. Any such resignation shall take effect at the time specified therein, or, if the time when it shall become effective shall not be specified therein, then it shall become effective upon its receipt; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective.
SECTION 3. Removal. Any officer of the Corporation may be removed, either with or without cause, at any time, by a resolution adopted by a majority of the Board at any meeting of the Board.
SECTION 4. Vacancies. A vacancy in any office, whether arising from death, resignation, removal or any other cause, may be filled for the unexpired portion of the term of office which shall be vacant, in the manner prescribed in these By-laws for the regular election or appointment to such office.
SECTION 5. Chairman of the Board. The Chairman of the Board shall, if present, preside at each meeting of the stockholders and of the Board and shall perform such other duties as may from time to time be assigned by the Board. The Chairman may sign certificates representing shares of the stock of the Corporation pursuant to the provisions of Section 1 of Article VII of these By-laws; sign, execute and deliver in the name of the Corporation all deeds, mortgages, bonds, contracts or other instruments authorized by the Board, except in cases where the signing, execution or delivery thereof shall be expressly delegated by the Board or these By-laws to some other
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officer or agent of the Corporation or where they shall be required by law otherwise to be signed, executed and delivered; and affix the seal of the Corporation to any instrument which shall require it. The Chairman of the Board, when there is no President or in the absence or incapacity of the President, shall perform all the duties and functions and exercise all the powers of the President.
SECTION 6. Vice Chairman. Each Vice Chairman shall perform all such duties as from time to time may be assigned by the Board or the Chairman of the Board. The Vice Chairman may sign certificates representing shares of the stock of the Corporation pursuant to the provisions of Section 1 of Article VII of these By-laws; sign, execute and deliver in the name of the Corporation all deeds, mortgages, bonds, contracts or other instruments authorized by the Board, except in cases where the signing, execution or delivery thereof shall be expressly delegated by the Board or these By-laws to some officer or agent of the Corporation or where they shall be required by law otherwise to be signed, executed and delivered; and affix the seal of the Corporation to any instrument which shall require it; and in general, perform all duties incident to the office of Vice Chairman.
SECTION 7. President. The President shall perform all such duties as from time to time may be assigned by the Board or the Chairman of the Board. The President may sign certificates representing shares of the stock of the Corporation pursuant to the provisions of Section 1 of Article VII of these By-laws; sign, execute and deliver in the name of the Corporation all deeds mortgages, bonds, contracts or other instruments authorized by the Board, except in cases where the signing, execution or delivery thereof shall be expressly delegated by the Board or these By-laws to some other officer or agent of the Corporation or where they shall be required by law otherwise to be signed, executed and delivered, and affix the seal of the Corporation to any instrument which shall require it; and, in general, perform all duties incident to the office of President. The President shall in the absence or incapacity of the Chairman of the Board and the Lead Director, perform all the duties and functions and exercise all the powers of the Chairman of the Board.
SECTION 8. Designated Officers. (a) Chief Executive Officer. Either the Chairman of the Board, or an officer, as the Board of Directors may designate, shall be the Chief Executive Officer of the Corporation. The officer so designated shall have, in addition to the powers and duties applicable to the office set forth in Section 5 or 7 of this Article V, general and active supervision over the business and affairs of the Corporation and over its several officers, agents, and employees, subject, however, to the control of the Board. The Chief Executive Officer shall see that all orders and resolutions of the Board are carried into effect, be an ex officio member of all committees of the Board (except the Audit Committee, the Directors and Corporate Governance Committee, and committees specifically empowered to fix or approve the Chief Executive Officer's compensation or to grant or administer bonus, option or other similar plans in which the Chief Executive Officer is eligible to participate), and, in general, shall perform all duties incident to the position of Chief Executive Officer and such other duties as may from time to time be assigned by the Board. (b) Other
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Designated Officers. The Board of Directors may designate officers to serve as Chief Financial Officer, Chief Accounting Officer and other such designated positions and to fulfill the responsibilities of such designated positions in addition to their duties as officers as set forth in this Article V.
SECTION 9. Executive Vice Presidents, Senior Vice Presidents and Vice Presidents. Each Executive and Senior Vice President shall perform all such duties as from time to time may be assigned by the Board or the Chairman of the Board or a Vice Chairman or the President. Each Vice President shall perform all such duties as from time to time may be assigned by the Board or the Chairman of the Board or a Vice Chairman or the President or an Executive or a Senior Vice President. Any Vice President may sign certificates representing shares of stock of the Corporation pursuant to the provisions of Section 1 of Article VII of these By-laws.
SECTION 10. Treasurer. The Treasurer shall:
(a) have charge and custody of, and be responsible for, all the funds and securities of the Corporation, and may invest the same in any securities, may open, maintain and close accounts for effecting any and all purchase, sale, investment and lending transactions in securities of any and all kinds for and on behalf of the Corporation or any employee pension or benefit plan fund or other fund established by the Corporation, as may be permitted by law;
(b) keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation;
(c) deposit all moneys and other valuables to the credit of the Corporation in such depositaries as may be designated by the Board or the Executive Committee;
(d) receive, and give receipts for, moneys due and payable to the Corporation from any source whatsoever;
(e) disburse the funds of the Corporation and supervise the investment of its funds, taking proper vouchers therefor;
(f) render to the Board, whenever the Board may require, an account of all transactions as Treasurer; and
(g) in general, perform all the duties incident to the office of Treasurer and such other duties as from time to time may be assigned by the Board or the Chairman of the Board or a Vice Chairman or the President or an Executive or Senior Vice President.
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SECTION 11. Secretary. The Secretary shall:
(a) keep or cause to be kept in one or more books provided for the purpose, the minutes of all meetings of the Board, the Executive Committee and other committees of the Board and the stockholders;
(b) see that all notices are duly given in accordance with the provisions of these By-laws and as required by law;
(c) be custodian of the records and the seal of the Corporation and affix and attest the seal to all stock certificates of the Corporation and affix and attest the seal to all other documents to be executed on behalf of the Corporation under its seal;
(d) see that the books, reports, statements, certificates and other documents and records required by law to be kept and filed are properly kept and filed; and
(e) in general, perform all the duties incident to the office of Secretary and such other duties as from time to time may be assigned by the Board or the Chairman of the Board or a Vice Chairman or the President or an Executive or Senior Vice President.
SECTION 12. Controller. The Controller shall:
(a) have control of all the books of account of the Corporation;
(b) keep a true and accurate record of all property owned by it, of its debts and of its revenues and expenses;
(c) keep all accounting records of the Corporation (other than the accounts of receipts and disbursements and those relating to the deposits of money and other valuables of the Corporation, which shall be kept by the Treasurer);
(d) render to the Board, whenever the Board may require, an account of the financial condition of the Corporation; and
(e) in general, perform all the duties incident to the office of Controller and such other duties as from time to time may be assigned by the Board or the Chairman of the Board or a Vice Chairman or the President or an Executive or Senior Vice President.
SECTION 13. Compensation. The compensation of the officers of the Corporation shall be fixed from time to time by the Board; provided, however, that the Board may delegate to a committee the power to fix or approve the compensation of any officers. An officer of the Corporation shall not be prevented from receiving compensation by reason of being also a director of the Corporation; but any such officer who shall also be a director shall not have any vote in the determination of the amount of compensation paid to such officer.
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ARTICLE VI
CONTRACTS, CHECKS, DRAFTS, BANK ACCOUNTS, ETC.
SECTION 1. Execution of Contracts. Except as otherwise required by law or these By-laws, any contract or other instrument may be executed and delivered in the name and on behalf of the Corporation by any officer (including any assistant officer) of the Corporation. The Board or the Executive Committee may authorize any agent or employee to execute and deliver any contract or other instrument in the name and on behalf of the Corporation, and such authority may be general or confined to specific instances as the Board or such Committee, as the case may be, may by resolution determine.
SECTION 2. Loans. Unless the Board shall otherwise determine, the Chairman of the Board or a Vice Chairman or the President or any Vice President, acting together with the Treasurer or the Secretary, may effect loans and advances at any time for the Corporation from any bank, trust company or other institution, or from any firm, corporation or individual, and for such loans and advances may make, execute and deliver promissory notes, bonds or other certificates or evidences of indebtedness of the Corporation, but in making such loans or advances no officer or officers shall mortgage, pledge, hypothecate or transfer any securities or other property of the Corporation, except when authorized by resolution adopted by the Board.
SECTION 3. Checks, Drafts, etc. All checks, drafts, bills of exchange or other orders for the payment of money out of the funds of the Corporation, and all notes or other evidences of indebtedness of the Corporation, shall be signed in the name and on behalf of the Corporation by such persons and in such manner as shall from time to time be authorized by the Board or the Executive Committee or authorized by the Treasurer acting together with either the General Manager of an operating unit or a nonfinancial Vice President of the Corporation, which authorization may be general or confined to specific instances.
SECTION 4. Deposits. All funds of the Corporation not otherwise employed shall be deposited from time to time to the credit of the Corporation in such banks, trust companies or other depositaries as the Board or the Executive Committee may from time to time designate or as may be designated by any officer or officers of the Corporation to whom such power of designation may from time to time be delegated by the Board or the Executive Committee. For the purpose of deposit and for the purpose of collection for the account of the Corporation, checks, drafts and other orders for the payment of money which are payable to the order of the Corporation may be endorsed, assigned and delivered by any officer, employee or agent of the Corporation.
SECTION 5. General and Special Bank Accounts. The Board or the Executive Committee may from time to time authorize the opening and keeping of general and special bank accounts with such banks, trust companies or other depositaries as the Board or the Executive Committee may designate or as may be designated by any
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officer or officers of the Corporation to whom such power of designation may from time to time be delegated by the Board or the Executive Committee. The Board or the Executive Committee may make such special rules and regulations with respect to such bank accounts, not inconsistent with the provisions of these By-laws, as it may deem expedient.
SECTION 6. Indemnification. The Corporation shall, to the fullest extent permitted by applicable law as in effect at any time, indemnify any person made, or threatened to be made, a party to an action or proceeding whether civil or criminal (including an action or proceeding by or in the right of the Corporation) by reason of the fact that such person is (i) an officer or director of the Corporation or (ii) an officer or director of the Corporation who is asked to serve in any capacity at the request of the Corporation in any corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against, in each case, judgments, fines, amounts paid in settlement and reasonable expenses, including attorneys' fees actually and necessarily incurred as a result of such action or proceeding, or any appeal therein. Such indemnification shall be a contract right that vests upon the occurrence or alleged occurrence of any act or omission to act that forms the basis for or is related to the claim for which indemnification is sought and shall include the right to be paid advances of any expenses incurred by such person in connection with such action, suit or proceeding, and the right to be indemnified for expenses incurred by such person in connection with successfully establishing a right to indemnification, in each case consistent with the provisions of applicable law in effect at any time. Indemnification shall be deemed to be 'permitted' within the meaning of the first sentence hereof if it is not expressly prohibited by applicable law as in effect at the time. The indemnification rights hereunder shall continue as to any such person who has ceased to be an officer or director of the Corporation and shall inure to the benefit of the heirs, executors and administrators of any such person. If the right of indemnification provided for in this Section 6 is amended or repealed, such amendment or repeal will not limit the indemnification provided for herein with respect to any acts or omissions to act occurring prior to any such amendment or repeal.
ARTICLE VII
SHARES
SECTION 1. Stock Certificates. The shares of the Corporation shall be represented by certificates, or shall be uncertificated shares. Each owner of stock of the Corporation shall be entitled to have a certificate, in such form as shall be approved by the Board, certifying the number of shares of stock of the Corporation owned. To the extent that shares are represented by certificates, such certificates of stock shall be signed in the name of the Corporation by the Chairman of the Board or a Vice Chairman or the President or a Vice President and by the Secretary and sealed with the seal of the Corporation (which seal may be a facsimile, engraved or printed); provided, however, that where any such certificate is signed by a registrar, other than the Corporation or its employee, the signatures of the Chairman of the Board, a Vice
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Chairman, the President, the Secretary, and transfer agent or a transfer clerk acting on behalf of the Corporation upon such certificates may be facsimiles, engraved or printed. In case any officer, transfer agent or transfer clerk acting on behalf of the Corporation ceases to be such officer, transfer agent, or transfer clerk before such certificates shall be issued, they may nevertheless be issued by the Corporation with the same effect as if they were still such officer, transfer agent or transfer clerk at the date of their issue.
SECTION 2. Books of Account and Record of Stockholders. There shall be kept at the office of the Corporation correct books of account of all its business and transactions, minutes of the proceedings of stockholders, Board, and Executive Committee, and a book to be known as the record of stockholders, containing the names and addresses of all persons who are stockholders, the number of shares of stock held, and the date when the stockholder became the owner of record thereof.
SECTION 3. Transfers of Stock. Transfers of shares of stock of the Corporation shall be made on the record of stockholders of the Corporation only upon authorization by the registered holder thereof, or by an attorney thereunto authorized by power of attorney duly executed and filed with the Secretary or with a transfer agent or transfer clerk, and on surrender of the certificate or certificates for such shares properly endorsed, provided such shares are represented by a certificate, or accompanied by a duly executed stock transfer power and the payment of all taxes thereon. The person in whose names shares of stock shall stand on the record of stockholders of the Corporation shall be deemed the owner thereof for all purposes as regards the Corporation. Whenever any transfers of shares shall be made for collateral security and not absolutely and written notice thereof shall be given to the Secretary or to such transfer agent or transfer clerk, such fact shall be stated in the entry of the transfer.
SECTION 4. Regulations. The Board may make such additional rules and regulations as it may deem expedient, not inconsistent with these By-laws, concerning the issue, transfer and registration of certificated or uncertificated shares of stock of the Corporation. It may appoint, or authorize any officer or officers to appoint, one or more transfer agents or one or more transfer clerks and one or more registrars and may require all certificates of stock to bear the signature or signatures of any of them.
SECTION 5. Fixing of Record Date. The Board shall fix a time not exceeding sixty nor less than ten days prior to the date then fixed for the holding of any meeting of the stockholders or prior to the last day on which the consent or dissent of the stockholders may be effectively expressed for any purpose without a meeting, as the time as of which the stockholders entitled to notice of and to vote at such meeting or whose consent or dissent is required or may be expressed for any purpose, as the case may be, shall be determined, and all persons who were holders of record of voting stock at such time, and no others, shall be entitled to notice of and to vote at such meeting or to express their consent or dissent, as the case may be. The Board may fix a time not exceeding sixty days preceding the date fixed for the payment of any dividend or the making of any distribution or the allotment of rights to subscribe for securities of the Corporation, or for the delivery of evidences of rights or evidences of interests arising
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out of any change, conversion or exchange of capital stock or other securities, as the record date for the determination of the stockholders entitled to receive any such dividend, distribution, allotment, rights or interests, and in such case only the stockholders of record at the time so fixed shall be entitled to receive such dividend, distribution, allotment, rights or interests.
SECTION 6. Lost, Destroyed or Mutilated Certificates. The holder of any certificate representing shares of stock of the Corporation shall immediately notify the Corporation of any loss, destruction or mutilation of such certificate, and the Corporation may issue a new certificate of stock in the place of any certificate theretofore issued by it which the owner thereof shall allege to have been lost or destroyed or which shall have been mutilated, and the Corporation may, in its discretion, require such owner or the owner's legal representatives to give to the Corporation a bond in such sum, limited or unlimited, and in such form and with such surety or sureties as the Board in its absolute discretion shall determine, to indemnify the Corporation against any claim that may be made against it on account of the alleged loss or destruction of any such certificate, or the issuance of such new certificate. Anything to the contrary notwithstanding, the Corporation, in its absolute discretion, may refuse to issue any such new certificate, except pursuant to legal proceedings under the laws of the State of New York.
SECTION 7. Inspection of Records. The record of stockholders and minutes of the proceedings of stockholders shall be available for inspection, within the limits and subject to the conditions and restrictions prescribed by applicable law.
SECTION 8. Auditors. The Board shall employ an independent public or certified public accountant or firm of such accountants who shall act as auditors in making examinations of the consolidated financial statements of the Corporation and its subsidiaries in accordance with generally accepted auditing standards. The auditors shall certify that the annual financial statements are prepared in accordance with generally accepted accounting principles, and shall report on such financial statements to the stockholders and directors of the Corporation. The Board's selection of auditors shall be presented for ratification by the stockholders at the annual meeting. Directors and officers, when acting in good faith, may rely upon financial statements of the Corporation represented to them to be correct by the officer of the Corporation having charge of its books of account, or stated in a written report by the auditors fairly to reflect the financial condition of the Corporation.
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ARTICLE VIII
OFFICES
SECTION 1. Principal Office. The principal office of the Corporation shall be at such place in the Town of North Castle, County of Westchester and State of New York as the Board shall from time to time determine.
SECTION 2. Other Offices. The Corporation may also have an office or offices other than said principal office at such place or places as the Board shall from time to time determine or the business of the Corporation may require.
ARTICLE IX
WAIVER OF NOTICE
Whenever under the provisions of any law of the State of New York, the Certificate of Incorporation or these By-laws or any resolution of the Board or any committee thereof, the Corporation or the Board or any committee thereof is authorized to take any action after notice to the stockholders, directors or members of any such committee, or after the lapse of a prescribed period of time, such action may be taken without notice and without the lapse of any period of time, if, at any time before or after such action shall be completed, such notice or lapse of time shall be waived by the person or persons entitled to said notice or entitled to participate in the action to be taken, or, in the case of a stockholder, by an attorney thereunto authorized. Attendance at a meeting requiring notice by any person or, in the case of a stockholder, by the stockholder's attorney, agent or proxy, shall constitute a waiver of such notice on the part of the person so attending, or by such stockholder, as the case may be.
ARTICLE X
FISCAL YEAR
The fiscal year of the Corporation shall end on the thirty-first day of December in each year.
ARTICLE XI
SEAL
The Seal of the Corporation shall consist of two concentric circles with the IBM logotype appearing in bold face type within the inner circle and the words 'International Business Machines Corporation' appearing within the outer circle.
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ARTICLE XII
AMENDMENTS
These By-laws may be amended or repealed or new By-laws may be adopted by the stockholders at any annual or special meeting, if the notice thereof mentions that amendment or repeal or the adoption of new By-laws is one of the purposes of such meeting. These By-laws, subject to the laws of the State of New York, may also be amended or repealed or new By-laws may be adopted by the affirmative vote of a majority of the Board given at any meeting, if the notice thereof mentions that amendment or repeal or the adoption of new By-laws is one of the purposes of such meeting.
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Exhibit 31.1
CERTIFICATION PURSUANT TO RULE 13A-14(a) OR 15D-14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Arvind Krishna, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of International Business Machines Corporation; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a. | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b. | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c. | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d. | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): |
| a. | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b. | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: April 26, 2022 | |
| |
/s/Arvind Krishna | |
| |
Arvind Krishna | |
Chairman and Chief Executive Officer | |
Exhibit 31.2
CERTIFICATION PURSUANT TO RULE 13A-14(a) OR 15D-14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, James J. Kavanaugh, certify that:
| a. | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b. | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c. | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d. | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| a. | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b. | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: April 26, 2022 | |
| |
/s/ James J. Kavanaugh | |
| |
James J. Kavanaugh | |
Senior Vice President and Chief Financial Officer | |
Exhibit 32.1
INTERNATIONAL BUSINESS MACHINES CORPORATION
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of International Business Machines Corporation (the “Company”) on Form 10-Q for the period ending March 31, 2022, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Arvind Krishna, Chairman and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Arvind Krishna | |
| |
Arvind Krishna | |
Chairman and Chief Executive Officer | |
April 26, 2022 | |
A signed original of this written statement required by Section 906 has been provided to IBM and will be retained by IBM and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
INTERNATIONAL BUSINESS MACHINES CORPORATION
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of International Business Machines Corporation (the “Company”) on Form 10-Q for the period ending March 31, 2022, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, James J. Kavanaugh, Senior Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ James J. Kavanaugh | |
| |
James J. Kavanaugh | |
Senior Vice President and Chief Financial Officer | |
April 26, 2022 | |
A signed original of this written statement required by Section 906 has been provided to IBM and will be retained by IBM and furnished to the Securities and Exchange Commission or its staff upon request.