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