Let’s create
2021
Annual Report
Dear IBM Investor:
Today’s IBM has defined a clear strategy to lead in the era
of hybrid cloud and AI.
In 2021, we took a series of dramatic steps to execute against
that strategy, strengthening our portfolio, expanding our partner
ecosystem, and returning your company to growth.
As a result, we enter 2022 more strategically focused and
more technologically capable. We are integrating technology and
expertise—from IBM, our partners, and even our competitors—
to meet the urgent needs of our clients, who see hybrid cloud and
AI as crucial sources of competitive advantage. And we are ready
to be the catalyst of progress for our clients as they pursue the
digital transformation of the world’s mission-critical businesses.
As you will see in this report, our strategy is resonating with
clients and partners, our technology and business expertise are
in high demand, and our company is more nimble, focused, and
positioned for sustainable growth.
2021 performance
For the year, IBM generated $57.4 billion in revenue and
$12.8 billion in cash from operations.
Revenue growth accelerated at constant currency throughout
2021, and we exited the year with 8.6% growth in the fourth
quarter, including approximately 3.5 points from incremental
external sales to Kyndryl. Hybrid cloud revenue grew 19%
at constant currency in 2021 and now makes up 35% of IBM
revenue. Today, over 70% of our annual revenue is in software
and consulting, both delivering healthy, sustainable growth.
Our performance was driven by our unique ability to combine
IBM’s technology and expertise to create value for our clients
and partners. We integrate IBM Software, IBM Consulting, and
IBM Infrastructure to deliver this value.
IBM Software allows clients to leverage the full power of
hybrid cloud and AI. Software revenues were up 4% at constant
currency. Red Hat continues to gain momentum, growing nearly
21% at constant currency in the fourth quarter, benefiting from its
integration with IBM’s portfolio and reflecting strong demand for
open source innovation.
IBM Consulting revenues were up 8% at constant currency,
driven by clients that rely on IBM as their trusted partner for
digital transformation.
IBM Infrastructure revenues declined 3% at constant
currency, reflecting product cycle dynamics. Clients continue
to leverage our Power servers, storage, and IBM Z systems as
foundational elements of their hybrid cloud infrastructure. In
fact, we have shipped more MIPs in the z15 than any program
in our history.
2
With this revenue and cash generation, we returned
$6 billion to stockholders through dividends in 2021. We reduced
debt by $10 billion in 2021 and by $21 billion since acquiring
Red Hat in 2019. We did all of this while we continued to invest
in skills, innovation, and our ecosystem, including $3 billion
on acquisitions in the year.
IBM now has a higher-growth, higher-value business, with
strong and growing free cash flow, lower capital intensity, and
attractive shareholder returns.
Strategy and execution
We entered 2021 with a series of clear but ambitious goals:
to strengthen our portfolio, simplify our operations, and broaden
our ecosystem. Our financial performance is a direct reflection
of our ability to execute against these goals.
Throughout the year, we continued to align our offerings
with the two most transformational technologies of our time:
hybrid cloud and AI. Our platform-centric approach starts with
Red Hat, which allows our clients to develop and deploy their
applications on private and public clouds, achieve consistent
security across their computing infrastructure, and consume
innovation from anywhere.
Our portfolio is positioned to capture the $1 trillion hybrid
cloud opportunity, enabling our clients to access and deploy our
AI capabilities on IBM’s cloud or those of other major providers.
Our software has been enhanced and bundled to help clients
become more data-driven, and to automate, secure, and
modernize their business and IT operations. IBM Consulting
has transformed itself by deepening its technical expertise
and embracing a co-creation model with clients.
To complement our organic investments, we made 15
strategic acquisitions to strengthen and extend our hybrid cloud
and AI offerings. For example, Waeg, Bluetab, and Taos reinforce
our cloud consulting expertise. Turbonomic integrates with
Instana and Watson AIOps to create an industry-leading suite of
automation software. The recent acquisition of Envizi builds on
our existing asset management and supply chain solutions to help
organizations develop more resilient and sustainable operations.
And ReaQta expands our AI-based threat detection and response
capabilities in IBM Security.
To improve how we deliver the value of these offerings to
our clients, we have updated our client engagement model to
emphasize experiential selling and co-creation. We have also
greatly expanded our partner ecosystem. This network of systems
integrators, independent software vendors, service providers,
channel partners, and developers has been carefully selected
to deliver value to our clients, our partners, and IBM. In 2021,
we strengthened existing relationships with companies like
Adobe, Oracle, and EY. We created new consulting services
in collaboration with SAP and co-created an AI-enabled
analytics solution with Deloitte. We announced new strategic
partnerships with Cisco, Palo Alto Networks, and Telus, all
focused on 5G, Edge, and network automation. And we saw
our partnership revenue with AWS, Azure, and Salesforce
grow more than 50%.
A client-centric culture
Our efforts have been designed to accelerate the delivery of value
to our clients and partners, part of a larger cultural shift at IBM
toward total client-centricity. We believe that IBM has a unique
ability to solve our clients’ most pressing business problems,
bringing together all the necessary hardware, software, and
consulting, regardless of whether those solutions come from
IBM or our ecosystem partners.
We are seeing high demand for our capabilities in many areas.
Clients want to automate as many business tasks as possible
given the current workforce dynamics. They are increasingly using
AI and predictive capabilities to improve their supply chains.
Security remains a major focus area, as the cost of cybercrime
continues to rise. As clients deal with these challenges and
opportunities, they are looking for a trusted partner with a
proven track record of delivering strategic transformation.
For example, we are helping Spain’s Telefónica to modernize
its network platform, combining the potential of 5G with the
customization and intelligence of hybrid cloud. National Grid,
a leading US electric and gas utility, is working with IBM
and Boston Dynamics to analyze data at the edge in real time
to improve equipment uptime and prevent power outages.
The Australian federal government is working with IBM on
the technology platform that powers the country’s COVID-19
vaccination program. And IBM Consulting and PNC Bank
partnered on a next-generation solution that allows customers
to make banking decisions based on real-time data—a massive
change for the banking industry.
This client-first, problem-solving approach is the reason why
our client renewal rates are increasing and our recurring revenue
base is growing. It is the reason why longtime clients like CVS,
Verizon, and Anthem continue to put their trust in our people and
our technology. And it is the reason why we now have more than
3,800 hybrid cloud platform clients and nearly 3,000 clients
co-creating in IBM Garages.
3
Arvind Krishna
Chairman and
Chief Executive Officer
Our commitment to science and innovation
While we are focused on meeting the needs of clients today,
we continue to shape the technologies of tomorrow. That is why
IBM Research continues to advance the fundamental science
of computing, driving innovation and pioneering a new era of
accelerated discovery.
IBM continues to lead the development of quantum
computing. This year, we delivered operational quantum
computers to Japan and Germany, deployed the world’s first
127-qubit processor, and are now on our way to a 1,000-qubit
processor by the end of 2023. We also forged a series of long-
term partnerships with universities, governments, and hospitals
to develop quantum applications that will accelerate the
discovery of everything from medicine to materials.
In 2021, we unveiled not one, but two, major breakthroughs
in semiconductor design. First, the world’s first 2-nanometer
chip technology, which will allow 50 billion transistors to fit on
a chip the size of a fingernail. The chips are expected to achieve
45% higher performance than today’s 7-nanometer chips.
Second, in collaboration with our Albany Research Alliance
partner Samsung, IBM Research introduced a completely new
approach to semiconductor design called Vertical-Transport
Nanosheet Field Effect Transistor, or VTFET, which could help
keep Moore’s law alive for years to come.
Responsible stewardship for the digital age
At IBM, we have always understood that our responsibilities
extend far beyond the bottom line. That is why we embrace
our leadership role in defining good tech in the digital age.
Among the most pressing challenges facing our society
today is closing the STEM skills gap, which holds back both
technological and socioeconomic progress. To address this
issue, IBM regularly engages at the highest levels of government
to improve access to the education and skills needed for
modern, rewarding jobs. In addition, IBM has committed
to providing 30 million people of all ages with critical skills by
2030, by fostering more than 50 new partnerships for the
IBM SkillsBuild program.
We also continue to make progress on diversity and inclusion,
which we believe is imperative for the health of our business
and our society. In 2021, we added a diversity modifier to our
executive compensation program to reinforce the importance
of a diverse workplace. The Human Rights Campaign Foundation
designated IBM as a “Best Place to Work for LGBTQ+ Equality”
with a 100% rating. These efforts—and others—were recently
recognized by JUST Capital, which named IBM the most just
company in our industry.
4
In 2021, we furthered our tradition of leadership in
sustainability, announcing a goal of net-zero greenhouse gas
emissions by 2030 across all the countries in which we operate.
Our commitment to the environment is also evident in our
products, including the new IBM Environmental Intelligence
Suite, which combines weather, climate, and operational data to
measure and manage environmental performance. And in May,
IBM launched the 2021 Call for Code Global Challenge, which
invited the world’s software developers to combat climate change
with technology powered by open source software. The top prize
this year went to Saaf Water, an accessible water quality sensor
and analytics platform for people living in rural localities.
The catalyst that makes the world work better
On the cover of this report is a simple phrase: “Let’s create.”
This is a signal to the world that IBM has changed. We are
more open to partnership, more open to ideas, and more open
to innovation than ever before. “Let’s create” is an invitation to
all of our stakeholders to join us in solving the most complex
problems facing business and society today.
As the nature of those problems changes over time, so too
will IBM, reinventing itself to overcome whatever obstacles stand
in the way of progress. And while many things about our company
change, there are some things that will always stay the same.
We will always be dedicated to our clients’ success, pursue
innovation that matters, and set the standard for trust and
responsibility.
Why do we hold ourselves to such high standards? Because
IBM’s clients own and operate the planet’s mission-critical
systems: electrical grids, airlines, telecommunications networks,
banks, government services, and many others. These systems
are more than just engines of economic growth. They are the
systems that support modern society. In making them faster,
more productive, and more secure, we don’t just make business
work better; we make the world work better. We don’t just
create business value; we create progress.
I believe IBM is now positioned to be the catalyst of that
progress for decades to come.
Arvind Krishna
Chairman and Chief Executive Officer
In an effort to provide additional and useful information regarding the company’s
financial results and other financial information, as determined by generally accepted
accounting principles (GAAP), these materials contain non-GAAP financial measures
on a continuing operations basis, including revenue growth rates adjusted for constant
currency. The rationale for management’s use of this non-GAAP information is included
on page 6 of the company’s 2021 Annual Report, which is Exhibit 13 to the Form 10-K
submitted with the SEC on February 22, 2022. For reconciliation of these non-GAAP
financial measures to GAAP and other information, please refer to pages 9, 17, and
32 of the company’s 2021 Annual Report. Cash from operations is presented on
a consolidated basis, which includes activity from discontinued operations related
to the separation of Kyndryl.
Report of Financials
International Business Machines Corporation and Subsidiary Companies
5
MANAGEMENT DISCUSSION
Overview
Forward-Looking and Cautionary Statements
Management Discussion Snapshot
Description of Business
Year in Review
Prior Year in Review
Other Information
Looking Forward
Liquidity and Capital Resources
Critical Accounting Estimates
Currency Rate Fluctuations
Market Risk
Cybersecurity
Financing
Report of Management
Report of Independent Registered
Public Accounting Firm
CONSOLIDATED FINANCIAL STATEMENTS
Income Statement
Comprehensive Income
Balance Sheet
Cash Flows
Equity
6
7
8
11
17
37
46
46
47
50
53
53
54
55
58
59
62
63
64
65
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Basis & Policies
A Significant Accounting Policies
B Accounting Changes
C Separation of Kyndryl
Performance & Operations
D Revenue Recognition
E Segments
F Acquisitions & Divestitures
G Research, Development & Engineering
H Taxes
I Earnings Per Share
Balance Sheet & Liquidity
J Financial Assets & Liabilities
K Inventory
L Financing Receivables
M Property, Plant & Equipment
N Leases
O Intangible Assets Including Goodwill
P Investments & Sundry Assets
Q Borrowings
R Other Liabilities
S Commitments & Contingencies
T Equity Activity
Risk Management, Compensation/Benefits & Other
U Derivative Financial Instruments
V Stock-Based Compensation
W Retirement-Related Benefits
X Subsequent Events
Performance Graph
Selected Quarterly Data
Stockholder Information
Board of Directors and Senior Leadership
68
81
83
85
87
91
96
96
100
101
102
102
105
105
107
109
109
112
113
115
118
121
124
135
136
137
139
140
6
Management Discussion
International Business Machines Corporation and Subsidiary Companies
OVERVIEW
The financial section of the International Business Machines Corporation (IBM or the company) 2021 Annual Report includes the
Management Discussion, the Consolidated Financial Statements and the Notes to Consolidated Financial Statements. This Overview is
designed to provide the reader with some perspective regarding the information contained in the financial section.
Organization of Information
• The Management Discussion is designed to provide readers with an overview of the business and a narrative on our financial
results and certain factors that may affect our future prospects from the perspective of management. The “Management
Discussion Snapshot” presents an overview of the key performance drivers in 2021.
• On November 3, 2021, the company completed the previously announced 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. Refer to note C, “Separation of Kyndryl,” for
additional information.
• Beginning with the “Year in Review,” the Management Discussion contains the results of operations for each reportable segment
of the business, a discussion of our financial position recast to reflect the separation of Kyndryl and a discussion of cash flows as
reflected in the Consolidated Statement of Cash Flows. Other key sections within the Management Discussion include: “Looking
Forward” and “Liquidity and Capital Resources,” the latter of which includes a description of management’s definition and use of
free cash flow.
• The Consolidated Financial Statements provide an overview of income and cash flow performance and financial position.
• The Notes follow the Consolidated Financial Statements. Among other items, the Notes contain our accounting policies,
information on the separation of Kyndryl, revenue information, acquisitions and divestitures, certain commitments and
contingencies and retirement-related plans information.
• Effective 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 beginning in the fourth quarter of 2021
but did not impact the company’s Consolidated Financial Statements. Refer to note E, “Segments,” for additional information on
the company’s reportable segments. The segments presented in this Annual Report are reported on a comparable basis for all
periods.
• On July 9, 2019, IBM acquired 100 percent of the outstanding shares of Red Hat, Inc. (Red Hat). Red Hat is reported within the
Software segment, in Hybrid Platform & Solutions. Refer to note F, “Acquisitions & Divestitures,” for additional information.
• 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 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. See “Currency Rate Fluctuations” for
additional information.
• To provide useful decision-making information for management and shareholders, the company defines and measures hybrid
cloud revenue as end-to-end cloud capabilities within hybrid cloud environments, which includes technology (software and
hardware), services and solutions to enable clients to implement cloud solutions across public, private and multi-clouds. The
definition of hybrid cloud revenue is consistent with the prior methodology for cloud revenue historically presented. This spans
across IBM’s Consulting, Software and Infrastructure segments. Examples include (but are not limited to) Red Hat Enterprise
Linux (RHEL), Red Hat OpenShift, Cloud Paks, as-a-service offerings, service engagements related to cloud deployment of
technology and applications, and infrastructure used in cloud deployments.
• Within the financial statements and tables in this Annual Report, certain columns and rows may not add due to the use of rounded
numbers for disclosure purposes. Percentages reported are calculated from the underlying whole-dollar numbers.
Management Discussion
International Business Machines Corporation and Subsidiary Companies
7
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 related tax effects. 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 include applicable employee awards and tax impacts related to the
separation. Given its unique and temporary nature, management has also characterized the unrealized gain on Kyndryl common stock
recorded in other (income) and expense in the Consolidated Income Statement as non-operating. The gain reflects 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
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.
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
Certain statements contained in this Annual Report may constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Any forward-looking statement in this Annual Report speaks only as of the date on which
it is made; IBM assumes no obligation to update or revise any such statements except as required by law. Forward-looking
statements are based on IBM’s current assumptions regarding future business and financial performance; these statements, by
their nature, address matters that are uncertain to different degrees. Forward-looking statements involve a number of risks,
uncertainties and other factors that could cause actual results to be materially different, as discussed more fully elsewhere in this
Annual Report and in the company’s filings with the Securities and Exchange Commission (SEC), including IBM’s 2021 Form 10-K
filed on February 22, 2022.
8
Management Discussion
International Business Machines Corporation and Subsidiary Companies
MANAGEMENT DISCUSSION SNAPSHOT
($ and shares in millions except per share amounts)
For year ended December 31:
Revenue
Gross profit margin
Total expense and other (income)
Income from continuing operations before income taxes
Provision for/(benefit from) income taxes from continuing operations
Income from continuing operations
Income from continuing operations margin
Income from discontinued operations, net of tax
Net income
Earnings per share from continuing operations–assuming dilution
Consolidated earnings per share–assuming dilution
Weighted-average shares outstanding–assuming dilution
Assets
Liabilities
Equity
*
2.7 percent adjusted for currency.
2021
2020
$ 57,350
$ 55,179
54.9 %
$ 26,649
4,837
$
124
$
4,712
$
55.9 %
$ 28,293 **
$
2,572 **
$ (1,360)
$
$
$
$
$
8.2 %
1,030 $
$
5,743
$
5.21
$
6.35
904.6
$132,001
$113,005
$ 18,996
3,932 **
7.1 %
1,658
5,590
4.38 **
6.23
896.6
$155,971
$135,244
$ 20,727
Yr.-to-Yr.
Percent/Margin
Change
3.9 %*
(1.0)pts.
(5.8)%
88.0 %
NM
19.8 %
1.1 pts.
(37.9)%
2.7 %
18.9 %
1.9 %
0.9 %
(15.4)%
(16.4)%
(8.4)%
** Includes a $1.5 billion pre-tax charge for structural actions in the fourth quarter resulting in an impact to diluted earnings per share from continuing
operations of ($1.33).
Includes a $0.6 billion pre-tax charge for structural actions in the fourth quarter resulting in an impact to diluted earnings per share from discontinued
operations of ($0.51).
At December 31. Discontinued operations are included in 2020 balances.
NM–Not meaningful
The following table provides the company’s operating (non-GAAP) earnings for 2021 and 2020. See page 29 for additional information.
($ in millions except per share amounts)
For year ended December 31:
Net income as reported
Income from discontinued operations, net of tax
Income from continuing operations
Non-operating adjustments (net of tax)
Acquisition-related charges
Non-operating retirement-related costs/(income)
U.S. tax reform impacts
Kyndryl-related impacts
Operating (non-GAAP) earnings
Diluted operating (non-GAAP) earnings per share
2021
$5,743
1,030
$4,712
1,424
1,031
89
(81)
$7,174
$ 7.93
2020
$5,590
1,658 *
$3,932 **
1,434
864
(110)
—
$6,120 **
$ 6.82 **
Yr.-to-Yr.
Percent Change
2.7 %
(37.9)
19.8 %
(0.7)
19.3
NM
NM
17.2 %
16.3 %
* Includes a $0.6 billion pre-tax charge for structural actions in the fourth quarter.
** Includes a $1.5 billion pre-tax charge for structural actions in the fourth quarter resulting in an impact to diluted operating (non-GAAP) earnings per
share of ($1.33).
NM–Not meaningful
Separation of Kyndryl
On November 3, 2021, IBM took an important step in advancing its focus on hybrid cloud and Artificial Intelligence (AI) with the
separation of its managed infrastructure services unit into a new public company, Kyndryl. The separation of Kyndryl creates two
industry-leading companies, which will continue to have a strong commercial relationship. Both IBM and Kyndryl have increased
clarity and ability to focus on their respective operating and financial models, including capital deployment, investment strategies,
and investment grade capital structures. The separation enables greater freedom of action to partner and capture new
opportunities. The outcome of all of these actions will be increased value for clients and investors.
Global Pandemic
On March 11, 2020, the World Health Organization (WHO) declared the novel coronavirus (COVID-19) a global pandemic which
resulted in significant governmental measures being initiated around the globe to slow down and control the spread of the virus.
As we managed through the second year of the pandemic, the health of IBM employees, our clients, business partners and
community remains our primary focus. We are actively engaged to ensure our plans continue to be aligned with recommendations
of the WHO, the U.S. Centers for Disease Control and Prevention and governmental regulations.
Management Discussion
International Business Machines Corporation and Subsidiary Companies
9
The continued environment of uncertainty has only reinforced the need for clients to modernize their businesses to succeed in this
new normal, with hybrid cloud and AI at the core of their digital transformations. Across industries, clients are using technology as
a source of competitive advantage. We are enabling clients’ transformations by embedding technology at the core of their
businesses. Among other things, for example, we are leveraging our hybrid cloud and AI capabilities to help clients reimagine
critical workflows, at scale, and modernize applications to increase agility, drive innovation and create operational efficiencies. We
are also applying data analytics and automation to mitigate friction in their supply chains and automate business tasks.
The spending environment continued to improve throughout the year despite additional waves of the pandemic. From an industry
standpoint, we have seen meaningful improvement in areas most affected by the pandemic such as travel, transportation,
automotive and industrial products as well as retail and consumer packaged goods. IBM continues to be well positioned to support
our clients to emerge even stronger.
Financial Performance Summary
In 2021, we reported $57.4 billion in revenue, income from continuing operations of $4.7 billion and operating (non-GAAP)
earnings of $7.2 billion. Diluted earnings per share from continuing operations was $5.21 as reported and $7.93 on an operating
(non-GAAP) basis. On a consolidated basis, we generated $12.8 billion in cash from operations and $6.5 billion in free cash flow,
which includes 10 months of Kyndryl operations, cash impacts from the structural actions initiated in the fourth quarter of 2020
and Kyndryl separation-related charges, and delivered shareholder returns of $5.9 billion in dividends. These results reflect
progress in our key growth areas resulting from the strong client demand we see in the marketplace for our technology and
consulting. We continue to increase investments in skills, innovation and our ecosystem, and our balance sheet continues to
provide us with the flexibility to support our business needs.
Total revenue grew 3.9 percent as reported and 3 percent adjusted for currency compared to the prior year with increases in our
key growth areas of software and consulting. Year-to-year performance also included a benefit from incremental revenue from our
new commercial relationship with Kyndryl beginning in the fourth quarter of 2021, which represented approximately 1 point of our full-
year revenue growth. Software revenue increased 5.3 percent as reported and 4 percent adjusted for currency, including
approximately 2 points of growth from fourth-quarter sales to Kyndryl. Hybrid Platform & Solutions grew 8.8 percent as reported
(8 percent adjusted for currency), led by strong double-digit growth in Red Hat. Transaction Processing declined 3.3 percent as
reported (4 percent adjusted for currency) as clients continued their preference for operating expenses over capital expenditures.
Consulting revenue increased 9.8 percent as reported and 8 percent adjusted for currency with growth across all three business
areas. Infrastructure revenue decreased 2.4 percent year to year as reported and 3 percent adjusted for currency, with the overall
decline in revenue reflecting our product cycle dynamics. This performance also includes approximately 1 point of growth from
fourth-quarter sales to Kyndryl. Across the segments, total hybrid cloud revenue of $20.2 billion in 2021 grew 20 percent as
reported and 19 percent adjusted for currency.
From a geographic perspective, Americas revenue grew 4.4 percent year to year as reported (4 percent adjusted for currency).
Europe/Middle East/Africa (EMEA) increased 4.1 percent (1 percent adjusted for currency). Asia Pacific grew 2.8 percent (3 percent
adjusted for currency).
The gross margin of 54.9 percent decreased 1.0 point year to year, however, gross profit dollars increased 2.0 percent compared to
the prior year. Overall, gross margin was impacted by the significant investments we are making to drive our hybrid cloud and AI
strategy as well as our product cycle dynamics. The operating (non-GAAP) gross margin of 56.2 percent decreased 1.1 points versus
the prior year.
Total expense and other (income) decreased 5.8 percent in 2021 versus the prior year primarily driven by a $1.9 billion (7 points)
decrease in charges for workforce rebalancing and a benefit from expected credit loss expense in the current year compared to a
provision in the prior year, partially offset by higher non-operating retirement-related costs and the effects of currency. Our expense
dynamics reflect a higher level of investment in innovation, skills and our ecosystem, both organically and through acquisitions, as we
execute our hybrid cloud and AI strategy. We are aggressively hiring and scaling resources to better serve clients, while increasing our
research spend to deliver innovation in AI, hybrid cloud and emerging areas such as quantum and we are expanding our ecosystem.
Total operating (non-GAAP) expense and other (income) decreased 6.8 percent year to year, driven primarily by the same factors
excluding the higher non-operating retirement-related costs.
Pre-tax income from continuing operations of $4.8 billion increased 88.0 percent and the pre-tax margin was 8.4 percent, an increase
of 3.8 points versus 2020, primarily due to the higher workforce rebalancing charges in 2020. The continuing operations effective tax
rate for 2021 was 2.6 percent compared to (52.9) percent in 2020. The current-year effective tax rate was primarily driven by tax
benefits related to audit settlements in multiple jurisdictions. The prior-year effective tax rate was primarily driven by a net tax benefit
of $0.9 billion related to an intra-entity sale of certain of the company’s intellectual property (IP) in the first quarter of 2020, and a
benefit of $0.2 billion related to a foreign tax law change. Net income from continuing operations of $4.7 billion increased 19.8 percent
and the net income from continuing operations margin was 8.2 percent, up 1.1 points year to year. Operating (non-GAAP) pre-tax
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Management Discussion
International Business Machines Corporation and Subsidiary Companies
income from continuing operations of $7.9 billion increased 43.6 percent year to year and the operating (non-GAAP) pre-tax margin
from continuing operations increased 3.8 points to 13.7 percent, reflecting the lower workforce rebalancing charges in the current year.
The operating (non-GAAP) effective tax rate for 2021 was 9.0 percent compared to (11.5) percent in 2020. The prior year operating
(non-GAAP) benefit from income taxes was primarily driven by the net tax benefit from the intra-entity IP sale. Operating (non-GAAP)
income from continuing operations of $7.2 billion increased 17.2 percent and the operating (non-GAAP) income margin from continuing
operations of 12.5 percent was up 1.4 points year to year.
Diluted earnings per share from continuing operations of $5.21 in 2021 increased 18.9 percent and operating (non-GAAP) diluted
earnings per share of $7.93 increased 16.3 percent versus 2020, with the prior year including a ($1.33) impact from the fourth-quarter
structural actions on both an as reported and operating (non-GAAP) basis.
Our balance sheet is presented on a consolidated basis, with the December 31, 2020 balance sheet reclassified to provide line items
on a continuing operations basis and separately provide current and noncurrent assets and liabilities for Kyndryl discontinued
operations. In order to present a meaningful year-to-year comparison, the amounts presented below exclude assets and liabilities of
discontinued operations.
At December 31, 2021, the balance sheet remained strong with the flexibility to support and invest in the business needs. Cash and
cash equivalents, restricted cash and marketable securities at year end were $7.6 billion, a decrease of $6.7 billion from December 31,
2020. During 2021, we continued to de-lever our debt, invest in acquisitions and provide a growing dividend to shareholders. We have
reduced total debt by $9.6 billion from prior year end and $21.3 billion since the second quarter of 2019 (immediately preceding the
Red Hat transaction).
Total assets, excluding discontinued operations, decreased $8.2 billion (decreased $5.1 billion adjusted for currency) from December
31, 2020 primarily driven by:
• A decrease of $6.7 billion ($6.5 billion adjusted for currency) in cash and cash equivalents, restricted cash and marketable
securities due to debt paydown, investments in acquisitions and dividend payments;
• A decline in receivables of $3.5 billion ($2.8 billion adjusted for currency) primarily due to sales of financing receivables and
volumes decline; and
• A decrease in deferred taxes of $1.0 billion ($0.7 billion adjusted for currency) primarily due to pension plan remeasurements,
foreign audit settlements and realization of deferred tax assets in foreign jurisdictions; partially offset by
• An increase in prepaid pension assets of $2.3 billion ($2.4 billion adjusted for currency) driven by plan remeasurements and
higher returns on plan assets; and
• An increase of $1.4 billion ($1.5 billion adjusted for currency) in prepaid expenses and other current assets primarily due to our
investment in Kyndryl and an increase in derivative assets.
Total liabilities, excluding discontinued operations, decreased $15.1 billion (decreased $10.9 billion adjusted for currency) from
December 31, 2020 primarily driven by:
• A decrease in total debt of $9.6 billion ($8.4 billion adjusted for currency) primarily driven by debt maturities and early
retirements;
• A decrease in retirement and nonpension postretirement benefit obligations of $2.7 billion ($1.9 billion adjusted for currency)
mainly driven by plan remeasurements; and
• A decrease in other accrued expenses and liabilities of $1.7 billion ($1.2 billion adjusted for currency) primarily due to payments
for workforce rebalancing actions.
Total equity of $19.0 billion decreased $1.7 billion from December 31, 2020 as a result of:
• A decrease of $7.2 billion related to the separation of Kyndryl; and
• Dividends paid of $5.9 billion; partially offset by
• Net income of $5.7 billion; and
• A decrease in accumulated other comprehensive losses of $4.8 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. For 2021, they included 10 months of Kyndryl operations versus a full year of Kyndryl in 2020.
On a consolidated basis, cash provided by operating activities was $12.8 billion in 2021, a decrease of $5.4 billion compared to 2020,
driven primarily by a decrease in cash provided by receivables ($3.9 billion) and a decrease in payroll tax and value-added tax payment
Management Discussion
International Business Machines Corporation and Subsidiary Companies
11
liabilities ($1.0 billion) due to payments in the current year for tax relief provided under the U.S. CARES Act and other non-U.S.
government assistance programs in 2020.
Net cash used in investing activities of $6.0 billion increased $2.9 billion compared to the prior year, primarily driven by an increase in
net cash used for acquisitions ($3.0 billion).
Financing activities were a net use of cash of $13.4 billion in 2021 compared to $9.7 billion in 2020. The year-to-year increase of $3.6
billion was driven by a decrease in net cash provided from debt transactions ($4.4 billion), partially offset by an increase in cash
provided of $0.9 billion due to the Kyndryl distribution to IBM at separation.
DESCRIPTION OF BUSINESS
Please refer to IBM’s Annual Report on Form 10-K filed with the SEC on February 22, 2022, for Item 1A. entitled “Risk Factors.”
IBM is addressing the hybrid cloud and AI opportunity with a platform-centric approach, focused on providing two primary sources of
client value – technology and business expertise. We provide integrated solutions and products that leverage: data, information
technology, deep expertise in industries and business processes, with trust and security and a broad ecosystem of partners and
alliances. Our hybrid cloud platform and AI technology and services capabilities support clients’ digital transformations and help them
engage with their customers and employees in new ways. These solutions draw from an industry-leading portfolio of capabilities in
software, consulting services, and a deep incumbency in mission-critical systems, all bolstered by one of the world’s leading research
organizations.
IBM Strategy
Our strategy is focused on helping clients leverage the power of hybrid cloud and Artificial Intelligence (AI). In 2021, we took an
important step with the spin-off of our managed infrastructure services business, now known as Kyndryl. Our strategy resonates with
clients, who must continually innovate and redefine their businesses with technology. Our flexible, secure, and open hybrid cloud
platform accelerates clients’ outcomes, differentiates the company, and drives a multiplier effect across our software, consulting, and
infrastructure businesses as well as to a broad ecosystem of partners. Our strategy positions IBM for accelerated growth today, while
preparing the company for the opportunities of the future.
Accelerating Digital Transformation
A new era of rapid change and disruption is underway. The need for digital transformation has dramatically accelerated due to the
pandemic and extends through the core mission-critical business processes of almost all large enterprises. Successful digital
transformations face major obstacles: (1) managing increased complexity, as large enterprises use multiple heterogeneous IT
environments and clouds, (2) deriving value from an explosion of available data, projected by analysts to grow up to three-fold in the
next three years, (3) guaranteeing competitive operations, in the context of disruptive changes and worker shortages, (4) addressing
the increase of malicious security breaches and rising cost of cybercrime, and (5) successfully meeting those challenges together with
a cohesive end-to-end sustainable execution.
To address these obstacles, enterprises want technology that provides flexibility with open-source across heterogeneous
environments – an approach known as hybrid cloud. We have demonstrated that such an approach creates 2.5 times more value for
enterprises than a public cloud-only one. Open-source technologies, such as Linux, containers, and Kubernetes, are essential to hybrid
cloud, as they harness the power of millions of developers to accelerate the speed of innovation. 85 percent of organizations expect to
use Linux containers by 2025. Additionally, AI continues to expand as a key technology to unlock value, with more than 80 percent of
enterprises agreeing that intelligent automation can improve business results. As AI for production scales, enterprises and
governments focus on ensuring AI models are unbiased and trustworthy.
A Differentiated Architecture for Business Innovation
The evolution we see in the market confirms the strategic changes executed by IBM to deliver on a hybrid cloud and AI strategy,
creating sustained value for our clients. Our differentiation derives from a flexible, secure, open hybrid cloud platform, the
comprehensive set of assets it impacts, and our ability to combine them to scale up solutions for enterprise digital transformation and
mission-critical systems.
Our value proposition builds on five core capabilities, addressing our clients’ hybrid cloud and AI needs: (1) Build and modernize for
the hybrid cloud, to develop and operate with speed, consistency and agility, (2) Create data-driven business insights regardless of
where data lives and while maintaining enterprise grade data governance, privacy and trust, (3) Automate the end-to-end enterprise
processes, for effectiveness and efficiency with AI driven decision-making, (4) Secure everywhere, with consistent governance and
compliance across environments, and (5) Bring it together by transforming our clients’ businesses and processes into sustainable best-
in-class industry practices.
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International Business Machines Corporation and Subsidiary Companies
Our full technology stack helps us to meet clients wherever they are in digital transformation, and we offer the consulting expertise to
help guide and implement the best solutions for that journey. Our rapidly growing ecosystem of cloud, ISVs, hardware, network, and
services partners enhance the client experience and drive the value and innovation that can be derived from IBM open-source
technologies.
IBM Consulting
Business Transformation •
Technology Consulting •
Application Operations
System Integrator
Partners
IBM Software
IBM Cloud Paks
Automation • Data & AI •
Security • Transaction Processing
Software and SaaS
Partners
Red Hat Hybrid Cloud Platform
Development, Security and Operational Services
OpenShift • Red Hat Enterprise Linux • Ansible Automation Platform
IBM Infrastructure
IBM Z • Distributed Infrastructure (IBM Cloud,
Power, Storage) • Infrastructure Support
Public Clouds
AWS • Azure • Others
Enterprise
Infrastructure
Edge
Our hybrid cloud approach is platform-centric, with Linux, containers, and Kubernetes as the architectural foundation. Platforms
provide compelling economics: every $1 of platform spend on average drives $3 to $5 of software revenue, $6 to $8 of services and
$1 to $2 of enterprise infrastructure. The multiplier effect of our technology stack creates more value for IBM and our growing
ecosystem of partners. The hybrid cloud market alone represents a $1 trillion market, out of which (1) Red Hat Hybrid cloud platforms
and IBM Software address a $450 billion market opportunity, (2) IBM Consulting, a $300 billion market opportunity, and (3) IBM
Infrastructure, a $230 billion market opportunity.
To capture this hybrid cloud market opportunity, we are prioritizing our investment in offerings aligned to our stated strategy such as
Red Hat OpenShift and RHEL, IBM Cloud Paks, related IBM Consulting practices and IBM Infrastructure. We have purposefully
embedded our hybrid cloud open platform with our other offerings, to accelerate innovation and amplify impact in our clients’
environment. We have also fostered our ESG initiatives, as the world continues to move toward a more circular economy, a priority for
our stakeholder groups and a growing business opportunity for IBM. In 2021, we targeted 2030 for reaching net zero greenhouse gas
emissions, and we launched new AI-enabled solutions such as the IBM Environmental Intelligent Suite, to make our clients more
sustainable over time.
In addition to our organic investments in R&D, we have been aggressive in inorganic investments in critical hybrid cloud and
sustainability software assets, such as Instana, Turbonomic and Envizi. In Consulting, we have also been aggressive acquiring the
expertise our clients demand to support their digital innovation including 7Summits, Taos, BoxBoat Technologies and BlueTab
Solutions. We successfully completed 15 acquisitions in 2021.
IBM Software solutions amplify the growth and value of our hybrid cloud platform into the software stack with four critical technology
capabilities – (1) “Modernize” from legacy to hybrid cloud architecture, (2) Create “data-driven” business insights from distributed data
linked via a hybrid data fabric powered by an automated governance, (3) “Automate” end-to-end processes running across IT and
business environments, (4) “Secure” together multiple environments, applications and data. Our capabilities are delivered through
Cloud Paks that are pre-integrated, pre-certified, AI-powered containerized software packages and are optimized for Red Hat
OpenShift. Of the Fortune 500, 40 percent have purchased IBM Cloud Paks, and two-thirds use IBM Security, while increasingly
leveraging our expanding software subscription and as-a-service models. We deeply infuse Artificial Intelligence across our Software
portfolio, and we are advancing trustworthy AI with a multidisciplinary approach through the IBM AI Ethics board. In 2021, we added
new natural language processing enhancements to Watson Discovery. We are combining and integrating products such as Turbonomic,
Instana and Watson AIOps to offer a complete set of AI-powered automation software.
Red Hat, reported in our Software segment, is the leading hybrid cloud software platform, and the only one that is fully integrated and
open source, with built-in development, security, and operations features. More than 94 percent of the Fortune 500 use Red Hat
products and solutions. Red Hat takes advantage of a broad ecosystem of partners and of millions of developers to accelerate
innovation. Leveraging the power of Kubernetes and containers, OpenShift creates the foundation that allows our clients to manage
Management Discussion
International Business Machines Corporation and Subsidiary Companies
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siloed, multi-cloud, edge, and legacy infrastructure as a single platform. These capabilities are a clear differentiator, enabling our clients
to “write once, deploy anywhere” for their hybrid architecture. We are seeing strong momentum, with more than 3,800 clients using
our hybrid cloud platform, adding 1,000 clients in 2021. Red Hat OpenShift is recognized as a leader and clear choice for container
platform, with more than 40 percent market share in 2021. We are continually investing in Red Hat OpenShift, RHEL and Ansible to
extend our technology leadership, while combining the Red Hat platform with IBM’s incumbency, scale, and reach.
IBM Consulting, with 150,000+ professionals in over 150+ countries, helps clients design their digital transformation, build open hybrid
cloud architectures, orchestrate applications across environments, and optimize key workflows and business processes. 100 percent
of top ten companies in financial services, telecoms, public sector, automotive and healthcare are clients. IBM Consulting has more
Red Hat OpenShift certified experts than any of our competition and drove about 700 Red Hat engagements in 2021. IBM Consulting
has re-designed its services practices to foster adoption of our hybrid cloud platform and has built or migrated hybrid cloud applications
for more than 500 clients. IBM Consulting works with our hybrid cloud and AI ecosystem partners and developers to create the custom
solutions that realize digital transformation for clients worldwide, across industries. IBM Consulting also captures growth by investing
in advanced practices with AWS, Azure, and major ISVs, such as Adobe, Oracle, SAP and Salesforce.
IBM Infrastructure is the foundation of our hybrid cloud stack, and closely integrates the Red Hat solutions. Our clients are using a
combination of public and private cloud infrastructure to keep their mission-critical data and workloads secure, and we continue to be
at the heart of mission-critical enterprise workloads. For example, 90 percent of the top 50 banks run on IBM Z, our Mainframe solution.
IBM Z delivers security, privacy, and resiliency at scale in a hybrid cloud environment – including running OpenShift to extend the hybrid
cloud value proposition. Power, Storage, and IBM Cloud enhance how clients consume, manage, and operate as they take full
advantage of our hybrid cloud capabilities for critical workloads. As a result, 94 percent of the Fortune 50 use IBM Cloud.
IBM Research continues to invest in the most promising future technologies with critical impact on clients’ hybrid cloud and AI
transformations with confidential computing, trusted AI, neuro-symbolic AI, and sustainability. IBM Quantum fosters next generation
computing by (1) delivering the industry leading as-a-Service and software development platform, Qiskit, (2) enabling quantum
workflows in existing software such as Watson Studio and (3) providing consulting and technical services as clients and partners adopt
quantum computing. In 2021, we unveiled Eagle, a 127-qubit quantum processor. This is the first quantum chip that breaks the 100-
qubit barrier and represents a key milestone on our path towards building a 1,000-qubit processor in 2023. Today, more than 380,000
registered users have run over 1.2 trillion hardware quantum circuits. We are committed to accelerating and scaling quantum
computing by partnering with industries and fostering a growing ecosystem. The IBM Quantum Network has grown to more than 175
members, including universities, banks, auto companies, telcos, and a wide array of companies from other industries.
Expanding Client Engagements and Our Ecosystem
During 2021, we increased our focus, agility, and client-centric culture. We evolved the way we go to market with our two sales groups
– Technology and Consulting. We are scaling technical engagement with clients through significant expansion of experiential selling,
client engineering, customer success managers and technical sales talent to help our clients achieve their goals with hybrid cloud and
AI.
In parallel, we have accelerated the expansion of our ecosystem as an essential vehicle of our market footprint and growth. We are
proactively partnering with a broad variety of companies including hyperscalers, service providers, global system integrators,
Software/SaaS vendors and hardware vendors. These partners embed our hybrid cloud platform in their own offerings, integrate it in
their services and/or resell it as a channel. We are investing $1 billion in our ecosystem to ensure that our partners have the resources
they need to develop software and build their businesses on our platform. Additionally, we have established a strategic partnership
with Kyndryl combining IBM incumbency in applications integration with Kyndryl incumbency in managed infrastructure.
2021 was a milestone year for IBM’s Hybrid Cloud and AI strategy. We have positioned our business to capture growth opportunities
and to fulfill IBM’s purpose to be the catalyst that makes the world work better.
Business Segments and Capabilities
IBM operates in more than 175 countries around the world. Our platform-centric hybrid cloud and AI strategy is realized through our
operations and consist of four business segments: Software, Consulting, Infrastructure and Financing.
Software
Software brings together our hybrid cloud platform and our software solutions, optimized for that platform, to help clients become
more data-driven, and to automate, secure and modernize their environments. It includes all software, except operating system
software reported in the Infrastructure segment.
Software comprises two business areas – Hybrid Platform & Solutions and Transaction Processing, which have the following
capabilities:
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Management Discussion
International Business Machines Corporation and Subsidiary Companies
Hybrid Platform & Solutions: includes software, infused with AI, to help clients operate, manage, and optimize their IT resources and
business processes within hybrid, multi-cloud environments. It includes the following:
Red Hat: provides enterprise open-source solutions, for hybrid, multi-cloud environments, which includes Red Hat Enterprise Linux
(RHEL), OpenShift, our hybrid cloud platform, as well as Ansible.
Automation: optimizes processes from business workflows to IT operations with AI-powered automation. Automation includes
software for business automation, AIOps and management, integration, and application servers.
Data & AI: accelerates data-driven agendas by infusing AI throughout the enterprise, empowering intelligent decision making. The
portfolio includes capabilities that simplify self-service data consumption through a data fabric, optimize customer care operations and
make better predictions through business analytics. Data & AI capabilities facilitate how businesses collaborate with each other, and
enable intelligent management of enterprise assets and supply chains with environmental intelligence and the world’s most accurate
weather forecast data to build more resilient, sustainable operations.
Security: creates a risk-aware, secure business by gaining real-time threat insights, orchestrating actions and automating responses
across all touchpoints. Security includes software and services for threat, data and identity.
Transaction Processing: the software that supports clients’ mission-critical, on-premise workloads in industries such as banking,
airlines and retail. This includes transaction processing software such as Customer Information Control System and storage software,
as well as the analytics and integration software running on IBM operating systems such as DB2 and WebSphere running on z/OS.
Consulting
Consulting provides deep
industry expertise and market-leading capabilities
in business transformation and technology
implementation. Consulting designs and builds open, hybrid cloud architectures and optimizes key workflows and business processes
with IBM and ecosystem partner technologies. Consulting uses its IBM Garage method to convene experts to co-create business
products and solutions together with clients to accelerate their digital transformations.
Consulting comprises three business areas – Business Transformation, Technology Consulting and Application Operations, which have
the following capabilities:
Business Transformation: provides services that enable clients to apply technologies at scale to transform key workflows, processes
and domains end-to-end, including strategy, business process design and operations, data and analytics, and system integration. These
services deploy AI in business processes to exploit the value of data and include a full ecosystem of partners alongside IBM technology,
including strategic partnerships with Adobe, Oracle, SAP and Salesforce, among others.
Technology Consulting: helps clients architect and implement cloud platforms and strategies to transform the enterprise experience
and enable innovation, including application modernization for hybrid cloud with Red Hat OpenShift.
Application Operations: focuses on application and cloud platform services required to operationalize and run cloud platforms. It
facilitates clients’ efforts to manage, optimize, and orchestrate application and data workloads across environments through both
custom applications and ISV/ERP packages.
Infrastructure
Infrastructure provides trusted, agile, and secure solutions for hybrid cloud, and is the foundation of the hybrid cloud stack.
Infrastructure is optimized for infusing AI into mission-critical transactions and tightly integrated with IBM Software including Red Hat
for accelerated hybrid cloud benefits. Infrastructure also includes remanufacturing and remarketing of used equipment with a focus
on sustainable recovery services.
Infrastructure comprises two business areas – Hybrid Infrastructure and Infrastructure Support, which have the following capabilities:
Hybrid Infrastructure: provides clients with innovative infrastructure platforms to help meet the new requirements of hybrid multi-
cloud and enterprise AI workloads leveraging flexible and as-a-service consumption models. Hybrid Infrastructure includes IBM Z and
Distributed Infrastructure.
IBM Z: the premier transaction processing platform with leading security, resilience and scale. It includes IBM Z and LinuxONE, with a
range of high-performance systems designed to address computing capacity, security and performance needs of businesses. IBM Z
operating system software environments include z/OS, a security-rich, high-performance enterprise operating system, as well as Linux
and other platforms that are enabled with enterprise AI and are hybrid cloud ready.
Management Discussion
International Business Machines Corporation and Subsidiary Companies
15
Distributed Infrastructure: the portfolio is uniquely positioned for hybrid cloud, meeting client demands for scalability, security and
capacity. Distributed Infrastructure includes Power, Storage, and IBM Cloud Infrastructure-as-a-Service (IaaS). Power consists of high-
performance servers, designed and engineered for big data and AI-enabled workloads and are optimized for hybrid cloud and Linux.
The Storage portfolio consists of a broad range of storage hardware and software-defined offerings, including Z-attach and distributed
flash, tape solutions, software-defined storage controllers, data protection software and network-attach storage. Both Power and
Storage offerings are available via flexible consumption models. IBM Cloud IaaS is built on enterprise-grade hardware with an open
architecture and is specifically designed for regulated industries with leading security and compliance capabilities. IBM Cloud IaaS
offers flexible computing options across x86, Power, Storage and IBM Z as a service to meet client workload needs.
Infrastructure Support: works across hybrid cloud environments providing a uniquely integrated services experience for clients.
Infrastructure Support delivers comprehensive, proactive and AI-enabled services to maintain and improve the availability and value
of clients’ IT infrastructure (hardware and software) both on-premises and in the cloud. These offerings include maintenance for IBM
products and other technology platforms, as well as open source and cross-vendor software and solution support.
Financing
Financing facilitates IBM clients’ acquisition of information technology systems, software and services through its financing solutions.
The financing arrangements are predominantly for products or services that are critical to the end users’ business operations and
support IBM’s hybrid cloud platform and AI strategy. Financing conducts a comprehensive credit evaluation of its clients prior to
extending financing. As a captive financier, Financing has the benefit of both deep knowledge of its client base and a clear insight into
the products and services financed. These factors allow the business to effectively manage two of the major risks associated with
financing, credit and residual value, while generating strong returns on equity.
Financing comprises the following two business areas – Client Financing and Commercial Financing:
Client Financing: lease, installment payment plan and loan financing to end-user clients for terms up to seven years, and internal loan
financing in support of IBM IaaS service arrangements. Assets financed are primarily new and used IT hardware, software and services
where we have expertise.
Commercial Financing: short-term working capital financing to distributors and resellers primarily of IBM products. In 2019, we began
the wind down of the Original Equipment Manufacturer (OEM) IT portion of our commercial financing operations which completed in
early 2021. In the fourth-quarter 2020, Financing expanded its financial flexibility by entering into an agreement with a third-party
investor to sell up to $3 billion of its IBM commercial financing receivables, at any one time, on a revolving basis over the agreement’s
three-year term.
Human Capital
Employees and Related Workforce
(In thousands)
For the year ended December 31:
IBM/wholly owned subsidiaries
Less-than-wholly owned subsidiaries
Complementary*
2021
282.1
9.8
15.7
* The complementary workforce is an approximation of equivalent full-time employees hired under temporary, part-time and limited-term employment
arrangements to meet specific business needs in a flexible and cost-effective manner.
As a globally integrated enterprise, IBM operates in more than 175 countries and is continuing to shift our business to the higher value
segments of enterprise IT. Our global workforce is highly skilled, reflective of the work we do for our clients’ digital transformations
and in support of their mission-critical operations. Our global workforce includes developers, consultants, client delivery and services
specialists, research scientists and others. Our employees are among the world’s leading experts in cloud, AI, quantum computing,
cybersecurity and industry-specific solutions.
In November 2021, we completed the separation of our managed infrastructure services business to Kyndryl, comprising
approximately 90,000 employees. Over our 111-year history, we have consistently made bold moves to transform and develop our
talent. Today, IBM employees are clearly focused on our hybrid cloud and AI strategy for growth.
Talent and Culture
IBM attracts, develops, engages and retains talent in a dynamic and competitive environment. IBM offers a compelling employee value
proposition: we develop and deliver innovative technologies including hybrid cloud, AI, and quantum, for clients whose businesses the
world relies on. IBM is continuously transforming and developing its talent, both through learning and hiring. Voluntary attrition was
higher in 2021 than in 2020 consistent with the overall labor market. On a longer horizon, the average voluntary attrition rate of the
pandemic years (2020 and 2021) was still lower than the previous two years (2018 and 2019). In 2021, we added skills in consulting
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Management Discussion
International Business Machines Corporation and Subsidiary Companies
and key technical areas. We are scaling our investments in garages, client engineering centers and customer success managers.
Employees are encouraged and enabled to learn and grow their careers, with employees using our learning platform to complete more
than 70 hours of learning on average in 2021. Our digital learning and career platform uses Watson AI to generate personalized
recommendations and includes peer-to-peer collaboration and internal social sharing. Over 170,000 employees globally participated
in our annual engagement survey, which measures factors such as workplace experience, inclusion, pride and propensity to
recommend IBM as an employer. Our industry-leading talent practices enabled more than eight out of ten employees to be highly
engaged. Every manager and leader in IBM has access to their team and organization engagement levels along with actionable data-
driven insights.
Diversity and Inclusion
IBM has a long, proud history as a pioneer in diversity and inclusion. A diverse and inclusive workplace leads to greater innovation,
agility, performance, and engagement, enabling both business growth and societal impact. We ensure employees from diverse
backgrounds are engaged, can be their authentic selves, build skills and grow their careers. In April 2021, with the full support of our
Board of Directors, we disclosed an overview of our diversity, equity and inclusion efforts and programs, including diversity
representation data and remain committed to continued transparency in 2022. We are proud of our inclusive culture, with nine out of
ten employees responding that they can be their authentic selves at work. Our focus on creating a diverse and inclusive workplace led
to increased levels of inclusion for women, Black and Hispanic employees. Women make up more than one-third of our workforce, and
we increased representation of women, Black and Hispanic employees in 2021 compared to the prior year. In addition, executive
representation of women globally, and Hispanic and Black executives in the U.S. improved by 1.0 point, 0.4 points and 1.5 points,
respectively, in 2021. Further, a diversity modifier was added to the executive compensation program in 2021 to reinforce our
continued accountability for progress. Globally, IBM executives are measured on the improvement of diversity and inclusion for women.
In the U.S., executives are also measured on improvement of diversity and inclusion for U.S. underrepresented minorities. While we
have taken significant actions and made progress, we have ongoing work to do.
IBM believes in pay equity: we have had an equal pay policy since 1935 and a long-standing practice of maintaining pay equity. To this
end, we conduct statistical pay equity analysis that includes all countries with IBM employees. We also empower employees to
understand their pay by providing comprehensive education and transparent access to pay statements including a comparison to
market pay ranges.
Health, Safety and Well-Being
We have a long-standing commitment to the health, safety and well-being of our employees. This remained a focus in 2021 as we
continued to face the COVID-19 pandemic. We have a robust case management system to manage COVID-19 exposures and a
comprehensive playbook on workplace health and safety measures that allow our offices to reopen when local clinical conditions allow.
These measures include limiting travel and in-person meetings and events, required self-screening before accessing workplaces, and
imposing strict social distancing and mask wearing. In countries where vaccine access is sufficient or where legally mandated, only
employees who are fully vaccinated against COVID-19 can access IBM workplaces.
Additionally, from the outset of the COVID-19 pandemic, IBM has focused on mental health and supporting our employees for the long
run with programs shaped by frequent survey polls and employee input sessions. Such programs include: four weeks additional paid
time off for working parents and caregivers facing disruption, training for employees on resilience and for managers on how to identify
and address mental health issues and financial counseling offerings tailored to pandemic-related matters. Employees are supported
with 24/7 access to IBM’s world-class Health and Safety team, education, timely updates and forums to ask questions and raise
concerns.
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YEAR 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
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 table below presents each reportable segment’s revenue and gross margin results, followed by an analysis of the
2021 versus 2020 reportable segment results. Prior-year results have been recast to conform with the changes noted above.
($ in millions)
For the year ended December 31:
Revenue
Software
Gross margin
Consulting
Gross margin
Infrastructure
Gross margin
Financing
Gross margin
Other
Gross margin
Total revenue
Total gross profit
Total gross margin
Non-operating adjustments
Amortization of acquired intangible assets
Operating (non-GAAP) gross profit
Operating (non-GAAP) gross margin
* Recast to reflect segment changes.
Software
($ in millions)
For the year ended December 31:
Software revenue
Hybrid Platform & Solutions
Red Hat
Automation
Data & AI
Security
Transaction Processing
* Recast to reflect segment changes.
2021
2020 *
$ 24,141
$ 22,927
78.8 %
78.3 %
17,844
16,257
28.0 %
29.3 %
14,188
14,533
55.3 %
774
31.7 %
404
(152.4)%
57.5 %
975
41.6 %
488
(126.5)%
$ 57,350
$ 31,486
$ 55,179
$ 30,865
54.9 %
55.9 %
719
$ 32,205
726
$ 31,591
56.2 %
57.3 %
Yr.-to-Yr.
Percent/
Margin
Change
Yr.-to-Yr.
Percent Change
Adjusted for
Currency
4.1 %
8.3 %
(3.4)%
(21.9)%
(18.8)%
2.7 %
5.3 %
0.4 pts.
9.8 %
(1.3)pts.
(2.4)%
(2.2)pts.
(20.6)%
(9.9)pts.
(17.1)%
(25.9)pts.
3.9 %
2.0 %
(1.0)pts.
(1.0)%
1.9 %
(1.1)pts.
2021
2020 *
$24,141
$17,751
$ 22,927
$ 16,321
6,390
6,606
Yr.-to-Yr.
Percent
Change
Yr.-to-Yr.
Percent Change
Adjusted for
Currency
5.3 %
8.8 %
30.6
6.1
0.0
6.8
(3.3)
4.1 %
7.5 %
29.6
4.8
(1.2)
5.0
(4.2)
Software revenue of $24,141 million increased 5.3 percent as reported (4 percent adjusted for currency) in 2021 compared to the
prior year. In the fourth quarter of 2021, we had incremental sales from our new commercial relationship with Kyndryl, representing
approximately 2 points of full-year revenue growth. We had strong double-digit growth in Software hybrid cloud revenue as reported
and adjusted for currency. There was strong growth in Hybrid Platform & Solutions, as reported and at constant currency, driven
primarily by Red Hat, Security and Automation, as our strategy around hybrid cloud and AI solutions continued to resonate with our
clients. Transaction Processing revenue decreased year to year as reported and adjusted for currency. Although a significant portion of
the revenue in this area is annuity based, the timing of larger transactions is tied to client buying cycles and their preference for more
consumption-like models which impacted sales of perpetual licenses.
Hybrid Platform & Solutions revenue of $17,751 million increased 8.8 percent as reported (8 percent adjusted for currency) in 2021
compared to the prior year. The incremental sales from Kyndryl in the fourth quarter of 2021 in Hybrid Platform & Solutions were not
18
Management Discussion
International Business Machines Corporation and Subsidiary Companies
material to the full-year revenue growth. Red Hat revenue increased 30.6 percent as reported (30 percent adjusted for currency), with
strong growth across infrastructure software and application development and emerging technologies, as RHEL and OpenShift address
enterprises’ critical hybrid cloud requirements. We now have 3,800 clients on our hybrid cloud platform as of December 31, 2021,
which was an increase of more than 1,000 clients compared to the prior year. Automation revenue increased 6.1 percent as reported
(5 percent adjusted for currency), reflecting solid performance in AIOps and Management as we help our clients address resource
management and observability. We are building our capabilities both organically and inorganically, and clients are realizing rapid time
to value from our recent acquisitions including Instana and Turbonomic. Security revenue increased 6.8 percent as reported (5 percent
adjusted for currency) with year-to-year growth across security software and services. Security innovation is an integral part of our
strategy, and in the fourth quarter of 2021 we launched a new data security solution, Guardium Insights, and completed the acquisition
of ReaQta. Data & AI revenue was flat year to year and declined 1 percent adjusted for currency. Within Data & AI, we had solid year-
to-year growth in Data Fabric as well as our Business Analytics and Weather offerings.
Transaction Processing revenue of $6,390 million decreased 3.3 percent as reported (4 percent adjusted for currency) in 2021
compared to the prior year. Incremental sales from Kyndryl in the fourth quarter of 2021 contributed approximately 5 points of full-
year revenue growth. In 2021, clients continued their preference for operating expenses over capital expenditures, which continued
to put pressure on perpetual licenses, in favor of more consumption-like models. Our subscription and support renewal rate was
stronger in 2021 compared to the prior year, reflecting our clients’ commitment to our infrastructure platform and our high-value
software offerings.
Within Software, hybrid cloud revenue of $8.7 billion grew 26 percent as reported and 25 percent adjusted for currency year to year,
driven by Red Hat as well as our software that has been optimized for our hybrid cloud platform which helps our clients apply AI,
automation and security across their environments to transform and improve their business workflows.
($ in millions)
For the year ended December 31:
Software
Gross profit
Gross profit margin
Pre-tax income
Pre-tax margin
* Recast to reflect segment changes.
2021
2020 *
Yr.-to-Yr.
Percent/
Margin
Change
$ 19,014
$17,958
78.8 %
78.3 %
$ 4,722
$ 3,341
19.6 %
14.6 %
5.9 %
0.4 pts.
41.3 %
5.0 pts.
The Software gross profit margin increased 0.4 points to 78.8 percent in 2021 compared to the prior year. Pre-tax income of $4,722
million increased 41.3 percent compared to the prior year with a pre-tax margin expansion of 5.0 points to 19.6 percent. The increase
in pre-tax income and margin reflects the lower workforce rebalancing charges year to year, which resulted in a 3.3 points
improvement in the pre-tax margin compared to 2020.
Consulting
($ in millions)
For the year ended December 31:
Consulting revenue
Business Transformation
Technology Consulting
Application Operations
* Recast to reflect segment changes.
2021
2020 *
$17,844
$ 8,284
3,466
6,095
$16,257
$ 7,193
3,133
5,931
Yr.-to-Yr.
Percent
Change
9.8 %
15.2 %
10.6
2.8
Yr.-to-Yr.
Percent Change
Adjusted for
Currency
8.3 %
13.4 %
10.1
1.2
Consulting revenue of $17,844 million increased 9.8 percent as reported (8 percent adjusted for currency) in 2021 compared to the
prior year, with growth across all three business areas. Clients are accelerating their business transformations and are turning to IBM
Consulting as their trusted partner to help drive innovation, increase agility and productivity, and capture new growth opportunities,
powered by hybrid cloud and AI. We had strong double-digit growth in Consulting hybrid cloud revenue as reported and adjusted for
currency. Our total Consulting signings in 2021 grew at a mid-single-digit rate compared to the prior year and our book-to-bill for 2021
was 1.1. Consulting continued to drive hybrid cloud platform adoption by our clients, with approximately 700 Red Hat engagements in
2021. Our strategic acquisitions and expansion of strategic partnerships also contributed to our year-to-year revenue growth in 2021.
Business Transformation revenue of $8,284 million increased 15.2 percent as reported (13 percent adjusted for currency) compared
to the prior year. We had strong demand for our Business Transformation solutions, with good performance across all service lines
including growth in offerings such as data platform services, Salesforce consulting services, and SAP consulting services and solutions.
Management Discussion
International Business Machines Corporation and Subsidiary Companies
19
Technology Consulting revenue of $3,466 million increased 10.6 percent as reported (10 percent adjusted for currency) driven
primarily by growth in high-value offerings to develop cloud native applications and modernize existing applications for the cloud.
Application Operations revenue of $6,095 million increased 2.8 percent as reported (1 percent adjusted for currency), driven primarily
by offerings which provide end-to-end management of custom applications in cloud environments, reflecting our clients’ trust in IBM
Consulting to operate and manage their critical applications whether running in the cloud or on-premises environments.
Within Consulting, hybrid cloud revenue of $7.9 billion grew 34 percent as reported and 32 percent adjusted for currency, driven by
Red Hat-related signings focused on modernizing clients’ applications and revenue from consulting engagements in the areas of our
strategic partnerships, such as Salesforce, SAP, AWS and Azure.
($ in millions)
For the year ended December 31:
Consulting
Gross profit
Gross profit margin
Pre-tax income
Pre-tax margin
* Recast to reflect segment changes.
2021
2020 *
Yr.-to-Yr.
Percent/
Margin
Change
$ 4,994
28.0 %
$ 1,449
8.1 %
$ 4,760
29.3 %
$ 1,034
6.4 %
4.9 %
(1.3)pts.
40.1 %
1.8 pts.
The Consulting gross profit margin decreased 1.3 points to 28.0 percent compared to the prior year. Pre-tax income of $1,449 million
increased 40.1 percent compared to the prior year and the pre-tax margin increased 1.8 points to 8.1 percent. The decline in gross
profit margin reflects our investment in new offerings, integrating and scaling our acquisitions, as well as increased labor costs due to
the competitive labor market which were not yet reflected in our pricing. The year-to-year improvement in pre-tax income reflects
increased gross profit dollars driven by growth in revenue. The increase in pre-tax margin compared to the prior year was driven
primarily by the lower workforce rebalancing charges year to year, which resulted in a 2.9 points improvement in the pre-tax margin,
which was partially offset by the decline in gross profit margin.
Consulting Signings and Book-to-Bill
($ in millions)
For the year ended December 31:
Total Consulting signings
2021
$19,163
2020 **
$18,018
* Recast to conform to 2021 presentation, reflecting the separation of Kyndryl on November 3, 2021.
Yr.-to-Yr.
Percent
Change
Yr.-to-Yr.
Percent Change
Adjusted for
Currency
6.4 %
5.8 %
Signings are management’s initial estimate of the value of a client’s commitment under a services contract within IBM Consulting.
There are no third-party standards or requirements governing the calculation of signings. The calculation used by management involves
estimates and judgments to gauge the extent of a client’s commitment, including the type and duration of the agreement, and the
presence of termination charges or wind-down costs.
Contract extensions and increases in scope are treated as signings only to the extent of the incremental new value. Total signings can
vary over time due to a variety of factors including, but not limited to, the timing of signing a small number of larger contracts. Signings
associated with an acquisition will be recognized on a prospective basis.
Management believes the estimated values of signings disclosed provide an indication of our forward-looking revenue. Signings are
used to monitor the performance of the business and viewed as useful information for management and shareholders. The conversion
of signings into revenue may vary based on the types of services and solutions, contract duration, customer decisions, and other factors,
which may include, but are not limited to, the macroeconomic environment.
Book-to-bill represents the ratio of IBM Consulting signings to its revenue over the same period. The metric is a useful indicator of the
demand of our business over time. This definition should be read in conjunction with the signings definition noted above.
20
Management Discussion
International Business Machines Corporation and Subsidiary Companies
Infrastructure
($ in millions)
For the year ended December 31:
Infrastructure revenue
Hybrid Infrastructure
IBM Z
Distributed Infrastructure
Infrastructure Support
* Recast to reflect segment changes.
2021
$14,188
$ 8,167
2020 *
$14,533
$ 8,415
6,021
6,118
Yr.-to-Yr.
Percent
Change
Yr.-to-Yr.
Percent Change
Adjusted for
Currency
(2.4) %
(2.9) %
(4.9)
(1.8)
(1.6)
(3.4)%
(3.7)%
(5.4)
(2.6)
(3.0)
Infrastructure revenue of $14,188 million decreased 2.4 percent year to year as reported (3 percent adjusted for currency). In the
fourth quarter of 2021, we had incremental sales from Kyndryl, representing approximately 1 point of growth in full-year revenue. The
overall decline in revenue reflects our product cycle dynamics. Although impacted by product cycles, our portfolio of products
continues to provide critical and lasting value to our clients in support of their hybrid cloud and digital transformation journeys, and we
continue to innovate and refresh our product portfolio to deliver enhanced technologies to our clients.
Hybrid Infrastructure revenue of $8,167 million declined 2.9 percent as reported (4 percent adjusted for currency). Revenue in 2021
included incremental sales from Kyndryl in fourth quarter, representing approximately 1 point of growth in full-year revenue. The
overall decline in revenue reflects product cycle dynamics in IBM Z and our Distributed Infrastructure platforms. IBM Z revenue
decreased 4.9 percent as reported (5 percent adjusted for currency) as we concluded the tenth quarter of z15 availability at the end of
2021. The z15 program continued to outpace the success of the prior program and we shipped more MIPS in the z15 program than any
program in our history. Clients continued to leverage IBM Z as an essential part of their hybrid cloud infrastructure and its combination
of security, scalability, reliability, cloud native development, and newer flexible consumption offerings demonstrate the value of the
IBM Z platform within our hybrid cloud and AI strategy. Distributed Infrastructure revenue declined 1.8 percent as reported (3 percent
adjusted for currency), driven primarily by declines in Power and Cloud Platform, partially offset by growth in Storage solutions driven
by demand from hyperscalers for our tape products. In the third-quarter 2021, our next generation Power 10 became available within
the high-end system which has unique hardware innovations, including a processor specifically optimized for data intensive workloads
such as SAP S/4HANA.
Infrastructure Support revenue of $6,021 million declined 1.6 percent as reported (3 percent adjusted for currency) year to year. The
fourth-quarter incremental sales from Kyndryl represented approximately 2 points of growth in full-year revenue. The overall decline
in revenue in 2021 reflects the hardware product cycles.
Within Infrastructure, hybrid cloud revenue of $3.6 billion declined 10 percent as reported and 11 percent adjusted for currency, driven
primarily by product cycle dynamics.
($ in millions)
For the year ended December 31:
Infrastructure
Gross profit
Gross profit margin
Pre-tax income
Pre-tax margin
* Recast to reflect segment changes.
2021
2020 *
Yr.-to-Yr.
Percent/
Margin
Change
$ 7,848
55.3 %
$ 2,025
14.3 %
$ 8,359
57.5 %
$ 1,654
11.4 %
(6.1)%
(2.2)pts.
22.4 %
2.9 pts.
The Infrastructure gross profit margin decreased 2.2 points to 55.3 percent in 2021 compared to the prior year, driven primarily by
margin declines in Distributed Infrastructure reflecting product cycle dynamics, partially offset by margin improvement in IBM Z. Pre-
tax income of $2,025 million increased 22.4 percent and pre-tax margin increased 2.9 points year to year to 14.3 percent, driven
primarily by the lower workforce rebalancing charges year to year, which resulted in a 3.6 points improvement in pre-tax margin,
partially offset by the decline in gross profit.
Financing
See pages 55 through 57 for a discussion of Financing’s segment results.
Management Discussion
International Business Machines Corporation and Subsidiary Companies
21
Geographic Revenue
In addition to the revenue presentation by reportable segment, we also measure revenue performance on a geographic basis.
($ in millions)
For the year ended December 31:
Total revenue
Americas
Europe/Middle East/Africa
Asia Pacific
2021
$ 57,350
$ 28,299
17,447
11,604
2020
$ 55,179
$ 27,119
16,767
11,293
Yr.-to-Yr.
Percent
Change
3.9 %
4.4 %
4.1
2.8
Yr.-to-Yr.
Percent Change
Adjusted for
Currency
2.7 %
4.0 %
0.8
2.6
Total revenue of $57,350 million in 2021 increased 3.9 percent year to year as reported and 3 percent adjusted for currency. Revenue
in 2021 includes incremental sales from our new commercial relationship with Kyndryl which began in the fourth quarter of 2021,
representing approximately 1 point of revenue growth for the year.
Americas revenue increased 4.4 percent as reported and 4 percent adjusted for currency. In 2021, revenue includes incremental sales
from Kyndryl, representing approximately 1 point of revenue growth for the year. Within North America, the U.S. increased 3.0 percent
and Canada increased 23.6 percent as reported and 16 percent adjusted for currency. Latin America increased 0.9 percent as reported
and 4 percent adjusted for currency. Within Latin America, Brazil revenue was flat as reported, but grew 3 percent adjusted for currency.
EMEA revenue increased 4.1 percent as reported and 1 percent adjusted for currency. Revenue in 2021 includes incremental sales
from Kyndryl, representing approximately 1 point of revenue growth for the year. The UK, France and Germany increased 7.4 percent,
6.5 percent and 5.6 percent, respectively, as reported, and increased 1 percent, 4 percent and 4 percent, respectively, adjusted for
currency. Italy increased 0.6 percent as reported, but decreased 2 percent adjusted for currency.
Asia Pacific revenue increased 2.8 percent as reported and 3 percent adjusted for currency. In 2021, revenue includes incremental
sales from Kyndryl, representing approximately 2 points of revenue growth for the year. Japan revenue decreased 0.6 percent as
reported, but grew 3 percent adjusted for currency. India increased 6.8 percent as reported and 7 percent adjusted for currency.
Australia increased 7.7 percent as reported and was flat adjusted for currency. China increased 2.0 percent as reported, but declined
2 percent adjusted for currency.
Total Expense and Other (Income)
($ in millions)
For the year ended December 31:
Total expense and other (income)
Non-operating adjustments
Amortization of acquired intangible assets
Acquisition-related charges
Non-operating retirement-related (costs)/income
Kyndryl-related impacts
Operating (non-GAAP) expense and other (income)
Total expense-to-revenue ratio
Operating (non-GAAP) expense-to-revenue ratio
2021
$ 26,649
2020
$ 28,293 *
(1,119)
(43)
(1,282)
118
$ 24,324
46.5 %
42.4 %
(1,106)
(13)
(1,073)
—
$ 26,101 *
51.3 %
47.3 %
Yr.-to-Yr.
Percent/
Margin
Change
(5.8)%
1.1
226.6
19.5
NM
(6.8)%
(4.8)pts.
(4.9)pts.
* Includes a $1.5 billion pre-tax charge for structural actions in the fourth quarter.
NM–Not meaningful
Our expense dynamics reflect a higher level of investment in innovation, skills and our ecosystem, both organically and through
acquisitions, as we execute our hybrid cloud and AI strategy. 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, and we are expanding our ecosystem.
Total expense and other (income) decreased 5.8 percent in 2021 versus the prior year primarily driven by a $1.9 billion decrease
in charges for workforce rebalancing, including the charges for structural actions in the fourth quarter of 2020, and a benefit from
expected credit loss expense in the current year compared to a provision in the prior year, partially offset by higher non-operating
retirement-related costs and the effects of currency. Total operating (non-GAAP) expense and other (income) decreased 6.8
percent year to year, driven primarily by the factors above excluding the higher non-operating retirement-related costs.
22
Management Discussion
International Business Machines Corporation and Subsidiary Companies
For additional information regarding total expense and other (income) for both expense presentations, see the following analyses
by category.
Selling, General and Administrative Expense
($ in millions)
For the year ended December 31:
Selling, general and administrative expense
Selling, general and administrative–other
Advertising and promotional expense
Workforce rebalancing charges
Amortization of acquired intangible assets
Stock-based compensation
Provision for/(benefit from) expected credit loss expense
Total selling, general and administrative expense
Non-operating adjustments
Amortization of acquired intangible assets
Acquisition-related charges
Kyndryl-related impacts
Operating (non-GAAP) selling, general and administrative expense
* Includes a $1.5 billion pre-tax charge for structural actions in the fourth quarter.
NM–Not meaningful
2021
2020
$15,550
1,413
181
1,116
555
(71)
$18,745
(1,116)
(43)
(8)
$17,577
$15,281
1,509
2,035 *
1,104
550
83
$20,561 *
(1,104)
(13)
—
$19,445 *
Yr.-to-Yr.
Percent
Change
1.8 %
(6.3)
(91.1)
1.1
1.0
NM
(8.8)%
1.1
226.6
NM
(9.6)%
Total selling, general and administrative (SG&A) expense decreased 8.8 percent in 2021 versus 2020, driven primarily by the
following factors:
• Lower workforce rebalancing charges in the current year (9 points); and
• A benefit from expected credit loss expense compared to a provision in the prior year (1 point); partially offset by
• The effects of currency (1 point).
Operating (non-GAAP) SG&A expense decreased 9.6 percent year to year primarily driven by the same factors.
Provisions for expected credit loss expense decreased $154 million in 2021 compared to 2020, primarily driven by decreases in both
specific and general reserves in the current year compared to increases in the prior year. In the prior year, the global pandemic resulted
in some deterioration in customer credit quality and/or bankruptcies which had an impact to provisions in the first half of 2020. We
saw continued improvement in credit quality and some emergence from bankruptcies in the current year as economies have begun to
reopen in many parts of the world. The receivables provision coverage was 2.1 percent at December 31, 2021, a decrease of 10 basis
points from December 31, 2020.
Research, Development and Engineering Expense
($ in millions)
For the year ended December 31:
Total research, development and engineering
2021
$ 6,488
2020
$ 6,262
Yr.-to-Yr.
Percent
Change
3.6 %
Research, development and engineering (RD&E) expense increased 3.6 percent in 2021 versus 2020, reflecting our continuing
investment in innovation as we increase spending in areas including quantum, hybrid cloud and AI. The year-to-year increase was
primarily driven by higher spending (2 points) and the effects of currency (1 point).
Intellectual Property and Custom Development Income
($ in millions)
For the year ended December 31:
Licensing of intellectual property including royalty-based fees
Custom development income
Sales/other transfers of intellectual property
Total
2021
$ 306
272
35
$ 612
2020
$ 310
270
41
$ 620
Yr.-to-Yr.
Percent
Change
(1.4)%
0.6
(14.8)
(1.4)%
Total Intellectual Property and Custom Development Income decreased 1.4 percent in 2021 compared to 2020. 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.
Management Discussion
International Business Machines Corporation and Subsidiary Companies
23
Other (Income) and Expense
($ in millions)
For the year ended December 31:
Other (income) and expense
Foreign currency transaction losses/(gains)
(Gains)/losses on derivative instruments
Interest income
Net (gains)/losses from securities and investment assets
Retirement-related costs/(income)
Other
Total other (income) and expense
Non-operating adjustments
Amortization of acquired intangible assets
Non-operating retirement-related costs/(income)
Kyndryl-related impacts
Operating (non-GAAP) other (income) and expense
NM–Not meaningful
2021
2020
$ (204)
205
(52)
(133)
1,282
(225)
$ 873
(2)
(1,282)
126
$ (285)
$ 114
(101)
(105)
(22)
1,073
(156)
$ 802
(2)
(1,073)
—
$ (273)
Yr.-to-Yr.
Percent
Change
NM
NM
(50.2)%
499.2
19.5
43.8
8.8 %
—
19.5
NM
4.6 %
Total other (income) and expense was $873 million of expense in 2021 compared to $802 million in 2020. The year-to-year change
was primarily driven by:
• Higher non-operating retirement-related costs ($209 million). Refer to “Retirement-Related Plans” for additional information; and
• Lower interest income ($53 million) driven by lower interest rates and a lower average cash balance in the current year; partially
offset by
• An unrealized gain on the shares of Kyndryl stock retained by IBM ($126 million).
Operating (non-GAAP) other (income) and expense was $285 million of income in 2021 and increased $13 million compared to the
prior-year period and excludes the impacts of non-operating retirement-related costs, the amortization of acquired intangible assets
and the unrealized gain on Kyndryl stock described above.
Interest Expense
($ in millions)
For the year ended December 31:
Total interest expense
2021
$1,155
2020
$1,288
Yr.-to-Yr.
Percent
Change
(10.3)%
Interest expense decreased $133 million compared to 2020. Interest expense is presented in cost of financing in the Consolidated
Income Statement only if the related external borrowings are to support the Financing external business. Overall interest expense
(excluding capitalized interest) in 2021 was $1,547 million, a decrease of $191 million year to year primarily driven by a lower average
debt balance in the current year.
Stock-Based Compensation
Pre-tax stock-based compensation cost of $919 million increased $45 million compared to 2020. This was primarily due to
increases related to the conversion of options previously issued by acquired entities ($30 million) and restricted stock units ($25
million), partially offset by a decrease from performance share units ($10 million). Stock-based compensation cost, and the year-
to-year change, was reflected in the following categories: Cost: $145 million, up $19 million; SG&A expense: $555 million, up $5
million; and RD&E expense: $218 million, up $21 million.
24
Management Discussion
International Business Machines Corporation and Subsidiary Companies
Retirement-Related Plans
The following table provides the total pre-tax cost for all retirement-related plans. Total operating costs/(income) are included in the
Consolidated Income Statement within the caption (e.g., Cost, SG&A, RD&E) relating to the job function of the plan participants.
($ in millions)
For the year ended December 31:
Retirement-related plans–cost
Service cost
Multi-employer plans
Cost of defined contribution plans
Total operating costs/(income)
Interest cost
Expected return on plan assets
Recognized actuarial losses
Amortization of prior service costs/(credits)
Curtailments/settlements
Other costs
Total non-operating costs/(income)
Total retirement-related plans–cost
2021
2020
$ 312
17
992
$ 1,320
$ 1,626
(2,920)
2,454
9
94
18
$ 1,282
$ 2,601
$ 341
23
1,015
$ 1,379
$ 2,181
(3,402)
2,215
12
49
18
$ 1,073
$ 2,451
Yr.-to-Yr.
Percent
Change
(8.6)%
(26.5)
(2.3)
(4.2)%
(25.4)%
(14.1)
10.8
(25.0)
91.7
3.5
19.4 %
6.1 %
Total pre-tax retirement-related plan cost increased by $150 million compared to 2020, primarily driven by lower expected returns on
plan assets ($481 million) and an increase in recognized actuarial losses ($239 million), partially offset by lower interest costs ($555
million).
As discussed in the “Operating (non-GAAP) Earnings” section, we characterize certain retirement-related costs as operating and others
as non-operating. Utilizing this characterization, operating retirement-related costs in 2021 were $1,320 million, a decrease of $59
million compared to 2020. Non-operating costs of $1,282 million in 2021 increased $209 million year to year, driven primarily by the
same factors as above.
Income Taxes
The continuing operations effective tax rate for 2021 was 2.6 percent compared to (52.9) percent in 2020. The current-year effective
tax rate was primarily driven by tax benefits related to audit settlements in multiple jurisdictions. The prior-year effective tax rate was
primarily driven by a net tax benefit of $0.9 billion related to an intra-entity sale of certain of the company’s intellectual property in the
first quarter of 2020, and a benefit of $0.2 billion related to a foreign tax law change. The operating (non-GAAP) effective tax rate for
2021 was 9.0 percent compared to (11.5) percent in 2020. The prior year operating (non-GAAP) benefit from income taxes was
primarily driven by the net tax benefit from the intra-entity IP sale. For more information, see note H, “Taxes.”
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.
For the year ended December 31:
Earnings per share of common stock from continuing operations
Assuming dilution
Basic
Diluted operating (non-GAAP)
Weighted-average shares outstanding (in millions)
Assuming dilution
Basic
2021
2020
$5.21
$5.26
$7.93
904.6
896.0
$ 4.38 *
$ 4.42 *
$ 6.82 *
896.6
890.3
Yr.-to-Yr.
Percent
Change
18.9 %
19.0 %
16.3 %
0.9 %
0.6 %
* The $1.5 billion pre-tax charge for structural actions in the fourth quarter resulted in an impact of ($1.33) to diluted earnings per share from continuing
operations and diluted operating (non-GAAP) earnings per share. The impact to basic earnings per share was ($1.34).
Actual shares outstanding at December 31, 2021 and 2020 were 898.1 million and 892.7 million, respectively. The year-to-year
increase was primarily the result of the common stock issued under employee plans. The average number of common shares
outstanding assuming dilution was 8.0 million shares higher in 2021 versus 2020.
Management Discussion
International Business Machines Corporation and Subsidiary Companies
25
Financial Position
Dynamics
Our balance sheet is presented on a consolidated basis, with the December 31, 2020 balance sheet reclassified to provide line items
on a continuing operations basis and separately provide current and noncurrent assets and liabilities for Kyndryl discontinued
operations. Our post-separation balance sheet at December 31, 2021 continues to provide us with flexibility to support our business
needs. We continue to manage the investment portfolio to meet our liquidity objectives.
Cash, restricted cash and marketable securities at December 31, 2021 were $7,556 million, a decrease of $6,695 million compared to
prior year end, as we continued to actively de-lever our debt, invested $3,293 million in acquisitions and provided a growing dividend
to our shareholders. Financing receivables declined $4,540 million to $13,439 million since the end of 2020 primarily due to the
strategic actions taken to re-focus our Financing portfolio. Assets from discontinued operations declined $15,764 million due to the
separation of Kyndryl, which occurred on November 3, 2021.
Total debt of $51,703 million decreased $9,629 million from prior year end. We have reduced total debt $21,307 million since the end
of the second quarter of 2019 (immediately preceding the Red Hat acquisition). We have made good progress in deleveraging while
being acquisitive and without sacrificing investments in our business or our solid dividend policy. Liabilities from discontinued
operations declined $7,136 million due to the separation of Kyndryl.
Our cash flow is presented on a consolidated basis and includes 10 months of Kyndryl operations for 2021 versus a full year of Kyndryl
operations for 2020. During 2021, we generated $12,796 million in cash from operating activities, a decrease of $5,401 million
compared to 2020. Our cash from operating activities for 2021 reflects cash paid in 2021 for separation charges and structural actions
initiated in the fourth-quarter 2020. We returned $5,869 million to shareholders through dividends in 2021. Our cash generation
permits us to invest and deploy capital to areas with the most attractive long-term opportunities.
Consistent with accounting standards, the company remeasured the funded status of our retirement and postretirement plans at
December 31. At December 31, 2021, the overall net underfunded position was $5,450 million, a decrease of $5,033 million from
December 31, 2020, driven by higher discount rates partially offset by modest asset returns. At year end, our qualified defined benefit
plans were well-funded and the required contributions related to these plans and multi-employer plans are expected to be
approximately $200 million in 2022. In 2021, the return on the U.S. Personal Pension Plan assets was 2.0 percent and the plan was 112
percent funded at December 31, 2021. Overall, global asset returns were 3.0 percent and the qualified defined benefit plans worldwide
were 107 percent funded at December 31, 2021.
IBM Working Capital
($ in millions)
At December 31:
Current assets
Current liabilities
Working capital
Current ratio
2021
$ 29,539
33,619
$ (4,080)
0.88:1
2020*
$ 36,547
36,049
498
$
1.01:1
* Amounts presented exclude the current assets and current liabilities of discontinued operations of $2,618 million and $3,820 million, respectively.
Working capital decreased $4,577 million from the year-end 2020 position. The key changes are described below:
Current assets decreased $7,008 million ($6,060 million adjusted for currency) due to:
• A decrease of $6,695 million ($6,464 million adjusted for currency) in cash and cash equivalents, restricted cash and marketable
securities due to debt paydown, investments in acquisitions and dividend payments; and
• A decline in receivables of $1,607 million ($1,115 million adjusted for currency) mainly due to sales of financing receivables;
partially offset by
• An increase of $1,378 million ($1,536 million adjusted for currency) in prepaid expenses and other current assets primarily due to
investment in Kyndryl of $807 million and an increase in derivative assets.
Current liabilities decreased $2,430 million ($1,080 million adjusted for currency) as a result of:
• A decrease in other accrued expenses and liabilities of $1,740 million ($1,188 million adjusted for currency) primarily due to
payments of $1,640 million for workforce rebalancing actions;
• A decrease in taxes payable of $909 million ($777 million adjusted for currency) primarily driven by tax payments and a decline in
reserves as a result of the resolution of certain tax audit matters; and
• A decrease in short-term debt of $329 million ($317 million adjusted for currency) due to maturities of $7,155 million; partially
offset by reclassifications of $6,792 million from long-term debt to reflect upcoming maturities; partially offset by
• An increase in deferred income of $538 million ($926 million adjusted for currency).
26
Management Discussion
International Business Machines Corporation and Subsidiary Companies
Receivables and Allowances
Roll Forward of Total IBM Receivables Allowance for Credit Losses
($ in millions)
January 1, 2021
$ 550
Additions/
(Releases) *
$ (56)
Write-offs **
$ (46)
Other
$ (5)
December 31, 2021
$ 443
* Additions/(Releases) for Allowance for Credit Losses are recorded in expense.
** Refer to note A, “Significant Accounting Policies,” for additional information regarding allowance for credit losses write-offs.
Primarily represents translation adjustments.
The total IBM receivables provision coverage was 2.1 percent at December 31, 2021, excluding receivables classified as held for sale,
a decrease of 10 basis points compared to December 31, 2020. The decrease in coverage and decrease in allowance were driven by
the overall decrease in receivables and an improvement in certain customers’ credit quality given the improvement of the
macroeconomic environment since the beginning of the pandemic in 2020. The majority of the write-offs during the year 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.
($ in millions)
At December 31:
Amortized cost*
Specific allowance for credit losses
Unallocated allowance for credit losses
Total allowance for credit losses
Net financing receivables
Allowance for credit losses coverage
2021
$ 12,859
159
42
201
$ 12,658
2020
$ 17,881
184
79
263
$ 17,618
1.6 %
1.5 %
* Includes deferred initial direct costs which are expensed in IBM’s consolidated financial results.
The percentage of Financing segment receivables reserved increased from 1.5 percent at December 31, 2020 to 1.6 percent at
December 31, 2021, primarily driven by the decline in amortized cost, which reflects the strategic actions described in Financing's
"Results of Operations.”
Roll Forward of Financing Segment Receivables Allowance for Credit Losses (included in Total IBM)
($ in millions)
January 1, 2021
$ 263
Additions/
(Releases) *
$ (39)
Write-offs **
$ (17)
Other
$ (5)
December 31, 2021
$ 201
* Additions/(Releases) for Allowance for Credit Losses are recorded in expense.
** Refer to note A, “Significant Accounting Policies,” for additional information regarding allowance for credit loss write-offs.
Primarily represents translation adjustments.
Financing’s expected credit loss expense (including reserves for off-balance sheet commitments which are recorded in other liabilities)
was a release of $54 million in 2021, compared to an addition of $34 million in 2020. The decrease was primarily driven by lower
reserves in Americas and EMEA, due to the overall improvement in the quality of our portfolio, as well as lower future funding
commitments reserves related to the separation of Kyndryl.
Noncurrent Assets and Liabilities
($ in millions)
At December 31:
Noncurrent assets
Long-term debt
Noncurrent liabilities (excluding debt)
2021
$ 102,462
$ 44,917
$ 34,469
2020*
$ 103,660
$ 54,217
$ 37,842
* Amounts presented exclude the noncurrent assets ($13,147 million) and noncurrent liabilities ($3,317 million), including long-term debt, of discontinued
operations.
Management Discussion
International Business Machines Corporation and Subsidiary Companies
27
The decrease in noncurrent assets of $1,198 million (an increase of $967 million adjusted for currency) was driven by:
• A decrease in long-term financing receivables of $1,662 million ($1,425 million adjusted for currency) primarily due to volumes
decline and sales of receivables; and
• A decrease in deferred taxes of $1,034 million ($735 million adjusted for currency) primarily due to pension plan
remeasurements, foreign audit settlements and realization of deferred tax assets in foreign jurisdictions; and
• A decrease in net property, plant and equipment of $511 million ($315 million adjusted for currency); and
• A decrease of $934 million ($587 million adjusted for currency) in total operating right-of-use assets, deferred costs and
investments and sundry assets; partially offset by
• An increase in prepaid pension assets of $2,293 million ($2,405 million adjusted for currency) driven by plan remeasurements
and higher returns on plan assets; and
• An increase in goodwill and net intangible assets of $650 million ($1,625 million adjusted for currency) due to additions from new
acquisitions, partially offset by intangibles amortization.
Long-term debt decreased $9,300 million ($8,092 million adjusted for currency) primarily driven by:
• Reclassifications to short-term debt of $6,792 million to reflect upcoming maturities; and
• Early redemption of IBM Credit debt of $1,250 million.
Noncurrent liabilities (excluding debt) decreased $3,372 million ($1,680 million adjusted for currency) primarily driven by:
• A decrease in retirement and nonpension postretirement benefit obligations of $2,749 million ($1,875 million adjusted for
currency) mainly driven by plan remeasurements; and
• A decrease of $623 million (an increase of $195 million adjusted for currency) in operating lease liabilities, other liabilities and
deferred income.
Debt
Our funding requirements are continually monitored and we execute our strategies to manage the overall asset and liability
profile. Additionally, we maintain sufficient flexibility to access global funding sources as needed.
($ in millions)
At December 31:
Total debt
Financing segment debt
Non-Financing debt
2021
$ 51,703
$ 13,929
37,775
2020
$61,333 *
$21,098 **
40,235 *
* Amounts presented exclude debt (primarily finance leases) of discontinued operations.
** Amounts presented at December 31, 2020 have been recast to conform to 2021 presentation.
Financing segment debt includes debt of $1,345 million in 2021 and $4,311 million in 2020 to support intercompany financing receivables and other
intercompany assets. Refer to Financing’s “Financial Position” on page 55 for additional details.
Total debt of $51,703 million decreased $9,629 million ($8,410 million adjusted for currency) from December 31, 2020, primarily
driven by early retirements and debt maturities of $8,557 million. Total debt decreased $21,307 million since the end of the second
quarter 2019 (immediately preceding the Red Hat acquisition).
Non-Financing debt of $37,775 million decreased $2,460 million ($1,640 million adjusting for currency) from December 31, 2020 due
to scheduled debt maturities during 2021.
Financing segment debt of $13,929 million decreased $7,170 million ($6,770 million adjusting for currency) from December 31, 2020,
primarily due to lower external funding requirements associated with financing receivables, as well as lower internal funding
requirements after the separation of Kyndryl. In the first quarter of 2021, IBM Credit early redeemed all of its outstanding fixed-rate
debt in the aggregate amount of $1.75 billion and deregistered with the U.S. Securities and Exchange Commission.
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 December 31, 2021.
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 E, “Segments.” In the Consolidated Income
28
Management Discussion
International Business Machines Corporation and Subsidiary Companies
Statement, the external debt-related interest expense supporting Financing’s internal financing to the company is classified as interest
expense.
Equity
Total equity decreased $1,731 million from December 31, 2020, primarily due to a decrease of $7,203 million related to the separation
of Kyndryl and dividends paid of $5,869 million; partially offset by increases from net income of $5,743 million, a decrease in
accumulated other comprehensive losses of $4,839 driven by retirement-related benefit plans ($3,828 million), cash flow hedges
($438 million) and foreign currency translation adjustments ($573 million), and common stock of $762 million.
Cash Flow
Our cash flows from operating, investing and financing activities, as reflected in the Consolidated Statement of Cash Flows on page 65
are summarized in the table below and include the cash flows of discontinued operations. These amounts also include the cash flows
associated with the Financing business.
($ in millions)
For the year ended December 31:
Net cash provided by/(used in)
Operating activities
Investing activities
Financing activities
Effect of exchange rate changes on cash, cash equivalents and restricted cash
Net change in cash, cash equivalents and restricted cash
2021
2020
$ 12,796
(5,975)
(13,354)
(185)
$ (6,718)
$ 18,197
(3,028)
(9,721)
(87)
$ 5,361
Net cash provided by operating activities decreased $5,401 million in 2021 driven by the following key factors:
• A decrease of cash provided by receivables of $3,925 million primarily driven by higher volumes in trade receivables;
• A decrease in payroll tax and value-added tax payment liabilities of approximately $1,000 million due to payments in the current
year for tax relief provided under the U.S. CARES Act and other non-U.S. government assistance programs in 2020 related to
COVID-19; and
• An increase in payments for structural actions and Kyndryl separation-related charges; partially offset by performance related
improvements within net income.
Net cash used in investing activities increased $2,947 million driven by:
• An increase in net cash used for acquisitions of $2,958 million aligned with our hybrid cloud and AI strategy;
• A decrease of $475 million in cash provided by net non-operating finance receivables primarily driven by the wind down of the
OEM IT commercial financing operations; and
• A decrease in cash provided by divestitures of $389 million; partially offset by
• A decrease in cash used for net capital expenditures of $661 million.
Net cash used in financing activities increased $3,633 million driven by:
• A decrease in net cash provided by debt transactions of $4,401 million driven primarily by a higher level of net additions in the
prior year, partially offset by a lower level of maturities in the current year; partially offset by
• An increase in cash provided of $879 million due to Kyndryl distribution to IBM at separation.
Discontinued Operations
Pre-tax income from discontinued operations of $1,744 million in 2021 decreased 18.6 percent compared to the prior year. As the
separation of Kyndryl occurred on November 3, 2021, the current year included 10 months of Kyndryl operations compared with a full
year in 2020. The current year also included a higher level of separation-related charges. These dynamics were partially offset by higher
charges for structural actions in the prior year. The discontinued operations provision for income taxes in 2021 was $714 million
compared with $484 million in 2020. The current-year provision included tax charges related to the Kyndryl separation. See note C,
“Separation of Kyndryl,” for additional information.
Management Discussion
International Business Machines Corporation and Subsidiary Companies
29
GAAP Reconciliation
The tables below provide a reconciliation of our income statement results as reported under GAAP to our operating earnings
presentation which is a non-GAAP measure. Management’s calculation of operating (non-GAAP) earnings, as presented, may differ
from similarly titled measures reported by other companies. Please refer to the “Operating (non-GAAP) Earnings” section for
management’s rationale for presenting operating earnings information.
($ in millions except per share amounts)
For the year ended December 31, 2021:
Gross profit
Gross profit margin
SG&A
RD&E
Other (income) and expense
Total expense and other (income)
Pre-tax income from continuing operations
Pre-tax margin from continuing operations
Provision for income taxes*
Effective tax rate
Income from continuing operations
Income margin from continuing operations
Diluted earnings per share from continuing
Acquisition-
Retirement-
GAAP
$ 31,486
54.9 %
Related
Adjustments
719
1.3 pts.
$
$ 18,745
6,488
873
26,649
4,837
$(1,160)
—
(2)
(1,162)
1,881
$
Related
Adjustments
—
— pts.
—
—
(1,282)
(1,282)
1,282
$
$
8.4 %
124
2.6 %
$
3.3 pts.
457
5.2 pts.
$
2.2 pts.
251
2.8 pts.
U.S. Tax
Reform
Impacts
$ —
— pts.
$ —
—
—
—
—
— pts.
$
Kyndryl-
Related
Impacts
—
$
— pts.
(8)
—
126
118
(118)
(0.2)pts.
$ (89)
$ (37)
$
(1.1)pts.
(0.4)pts.
Operating
(non-GAAP)
$32,205
56.2 %
$17,577
6,488
(285)
24,324
7,881
13.7 %
706
9.0 %
$ 4,712
$ 1,424
$ 1,031
$ 89
$ (81)
$ 7,174
8.2 %
2.5 pts.
1.8 pts.
0.2 pts.
(0.1)pts.
12.5 %
operations
$ 5.21
$ 1.57
$ 1.14
$0.10
$(0.09)
$
7.93
* The tax impact on operating (non-GAAP) pre-tax income is calculated under the same accounting principles applied to the GAAP pre-tax income which
employs an annual effective tax rate method to the results.
($ in millions except per share amounts)
For the year ended December 31, 2020:
Gross profit
Gross profit margin
SG&A
RD&E
Other (income) and expense
Total expense and other (income)
Pre-tax income from continuing operations
Pre-tax margin from continuing operations
Provision for/(benefit from) income taxes**
Effective tax rate
Income from continuing operations
Income margin from continuing operations
Diluted earnings per share from continuing
Acquisition-
Related
Adjustments
726
1.3 pts.
$
$(1,117)
—
(2)
(1,119)
1,845
$
Retirement-
Related
Adjustments
—
— pts.
—
—
(1,073)
(1,073)
1,073
$
GAAP
$ 30,865
55.9 %
$ 20,561 *
6,262
802
28,293 *
2,572 *
4.7 %
$ (1,360)
$
(52.9)%
3.3 pts.
411
25.3 pts.
$ 3,932 *
$ 1,434
7.1 %
2.6 pts.
$
$
1.9 pts.
208
14.1 pts.
864
1.6 pts.
$
U.S. Tax
Reform
Impacts
—
$
— pts.
—
—
—
—
—
— pts.
Kyndryl-
Related
Impacts
$ —
— pts.
$ —
—
—
—
—
— pts.
$ 110
$ —
2.0 pts.
— pts.
$ (110)
$ —
(0.2)pts.
— pts.
operations
$ 4.38 *
$ 1.60
$ 0.96
$(0.12)
$ —
Operating
(non-GAAP)
$31,591
57.3 %
$19,445 *
6,262
(273)
26,101 *
5,490 *
9.9 %
$ (630)
(11.5)%
$ 6,120 *
11.1 %
*
6.82
$
* Includes a $1.5 billion pre-tax charge for structural actions in the fourth quarter resulting in an impact of ($1.33) to diluted earnings per share from
continuing operations and diluted operating (non-GAAP) earnings per share.
** The tax impact on operating (non-GAAP) pre-tax income is calculated under the same accounting principles applied to the GAAP pre-tax income which
employs an annual effective tax rate method to the results.
30
Management Discussion
International Business Machines Corporation and Subsidiary Companies
Consolidated Fourth-Quarter Results
($ and shares in millions except per share amounts)
For the fourth quarter:
Revenue
Gross profit margin
Total expense and other (income)
Income from continuing operations before income taxes
Provision for/(benefit from) income taxes from continuing operations
Income from continuing operations
Income from continuing operations margin
Income/(loss) from discontinued operations, net of tax
Net income
Earnings per share from continuing operations–assuming dilution
Consolidated earnings per share–assuming dilution
Weighted-average shares outstanding–assuming dilution
* 8.6 percent adjusted for currency.
2021
$ 16,695
56.9 %
$ 6,632
$ 2,869
407
$
$ 2,462
14.7 %
(129)
$
$ 2,332
$ 2.72
$ 2.57
906.6
2020
$ 15,682
58.9 %
$ 8,224 **
$ 1,014 **
(175)
$
$ 1,190 **
7.6 %
166
$
$ 1,356
$ 1.32 **
$ 1.51
899.0
Yr.-to-Yr.
Percent/
Margin
Change
6.5 %*
(2.0)pts.
(19.4)%
182.8 %
NM
106.9 %
7.2 pts.
NM
72.0 %
106.1 %
70.2 %
0.9 %
** Includes a $1.5 billion pre-tax charge for structural actions resulting in an impact to diluted earnings per share from continuing operations of ($1.33).
Includes a $0.6 billion pre-tax charge for structural actions resulting in an impact to diluted earnings per share from discontinued operations of ($0.51).
NM–Not meaningful
The following table provides operating (non-GAAP) earnings for the fourth quarter of 2021 and 2020. See page 36 for additional
information.
($ in millions except per share amounts)
For the fourth quarter:
Net income as reported
Income/(loss) from discontinued operations, net of tax
Income from continuing operations
Non-operating adjustments (net of tax)
Acquisition-related charges
Non-operating retirement-related costs/(income)
U.S. tax reform impacts
Kyndryl-related impacts
Operating (non-GAAP) earnings
Diluted operating (non-GAAP) earnings per share
* Includes a $0.6 billion pre-tax charge for structural actions.
2021
$ 2,332
(129)
$ 2,462
355
206
94
(81)
$ 3,035
$ 3.35
2020
$ 1,356
166 *
$ 1,190 **
357
122
18
—
$ 1,686 **
$ 1.88 **
Yr.-to-Yr.
Percent
Change
72.0 %
NM
106.9 %
(0.4)
68.4
430.4
NM
80.0 %
78.2 %
** Includes a $1.5 billion pre-tax charge for structural actions resulting in an impact to diluted operating (non-GAAP) earnings per share of ($1.33).
NM–Not meaningful
Snapshot
In the fourth quarter of 2021, we reported $16.7 billion in revenue, income from continuing operations of $2.5 billion and operating
(non-GAAP) earnings of $3.0 billion. Diluted earnings per share from continuing operations was $2.72 as reported and $3.35 on an
operating (non-GAAP) basis. On a consolidated basis, we generated $2.5 billion in cash from operations, $3.3 billion in free cash flow
and delivered shareholder returns of $1.5 billion in dividends. These results reflect the strong demand we see in the marketplace for
our technology and consulting. We continue to invest in skills, innovation and our ecosystem to position us for 2022 and the longer
term.
Total revenue increased 6.5 percent as reported and 9 percent adjusted for currency compared to the prior year with strong
performance in our key growth areas of software and consulting. Fourth-quarter 2021 also includes incremental revenue from our new
commercial relationship with Kyndryl, representing approximately 3.5 points of our total revenue growth. Software increased
8.2 percent as reported and 10 percent adjusted for currency, with growth in both Hybrid Platform & Solutions and Transaction
Processing. Within this segment, Hybrid Platform & Solutions grew 7.1 percent (9 percent adjusted for currency), with Red Hat
delivering strong double-digit growth. Transaction Processing revenue grew from the new commercial relationship with Kyndryl.
Consulting increased 13.1 percent as reported and 16 percent adjusted for currency with growth across all business areas. Consulting
growth was led by Business Transformation which grew 17.9 percent as reported and 20 percent adjusted for currency reflecting strong
demand for solutions to transform critical workflows. Infrastructure decreased 0.2 percent as reported but grew 2 percent adjusted
Management Discussion
International Business Machines Corporation and Subsidiary Companies
31
for currency including a benefit from the Kyndryl commercial relationship. Across the segments, total IBM hybrid cloud revenue of $6.2
billion in the fourth quarter of 2021 grew 16 percent as reported and 18 percent adjusted for currency.
From a geographic perspective, Americas revenue increased 6.6 percent year to year as reported (7 percent adjusted for currency).
EMEA increased 3.6 percent (7 percent adjusted for currency). Asia Pacific increased 10.9 percent year to year as reported (16 percent
adjusted for currency).
The gross margin was 56.9 percent and the operating (non-GAAP) gross margin was 58.0 percent, both decreasing 2.0 points year to
year. Overall, gross margin was impacted by the significant investments we are making to drive our hybrid cloud and AI strategy and a
competitive labor market which has impacted labor costs due to higher acquisition, retention and wage costs.
Total expense and other (income) decreased 19.4 percent in the fourth quarter of 2021 versus the prior-year period primarily driven
by a $1.5 billion pre-tax charge in the fourth quarter of 2020 for structural actions to simplify and optimize our operating model and
improve our position going forward. This decrease was partially offset by increased spending as we continue to invest to drive growth
and scale resources to better serve our clients. We are also increasing our research spend to deliver innovation in AI, hybrid cloud and
emerging areas such as quantum and expanding our ecosystem. Total operating (non-GAAP) expense and other (income) decreased
19.8 percent year to year, driven primarily by the same factors.
Pre-tax income from continuing operations of $2.9 billion increased $1.9 billion and the pre-tax margin was 17.2 percent, an increase
of 10.7 points versus the prior-year period, primarily due to the prior-year workforce rebalancing charge. The continuing operations
effective tax rate for the fourth quarter of 2021 was 14.2 percent compared to an effective tax rate of (17.3) percent in the fourth
quarter of 2020. The prior-year tax rate was primarily driven by the geographical mix of pre-tax income, including from structural
actions taken in 2020. Net income from continuing operations was $2.5 billion, an increase of 106.9 percent year to year. The net
income margin from continuing operations was 14.7 percent, an increase of 7.2 points from the prior-year period.
Operating (non-GAAP) pre-tax income from continuing operations of $3.5 billion increased 101.9 percent year to year and the
operating (non-GAAP) pre-tax margin from continuing operations increased 10.0 points to 21.2 percent, primarily due to the prior-year
workforce rebalancing charge. The operating (non-GAAP) effective tax rate from continuing operations in the fourth quarter of 2021
was 14.2 percent versus 3.7 percent in the prior year. The increase was primarily driven by the same factors described above. Operating
(non-GAAP) income from continuing operations of $3.0 billion increased 80.0 percent with an operating (non-GAAP) income margin
from continuing operations of 18.2 percent, up 7.4 points year to year.
Diluted earnings per share from continuing operations of $2.72 in the fourth quarter of 2021 increased 106.1 percent and operating
(non-GAAP) diluted earnings per share of $3.35 increased 78.2 percent versus the fourth quarter of 2020, respectively.
32
Management Discussion
International Business Machines Corporation and Subsidiary Companies
Results of Continuing Operations
As discussed in the “Organization of Information” section, with the completion of the separation on November 3, 2021, results of
Kyndryl are reported as discontinued operations. Prior periods have been reclassified to conform to this presentation in the
Management Discussion to allow for a meaningful comparison of continuing operations.
Segment Details
The following is an analysis of the fourth quarter of 2021 versus the fourth quarter of 2020 reportable segment revenue and gross
margin results. Segment pre-tax income includes certain limited transactions, predominantly between the Financing and Infrastructure
segments, that are recorded to other income and excludes certain unallocated corporate items. Prior-year results have been recast to
conform with segment changes effective fourth-quarter 2021.
($ in millions)
For the fourth quarter:
Revenue
Software
Gross margin
Consulting
Gross margin
Infrastructure
Gross margin
Financing
Gross margin
Other
Gross margin
Total revenue
Total gross profit
Total gross margin
Non-operating adjustments
Amortization of acquired intangible assets
Operating (non-GAAP) gross profit
Operating (non-GAAP) gross margin
* Recast to reflect segment changes.
Software
2021
2020 *
$ 7,273
$ 6,719
80.9 %
80.5 %
4,746
4,196
27.0 %
29.7 %
4,414
4,425
54.8 %
172
32.5 %
89
60.1 %
244
36.0 %
98
(160.7)%
(170.4)%
$ 16,695
$ 9,500
$ 15,682
$ 9,238
Yr.-to-Yr.
Percent/
Margin
Change
Yr.-to-Yr.
Percent Change
Adjusted for
Currency
8.2 %
0.4 pts.
13.1 %
(2.7)pts.
(0.2)%
(5.3)pts.
10.1 %
15.7 %
1.7 %
(29.4)%
(28.8)%
(3.6)pts.
(9.3)%
9.7 pts.
6.5 %
2.8 %
2.1 %
8.6 %
56.9 %
58.9 %
(2.0)pts.
182
176
$ 9,682
$ 9,414
3.6 %
2.8 %
58.0 %
60.0 %
(2.0)pts.
Software revenue of $7,273 million increased 8.2 percent as reported (10 percent adjusted for currency) in the fourth quarter of 2021
compared to the prior-year period. Fourth-quarter 2021 includes incremental revenue from our new commercial relationship with
Kyndryl, representing approximately 5 points of revenue growth. We had double-digit growth in total hybrid cloud revenue within the
segment as reported and adjusted for currency. We had continued strength in our Hybrid Platform & Solutions portfolio, led by Red
Hat, Automation and Data & AI. Transaction Processing revenue grew in the fourth quarter with all the growth coming from the new
commercial relationship with Kyndryl.
Hybrid Platform & Solutions revenue of $5,140 million increased 7.1 percent as reported (9 percent adjusted for currency) year to year.
This revenue performance reflects the strength across the software growth areas that focus on hybrid cloud and AI, and includes
incremental revenue in fourth-quarter 2021 from our new commercial relationship with Kyndryl, representing approximately 1 point
of revenue growth. Red Hat revenue grew 18.6 percent as reported (21 percent adjusted for currency) driven primarily by strong growth
in infrastructure and double-digit growth in application development and emerging technologies, as RHEL and OpenShift address
enterprises’ critical hybrid cloud requirements. Automation revenue increased 12.8 percent as reported (15 percent adjusted for
currency), driven primarily by good performance in AIOps and management that address resource management and observability, as
well as continued growth in Cloud Pak for Integration. Data & AI revenue grew 1.4 percent as reported (3 percent adjusted for currency)
reflecting the strength in Data Fabric which enables clients to connect siloed data that is distributed across a hybrid cloud landscape.
Within Data & AI, we also had strong performance in our business analytics and weather offerings. Within Security, although we had
growth in the full-year 2021, revenue in the fourth quarter declined 2.3 points as reported (1 percent adjusted for currency) driven by
lower performance in Data Security. Security innovation is an integral part of our strategy and in the fourth quarter, we launched a new
data security solution, Guardium Insights, and acquired ReaQta which leverages AI and machine learning to automatically identify and
block threats.
Within Hybrid Platform & Solutions, our annual recurring revenue (ARR) increased 8 percent in the fourth quarter of 2021 compared to
the prior-year period. ARR is a key performance metric management uses to assess the health and growth trajectory of our Hybrid
Management Discussion
International Business Machines Corporation and Subsidiary Companies
33
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.
Transaction Processing revenue of $2,133 million increased 11.2 percent as reported (14 percent adjusted for currency) year to year.
Fourth-quarter 2021 includes incremental revenue from our new commercial relationship with Kyndryl, representing approximately
16 points of revenue growth. In the fourth quarter, we also had some large perpetual license transactions given the expansion in IBM
Z capacity driven by the z15 program, as well as strong renewal rates which is proof of our client’s commitment to our infrastructure
platform and our high-value software offerings.
Within Software, total hybrid cloud revenue of $2.7 billion grew 22 percent as reported (24 percent adjusted for currency) in the fourth
quarter of 2021 compared to the prior-year period reflecting our clients’ demand for our Hybrid Platform & Solutions offerings.
Software gross profit margin of 80.9 percent increased 0.4 points year to year compared to the prior-year period. Pre-tax income of
$2,109 million increased 83.2 percent and pre-tax margin increased 11.9 points to 29.0 percent, reflecting the lower workforce
rebalancing charges year to year which resulted in 9.7 points of improvement on the pre-tax margin.
Consulting
Consulting revenue of $4,746 million increased 13.1 percent as reported (16 percent adjusted for currency) in the fourth quarter of
2021 compared to the prior-year period. We had strong growth year to year in all three business areas, led by Business Transformation,
and our book-to-bill ratio was 1.2. We had double-digit growth in total hybrid cloud revenue in the segment as reported and adjusted
for currency. Clients are accelerating their business transformations, powered by hybrid cloud and AI, to drive innovation, increase
their agility and productivity, and capture new growth opportunities. Enterprises are turning to IBM Consulting as their trusted partner
on their transformation journey and are leveraging our deep client, industry and technical expertise, which helps drive adoption of our
hybrid cloud platform.
Business Transformation revenue of $2,213 million increased 17.9 percent as reported (20 percent adjusted for currency). This
business area brings together technology and strategic consulting to transform critical workflows at scale. We enable this by leveraging
our skills and capabilities in IBM technologies along with our strategic ecosystem partners. Our practices are centered on areas such
as finance and supply chain, talent, industry-specific solutions and digital design. This quarter, we had broad-based revenue growth
reflecting strong demand for these solutions.
Technology Consulting revenue of $928 million increased 14.4 percent as reported (19 percent adjusted for currency). Technology
Consulting architects and implements cloud platforms and strategies, leveraging hybrid cloud with Red Hat OpenShift. In the fourth
quarter, we continued to see good performance in application modernization offerings that build cloud native applications as well as
modernize existing applications for the cloud.
Application Operations revenue of $1,605 million increased 6.5 percent as reported (8 percent adjusted for currency). This business
area focuses on application and cloud platform services required to operationalize and run in both cloud and on-premise environments.
The growth in fourth-quarter revenue was driven by offerings which provide end-to-end management of custom applications in cloud
environments.
Within Consulting, hybrid cloud revenue of $2.2 billion grew 31 percent as reported (34 percent adjusted for currency) in the fourth
quarter of 2021 compared to the prior-year period, reflecting strong double-digit growth across all three business areas. Consulting
Red Hat-related signings more than doubled year to year in the fourth quarter, as we added over 150 engagements in the quarter. Our
hybrid cloud revenue from our strategic partnerships grew at a solid double-digit rate in the fourth quarter on a year-to-year basis.
Consulting fourth-quarter gross profit margin of 27.0 percent decreased 2.7 points year to year. The gross profit margin decline was
across all three business areas. We are in a competitive labor market and continued to have increased pressure on labor costs. We
expect to capture this increased resource cost in engagements going forward, however, this will take time to be reflected in our future
profit profile. Pre-tax income increased $374 million to $436 million and pre-tax margin increased 7.7 points to 9.2 percent compared
to the prior-year period. The increase in pre-tax income and margin reflects the lower workforce rebalancing charges year to year which
resulted in 9.4 points of improvement on the pre-tax margin.
34
Management Discussion
International Business Machines Corporation and Subsidiary Companies
Infrastructure
Infrastructure revenue of $4,414 million decreased 0.2 percent as reported, but increased 2 percent adjusted for currency in the fourth
quarter of 2021 compared to the prior-year period. The incremental sales from our new commercial relationship with Kyndryl
contributed approximately 5 points of revenue growth in the fourth quarter. By bringing together Hybrid Infrastructure and
Infrastructure Support (formerly Technology Support Services), we can now better manage the lifecycle of our hardware platform and
provide end-to-end value for our clients.
Hybrid Infrastructure revenue of $2,873 million was flat as reported and grew 2 percent adjusted for currency in the fourth quarter of
2021 compared to the prior-year period. In the fourth quarter, the incremental sales from our new commercial relationship with Kyndryl
contributed approximately 4 points of revenue growth. Distributed Infrastructure grew 4.7 percent as reported and 7 percent adjusted
for currency, driven primarily by revenue growth across our storage portfolio, partially offset by declines in Power and Cloud IaaS. IBM
Z revenue decreased 5.9 percent as reported (4 percent adjusted for currency) reflecting the z15 product cycle. This was the tenth
quarter of z15 availability and the program continues to outpace the strong z14 program with more MIPS shipped than any program in
our history. With its combination of security, scalability and reliability, the z15 continues to resonate with our clients, who are leveraging
IBM Z as an essential part of their hybrid cloud infrastructure.
Infrastructure Support revenue of $1,541 million decreased 0.9 percent as reported, but grew 1 percent adjusted for currency in the
fourth quarter of 2021 compared to the prior year. The Infrastructure Support business benefited from our new commercial
relationship with Kyndryl, which contributed incremental revenue representing approximately 6 points of revenue growth in the fourth
quarter.
Within Infrastructure, hybrid cloud revenue of $1.3 billion decreased 12 percent as reported (11 percent adjusted for currency) in the
fourth quarter of 2021 compared to the same period in 2020, primarily driven by the IBM Z and Distributed Infrastructure product
cycles.
The Infrastructure gross profit margin decreased 5.3 points to 54.8 percent in the fourth quarter of 2021 compared to the prior-year
period. Pre-tax income of $1,036 million increased 64.6 percent and the pre-tax margin increased 9.2 points year to year to
23.5 percent. The decrease in gross profit margin was driven primarily by declines in margins across the Hybrid Infrastructure product
portfolio and margin decline in Infrastructure Support. The increase in pre-tax income and margin reflects the lower workforce
rebalancing charges year to year, which resulted in 9.4 points of improvement in the pre-tax margin.
Financing
Financing revenue of $172 million decreased 29.4 percent as reported (29 percent adjusted for currency) compared to the prior year,
primarily driven by declines in client financing revenue due to a lower average asset balance. Financing's fourth-quarter pre-tax income
decreased 27.9 percent to $79 million and the pre-tax margin of 46.0 percent increased 0.9 points year to year. The decrease in pre-
tax income was driven by the lower average asset balance noted above which reflects the strategic actions described in Financing’s
“Results of Operations.”
Geographic Revenue
Total revenue of $16,695 million increased 6.5 percent as reported and 9 percent adjusted for currency in the fourth quarter compared
to the prior-year period. Fourth-quarter 2021 includes incremental revenue from our new commercial relationship with Kyndryl,
representing approximately 3.5 points of revenue growth.
Americas revenue of $8,121 million increased 6.6 percent as reported and 7 percent adjusted for currency. Fourth-quarter 2021
includes incremental revenue from Kyndryl, representing approximately 2 points of revenue growth. Within North America, revenue in
the U.S. increased 5.0 percent and Canada increased 22.3 percent as reported (19 percent adjusted for currency). Latin America
increased 6.1 percent as reported (9 percent adjusted for currency). Within Latin America, Brazil increased 6.3 percent as reported
(8 percent adjusted for currency).
EMEA revenue of $5,266 million increased 3.6 percent as reported and 7 percent adjusted for currency. This includes incremental
revenue from Kyndryl, representing approximately 4 points of revenue growth. Germany and France increased 7.3 percent and 6.8
percent, respectively, as reported, and increased 13 percent and 12 percent, respectively, adjusted for currency. Italy decreased 3.6
percent as reported, but grew 2 percent adjusted for currency. In the UK, revenue declined 1.1 percent as reported and 3 percent
adjusted for currency.
Asia Pacific revenue of $3,307 million increased 10.9 percent as reported and 16 percent adjusted for currency. The fourth quarter
incremental revenue from Kyndryl represented approximately 6 points of revenue growth. Japan increased 6.0 percent as reported
and 15 percent adjusted for currency. India, China and Australia increased 29.8 percent, 19.1 percent and 16.0 percent, respectively,
as reported and increased 32 percent, 17 percent and 18 percent, respectively, adjusted for currency.
Management Discussion
International Business Machines Corporation and Subsidiary Companies
35
Total Expense and Other (Income)
($ in millions)
For the fourth quarter:
Total expense and other (income)
Non-operating adjustments
Amortization of acquired intangible assets
Acquisition-related charges
Non-operating retirement-related (costs)/income
Kyndryl-related impacts
Operating (non-GAAP) expense and other (income)
Total expense-to-revenue ratio
Operating (non-GAAP) expense-to-revenue ratio
* Includes a $1.5 billion pre-tax charge for structural actions.
NM–Not meaningful
2021
$6,632
2020
$ 8,224 *
(284)
(6)
(315)
118
$6,145
39.7 %
36.8 %
(273)
(10)
(278)
—
$ 7,662 *
52.4 %
48.9 %
Yr.-to-Yr.
Percent/
Margin
Change
(19.4)%
4.1 %
(41.9)
13.2
NM
(19.8)%
(12.7)pts.
(12.1)pts.
Total expense and other (income) decreased 19.4 percent in the fourth quarter with an expense-to-revenue ratio of 39.7 percent
compared to 52.4 percent in the fourth quarter of 2020. The year-to-year decrease was primarily driven by the fourth-quarter 2020
charge for structural actions (18 points), impact of currency (3 points), non-operating Kyndryl-related benefits (1 point) and shared
services expense transferred to Kyndryl at separation (1 point), partially offset by higher spending (3 points) and higher non-operating
retirement-related costs (1 point). Our expense dynamics reflect a higher level of investment in innovation, skills and our ecosystem,
both organically and through acquisitions, as we execute our hybrid cloud and AI strategy. We are aggressively hiring and scaling
resources to better serve clients, while increasing our research spend to deliver innovation in AI, hybrid cloud and emerging areas such
as quantum, and we are expanding our ecosystem.
Total operating (non-GAAP) expense and other income decreased 19.8 percent year to year, primarily driven by the same factors
described above, excluding the non-operating Kyndryl-related benefits and higher non-operating retirement-related costs.
Cash Flow
On a consolidated basis, we generated $2.5 billion in cash flow from operating activities in the fourth quarter of 2021, a decrease of
$3.3 billion compared to the fourth quarter of 2020, primarily driven by a decrease in cash provided by receivables of $2.5 billion which
includes one month of Kyndryl’s results. Net cash used in investing activities of $0.7 billion was $0.1 billion higher than the prior year,
primarily driven by a decrease in cash provided by net non-operating finance receivables ($0.4 billion), partially offset by a decrease in
cash used for capital expenditures ($0.3 billion). Net cash used in financing activities of $2.7 billion decreased $3.6 billion compared
to the prior year, primarily due to lower net reductions in debt ($2.8 billion) and net cash proceeds from the Kyndryl distribution to IBM
upon separation ($0.9 billion).
Results of Discontinued Operations
Pre-tax income/(loss) from discontinued operations, was a loss of $63 million in the fourth quarter of 2021 compared to income of
$354 million in the fourth quarter of 2020. As the separation of Kyndryl occurred on November 3, 2021, the fourth-quarter 2021
included a partial quarter of Kyndryl operations compared with a full quarter in the prior-year period. The current-year period also
included a higher level of separation-related charges. These dynamics were partially offset by higher charges for structural actions in
the prior-year period. The discontinued operations provision for income taxes in the fourth quarter of 2021 was $66 million compared
with $188 million in the prior-year period. The fourth-quarter 2021 provision for income taxes included tax charges related to the
Kyndryl separation.
36
Management Discussion
International Business Machines Corporation and Subsidiary Companies
GAAP Reconciliation
The tables below provide a reconciliation of our income statement results as reported under GAAP to our operating earnings
presentation which is a non-GAAP measure. Management’s calculation of operating (non-GAAP) earnings, as presented, may differ
from similarly titled measures reported by other companies. Refer to the “Operating (non-GAAP) Earnings” section for management’s
rationale for presenting operating earnings information.
($ in millions except per share amounts)
For the fourth quarter 2021:
Gross profit
Gross profit margin
SG&A
Other (income) and expense
Total expense and other (income)
Pre-tax income from continuing operations
Pre-tax margin from continuing operations
Provision for income taxes*
Effective tax rate
Income from continuing operations
Income margin from continuing operations
Diluted earnings per share from continuing
56.9 %
$ 4,903
(18)
6,632
2,869
17.2 %
$ 407
14.2 %
$ 2,462
14.7 %
Acquisition- Retirement-
Related
GAAP Adjustments
$ 182
$ 9,500
Related
Adjustments
$ —
1.1 pts.
$(290)
(1)
(290)
472
2.8 pts.
$ 117
— pts.
$ —
(315)
(315)
315
1.9 pts.
U.S. Tax
Reform
Impacts
—
$
— pts.
—
—
—
—
— pts.
$
Kyndryl-
Related
Impacts
—
$
— pts.
(8)
126
118
(118)
(0.7)pts.
$
Operating
(non-GAAP)
$9,682
58.0 %
$4,605
(208)
6,145
3,537
21.2 %
$ 109
$ (94)
$ (37)
$ 502
1.4 pts.
1.8 pts.
$ 355
$ 206
$
2.1 pts.
1.2 pts.
(2.7)pts.
94
0.6 pts.
(0.6)pts.
14.2 %
$ (81)
$3,035
(0.5)pts.
18.2 %
operations
$ 2.72
$ 0.39
$ 0.23
$ 0.10
$(0.09)
$ 3.35
* The tax impact on operating (non-GAAP) pre-tax income from continuing operations is calculated under the same accounting principles applied to the
GAAP pre-tax income which employs an annual effective tax rate method to the results.
($ in millions except per share amounts)
For the fourth quarter 2020:
Gross profit
Gross profit margin
SG&A
Other (income) and expense
Total expense and other (income)
Pre-tax income from continuing operations
Pre-tax margin from continuing operations
Provision for/(benefit from) income taxes**
Effective tax rate
Income from continuing operations
Income margin from continuing operations
Diluted earnings per share from continuing
Acquisition- Retirement-
Related
GAAP Adjustments
$ 176
$ 9,238
Related
Adjustments
$ —
58.9 %
$ 6,256 *
230
8,224 *
1,014 *
6.5 %
$ (175)
1.1 pts.
$(283)
(1)
(283)
459
2.9 pts.
$ 102
— pts.
$ —
(278)
(278)
278
1.8 pts.
$ 156
U.S. Tax
Reform
Impacts
—
$
— pts.
—
—
—
—
— pts.
$
$ (18)
(17.3)%
10.4 pts.
11.7 pts.
$ 1,190 *
$ 357
$ 122
$
7.6 %
2.3 pts.
0.8 pts.
(1.0)pts.
18
0.1 pts.
Kyndryl-
Related
Impacts
$ —
Operating
(non-GAAP)
$9,414
— pts.
$ —
—
—
—
— pts.
$ —
— pts.
$ —
— pts.
60.0 %
$5,973 *
(49)
7,662 *
1,752 *
11.2 %
66
3.7 %
$1,686 *
10.8 %
$
operations
$ 1.32 *
$ 0.40
$ 0.14
$ 0.02
$ —
$ 1.88 *
* Includes a $1.5 billion pre-tax charge for structural actions resulting in an impact of ($1.33) to diluted earnings per share from continuing operations and
diluted operating (non-GAAP) earnings per share.
** The tax impact on operating (non-GAAP) pre-tax income from continuing operations is calculated under the same accounting principles applied to the
GAAP pre-tax income which employs an annual effective tax rate method to the results.
Management Discussion
International Business Machines Corporation and Subsidiary Companies
37
PRIOR YEAR IN REVIEW
This section provides a summary of our financial performance in 2020 as compared with 2019. As discussed in the “Organization of
Information” section, financial performance has been reclassified to reflect discontinued operations presentation and recast to
conform to our segment changes effective fourth-quarter 2021. Refer to “Year in Review” pages 30-45 of the “Management
Discussion” section of our 2020 Annual Report for other details of our financial performance in 2020 compared to 2019.
($ and shares in millions except per share amounts)
For year ended December 31:
Revenue
Gross profit margin
Total expense and other (income)
Income from continuing operations before income taxes
Provision for/(benefit from) income taxes from continuing operations
Income from continuing operations
Income from continuing operations margin
Income from discontinued operations, net of tax
Net income
Earnings per share from continuing operations–assuming dilution
Consolidated earnings per share–assuming dilution
Weighted-average shares outstanding–assuming dilution
2020
2019
$55,179
$57,714
55.9 %
54.6 %
$28,293 **
$ 2,572 **
$ (1,360)
$ 3,932 **
$24,327
$ 7,206
$
60
$ 7,146
7.1 %
12.4 %
$ 1,658 $ 2,285
$ 9,431
$ 5,590
$
$
8.00
$ 10.56
$
892.8
4.38 **
6.23
896.6
Yr.-to-Yr.
Percent/Margin
Change
(4.4)%*
1.3 pts.
16.3 %
(64.3)%
NM
(45.0)%
(5.3)pts.
(27.4)%
(40.7)%
(45.3)%
(41.0)%
0.4 %
* (4.5) percent adjusted for currency; (2.9) percent excluding divested businesses and adjusted for currency.
** Includes a $1.5 billion pre-tax charge for structural actions in the fourth quarter resulting in an impact to diluted earnings per share from continuing
operations of ($1.33).
Includes a $0.6 billion pre-tax charge for structural actions in the fourth quarter resulting in an impact to diluted earnings per share from discontinued
operations of ($0.51).
NM–Not meaningful
The following table provides the company’s operating (non-GAAP) earnings for 2020 and 2019. See page 45 for additional information.
($ in millions except per share amounts)
For year ended December 31:
Net income as reported
Income from discontinued operations, net of tax
Income from continuing operations
Non-operating adjustments (net of tax)
Acquisition-related charges
Non-operating retirement-related costs/(income)
U.S. tax reform impacts
Operating (non-GAAP) earnings
Diluted operating (non-GAAP) earnings per share
2020
$5,590
1,658 *
$3,932 **
1,434
864
(110)
$6,120 **
$ 6.82 **
2019
$ 9,431
2,285
$ 7,146
1,335
466
146
$ 9,093
$ 10.18
Yr.-to-Yr.
Percent Change
(40.7)%
(27.4)
(45.0)%
7.4
85.6
NM
(32.7)%
(33.0)%
* Includes a $0.6 billion pre-tax charge for structural actions in the fourth quarter.
** Includes a $1.5 billion pre-tax charge for structural actions in the fourth quarter resulting in an impact to diluted operating (non-GAAP) earnings per
share of ($1.33).
NM–Not meaningful
Financial Performance Summary
In 2020, we reported $55.2 billion in revenue and income from continuing operations of $3.9 billion, which included a $1.5 billion
pre-tax charge for structural actions (primarily workforce rebalancing) in the fourth quarter to simplify and optimize our operating
model. Operating (non-GAAP) earnings in 2020 were $6.1 billion, which also included the charge for workforce rebalancing. Diluted
earnings per share from continuing operations was $4.38 as reported and $6.82 on an operating (non-GAAP) basis. On a
consolidated basis, we also generated $18.1 billion in cash from operations, $10.8 billion in free cash flow and delivered shareholder
returns of $5.8 billion in dividends. With the unprecedented COVID-19 pandemic and macroeconomic uncertainty beginning in
March 2020, client priorities shifted to maintaining operational stability, flexibility and preservation of cash. While there was
continued demand for offerings that support their digital transformation, clients moved to shorter term duration engagements and
prioritized operational expenditures over capital expenditures, which impacted the company’s performance in 2020. However, our
results reflected strong performance in hybrid cloud led by Red Hat, gross margin expansion and solid cash generation. We also
continued to strengthen our position as a hybrid cloud platform and AI company through strategic organic investments and
acquisitions.
38
Management Discussion
International Business Machines Corporation and Subsidiary Companies
Total revenue decreased 4.4 percent as reported and 4.5 percent adjusted for currency compared to the prior year. To provide
better transparency on the recurring performance of the ongoing business, total revenue, geographic revenue and hybrid cloud
revenue growth rates are provided excluding divested businesses and at constant currency. These divested businesses are
included in the category “Other—divested businesses.” Excluding divested businesses and adjusted for currency, revenue
decreased 2.9 percent. Software revenue increased 2.3 percent as reported and 2 percent adjusted for currency, with strong
performance from Red Hat, offset by declines in transactional performance in other areas of the portfolio. Software revenue
performance was impacted by purchase deferrals, clients opting for shorter duration contracts and preference for operating
expenses over capital expenditures. Consulting decreased 4.0 percent as reported and 4 percent adjusted for currency with
declines due to project delays and less discretionary spending by clients. Infrastructure decreased 7.9 percent year to year as
reported and 8 percent adjusted for currency primarily due to product cycle dynamics. Across the segments, total IBM hybrid cloud
revenue of $16.8 billion in 2020 grew 22 percent as reported (21 percent adjusted for currency) and 24 percent excluding divested
businesses and adjusted for currency.
From a geographic perspective, Americas revenue declined 5.5 percent year to year as reported (3 percent excluding divested
businesses and adjusted for currency). EMEA decreased 3.0 percent (3 percent excluding divested businesses and adjusted for
currency). Asia Pacific declined 3.7 percent (3 percent excluding divested businesses and adjusted for currency).
The gross margin of 55.9 percent increased 1.3 points year to year, and the operating (non-GAAP) gross margin of 57.3 percent
increased 1.7 points versus the prior year, reflecting portfolio mix with strong software contribution and our focus on productivity.
Total expense and other (income) increased 16.3 percent in 2020 compared to the prior year. The year-to-year performance was driven
by higher charges for workforce rebalancing, a full year of Red Hat operational spending in 2020 compared to six months in 2019, lower
gains from divestitures and higher non-operating retirement-related costs, partially offset by lower spending including reductions in
travel and other expenses associated with COVID-19 restrictions. Total operating (non-GAAP) expense and other (income) increased
15.5 percent year to year, driven primarily by the same factors excluding the non-operating retirement-related costs.
Pre-tax income from continuing operations of $2.6 billion decreased 64.3 percent and the pre-tax margin was 4.7 percent, a decrease
of 7.8 points versus 2019, primarily due to higher workforce rebalancing charges in 2020, lower gains from divestitures and higher
retirement-related costs in the current year. The continuing operations effective tax rate for 2020 was (52.9) percent compared to 0.8
percent in 2019. The benefit from income taxes in 2020 was primarily due to the tax impacts of an intra-entity sale of certain of the
company’s intellectual property and related impacts in the first quarter, which resulted in a net tax benefit of $0.9 billion and a benefit
of $0.2 billion related to a foreign tax law change. Net income from continuing operations of $3.9 billion decreased 45.0 percent and
the net income from continuing operations margin was 7.1 percent, down 5.3 points year to year, primarily due to the fourth-quarter
workforce rebalancing charge. Operating (non-GAAP) pre-tax income from continuing operations of $5.5 billion decreased
42.1 percent year to year and the operating (non-GAAP) pre-tax margin from continuing operations decreased 6.5 points to 9.9
percent, reflecting the higher workforce rebalancing charges and lower gains from divestitures in the current year. The operating (non-
GAAP) effective tax rate for 2020 was (11.5) percent compared to 4.0 percent in 2019. The current year operating (non-GAAP) benefit
from income taxes was primarily driven by the net tax benefit from an intra-entity IP sale in the first quarter. Operating (non-GAAP)
income from continuing operations of $6.1 billion decreased 32.7 percent and the operating (non-GAAP) income margin from
continuing operations of 11.1 percent was down 4.7 points year to year.
Diluted earnings per share from continuing operations of $4.38 in 2020 decreased 45.3 percent and operating (non-GAAP) diluted
earnings per share of $6.82 decreased 33.0 percent versus 2019, both including a ($1.33) impact from the structural actions initiated
in the fourth-quarter 2020.
During 2020, we continued to take actions to further enhance our balance sheet and liquidity position. Cash and cash equivalents,
restricted cash and marketable securities at year end were $14.3 billion, an increase of $5.3 billion from December 31, 2019.
Throughout 2020, we took mitigation actions to preserve liquidity as well as strategic actions to optimize our capital structure, for
example, we re-focused our Financing portfolio reducing our external debt needs. We reduced total debt by $1.4 billion from year end
2019 and $11.7 billion since the second quarter of 2019 (immediately preceding the Red Hat transaction).
Management Discussion
International Business Machines Corporation and Subsidiary Companies
39
Results of Continuing Operations
As discussed in the “Organization of Information” section, with the completion of the separation on November 3, 2021, results of
Kyndryl are reported as discontinued operations. Prior periods have been reclassified to conform to this presentation in the
Management Discussion to allow for a meaningful comparison of continuing operations.
Segment Details
The following is an analysis of the 2020 versus 2019 reportable segment results. The table below presents each reportable segment’s
revenue and gross margin results. Segment pre-tax income includes certain limited transactions, predominantly between the Financing
and Infrastructure segments, that are recorded to other income and excludes certain unallocated corporate items. Prior-year results
have been recast to conform with segment changes effective fourth-quarter 2021.
($ in millions)
For the year ended December 31:
Revenue
Software
Gross margin
Consulting
Gross margin
Infrastructure
Gross margin
Financing
Gross margin
Other
Gross margin
Total revenue
Total gross profit
Total gross margin
Non-operating adjustments
Amortization of acquired intangible assets
Acquisition-related charges
Operating (non-GAAP) gross profit
Operating (non-GAAP) gross margin
* Recast to reflect segment changes.
** (2.9) percent excluding divested businesses and adjusted for currency.
NM–Not meaningful
Software
($ in millions)
For the year ended December 31:
Software revenue
Hybrid Platform & Solutions
Red Hat
Automation
Data & AI
Security
Transaction Processing
* Recast to reflect segment changes.
2020 *
2019 *
$ 22,927
$ 22,408
78.3 %
78.0 %
16,257
16,939
29.3 %
27.4 %
14,533
15,774
57.5 %
975
41.6 %
488
(126.5)%
$ 55,179
$ 30,865
55.9 %
726
—
$ 31,591
55.6 %
1,215
42.2 %
1,378
9.4 %
$ 57,714
$ 31,533
54.6 %
527
13
$ 32,073
57.3 %
55.6 %
Yr.-to-Yr.
Percent/
Margin
Change
Yr.-to-Yr.
Percent Change
Adjusted for
Currency
2.1 %
(4.3)%
(7.5)%
(18.9)%
(65.0)%
(4.5)%
2.3 %
0.4 pts.
(4.0) %
1.8 pts.
(7.9) %
1.9 pts.
(19.8) %
(0.6) pts.
(64.6) %
NM
(4.4) %**
(2.1) %
1.3 pts.
37.8 %
(100.0) %
(1.5) %
1.7 pts.
2020 *
$ 22,927
$ 16,321 **
2019 *
$ 22,408
$ 14,472
6,606
7,936
Yr.-to-Yr.
Percent
Change
Yr.-to-Yr.
Percent Change
Adjusted for
Currency
2.3 %
12.8 %
287.8 **
(10.3)
(6.3)
0.7
(16.8)
2.1 %
12.5 %
286.8 **
(10.6)
(6.6)
0.6
(17.0)
** Red Hat was acquired on July 9, 2019. Results in 2020 include a full year of Red Hat revenue.
Software revenue of $22,927 million increased 2.3 percent as reported (2 percent adjusted for currency) in 2020 compared to the
prior year. There was strong growth in Hybrid Platform & Solutions, driven primarily by Red Hat, as our hybrid cloud and AI solutions
are resonating with clients. Transaction Processing revenue decreased year to year, driven by declines in transactional software
performance as clients delayed longer term commitments in 2020 due to the macroeconomic environment.
Hybrid Platform & Solutions revenue of $16,321 million increased 12.8 percent as reported (12 percent adjusted for currency)
compared to the prior year, driven by a full year of Red Hat revenue contribution and Red Hat’s strong performance in infrastructure
software and application development and emerging technologies. Red Hat OpenShift, the leading open source hybrid cloud platform,
helped clients modernize mission-critical workloads, build cloud native applications, and deploy and manage data and applications
40
Management Discussion
International Business Machines Corporation and Subsidiary Companies
across various clouds within an environment that is open, flexible and secure. Security revenue grew year to year due to good client
adoption in security solutions such as Cloud Pak for Security and growth in security services as clients focused on their secure digital
transformations. This growth was partially offset by year-to-year declines in Automation and Data & AI as clients deferred
transformational investments in 2020 to focus on their core operations.
Transaction Processing revenue of $6,606 million decreased 16.8 percent as reported (17 percent adjusted for currency) in 2020
compared to the prior year. With the macroeconomic environment due to the COVID-19 pandemic, clients focused on near-term
priorities resulting in purchase deferrals, which impacted our transactional software performance in 2020. However, our subscription
and support revenue grew in 2020 compared to the prior year.
Within Software, hybrid cloud revenue of $6.9 billion grew 69 percent as reported and 68 percent adjusted for currency year to year.
($ in millions)
For the year ended December 31:
Software
Gross profit
Gross profit margin
Pre-tax income
Pre-tax margin
* Recast to reflect segment changes.
2020 *
2019 *
Yr.-to-Yr.
Percent/
Margin
Change
$ 17,958
$ 17,470
78.3 %
78.0 %
$ 3,341
$ 5,025
14.6 %
22.4 %
2.8 %
0.4 pts.
(33.5)%
(7.8)pts.
The Software gross profit margin increased 0.4 points to 78.3 percent in 2020 compared to the prior year. The gross profit margin
expansion was driven primarily by the full-year contribution from Red Hat and year-to-year improvement in services margins as we
continued to focus on shifting to higher value services, such as Software-as-a-Service and security services, and driving AI-powered
automation across the portfolio. Pre-tax income of $3,341 million decreased 33.5 percent compared to the prior year with a pre-tax
margin decline of 7.8 points to 14.6 percent. The decline in pre-tax income and margin was driven primarily by the decline in
transactional software performance in Transaction Processing and our continued investment in strategic areas of hybrid cloud and AI.
The decline also reflects the impact of higher workforce rebalancing charges year to year which had 3.1 points of impact on the pre-
tax margin.
Consulting
($ in millions)
For the year ended December 31:
Consulting revenue
Business Transformation
Technology Consulting
Application Operations
* Recast to reflect segment changes.
2020 *
$16,257
$ 7,193
3,133
5,931
2019 *
$16,939
$ 7,569
2,821
6,549
Yr.-to-Yr.
Percent
Change
Yr.-to-Yr.
Percent Change
Adjusted for
Currency
(4.0)%
(5.0)%
11.1
(9.4)
(4.3)%
(5.2)%
10.3
(9.5)
Consulting revenue of $16,257 million decreased 4.0 percent as reported (4 percent adjusted for currency) in 2020 compared to the
prior year. As the global pandemic intensified through the year, we aligned our offerings to help clients focus on engaging customers
virtually, modernizing and migrating applications to the cloud, empowering a remote workforce, and focusing on cybersecurity and IT
resiliency. In 2020, Consulting accelerated the number of engagements using Red Hat technology and continued to drive client
adoption of Red Hat OpenShift and IBM Cloud Paks.
Business Transformation revenue of $7,193 million decreased 5.0 percent as reported (5 percent adjusted for currency) in 2020
compared to the prior year. Given the macroeconomic environment during 2020, clients shifted priorities, which led to project delays
and less demand for more discretionary offerings. Our cognitive process services (formerly Global Process Services) revenue returned
to growth in the fourth quarter of 2020, as we continued to deliver efficiency and flexibility to our clients’ processes by infusing
innovative technology and redesigning intelligent workflows.
Technology Consulting revenue of $3,133 million increased 11.1 percent as reported (10 percent adjusted for currency) in 2020
compared to the prior year, driven primarily by growth in higher value offerings to develop and modernize cloud applications.
Application Operations revenue of $5,931 million decreased 9.4 percent as reported (10 percent adjusted for currency), reflecting the
decline in our traditional on-premises application management services.
Management Discussion
International Business Machines Corporation and Subsidiary Companies
41
Within Consulting, hybrid cloud revenue of $5.9 billion grew 11 percent year to year as reported and adjusted for currency. Consulting
continued to drive the adoption of our hybrid cloud platform to help our clients accelerate their digital reinventions by modernizing
their application infrastructures and leveraging business transformation services built on hybrid cloud.
($ in millions)
For the year ended December 31:
Consulting
Gross profit
Gross profit margin
Pre-tax income
Pre-tax margin
* Recast to reflect segment changes.
2020 *
2019 *
Yr.-to-Yr.
Percent/
Margin
Change
$ 4,760
29.3 %
$ 1,034
6.4 %
$ 4,648
27.4 %
$ 1,344
7.9 %
2.4 %
1.8 pts.
(23.0)%
(1.6)pts.
The Consulting gross profit margin increased 1.8 points to 29.3 percent in 2020 compared to the prior year. The gross margin expansion
reflects our shift to higher-value offerings, improved productivity and operational efficiency created by our investments in innovative
delivery capabilities and our ability to leverage our variable and global delivery resource model. Pre-tax income of $1,034 million
decreased 23.0 percent compared to the prior year and the pre-tax margin declined 1.6 points to 6.4 percent. The year-to-year declines
in pre-tax income and margin were driven by the higher workforce rebalancing charges year to year, which had 2.7 points of impact to
pre-tax margin, partially offset by the gross margin expansion.
Infrastructure
($ in millions)
For the year ended December 31:
Infrastructure revenue
Hybrid Infrastructure
IBM Z
Distributed Infrastructure
Infrastructure Support
* Recast to reflect segment changes.
2020 *
$14,533
$ 8,415
2019 *
$15,774
$ 9,176
6,118
6,599
Yr.-to-Yr.
Percent
Change
Yr.-to-Yr.
Percent Change
Adjusted for
Currency
(7.9)%
(8.3)%
(1.3)
(12.0)
(7.3)
(7.5)%
(8.6)%
(1.7)
(12.2)
(6.0)
Infrastructure revenue of $14,533 million decreased 7.9 percent year to year as reported (8 percent adjusted for currency). Although
impacted by product cycles, our Infrastructure solutions continued to deliver critical and lasting value to enterprise clients in support
of our hybrid cloud strategy.
Hybrid Infrastructure revenue of $8,415 million decreased 8.3 percent as reported (9 percent adjusted for currency) driven primarily
by the decline in Distributed Infrastructure reflecting the Power and Storage product cycles. IBM Z revenue decreased 1.3 percent as
reported (2 percent adjusted for currency), driven by a decline in IBM Z operating system software, partially offset by growth in IBM Z
hardware reflecting an elongated z15 adoption cycle as a result of the challenging environment. IBM Z continued to offer clients a high-
value, secure and scalable platform with cloud native development capabilities.
Infrastructure Support revenue decreased 7.3 percent as reported (6 percent adjusted for currency) year to year, driven primarily by
the IBM Z and Distributed Infrastructure portfolio product cycles and a shift away from lower value services.
42
Management Discussion
International Business Machines Corporation and Subsidiary Companies
Within Infrastructure, hybrid cloud revenue of $4.0 billion declined 3 percent as reported and 4 percent adjusted for currency.
($ in millions)
For the year ended December 31:
Infrastructure
Gross profit
Gross profit margin
Pre-tax income
Pre-tax margin
* Recast to reflect segment changes.
2020 *
2019 *
Yr.-to-Yr.
Percent/
Margin
Change
$ 8,359
57.5 %
$ 1,654
11.4 %
$ 8,773
55.6 %
$ 2,481
15.7 %
(4.7)%
1.9 pts.
(33.3)%
(4.3)pts.
The Infrastructure gross profit margin increased 1.9 points to 57.5 percent in 2020 compared to the prior year, driven primarily by
margin improvements in Hybrid Infrastructure reflecting margin expansion in IBM Z and Power within Distributed Infrastructure. Pre-
tax income of $1,654 million declined 33.3 percent and pre-tax margin decreased 4.3 points year to year to 11.4 percent, driven
primarily by the higher level of workforce rebalancing charges in the current year, which had 3.4 points of impact on the pre-tax margin.
Financing
($ in millions)
For the year ended December 31:
Revenue
Pre-tax income
* Recast to conform to 2021 presentation.
2020 *
$ 975
$ 449
2019 *
$ 1,215
$ 652
Yr.-to-Yr.
Percent
Change
(19.8)%
(31.2)%
In 2019, we began the wind down of our OEM Commercial Financing business to refocus our Financing business on IBM’s products
and services which completed in early 2021. In 2020, we entered into arrangements to sell certain financing receivables to third
parties. While the strategic actions we have taken are the primary driver of the decline in external 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 revenue decreased 19.8 percent (19 percent adjusted for currency) compared to the prior year, driven by commercial
financing which declined $196 million to $45 million and client financing which declined $44 million to $930 million. For the year ended
December 31, 2020, the decrease in financing revenue was due to a lower average asset balance, primarily driven by the strategic
actions described above.
Financing pre-tax income decreased 31.2 percent to $449 million compared to the prior year and the pre-tax margin of 46.1 percent
decreased 7.6 points year to year. The decrease in pre-tax income was primarily driven by a decrease in gross profit reflecting the
strategic actions described above, a decline in internal financing and higher provisions for credit losses in Americas.
Geographic Revenue
In addition to the revenue presentation by reportable segment, we also measure revenue performance on a geographic basis.
($ in millions)
For the year ended December 31:
Total revenue
Americas
Europe/Middle East/Africa
Asia Pacific
2020
$55,179
$27,119
16,767
11,293
2019
$57,714
$28,704
17,282
11,728
Yr.-to-Yr.
Percent
Change
(4.4)%
(5.5)%
(3.0)
(3.7)
Yr.-to-Yr.
Percent Change
Adjusted for
Currency
(4.5)%
(4.5)%
(4.5)
(4.5)
Yr.-to-Yr.
Percent Change
Excluding Divested
Businesses And
Adjusted for
Currency
(2.9)%
(2.8)%
(2.8)
(3.4)
Total revenue of $55,179 million in 2020 decreased 4.4 percent year to year as reported (4 percent adjusted for currency and 3 percent
excluding divested businesses and adjusted for currency).
Americas revenue decreased 5.5 percent as reported (4 percent adjusted for currency and 3 percent excluding divested businesses
and adjusted for currency). Within North America, the U.S. decreased 4.7 percent and Canada decreased 4.7 percent as reported (4
Management Discussion
International Business Machines Corporation and Subsidiary Companies
43
percent adjusted for currency). Latin America declined 12.0 percent as reported (2 percent adjusted for currency). Within Latin America,
Brazil declined 15.5 percent as reported (2 percent adjusted for currency).
EMEA revenue decreased 3.0 percent as reported (4 percent adjusted for currency and 3 percent excluding divested businesses and
adjusted for currency). The UK, Germany, France and Italy decreased 8.8 percent, 5.8 percent, 3.9 percent and 1.1 percent,
respectively, as reported, and declined 9 percent, 8 percent, 6 percent and 3 percent, respectively, adjusted for currency.
Asia Pacific revenue decreased 3.7 percent as reported (4 percent adjusted for currency and 3 percent excluding divested businesses
and adjusted for currency). Japan decreased 1 percent as reported and 3 percent adjusted for currency. China decreased 13.7 percent
as reported and 14 percent adjusted for currency. India declined 1.1 percent as reported, but grew 4 percent adjusted for currency.
Australia increased 0.8 percent as reported and 1 percent adjusted for currency.
Total Expense and Other (Income)
($ in millions)
For the year ended December 31:
Selling, general and administrative
Research, development and engineering
Intellectual property and custom development income
Other (income) and expense
Interest expense
Total expense and other (income)
Non-operating adjustments
Amortization of acquired intangible assets
Acquisition-related charges
Non-operating retirement-related (costs)/income
Operating (non-GAAP) expense and other (income)
Total expense-to-revenue ratio
Operating (non-GAAP) expense-to-revenue ratio
2020
$20,561 *
6,262
(620)
802
1,288
$28,293 *
(1,106)
(13)
(1,073)
$26,101 *
51.3 %
47.3 %
2019
$18,724
5,910
(639)
(1,012)
1,344
$24,327
(744)
(409)
(576)
$22,598
42.2 %
39.2 %
Yr.-to-Yr.
Percent
Change
9.8 %
5.9
(2.8)
NM
(4.2)
16.3 %
48.6
(96.8)
86.4
15.5 %
9.1 pts.
8.1 pts.
* Includes a $1.5 billion pre-tax charge for structural actions in the fourth quarter.
NM–Not meaningful
Total expense and other (income) year-to-year results for the year ended December 31, 2020 were impacted by the Red Hat acquisition
which closed in July 2019. As a result, in 2020, there was a full year of expenses for Red Hat operational spending and amortization of
acquired intangible assets associated with the transaction. Expense in 2020 also included a fourth-quarter $1.5 billion pre-tax charge
for structural actions (primarily workforce rebalancing) to simplify and optimize our operating model.
Total expense and other (income) increased 16.3 percent in 2020 versus the prior year, primarily driven by higher Red Hat
operational spending, the fourth-quarter charge for workforce rebalancing, lower gains from divestitures and higher non-
operating retirement-related costs, partially offset by lower spending including reductions in travel and other expenses
associated with COVID-19 restrictions. Total operating (non-GAAP) expense and other (income) increased 15.5 percent year to
year, driven primarily by the factors above excluding the higher non-operating retirement-related costs.
Total selling, general and administrative (SG&A) expense increased 9.8 percent in 2020 versus 2019, driven primarily by the
following factors:
• Higher workforce rebalancing charge (9 points);
• Higher spending (1 point) driven by a full year of Red Hat operational expense in 2020 compared to six months in 2019 (6 points),
partially offset by spending reductions associated with COVID-19 restrictions;
• Higher amortization of acquired intangible assets associated with the Red Hat transaction (2 points); partially offset by
• Lower acquisition-related charges associated with the Red Hat transaction (2 points).
Provisions for expected credit loss expense increased $45.9 million in 2020 compared to 2019. The receivables provision coverage
was 2.2 percent at December 31, 2020, an increase of 70 basis points from December 31, 2019. The higher coverage rate at December
31, 2020 also reflects the adoption of the new guidance for current expected credit losses.
RD&E expense increased 5.9 percent in 2020 versus 2019 primarily driven by:
• Higher spending (7 points) driven by a full year of Red Hat spending in 2020 compared to six months in 2019 (8 points); partially
offset by
• Lower acquisition-related charges associated with the Red Hat transaction (1 point).
44
Management Discussion
International Business Machines Corporation and Subsidiary Companies
Total intellectual property and custom development income decreased 2.8 percent in 2020 compared to 2019. This was primarily due
to a decline in licensing of intellectual property including royalty-based fees compared to the prior 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.
Total other (income) and expense was expense of $802 million in 2020 compared to income of $1,012 million in 2019. The year-to-
year change was primarily driven by:
• Lower gains from divestitures ($733 million);
• Higher non-operating retirement-related costs ($497 million);
• Net exchange losses (including derivative instruments) in the current year versus net exchange gains (including derivative
instruments) in the prior year ($277 million); and
• Lower interest income ($244 million) driven by lower interest rates and a lower average cash balance in the current year.
Interest expense decreased $56 million compared to 2019. Interest expense is presented in cost of financing in the Consolidated
Income Statement only if the related external borrowings are to support the Financing external business. Overall interest expense
(excluding capitalized interest) in 2020 was $1,738 million, a decrease of $214 million year to year, primarily driven by lower average
interest rates.
Income Taxes
The continuing operations effective tax rate for 2020 was (52.9) percent compared to 0.8 percent in 2019. The decrease in the effective
tax rate was primarily driven by a net tax benefit of $0.9 billion related to an intra-entity sale of certain of the company’s intellectual
property and related impacts in the first quarter of 2020, and a benefit of $0.2 billion related to a foreign tax law change. The operating
(non-GAAP) effective tax rate for 2020 was (11.5) percent compared to 4.0 percent in 2019. The 2020 operating (non-GAAP) benefit
from income taxes was primarily driven by the net tax benefit from the intra-entity IP sale. For more information, see note H, “Taxes.”
Results of Discontinued Operations
Income from discontinued operations, net of tax was $1,658 million in 2020 compared to $2,285 million in 2019, a decrease of 27.4
percent year to year. The decrease was primarily driven by charges for structural actions in the fourth quarter of 2020. Refer to note C,
“Separation of Kyndryl,” for additional information.
Management Discussion
International Business Machines Corporation and Subsidiary Companies
45
GAAP Reconciliation
The tables below provide a reconciliation of our income statement results as reported under GAAP to our operating earnings
presentation which is a non-GAAP measure. Management’s calculation of operating (non-GAAP) earnings, as presented, may differ
from similarly titled measures reported by other companies. Refer to the “Operating (non-GAAP) Earnings” section for management’s
rationale for presenting operating earnings information.
($ in millions except per share amounts)
55.9 %
GAAP
$ 30,865
For the year ended December 31, 2020:
Gross profit
Gross profit margin
SG&A
RD&E
Other (income) and expense
Interest expense
Total expense and other (income)
Pre-tax income from continuing operations
Pre-tax margin from continuing operations
Provision for/(benefit from) income taxes**
Effective tax rate
Income from continuing operations
Income margin from continuing operations
Diluted earnings per share from continuing operations $ 4.38 *
$ 20,561 *
6,262
802
1,288
28,293 *
2,572 *
$ 3,932 *
$ (1,360)
4.7 %
(52.9)%
7.1 %
Acquisition-
Related
Adjustments
726
1.3 pts.
$
$(1,117)
—
(2)
—
(1,119)
1,845
$
$
Retirement-
Related
Adjustments
—
— pts.
—
—
(1,073)
—
(1,073)
1,073
$
3.3 pts.
411
25.3 pts.
$ 1,434
2.6 pts.
$
$
1.9 pts.
208
14.1 pts.
864
1.6 pts.
$
U.S. Tax
Reform
Impacts
—
$
— pts.
—
—
—
—
—
—
— pts.
$ 110
2.0 pts.
$ (110)
(0.2)pts.
$ 1.60
$ 0.96
$ (0.12)
Operating
(non-GAAP)
$31,591
57.3 %
$19,445 *
6,262
(273)
1,288
26,101 *
5,490 *
9.9 %
$ (630)
(11.5)%
$ 6,120 *
11.1 %
6.82 *
$
* Includes a $1.5 billion pre-tax charge for structural actions in the fourth quarter resulting in an impact of ($1.33) to diluted earnings per share from
continuing operations and diluted operating (non-GAAP) earnings per share.
** The tax impact on operating (non-GAAP) pre-tax income is calculated under the same accounting principles applied to the GAAP pre-tax income which
employs an annual effective tax rate method to the results.
($ in millions except per share amounts)
Acquisition-
Retirement-
54.6 %
GAAP
$ 31,533
For the year ended December 31, 2019:
Gross profit
Gross profit margin
SG&A
RD&E
Other (income) and expense
Interest expense
Total expense and other (income)
Pre-tax income from continuing operations
Pre-tax margin from continuing operations
Provision for income taxes*
Effective tax rate
Income from continuing operations
Income margin from continuing operations
Diluted earnings per share from continuing operations $ 8.00
$ 18,724
5,910
(1,012)
1,344
24,327
7,206
$ 7,146
$
12.5 %
60
0.8 %
12.4 %
Related
Adjustments
540
0.9 pts.
$
$(1,024)
(53)
152
(228)
(1,154)
1,693
$
2.9 pts.
358
3.6 pts.
$
$
Related
Adjustments
—
— pts.
—
—
(576)
—
(576)
576
1.0 pts.
$ 110
$
U.S. Tax
Reform
Impacts
—
$
— pts.
—
—
—
—
—
—
— pts.
$ (146)
Operating
(non-GAAP)
$32,073
55.6 %
$17,700
5,857
(1,436)
1,116
22,598
9,475
$
16.4 %
382
4.0 %
1.1 pts.
(1.5)pts.
$ 1,335
$ 466
$ 146
$ 9,093
2.3 pts.
0.8 pts.
0.3 pts.
15.8 %
$ 1.50
$ 0.52
$ 0.16
$ 10.18
* The tax impact on operating (non-GAAP) pre-tax income is calculated under the same accounting principles applied to the GAAP pre-tax income which
employs an annual effective tax rate method to the results.
46
Management Discussion
International Business Machines Corporation and Subsidiary Companies
OTHER INFORMATION
Looking Forward
Executing on a Hybrid Cloud & AI Strategy
Over the last year and a half, we have taken a series of significant steps to execute our hybrid cloud and AI strategy and to improve our
revenue profile. Our portfolio, our capital allocation and the actions we have been taking are all designed to “create value through
focus” for our clients, our partners, our employees and our shareholders.
Our most significant portfolio action was the separation of Kyndryl which was completed on November 3. The separation of Kyndryl
creates two industry-leading companies, which will continue to have a strong commercial relationship. Both IBM and Kyndryl have
increased clarity and ability to focus on their respective operating and financial models, including capital deployment, investment
strategies and investment grade capital structures. The separation enables greater freedom of action to partner and capture new
opportunities.
We are building a stronger client-centric culture to drive growth. We have been aggressively hiring with approximately 60 percent of
our hires in Consulting. We are scaling resources in garages, client engineering centers and customer success managers, to better serve
our clients. We are increasing investments in R&D to deliver innovation in AI, hybrid cloud and emerging areas like quantum. We
continue to acquire companies that complement and strengthen our portfolio, with a total of 15 acquisitions in 2021. We are increasing
investment to expand our ecosystem to drive platform adoption and are simplifying and redesigning our go-to market to better meet
client needs, and to execute on our growth agenda.
We are addressing the hybrid cloud and AI opportunity with a more platform-centric business model. Our new management structure,
under our four reportable segments: Software, Consulting, Infrastructure and Financing, aligns our operating model to our platform-
centric approach, reflects a simpler and more streamlined business and provides greater transparency into segment trends.
Our platform-centric approach is designed to meet clients wherever they are in their digital transformation journey. The hybrid cloud
platform we have built is open, secure, and flexible and continues to gain traction in the marketplace. We are seeing high demand for
our capabilities in several areas. Across industries, clients see technology as a major source of competitive advantage and are eager to
automate as many business tasks as possible. They realize that powerful technologies, embedded at the heart of their business, can
lead to seismic shifts in the way they create value and differentiation. They are using AI and predictive capabilities to mitigate friction
in their supply chains. Cybersecurity remains a major area of concern as the cost of cybercrime rises each year. As clients deal with
these challenges and opportunities, they are looking for a partner they can trust and who has a proven track record in bringing about
strategic transformation projects. There is tremendous opportunity for us to help our clients leverage the power of hybrid cloud and AI.
This is what we have built our platform for and why we have such confidence in our strategy.
With the actions we have taken to simplify our operating model, the fundamentals of our business model remain solid. Our balance
sheet and liquidity position remains strong. At December 31, 2021, we had $7.6 billion of cash and cash equivalents, restricted cash
and marketable securities. We have made good progress in deleveraging, while being acquisitive and without sacrificing investments
in our business or our solid dividend policy. We have reduced our debt by $9.6 billion since the end of 2020 and $21.3 billion from our
peak level at June 30, 2019 (immediately preceding the Red Hat acquisition).
We exited 2021 a different company. We have a higher growth and higher value business mix, with over 70 percent of our revenue in
software and services, and a significant recurring revenue base, dominated by software. This will result in an improving revenue growth
profile, higher operating margin, strong and growing free cash flow and lower capital intensity – leading to a higher return on invested
capital business. 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 a strong
dividend policy. Our expectations for 2022 are aligned with our mid-term financial model which was previously communicated at our
investor briefing on October 4, 2021.
Retirement-Related Plans
The combination of modest returns and higher discount rates improved the overall funded status of our plans. In aggregate, our
worldwide-tax qualified plans are funded at 107 percent, with the U.S. at 112 percent. 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 in 2022, 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 higher income from expected return on assets and lower recognized actuarial losses.
Management Discussion
International Business Machines Corporation and Subsidiary Companies
47
Liquidity and Capital Resources
The company has consistently generated strong cash flow from operations, providing a source of funds ranging between $12.8 billion
and $18.2 billion per year over the past three years. The company provides for additional liquidity through several sources: maintaining
an adequate cash balance, access to global funding sources, committed global credit facilities and other committed and uncommitted
lines of credit worldwide. The following table provides a summary of the major sources of liquidity for the years ended December 31,
2019 through 2021.
Cash Flow and Liquidity Trends
($ in billions)
Net cash from operating activities*
Cash and cash equivalents, restricted cash and short-term marketable securities
Committed global credit facilities
2021
$ 12.8 **
$ 7.6
$ 10.0
2020
$ 18.2
$ 14.3
$ 15.3
2019
$ 14.8
$ 9.0
$ 15.3
* Includes cash flows of discontinued operations of $1.6 billion, $4.4 billion and $4.5 billion in 2021, 2020 and 2019, respectively.
** Includes 10 months of Kyndryl operations, and reflects cash paid in 2021 for separation charges and structural actions initiated in the fourth-quarter
2020.
See note Q, “Borrowings,” for additional information.
In 2021, we continued to actively de-lever our debt, invested $3.3 billion in acquisitions and provided a growing dividend to our
shareholders.
On July 9, 2019, we closed the acquisition of Red Hat for cash consideration of $34.8 billion. The transaction was funded through a
combination of cash on hand and proceeds from debt issuances. In order to reduce this debt and return to target leverage ratios within
a couple of years, we suspended our share repurchase program at the time of the Red Hat acquisition closing.
The indenture governing our debt securities and our 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 IBM’s consolidated net tangible assets, and restrict our ability to merge or consolidate unless certain
conditions are met. The credit facilities also include a covenant on our 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.
We are in compliance with all of our significant debt covenants and provide periodic certification to our lenders. The failure to comply
with debt covenants could constitute an event of default with respect to our 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.
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 contractual agreements governing
derivative instruments contain standard market clauses which can trigger the termination of the agreement if IBM’s credit rating were
to fall below investment grade. At December 31, 2021, the fair value of those instruments that were in a liability position was
$162 million, before any applicable netting, and this position is subject to fluctuations in fair value period to period based on the level
of the company’s 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.
The major ratings agencies ratings on our debt securities at December 31, 2021 were as follows:
IBM Ratings
Senior long-term debt
Commercial paper
Standard
and Poor’s
Moody’s
Investors
Service
A3
Prime-2
A-
A-2
IBM has ample financial flexibility, supported by our strong liquidity position and cash flows, to operate at a single A credit rating. Debt
levels have decreased $9.6 billion from December 31, 2020 and $21.3 billion from our peak levels at June 30, 2019 (immediately
preceding the Red Hat acquisition).
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. 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. During this time, various central bank committees and working groups addressed
replacement of benchmark rates, the process for amending existing LIBOR-based contracts, and the potential economic impacts of
48
Management Discussion
International Business Machines Corporation and Subsidiary Companies
different alternatives. The Alternative Reference Rates Committee has identified the Secured Overnight Financing Rate (SOFR) as its
preferred alternative rate for USD LIBOR. SOFR is a measure of the cost of borrowing cash overnight, collateralized by U.S. Treasury
securities, and is based on directly observable U.S. Treasury-backed repurchase transactions. Effective December 31, 2021, the use
of LIBOR has been 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. We have
evaluated the replacement of the LIBOR benchmark interest rate, including risk management and internal operational readiness, and
have monitored the FASB standard-setting process to address financial reporting issues that might arise in connection with transition
from LIBOR to a new benchmark rate. 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 65 and highlight causes and events underlying sources and uses of cash in that format on page 28. For the purpose of running
its business, IBM manages, monitors and analyzes cash flows in a different format.
Management uses free cash flow as a measure to evaluate its operating results, plan share repurchase levels, strategic investments
and assess its ability and need to incur and service debt. The entire free cash flow amount is not necessarily available for discretionary
expenditures. We define free cash flow as net cash from operating activities less the change in Financing receivables and net capital
expenditures, including the investment in software. A key objective of the Financing business is to generate strong returns on equity,
and our Financing receivables are the basis for that growth. Accordingly, management considers Financing receivables as a profit-
generating investment, not as working capital that should be minimized for efficiency. Therefore, management includes presentations
of both free cash flow and net cash from operating activities that exclude the effect of Financing receivables.
The following table represents the way in which management reviews cash flow as described below and is presented on a consolidated
basis, including cash flows of discontinued operations.
($ in billions)
For the year ended December 31:
Net cash from operating activities per GAAP*
Less: the change in Financing receivables
Net cash from operating activities, excluding Financing receivables
Capital expenditures, net
Free cash flow (FCF)
Acquisitions
Divestitures
Share repurchase
Common stock repurchases for tax withholdings
Dividends
Non-Financing debt
Other (includes Financing receivables and Financing debt)
Change in cash, cash equivalents, restricted cash and short-term
marketable securities
2021
$ 12.8
3.9
8.9
(2.4)
6.5 **
(3.3)
0.1
—
(0.3)
(5.9)
(1.2)
(2.7)
2020
$ 18.2
4.3
13.8
(3.0)
10.8
(0.3)
0.5
—
(0.3)
(5.8)
0.2
0.2
2019
$ 14.8
0.5
14.3
(2.4)
11.9
(32.6)
1.1
(1.4)
(0.3)
(5.7)
22.8
1.0
$ (6.7)
$ 5.3
$ (3.2)
* Includes cash flows of discontinued operations of $1.6 billion, $4.4 billion and $4.5 billion in 2021, 2020 and 2019, respectively.
** Includes cash impacts of approximately $1.4 billion for Kyndryl-related structural actions and separation charges.
Includes the distribution from Kyndryl of $0.9 billion.
From the perspective of how management views cash flow, in 2021, after investing $2.4 billion in capital investments, we generated
free cash flow of $6.5 billion. These consolidated results include 10 months of Kyndryl operations, and reflect cash paid in 2021 for
separation charges and structural actions initiated in the fourth-quarter 2020. Payments made in 2021 for prior-year taxes that were
deferred in relation to COVID-19 government relief programs also contributed to the year-to-year decline. In 2021, we continued to
return value to shareholders including $5.9 billion in dividends.
IBM’s Board of Directors considers the dividend payment on a quarterly basis. In the second quarter of 2021, the Board of Directors
increased the company’s quarterly common stock dividend from $1.63 to $1.64 per share.
Events that could temporarily change the historical cash flow dynamics discussed previously include significant changes in operating
results, material changes in geographic sources of cash, unexpected adverse impacts from litigation, future pension funding
requirements during 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 S, “Commitments &
Contingencies.” With respect to pension funding, in 2021, we contributed $103 million to our non-U.S. defined benefit plans compared
to $189 million in 2020. As highlighted in the Contractual Obligations table, we expect to make legally mandated pension plan
contributions to certain non-U.S. plans of approximately $1.1 billion in the next five years. The 2022 contributions are currently
Management Discussion
International Business Machines Corporation and Subsidiary Companies
49
expected to be approximately $200 million. Contributions related to all retirement-related plans are expected to be approximately
$2.1 billion in 2022, approximately flat compared to 2021. Financial market performance could increase the legally mandated
minimum contributions in certain non-U.S. countries that require more frequent remeasurement of the funded status. We are not
quantifying any further impact from pension funding because it is not possible to predict future movements in the capital markets or
pension plan funding regulations.
In 2022, we are not legally required to make any contributions to the U.S. defined benefit pension plans.
Our cash flows are sufficient to fund our current operations and obligations, including investing and financing activities such as
dividends and debt service. When additional requirements arise, we have several liquidity options available. These options may include
the ability to borrow additional funds at reasonable interest rates and utilizing our committed global credit facilities. With our share
repurchase program suspended since the close of the Red Hat acquisition, our overall shareholder payout remains at a comfortable
level and we remain fully committed to our long-standing dividend policy.
Contractual Obligations
($ in millions)
Long-term debt obligations
Interest on long-term debt obligations
Finance lease obligations*
Operating lease obligations*
Purchase obligations
Other long-term liabilities:
Minimum defined benefit plan pension funding
(mandated)**
Excess 401(k) Plus Plan
Long-term termination benefits
Tax reserves
Other
Total
Total Contractual
Payment Stream
$ 52,240
15,252
99
3,669
2,959
1,100
1,892
1,388
5,311
612
$ 84,522
Payments Due In
2022
$ 6,729
1,478
36
1,047
854
2023–24
$11,204
2,617
35
1,530
1,447
2025–26
$ 8,726
1,837
7
737
643
After 2026
$25,581
9,320
20
356
15
200
206
539
37
131
$ 11,257
500
455
229
400
511
135
720
485
172
$18,189
52
$ 13,048
258
$36,755
* Finance lease obligations are presented on a discounted cash flow basis, whereas operating lease obligations are presented on an undiscounted cash
flow basis.
** As funded status on plans will vary, obligations for mandated minimum pension payments after 2026 could not be reasonably estimated.
These amounts represent the liability for unrecognized tax benefits. We estimate that approximately $37 million of the liability is expected to be settled
within the next 12 months. The settlement period for the noncurrent portion of the income tax liability cannot be reasonably estimated as the timing of
the payments will depend on the progress of tax examinations with the various tax authorities; however, it is not expected to be due within the next
12 months.
Certain contractual obligations reported in the previous table exclude the effects of time value and therefore, may not equal the
amounts reported in the Consolidated Balance Sheet. Certain noncurrent liabilities are excluded from the previous table as their future
cash outflows are uncertain. This includes deferred taxes, derivatives, deferred income, disability benefits and other sundry items.
Certain obligations related to our divestitures are included.
Purchase obligations include all commitments to purchase goods or services of either a fixed or minimum quantity that meet any of the
following criteria: (1) they are noncancelable, (2) we would incur a penalty if the agreement was canceled, or (3) we must make
specified minimum payments even if we do not take delivery of the contracted products or services (take-or-pay). If the obligation to
purchase goods or services is noncancelable, the entire value of the contract is included in the previous table. If the obligation is
cancelable, but we would incur a penalty if canceled, the dollar amount of the penalty is included as a purchase obligation. Contracted
minimum amounts specified in take-or-pay contracts are also included in the table as they represent the portion of each contract that
is a firm commitment.
In the ordinary course of business, we enter into contracts that specify that we will purchase all or a portion of our requirements of a
specific product, commodity or service from a supplier or vendor. These contracts are generally entered into in order to secure pricing
or other negotiated terms. They do not specify fixed or minimum quantities to be purchased and, therefore, we do not consider them
to be purchase obligations.
Interest on floating-rate debt obligations is calculated using the effective interest rate at December 31, 2021, plus the interest rate
spread associated with that debt, if any.
50
Management Discussion
International Business Machines Corporation and Subsidiary Companies
Off-Balance Sheet Arrangements
From time to time, we may enter into off-balance sheet arrangements as defined by SEC Financial Reporting Release 67 (FRR-67),
“Disclosure in Management’s Discussion and Analysis about Off-Balance Sheet Arrangements and Aggregate Contractual Obligations.”
At December 31, 2021, we had no such off-balance sheet arrangements that have, or are reasonably likely to have, a material current
or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources. See the table above for our contractual obligations, and note S, “Commitments & Contingencies,”
for detailed information about our guarantees, financial commitments and indemnification arrangements. We do not have retained
interests in assets transferred to unconsolidated entities or other material off-balance sheet interests or instruments.
Critical Accounting Estimates
The application of GAAP requires IBM to make estimates and assumptions about certain items and future events that directly affect its
reported financial condition. The accounting estimates and assumptions discussed in this section are those that we consider to be the
most critical to our financial statements. An accounting estimate is considered critical if both (a) the nature of the estimate or
assumption is material due to the levels of subjectivity and judgment involved, and (b) the impact within a reasonable range of
outcomes of the estimate and assumption is material to IBM’s financial condition. Senior management has discussed the development,
selection and disclosure of these estimates with the Audit Committee of IBM’s Board of Directors. Our significant accounting policies
are described in note A, “Significant Accounting Policies.”
The macroeconomic impacts of the COVID-19 pandemic did not have a material impact on our critical accounting estimates reflected
in our 2020 and 2021 results. Given the inherent uncertainty of the magnitude of future impacts from and/or the duration of the
pandemic, our estimates may change materially in future periods.
A quantitative sensitivity analysis is provided where that information is reasonably available, can be reliably estimated and provides
material information to investors. The amounts used to assess sensitivity (e.g., 1 percent, 10 percent, etc.) are included to allow users
of the Annual Report to understand a general direction cause and effect of changes in the estimates and do not represent
management’s predictions of variability. For all of these estimates, it should be noted that future events rarely develop exactly as
forecasted, and estimates require regular review and adjustment.
Pension Assumptions
For our defined benefit pension plans, the measurement of the benefit obligation to plan participants and net periodic pension
(income)/cost requires the use of certain assumptions, including, among others, estimates of discount rates and expected return on
plan assets.
Changes in the discount rate assumptions would impact the (gain)/loss amortization and interest cost components of the net periodic
pension (income)/cost calculation and the projected benefit obligation (PBO). The discount rate assumption for the IBM Personal
Pension Plan (PPP), a U.S.-based defined benefit plan, increased by 40 basis points to 2.60 percent on December 31, 2021. This change
will decrease pre-tax income recognized in 2022 by an estimated $33 million. If the discount rate assumption for the PPP had
decreased by 40 basis points on December 31, 2021, pre-tax income recognized in 2022 would increase by an estimated $43 million.
Further changes in the discount rate assumptions would impact the PBO which, in turn, may impact our funding decisions if the PBO
exceeds plan assets. A 25 basis point increase or decrease in the discount rate would cause a corresponding decrease or increase,
respectively, in the PPP’s PBO of an estimated $1.1 billion based upon December 31, 2021 data.
The expected long-term return on plan assets assumption is used in calculating the net periodic pension (income)/cost. Expected
returns on plan assets are calculated based on the market-related value of plan assets, which recognizes changes in the fair value of
plan assets systematically over a five-year period in the expected return on plan assets line in net periodic pension (income)/cost. The
differences between the actual return on plan assets and the expected long-term return on plan assets are recognized over five years
in the expected return on plan assets line in net periodic pension (income)/cost and also as a component of actuarial (gains)/losses,
which are recognized over the service lives or life expectancy of the participants, depending on the plan, provided such amounts exceed
thresholds which are based upon the benefit obligation or the value of plan assets, as provided by accounting standards.
To the extent the outlook for long-term returns changes such that management changes its expected long-term return on plan assets
assumption, each 50 basis point change in the expected long-term return on PPP plan assets assumption would have an estimated
impact of $238 million on the following year’s pre-tax net periodic pension (income)/cost (based upon the PPP’s plan assets at
December 31, 2021 and assuming no contributions are made in 2022).
We may voluntarily make contributions or be required, by law, to make contributions to our pension plans. Actual results that differ
from the estimates may result in more or less future IBM funding into the pension plans than is planned by management. Impacts of
these types of changes on our pension plans in other countries worldwide would vary depending upon the status of each respective
plan.
Management Discussion
International Business Machines Corporation and Subsidiary Companies
51
In addition to the above, we evaluate other pension assumptions involving demographic factors, such as retirement age and mortality,
and update these assumptions to reflect experience and expectations for the future. Actual results in any given year can differ from
actuarial assumptions because of economic and other factors.
For additional information on our pension plans and the development of these assumptions, see note W, “Retirement-Related
Benefits.”
Revenue Recognition
Application of GAAP related to the measurement and recognition of revenue requires us to make judgments and estimates. Specifically,
complex arrangements with nonstandard terms and conditions may require significant contract interpretation to determine the
appropriate accounting, including whether promised goods and services specified in an arrangement are distinct performance
obligations. Other significant judgments include determining whether IBM or a reseller is acting as the principal in a transaction and
whether separate contracts should be combined and considered part of one arrangement.
Revenue recognition is also impacted by our ability to determine when a contract is probable of collection and to estimate variable
consideration, including, for example, rebates, volume discounts, service-level penalties and performance bonuses. We consider
various factors when making these judgments, including a review of specific transactions, historical experience and market and
economic conditions. Evaluations are conducted each quarter to assess the adequacy of the estimates. If the estimates were changed
by 10 percent in 2021, the impact on net income would have been $42 million.
Costs to Complete Service Contracts
We enter into numerous service contracts through our services businesses. During the contractual period, revenue, cost and profits
may be impacted by estimates of the ultimate profitability of each contract, especially contracts for which we use cost-to-cost
measures of progress. If at any time these estimates indicate the contract will be unprofitable, the entire estimated loss for the
remainder of the contract is recorded immediately in cost. We perform ongoing profitability analyses of these services contracts in
order to determine whether the latest estimates require updating. Key factors reviewed to estimate the future costs to complete each
contract are future labor costs and product costs and expected productivity efficiencies. Contract loss provisions recorded as a
component of other accrued expenses and liabilities were immaterial at December 31, 2021 and 2020.
Income Taxes
We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Significant judgments are required in determining the
consolidated provision for income taxes.
During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is
uncertain. As a result, we recognize tax liabilities based on estimates of whether additional taxes and interest will be due. These tax
liabilities are recognized when, despite our belief that our tax return positions are supportable, we believe that certain positions may
not be fully sustained upon review by tax authorities. We believe that our accruals for tax liabilities are adequate for all open audit years
based on our assessment of many factors, including past experience and interpretations of tax law. This assessment relies on estimates
and assumptions and may involve a series of complex judgments about future events. To the extent that new information becomes
available which causes us to change our judgment regarding the adequacy of existing tax liabilities, such changes to tax liabilities will
impact income tax expense in the period in which such determination is made.
Significant judgment is also required in determining any valuation allowance recorded against deferred tax assets. In assessing the
need for a valuation allowance, management considers all available evidence for each jurisdiction including past operating results,
estimates of future taxable income and the feasibility of ongoing tax planning strategies/actions. In the event that we change our
determination as to the amount of deferred tax assets that can be realized, we will adjust the valuation allowance with a corresponding
impact to income tax expense in the period in which such determination is made.
The consolidated provision for income taxes will change period to period based on nonrecurring events, such as the settlement of
income tax audits and changes in tax laws, as well as recurring factors including the geographic mix of income before taxes, state and
local taxes and the effects of various global income tax strategies.
To the extent that the provision for income taxes increases/decreases by 1 percent of income from continuing operations before income
taxes, consolidated net income would have decreased/improved by $48 million in 2021.
Valuation of Assets
The application of business combination and impairment accounting requires the use of significant estimates and assumptions. The
acquisition method of accounting for business combinations requires us to estimate the fair value of assets acquired including
separately identifiable intangible assets, liabilities assumed, and any noncontrolling interest in the acquiree to properly allocate
purchase price consideration. Impairment testing for assets, other than goodwill, requires the allocation of cash flows to those assets
or group of assets and if required, an estimate of fair value for the assets or group of assets. Our estimates are based upon assumptions
52
Management Discussion
International Business Machines Corporation and Subsidiary Companies
believed to be reasonable, but which are inherently uncertain and unpredictable. These valuations require the use of management’s
assumptions, which would not reflect unanticipated events and circumstances that may occur.
Valuation of Goodwill
We review goodwill for impairment annually and whenever events or changes in circumstances indicate the carrying value of goodwill
may not be recoverable. We may elect to first assess qualitative risk factors to determine whether it is more likely than not that the fair
value of a reporting unit is less than its carrying amount. Judgment in the assessment of qualitative factors of impairment include entity
specific factors, industry and market conditions, legal and regulatory actions, as well as other individual factors impacting each
reporting unit such as loss of key personnel and overall financial performance. If we do not perform a qualitative assessment, or if the
qualitative assessment indicates it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we
perform a quantitative test.
In the quantitative test, we compare the fair value of each reporting unit to its carrying amount. Estimating the fair value of a reporting
unit is judgmental in nature and involves the use of significant estimates and assumptions. We estimate the fair value of our reporting
units using the income approach. When circumstances warrant, we may also use a combination of the income approach and certain
market approaches.
Under the income approach, we estimate the fair value of a reporting unit based on the present value of estimated discounted future
cash flows. The discounted cash flow methodology includes the use of projections, which require the use of significant estimates and
assumptions specific to the reporting unit as well as those based on general economic conditions. Factors specific to each reporting
unit include revenue growth rates, gross margins, discount rates, terminal value growth rates, capital expenditures projections,
assumed tax rates and other assumptions deemed reasonable by management.
We perform the annual goodwill impairment analysis during the fourth quarter. In fourth-quarter 2021, as a result of the separation of
Kyndryl that occurred on November 3, 2021 and the segment changes immediately prior to the separation, we performed the
quantitative test for goodwill impairment for all reporting units.
When estimating the fair value of the Infrastructure Services reporting unit, which included Kyndryl, we applied a weighted average
approach utilizing a combination of income and market approaches. Under the market approaches, we estimated the fair value through
consideration of market multiples of comparable companies and the market capitalization of Kyndryl. We applied a control premium
to these market approaches, which was estimated primarily through consideration of market data for recent comparable transactions.
The income approach was used to estimate the fair value of all other reporting units.
The quantitative assessments resulted in no impairment as the estimated fair value of each reporting unit exceeded its carrying value.
The Infrastructure Services reporting unit, which contained the future Kyndryl reporting unit and had goodwill of $5.8 billion as of the
time of testing, exceeded its carrying amount by approximately 8 percent. Each of the other reporting units with goodwill had a fair
value that was substantially in excess of its carrying value. Following the changes to the organizational structure, goodwill was
reassigned to the new reporting units using a relative fair value allocation approach. As a result, we performed the quantitative test for
goodwill impairment for all affected reporting units. The quantitative assessment resulted in no impairment. Goodwill applicable to the
Kyndryl business of $5.8 billion was allocated to the Kyndryl reporting unit and was derecognized at the time of the separation. Each
of the other reporting units with goodwill had a fair value that was substantially in excess of its carrying value.
Loss Contingencies
We are currently involved in various claims and legal proceedings. At least quarterly, we review the status of each significant matter
and assess our potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the
amount can be reasonably estimated, we accrue a liability for the estimated loss. Significant judgment is required in both the
determination of probability and the determination as to whether an exposure is reasonably estimable. Because of uncertainties related
to these matters, accruals are based only on the best information available at the time. As additional information becomes available,
we reassess the potential liability related to our pending claims and litigation, and may revise our estimates. These revisions in the
estimates of the potential liabilities could have a material impact on our results of operations and financial position.
Financing Receivables Allowance for Credit Losses
The Financing business reviews its financing receivables portfolio on a regular basis in order to assess collectibility and records
adjustments to the allowance for credit losses at least quarterly. A description of the methods used by management to estimate the
amount of uncollectible receivables is included in note A, “Significant Accounting Policies.” Factors that could result in actual receivable
losses that are materially different from the estimated reserve include significant changes in the economy, or a sudden change in the
economic health of a significant client that represents a concentration in Financing’s receivables portfolio.
To the extent that actual collectibility differs from management’s estimates currently provided for by 10 percent, Financing’s segment
pre-tax income and our income from continuing operations before income taxes would be higher or lower by an estimated $20 million
depending upon whether the actual collectibility was better or worse, respectively, than the estimates.
Residual Value
Residual value represents the estimated fair value of equipment under lease as of the end of the lease. Residual value estimates can
impact the determination of whether a lease is classified as operating, sales-type or direct financing. Financing estimates the future
Management Discussion
International Business Machines Corporation and Subsidiary Companies
53
fair value of leased equipment by using historical models, analyzing the current market for new and used equipment, and obtaining
forward-looking product information such as marketing plans and technological innovations. Residual value estimates are periodically
reviewed and “other than temporary” declines in estimated future residual values are recognized upon identification. Anticipated
increases in future residual values are not recognized until the equipment is remarketed.
Factors that could cause actual results to materially differ from the estimates include significant changes in the used-equipment market
brought on by unforeseen changes in technology innovations and any resulting changes in the useful lives of used equipment.
To the extent that actual residual value recovery is lower than management’s estimates by 10 percent, Financing’s segment pre-tax
income and our income from continuing operations before income taxes for 2021 would have been lower by an estimated $35 million.
If the actual residual value recovery is higher than management’s estimates, the increase in income will be realized at the end of lease
when the equipment is remarketed.
Currency Rate Fluctuations
Changes in the relative values of non-U.S. currencies to the U.S. dollar affect our financial results and financial position. At
December 31, 2021, currency changes resulted in assets and liabilities denominated in local currencies being translated into fewer
dollars than at year-end 2020. 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 may
temporarily mitigate, but 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
2021. Based on the currency rate movements in 2021, total revenue increased 3.9 percent as reported and 2.7 percent at constant
currency versus 2020. On an income from continuing operations before income taxes basis, these translation impacts offset by the net
impact of hedging activities resulted in a theoretical maximum (assuming no pricing or sourcing actions) increase of approximately $70
million in 2021 on an as-reported basis and an increase of approximately $100 million on an operating (non-GAAP) basis. The same
mathematical exercise resulted in an increase of approximately $260 million in 2020 on an as-reported and 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.
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.
Market Risk
In the normal course of business, our financial position is routinely subject to a variety of risks. In addition to the market risk associated
with interest rate and currency movements on outstanding debt and non-U.S. dollar denominated assets and liabilities, other examples
of risk include collectibility of accounts receivable and recoverability of residual values on leased assets.
We regularly assess these risks and have established policies and business practices to protect against the adverse effects of these
and other potential exposures. As a result, we do not anticipate any material losses from these risks.
Our debt, in support of the Financing business and the geographic breadth of our operations, contains an element of market risk from
changes in interest and currency rates. We manage this risk, in part, through the use of a variety of financial instruments including
derivatives, as described in note U, “Derivative Financial Instruments.”
To meet disclosure requirements, we perform a sensitivity analysis to determine the effects that market risk exposures may have on
the fair values of our debt and other financial instruments.
The financial instruments that are included in the sensitivity analysis are comprised of our cash and cash equivalents, marketable
securities, short-term and long-term loans, commercial financing and installment payment receivables, investments, long-term and
54
Management Discussion
International Business Machines Corporation and Subsidiary Companies
short-term debt and derivative financial instruments. Our derivative financial instruments generally include interest rate swaps, foreign
currency swaps and forward contracts.
To perform the sensitivity analysis, we assess the risk of loss in fair values from the effect of hypothetical changes in interest rates and
foreign currency exchange rates on market-sensitive instruments. The market values for interest and foreign currency exchange risk
are computed based on the present value of future cash flows as affected by the changes in rates that are attributable to the market
risk being measured. The discount rates used for the present value computations were selected based on market interest and foreign
currency exchange rates in effect at December 31, 2021 and 2020. The differences in this comparison are the hypothetical losses
associated with each type of risk.
Information provided by the sensitivity analysis does not necessarily represent the actual changes in fair value that we would incur
under normal market conditions because, due to practical limitations, all variables other than the specific market risk factor are held
constant. In addition, the results of the model are constrained by the fact that certain items are specifically excluded from the analysis,
while the financial instruments relating to the financing or hedging of those items are included by definition. Excluded items include
short-term and long-term receivables from sales-type and direct financing leases, forecasted foreign currency cash flows and the
company’s net investment in foreign operations. As a consequence, reported changes in the values of some of the financial instruments
impacting the results of the sensitivity analysis are not matched with the offsetting changes in the values of the items that those
instruments are designed to finance or hedge.
The results of the sensitivity analysis at December 31, 2021 and 2020, are as follows:
Interest Rate Risk
A hypothetical 10 percent adverse change in the levels of interest rates, with all other variables held constant, would result in a decrease
in the fair value of our financial instruments of approximately $0.4 billion at December 31, 2021 and 2020. Changes in the relative
sensitivity of the fair value of our financial instrument portfolio for these theoretical changes in the level of interest rates are primarily
driven by changes in debt maturities, interest rate profile and amount.
Foreign Currency Exchange Rate Risk
A hypothetical 10 percent adverse change in the levels of foreign currency exchange rates relative to the U.S. dollar, with all other
variables held constant, would result in a decrease in the fair value of our financial instruments of approximately $1.4 billion and $1.8
billion at December 31, 2021 and 2020, respectively. The theoretical changes from the prior year are primarily driven by changes in
foreign currency activities related to IBM Financing, as well as long-term debt and derivatives.
Financing Risks
See the “Description of Business” on page 15 for a discussion of the financing risks associated with the Financing business and
management’s actions to mitigate such risks.
Cybersecurity
While cybersecurity risk can never be completely eliminated, our approach draws on the depth and breadth of our global capabilities,
both in terms of our offerings to clients and our internal approaches to risk management. We offer commercial security solutions that
deliver capabilities in areas such as identity and access management, data security, application security, network security and endpoint
security. These solutions include pervasive encryption, threat intelligence, analytics, cognitive and artificial intelligence, and forensic
capabilities that analyze client security events, yielding insights about attacks, threats, and vulnerabilities facing the client. We also
offer professional consulting and technical services solutions for security from assessment and incident response to deployment and
resource augmentation. In addition, we offer managed and outsourced security solutions from multiple security operations centers
around the world. Finally, security is embedded in a multitude of our products and offerings through secure engineering and operations,
and by critical functions (e.g., encryption, access control) in servers, storage, software, services, and other solutions.
From an enterprise perspective, we implement a multi-faceted risk-management approach based on the National Institute of
Standards and Technology Cybersecurity Framework to identify and address cybersecurity risks. In addition, we have established
policies and procedures that provide the foundation upon which IBM’s infrastructure and data are managed. We regularly assess and
adjust our technical controls and methods to identify and mitigate emerging cybersecurity risks. We use a layered approach with
overlapping controls to defend against cybersecurity attacks and threats on networks, end-user devices, servers, applications, data
and cloud solutions. We draw heavily on our own commercial security solutions and services to mitigate cybersecurity risks. We also
have threat intelligence and security monitoring programs, as well as a global incident response process to respond to cybersecurity
threats and attacks. In addition, we utilize a combination of online training, educational tools, videos and other awareness initiatives
to foster a culture of security awareness and responsibility among our workforce.
Management Discussion
International Business Machines Corporation and Subsidiary Companies
55
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
($ in millions)
For the year ended December 31:
Revenue
Pre-tax income
* Recast to conform to 2021 presentation.
2021
$774
$441
2020 *
$975
$449
Yr.-to-Yr.
Percent
Change
(20.6)%
(1.8)%
We have refocused our Financing business on IBM’s products and services. The wind down of our OEM commercial financing operations
completed in early 2021. In 2020, we began entering into agreements to sell certain 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 revenue decreased 20.6 percent (22 percent adjusted for currency) compared to the prior year, driven by client financing
down $166 million to $763 million and commercial financing down $35 million to $10 million. For the year ended December 31, 2021,
the decrease in financing revenue was due to a lower average asset balance, driven by the strategic actions described above.
Financing pre-tax income decreased 1.8 percent to $441 million compared to the prior year and the pre-tax margin of 57.0 percent
increased 10.9 points year to year. The decrease in pre-tax income was primarily driven by a decrease in gross profit which reflects the
strategic actions described above, partially offset by improvements in provisions for credit losses due to the overall improvement in
the credit quality of our portfolio year to year, as well as lower future funding commitments reserves related to the separation of Kyndryl.
Financial Position
($ in millions)
At December 31:
Cash and cash equivalents
Client financing receivables
Net investment in sales-type and direct financing leases (2)
Client loans
Total client financing receivables
Commercial financing receivables (3)
Held for investment
Held for sale
Other receivables
Total external receivables (4)
Intercompany financing receivables (5)(6)
Other assets(7)
Total assets
Intercompany payables (5)
Debt (8)
Other liabilities
Total liabilities
Total equity
Total liabilities and equity
(1) Recast to reflect segment changes.
2021
$ 1,359
2020 (1)
$ 1,862
3,396
8,818
$ 12,215
444
793
61
$ 13,512
778
1,231
$ 16,880
$
467
13,929
937
$ 15,333
$ 1,547
$ 16,880
4,092
11,498
$ 15,590
2,028
383
91
$ 18,092
3,959
1,061
$ 24,974
$
278
21,098
1,254
$ 22,629
$ 2,344
$ 24,974
(2) Includes deferred initial direct costs which are expensed in IBM’s consolidated financial results.
(3) Recast to conform to 2021 presentation.
(4) The difference between the decrease in total external receivables of $4.6 billion (from $18.1 in 2020 to $13.5 billion in 2021) and the $3.9 billion change
in Financing segment’s receivables disclosed in the free cash flow presentation on page 48 is primarily attributable to currency impacts.
(5) The entire amount is eliminated for purposes of IBM’s consolidated financial results and therefore does not appear in the Consolidated Balance Sheet.
(6) These assets, along with all other financing assets in this table, are leveraged at the value in the table using Financing segment debt. 2020 includes $3.0
billion of intercompany financing loans in support of Kyndryl's arrangements settled upon separation.
(7) Includes $0.7 billion of other intercompany assets.
(8) Financing segment debt is primarily composed of intercompany loans.
At December 31, 2021, we continue to apply our rigorous credit policies. Approximately 67 percent of the total external portfolio was
with investment-grade clients with no direct exposure to consumers, an increase of 6 points year to year and an increase of 1 point
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Management Discussion
International Business Machines Corporation and Subsidiary Companies
compared to September 30, 2021. This investment grade percentage is based on the credit ratings of the companies in the portfolio
and reflects mitigating credit enhancement actions taken by the client to reduce the risk to IBM.
We have a long-standing practice of taking mitigation actions, in certain circumstances, to transfer credit risk to third parties. 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.
The company has entered into agreements with third-party financial institutions to sell certain of its client and commercial financing
receivables for cash proceeds. Sales of client financing receivables include both loan and lease receivables. In addition, on December
24, 2020, the company entered into an agreement with a third-party investor to sell up to $3.0 billion of IBM short-term commercial
financing receivables, at any one time, on a revolving basis, starting in the U.S. and Canada in 2020, and expanding to other countries
within Europe and Asia Pacific in 2021, including Germany and the UK.
The following table presents the total amount of client and commercial financing receivables transferred:
($ in millions)
Client financing receivables for the year ended December 31
Lease receivables
Loan receivables
Total client financing receivables transferred*
Commercial financing receivables
Receivables transferred for the year ended December 31
Receivables transferred and uncollected as of December 31**
2021
2020
$ 819
2,224
$ 3,043
$ 7,359
1,653
$ 1,152
1,410
$ 2,562
$ 515
510
* More than half of the client financing receivables sold were classified as current assets at the time of sale.
** Of the total amount of commercial financing receivables sold and derecognized from the Consolidated Balance Sheet, the amounts presented remained
uncollected from business partners as of December 31, 2021 and 2020.
For additional information relating to financing receivables refer to note L, “Financing Receivables.” Refer to pages 26 through 28 for
additional information related to Financing segment receivables, allowance for credit losses and debt.
Return on Equity Calculation
($ in millions)
At December 31:
Numerator
Financing after-tax income (1) **
Denominator
Average Financing equity (2)
Financing return on equity (1)/(2)
* Recast to reflect segment changes.
2021
2020 *
$ 374
$ 381
$ 1,935
19.3 %
$2,467
15.4 %
** Calculated based upon an estimated tax rate principally based on Financing’s geographic mix of earnings as IBM’s provision for income taxes is
determined on a consolidated basis.
+ Average of the ending equity for Financing for the last five quarters.
Return on equity was 19.3 percent compared to 15.4 percent for the years ended December 31, 2021 and 2020, respectively. The
increase was driven by a lower average equity balance, which reflects the strategic actions and the overall improvement in the credit
quality of our portfolio described in the Financing's "Results of Operations” and "Financial Position" above.
Residual Value
Residual value is a risk unique to the financing business, and management of this risk is dependent upon the ability to accurately project
future equipment values at lease inception. Financing has insight into product plans and cycles for IBM products. Based upon this
product information, Financing continually monitors projections of future equipment values and compares them with the residual
values reflected in the portfolio.
Financing optimizes the recovery of residual values by selling assets sourced from end of lease, leasing used equipment to new clients
or extending lease arrangements with current clients.
Management Discussion
International Business Machines Corporation and Subsidiary Companies
57
The following table presents the recorded amount of unguaranteed residual value for sales-type and direct financing leases, as well as
operating leases at December 31, 2021 and December 31, 2020. In addition, the table presents the run out of when the unguaranteed
residual value assigned to equipment on leases at December 31, 2021 and December 31, 2020, is expected to be returned to the
company.
Unguaranteed Residual Value
($ in millions)
Sales-type and direct financing leases
Operating leases
Total unguaranteed residual value
At December 31,
2020
$469
48
$516
At December 31,
2021
$335
13
$348
Estimated Run Out of December 31, 2021 Balance
2025
and Beyond
$ 45
2
$ 47
2023
$ 126
2
$ 128
2024
$65
0
$65
2022
$ 99
9
$ 108
58
Report of Management
International Business Machines Corporation and Subsidiary Companies
Management Responsibility for Financial Information
Responsibility for the integrity and objectivity of the financial information presented in this Annual Report rests with IBM management.
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United
States of America, applying certain estimates and judgments as required.
IBM maintains an effective internal control structure. It consists, in part, of organizational arrangements with clearly defined lines of
responsibility and delegation of authority, and comprehensive systems and control procedures. An important element of the control
environment is an ongoing internal audit program. Our system also contains self-monitoring mechanisms, and actions are taken to
correct deficiencies as they are identified.
To assure the effective administration of internal controls, we carefully select and train our employees, develop and disseminate
written policies and procedures, provide appropriate communication channels and foster an environment conducive to the effective
functioning of controls. We believe that it is essential for the company to conduct its business affairs in accordance with the highest
ethical standards, as set forth in the IBM Business Conduct Guidelines. These guidelines, translated into numerous languages, are
distributed to employees throughout the world, and reemphasized through internal programs to assure that they are understood and
followed.
The Audit Committee of the Board of Directors is composed solely of independent, non-management directors, and is responsible for
recommending to the Board the independent registered public accounting firm to be retained for the coming year, subject to
stockholder ratification. The Audit Committee meets regularly and privately with the independent registered public accounting firm,
with the company’s internal auditors, as well as with IBM management, to review accounting, auditing, internal control structure and
financial reporting matters.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting of the company. Internal
control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the
United States of America.
The company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets
that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management conducted an evaluation of the effectiveness of internal control over financial reporting based on the criteria established
in Internal Control–Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Based on this evaluation, management concluded that the company’s internal control over financial reporting was effective as
of December 31, 2021.
PricewaterhouseCoopers LLP, an independent registered public accounting firm, is retained to audit IBM’s Consolidated Financial
Statements and the effectiveness of the internal control over financial reporting. Its accompanying report is based on audits conducted
in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Arvind Krishna
Chairman and Chief Executive Officer
February 22, 2022
James J. Kavanaugh
Senior Vice President and Chief Financial Officer
February 22, 2022
Report of Independent Registered Public Accounting Firm
International Business Machines Corporation and Subsidiary Companies
59
To the Board of Directors and Stockholders of International Business Machines Corporation
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of International Business Machines Corporation and its subsidiaries
(the “Company”) as of December 31, 2021 and 2020, and the related consolidated statements of income, of comprehensive income,
of equity and of cash flows for each of the three years in the period ended December 31, 2021, including the related notes (collectively
referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting
as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of
the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the
period ended December 31, 2021 in conformity with accounting principles generally accepted in the United States of America. Also in
our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31,
2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying
Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express opinions on the Company’s
consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public
accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations
of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due
to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of
the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included
performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable
basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements
in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only
in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect
on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial
statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or
60
Report of Independent Registered Public Accounting Firm
International Business Machines Corporation and Subsidiary Companies
disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or
complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial
statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the
critical audit matters or on the accounts or disclosures to which they relate.
Income Taxes–Uncertain Tax Positions
As described in Notes A and H to the consolidated financial statements, the Company is subject to income taxes in the United States and
numerous foreign jurisdictions. As disclosed by management, during the ordinary course of business there are many transactions and
calculations for which the ultimate tax determination is uncertain. As a result, management recognizes tax liabilities based on estimates of
whether additional taxes and interest will be due. As further described by management, these tax liabilities are recognized when, despite
management’s belief that the tax return positions are supportable, management believes that certain positions may not be fully sustained
upon review by tax authorities. Management bases its assessment of the accruals for tax liabilities on many factors, including past
experience and interpretations of tax law. This assessment relies on estimates and assumptions and may involve a series of complex
judgments about future events. As of December 31, 2021, unrecognized tax benefits were $8.7 billion.
The principal considerations for our determination that performing procedures relating to uncertain tax positions is a critical audit matter
are the significant judgment by management when estimating the uncertain tax positions, including applying complex tax laws, and a high
degree of estimation uncertainty based on potential for significant adjustments as a result of audits by tax authorities or other forms of tax
settlement. This in turn led to a high degree of auditor judgment, effort, and subjectivity in performing procedures to evaluate management’s
timely identification and measurement of uncertain tax positions. Also, the evaluation of audit evidence available to support the uncertain
tax positions is complex and required significant auditor judgment as the nature of the evidence is often inherently subjective, and the audit
effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the
consolidated financial statements. These procedures included testing the effectiveness of controls relating to the identification and
recognition of the uncertain tax positions, and controls addressing completeness of the uncertain tax positions, as well as controls over
measurement of the amount recorded. These procedures also included, among others (i) testing the information used in the calculation of
the uncertain tax positions, including intercompany agreements, international, federal, and state filing positions, and the related final tax
returns; (ii) testing the calculation of the uncertain tax positions by jurisdiction, including management’s assessment of the technical merits
of tax positions and estimates of the amount of tax benefit expected to be sustained; (iii) testing the completeness of management’s
assessment of both the identification of uncertain tax positions and possible outcomes of each uncertain tax position; and (iv) evaluating
the status and results of income tax audits pending in various tax jurisdictions. Professionals with specialized skill and knowledge were
used to assist in the evaluation of the completeness and measurement of the Company’s uncertain tax positions, including evaluating the
reasonableness of management’s assessment of whether tax positions are more-likely-than-not of being sustained and the amount of
potential benefit to be realized.
Goodwill Impairment Assessment for the Infrastructure Services Reporting Unit
As described in Notes A and O to the consolidated financial statements, the Company’s consolidated goodwill balance was $55.6 billion
as of December 31, 2021. Goodwill is tested for impairment at least annually, in the fourth quarter and whenever changes in
circumstances indicate an impairment may exist. The goodwill impairment test is performed at the reporting unit level, which is
generally at the level of or one level below an operating segment. As disclosed by management, if a quantitative test is performed,
management compares the fair value of the reporting unit to its carrying amount. In the fourth quarter of 2021, as a result of the
separation of Kyndryl and the segment changes immediately prior to the separation, management performed a quantitative test for
goodwill impairment. Goodwill associated with the Infrastructure Services (IS) reporting unit was $5.8 billion as of the time of testing.
Management estimated fair value based on a weighted average approach utilizing a combination of income and market approaches.
Under the market approaches, management estimated the fair value through consideration of market multiples of comparable
companies and market capitalization. Management applied a control premium to these market approaches. Under the income
approach, management estimated the fair value based on the present value of estimated discounted future cash flows, which require
the use of significant assumptions, including revenue growth rates and discount rates.
The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment for the
IS reporting unit is a critical audit matter are the significant judgment by management when developing the fair value of the reporting
unit, which in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating
management’s significant assumptions related to revenue growth rates and the discount rate used in the income approach, and the
selection of market multiples of comparable companies and the control premium, as applicable, for the market approaches. Also, the
audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion
on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s
goodwill impairment assessment, including controls over the valuation of the IS reporting unit. These procedures also included, among
Report of Independent Registered Public Accounting Firm
International Business Machines Corporation and Subsidiary Companies
61
others, (i) testing management’s process for developing the fair value estimate, (ii) evaluating the appropriateness of the income and
market approaches and the weighting of the approaches; (iii) testing the completeness and accuracy of underlying data used in the
income and market approaches; and (iv) evaluating the reasonableness of the significant assumptions used by management related to
revenue growth rates and the discount rate in the income approach and market multiples of comparable companies and the control
premium, as applicable, in the market approaches. Evaluating management’s assumptions related to revenue growth rates involved
evaluating whether the assumptions used by management were reasonable considering (i) the consistency with external market and
industry data, (ii) the current and past performance of the reporting unit, and (iii) whether these assumptions were consistent with
evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in the evaluation
of the appropriateness of the income and market approaches, the weighting of the approaches, and evaluating the appropriateness of
the discount rate, control premium, and market multiples of comparable companies assumptions.
PricewaterhouseCoopers LLP
New York, New York
February 22, 2022
We, or firms that we have ultimately acquired, have served as the Company’s auditor since 1923. For the period from 1923 to 1958,
the Company was audited by firms that a predecessor firm to PricewaterhouseCoopers LLP ultimately acquired.
62
Consolidated Income Statement
International Business Machines Corporation and Subsidiary Companies
($ in millions except per share amounts)
For the year ended December 31:
Revenue
Services
Sales
Financing
Total revenue
Cost
Services
Sales
Financing
Total cost
Gross profit
Expense and other (income)
Selling, general and administrative
Research, development and engineering
Intellectual property and custom development income
Other (income) and expense
Interest expense
Total expense and other (income)
Income from continuing operations before income taxes
Provision for/(benefit from) income taxes
Income from continuing operations
Income/(loss) from discontinued operations, net of tax
Net income
Earnings/(loss) per share of common stock
Assuming dilution
Continuing operations
Discontinued operations
Total
Basic
Continuing operations
Discontinued operations
Total
Weighted-average number of common shares outstanding
Assuming dilution
Basic
* Reclassified to reflect discontinued operations presentation.
** Reclassified to conform to 2021 presentation.
Amounts may not add due to rounding.
The accompanying notes are an integral part of the financial statements.
Notes
2021
2020 *
2019 *
D
G
Q&U
H
C
I
I
I
I
I
I
$29,225
27,346
780
57,350
19,147
6,184
534
25,865
31,486
18,745
6,488
(612)
873
1,155
26,649
4,837
124
4,712
1,030
$ 5,743
$
$
$
$
5.21
1.14
6.35
5.26
1.15
6.41
$27,626
$29,141
26,569 **
984 **
55,179
17,689
6,048 **
577 **
24,314
30,865
20,561
6,262
(620)
802
1,288
28,293
2,572
(1,360)
3,932
1,658
$ 5,590
$
$
$
$
4.38
1.85
6.23
4.42
1.86
6.28
27,357 **
1,216 **
57,714
19,009
6,467 **
704 **
26,181
31,533
18,724
5,910
(639)
(1,012)
1,344
24,327
7,206
60
7,146
2,285
$ 9,431
$
8.00
2.56
$ 10.56
$
8.05
2.58
$ 10.63
904,641,001
895,990,771
896,563,971
890,348,679
892,813,376
887,235,105
Consolidated Statement of Comprehensive Income
International Business Machines Corporation and Subsidiary Companies
63
($ in millions)
For the year ended December 31:
Net income
Other comprehensive income/(loss), before tax
Foreign currency translation adjustments
Net changes related to available-for-sale securities
Unrealized gains/(losses) arising during the period
Reclassification of (gains)/losses to net income
Total net changes related to available-for-sale securities
Unrealized gains/(losses) on cash flow hedges
Unrealized gains/(losses) arising during the period
Reclassification of (gains)/losses to net income
Total unrealized gains/(losses) on cash flow hedges
Retirement-related benefit plans
Prior service costs/(credits)
Net (losses)/gains arising during the period
Curtailments and settlements
Amortization of prior service (credits)/costs
Amortization of net (gains)/losses
Total retirement-related benefit plans
Other comprehensive income/(loss), before tax
Income tax (expense)/benefit related to items of other comprehensive
income
Other comprehensive income/(loss)
Total comprehensive income
* 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.
Notes
2021
2020 *
2019 *
$ 5,743
$ 5,590
$ 9,431
T
T
T
T
T
T
T
987
(1,500)
(39)
0
—
0
344
243
587
(51)
2,433
94
9
2,484
4,969
6,542
(1,703)
4,839
$ 10,582
(1)
—
(1)
(349)
(21)
(370)
(37)
(1,678)
52
13
2,314
664
(1,206)
466
(740)
$ 4,850
1
—
1
(689)
75
(614)
(73)
(120)
41
(9)
1,843
1,681
1,029
(136)
893
$ 10,324
64
Consolidated Balance Sheet
International Business Machines Corporation and Subsidiary Companies
($ in millions except per share amounts)
At December 31:
Assets
Current assets
Cash and cash equivalents
Restricted cash
Marketable securities
Notes and accounts receivable—trade (net of allowances of $218 in 2021 and $260 in 2020)
Short-term financing receivables
Held for investment (net of allowances of $176 in 2021 and $218 in 2020)
Held for sale
Other accounts receivable (net of allowances of $24 in 2021 and $25 in 2020)
Inventory
Deferred costs
Prepaid expenses and other current assets
Current assets of discontinued operations
Total current assets
Property, plant and equipment
Less: Accumulated depreciation
Property, plant and equipment—net
Operating right-of-use assets—net
Long-term financing receivables (net of allowances of $25 in 2021 and $45 in 2020)
Prepaid pension assets
Deferred costs
Deferred taxes
Goodwill
Intangible assets—net
Investments and sundry assets
Non-current assets of discontinued operations
Total assets
Liabilities and equity
Current liabilities
Notes
2021
2020 *
$
6,650 $ 13,188
463
600
5,790
307
600
6,754
7,221
793
1,002
1,649
1,097
3,466
—
29,539
20,085
14,390
5,694
3,222
5,425
9,850
924
7,370
55,643
12,511
1,823
—
10,509 **
383 **
695
1,812
1,018
2,089
2,618
39,165
20,100
13,895
6,205
3,566
7,086
7,557
1,150
8,404
53,765
13,739
2,187
13,147
$ 132,001 $ 155,971
J
L
K
D
C
M
M
M
N
L
W
D
H
O
O
P
C
Taxes
Short-term debt
Accounts payable
Compensation and benefits
Deferred income
Operating lease liabilities
Other accrued expenses and liabilities
Current liabilities of discontinued operations
Total current liabilities
Long-term debt
Retirement and nonpension postretirement benefit obligations
Deferred income
Operating lease liabilities
Other liabilities
Non-current liabilities of discontinued operations
Total liabilities
Commitments and Contingencies
Equity
IBM stockholders' equity
Common stock, par value $.20 per share, and additional paid-in capital
Shares authorized: 4,687,500,000
Shares issued (2021—2,248,577,848; 2020—2,242,969,004)
Retained earnings
Treasury stock, at cost (shares: 2021—1,350,509,249; 2020—1,350,315,580)
Accumulated other comprehensive income/(loss)
Total IBM stockholders' equity
Noncontrolling interests
Total equity
Total liabilities and equity
* Reclassified to reflect discontinued operations presentation.
** Recast to conform to 2021 presentation.
Amounts may not add due to rounding.
The accompanying notes are an integral part of the financial statements.
$
H
J&Q
N
C
J&Q
W
2,289 $
6,787
3,955
3,204
12,518
974
3,892
—
33,619
44,917
14,435
3,577
2,462
13,996
—
113,005
3,198
7,116
4,033
3,056
11,980
1,035
5,632
3,820
39,869
54,217
17,184
3,758
2,720
14,180
3,317
135,244
57,319
56,556
154,209
(169,392)
(23,234)
18,901
95
18,996
162,717
(169,339)
(29,337)
20,597
129
20,727
$ 132,001 $ 155,971
N
R
C
S
T
A
Consolidated Statement of Cash Flows
International Business Machines Corporation and Subsidiary Companies
65
($ in millions)
For the year ended December 31:
Cash flows from operating activities
Net income
Adjustments to reconcile net income to cash provided by operating activities
2021
2020
2019
$ 5,743
$ 5,590
$ 9,431
Depreciation
Amortization of intangibles
Stock-based compensation
Deferred taxes
Net (gain)/loss on asset sales and other
Change in operating assets and liabilities, net of acquisitions/divestitures
Receivables (including financing receivables)
Retirement related
Inventory
Other assets/other liabilities
Accounts payable
Net cash provided by operating activities
Cash flows from investing activities
Payments for property, plant and equipment
Proceeds from disposition of property, plant and equipment
Investment in software
Purchases of marketable securities and other investments
Proceeds from disposition of marketable securities and other investments
Non-operating finance receivables—net
Acquisition of businesses, net of cash acquired
Divestiture of businesses, net of cash transferred
Net cash provided by/(used in) investing activities
Cash flows from financing activities
Proceeds from new debt
Payments to settle debt
Short-term borrowings/(repayments) less than 90 days—net
Common stock repurchases
Common stock repurchases for tax withholdings
Financing—other
Distribution from Kyndryl*
Cash dividends paid
Net cash provided by/(used in) financing activities
Effect of exchange rate changes on cash, cash equivalents and restricted cash
Net change in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at January 1
Cash, cash equivalents and restricted cash at December 31
Supplemental data
Income taxes paid—net of refunds received
Interest paid on debt
3,888
2,529
982
(2,001)
(307)
1,372
1,038
138
(671)
85
12,796
(2,062)
387
(706)
(3,561)
3,147
0
(3,293)
114
(5,975)
522
(8,597)
(40)
—
(319)
70
879
(5,869)
(13,354)
(185)
(6,718)
13,675
$ 6,957
4,227
2,468
937
(3,203)
(70)
5,297
936
(209)
2,087
138
18,197
(2,618)
188
(612)
(6,246)
5,618
475
(336)
503
(3,028)
10,504
(13,365)
(853)
—
(302)
92
—
(5,797)
(9,721)
(87)
5,361
8,314
$ 13,675
4,209
1,850
679
(1,527)
(1,096)
502
301
67
858
(503)
14,770
(2,286)
537
(621)
(3,693)
3,961
6,720
(32,630)
1,076
(26,936)
31,825
(12,944)
(2,597)
(1,361)
(272)
99
—
(5,707)
9,042
(167)
(3,290)
11,604
$ 8,314
$ 2,103
$ 1,512
$ 2,253
$ 1,830
$ 2,091
$ 1,685
* Represents $879 million net cash proceeds from Kyndryl dividend payments to IBM, funded from the proceeds of $2.9 billion of debt issued and retained
by Kyndryl.
Cash flows above are presented on an IBM consolidated basis and therefore, also include $24 million of cash and cash equivalents presented in current
assets of discontinued operations in the IBM Consolidated Balance Sheet as of December 31, 2020. Refer to note C, “Separation of Kyndryl,” for additional
information related to cash flows from Kyndryl discontinued operations.
Amounts may not add due to rounding.
The accompanying notes are an integral part of the financial statements.
66
Consolidated Statement of Equity
International Business Machines Corporation and Subsidiary Companies
($ in millions except per share amounts)
2019
Equity, January 1, 2019
Net income plus other comprehensive
income/(loss)
Net income
Other comprehensive income/(loss)
Total comprehensive income/(loss)
Cash dividends paid—common stock
($6.43 per share)
Common stock issued under employee
Common
Stock and
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Non-
Treasury Comprehensive Stockholders’ Controlling
Interests
Income/(Loss)
Total IBM
Equity
Stock
Total
Equity
$55,151 $ 159,206 $ (168,071)
$ (29,490)
$16,796
$ 134 $16,929
9,431
893
9,431
893
$10,324
9,431
893
$10,324
(5,707)
(5,707)
(5,707)
plans (4,569,917 shares)
745
Purchases (2,000,704 shares) and sales
(2,041,347 shares) of treasury stock
under employee plans—net
Other treasury shares purchased, not
retired (9,979,516 shares)
Changes in other equity
Changes in noncontrolling interests
Equity, December 31, 2019
Amounts may not add due to rounding.
30
(11)
(1,331)
(5)
745
19
(1,331)
(5)
745
19
(1,331)
(5)
10
10
$ 144 $20,985
$55,895 $ 162,954 $ (169,413)
$ (28,597)
$20,841
The accompanying notes are an integral part of the financial statements.
($ in millions except per share amounts)
Common
Stock and
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Non-
Treasury Comprehensive Stockholders’ Controlling
Interests
Income/(Loss)
Total IBM
Equity
Stock
Total
Equity
2020
Equity, January 1, 2020
Cumulative effect of change in accounting
principle*
Net income plus other comprehensive
income/(loss)
Net income
Other comprehensive income/(loss)
Total comprehensive income/(loss)
Cash dividends paid—common stock
($6.51 per share)
Common stock issued under employee
$55,895 $162,954 $(169,413)
$ (28,597)
$20,841
$ 144 $20,985
(66)
5,590
(66)
(66)
(740)
5,590
(740)
$ 4,850
5,590
(740)
$ 4,850
(5,797)
(5,797)
(5,797)
plans (4,972,028 shares)
661
Purchases (2,363,966 shares) and sales
(2,934,907 shares) of treasury stock
under employee plans—net
Changes in noncontrolling interests
Equity, December 31, 2020
36
74
661
110
661
110
(15)
(15)
$ 129 $20,727
$56,556 $162,717 $(169,339)
$ (29,337)
$20,597
* Reflects the adoption of the FASB guidance on current expected credit losses. Refer to note B, “Accounting Changes.”
Amounts may not add due to rounding.
The accompanying notes are an integral part of the financial statements.
Consolidated Statement of Equity
International Business Machines Corporation and Subsidiary Companies
67
($ in millions except per share amounts)
2021
Equity, January 1, 2021
Net income plus other comprehensive
income/(loss)
Net income
Other comprehensive income/(loss)
Total comprehensive income/(loss)
Cash dividends paid—common stock
($6.55 per share)
Common stock issued under employee
Common
Stock and
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Non-
Treasury Comprehensive Stockholders’ Controlling
Interests
Stock Income/(Loss)
Total IBM
Equity
Total
Equity
$56,556 $162,717 $(169,339)
$ (29,337)
$20,597
$ 129 $ 20,727
5,743
4,839
5,743
4,839
$10,582
5,743
4,839
$ 10,582
(5,869)
(5,869)
(5,869)
plans (5,608,845 shares)
762
762
762
Purchases (2,286,912 shares) and sales
(2,093,243 shares) of treasury stock
under employee plans—net
Separation of Kyndryl*
Changes in noncontrolling interests
Equity, December 31, 2021
22
(8,404)
(53)
1,264
(31)
(7,140)
$57,319 $154,209 $(169,392)
$ (23,234)
$18,901
(31)
(62) (7,203)
28
28
$ 95 $ 18,996
* Refer to note C, “Separation of Kyndryl,” for additional information.
Amounts may not add due to rounding.
The accompanying notes are an integral part of the financial statements.
68
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
NOTE A. SIGNIFICANT ACCOUNTING POLICIES
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).
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-year amounts
have been reclassified to conform to the current year presentation. This is annotated where applicable.
On November 3, 2021, the company completed the previously announced 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. Refer to note J, “Financial Assets and
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 C, “Separation of Kyndryl,” for additional
information.
Effective 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 beginning in the fourth quarter of 2021 but did not
impact the company’s Consolidated Financial Statements. Refer to note E, “Segments,” for additional information on the company’s
reportable segments. The segments presented in this Annual Report are reported on a comparable basis for all periods.
On July 9, 2019, the company completed the acquisition of all the outstanding shares of Red Hat, Inc. (Red Hat). Refer to note F,
“Acquisitions & Divestitures,” for additional information.
The benefit from income taxes for the year ended December 31, 2020 includes the tax impacts of an intra-entity sale of certain of the
company’s intellectual property, which resulted in a net benefit of $0.9 billion in the first quarter of 2020 and a benefit of $0.2 billion
related to a foreign tax law change. Refer to note H, “Taxes,” for additional information.
Noncontrolling interest amounts of $19 million, $13 million and $16 million, net of tax, for the years ended December 31, 2021, 2020
and 2019, respectively, are included as a reduction within other (income) and expense in the Consolidated Income Statement.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of IBM and its controlled subsidiaries, which are primarily majority owned.
Any noncontrolling interest in the equity of a subsidiary is reported as a component of total equity in the Consolidated Balance Sheet.
Net income and losses attributable to the noncontrolling interest is reported as described above in the Consolidated Income Statement.
The accounts of variable interest entities (VIEs) are included in the Consolidated Financial Statements, if required. Investments in
business entities in which the company does not have control but has the ability to exercise significant influence over operating and
financial policies, are accounted for using the equity method and the company’s proportionate share of income or loss is recorded in
other (income) and expense. The accounting policy for other investments in equity securities is described within the “Marketable
Securities” section of this note. Equity investments in non-publicly traded entities lacking controlling financial interest or significant
influence are primarily measured at cost, absent other indicators of fair value, net of impairment, if any. All intercompany transactions
and accounts have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
amounts that are reported in the Consolidated Financial Statements and accompanying disclosures. Estimates are made for the
following, among others: revenue, costs to complete service contracts, income taxes, pension assumptions, valuation of assets
including goodwill and intangible assets, loss contingencies, allowance for credit losses and other matters. These estimates are based
on management’s best knowledge of current events, historical experience, actions that the company may undertake in the future and
on various other assumptions that are believed to be reasonable under the circumstances, including the macroeconomic impacts of
the COVID-19 pandemic. Actual results may be different from these estimates.
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
69
Revenue
The company accounts for a contract with a client when it has written approval, the contract is committed, the rights of the parties,
including payment terms, are identified, the contract has commercial substance and consideration is probable of collection.
Revenue is recognized when, or as, control of a promised product or service transfers to a client, in an amount that reflects the
consideration to which the company expects to be entitled in exchange for transferring those products or services. If the consideration
promised in a contract includes a variable amount, the company estimates the amount to which it expects to be entitled using either
the expected value or most likely amount method. The company’s contracts may include terms that could cause variability in the
transaction price, including, for example, rebates, volume discounts, service-level penalties, and performance bonuses or other forms
of contingent revenue.
The company only includes estimated amounts in the transaction price to the extent it is probable that a significant reversal of
cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. The company
may not be able to reliably estimate contingent revenue in certain long-term arrangements due to uncertainties that are not expected
to be resolved for a long period of time or when the company’s experience with similar types of contracts is limited. The company’s
arrangements infrequently include contingent revenue. Changes in estimates of variable consideration are included in note D, “Revenue
Recognition.”
The company’s standard billing terms are that payment is due upon receipt of invoice, payable within 30 days. Invoices are generally
issued as control transfers and/or as services are rendered. Additionally, in determining the transaction price, the company adjusts the
promised amount of consideration for the effects of the time value of money if the billing terms are not standard and the timing of
payments agreed to by the parties to the contract provide the client or the company with a significant benefit of financing, in which
case the contract contains a significant financing component. As a practical expedient, the company does not account for significant
financing components if the period between when the company transfers the promised product or service to the client and when the
client pays for that product or service will be one year or less. Most arrangements that contain a financing component are financed
through the company’s Financing business and include explicit financing terms.
The company may include subcontractor services or third-party vendor equipment or software in certain integrated services
arrangements. In these types of arrangements, revenue from sales of third-party vendor products or services is recorded net of costs
when the company is acting as an agent between the client and the vendor, and gross when the company is the principal for the
transaction. To determine whether the company is an agent or principal, the company considers whether it obtains control of the
products or services before they are transferred to the customer. In making this evaluation, several factors are considered, most
notably whether the company has primary responsibility for fulfillment to the client, as well as inventory risk and pricing discretion.
The company recognizes revenue on sales to solution providers, resellers and distributors (herein referred to as resellers) when the
reseller has economic substance apart from the company and the reseller is considered the principal for the transaction with the end-
user client.
The company reports revenue net of any revenue-based taxes assessed by governmental authorities that are imposed on and
concurrent with specific revenue-producing transactions.
In addition to the aforementioned general policies, the following are the specific revenue recognition policies for arrangements with
multiple performance obligations and for each major category of revenue.
Arrangements with Multiple Performance Obligations
The company’s global capabilities as a hybrid cloud platform and AI company include services, software, hardware and related
financing. The company enters into revenue arrangements that may consist of any combination of these products and services based
on the needs of its clients.
The company continues to develop new products and offerings and their associated consumption and delivery methods, including the
use of cloud and as-a-Service models. These are not separate businesses; they are offerings across the segments that address market
opportunities in areas such as analytics, data, cloud and security. Revenue from these offerings follows the specific revenue recognition
policies for arrangements with multiple performance obligations and for each major category of revenue, depending on the type of
offering, which are comprised of services, software and/or hardware.
To the extent that a product or service in multiple performance obligation arrangements is subject to other specific accounting
guidance, such as leasing guidance, that product or service is accounted for in accordance with such specific guidance. For all other
products or services in these arrangements, the company determines if the products or services are distinct and allocates the
consideration to each distinct performance obligation on a relative standalone selling price basis.
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Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
When products and services are not distinct, the company determines an appropriate measure of progress based on the nature of its
overall promise for the single performance obligation.
The revenue policies in the Services, Hardware and/or Software sections below are applied to each performance obligation, as
applicable.
Services
The company’s primary services offerings include consulting services, including business transformation; technology consulting and
application operations including the design and development of complex IT environments to a client’s specifications (e.g., design and
build); cloud services; business process outsourcing; and infrastructure support. Many of these services can be delivered entirely or
partially through cloud or as-a-Service delivery models. The company’s services are provided on a time-and-material basis, as a fixed-
price contract or as a fixed-price per measure of output contract and the contract terms range from less than one year to over 10 years.
In services arrangements, the company typically satisfies the performance obligation and recognizes revenue over time. In design and
build arrangements, the performance obligation is satisfied over time either because the client controls the asset as it is created (e.g.,
when the asset is built at the customer site) or because the company’s performance does not create an asset with an alternative use
and the company has an enforceable right to payment plus a reasonable profit for performance completed to date. In most other
services arrangements, the performance obligation is satisfied over time because the client simultaneously receives and consumes the
benefits provided as the company performs the services.
Revenue from time-and-material contracts is recognized on an output basis as labor hours are delivered and/or direct expenses are
incurred. Revenue from as-a-Service type contracts, such as Infrastructure-as-a-Service, is recognized either on a straight-line basis
or on a usage basis, depending on the terms of the arrangement (such as whether the company is standing ready to perform or whether
the contract has usage-based metrics). If an as-a-Service contract includes setup activities, those promises in the arrangement are
evaluated to determine if they are distinct.
In areas such as application management, business process outsourcing and other cloud-based services arrangements, the company
determines whether the services performed during the initial phases of the arrangement, such as setup activities, are distinct. In most
cases, the arrangement is a single performance obligation comprised of a series of distinct services that are substantially the same and
that have the same pattern of transfer (i.e., distinct days of service). The company applies a measure of progress (typically time-based)
to any fixed consideration and allocates variable consideration to the distinct periods of service based on usage. As a result, revenue
is generally recognized over the period the services are provided on a usage basis. This results in revenue recognition that corresponds
with the value to the client of the services transferred to date relative to the remaining services promised.
Revenue related to maintenance and technology support and extended warranty is recognized on a straight-line basis over the period
of performance because the company is standing ready to provide services.
In design and build contracts, revenue is recognized based on progress toward completion of the performance obligation using a cost-
to-cost measure of progress. Revenue is recognized based on the labor costs incurred to date as a percentage of the total estimated
labor costs to fulfill the contract. Due to the nature of the work performed in these arrangements, the estimation of cost at completion
is complex, subject to many variables and requires significant judgment. Key factors reviewed by the company to estimate costs to
complete each contract are future labor and product costs and expected productivity efficiencies. Changes in original estimates are
reflected in revenue on a cumulative catch-up basis in the period in which the circumstances that gave rise to the revision become
known by the company. Refer to note D, “Revenue Recognition,” for the amount of revenue recognized in the reporting period on a
cumulative catch-up basis (i.e., from performance obligations satisfied, or partially satisfied, in previous periods).
The company performs ongoing profitability analyses of its design and build services contracts accounted for using a cost-to-cost
measure of progress in order to determine whether the latest estimates of revenues, costs and profits require updating. If at any time
these estimates indicate that the contract will be unprofitable, the entire estimated loss for the remainder of the contract is recorded
immediately. For other types of services contracts, any losses are recorded as incurred.
In some services contracts, the company bills the client prior to recognizing revenue from performing the services. Deferred income of
$3,460 million and $3,604 million at December 31, 2021 and 2020, respectively, is included in the Consolidated Balance Sheet. In
other services contracts, the company performs the services prior to billing the client. When the company performs services prior to
billing the client in design and build contracts, the right to consideration is typically subject to milestone completion or client
acceptance and the unbilled accounts receivable is classified as a contract asset. At December 31, 2021 and 2020, contract assets for
services contracts of $430 million and $376 million, respectively, are included in prepaid expenses and other current assets in the
Consolidated Balance Sheet. The remaining amount of unbilled accounts receivable of $723 million and $650 million at December 31,
2021 and 2020, respectively, is included in notes and accounts receivable–trade in the Consolidated Balance Sheet.
Billings usually occur in the month after the company performs the services or in accordance with specific contractual provisions.
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
71
Hardware
The company’s hardware offerings include the sale or lease of Hybrid Infrastructure solutions including Z systems as well as Distributed
Infrastructure solutions such as Power and storage solutions. The capabilities of these products can also be delivered through as-a-
Service or cloud delivery models, such as Infrastructure-as-a-Service and Storage-as-a-Service. The company also offers installation
services for its more complex hardware products. Hardware offerings are often sold with distinct maintenance services, described in
the Services section above.
Revenue from hardware sales is recognized when control has transferred to the customer which typically occurs when the hardware
has been shipped to the client, risk of loss has transferred to the client and the company has a present right to payment for the
hardware. In limited circumstances when a hardware sale includes client acceptance provisions, revenue is recognized either when
client acceptance has been obtained, client acceptance provisions have lapsed, or the company has objective evidence that the criteria
specified in the client acceptance provisions have been satisfied. Revenue from hardware sales-type leases is recognized at the
beginning of the lease term. Revenue from rentals and operating leases is recognized on a straight-line basis over the term of the rental
or lease.
Revenue from as-a-Service arrangements is recognized either on a straight-line basis or on a usage basis as described in the Services
section above. Installation services are accounted for as distinct performance obligations with revenue recognized as the services are
performed. Shipping and handling activities that occur after the client has obtained control of a product are accounted for as an activity
to fulfill the promise to transfer the product rather than as an additional promised service and, therefore, no revenue is deferred and
recognized over the shipping period.
Software
The company’s software offerings include hybrid platform software solutions, which contain many of the company’s strategic areas
including Red Hat, automation, data and AI, and security; transaction processing, which primarily supports mission-critical systems for
clients; and, distributed infrastructure software, which provides operating systems for IBM Z and Power Systems hardware. These
offerings include proprietary software and open source software, and many can be delivered entirely or partially through as-a-Service
or cloud delivery models, while others are delivered as on-premise software licenses.
Revenue from proprietary perpetual (one-time charge) license software is recognized at a point in time at the inception of the
arrangement when control transfers to the client, if the software license is distinct from the post-contract support (PCS) offered by the
company.
Revenue from proprietary term license software is recognized at a point in time for the committed term of the contract, unless
consideration depends on client usage, in which case revenue is recognized when the usage occurs.
Proprietary term licenses often have a one-month contract term due to client termination rights, in which case, revenue would be
recognized in that month for both the license and PCS. Clients may contract to convert their existing IBM term license software into
perpetual license software plus PCS. When proprietary term license software is converted to perpetual license software, the
consideration becomes fixed with no cancellability and, therefore, revenue for the perpetual license is recognized upon conversion,
consistent with the accounting for other perpetual licenses, as described above. PCS revenue is recognized as described below.
The company also has open source software offerings. Since open source software is offered under an open source licensing model
and therefore, the license is available for free, the standalone selling price is zero. As such, when the license is sold with PCS or other
products and services, no consideration is allocated to the license when it is a distinct performance obligation and therefore no revenue
is recognized when control of the license transfers to the client. Revenue is recognized over the PCS period. In certain cases, open
source software is bundled with proprietary software and, if the open source software is not considered distinct, the software bundle
(e.g., Cloud Pak) is accounted for under a proprietary software model. Cloud Paks can be sold either as perpetual or committed-term
software licenses, both of which are described above.
Revenue from PCS is recognized over the contract term on a straight-line basis because the company is providing a service of standing
ready to provide support, when-and-if needed, and is providing unspecified software upgrades on a when-and-if available basis over
the contract term.
Revenue from software hosting or Software-as-a-Service arrangements is recognized either on a straight-line basis or on a usage basis
as described in the Services section above. In software hosting arrangements, the rights provided to the client (e.g., ownership of a
license, contract termination provisions and the feasibility of the client to operate the software) are considered in determining whether
the arrangement includes a license. In arrangements that include a software license, the associated revenue is recognized in
accordance with the software license recognition policy above rather than over time as a service.
72
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
Financing
Financing income attributable to sales-type leases, direct financing leases and loans is recognized on the accrual basis using the
effective interest method. Operating lease income is recognized on a straight-line basis over the term of the lease.
Standalone Selling Price
The company allocates the transaction price to each performance obligation on a relative standalone selling price basis. The standalone
selling price (SSP) is the price at which the company would sell a promised product or service separately to a client. In most cases, the
company is able to establish SSP based on the observable prices of products or services sold separately in comparable circumstances
to similar clients. The company typically establishes SSP ranges for its products and services which are reassessed on a periodic basis
or when facts and circumstances change.
In certain instances, the company may not be able to establish a SSP range based on observable prices and the company estimates
SSP. The company estimates SSP by considering multiple factors including, but not limited to, overall market conditions, including
geographic or regional specific factors, competitive positioning, competitor actions, internal costs, profit objectives and pricing
practices. Additionally, in certain circumstances, the company may estimate SSP for a product or service by applying the residual
approach. Estimating SSP is a formal process that includes review and approval by the company’s management.
Services Costs
Recurring operating costs for services contracts are recognized as incurred. For fixed-price design and build contracts, the costs of
external hardware and software accounted for under the cost-to-cost measure of progress are deferred and recognized based on the
labor costs incurred to date (i.e., the measure of progress), as a percentage of the total estimated labor costs to fulfill the contract as
control transfers over time for these performance obligations. Certain eligible, nonrecurring costs (i.e., setup costs) incurred in the
initial phases of business process outsourcing contracts and other cloud-based services contracts, including Software-as-a-Service
arrangements, are capitalized when the costs relate directly to the contract, the costs generate or enhance resources of the company
that will be used in satisfying the performance obligation in the future, and the costs are expected to be recovered. These costs consist
of transition and setup costs related to the provisioning, configuring, implementation and training and other deferred fulfillment costs,
including, for example, prepaid assets used in services contracts (i.e., prepaid software or prepaid maintenance). Capitalized costs are
amortized on a straight-line basis over the expected period of benefit, which includes anticipated contract renewals or extensions,
consistent with the transfer to the client of the services to which the asset relates. Additionally, fixed assets associated with these
contracts are capitalized and depreciated on a straight-line basis over the expected useful life of the asset. If an asset is contract
specific, then the depreciation period is the shorter of the useful life of the asset or the contract term. Amounts paid to clients in excess
of the fair value of acquired assets used in business process outsourcing arrangements are deferred and amortized on a straight-line
basis as a reduction of revenue over the expected period of benefit. The company performs periodic reviews to assess the recoverability
of deferred contract transition and setup costs. If the carrying amount is deemed not recoverable, an impairment loss is recognized.
Refer to note D, “Revenue Recognition,” for the amount of deferred costs to fulfill a contract at December 31, 2021 and 2020.
In situations in which a business process outsourcing or other cloud-based services contract is terminated, the terms of the contract
may require the client to reimburse the company for the recovery of unbilled accounts receivable, unamortized deferred contract costs
and additional costs incurred by the company to transition the services.
Software Costs
Costs that are related to the conceptual formulation and design of licensed software programs are expensed as incurred to research,
development and engineering expense; costs that are incurred to produce the finished product after technological feasibility has been
established are capitalized as an intangible asset. Capitalized amounts are amortized on a straight-line basis over periods ranging up
to three years and are recorded in software cost within cost of sales. The company performs periodic reviews to ensure that
unamortized program costs remain recoverable from future revenue. Costs to support or service licensed programs are charged to
software cost within cost of sales as incurred.
The company capitalizes certain costs that are incurred to purchase or develop internal-use software. Internal-use software programs
also include software used by the company to deliver Software-as-a-Service when the client does not receive a license to the software
and the company has no substantive plans to market the software externally. Capitalized costs are amortized on a straight-line basis
over periods ranging up to three years and are recorded in selling, general and administrative expense or cost of sales, depending on
whether the software is used by the company in revenue generating transactions. Additionally, the company may capitalize certain
types of implementation costs and amortize them over the term of the arrangement when the company is a customer in a cloud-
computing arrangement.
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
73
Incremental Costs of Obtaining a Contract
Incremental costs of obtaining a contract (e.g., sales commissions) are capitalized and amortized on a straight-line basis over the
expected customer relationship period if the company expects to recover those costs. The expected customer relationship period is
determined based on the average customer relationship period, including expected renewals, for each offering type and ranges from
three to six years. Expected renewal periods are only included in the expected customer relationship period if commission amounts
paid upon renewal are not commensurate with amounts paid on the initial contract. Incremental costs of obtaining a contract include
only those costs the company incurs to obtain a contract that it would not have incurred if the contract had not been obtained. The
company has determined that certain commissions programs meet the requirements to be capitalized. Some commission programs
are not subject to capitalization as the commission expense is paid and recognized as the related revenue is recognized. Additionally,
as a practical expedient, the company expenses costs to obtain a contract as incurred if the amortization period would have been a year
or less. These costs are included in selling, general and administrative expenses.
Product Warranties
The company offers warranties for its hardware products that generally range up to three years, with the majority being either one or
three years. Any cost of standard warranties is accrued when the corresponding revenue is recognized. The company estimates its
standard warranty costs for products based on historical warranty claim experience and estimates of future spending and applies this
estimate to the revenue stream for products under warranty. Estimated future costs for warranties applicable to revenue recognized
in the current period are charged to cost of sales. The warranty liability is reviewed quarterly to verify that it properly reflects the
remaining obligation based on the anticipated expenditures over the balance of the obligation period. Adjustments are made when
actual warranty claim experience differs from estimates. Costs from fixed-price support or maintenance contracts, including extended
warranty contracts, are recognized as incurred.
Revenue from extended warranty contracts is initially recorded as deferred income and subsequently recognized on a straight-line
basis over the delivery period because the company is providing a service of standing ready to provide services over such term.
Refer to note S, “Commitments & Contingencies,” for additional information.
Shipping and Handling
Costs related to shipping and handling are recognized as incurred and included in cost in the Consolidated Income Statement.
Expense and Other Income
Selling, General and Administrative
Selling, general and administrative (SG&A) expense is charged to income as incurred, except for certain sales commissions, which are
capitalized and amortized. For further information regarding capitalizing sales commissions, see “Incremental Costs of Obtaining a
Contract” above. Expenses of promoting and selling products and services are classified as selling expense and, in addition to sales
commissions, include such items as compensation, advertising and travel. General and administrative expense includes such items as
compensation, legal costs, office supplies, non-income taxes, insurance and office rental. In addition, general and administrative
expense includes other operating items such as an allowance for credit losses, workforce rebalancing charges for contractually
obligated payments to employees terminated in the ongoing course of business, acquisition costs related to business combinations,
amortization of certain intangible assets and environmental remediation costs.
Advertising and Promotional Expense
The company expenses advertising and promotional costs as incurred. Cooperative advertising reimbursements from vendors are
recorded net of advertising and promotional expense in the period in which the related advertising and promotional expense is incurred.
Advertising and promotional expense, which includes media, agency and promotional expense, was $1,413 million, $1,509 million and
$1,591 million in 2021, 2020 and 2019, respectively, and is recorded in SG&A expense in the Consolidated Income Statement.
Research, Development and Engineering
Research, development and engineering (RD&E) costs are expensed as incurred. Software costs that are incurred to produce the
finished product after technological feasibility has been established are capitalized as an intangible asset.
74
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
Intellectual Property and Custom Development Income
The company licenses and sells the rights to certain of its intellectual property (IP) including internally developed patents, trade secrets
and technological know-how. Certain IP transactions to third parties are licensing/royalty-based and others are transaction-based
sales/other transfers. Income from licensing arrangements is recognized at the inception of the license term if the nature of the
company’s promise is to provide a right to use the company’s intellectual property as it exists at that point in time (i.e., the license is
functional intellectual property) and control has transferred to the client. Income is recognized over time if the nature of the company’s
promise is to provide a right to access the company’s intellectual property throughout the license period (i.e., the license is symbolic
intellectual property), such as a trademark license. Income from royalty-based fee arrangements is recognized at the later of when the
subsequent sale or usage occurs or the performance obligation to which some or all of the royalty has been allocated has been satisfied
(or partially satisfied). The company also enters into cross-licensing arrangements of patents, and income from these arrangements is
recognized when control transfers to the customer. In addition, the company earns income from certain custom development projects
with strategic technology partners and specific clients. The company records the income from these projects over time as the company
satisfies the performance obligation if the fee is nonrefundable and is not dependent upon the ultimate success of the project.
Other (Income) and Expense
Other (income) and expense includes interest income (other than from Financing external transactions), gains and losses on certain
derivative instruments, gains and losses from securities and other investments including the changes in fair value associated with the
company’s retained interest in Kyndryl common stock, gains and losses from certain real estate transactions, foreign currency
transaction gains and losses, gains and losses from the sale of financial assets, gains and losses from the sale of businesses, other than
reported as discontinued operations, and amounts related to accretion of asset retirement obligations. Other (income) and expense
also includes certain components of retirement-related costs, including interest costs, expected return on plan assets, amortization of
prior service costs/(credits), curtailments and settlements and other net periodic pension/post-retirement benefit costs.
Business Combinations and Intangible Assets Including Goodwill
The company accounts for business combinations using the acquisition method and accordingly, the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree are generally recorded at their acquisition date fair values. Contract
assets and contract liabilities are measured in accordance with the guidance on revenue recognition. Goodwill represents the excess
of the purchase price over the fair value of net assets, including the amount assigned to identifiable intangible assets. The primary
drivers that generate goodwill are the value of synergies between the acquired entities and the company and the acquired assembled
workforce, neither of which qualifies as a separately identifiable intangible asset. Goodwill recorded in an acquisition is assigned to
applicable reporting units based on expected revenues or expected cash flows. Identifiable intangible assets with finite lives are
amortized over their useful lives. Amortization of completed technology is recorded in cost, and amortization of all other intangible
assets is recorded in SG&A expense. Acquisition-related costs, including advisory, legal, accounting, valuation and pre-close and other
costs, are typically expensed in the periods in which the costs are incurred and are recorded in SG&A expense. The results of operations
of acquired businesses are included in the Consolidated Financial Statements from the acquisition date.
Impairment
Long-lived assets, other than goodwill, are tested for impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. The impairment test is typically based on undiscounted cash flows and, if impaired, the asset
is written down to fair value based on either discounted cash flows or appraised values. Goodwill is tested for impairment at least
annually, in the fourth quarter and whenever changes in circumstances indicate an impairment may exist. The goodwill impairment
test is performed at the reporting unit level, which is generally at the level of or one level below an operating segment.
Depreciation and Amortization
Property, plant and equipment are carried at cost and depreciated over their estimated useful lives using the straight-line method. The
estimated useful lives of certain depreciable assets are as follows: buildings, 30 to 50 years; building equipment, 10 to 20 years; land
improvements, 20 years; production, engineering, office and other equipment, 2 to 20 years; and information technology equipment,
1.5 to 5 years. Leasehold improvements are amortized over the shorter of their estimated useful lives or the related lease term, rarely
exceeding 25 years.
As noted within the “Software Costs” section of this note, capitalized software costs are amortized on a straight-line basis over periods
ranging up to 3 years. Other intangible assets are amortized over periods between 1 and 20 years.
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
75
Environmental
The cost of internal environmental protection programs that are preventative in nature are expensed as incurred. When a cleanup
program becomes likely, and it is probable that the company will incur cleanup costs and those costs can be reasonably estimated, the
company accrues remediation costs for known environmental liabilities.
Asset Retirement Obligations
Asset retirement obligations (ARO) are legal obligations associated with the retirement of long-lived assets and the liability is initially
recorded at fair value. The related asset retirement costs are capitalized by increasing the carrying amount of the related assets by the
same amount as the liability. Asset retirement costs are subsequently depreciated over the useful lives of the related assets.
Subsequent to initial recognition, the company records period-to-period changes in the ARO liability resulting from the passage of time
in interest expense and revisions to either the timing or the amount of the original expected cash flows to the related assets.
Defined Benefit Pension and Nonpension Postretirement Benefit Plans
The funded status of the company’s defined benefit pension plans and nonpension postretirement benefit plans (retirement-related
benefit plans) is recognized in the Consolidated Balance Sheet. The funded status is measured as the difference between the fair value
of plan assets and the benefit obligation at December 31, the measurement date. For defined benefit pension plans, the benefit
obligation is the projected benefit obligation (PBO), which represents the actuarial present value of benefits expected to be paid upon
retirement based on employee services already rendered and estimated future compensation levels. For the nonpension
postretirement benefit plans, the benefit obligation is the accumulated postretirement benefit obligation (APBO), which represents the
actuarial present value of postretirement benefits attributed to employee services already rendered. The fair value of plan assets
represents the current market value of assets held in an irrevocable trust fund, held for the sole benefit of participants, which are
invested by the trust fund. Overfunded plans, with the fair value of plan assets exceeding the benefit obligation, are aggregated and
recorded as a prepaid pension asset equal to this excess. Underfunded plans, with the benefit obligation exceeding the fair value of
plan assets, are aggregated and recorded as a retirement and nonpension postretirement benefit obligation equal to this excess.
The current portion of the retirement and nonpension post-retirement benefit obligations represents the actuarial present value of
benefits payable in the next 12 months exceeding the fair value of plan assets, measured on a plan-by-plan basis. This obligation is
recorded in compensation and benefits in the Consolidated Balance Sheet.
Net periodic pension and nonpension postretirement benefit cost/(income) is recorded in the Consolidated Income Statement and
includes service cost, interest cost, expected return on plan assets, amortization of prior service costs/(credits) and (gains)/losses
previously recognized as a component of other comprehensive income/(loss) (OCI) and amortization of the net transition asset
remaining in accumulated other comprehensive income/(loss) (AOCI). The service cost component of net benefit cost is recorded in
Cost, SG&A and RD&E in the Consolidated Income Statement (unless eligible for capitalization) based on the employees’ respective
functions. The other components of net benefit cost are presented separately from service cost within other (income) and expense in
the Consolidated Income Statement.
(Gains)/losses and prior service costs/(credits) are recognized as a component of OCI in the Consolidated Statement of Comprehensive
Income as they arise. Those (gains)/losses and prior service costs/(credits) are subsequently recognized as a component of net periodic
cost/(income) pursuant to the recognition and amortization provisions of applicable accounting guidance. (Gains)/losses arise as a
result of differences between actual experience and assumptions or as a result of changes in actuarial assumptions. Prior service
costs/(credits) represent the cost of benefit changes attributable to prior service granted in plan amendments.
The measurement of benefit obligations and net periodic cost/(income) is based on estimates and assumptions approved by the
company’s management. These valuations reflect the terms of the plans and use participant-specific information such as
compensation, age and years of service, as well as certain assumptions, including estimates of discount rates, expected return on plan
assets, rate of compensation increases, interest crediting rates and mortality rates.
Defined Contribution Plans
The company’s contribution for defined contribution plans is recorded when the employee renders service to the company. The charge
is recorded in Cost, SG&A and RD&E in the Consolidated Income Statement based on the employees’ respective functions.
76
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
Stock-Based Compensation
Stock-based compensation represents the cost related to stock-based awards granted to employees. The company measures stock-
based compensation cost at the grant date, based on the estimated fair value of the award and recognizes the cost on a straight-line
basis (net of estimated forfeitures) over the employee requisite service period. The company grants its employees Restricted Stock
Units (RSUs), including Retention Restricted Stock Units (RRSUs); Performance Share Units (PSUs); and stock options. RSUs are stock
awards granted to employees that entitle the holder to shares of common stock as the award vests, typically over a one- to five-year
period. PSUs are stock awards where the number of shares ultimately received by the employee depends on the company’s
performance against specified targets and typically vest over a three-year period. Over the performance period, the number of shares
that will be issued is adjusted based upon the probability of achievement of performance targets. The ultimate number of shares issued
and the related compensation cost recognized as expense will be based on a comparison of the final performance metrics to the
specified targets. Dividend equivalents are not paid on the stock awards described above. The fair value of the awards is determined
and fixed on the grant date based on the company’s stock price, adjusted for the exclusion of dividend equivalents where applicable
and for PSUs assumes that performance targets will be achieved. The company estimates the fair value of stock options using a Black-
Scholes valuation model. Stock-based compensation cost is recorded in Cost, SG&A, and RD&E in the Consolidated Income Statement
based on the employees’ respective functions.
The company records deferred tax assets for awards that result in deductions on the company’s income tax returns, based on the
amount of compensation cost recognized and the relevant statutory tax rates. The differences between the deferred tax assets
recognized for financial reporting purposes and the actual tax deduction reported on the income tax return are recorded as a benefit
or expense to the provision for income taxes in the Consolidated Income Statement.
Income Taxes
Income tax expense is based on reported income before income taxes. Deferred income taxes reflect the tax effect of temporary
differences between asset and liability amounts that are recognized for financial reporting purposes and the amounts that are
recognized for income tax purposes. These deferred taxes are measured by applying currently enacted tax laws. The company includes
Global Intangible Low-Taxed Income (GILTI) in measuring deferred taxes. Valuation allowances are recognized to reduce deferred tax
assets to the amount that will more likely than not be realized. In assessing the need for a valuation allowance, management considers
all available evidence for each jurisdiction including past operating results, estimates of future taxable income and the feasibility of
ongoing tax planning strategies/actions. When the company changes its determination as to the amount of deferred tax assets that can
be realized, the valuation allowance is adjusted with a corresponding impact to income tax expense in the period in which such
determination is made.
The company recognizes additional tax liabilities when the company believes that certain positions may not be fully sustained upon
review by tax authorities. Benefits from tax positions are measured at the largest amount of benefit that is greater than 50 percent
likely of being realized upon settlement. The noncurrent portion of tax liabilities is included in other liabilities in the Consolidated
Balance Sheet. To the extent that new information becomes available which causes the company to change its judgment regarding the
adequacy of existing tax liabilities, such changes to tax liabilities will impact income tax expense in the period in which such
determination is made. Interest and penalties, if any, related to accrued liabilities for potential tax assessments are included in income
tax expense.
Translation of Non-U.S. Currency Amounts
Assets and liabilities of non-U.S. subsidiaries that have a local functional currency are translated to U.S. dollars at year-end exchange
rates. Translation adjustments are recorded in OCI. Income and expense items are translated at weighted-average rates of exchange
prevailing during the year.
Inventory, property, plant and equipment—net and other non-monetary assets and liabilities of non-U.S. subsidiaries and branches
that operate in U.S. dollars are translated at the approximate exchange rates prevailing when the company acquired the assets or
liabilities. All other assets and liabilities denominated in a currency other than U.S. dollars are translated at year-end exchange rates
with the transaction gain or loss recognized in other (income) and expense. Income and expense items are translated at the weighted-
average rates of exchange prevailing during the year. These translation gains and losses are included in net income for the period in
which exchange rates change.
Derivative Financial Instruments
The company uses derivative financial instruments primarily to manage foreign currency and interest rate risk, and to a lesser extent,
equity and credit risk. The company does not use derivative financial instruments for trading or speculative purposes. Derivatives that
qualify for hedge accounting can be designated as either cash flow hedges, net investment hedges, or fair value hedges. The company
may enter into derivative contracts that economically hedge certain of its risks, even when hedge accounting does not apply, or the
company elects not to apply hedge accounting.
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
77
Derivatives are recognized in the Consolidated Balance Sheet at fair value on a gross basis as either assets or liabilities and classified
as current or noncurrent based upon whether the maturity of the instrument is less than or greater than 12 months.
Changes in the fair value of derivatives designated as a cash flow hedge are recorded, net of applicable taxes, in OCI and subsequently
reclassified into the same income statement line as the hedged exposure when the underlying hedged item is recognized in earnings.
Effectiveness for net investment hedging derivatives is measured on a spot-to-spot basis. Changes in the fair value of highly effective
net investment hedging derivatives and other non-derivative financial instruments designated as net investment hedges are recorded
as foreign currency translation adjustments in AOCI. Changes in the fair value of the portion of a net investment hedging derivative
excluded from the assessment of effectiveness are recorded in interest expense and cost of financing. Changes in the fair value of
interest rate derivatives designated as a fair value hedge and the offsetting changes in the fair value of the underlying hedged exposure
are recorded in interest expense and cost of financing. Changes in the fair value of derivatives not designated as hedges are reported
in earnings primarily in other (income) and expense. See note U, “Derivative Financial Instruments,” for further information.
The cash flows associated with derivatives designated as fair value and cash flow hedges are reported in cash flows from operating
activities in the Consolidated Statement of Cash Flows. Cash flows from derivatives designated as net investment hedges and
derivatives not designated as hedges are reported in cash flows from investing activities in the Consolidated Statement of Cash Flows.
Cash flows from derivatives designated as hedges of foreign currency denominated debt directly associated with the settlement of the
principal are reported in payments to settle debt in cash flows from financing activities in the Consolidated Statement of Cash Flows.
Financial Instruments
In determining the fair value of its financial instruments, the company uses a variety of methods and assumptions that are based on
market conditions and risks existing at each balance sheet date. See note J, “Financial Assets & Liabilities,” for further information. All
methods of assessing fair value result in a general approximation of value, and such value may never actually be realized.
Fair Value Measurement
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;
• 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.
Available-for-sale securities are measured for impairment on a recurring basis by comparing the security’s fair value with its amortized
cost basis. Effective January 1, 2020 with the adoption of the new standard on credit losses, if the fair value of the security falls below
its amortized cost basis, the change in fair value is recognized in the period the impairment is identified when the loss is due to credit
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Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
factors. The change in fair value due to non-credit factors is recorded in other comprehensive income when the company does not
intend to sell and has the ability to hold the investment. The company’s standard practice is to hold all of its debt security investments
classified as available-for-sale until maturity. There were no impairments for credit losses and no material non-credit impairments
recognized for the years ended December 31, 2021 and 2020. Prior to the adoption of the new standard, available-for-sale securities
were measured for impairment using an other-than-temporary impairment model. No impairment was recorded for the year ended
December 31, 2019.
Certain nonfinancial assets such as property, plant and equipment, land, goodwill and intangible assets are subject to nonrecurring fair
value measurements if they are deemed to be impaired. The impairment models used for nonfinancial assets depend on the type of
asset. There were no material impairments of nonfinancial assets for the years ended December 31, 2021, 2020 and 2019.
Cash Equivalents
All highly liquid investments with maturities of three months or less at the date of purchase are considered to be cash equivalents.
Marketable Securities
The company measures equity investments at fair value with changes recognized in net income.
Debt securities included in current assets represent securities that are expected to be realized in cash within one year of the balance
sheet date. Long-term debt securities and alliance equity securities are included in investments and sundry assets. Debt securities are
considered available-for-sale and are reported at fair value with unrealized gains and losses, net of applicable taxes, in OCI. The
realized gains and losses on available-for-sale debt securities are included in other (income) and expense in the Consolidated Income
Statement. Realized gains and losses are calculated based on the specific identification method.
Inventory
Raw materials, work in process and finished goods are stated at the lower of average cost or net realizable value.
Notes and Accounts Receivable—Trade and Contract Assets
The company classifies the right to consideration in exchange for products or services transferred to a client as either a receivable or a
contract asset. A receivable is a right to consideration that is unconditional as compared to a contract asset which is a right to
consideration that is conditional upon factors other than the passage of time. The majority of the company’s contract assets represent
unbilled amounts related to design and build services contracts when the cost-to-cost method of revenue recognition is utilized,
revenue recognized exceeds the amount billed to the client, and the right to consideration is subject to milestone completion or client
acceptance. Contract assets are generally classified as current and are recorded on a net basis with deferred income (i.e., contract
liabilities) at the contract level.
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. Leases are
accounted for in accordance with lease accounting standards. Loans, which are generally unsecured, are primarily for software and
services. Commercial financing receivables are primarily for working capital financing to distributors and resellers of IBM products and
services. Financing receivables are classified as either held for sale or held for investment, depending on the company’s intent and
ability to hold the underlying contract for the foreseeable future or until maturity or payoff. Loans and commercial financing receivables
are recorded at amortized cost, which approximates fair value.
Transfers of Financial Assets
The company enters into arrangements to sell certain financial assets (primarily notes and accounts receivable–trade and financing
receivables) to third-party financial institutions. For a transfer of financial assets to be considered a sale, the asset must be legally
isolated from the company and the purchaser must have control of the asset. Determining whether all the requirements have been met
includes an evaluation of legal considerations, the extent of the company’s continuing involvement with the assets transferred and any
other relevant consideration. When the true sale criteria are met, the company derecognizes the carrying value of the financial asset
transferred and recognizes a net gain or loss on the sale. The proceeds from these arrangements are reflected as cash provided by
operating activities in the Consolidated Statement of Cash Flows. If the true sale criteria are not met, the transfer is considered a
secured borrowing and the financial asset remains on the Consolidated Balance Sheet with proceeds from the sale recognized as debt
and recorded as cash flows from financing activities in the Consolidated Statement of Cash Flows.
Arrangements to sell notes and accounts receivable–trade are used in the normal course of business as part of the company’s cash
and liquidity management. Facilities primarily in the U.S., Canada and several countries in Europe enable the company to sell certain
notes and accounts receivable–trade, without recourse, to third parties in order to manage credit, collection, concentration and
currency risk. The gross amounts sold (the gross proceeds) under these arrangements were $1.8 billion, $2.2 billion and $1.4 billion
for the years ended December 31, 2021, 2020 and 2019, respectively. Within the notes and accounts receivables–trade sold and
derecognized from the Consolidated Balance Sheet, $0.7 billion, $0.4 billion, and $0.4 billion remained uncollected from customers at
December 31, 2021, 2020 and 2019, respectively. The fees and the net gains and losses associated with the transfer of receivables
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
79
were not material for any of the periods presented. Refer to note L, “Financing Receivables,” for more information on transfers of
financing receivables.
Allowance for Credit Losses
Effective January 1, 2020, the company adopted the new accounting standard related to current expected credit losses. The standard
applies to financial assets measured at amortized cost, including loans, net investments in leases, trade accounts receivable and
certain off-balance sheet commitments. As of the effective date, the company estimates its allowance for current expected credit
losses based on an expected loss model, compared to prior periods which were estimated using an incurred loss model. The impact
related to adopting the new standard was not material. Certain changes resulting from the new standard impacted the company’s
description of its significant accounting policies compared to 2019. For further information regarding the adoption of the new standard,
see note B, “Accounting Changes.”
Receivables are recorded concurrent with billing and shipment of a product and/or delivery of a service to customers. An allowance for
uncollectible trade receivables and contract assets, if needed, is estimated based on specific customer situations, current and future
expected economic conditions, past experiences of losses, as well as an assessment of potential recoverability of the balance due.
The company estimates its allowances for expected credit losses for financing receivables by considering past events, including any
historical default, historical concessions and resulting troubled debt restructurings, current economic conditions, any non-freestanding
mitigating credit enhancements, and certain forward-looking information, including reasonable and supportable forecasts. As of
January 1, 2020, the methodologies that the company uses to calculate its financing receivables reserves, which are applied
consistently to its different portfolios, are as follows:
Individually Evaluated–The company reviews all financing receivables considered at risk quarterly, and performs an analysis based
upon current information available about the client, such as financial statements, news reports, published credit ratings, current
market-implied credit analysis, as well as collateral net of repossession cost, prior collection history and current and future expected
economic conditions. For loans that are collateral dependent, impairment is measured using the fair value of the collateral when
foreclosure is probable. Using this information, the company determines the expected cash flow for the receivable and calculates an
estimate of the potential loss and the probability of loss. For those accounts in which the loss is probable, the company records a
specific reserve.
Collectively Evaluated–The company determines its allowances for credit losses for collectively evaluated financing receivables
(unallocated) based on two portfolio segments: client financing receivables and commercial financing receivables. The company further
segments the portfolio into three classes: Americas, Europe/Middle East/Africa (EMEA) and Asia Pacific.
For client financing receivables, the company uses a credit loss model to calculate allowances based on its internal loss experience
and current conditions and forecasts, by class of financing receivable. The company records an unallocated reserve that is calculated
by applying a reserve rate to its portfolio, excluding accounts that have been individually evaluated and specifically reserved. This
reserve rate is based upon credit rating, probability of default, term and loss history. The allowance is adjusted quarterly for expected
recoveries of amounts that were previously written off or are expected to be written off. Recoveries cannot exceed the aggregated
amount of the previous write-off or expected write-off.
The company considers forward-looking macroeconomic variables such as gross domestic product, unemployment rates, equity prices
and corporate profits when quantifying the impact of economic forecasts on its client financing receivables allowance for expected
credit losses. Macroeconomic variables may vary by class of financing receivables based on historical experiences, portfolio
composition and current environment. The company also considers the impact of current conditions and economic forecasts relating
to specific industries, geographical areas, and client credit ratings, in addition to performing a qualitative review of credit risk factors
across the portfolio. Under this approach, forecasts of these variables over two years are considered reasonable and supportable.
Beyond two years, the company reverts to long-term average loss experience. Forward-looking estimates require the use of judgment,
particularly in times of economic uncertainty.
The portfolio of commercial financing receivables is short term in nature and any allowance for these assets is estimated based on a
combination of write-off history and current economic conditions, excluding any individually evaluated accounts.
Other Credit-Related Policies
Past Due–The company views receivables as past due when payment has not been received after 90 days, measured from the original
billing date.
Non-Accrual–Non-accrual assets include those receivables (impaired loans or nonperforming leases) with specific reserves and other
accounts for which it is likely that the company will be unable to collect all amounts due according to original terms of the lease or loan
agreement. Interest income recognition is discontinued on these receivables. Cash collections are first applied as a reduction to
principal outstanding. Any cash received in excess of principal payments outstanding is recognized as interest income. Receivables
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Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
may be removed from non-accrual status, if appropriate, based upon changes in client circumstances, such as a sustained history of
payments.
Write-Off–Receivable losses are charged against the allowance in the period in which the receivable is deemed uncollectible.
Subsequent recoveries, if any, are credited to the allowance. Write-offs of receivables and associated reserves occur to the extent that
the customer is no longer in operation and/or there is no reasonable expectation of additional collections or repossession.
Leases
The company conducts business as both a lessee and a lessor. In its ordinary course of business, the company enters into leases as a
lessee for property, plant and equipment. The company is also the lessor of certain equipment, mainly through its Financing segment.
When procuring goods or services, or upon entering into a contract with its clients, the company determines whether an arrangement
contains a lease at its inception. As part of that evaluation, the company considers whether there is an implicitly or explicitly identified
asset in the arrangement and whether the company, as the lessee, or the client, if the company is the lessor, has the right to control
the use of that asset.
Accounting for Leases as a Lessee
When the company is the lessee, all leases with a term of more than 12 months are recognized as right-of-use (ROU) assets and
associated lease liabilities in the Consolidated Balance Sheet. The lease liabilities are measured at the lease commencement date and
determined using the present value of the lease payments not yet paid and the company’s incremental borrowing rate, which
approximates the rate at which the company would borrow on a secured basis in the country where the lease was executed. The
interest rate implicit in the lease is generally not determinable in transactions where the company is the lessee. The ROU asset equals
the lease liability adjusted for any initial direct costs (IDCs), prepaid rent and lease incentives. The company’s variable lease payments
generally relate to payments tied to various indexes, non-lease components and payments above a contractual minimum fixed amount.
Operating leases are included in operating right-of-use assets–net, current operating lease liabilities and operating lease liabilities in
the Consolidated Balance Sheet. Finance leases are included in property, plant and equipment, short-term debt and long-term debt in
the Consolidated Balance Sheet. The lease term includes options to extend or terminate the lease when it is reasonably certain that
the company will exercise that option.
The company made a policy election to not recognize leases with a lease term of 12 months or less in the Consolidated Balance Sheet.
For all asset classes, the company has elected the lessee practical expedient to combine lease and non-lease components (e.g.,
maintenance services) and account for the combined unit as a single lease component. A significant portion of the company’s lease
portfolio is real estate, which are mainly accounted for as operating leases, and are primarily used for corporate offices and data
centers. The average term of the real estate leases is approximately five years. The company also has equipment leases, such as IT
equipment and vehicles, which have lease terms that range from two to five years. For certain of these operating and finance leases,
the company applies a portfolio approach to account for the lease assets and lease liabilities.
Accounting for Leases as a Lessor
The company typically enters into leases as an alternative means of realizing value from equipment that it would otherwise sell. Assets
under lease include new and used IBM equipment and certain OEM products. IBM equipment generally consists of IBM Z, Power and
Storage products.
Lease payments due to IBM are typically fixed and paid in equal installments over the lease term. The majority of the company’s leases
do not contain variable payments that are dependent on an index or a rate. Variable lease payments that do not depend on an index or
a rate (e.g., property taxes), that are paid directly by the company and are reimbursed by the client, are recorded as revenue, along
with the related cost, in the period in which collection of these payments is probable. Payments that are made directly by the client to
a third party, including certain property taxes and insurance, are not considered part of variable payments and therefore are not
recorded by the company. The company has made a policy election to exclude from consideration in contracts all collections from sales
and other similar taxes.
The company’s payment terms for leases are typically unconditional. Therefore, in an instance when the client requests to terminate
the lease prior to the end of the lease term, the client would typically be required to pay the remaining lease payments in full. At the
end of the lease term, the company allows the client to either return the equipment, purchase the equipment at the then-current fair
market value or at a pre-stated purchase price, or renew the lease based on mutually agreed upon terms.
When lease arrangements include multiple performance obligations, the company allocates the consideration in the contract between
the lease components and the non-lease components on a relative standalone selling price basis.
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
81
Sales-Type and Direct Financing Leases
For a sales-type or direct financing lease, the carrying amount of the asset is derecognized from inventory and a net investment in the
lease is recorded. For a sales-type lease, the net investment in the lease is measured at commencement date as the sum of the lease
receivable and the estimated residual value of the equipment less unearned income and allowance for credit losses. Any selling profit
or loss arising from a sales-type lease is recorded at lease commencement. Selling profit or loss is presented on a gross basis when
the company enters into a lease to realize value from a product that it would otherwise sell in its ordinary course of business, whereas
in transactions where the company enters into a lease for the purpose of generating revenue by providing financing, the selling profit
or loss is presented on a net basis. Under a sales-type lease, initial direct costs are expensed at lease commencement. Over the term
of the lease, the company recognizes finance income on the net investment in the lease and any variable lease payments, which are
not included in the net investment in the lease.
For a direct financing lease, the net investment in the lease is measured similarly to a sales-type lease, however, the net investment in
the lease is reduced by any selling profit. In a direct financing lease, the selling profit and initial direct costs are deferred at
commencement and recognized over the lease term. The company rarely enters into direct financing leases.
The estimated residual value represents the estimated fair value of the equipment under lease at the end of the lease. Estimating
residual value is a risk unique to financing activities, and management of this risk is dependent upon the ability to accurately project
future equipment values. The company has insight into product plans and cycles for IBM products under lease. The company estimates
the future fair value of leased equipment by using historical models, analyzing the current market for new and used equipment, and
obtaining forward-looking product information such as marketing plans and technology innovations.
The company optimizes the recovery of residual values by extending lease arrangements with, or selling leased equipment to existing
clients. The company manages residual value risk through insight into its own product cycles. The company periodically reassesses the
realizable value of its lease residual values. Anticipated decreases in specific future residual values that are considered to be other-
than-temporary are recognized immediately upon identification and are recorded as an adjustment to the residual value estimate. For
sales-type and direct financing leases, this reduction lowers the recorded net investment and is recognized as a loss charged to finance
income in the period in which the estimate is changed, as well as an adjustment to unearned income to reduce future-period financing
income.
Operating Leases
Equipment provided to clients under an operating lease is carried at cost within property, plant and equipment in the Consolidated
Balance Sheet and depreciated over the lease term using the straight-line method, generally ranging from one to four years. The
depreciable basis is the original cost of the equipment less the estimated residual value of the equipment at the end of the lease term.
At commencement of an operating lease, IDCs are deferred. As lease payments are made, the company records sales revenue over
the lease term. IDCs are amortized over the lease term on the same basis as lease income is recorded.
Assets under operating leases are tested for impairment whenever events or changes in circumstances indicate that the carrying
amount may not be recoverable. The impairment test is based on undiscounted cash flows, and, if impaired, the asset is written down
to fair value based on either discounted cash flows or appraised values.
Common Stock
Common stock refers to the $.20 par value per share capital stock as designated in the company’s Certificate of Incorporation. Treasury
stock is accounted for using the cost method. When treasury stock is reissued, the value is computed and recorded using a weighted-
average basis.
Earnings Per Share of Common Stock
Earnings per share (EPS) is computed using the two-class method, which determines EPS for each class of common stock and
participating securities according to dividends and dividend equivalents and their respective participation rights in undistributed
earnings. Basic EPS of common stock is computed by dividing net income by the weighted-average number of common shares
outstanding for the period. Diluted EPS of common stock is computed on the basis of the weighted-average number of shares of
common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method.
Dilutive potential common shares include outstanding stock awards, convertible notes and stock options.
NOTE B. 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.
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Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
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.
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 is effective January 1, 2022 and early adoption is 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 is not expected to have a material impact in the
consolidated financial results.
Standards Implemented
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 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 in the year ended December 31, 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.
Reference Rate Reform
Standard/Description–Issuance date: March 2020, with amendments in 2021. This guidance provides optional expedients and
exceptions for applying GAAP to contract modifications, hedging relationships, and other transactions affected by the discontinuation
of the London Interbank Offered Rate (LIBOR) or by another reference rate expected to be discontinued, subject to meeting certain
criteria.
Effective Date and Adoption Considerations–The guidance is effective as of March 12, 2020 through December 31, 2022.
Effect on Financial Statements or Other Significant Matters–The company made a policy election in the first quarter of 2020 to adopt
the practical expedient which allows for the continuation of fair value hedge accounting for interest rate derivative contracts upon the
transition from LIBOR to Secured Overnight Financing Rate (SOFR) or another reference rate alternative, without any impact to the
Consolidated Income Statement. The replacement of the LIBOR benchmark within the company’s interest rate risk management
activities did not have a material impact in the consolidated financial results.
Simplifying the Test for Goodwill Impairment
Standard/Description–Issuance date: January 2017. This guidance simplifies the goodwill impairment test by removing Step 2. It also
requires disclosure of any reporting units that have zero or negative carrying amounts if they have goodwill allocated to them.
Effective Date and Adoption Considerations–The guidance was effective January 1, 2020 and early adoption was permitted. The
company adopted the guidance on a prospective basis as of the effective date.
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
83
Effect on Financial Statements or Other Significant Matters–The guidance did not have a material impact in the consolidated financial
results.
Financial Instruments–Credit Losses
Standard/Description–Issuance date: June 2016, with amendments in 2018, 2019, and 2020. This changes the guidance for credit
losses based on an expected loss model rather than an incurred loss model. It requires the consideration of all available relevant
information when estimating expected credit losses, including past events, current conditions and forecasts and their implications for
expected credit losses. It also expands the scope of financial instruments subject to impairment, including off-balance sheet
commitments and residual value.
Effective Date and Adoption Considerations–The guidance was effective January 1, 2020 with one-year early adoption permitted.
The company adopted the guidance as of the effective date, using the transition methodology whereby prior comparative periods were
not retrospectively presented in the Consolidated Financial Statements.
Effect on Financial Statements or Other Significant Matters–At January 1, 2020, an increase in the allowance for credit losses of $81
million was recorded for accounts receivable–trade and financing receivables (inclusive of its related off-balance sheet commitments).
Additionally, net deferred taxes were reduced by $14 million in the Consolidated Balance Sheet, resulting in a cumulative effect net
decrease to retained earnings of $66 million.
For all other standards that the company adopted in the periods presented, there was no material impact in the consolidated financial
results.
NOTE C. 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. 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 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 have been presented as discontinued operations and, as such,
have been excluded from continuing operations and segment results for all periods presented. Prior to the separation, Kyndryl was
predominantly reported within the company’s Global Technology Services segment. For additional information relating to the
company’s segments, refer to note E, “Segments.”
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.
In the fourth quarter of 2021, prior to separation, Kyndryl completed the offering of $2.4 billion in aggregate principal amount of senior
unsecured fixed-rate notes and entered into a $500 million three-year variable-rate term loan. Cash raised from the debt issuance and
term loan was used to fund Kyndryl’s opening cash balance, with the remaining net cash proceeds of $879 million paid by Kyndryl to
IBM in the form of a dividend at separation which is included in cash flows from financing activities in the Consolidated Statement of
Cash Flows. Following completion of the Kyndryl separation on November 3, 2021, the notes and term loan are no longer obligations
of IBM.
Separation costs of $1,042 million and $21 million incurred during the years ended December 31, 2021 and 2020, respectively, are
included in income from discontinued operations, net of taxes 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 tax charges related to the Kyndryl separation. There were no separation costs incurred in 2019.
IBM and Kyndryl entered into various agreements to effect the separation and provide a framework for their on-going relationship,
including a separation and distribution agreement, transition services agreement, employee matters agreement, tax matters
agreement, intellectual property agreement, real estate matters agreement, client relationship agreement, master subcontracting
agreement and a stockholder’s and registration rights agreement. The transition services predominantly consist of information
technology services that IBM will provide to Kyndryl 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 year ended December 31, 2021 was not material.
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Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
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 committed to provide Kyndryl
upgraded hardware at no cost to Kyndryl over a two-year period after the separation. IBM recorded $265 million for the total estimate
of IBM’s obligation under the agreement to other accrued expenses and liabilities in the Consolidated Balance Sheet.
The following table presents the major categories of income from discontinued operations:
($ in millions)
For the year ended December 31:
Revenue
Cost of sales
Selling, general and administrative expense
Workforce rebalancing charges
RD&E and Other (income) and expense
Income from discontinued operations before income taxes
Provision for income taxes
Income from discontinued operations, net of tax
2021 *
$ 14,994
11,270
1,865
35
80
$ 1,744
714 **
$ 1,030
2020 *
$ 18,441
13,651
1,638
887
124
$ 2,142
484
$ 1,658
2019 *
$ 19,433
14,478
1,726
158
116
$ 2,954
670
$ 2,285
* Excludes intercompany transactions between IBM and Kyndryl and general corporate overhead costs transferred to Kyndryl as discussed above.
** Includes tax charges related to the Kyndryl separation.
Represents 10 months of Kyndryl operations in 2021, versus a full year of Kyndryl operations in 2020 and 2019.
Includes $(1) million, $89 million and $(4) million in 2021, 2020 and 2019, respectively, related to discontinued operations of Microelectronics, divested
in 2015.
The following table presents the major classes of assets and liabilities of discontinued operations:
($ in millions)
At December 31:
Assets
Current assets
Notes and accounts receivable (net of allowances of $94)
Deferred costs
Prepaid expenses and other current assets
Total current assets of discontinued operations
Plant, rental machines and other property, net
Operating right-of-use assets, net
Deferred costs
Deferred taxes
Goodwill*
Other assets
Total non-current assets of discontinued operations
Total assets of discontinued operations
Liabilities
Current liabilities
Accounts payable
Compensation and benefits
Workforce reductions
Deferred income
Operating lease liabilities
Other accrued expenses and liabilities
Total current liabilities of discontinued operations
Long-term debt
Retirement and nonpension postretirement benefit obligations
Deferred income
Operating lease liabilities
Other liabilities
Total non-current liabilities of discontinued operations
Total liabilities of discontinued operations
2020
$ 1,361
1,089
168
2,618
3,835
1,120
1,300
837
5,851
203
13,147
$15,764
$
875
384
449
854
322
936
3,820
138
1,063
543
854
718
3,317
$ 7,136
* Goodwill allocated to discontinued operations represents the amount of goodwill attributable to Kyndryl which was determined on a relative fair value
basis.
The total net impact to stockholder’s equity as a result of the separation was a reduction of $7,203 million, which has been reflected
as a reduction of $8,404 million, $1,264 million and $62 million to retained earnings, accumulated other comprehensive income/(loss)
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
85
and noncontrolling interest, respectively, in the Consolidated Statement of Equity as of December 31, 2021. The company retained
19.9 percent of the shares of Kyndryl common stock which had a net book value of $681 million as of November 3, 2021, the separation
date. Refer to note A, “Significant Accounting Policies,” and note J, “Financial Assets & Liabilities,” for additional information on the
retained shares.
The following table presents selected financial information related to cash flows from discontinued operations:
($ in millions)
For the year ended December 31:
Net cash provided by/(used in) operating activities
Net cash provided by/(used in) investing activities
2021 *
$ 1,612
(380)
2020
$ 4,403
(935)
2019
$ 4,535
(1,113)
* Represents 10 months of Kyndryl operations in 2021, versus a full year of Kyndryl operations in 2020 and 2019.
NOTE D. REVENUE RECOGNITION
Disaggregation of Revenue
The following tables provide details of revenue by major products/service offerings, hybrid cloud revenue, and revenue by geography.
Revenue by Major Products/Service Offerings
($ in millions)
For the year ended December 31:
Hybrid Platform & Solutions
Transaction Processing
Total Software
Business Transformation
Technology Consulting
Application Operations
Total Consulting
Hybrid Infrastructure
Infrastructure Support
Total Infrastructure
Financing**
Other
Total Revenue
* Recast to reflect segment changes.
2021
$ 17,751
6,390
$ 24,141
$ 8,284
3,466
6,095
$ 17,844
$ 8,167
6,021
$ 14,188
774
$
$
404
$ 57,350
2020 *
$ 16,321
6,606
$ 22,927
$ 7,193
3,133
5,931
$ 16,257
$ 8,415
6,118
$ 14,533
975
$
$
488
$ 55,179
2019 *
$ 14,472
7,936
$ 22,408
$ 7,569
2,821
6,549
$ 16,939
$ 9,176
6,599
$ 15,774
$ 1,215
$ 1,378
$ 57,714
** 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
($ in millions)
For the year ended December 31:
Software
Consulting
Infrastructure
Other—divested businesses
Total
Revenue by Geography
($ in millions)
For the year ended December 31:
Americas
Europe/Middle East/Africa
Asia Pacific
Total
2021
$ 8,713
7,852
3,645
—
$ 20,210
2020
$ 6,907
5,861
4,039
32
$ 16,838
2019
$ 4,099
5,274
4,183
279
$ 13,834
2021
$ 28,299
17,447
11,604
$ 57,350
2020
$ 27,119
16,767
11,293
$ 55,179
2019
$ 28,704
17,282
11,728
$ 57,714
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
86
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
includes estimates of variable consideration, except when the variable consideration is a sales-based or usage-based royalty promised
in exchange for a license of intellectual property. Additionally, as a practical expedient, the company does not include contracts that
have an original duration of one year or less. RPO estimates are subject to change and are affected by several factors, including
terminations, changes in the scope of contracts, periodic revalidations, adjustment for revenue that has not materialized and
adjustments for currency.
At December 31, 2021, the aggregate amount of the transaction price allocated to RPO related to customer contracts that are
unsatisfied or partially unsatisfied was $62 billion. Approximately 68 percent of the amount is expected to be recognized as revenue
in the subsequent two years, approximately 28 percent in the subsequent three to five years and the balance thereafter.
Revenue Recognized for Performance Obligations Satisfied (or Partially Satisfied) in Prior Periods
For the year ended December 31, 2021, revenue was reduced by $61 million for performance obligations satisfied (or partially
satisfied) in previous periods mainly due to changes in estimates on contracts with cost-to-cost measures of progress. Refer to note A,
“Significant Accounting Policies,” for additional information on these contracts and estimates of costs to complete.
Reconciliation of Contract Balances
The following table provides information about notes and accounts receivable—trade, contract assets and deferred income balances.
($ in millions)
At December 31:
Notes and accounts receivable—trade (net of allowances of $218 in 2021 and $260 in 2020)
Contract assets*
Deferred income (current)
Deferred income (noncurrent)
* Included within prepaid expenses and other current assets in the Consolidated Balance Sheet.
2021
$ 6,754
471
12,518
3,577
2020
$ 5,790
425
11,980
3,758
The amount of revenue recognized during the year ended December 31, 2021 that was included within the deferred income balance
at December 31, 2020 was $10.2 billion and primarily related to services and software.
The following table provides roll forwards of the notes and accounts receivable—trade allowance for expected credit losses for the
years ended December 31, 2021 and 2020.
($ in millions)
January 1, 2021
$ 260
January 1, 2020
$ 235
Additions/(Releases)
$ (15)
Additions/(Releases)
$ 63
Write-offs
$(28)
Write-offs
$(39)
Other *
$1
Other *
$1
December 31, 2021
$218
December 31, 2020
$260
* Primarily represents translation adjustments.
The contract assets allowance for expected credit losses was not material in the years ended December 31, 2021 and 2020.
Deferred Costs
($ in millions)
At December 31:
Capitalized costs to obtain a contract
Deferred costs to fulfill a contract
Deferred setup costs
Other deferred fulfillment costs
Total deferred costs*
2021
$ 476
546
1,000
$ 2,022
2020
$ 572
591
1,004
$ 2,168
* Of the total deferred costs, $1,097 million was current and $924 million was noncurrent at December 31, 2021 and $1,018 million was current and
$1,150 million was noncurrent at December 31, 2020.
The amount of total deferred costs amortized during the year ended December 31, 2021 was $1,872 million and there were no material
impairment losses incurred. Refer to note A, “Significant Accounting Policies,” for additional information on deferred costs to fulfill a
contract and capitalized costs of obtaining a contract.
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
87
NOTE E. SEGMENTS
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 following table displays the segment updates:
Previous Segments
Cloud & Cognitive Software
Global Business Services
Global Technology Services
Changes*
Revenue categories
Revenue categories
- Separated managed infrastructure services**
- Technology Support Services
- IBM Cloud IaaS
- Managed infrastructure services retained JV+
New Segments
Software
Consulting
N/A
Systems
Revenue categories
Infrastructure
Global Financing
Other
* Does not include minor mission moves.
+ Technology Support Services
+ IBM Cloud IaaS
+ Global asset recovery service
- Global asset recovery service
+ Managed infrastructure services retained JV+
Financing
Other
** IBM completed the separation of its managed infrastructure services business to Kyndryl on November 3, 2021.
+ 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.
N/A Not applicable
–
The segments represent components of the company for which separate financial information is available that is utilized on a regular
basis by the chief operating decision maker (the chief executive officer) in determining how to allocate resources and evaluate
performance. The segments are determined based on several factors, including client base, homogeneity of products, technology,
delivery channels and similar economic characteristics.
With this organizational and management system change, the segments no longer include internal revenue. Certain transactions
between the segments are recorded to other income and expense and are reflected in segment pre-tax income. After the Kyndryl
separation, these transactions predominately represent loans between Financing and Infrastructure segments to facilitate the
acquisition of equipment and software used in IBM IaaS services arrangements. The prior period revenue and pre-tax income
presented in the tables below are reported on a comparable basis.
The company utilizes globally integrated support organizations to realize economies of scale and efficient use of resources. As a result,
a considerable amount of expense is shared by all of the segments. This shared expense includes sales coverage, certain marketing
functions and support functions such as Accounting, Treasury, Procurement, Legal, Human Resources, and Billing and Collections.
Where practical, shared expenses are allocated based on measurable drivers of expense, e.g., headcount. When a clear and measurable
driver cannot be identified, shared expenses are allocated on a financial basis that is consistent with the company’s management
system, e.g., advertising expense is allocated based on the gross profits of the segments. A portion of the shared expenses, which are
recorded in net income, are not allocated to the segments. These expenses are associated with the elimination of internal transactions
and other miscellaneous items.
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 due to the company’s segment
changes in the fourth quarter of 2021. Performance measurement is based on pre-tax income from continuing operations, consistent
with the company’s management and measurement system. 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.
88
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
Management System Segment View
($ in millions)
For the year ended December 31:
2021
Revenue
Pre-tax income from continuing operations
Revenue year-to-year change
Pre-tax income year-to-year change
Pre-tax income margin
2020*
Revenue
Pre-tax income from continuing operations**
Revenue year-to-year change
Pre-tax income year-to-year change
Pre-tax income margin
2019*
Revenue
Pre-tax income from continuing operations
* Recast to conform to 2021 presentation.
Software
Consulting
Infrastructure
Financing
$24,141
4,722
$17,844
1,449
5.3 %
41.3 %
19.6 %
9.8 %
40.1 %
8.1 %
$22,927
3,341
$16,257
1,034
2.3 %
(33.5)%
14.6 %
(4.0)%
(23.0)%
6.4 %
$ 14,188
2,025
(2.4)%
22.4 %
14.3 %
$ 14,533
1,654
(7.9)%
(33.3)%
11.4 %
Total
Segments
$56,946
8,637
4.1 %
33.3 %
15.2 %
$ 774
441
(20.6)%
(1.8)%
57.0 %
$ 975
449
$54,691
6,479
(19.8)%
(31.2)%
46.1 %
(2.9)%
(31.8)%
11.8 %
$22,408
5,025
$16,939
1,344
$ 15,774
2,481
$ 1,215
652
$56,336
9,502
** Includes the impact of a $1.5 billion pre-tax charge for structural actions in the fourth quarter of 2020. The impact by segment was as follows: Software
($0.7 billion), Consulting ($0.4 billion), Infrastructure ($0.4 billion). The impact to Financing was immaterial.
Reconciliations of IBM as Reported
($ in millions)
For the year ended December 31:
Revenue
Total reportable segments
Other—divested businesses
Other revenue
Total revenue
($ in millions)
For the year ended December 31:
Pre-tax income from continuing operations
Total reportable segments
Amortization of acquired intangible assets
Acquisition-related charges
Non-operating retirement-related (costs)/income
Kyndryl-related impacts
Elimination of internal transactions
Other—divested businesses
Unallocated corporate amounts and other
Total pre-tax income from continuing operations
* Recast to conform to 2021 presentation.
2021
2020 *
2019 *
$ 56,946
70
335
$ 57,350
$ 54,691
101
387
$ 55,179
0
0
$ 56,336
1,010
368
$ 57,714
2021
2020 *
2019 *
$ 8,637
(1,838)
(43)
(1,282)
118
(7)
25
(774)
$ 4,837
$ 6,479 **
(1,832)
(13)
(1,073)
—
(28)
12
(973)
$ 2,572 **
$ 9,502
(1,271)
(423)
(576)
—
(21)
580
(586)
$ 7,206
** Includes the impact of a $1.5 billion pre-tax charge for structural actions in the fourth quarter of 2020.
Immaterial Items
Investment in Equity Alliances and Equity Alliances Gains/(Losses)
The investments in equity alliances and the resulting gains and (losses) from these investments that are attributable to the segments
did not have a material effect on the financial position or the financial results of the segments.
Segment Assets and Other Items
Software assets are mainly goodwill, acquired intangible assets and accounts receivable. Consulting assets are primarily goodwill and
accounts receivable. Infrastructure assets are primarily goodwill, plant, property and equipment, and manufacturing inventory.
Financing assets are primarily financing receivables, and cash and marketable securities.
To ensure the efficient use of the company’s space and equipment, several segments may share leased or owned plant, property and
equipment assets. Where assets are shared, landlord ownership of the assets is assigned to one segment and is not allocated to each
user segment. This is consistent with the company’s management system and is reflected accordingly in the table below. In those
cases, there will not be a precise correlation between segment pre-tax income and segment assets.
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
89
Depreciation expense and capital expenditures that are reported by each segment also are consistent with the landlord ownership
basis of asset assignment.
Financing amounts for interest income reflect the income associated with Financing's external client transactions, as well as the income
from investment in cash and marketable securities. Financing amounts for interest expense reflect the expense associated with the
arm's length terms of the intercompany loans supporting Financing's external client transactions. Intercompany financing activities are
recorded to other income and expense and are reflected in segment pre-tax income.
Management System Segment View
($ in millions)
For the year ended December 31:
2021
Assets
Depreciation/amortization of intangibles**
Capital expenditures/investments in intangibles
Interest income
Interest expense
2020*
Assets
Depreciation/amortization of intangibles**
Capital expenditures/investments in intangibles
Interest income
Interest expense
2019*
Assets
Depreciation/amortization of intangibles**
Capital expenditures/investments in intangibles
Interest income
Interest expense
* Recast to conform to 2021 presentation.
Software
Consulting
Infrastructure
Financing
$59,336
1,204
565
—
—
$58,558
1,237
548
—
—
$58,230
676
517
—
—
$11,914
250
55
—
—
$10,548
207
26
—
—
$10,421
179
45
—
—
$ 11,766
1,399
792
—
—
$ 12,378
1,419
1,093
—
—
$ 12,002
1,348
612
—
—
$16,880
49
33
628
129
$24,974
120
41
834
307
$29,460
186
57
1,133
512
Total
Segments
$ 99,896
2,902
1,444
628
129
$106,458
2,983
1,709
834
307
$110,113
2,389
1,230
1,133
512
** Segment pre-tax income from continuing operations does not include the amortization of acquired intangible assets.
Reconciliations of IBM as Reported
($ in millions)
At December 31:
Assets
Total reportable segments
Elimination of internal transactions
Other—divested businesses
Unallocated amounts
Cash and marketable securities
Notes and accounts receivable
Deferred tax assets
Plant, other property and equipment
Operating right-of-use assets
Pension assets
Other
Total assets of discontinued operations**
Total IBM consolidated assets
* Recast to conform to 2021 presentation.
2021
2020 *
2019 *
$ 99,896
(1,608)
193
6,222
1,622
7,158
2,196
1,945
9,848
4,530
—
$ 132,001
$106,458
(4,686)
254
12,463
1,655
8,175
2,449
2,368
7,557
3,514
15,764
$155,971
$ 110,113
(4,317)
1,942
7,271
1,601
4,917
2,488
2,531
6,819
3,184
15,638
$ 152,186
** Refer to note C, “Separation of Kyndryl,” for additional information.
Major Clients
No single client represented 10 percent or more of the company’s total revenue in 2021, 2020 or 2019.
90
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
Geographic Information
The following tables provide information for those countries that are 10 percent or more of the specific category.
Revenue
($ in millions)
For the year ended December 31:
United States
Japan
Other countries
Total revenue
Revenues are attributed to countries based on the location of the client.
* Recast to conform to 2021 presentation.
Plant and Other Property–Net
($ in millions)
At December 31:
United States
Other countries
Total
* Recast to conform to 2021 presentation.
Operating Right-of-Use Assets–Net
($ in millions)
At December 31:
United States
Japan
Other countries
Total
* Recast to conform to 2021 presentation.
Revenue by Classes of Similar Products or Services
2021
$22,893
5,648
28,810
$57,350
2020 *
$22,258
5,680
27,241
$55,179
2019 *
$23,389
5,755
28,570
$57,714
2021
$ 3,375
2,293
$ 5,668
2020 *
$ 3,452
2,656
$ 6,108
2019 *
$ 3,513
2,273
$ 5,785
2021
$1,148
398
1,676
$3,222
2020 *
$1,165
532
1,870
$3,566
2019 *
$1,305
599
1,947
$3,850
The following table presents external revenue for similar classes of products or services within the company’s reportable segments.
Client solutions often include IBM software and systems and other suppliers’ products if the client solution requires it. For each of the
segments that include services, Software-as-a-Service, consulting, education, training and other product-related services are included
as services. For each of these segments, software includes product license charges and ongoing subscriptions.
($ in millions)
For the year ended December 31:
Software
Software
Services
Systems
Consulting
Services
Software
Systems
Infrastructure
Maintenance
Servers
Services
Storage
Software
Used Equipment Sales**
Financing
Financing
Used Equipment Sales
* Recast to conform to 2021 presentation.
** Represents Global Asset Recovery Service transferred from Financing segment.
2021
2020 *
2019 *
$20,098
3,934
109
$17,563
173
108
$ 4,743
3,363
2,616
1,908
1,426
131
$ 19,046
3,770
110
$ 15,986
183
89
$ 4,804
3,549
2,656
1,813
1,563
149
$18,574
3,670
165
$16,663
160
116
$ 5,171
3,829
2,927
1,936
1,725
186
$
628
145
$
834
140
$ 1,120
95
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
91
NOTE F. 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.
2021
In 2021, the company completed fifteen acquisitions at an aggregate cost of $3,342 million. Each acquisition is expected to enhance
the company’s portfolio of products and services capabilities and further advance IBM’s hybrid cloud and AI strategy.
Acquisition
Segment
Description of Acquired Business
First Quarter
Nordcloud
Taos Mountain, LLC (Taos)
StackRox
Second Quarter
Consulting
Consulting
Software
Turbonomic, Inc. (Turbonomic)
Software
Consulting company providing services in
cloud implementation, application
transformation and managed services
Leading cloud professional and managed
services provider
Innovator in container and Kubernetes-
native security
Application Resource Management and
Network Performance Management
software provider
ECX Copy Data Management business
Software
Smart data protection solution
from Catalogic Software, Inc.
Waeg
myInvenio
Third Quarter
VEVRE Software business
from Volta, Inc.
BoxBoat Technologies
Consulting
Software
Leading Salesforce consulting partner
Process mining software company
Software
Cloud-native virtual routing engine
Consulting
Premier DevOps consultancy and
enterprise Kubernetes certified service
provider
Bluetab Solutions Group
Consulting
Data solutions service provider
Fourth Quarter
SXiQ Digital Pty Ltd
Consulting
McD Tech Labs from McDonald’s
Software
ReaQta
Adobe Workfront practice from Rego
Consulting Corporation
Software
Consulting
Digital transformation services company
specializing in cloud applications, cloud
platforms and cloud cybersecurity
Asset purchase to accelerate the
development and deployment of
McDonald’s Automated Order Taking
(AOT) technology
Provider of endpoint security solutions
designed to leverage AI to automatically
identify and manage threats
Work management software consulting
for enterprise clients
Phlyt
Software
Cloud-native development consultancy
The following table reflects the purchase price related to these acquisitions and the resulting purchase price allocations as of December
31, 2021.
92
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
($ in millions)
Current assets
Property, plant and equipment/noncurrent assets
Intangible assets
Goodwill
Client relationships
Completed technology
Trademarks
Total assets acquired
Current liabilities
Noncurrent liabilities
Total liabilities assumed
Total purchase price
N/A–not applicable
Amortization
Life (in Years)
Turbonomic
$ 126
—
Other
Acquisitions
$ 108
12
N/A
4—10
4—7
1—6
1,439
290
117
18
$1,990
49
113
$ 161
$1,829
1,110
200
196
30
$1,656
59
84
$ 143
$1,513
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 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.
Turbonomic–The overall weighted-average useful life of the identified amortizable intangible assets acquired was 8.9 years. Goodwill
of $1,372 million and $67 million was assigned to the Software and Consulting segments, respectively. It is expected that none of the
goodwill will be deductible for tax purposes.
Other acquisitions–The overall weighted-average useful life of the identified amortizable intangible assets acquired was 6.6 years.
Goodwill of $646 million and $464 million was assigned to the Consulting and Software segments, respectively. It is expected that
approximately seven percent 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.
Transactions Closed in 2022–In January 2022, the company acquired Envizi, a leading data and analytics software provider for
environmental performance management; and Sentaca, a leading telco consulting services and solutions provider specializing in
automation, cloud migration, and future networks for telecommunication operators. In February 2022, the company acquired
Neudesic, an application development and cloud computing services company. Envizi will be integrated into the Software segment.
Sentaca and Neudesic will be integrated into the Consulting segment. At the date of issuance of the financial statements, the initial
purchase accounting for Envizi, Sentaca, and Neudesic was not complete.
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
93
2020
In 2020, the company completed seven acquisitions at an aggregate cost of $723 million.
Acquisition
Segment
Description of Acquired Business
First Quarter
Stratoss Lifecycle Manager business
(Stratoss) from Accanto Systems Oy
Second Quarter
Automated Security Assurance
Platform business (ASAP) from
Spanugo Inc.
Third Quarter
WDG Soluções Em Sistemas E
Automação De Processos LTDA (WDG
Automation)
Fourth Quarter
Instana
Software
Software
Cloud native business designed to deliver
web-scale levels of operational automation
for the cloud-based networking world
Cloud cybersecurity platform, integrated into
the IBM public cloud to further meet the
security demands of clients in highly
regulated industries
Software
Provider of robotic process automation
Software
TruQua Enterprises, LLC (TruQua)
Consulting
Expertus Technologies Inc. (Expertus)
Consulting
7Summits LLC (7Summits)
Consulting
Application performance monitoring and
observability company which helps
businesses better manage applications that
span the hybrid cloud landscape
IT services provider and SAP development
partner
Provider of cloud solutions for the financial
services industry
Leading Salesforce partner that delivers
transformative digital experiences across
industries
At December 31, 2020, the remaining cash to be remitted by the company related to certain fourth-quarter acquisitions was $323
million. This amount was classified as restricted cash in the Consolidated Balance Sheet, most of which was paid in the first quarter of
2021.
The following table reflects the purchase price related to these acquisitions and the resulting purchase price allocations as of December
31, 2020.
($ in millions)
Current assets
Property, plant and equipment/noncurrent assets
Intangible assets
Goodwill
Client relationships
Completed technology
Trademarks
Total assets acquired
Current liabilities
Noncurrent liabilities
Total liabilities assumed
Total purchase price
N/A—Not applicable
Amortization
Life (in Years)
N/A
5—7
2—7
1—7
Allocated
Amount
$ 35
7
575
84
73
11
$784
19
41
$ 61
$723
94
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
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 6.8 years. These 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. Goodwill of $362 million, $205 million and $8 million was assigned to the
Software, Consulting and Infrastructure segments, respectively. The goodwill recorded as a result of these acquisitions was not
deductible for tax purposes.
2019
In 2019, the company completed one acquisition at an aggregate cost of $35 billion.
Red Hat–On July 9, 2019, IBM completed the acquisition of all of the outstanding shares of Red Hat at an aggregate cost of $35 billion.
Red Hat’s portfolio of open source and cloud technologies combined with IBM’s innovative hybrid cloud technology and industry
expertise are accelerating the delivery of the hybrid cloud platform capabilities required to address the next chapter of cloud
implementations.
On the acquisition date, Red Hat shareholders received $190 per share in cash, representing a total equity value of approximately $34
billion. The company funded the transaction through a combination of cash on hand and proceeds from debt issuances.
The following table reflects the purchase price and the resulting purchase price allocation as of December 31, 2020. The net purchase
price adjustments recorded during 2020 were primarily related to noncurrent tax assets and liabilities.
($ in millions)
Current assets*
Property, plant and equipment/noncurrent assets
Intangible assets
Goodwill
Client relationships
Completed technology
Trademarks
Total assets acquired
Current liabilities**
Noncurrent liabilities
Total liabilities assumed
Total purchase price
Amortization
Life (in Years)
N/A
10
9
20
Allocated
Amount
$ 3,186
948
22,985
7,215
4,571
1,686
$ 40,592
1,395
4,117
$ 5,512
$ 35,080
* Includes $2.2 billion of cash and cash equivalents.
** Includes $485 million of short-term debt related to the convertible notes acquired from Red Hat that were recognized at their fair value on the
acquisition date, which was fully settled as of October 1, 2019.
N/A–Not applicable
The goodwill generated was primarily attributable to the assembled workforce of Red Hat and the increased synergies expected to be
achieved from the integration of Red Hat products into the company’s various integrated solutions neither of which qualify as an
amortizable intangible asset.
The overall weighted-average useful life of the identified amortizable intangible assets acquired was 10.9 years. These identified
intangible assets will be amortized on a straight-line basis over their useful lives, which approximates the pattern that the assets’
economic benefits are expected to be consumed over time. The following table presents the goodwill allocated to the segments as of
December 31, 2021:
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
95
($ in billions)
Segment
Software
Consulting
Infrastructure
Total
Goodwill
Allocated *
$18.4
1.1
0.8
$20.3 **
* Approximately seven percent of the goodwill was determined to be deductible for tax purposes.
** Goodwill of approximately $2.7 billion related to the Red Hat acquisition was derecognized at the time of the Kyndryl separation. Refer to note A,
“Significant Accounting Policies,” and note C, “Separation of Kyndryl,” for additional details.
The following table presents the supplemental consolidated financial results of the company as of December 31, 2019 on an unaudited
pro forma basis, as if the acquisition had been consummated on January 1, 2018. The primary adjustments reflected in the pro forma
results relate to: (1) the debt used to fund the acquisition, (2) changes driven by acquisition accounting, including amortization of
intangible assets and the deferred revenue fair value adjustment, (3) employee retention plans, (4) elimination of intercompany
transactions between IBM and Red Hat, and (5) the presentation of acquisition-related costs.
The unaudited pro forma financial information presented below does not purport to represent the actual results of operations that IBM
and Red Hat would have achieved had the companies been combined during the periods presented, and was not intended to project
the future results of operations that the combined company could achieve after the acquisition. Historical fiscal periods are not aligned
under this presentation. The unaudited pro forma financial information did not reflect any potential cost savings, operating efficiencies,
long-term debt pay down estimates, suspension of IBM’s share repurchase program, financial synergies or other strategic benefits as
a result of the acquisition or any restructuring costs to achieve those benefits.
(Unaudited)
($ in millions)
For the year ended December 31:
Revenue
Net income
2019
$ 60,195 *
$ 7,438 *
* Adjusted to reflect the Kyndryl separation. Refer to note A, “Significant Accounting Policies,” and note C, “Separation of Kyndryl,” for additional
information.
Divestitures
2021
Kyndryl–On November 3, 2021, the company completed the separation of Kyndryl. Refer to note C, “Separation of Kyndryl,” for
additional information.
Other Divestitures–In 2021, the company completed two divestitures reported in the Software segment and one divestiture reported
in Other–divested businesses. In the third quarter of 2021, IBM completed the sale of the company’s remaining OEM commercial
financing capabilities reported within the Financing segment. The financial terms related to each of these transactions did not have a
material impact to IBM's Consolidated Financial Statements.
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 the Software segment. The assets include Health Insights, MarketScan, Clinical
Development, Social Program Management, Micromedex, and imaging software offerings. The transaction is expected to close in the
second quarter of 2022, subject to customary regulatory clearances and closing conditions. At December 31, 2021, the company
concluded that the business did not meet the criteria for held-for-sale classification.
2020
There were no divestitures completed during the year ended December 31, 2020.
2019
Select IBM Software Products–On June 30, 2019, HCL Technologies Limited (HCL) acquired select standalone Software products from
IBM for $1,775 million, inclusive of $150 million of contingent consideration. The transaction included commercial software,
intellectual property and services offerings in addition to transition services for IT and other services. The company recognized a pre-
tax gain on this transaction of $626 million and $43 million in 2019 and 2020, respectively.
The company received cash of $812 million at closing and $812 million in the second quarter of 2020. The company also received
$140 million of contingent consideration as of December 31, 2021. In addition, IBM remits payment to HCL predominantly for servicing
certain customer contracts until such contracts are terminated or entitlements are assumed by HCL, related to deferred revenue that
96
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
existed prior to closing. IBM made cash payments to HCL of $38 million, $288 million, and $174 million in 2021, 2020 and 2019,
respectively, for such contracts.
Select IBM Marketing Platform and Commerce Offerings–On April 4, 2019, IBM and Centerbridge Partners, L.P. (Centerbridge)
announced a definitive agreement, in which Centerbridge would acquire select marketing platform and commerce offerings from IBM.
The transaction included commercial software and services offerings. In addition, IBM is providing Centerbridge with IT transition
services. All other contracted transition services concluded as of June 30, 2020. Upon closing, Centerbridge announced that this
business would be re-branded under the name Acoustic. The closing completed for the U.S. on June 30, 2019. The company received
a net cash payment of $240 million in 2019 and expects to receive an additional $150 million of cash within 36 months of the U.S.
closing.
A subsequent closing occurred in most other countries on March 31, 2020. The closing of all remaining countries occurred as of June
30, 2020. The pre-tax gain recognized on this transaction as of December 31, 2021 was $79 million.
IBM Risk Analytics and Regulatory Offerings–On September 24, 2019, IBM and SS&C Technologies Holdings, Inc. (SS&C) entered into
a definitive agreement in which SS&C would acquire certain Algorithmics and related assets from IBM. The transaction closed in the
fourth quarter of 2019. The company recognized an immaterial pre-tax gain on the sale for the year ended December 31, 2019.
Sales Performance Management Offerings–On November 20, 2019, IBM and Varicent Parent Holdings Corporation (Varicent) entered
into a definitive agreement in which Varicent would acquire certain sales performance management assets from IBM. The initial closing
of certain countries was completed on December 31, 2019. The company received a net cash payment of $230 million and recognized
a pre-tax gain on the sale of $136 million for the year ended December 31, 2019. A subsequent closing for the remaining countries
occurred on March 31, 2020 and the company recognized an immaterial pre-tax gain.
The above 2019 divested businesses are reported in Other–divested businesses as described in note E, "Segments."
In addition to the above, the company completed three divestitures reported in the Financing segment, the Consulting segment and
the Other–divested businesses in 2019. The financial terms related to each of these transactions were not material.
The pre-tax gains recognized on the divestitures above were recorded in other (income) and expense in the Consolidated Income
Statement.
NOTE G. RESEARCH, DEVELOPMENT & ENGINEERING
RD&E expense was $6,488 million in 2021, $6,262 million in 2020 and $5,910 million in 2019.
The company incurred total expense of $6,216 million, $5,968 million and $5,578 million in 2021, 2020 and 2019, respectively, for
scientific research and the application of scientific advances to the development of new and improved products and their uses, as well
as services and their application. Within these amounts, software-related expense was $3,922 million, $3,682 million and $3,497
million in 2021, 2020 and 2019, respectively.
Expense for product-related engineering was $272 million, $295 million and $334 million in 2021, 2020 and 2019, respectively.
NOTE H. TAXES
($ in millions)
For the year ended December 31:
Income/(loss) from continuing operations before income taxes
U.S. operations
Non-U.S. operations
Total income from continuing operations before income taxes
2021
2020
2019
$ (2,654)
7,491
$ 4,837
$ (2,349)
4,921
$ 2,572
(874)
$
8,080
$ 7,206
The income from continuing operations provision for/(benefit from) income taxes by geographic operations was as follows:
($ in millions)
For the year ended December 31:
U.S. operations
Non-U.S. operations
Total continuing operations provision for/(benefit from) income taxes
2021
2020
$ (969)
1,093
$ 124
$ 1,913
(3,273)
$ (1,360)
2019
$ (419)
479
$ 60
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
97
The components of the income from continuing operations provision for/(benefit from) income taxes by taxing jurisdiction were as
follows:
($ in millions)
For the year ended December 31:
U.S. federal
Current
Deferred
U.S. state and local
Current
Deferred
Non-U.S.
Current
Deferred
Total continuing operations provision for/(benefit from) income taxes
Discontinued operations provision for/(benefit from) income taxes
Provision for social security, real estate, personal property and other taxes
Total taxes included in net income
2021
2020
2019
$ 374
(1,358)
$ (984)
$ 161
(370)
$ (209)
$ 1,342
(25)
$ 1,317
$ 124
714
3,227
$ 4,065
$ 312
1,102
$ 1,414
$ 345
(358)
(13)
$
$ 1,208
(3,969)
$ (2,761)
$ (1,360)
484
3,199
$ 2,322
$ 327
(873)
$ (546)
$
(55)
(85)
$ (140)
$ 1,376
(630)
$ 746
60
$
670
3,304
$ 4,034
A reconciliation of the statutory U.S. federal tax rate to the company’s effective tax rate from continuing operations was as follows:
For the year ended December 31:
Statutory rate
Enactment of U.S. tax reform
Tax differential on foreign income
Intra-entity IP sale
Domestic incentives
State and local
Other
Effective rate
Percentages rounded for disclosure purposes.
2021
21 %
—
(10)
—
(5)
(3)
0
3 %
2020
21 %
—
(31)
(37)
(9)
0
3
(53) %
2019
21 %
2
(14)
—
(6)
(2)
0
1 %
The significant components reflected within the tax rate reconciliation labeled “Tax differential on foreign income” include the effects
of foreign subsidiaries’ earnings taxed at rates other than the U.S. statutory rate, U.S. taxes on foreign income and any net impacts of
intercompany transactions. These items also reflect audit settlements or changes in the amount of unrecognized tax benefits
associated with each of these items.
The continuing operations effective rate for 2021 was 2.6 percent compared to (52.9) percent in 2020. The current-year effective tax
rate was primarily driven by tax benefits related to audit settlements in multiple jurisdictions. The prior-year effective tax rate was
primarily driven by an intra-entity sale of certain of the company’s intellectual property in the first quarter of 2020 which required the
recognition of a $3.4 billion deferred tax asset. The recognition of this non-U.S. deferred tax asset and its related GILTI impacts in the
U.S. resulted in a net tax benefit of $0.9 billion in the first quarter of 2020. In addition, a change in foreign tax law resulted in a $0.2
billion tax benefit in the prior year.
The effect of tax law changes on deferred tax assets and liabilities did not have a material impact on the company’s 2021 effective tax
rate.
98
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
Deferred Tax Assets
($ in millions)
At December 31:
Retirement benefits
Leases
Share-based and other compensation
Domestic tax loss/credit carryforwards
Deferred income
Foreign tax loss/credit carryforwards
Bad debt, inventory and warranty reserves
Depreciation
Hedging losses
Restructuring charges
Accruals
Intangible assets
Capitalized research and development
Other
Gross deferred tax assets
Less: valuation allowance
Net deferred tax assets
*
Deferred Tax Liabilities
($ in millions)
At December 31:
Goodwill and intangible assets
GILTI deferred taxes
Leases and right-of-use assets
Depreciation
Retirement benefits
Software development costs
Deferred transition costs
Undistributed foreign earnings
Other
Gross deferred tax liabilities
2021
$ 3,142
1,061
661
1,619
630
983
390
249
26
216
305
2,929
2,161
1,280
15,652
883
$ 14,769
2020
$ 3,700
1,149
579
1,746
661
818
324
139
576
253
483
3,540
1,387
1,352
16,707
850
$ 15,857
2021
2020
$ 2,290
3,257
1,314
518
1,971
1,016
42
131
817
$ 11,356
$ 2,635
4,119
1,584
646
1,209
1,007
200
276
734
$ 12,410
For financial reporting purposes, the company had foreign and domestic loss carryforwards, the tax effect of which was $773 million,
as well as foreign and domestic credit carryforwards of $1,829 million. Substantially all of these carryforwards are available for at least
two years and the majority are available for 10 years or more.
The valuation allowances as of December 31, 2021, 2020 and 2019 were $883 million, $850 million and $608 million, respectively.
The amounts principally apply to certain foreign and domestic loss carryforwards and credits. In the opinion of management, it is more
likely than not that these assets will not be realized. However, to the extent that tax benefits related to these carryforwards are realized
in the future, the reduction in the valuation allowance will reduce income tax expense.
The amount of unrecognized tax benefits at December 31, 2021 increased by $141 million in 2021 to $8,709 million. A reconciliation
of the beginning and ending amount of unrecognized tax benefits was as follows:
($ in millions)
Balance at January 1
Additions based on tax positions related to the current year
Additions for tax positions of prior years
Reductions for tax positions of prior years (including impacts due to a lapse of statute)
Settlements
Balance at December 31
$ 8,568
934
247
(688)
(352)
$ 8,709
$ 7,146
1,690
159
(408)
(19)
$ 8,568
2021
2020
2019
$ 6,759
816
779
(922)
(286)
$ 7,146
The additions to unrecognized tax benefits related to the current and prior years were primarily attributable to non-U.S. tax matters,
including transfer pricing, as well as U.S. federal and state tax matters, credits and incentives. The settlements and reductions to
unrecognized tax benefits for tax positions of prior years were primarily attributable to non-U.S. audits, U.S. federal and state tax
matters, impacts due to lapse of statute of limitations and foreign currency translation adjustments.
The unrecognized tax benefits at December 31, 2021 of $8,709 million can be reduced by $546 million associated with timing
adjustments, U.S. tax credits, potential transfer pricing adjustments and state income taxes. The net amount of $8,163 million, if
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
99
recognized, would favorably affect the company’s effective tax rate. The net amounts at December 31, 2020 and 2019 were $7,994
million and $6,562 million, respectively.
Interest and penalties related to income tax liabilities are included in income tax expense. During the year ended December 31, 2021,
the company recognized $125 million in interest expense and penalties; in 2020, the company recognized $117 million in interest
expense and penalties; and, in 2019, the company recognized $13 million in interest expense and penalties. The company had $935
million for the payment of interest and penalties accrued at December 31, 2021, and had $843 million accrued at December 31, 2020.
Within the next 12 months, the company believes it is reasonably possible that the total amount of unrecognized tax benefits
associated with certain positions may be reduced. The potential decrease in the amount of unrecognized tax benefits is associated
with certain non-U.S. positions that are expected to be recognized due to a lapse in statute of limitations, as well as anticipated
resolution of various non-U.S. audits. The company estimates that the unrecognized tax benefits at December 31, 2021 could be
reduced by $166 million.
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 challenging tax assessments issued by the India Tax
Authorities. As of December 31, 2021, the company had recorded $727 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.
Within consolidated retained earnings at December 31, 2021 were undistributed after-tax earnings from certain non-U.S. subsidiaries
that were not indefinitely reinvested. At December 31, 2021, the company had a deferred tax liability of $131 million for the estimated
taxes associated with the repatriation of these earnings. Quantification of the deferred tax liability associated with indefinitely
reinvested non-earnings related outside basis differences, if any, was not practicable.
100
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
NOTE I. EARNINGS PER SHARE
The following table presents the computation of basic and diluted earnings per share of common stock.
($ in millions except per share amounts)
For the year ended December 31:
Weighted-average number of shares on which earnings per share
calculations are based
Basic
Add—incremental shares under stock-based compensation plans
Add—incremental shares associated with contingently issuable shares
Assuming dilution
Income from continuing operations
Income/(loss) from discontinued operations, net of tax
Net income on which basic earnings per share is calculated
Income from continuing operations
Net income applicable to contingently issuable shares
Income from continuing operations on which diluted earnings per
2021
2020
2019
895,990,771
6,883,290
1,766,940
904,641,001
$4,712
1,030
$5,743
$4,712
—
890,348,679
4,802,940
1,412,352
896,563,971
$3,932
1,658
$5,590
$3,932
(2)
887,235,105
4,199,440
1,378,831
892,813,376
$7,146
2,285
$9,431
$7,146
0
share is calculated
$4,712
$3,930
$7,146
Income/(loss) from discontinued operations, net of tax, on which
basic and diluted earnings per share is calculated
Net income on which diluted earnings per share is calculated
Earnings/(loss) per share of common stock
Assuming dilution
Continuing operations
Discontinued operations
Total
Basic
Continuing operations
Discontinued operations
Total
1,030
$5,743
1,658
$5,588
$ 5.21
1.14
$ 6.35
$ 5.26
1.15
$ 6.41
$ 4.38
1.85
$ 6.23
$ 4.42
1.86
$ 6.28
2,285
$9,431
$ 8.00
2.56
$10.56
$ 8.05
2.58
$10.63
Weighted-average stock options to purchase 980,505 common shares in 2021, 1,417,665 common shares in 2020 and 855,679
common shares in 2019 were outstanding, but were not included in the computation of diluted earnings per share because the exercise
price of the options was greater than the average market price of the common shares for the full year, and therefore, the effect would
have been antidilutive.
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
101
NOTE J. FINANCIAL ASSETS & LIABILITIES
Fair Value Measurements
Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents the company’s financial assets and financial liabilities that are measured at fair value on a recurring basis
at December 31, 2021 and 2020.
($ in millions)
At December 31:
Cash equivalents(1)
Fair Value
Hierarchy Level
2021
2020
Assets (7)
Liabilities (8)
Assets (7)
Liabilities (8)
Time deposits and certificates of deposit(2)
Money market funds
U.S. government securities(2)
Total cash equivalents
Equity investments(3)
Kyndryl common stock
Debt securities–current(2)(4)
Debt securities–noncurrent(2)(5)
Derivatives designated as hedging instruments
Interest rate contracts
Foreign exchange contracts
Derivatives not designated as hedging instruments
Foreign exchange contracts
Equity contracts(6)
Total
2
1
2
1
1
2
1,2,3
2
2
2
1,2
$1,903
263
599
$2,766
0
807
600
37
12
359
21
6
$4,608
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
—
117
42
4
$162
$7,658
148
500
$8,306
2
—
600
7
100
111
13
12
$9,151
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
—
580
47
—
$627
(1)Included within cash and cash equivalents in the Consolidated Balance Sheet.
(2)Available-for-sale debt securities with carrying values that approximate fair value.
(3)Included within investments and sundry assets in the Consolidated Balance Sheet.
(4)U.S. treasury bills that are reported within marketable securities in the Consolidated Balance Sheet.
(5)Primarily includes 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 December 31, 2021 were $358 million and $40 million, respectively, and at December 31, 2020 were $85 million and $151 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
December 31, 2021 were $60 million and $103 million, respectively, and at December 31, 2020 were $587 million and $40 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 at December 31, 2021 of $807 million is included within prepaid expenses and other
current assets in the Consolidated Balance Sheet. An unrealized gain of $126 million representing the difference between the book
value of the Kyndryl shares as of the date of separation and the fair value of the shares as of December 31, 2021 was recorded in other
(income) and expense in the Consolidated Income Statement for the year ended December 31, 2021. Refer to note C, “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 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 December 31, 2021 and 2020, 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.
102
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
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 $44,917 million and $54,217 million, and the
estimated fair value was $49,465 million and $61,460 million at December 31, 2021 and 2020, respectively. If measured at fair value
in the financial statements, long-term debt (including the current portion) would be classified as Level 2 in the fair value hierarchy.
NOTE K. INVENTORY
($ in millions)
At December 31:
Finished goods
Work in process and raw materials
Total
NOTE L. FINANCING RECEIVABLES
2021
$ 208
1,442
$1,649
2020
$ 163
1,649
$ 1,812
Financing receivables primarily consist of client loan and installment payment receivables (loans) and investment in sales-type and
direct financing leases (collectively referred to as client financing receivables) and commercial financing receivables. Loans are
provided primarily to clients to finance the purchase of hardware, software and services. Payment terms on these financing
arrangements are generally for terms up to seven years. Investment in sales-type and direct financing leases relate principally to the
company’s Infrastructure products and are for terms ranging generally from two to six years. Commercial financing receivables, which
consist of both held-for-investment and held-for-sale receivables, relate primarily to working capital financing for dealers and
remarketers of IBM products. Payment terms for working capital financing generally range from 30 to 90 days.
A summary of the components of the company’s financing receivables is presented as follows:
($ in millions)
At December 31, 2021:
Financing receivables, gross
Unearned income
Residual value**
Amortized cost
Allowance for credit losses
Total financing receivables, net
Current portion
Noncurrent portion
($ in millions)
At December 31, 2020:
Financing receivables, gross
Unearned income
Residual value**
Amortized cost
Allowance for credit losses
Total financing receivables, net
Current portion
Noncurrent portion
Client Financing Receivables
Client Loan and
Installment Payment
Receivables/
(Loans)
$9,303
(353)
—
$8,949
(131)
$8,818
$5,371
$3,447
Investment in
Sales-Type and
Direct Financing
Leases
$3,336
(223)
335
$3,448
(64)
$3,384
$1,406
$1,978
Commercial Financing Receivables
Held for
Investment
$450
—
—
$450
(6)
$444
$444
$ —
Held for
Sale *
$793
—
—
$793
—
$793
$793
$ —
Client Financing Receivables
Client Loan and
Installment Payment
Receivables/
(Loans)
$12,159
(488)
—
$11,671
(173)
$11,498
$ 6,955
$ 4,542
Investment in
Sales-Type and
Direct Financing
Leases
$4,001
(335)
485
$4,151
(82)
$4,069
$1,525
$2,544
Commercial Financing Receivables
Held for
Investment
$2,036
0
—
$2,036
(8)
$2,028
$2,028
—
$
Held for
Sale *
$383
—
—
$383
—
$383
$383
$ —
Total
$13,881
(576)
335
$13,640
(201)
$13,439
$ 8,014
$ 5,425
Total
$18,580
(823)
485
$18,242
(263)
$17,979
$10,892
$ 7,086
* The carrying value of the receivables classified as held for sale approximates fair value.
** Includes guaranteed and unguaranteed residual value.
+
Recast to conform to 2021 presentation.
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
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
103
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 $408 million and $482 million at December 31, 2021 and
2020, respectively. These borrowings are included in note Q, “Borrowings.”
Transfer of Financial Assets
The company has entered into agreements with third-party financial institutions to sell certain of its client financing receivables,
including both loan and lease receivables, for cash proceeds. In addition, on December 24, 2020, the company entered into an
agreement with a third-party investor to sell up to $3.0 billion of IBM short-term commercial financing receivables, at any one time, on
a revolving basis, starting in the U.S. and Canada in 2020, and expanding to other countries within Europe and Asia Pacific in 2021,
including Germany and the UK.
The following table presents the total amount of client and commercial financing receivables transferred:
($ in millions)
Client financing receivables for the year ended December 31
Lease receivables
Loan receivables
Total client financing receivables transferred*
Commercial financing receivables
Receivables transferred for the year ended December 31
Receivables transferred and uncollected as of December 31**
2021
2020
$ 819
2,224
$ 3,043
$ 7,359
1,653
$ 1,152
1,410
$ 2,562
$ 515
510
* More than half of the client financing receivables sold were classified as current assets at the time of sale.
** Of the total amount of commercial financing receivables sold and derecognized from the Consolidated Balance Sheet, the amounts presented remained
uncollected from business partners as of December 31, 2021 and 2020.
The transfer of these receivables qualified as true sales and therefore reduced financing receivables. The cash proceeds from the sales
are included in cash flows from operating activities and the impacts to the Consolidated Income Statement, including fees and net gain
or loss associated with the transfers of these receivables for the years ended December 31, 2021 and 2020 were not material.
Financing Receivables by Portfolio Segment
The following tables present the amortized cost basis for client financing receivables at December 31, 2021 and 2020, 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.
($ in millions)
At December 31, 2021:
Amortized cost
Allowance for credit losses
Beginning balance at January 1, 2021
Write-offs
Recoveries
Additions/(releases)
Other*
Ending balance at December 31, 2021
* Primarily represents translation adjustments.
($ in millions)
At December 31, 2020:
Amortized cost
Allowance for credit losses
Beginning balance at January 1, 2020
Write-offs
Recoveries
Additions/(releases)
Other*
Ending balance at December 31, 2020
* Primarily represents translation adjustments.
Americas
$ 6,573
$ 141
(8)
0
(19)
(3)
$ 111
Americas
$ 7,758
142
(28)
0
33
(6)
$ 141
EMEA
$ 3,793
Asia Pacific
$ 2,031
Total
$ 12,397
$
$
77
(2)
0
(11)
(3)
61
$
$
37
(7)
1
(7)
0
23
$
$
255
(17)
1
(38)
(7)
195
EMEA
$ 5,023
Asia Pacific
$ 3,042
Total
$ 15,822
69
(3)
0
5
6
77
$
41
(3)
2
(4)
1
37
$
252
(34)
3
34
1
255
$
104
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
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.”
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.
($ in millions)
At December 31, 2021:
Americas
EMEA
Asia Pacific
Total client financing receivables
($ in millions)
At December 31, 2020:
Americas
EMEA
Asia Pacific
Total client financing receivables
Total
Amortized
Cost
$ 6,573
3,793
2,031
$12,397
Total
Amortized
Cost
$ 7,758
5,023
3,042
$15,822
Amortized
Cost
> 90 Days (1)
$188
99
25
$312
Amortized
Cost
> 90 Days and
Accruing (1)
$100
7
5
$112
Billed
Invoices
> 90 Days and
Accruing
$ 6
2
2
$10
Amortized
Cost
> 90 Days (1)
$295
119
42
$456
Amortized
Cost
> 90 Days and
Accruing (1)
$200
28
12
$241
Billed
Invoices
> 90 Days and
Accruing
$12
5
4
$20
Amortized
Cost
Not
Accruing (2)
$ 90
95
20
$205
Amortized
Cost
Not
Accruing (2)
$ 96
95
32
$223
(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 $153 million and $178 million at December 31, 2021 and 2020, respectively. Financing
income recognized on these receivables was immaterial for the years ended December 31, 2021 and 2020, respectively.
Credit Quality Indicators
The company’s credit quality indicators, which are based on rating agency data, publicly available information and information provided
by customers, are reviewed periodically based on the relative level of risk. The resulting indicators are a numerical rating system that
maps to Moody’s Investors Service credit ratings as shown below. The company uses information provided by Moody’s, where
available, as one of many inputs in its determination of customer credit ratings. The credit quality of the customer is evaluated based
on these indicators and is assigned the same risk rating whether the receivable is a lease or a loan.
The following tables present the amortized cost basis for client financing receivables by credit quality indicator at December 31, 2021
and 2020, respectively. Receivables with a credit quality indicator ranging from Aaa to Baa3 are considered investment grade. All others
are considered non-investment grade. The credit quality indicators reflect mitigating credit enhancement actions taken by customers
which reduce the risk to IBM.
($ in millions)
At December 31, 2021:
Vintage year
2021
2020
2019
2018
2017
2016 and prior
Total
Americas
EMEA
Asia Pacific
Aaa - Baa3
Ba1 - D
Aaa - Baa3
Ba1 - D
Aaa - Baa3
Ba1 - D
$2,556
1,013
544
338
108
20
$4,579
$ 1,147
392
236
117
50
53
$ 1,994
$ 1,181
506
287
189
15
21
$ 2,198
$ 778
342
291
85
52
46
$1,595
$ 565
381
297
211
74
38
$1,567
$226
86
51
64
17
20
$464
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
105
($ in millions)
At December 31, 2020:
Vintage year
2020
2019
2018
2017
2016
2015 and prior
Total
Americas
EMEA
Asia Pacific
Aaa - Baa3
Ba1 - D
Aaa - Baa3
Ba1 - D
Aaa - Baa3
Ba1 - D
$2,818
988
829
285
90
28
$5,038
$ 1,449
623
360
154
52
81
$ 2,720
$ 1,513
668
329
70
33
22
$ 2,635
$1,427
519
245
128
46
22
$2,387
$ 958
564
419
205
114
38
$2,298
$351
123
167
52
33
18
$743
Troubled Debt Restructurings
The company did not have any significant troubled debt restructurings for the years ended December 31, 2021 and 2020.
NOTE M. PROPERTY, PLANT & EQUIPMENT
($ in millions)
At December 31:
Land and land improvements
Buildings and building and leasehold improvements
Information technology equipment
Production, engineering, office and other equipment
Plant and other property—gross
Less: Accumulated depreciation
Plant and other property—net
Rental machines
Less: Accumulated depreciation
Rental machines—net
Total—net
NOTE N. LEASES
Accounting for Leases as a Lessee
The following table presents the various components of lease costs:
($ in millions)
For the year ended December 31:
Finance lease cost
Operating lease cost
Short-term lease cost
Variable lease cost
Sublease income
Total lease cost
2021
$
224
6,049
10,515
3,222
20,010
14,343
5,668
74
48
27
$ 5,694
2020
$
234
6,407
9,840
3,354
19,836
13,728
6,108
265
168
97
$ 6,205
2021
$
52
1,126
21
336
(46)
$1,489
2020
$
35
1,181
28
343
(28)
$ 1,558
2019
$
14
1,257
24
364
(22)
$ 1,637
The company recorded net gains on sale and leaseback transactions of $7 million and $36 million for the years ended December 31,
2021 and 2019, respectively. The company had no sale and leaseback transactions in 2020.
The following table presents supplemental information relating to the cash flows arising from lease transactions. Cash payments
related to variable lease costs and short-term leases are not included in the measurement of operating and finance lease liabilities,
and, as such, are excluded from the amounts below.
($ in millions)
For the year ended December 31:
Cash paid for amounts included in the measurement of lease liabilities
Operating cash outflows from finance leases
Financing cash outflows from finance leases
Operating cash outflows from operating leases
ROU assets obtained in exchange for new finance lease liabilities
ROU assets obtained in exchange for new operating lease liabilities
2021
2020
2019
$
8
42
1,135
46
779
$
8
25
1,212
50
785
$
7
4
1,154
68 *
5,102 *
* Includes opening balance additions as a result of the adoption of the new lease guidance effective January 1, 2019. The post adoption addition of leases
for the year ended December 31, 2019 was $1,383 million for operating leases and immaterial for finance leases.
106
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
The following table presents the weighted-average lease term and discount rate for finance and operating leases.
At December 31:
Finance leases
Weighted-average remaining lease term
Weighted-average discount rate
Operating leases
Weighted-average remaining lease term
Weighted-average discount rate
2021
2020
4.1 yrs.
0.88 %
4.5 yrs.
3.01 %
4.9 yrs.
1.08 %
4.7 yrs.
3.25 %
The following table presents a maturity analysis of expected undiscounted cash flows for operating and finance leases on an annual
basis for the next five years and thereafter.
($ in millions)
Finance leases
Operating leases
$
2022
43
1,047
2023
2024
$ 30
845
$ 18
685
$
2025
9
424
$
2026
8
313
Thereafter
$ 28
356
Imputed
Interest *
$ (36)
(234)
$
Total **
99
3,435
* Imputed interest represents the difference between undiscounted cash flows and discounted cash flows.
** The company entered into lease agreements for certain facilities and equipment with payments totaling approximately $202 million that have not yet
commenced as of December 31, 2021, and therefore are not included in this table.
The following table presents information on the company’s finance leases recognized in the Consolidated Balance Sheet:
($ in millions)
At December 31:
ROU Assets—Property, plant and equipment
Lease Liabilities
Short-term debt
Long-term debt
Accounting for Leases as a Lessor
The following table presents amounts included in the Consolidated Income Statement related to lessor activity:
2021
$86
36
63
2020
$84
30
60
($ in millions)
For the year ended December 31:
Lease income—sales-type and direct financing leases
Sales-type lease selling price
Less: Carrying value of underlying assets*
Gross profit
Interest income on lease receivables
Total sales-type and direct financing lease income
Lease income—operating leases
Variable lease income
Total lease income
* Excludes unguaranteed residual value.
Sales-Type and Direct Financing Leases
2021
2020
2019
$1,355
(300)
1,055
179
1,234
169
120
$1,523
$ 1,321
(410)
911
249
1,160
255
115
$ 1,530
$ 1,360
(476)
884
303
1,187
322
56
$ 1,565
At December 31, 2021 and 2020, the unguaranteed residual values of sales-type and direct financing leases were $335 million and
$469 million, respectively. For further information on the company’s net investment in leases, including guaranteed and unguaranteed
residual values, refer to note L, “Financing Receivables.”
For the years ended December 31, 2021 and 2020, impairment of residual values was immaterial.
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
107
The following table presents a maturity analysis of the lease payments due to IBM on sales-type and direct financing leases over the
next five years and thereafter, as well as a reconciliation of the undiscounted cash flows to the financing receivables recognized in the
Consolidated Balance Sheet at December 31, 2021:
($ in millions)
2022
2023
2024
2025
2026
Thereafter
Total undiscounted cash flows
Present value of lease payments (recognized as financing receivables)
Difference between undiscounted cash flows and discounted cash flows
Total
$ 1,528
1,014
555
209
27
1
$ 3,336
3,113 *
$ 223
* The present value of the lease payments will not equal the financing receivables balances in the Consolidated Balance Sheet due to certain items
including IDCs, allowance for credit losses and residual values, which are included in the financing receivable balance, but are not included in the future
lease payments.
Operating Leases
The following table presents a maturity analysis of the undiscounted lease payments due to IBM on operating leases over the next
five years and thereafter at December 31, 2021:
($ in millions)
2022
2023
2024
2025
2026
Thereafter
Total undiscounted cash flows
Total
$ 13
4
0
0
—
—
$ 17
There were no material impairment losses incurred for equipment provided to clients under an operating lease for the years ended
December 31, 2021 and 2020.
At December 31, 2021 and 2020, the unguaranteed residual values of operating leases were $13 million and $48 million, respectively.
NOTE O. INTANGIBLE ASSETS INCLUDING GOODWILL
Intangible Assets
The following table presents the company’s intangible asset balances by major asset class:
($ in millions)
At December 31, 2021:
Intangible asset class
Capitalized software
Client relationships
Completed technology
Patents/trademarks
Other**
Total
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount *
$ 1,696
9,021
6,074
2,196
44
$ 19,031
$
(751)
(2,889)
(2,259)
(586)
(35)
$ (6,520)
$
945
6,132
3,815
1,610
9
$12,511
* Includes a decrease in net intangible asset balance of $221 million due to foreign currency translation.
** Other intangibles are primarily acquired proprietary and nonproprietary business processes, methodologies and systems.
108
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
($ in millions)
At December 31, 2020:
Intangible asset class
Capitalized software
Client relationships
Completed technology
Patents/trademarks
Other**
Total
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount *
$ 1,777
8,708
5,937
2,244
56
$18,722
$ (814)
(1,976)
(1,655)
(499)
(39)
$(4,983)
$
963
6,732
4,283
1,744
16
$13,739
* Includes an increase in net intangible asset balance of $279 million due to foreign currency translation.
** Other intangibles are primarily acquired proprietary and nonproprietary business processes, methodologies and systems.
There was no impairment of intangible assets recorded in 2021 and 2020. The net carrying amount of intangible assets decreased
$1,228 million during the year ended December 31, 2021, primarily due to intangible asset amortization, partially offset by additions
of acquired intangibles and capitalized software. The aggregate intangible amortization expense was $2,506 million and $2,441
million for the years ended December 31, 2021 and 2020, respectively. In addition, in 2021 and 2020, respectively, the company
retired $904 million and $1,461 million of fully amortized intangible assets, impacting both the gross carrying amount and
accumulated amortization by this amount.
The future amortization expense relating to intangible assets currently recorded in the Consolidated Balance Sheet is estimated to be
the following at December 31, 2021:
($ in millions)
2022
2023
2024
2025
2026
Thereafter
Goodwill
Capitalized
Software
$512
313
120
0
0
—
Acquired
Intangibles
$1,818
1,513
1,467
1,450
1,433
3,886
Total
$ 2,329
1,826
1,587
1,450
1,433
3,886
The changes in the goodwill balances by reportable segment, for the years ended December 31, 2021 and 2020, are as follows:
($ in millions)
Segment*
Software
Consulting
Infrastructure
Other—divested businesses
Total
($ in millions)
Segment*
Software
Consulting
Infrastructure
Other—divested businesses
Total
Balance at
January 1, 2021
$43,149
6,145
4,436
36
$53,765
Purchase
Goodwill
Price
Additions Adjustments
$ 23
$1,836
(21)
713
0
—
—
—
2
$
$2,549
Foreign
Currency
Translation
and Other
Balance at
Divestitures Adjustments ** December 31, 2021
$44,450
$(545)
6,797
(40)
4,396
(39)
1
—
$55,643
$(623)
$(13)
—
—
(37)
$(50)
Foreign
Currency
Translation
Purchase
Price
Balance at
January 1, 2020
$42,275
5,775
4,386
35
$52,471
Goodwill
Balance at
Additions Adjustments Divestitures Adjustments ** December 31, 2020
and Other
$362
205
8
—
$575
$(139)
—
—
—
$(139)
$ —
—
—
—
$ —
$651
165
42
1
$859
$43,149
6,145
4,436
36
$53,765
* Recast to reflect segment changes.
** Primarily driven by foreign currency translation.
The company performed its annual goodwill impairment test for all reporting units during the fourth quarter of 2021. Following the
changes to the organizational structure, goodwill was reassigned to the reporting units using a relative fair value allocation approach.
As a result, the company performed the quantitative goodwill impairment test for all affected reporting units.
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
109
There were no goodwill impairment losses recorded during 2021 or 2020 and the company has no accumulated impairment losses.
Purchase price adjustments recorded in 2021 and 2020 were related to acquisitions that were still subject to the measurement period
that ends at the earlier of 12 months from the acquisition date or when information becomes available. Net purchase price adjustments
recorded in 2021 were not material. During 2020, net purchase price adjustments recorded to noncurrent tax assets and liabilities
were related to the Red Hat acquisition.
NOTE P. INVESTMENTS & SUNDRY ASSETS
($ in millions)
At December 31:
Derivatives—noncurrent
Alliance investments
Equity method
Non-equity method
Long-term deposits
Other receivables
Employee benefit-related
Prepaid income taxes
Other assets
Total
NOTE Q. BORROWINGS
Short-Term Debt
($ in millions)
At December 31:
Short-term loans
Long-term debt—current maturities
Total
2021
40
$
159
47
205
181
210
743
237
$ 1,823
2020
$ 151
170
46
231
423
237
777
153
$ 2,187
$
2021
22
6,764
$ 6,787
2020
$ 130
6,986
$ 7,116
The weighted-average interest rate for short-term loans was 6.7 percent and 5.7 percent at December 31, 2021 and 2020, respectively.
110
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
Long-Term Debt
Pre-Swap Borrowing
($ in millions)
At December 31:
U.S. dollar debt (weighted-average interest rate at December 31, 2021):*
1.3%
2.6%
3.4%
3.3%
6.9%
3.3%
3.0%
6.5%
3.5%
2.0%
5.9%
8.0%
4.5%
2.9%
4.0%
7.0%
4.7%
4.3%
3.0%
7.1%
Maturities
2021
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2032
2038
2039
2040
2042
2045
2046
2049
2050
2096
$
—
5,673
1,573
5,016
608
4,356
2,221
313
3,250
1,350
600
83
2,745
650
1,107
27
650
3,000
750
316
$ 34,290
$ 15,903
406
1,263
378
$ 52,240
99
$ 52,339
839
130
311
$ 51,681
6,764
$ 44,917
$ 5,499
6,233
2,395
5,029
631
4,370
2,219
313
3,250
1,350
600
83
2,745
650
1,107
27
650
3,000
750
316
$ 41,218
$ 18,355
411
1,409
324
$ 61,718
91
$ 61,808
875
156
426
$ 61,203
6,986
$ 54,217
Other currencies (weighted-average interest rate at December 31, 2021, in parentheses):*
Euro (1.1%)
Pound sterling (2.6%)
Japanese yen (0.3%)
Other (11.3%)
2023-2040
2022
2022-2026
2022-2025
Finance lease obligations (1.8%)
2022-2030
Less: net unamortized discount
Less: net unamortized debt issuance costs
Add: fair value adjustment**
Less: current maturities
Total
* 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 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 all of its debt covenants and provides periodic certifications to its lenders. The failure to comply with its
debt covenants could constitute an event of default with respect to the debt to which such provisions apply. If certain events of default
were to occur, the principal and interest on the debt to which such event of default applied would become immediately due and payable.
In the first quarter of 2020, the company issued an aggregate of $4.1 billion of Euro fixed-rate notes and the proceeds were primarily used
to early redeem outstanding fixed-rate debt which was due in 2021 in the aggregate amount of $2.9 billion. 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
$49 million upon redemption that was recorded in other (income) and expense in the Consolidated Income Statement.
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
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
111
incurred a loss of approximately $22 million upon redemption that was recorded in other (income) and expense in the Consolidated Income
Statement.
Post-Swap Borrowing (Long-Term Debt, Including Current Portion)
($ in millions)
For the year ended December 31:
Fixed-rate debt
Floating-rate debt*
Total
2021
2020
Amount
Weighted-Average
Interest Rate
Amount
Weighted-Average
Interest Rate
$ 49,976
1,705
$ 51,681
2.8 %
2.6 %
$ 53,237
7,966
$ 61,203
2.7 %
1.1 %
* Includes $425 million and $2,975 million in 2021 and 2020, respectively, of notional interest-rate swaps that effectively convert fixed-rate long-term debt into
floating-rate debt. Refer to note U, “Derivative Financial Instruments,” for additional information.
Pre-swap annual contractual obligations of long-term debt outstanding at December 31, 2021, are as follows:
($ in millions)
2022
2023
2024
2025
2026
Thereafter
Total
Interest on Debt
($ in millions)
For the year ended December 31:
Cost of financing
Interest expense
Interest capitalized
Total interest paid and accrued
Total
$ 6,765
4,848
6,391
4,015
4,719
25,601
$ 52,339
2021
$ 392
1,155
3
$ 1,550
2020
$ 451
1,288
5
$ 1,743
2019
$ 608
1,344
4
$ 1,956
Refer to the related discussion in note E, “Segments,” for interest expense of the Financing segment. Refer to note U, “Derivative Financial
Instruments,” for a discussion of the use of foreign currency denominated debt designated as a hedge of net investment, as well as a
discussion of the use of currency and interest-rate swaps in the company’s debt risk management program.
Lines of Credit
On June 22, 2021, the company entered into a new $2.5 billion Three-Year Credit Agreement and $7.5 billion Five-Year Credit Agreement
to replace the existing $2.5 billion Three-Year and $10.25 billion Five-Year Credit Agreements. The maturity dates for the new Three-
Year and Five-Year Credit Agreements (the Credit Agreements) are June 21, 2024, and June 22, 2026, respectively. The Credit Agreements
permit the company and its subsidiary borrowers to borrow up to $10 billion on a revolving basis. In connection with entering into the Credit
Agreements, the company also terminated its $2.5 billion 364-Day Credit Agreement which was scheduled to expire on July 1, 2021. The
total expense recorded by the company related to these agreements was $12 million, $12 million and $9 million in 2021, 2020 and
2019, respectively. Subject to certain conditions stated in the Credit Agreements, the borrower may borrow, prepay and re-borrow
amounts under the Credit Agreements at any time during the term of such agreements. Funds borrowed may be used for the general
corporate purposes of the borrower.
Interest rates on borrowings under the Credit Agreements will be based on prevailing market interest rates, as further described in the
Credit Agreements. The Credit Agreements contain customary representations and warranties, covenants, events of default, and
indemnification provisions. The company believes that circumstances that might give rise to breach of these covenants or an event of
default, as specified in the Credit Agreements, are remote. The company also has other committed lines of credit in some of the geographies
112
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
which are not significant in the aggregate. Interest rates and other terms of borrowing under these lines of credit vary from country to
country, depending on local market conditions.
As of December 31, 2021, there were no borrowings by the company, or its subsidiaries, under these credit facilities.
NOTE R. OTHER LIABILITIES
($ in millions)
At December 31:
Income tax reserves
Excess 401(k) Plus Plan
Disability benefits
Derivative liabilities
Workforce reductions
Deferred taxes
Other taxes payable
Environmental accruals
Warranty accruals
Asset retirement obligations
Acquisition related
Divestiture related
Other
Total
2021
$ 6,179
1,686
359
103
752
3,956
72
224
29
92
218
47
278
$ 13,996
2020
$ 5,274
1,635
385
40
886
4,958
253
246
33
84
60
63
263
$14,180
In response to changing business needs, the company periodically takes workforce reduction actions to improve productivity, cost
competitiveness and to rebalance skills. The noncurrent contractually obligated future payments associated with these activities are
reflected in the workforce reductions caption in the previous table. The noncurrent liabilities are workforce accruals primarily related
to terminated employees who are no longer working for the company who were granted annual payments to supplement their incomes
in certain countries. Depending on the individual country’s legal requirements, these required payments will continue until the former
employee begins receiving pension benefits or passes away. The total amounts accrued for workforce reductions, including amounts
classified as other accrued expenses and liabilities in the Consolidated Balance Sheet, were $1,359 million and $2,631 million at
December 31, 2021 and 2020, respectively. The decrease is primarily due to cash payments made in 2021 for the workforce reduction
action in the fourth quarter of 2020 for which the company recorded a charge of $1,472 million in selling, general and administrative
expense in the Consolidated Income Statement for severance and employee related benefits in accordance with the accounting
guidance for ongoing benefit arrangements.
The company employs extensive internal environmental protection programs that primarily are preventive in nature. The company also
participates in environmental assessments and cleanups at a number of locations, including operating facilities, previously owned
facilities and Superfund sites. The company’s maximum exposure for all environmental liabilities cannot be estimated and no amounts
have been recorded for non-ARO environmental liabilities that are not probable or estimable. The total amounts accrued for non-ARO
environmental liabilities, including amounts classified as current in the Consolidated Balance Sheet, that do not reflect actual or
anticipated insurance recoveries, were $248 million and $266 million at December 31, 2021 and 2020, respectively. Estimated
environmental costs are not expected to materially affect the consolidated financial position or consolidated results of the company’s
operations in future periods. However, estimates of future costs are subject to change due to protracted cleanup periods and changing
environmental remediation regulations.
As of December 31, 2021, the company was unable to estimate the range of settlement dates and the related probabilities for certain
asbestos remediation AROs. These conditional AROs are primarily related to the encapsulated structural fireproofing that is not subject
to abatement unless the buildings are demolished and non-encapsulated asbestos that the company would remediate only if it
performed major renovations of certain existing buildings. Because these conditional obligations have indeterminate settlement dates,
the company could not develop a reasonable estimate of their fair values. The company will continue to assess its ability to estimate
fair values at each future reporting date. The related liability will be recognized once sufficient additional information becomes
available. The total amounts accrued for ARO liabilities, including amounts classified as current in the Consolidated Balance Sheet, were
$119 million and $122 million at December 31, 2021 and 2020, respectively.
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
113
NOTE S. COMMITMENTS & CONTINGENCIES
Commitments
The company’s extended lines of credit to third-party entities include unused amounts of $1.7 billion and $2.1 billion at December 31,
2021 and 2020, respectively. A portion of these amounts was available to the company’s business partners to support their working
capital needs. In addition, the company has committed to provide future financing to its clients in connection with client purchase
agreements for $3.2 billion and $3.4 billion at December 31, 2021 and 2020, 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,” for additional information. The allowance for these commitments is recorded in other liabilities in the
Consolidated Balance Sheet and was not material at December 31, 2021 and 2020.
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 December 31, 2021 and
2020 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
($ in millions)
Balance at January 1
Current period accruals
Accrual adjustments to reflect experience
Charges incurred
Balance at December 31
2021
$ 83
82
(1)
(86)
$ 77
2020
$113
83
(16)
(96)
$ 83
114
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
Extended Warranty Liability (Deferred Income)
($ in millions)
Balance at January 1
Revenue deferred for new extended warranty contracts
Amortization of deferred revenue
Other*
Balance at December 31
Current portion
Noncurrent portion
* Other consists primarily of foreign currency translation adjustments.
Contingencies
2021
$ 425
133
(198)
(10)
$ 350
$ 163
$ 186
2020
$ 477
166
(224)
6
$ 425
$ 204
$ 221
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 years ended December 31, 2021, 2020 and 2019 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 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.
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
115
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. CISGIL was granted permission to appeal
and the matter is now pending at the Court of Appeal in London.
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. IBM’s claims for breaches of contract and promissory estoppel are proceeding.
The company is party to, or otherwise involved in, proceedings brought by U.S. federal or state environmental agencies under the
Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), known as “Superfund,” or laws similar to CERCLA.
Such statutes require potentially responsible parties to participate in remediation activities regardless of fault or ownership of sites.
The company is also conducting environmental investigations, assessments or remediations at or in the vicinity of several current or
former operating sites globally pursuant to permits, administrative orders or agreements with country, state or local environmental
agencies, and is involved in lawsuits and claims concerning certain current or former operating sites.
The company is also subject to ongoing tax examinations and governmental assessments in various jurisdictions. Along with many
other U.S. companies doing business in Brazil, the company is involved in various challenges with Brazilian tax authorities regarding
non-income tax assessments and non-income tax litigation matters. The total potential amount related to all these matters for all
applicable years is approximately $400 million. The company believes it will prevail on these matters and that this amount is not a
meaningful indicator of liability.
NOTE T. EQUITY ACTIVITY
The authorized capital stock of IBM consists of (i) 4,687,500,000 shares of common stock with a $.20 per share par value, of which
898,068,600 shares were outstanding at December 31, 2021, and (ii) 150,000,000 shares of preferred stock with a $.01 per share par
value, whereby 75,000,000 shares have been designated as Series A Preferred Stock, of which 57,916,244 shares of Series A Preferred
Stock were issued to a wholly owned subsidiary of the company but were not outstanding at December 31, 2021. The company does
not intend to issue or transfer any shares of Series A Preferred Stock to any third parties.
Stock Repurchases
The Board of Directors authorizes the company to repurchase IBM common stock. The company suspended its share repurchase
program effective with the close of the Red Hat acquisition on July 9, 2019 in order to focus on reducing debt related to the acquisition.
The company repurchased 9,979,516 common shares at a cost of $1,331 million in 2019. Actual cash disbursements for repurchased
shares may differ due to varying settlement dates for these transactions. At December 31, 2021, $2,008 million of Board common
stock repurchase authorization was available.
Other Stock Transactions
The company issued the following shares of common stock as part of its stock-based compensation plans and employees stock
purchase plan: 5,608,845 shares in 2021, 4,972,028 shares in 2020, and 4,569,917 shares in 2019. The company issued 2,093,243
treasury shares in 2021, 2,934,907 treasury shares in 2020, and 2,041,347 treasury shares in 2019, as a result of restricted stock unit
releases and exercises of stock options by employees of certain acquired businesses and by non-U.S. employees. Also, as part of the
company’s stock-based compensation plans, 2,286,912 common shares at a cost of $319 million, 2,363,966 common shares at a cost
of $302 million, and 2,000,704 common shares at a cost of $272 million in 2021, 2020 and 2019, respectively, were remitted by
employees to the company in order to satisfy minimum statutory tax withholding requirements. These amounts are included in the
treasury stock balance in the Consolidated Balance Sheet and the Consolidated Statement of Equity.
116
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
Reclassifications and Taxes Related to Items of Other Comprehensive Income
($ in millions)
For the year ended December 31, 2021:
Other comprehensive income/(loss)
Foreign currency translation adjustments
Net changes related to available-for-sale securities
Unrealized gains/(losses) arising during the period
Reclassification of (gains)/losses to other (income) and expense
Total net changes related to available-for-sale securities
Unrealized gains/(losses) on cash flow hedges
Unrealized gains/(losses) arising during the period
Reclassification of (gains)/losses to:
Cost of services
Cost of sales
Cost of financing
SG&A expense
Other (income) and expense
Interest expense
Total unrealized gains/(losses) on cash flow hedges
Retirement-related benefit plans(1)
Prior service costs/(credits)
Net (losses)/gains arising during the period
Curtailments and settlements
Amortization of prior service (credits)/costs
Amortization of net (gains)/losses
Total retirement-related benefit plans
Other comprehensive income/(loss)
Before Tax
Tax (Expense)/
Amount
Benefit
Net of Tax
Amount
$ 987
$ (414)
$ 573
$
$
0
—
0
$ 344
(43)
16
22
24
157
65
$ 587
$ (51)
2,433
94
9
2,484
$4,969
$6,542
$
$
$
0
—
0
$
$
0
—
0
(89)
$ 256
11
(3)
(6)
(6)
(40)
(16)
$ (149)
$
(1)
(601)
(11)
0
(528)
$(1,140)
$(1,703)
(32)
13
17
19
118
49
$ 438
$ (52)
1,832
83
9
1,956
$3,828
$4,839
(1) These AOCI components are included in the computation of net periodic pension cost. Refer to note W, “Retirement-Related Benefits,” for additional
information.
($ in millions)
For the year ended December 31, 2020:
Other comprehensive income/(loss)
Foreign currency translation adjustments
Net changes related to available-for-sale securities
Unrealized gains/(losses) arising during the period
Reclassification of (gains)/losses to other (income) and expense
Total net changes related to available-for-sale securities
Unrealized gains/(losses) on cash flow hedges
Unrealized gains/(losses) arising during the period
Reclassification of (gains)/losses to:
Cost of services
Cost of sales
Cost of financing
SG&A expense
Other (income) and expense
Interest expense
Total unrealized gains/(losses) on cash flow hedges
Retirement-related benefit plans(1)
Prior service costs/(credits)
Net (losses)/gains arising during the period
Curtailments and settlements
Amortization of prior service (credits)/costs
Amortization of net (gains)/losses
Total retirement-related benefit plans
Other comprehensive income/(loss)
Before Tax
Tax (Expense)/
Amount
Benefit
Net of Tax
Amount
$(1,500)
$ 535
$ (965)
$
$
(1)
—
(1)
$
$
0
—
0
$
$
0
—
0
$ (349)
$ 89
$ (261)
(23)
(2)
27
0
(101)
78
$ (370)
$
(37)
(1,678)
52
13
2,314
$ 664
$(1,206)
6
1
(7)
0
25
(20)
$ 94
$
7
295
(14)
(1)
(451)
$(163)
$ 466
(18)
(2)
20
0
(75)
58
$ (277)
$
(29)
(1,383)
38
12
1,863
$ 501
$ (740)
(1) These AOCI components are included in the computation of net periodic pension cost. Refer to note W, “Retirement-Related Benefits,” for additional
information.
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
117
($ in millions)
For the year ended December 31, 2019:
Other comprehensive income/(loss)
Foreign currency translation adjustments
Net changes related to available-for-sale securities
Unrealized gains/(losses) arising during the period
Reclassification of (gains)/losses to other (income) and expense
Total net changes related to available-for-sale securities
Unrealized gains/(losses) on cash flow hedges
Unrealized gains/(losses) arising during the period
Reclassification of (gains)/losses to:
Cost of services
Cost of sales
Cost of financing
SG&A expense
Other (income) and expense
Interest expense
Total unrealized gains/(losses) on cash flow hedges
Retirement-related benefit plans(1)
Prior service costs/(credits)
Net (losses)/gains arising during the period
Curtailments and settlements
Amortization of prior service (credits)/costs
Amortization of net (gains)/losses
Total retirement-related benefit plans
Other comprehensive income/(loss)
Before Tax
Tax (Expense)/
Amount
Benefit
Net of Tax
Amount
$ (39)
$ 29
$ (10)
$
$
1
—
1
$
$
0
—
0
$
$
1
—
1
$ (689)
$ 167
$ (522)
(68)
(51)
89
(53)
(39)
197
$ (614)
$ (73)
(120)
41
(9)
1,843
$1,681
$1,029
17
15
(22)
14
10
(50)
$ 151
$ 10
52
(12)
5
(371)
$(316)
$(136)
(50)
(37)
67
(39)
(29)
148
$ (463)
$ (63)
(68)
29
(4)
1,471
$1,365
$ 893
(1) These AOCI components are included in the computation of net periodic pension cost. Refer to note W, “Retirement-Related Benefits,” for additional
information.
Net Change Net Unrealized
Retirement- Gains/(Losses)
on Available-
Related
Benefit
Accumulated
Other
For-Sale Comprehensive
Securities Income/(Loss)
$(29,490)
(663)
$ 0
1
Accumulated Other Comprehensive Income/(Loss) (net of tax)
($ in millions)
Net Unrealized
Gains/(Losses)
on Cash Flow
Foreign
Currency
Translation
December 31, 2018
Other comprehensive income before reclassifications
Amount reclassified from accumulated other
comprehensive income
Total change for the period
December 31, 2019
Other comprehensive income before reclassifications
Amount reclassified from accumulated other
comprehensive income
Total change for the period
December 31, 2020
Other comprehensive income before reclassifications
Amount reclassified from accumulated other
comprehensive income
Separation of Kyndryl**
Total change for the period
December 31, 2021
Hedges Adjustments *
$ 284
(522)
$ (3,690)
(10)
Plans
$(26,083)
(131)
59
(463)
(179)
(261)
(16)
(277)
(456)
256
183
—
438
$ (18)
—
(10)
(3,700)
(965)
—
(965)
(4,665)
573
—
730
1,303
$ (3,362)
1,496
1,365
(24,718)
(1,412)
1,914
501
(24,216)
1,780
2,049
534
4,362
$(19,854)
* Foreign currency translation adjustments are presented gross except for any associated hedges which are presented net of tax.
** Refer to note C, “Separation of Kyndryl,” for additional information.
—
1
0
0
—
0
0
0
—
—
0
$ (1)
1,556
893
(28,597)
(2,638)
1,898
(740)
(29,337)
2,608
2,231
1,264
6,103
$(23,234)
118
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
NOTE U. 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. The amount recognized in other accounts receivable for the right to reclaim cash collateral was $2 million at
December 31, 2021 and no amount was recognized at December 31, 2020. The amount recognized in accounts payable for the
obligation to return cash collateral at December 31, 2021 was $38 million and no amount was recognized at December 31, 2020. The
company restricts the use of cash collateral received to rehypothecation, and therefore reports it in restricted cash in the Consolidated
Balance Sheet. At December 31, 2021, $2 million was rehypothecated and no amount was rehypothecated at December 31, 2020.
Additionally, if derivative exposures covered by a qualifying master netting agreement had been netted in the Consolidated Balance
Sheet at December 31, 2021 and 2020, the total derivative asset and liability positions each would have been reduced by $60 million
and $213 million, respectively.
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 December 31, 2021 and 2020, the
total notional amount of the company’s interest-rate swaps was $0.4 billion and $3.0 billion, respectively. In the first quarter of 2021,
in addition to the scheduled swap maturities, the company terminated $1.3 billion of interest-rate swaps concurrent with the early
redemption of the underlying hedged fixed-rate debt. The weighted-average remaining maturity of these instruments at both
December 31, 2021 and 2020 was approximately 1.2 years. 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 December 31, 2021 and 2020.
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 December 31, 2021 and 2020.
In connection with cash flow hedges of forecasted interest payments related to the company’s borrowings, the company recorded net
losses of $157 million and $174 million (before taxes) at December 31, 2021 and 2020, respectively, in AOCI. The company estimates
that $18 million (before taxes) of the deferred net losses on derivatives in AOCI at December 31, 2021 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 December 31, 2021 and 2020, the carrying value of debt
designated as hedging instruments was $14.1 billion and $16.4 billion, respectively. The company also uses cross-currency swaps and
foreign exchange forward contracts for this risk management purpose. At December 31, 2021 and 2020, the total notional amount of
derivative instruments designated as net investment hedges was $6.8 billion and $7.2 billion, respectively. At December 31, 2021 and
2020, the weighted-average remaining maturity of these instruments was approximately 0.1 years and 0.3 years, respectively.
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
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
119
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 December 31, 2021, the
maximum remaining length of time over which the company has hedged its exposure to the variability in future cash flows is
approximately three years. At December 31, 2021 and 2020, the total notional amount of forward contracts designated as cash flow
hedges of forecasted royalty and cost transactions was $7.2 billion and $8.0 billion, respectively. At December 31, 2021 and 2020, the
weighted-average remaining maturity of these instruments was approximately 0.6 years and 0.7 years, respectively.
At December 31, 2021 and 2020, in connection with cash flow hedges of anticipated royalties and cost transactions, the company
recorded net gains of $315 million and net losses of $192 million (before taxes), respectively, in AOCI. The company estimates that
$236 million (before taxes) of deferred net gains on derivatives in AOCI at December 31, 2021 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 December 31, 2021, the maximum length of
time remaining over which the company has hedged its exposure was approximately six years. At December 31, 2021 and 2020, the
total notional amount of cross-currency swaps designated as cash flow hedges of foreign currency denominated debt was $2.0 billion
and $1.5 billion, respectively.
At December 31, 2021 and 2020, in connection with cash flow hedges of foreign currency denominated borrowings, the company
recorded net losses of $174 million and $236 million (before taxes), respectively, in AOCI. The company estimates that $15 million
(before taxes) of deferred net losses on derivatives in AOCI at December 31, 2021 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 both December 31, 2021 and 2020, the total notional amount of derivative instruments in economic hedges of foreign
currency exposure was $6.8 billion.
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 December 31,
2021 and 2020, the total notional amount of derivative instruments in economic hedges of these compensation obligations was $1.4
billion and $1.3 billion, respectively.
Cumulative Basis Adjustments for Fair Value Hedges
At December 31, 2021 and 2020, the following amounts were recorded in the Consolidated Balance Sheet related to cumulative basis
adjustments for fair value hedges:
($ in millions)
At December 31:
Short-term debt
Carrying amount of the hedged item
Cumulative hedging adjustments included in the carrying amount—assets/(liabilities)
Long-term debt
Carrying amount of the hedged item
Cumulative hedging adjustments included in the carrying amount—assets/(liabilities)*
2021
2020
$ (227)
(2)
$(1,302)
(2)
(508)
(309)
(2,097)
(424)
* Includes ($302) million and ($353) million of hedging adjustments on discontinued hedging relationships at December 31, 2021 and 2020, respectively.
120
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
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:
2021
$19,147
6,184
534
18,745
873
1,155
Total
2020
$17,689
6,048 *
577 *
20,561
802
1,288
Gains/(Losses) of
Total Hedge Activity
2019
$ 19,009
6,467 *
704 *
18,724
(1,012)
1,344
2021
2020
$ 43
(16)
1
176
(205)
3
$ 23
2
12
141
101
35
2019
$ 68
51
(42)
267
(15)
(93)
Gain/(Loss) Recognized in Consolidated Income Statement
Consolidated
Income Statement
Recognized on
Derivatives
Line Item
2021 2020 2019
Attributable to Risk
Being Hedged (2)
2021 2020 2019
Cost of financing
Interest expense
$ (1) $ 20 $ 44
98
58
(2)
$ 18 $ 4 $ (32)
(71)
11
53
Other (income)
and expense
SG&A expense
(53)
1
(48)
201
214
142
$ 150 $ 220 $302
N/A
N/A
N/A
N/A
N/A
N/A
$ 71 $ 14 $ (103)
($ in millions)
For the year ended December 31:
Cost of services
Cost of sales
Cost of financing
SG&A expense
Other (income) and expense
Interest expense
* Reclassifed to conform to 2021 presentation.
($ in millions)
For the year ended December 31:
Derivative instruments in fair value hedges (1)
Interest rate contracts
Derivative instruments not designated as hedging
instruments
Foreign exchange contracts
Equity contracts
Total
($ in millions)
For the year ended
December 31:
Derivative instruments in cash
flow hedges
Interest rate contracts
Gain/(Loss) Recognized in Consolidated Income Statement and Other Comprehensive Income
Recognized in OCI
Consolidated
Income Statement
Reclassified
from AOCI
Amounts Excluded from
Effectiveness Testing (3)
2021
2020 2019
Line Item 2021 2020 2019 2021 2020
2019
$
— $
— $ (168) Cost of financing $
(4) $ (5) $
Foreign exchange contracts
344
Interest expense
(349) (521) Cost of services
Cost of sales
Cost of financing
SG&A expense
Other (income)
and expense
Interest expense
(13) (13)
43 23
2
(16)
(18) (23)
0
(24)
(3) $ —
—
(8)
—
68
—
51
—
(86)
—
53
$ —
—
—
—
—
—
$ —
—
—
—
—
—
(157) 101
39
(52) (65) (190)
—
—
—
—
—
—
Instruments in net investment
hedges (4)
Foreign exchange contracts
1,644 (2,127)
Total
$ 1,989 $ (2,477) $ (784)
(95) Cost of financing
Interest expense
— —
— —
6
17
$ (243) $ 21 $ (75) $ 23
—
—
16
45
$60
35
77
$112
(1) The amount includes changes in clean fair values of the derivative instruments in fair value hedging relationships and the periodic accrual for coupon
payments required under these derivative contracts.
(2) The amount includes basis adjustments to the carrying value of the hedged item recorded during the period and amortization of basis adjustments
recorded on de-designated hedging relationships during the period.
(3) The company’s policy is to recognize all fair value changes in amounts excluded from effectiveness testing in net income each period.
(4) Instruments in net investment hedges include derivative and non-derivative instruments with the amounts recognized in OCI providing an offset to the
translation of foreign subsidiaries.
N/A–Not applicable
For the years ending December 31, 2021, 2020 and 2019, there were no material gains or losses excluded from the assessment of
hedge effectiveness (for fair value or cash flow hedges), or associated with an underlying exposure that did not or was not expected to
occur (for cash flow hedges); nor are there any anticipated in the normal course of business.
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
121
NOTE V. STOCK-BASED COMPENSATION
The following table presents total stock-based compensation cost included in income from continuing operations.
($ in millions)
For the year ended December 31:
Cost
SG&A expense
RD&E expense
Pre-tax stock-based compensation cost
Income tax benefits
Net stock-based compensation cost
2021
2020
$ 145
555
218
919
(223)
$ 695
$ 126
550
197
873
(198)
$ 675
2019
$ 85
419
125
628
(143)
$ 484
Red Hat was acquired on July 9, 2019. The 2021 and 2020 results include a full year of compensation expense for issuances and
conversions of stock-based compensation for Red Hat compared to six months in 2019.
The company’s total unrecognized compensation cost related to non-vested awards at December 31, 2021 was $1.4 billion and is
expected to be recognized over a weighted-average period of approximately 2.4 years.
Capitalized stock-based compensation cost was not material at December 31, 2021, 2020 and 2019.
Incentive Awards
Stock-based incentive awards are provided to employees under the terms of the company’s long-term performance plans (the Plans).
The Plans are administered by the Executive Compensation and Management Resources Committee of the Board of Directors. Awards
available under the Plans principally include restricted stock units, performance share units, stock options or any combination thereof.
There were 293 million shares originally authorized to be awarded under the company's existing Plans and 66 million shares granted
under previous plans that, if and when those awards were cancelled, could be reissued under the existing Plans. At December 31,
2021, 96 million unused shares were available to be granted.
Separation of Kyndryl
In connection with the separation of Kyndryl, as required by the Company’s stock-based incentive award plans, the number of shares
underlying remaining unvested stock awards was adjusted. The company also adjusted the exercise price and number of shares
underlying outstanding stock options. All adjustments were made with the intent to preserve the intrinsic value of each award
immediately before and after the separation. The adjustments to the number of shares and exercise price, as applicable, were
determined using a ratio of 1.03 which was calculated by using the IBM share price based on the market closing price before and
market opening price after the separation. The number of stock awards issued as a result of the adjustment was 0.8 million. The number
of stock options issued and the respective decrease in exercise price as a result of the adjustment was immaterial. The terms of the
outstanding awards remain the same and continue to vest over the original vesting periods. Any unvested stock awards held by
employees of Kyndryl were cancelled at the time of separation. The adjustments to shares underlying unvested stock awards did not
result in material stock-based compensation cost.
Stock Awards
Stock awards for the period presented were made in the form of Restricted Stock Units (RSUs), including Retention Restricted Stock
Units (RRSUs), or Performance Share Units (PSUs).
122
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
The following table summarizes RSU and PSU activity under the Plans during the years ended December 31, 2021, 2020 and 2019.
RSUs
PSUs
Weighted-Average
Weighted-Average
Grant Price Number of Units
Grant Price
Balance at January 1, 2019
Awards granted
Awards released
Awards canceled/forfeited/performance adjusted
Balance at December 31, 2019
Awards granted
Awards released
Awards canceled/forfeited/performance adjusted
Balance at December 31, 2020
Awards granted
Awards released
Awards canceled/forfeited/performance adjusted
Kyndryl separation - adjustment
Kyndryl separation - cancellation
Balance at December 31, 2021
$130
119
136
128
$123
115
126
121
$117
125
120
119
—
119
$116
9,802,704
5,650,861
(3,145,016)
(981,921)
11,326,628
10,651,955
(3,781,240)
(1,300,639)
16,896,704
9,566,307
(4,582,159)
(2,072,800)
660,089
(1,429,661)
19,038,480
$136
117
140
131
$126
117
137
125
$120
129
129
124
—
119
$118
Number of Units
2,419,695
1,395,534
(846,672)
(112,107)*
2,856,450 **
1,582,666
(630,974)
(256,642)*
3,551,500 **
1,561,120
(581,397)
(453,178)*
120,428
(469,616)
3,728,857 **
* Includes adjustments of (223,397), (70,089) and (8,544) PSUs for 2021, 2020 and 2019, respectively, because final performance metrics were above or
below specified targets.
** Represents the number of shares expected to be issued based on achievement of grant date performance targets. The actual number of shares issued
will depend on final performance against specified targets over the vesting period.
The total fair value of RSUs and PSUs granted and vested during the years ended December 31, 2021, 2020 and 2019 were as follows:
($ in millions)
For the year ended December 31:
RSUs
Granted
Vested
PSUs
Granted
Vested
2021
2020
2019
$ 1,195
549
$ 201
75
$ 1,220
478
$ 186
86
$ 674
428
$ 164
118
In connection with vesting and release of RSUs and PSUs, the tax benefits realized by the company for the years ended December 31,
2021, 2020 and 2019 were $175 million, $139 million and $131 million, respectively.
Stock Options
In 2016, the company made one grant of 1.5 million premium-priced stock options. As of December 31, 2021, these options were
vested with a weighted-average exercise price of $135 per share and had a remaining weighted-average contractual life of
approximately 4.1 years. The options are exercisable within a range of $125 to $149. These vested options have an intrinsic value of
$4.5 million as of December 31, 2021.
The company has not granted options since 2016. No material stock options were exercised, forfeited or canceled during the years
ended December 31, 2021, 2020 and 2019. Beginning in 2022, options will be granted by the company as part of its executive
compensation programs.
The company settles employee stock option exercises primarily with newly issued common shares and, occasionally, with treasury
shares. Total treasury shares held at December 31, 2021 and 2020 were approximately 1,351 million and 1,350 million shares,
respectively.
Acquisitions
In connection with the acquisition of Red Hat in July 2019, the company issued and assumed 6.4 million stock awards with a fair value
of $845 million. A share conversion ratio of 1.35 was applied to convert Red Hat’s outstanding equity awards for Red Hat’s common
stock into IBM stock awards. At December 31, 2021, there were 0.7 million of these stock awards outstanding with a weighted-average
grant price of $127 per share.
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
123
In connection with various other acquisition transactions, there was an additional 0.6 million stock options outstanding at
December 31, 2021, as a result of the company’s conversion of stock-based awards previously granted by acquired entities. The
weighted-average exercise price of these awards was $26 per share.
IBM Employees Stock Purchase Plan
The company maintains a non-compensatory Employees Stock Purchase Plan (ESPP). The ESPP enables eligible participants to
purchase shares of IBM common stock at a 5 percent discount off the average market price on the day of purchase through payroll
deductions of up to 10 percent of eligible compensation. Eligible compensation includes any compensation received by the employee
during the year. The ESPP provides for semi-annual offering periods during which shares may be purchased and continues as long as
shares remain available under the ESPP, unless terminated earlier at the discretion of the Board of Directors. Individual ESPP
participants are restricted from purchasing more than $25,000 of common stock in one calendar year or 1,000 shares in an offering
period.
Employees purchased approximately one million shares under the ESPP during each year ended December 31, 2021, 2020 and 2019.
Cash dividends declared and paid by the company on its common stock also include cash dividends on the company stock purchased
through the ESPP. Dividends are paid on full and fractional shares and can be reinvested. The company stock purchased through the
ESPP is considered outstanding and is included in the weighted-average outstanding shares for purposes of computing basic and
diluted earnings per share.
Approximately 16.8 million shares were available for purchase under the ESPP at December 31, 2021.
Effective April 1, 2022, the company will increase the discount from 5 percent to 15 percent off the average market price on the date
of purchase for eligible participants under its ESPP. This change is expected to result in the ESPP being considered compensatory under
the accounting requirements for stock-based compensation.
124
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
NOTE W. RETIREMENT-RELATED BENEFITS
Description of Plans
IBM sponsors the following retirement-related plans/benefits:
Plan
Eligibility
Funding
Benefit Calculation
Other
U.S. Defined
Benefit (DB)
Pension Plans
Qualified
Personal
Pension Plan
(PPP)
U.S. regular, full-
time and part-time
employees hired
prior to January 1,
2005
Company contributes to
irrevocable trust fund,
held for sole benefit of
participants and
beneficiaries
Vary based on the participant:
Benefit accruals ceased
December 31, 2007
Five-year, final pay formula
based on salary, years of
service, mortality and other
participant-specific factors
Unfunded, provides
benefits in excess of IRS
limitations for qualified
plans
Cash balance formula based
on percentage of employees’
annual salary, as well as an
interest crediting rate
Excess Personal
Pension Plan
(PPP)
Supplemental
Executive
Retention Plan
(Retention Plan)
401(k) Plus
U.S. Defined
Contribution (DC)
Plans (1)
Eligible U.S.
executives
Unfunded
U.S. regular, full-
time and part-time
employees
All contributions are
made in cash and
invested in accordance
with participants’
investment elections
Based on average
earnings, years of service and
age at termination of
employment
Dollar-for-dollar match,
generally 5 or 6 percent of
eligible compensation and
automatic matching of 1, 2 or
4 percent of eligible
compensation, depending on
date of hire
Company match and automatic
contributions (at the same rate
under 401(k) Plus Plan) on
eligible compensation deferred
and on compensation earned
in excess of the IRC pay limit.
The percentage varies
depending on eligibility
and years of service
Employees generally
receive contributions after
one year of service
Employees generally
receive contributions after
one year of service.
Amounts deferred into the
Plan, including company
contributions, are
recorded as liabilities
Varies based on plan design
formulas and eligibility
requirements
Since January 1, 2004,
new hires are not eligible
for these benefits
Excess 401(k)
Plus
U.S. employees
whose eligible
compensation is
expected to exceed
IRS compensation
limit for qualified
plans
U.S. Nonpension
Postretirement
Benefit Plan
Nonpension
Postretirement
Plan
Non-U.S. Plans
DB or DC
Medical and dental
benefits for eligible
U.S. retirees and
eligible dependents,
as well as life
insurance for eligible
U.S. retirees
Eligible regular
employees in certain
non-U.S.
subsidiaries or
branches
Unfunded, non-qualified
amounts deferred are
record-keeping
(notional) accounts and
are not held in trust for
the participants, but may
be invested in
accordance with
participants’ investment
elections (under the
401(k) Plus Plan options)
Company contributes to
irrevocable trust fund,
held for the sole benefit
of participants and
beneficiaries
Company deposits funds
under various fiduciary-
type arrangements,
purchases annuities
under group contracts or
provides reserves for
these plans
Based either on years of
service and the employee’s
compensation (generally
during a fixed number of years
immediately before
retirement) or on annual
credits
In certain countries,
benefit accruals have
ceased and/or have been
closed to new hires as of
various dates
Nonpension
Postretirement
Plan
Medical and dental
benefits for eligible
non-U.S. retirees
and eligible
dependents, as well
as life insurance for
certain eligible non-
U.S. retirees
Primarily unfunded
except for a few select
countries where the
company contributes to
irrevocable trust funds
held for the sole benefit
of participants and
beneficiaries
Varies based on plan design
formulas and eligibility
requirements by country
Most non-U.S. retirees are
covered by local
government sponsored
and administered
programs
(1) Matching and automatic contributions are made once at the end of the year for employees that are employed as of December 15 of the plan year.
Contributions may be made for certain types of separations that occur prior to December 15.
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
125
Plan Financial Information
Summary of Financial Information
The following table presents a summary of the total retirement-related benefits net periodic (income)/cost recorded in the
Consolidated Income Statement.
($ in millions)
U.S. Plans
Non-U.S. Plans
Total
2021 2020 2019
2019
For the year ended December 31:
$ 303 $167 $ (153) $ 1,119 $ 1,057 $ 842 $ 1,422 $ 1,224 $ 689
Defined benefit pension plans
11
Retention Plan
$ 319 $178 $ (142) $ 1,119 $ 1,057 $ 842 $ 1,438 $ 1,235 $ 700
Total defined benefit pension plans (income)/cost
$ 561 $585 $ 588 $ 409 $ 403 $ 389 $ 971 $ 988 $ 976
IBM 401(k) Plus Plan and non-U.S. plans
26
Excess 401(k)
$ 582 $612 $ 613 $ 409 $ 403 $ 389 $ 992 $ 1,015 $ 1,002
Total defined contribution plans cost
Nonpension postretirement benefit plans cost
64 $ 172 $ 202 $ 218
$ 127 $145 $ 154 $
Total retirement-related benefits net periodic cost $ 1,029 $934 $ 624 $ 1,573 $ 1,517 $ 1,295 $ 2,601 $ 2,451 $ 1,920
11
27
44 $
2021
2021
57 $
27
26
11
11
2020
2019
2020
21
16
16
21
—
—
—
—
—
—
The following table presents a summary of the total PBO for defined benefit pension plans, APBO for nonpension postretirement benefit
plans, fair value of plan assets and the associated funded status recorded in the Consolidated Balance Sheet.
($ in millions)
At December 31:
U.S. Plans
Overfunded plans
Qualified PPP
Underfunded plans
Benefit Obligations
Fair Value of Plan Assets
2021
2020
2021
2020
Funded Status *
2021
2020
$46,458 $50,375
$51,852
$54,386
$ 5,395
$ 4,011
Excess PPP
Retention Plan
Nonpension postretirement benefit plan
Total underfunded U.S. plans
$ 1,441 $ 1,556
306
3,791
$ 5,128 $ 5,652
283
3,404
$
$
—
—
8
8
$
$
—
—
15
15
$ (1,441)
(283)
(3,395)
$ (5,119)
$ (1,556)
(306)
(3,776)
$ (5,638)
Non-U.S. Plans
Overfunded plans
Qualified defined benefit pension plans**
Nonpension postretirement benefit plans
Total overfunded non-U.S. plans
Underfunded plans
Qualified defined benefit pension plans**
Nonqualified defined benefit pension plans
Nonpension postretirement benefit plans
Total underfunded non-U.S. plans
Total overfunded plans
Total underfunded plans
$21,617 $20,504
9
$21,617 $20,513
—
6,120
638
$17,360 $23,207
6,736
747
$24,118 $30,690
$68,075 $70,888
$29,246 $36,342
$26,071
—
$26,071
$13,908
—
31
$13,939
$77,924
$13,947
$24,051
9
$24,060
$ 4,454
—
$ 4,454
$ 3,546
0
$ 3,546
$18,257
—
31
$18,288
$78,445
$18,302
$ (3,452)
(6,120)
(607)
$(10,179)
$ 9,850
$(15,300)
$ (4,950)
(6,736)
(716)
$(12,402)
$ 7,557
$(18,040)
* Funded status is recognized in the Consolidated Balance Statement as follows: Asset amounts as prepaid pension assets; (Liability) amounts as
compensation and benefits (current liability) and retirement and nonpension postretirement benefit obligations (noncurrent liability).
** Non-U.S. qualified plans represent plans funded outside of the U.S. Non-U.S. nonqualified plans are unfunded.
At December 31, 2021, the company’s qualified defined benefit pension plans worldwide were 107 percent funded compared to the
benefit obligations, with the U.S. Qualified PPP 112 percent funded. Overall, including nonqualified plans, the company’s defined
benefit pension plans worldwide were 98 percent funded.
Defined Benefit Pension and Nonpension Postretirement Benefit Plan Financial Information
The following tables through page 128 represent financial information for the company’s retirement-related benefit plans, excluding
defined contribution plans. The defined benefit pension plans under U.S. Plans consist of the Qualified PPP, the Excess PPP and the
Retention Plan. The defined benefit pension plans and the nonpension postretirement benefit plans under non-U.S. Plans consist of all
plans sponsored by the company’s subsidiaries. The nonpension postretirement benefit plan under U.S. Plan consists of only the U.S.
Nonpension Postretirement Benefit Plan.
126
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
The following tables present the components of net periodic (income)/cost of the retirement-related benefit plans recognized in the
Consolidated Income Statement, excluding defined contribution plans.
($ in millions)
For the year ended December 31:
Service cost
Interest cost(1)
Expected return on plan assets(1)
Amortization of transition assets(1)
Amortization of prior service costs/(credits)(1)
Recognized actuarial losses(1)
Curtailments and settlements(1)
Multi-employer plans
Other costs/(credits)
Total net periodic (income)/cost
($ in millions)
For the year ended December 31:
Service cost
Interest cost(1)
Expected return on plan assets(1)
Amortization of transition assets(1)
Amortization of prior service costs/(credits)(1)
Recognized actuarial losses(1)
Curtailments and settlements(1)
Other costs/(credits)
Total net periodic cost
Defined Benefit Pension Plans
U.S. Plans
2021
—
1,109
(1,802)
—
16
996
—
—
—
319
$
$
$
$
2020
2019
— $
— $
2021
300
424
1,882
(1,115)
(2,599)
—
—
(12)
16
1,392
559
94
—
17
—
18
—
178 $ (142) $ 1,119
1,501
(2,169)
—
16
829
—
—
—
$
Non-U.S. Plans
2020
328 $
541
(1,229)
—
(9)
1,336
49
23
18
$ 1,057 $
Nonpension Postretirement Benefit Plans
2021
7
$
65
—
—
4
52
—
—
$127
U.S. Plan
2020
9
$
103
—
—
4
29
—
—
$145
2019
$ 10
145
—
—
(2)
1
—
—
$ 154
2021
$ 4
27
(3)
—
0
15
0
0
$44
Non-U.S. Plans
2020
$ 4
35
(4)
—
0
21
0
0
$ 57
2019
304
814
(1,530)
0
(25)
1,190
38
23
28
842
2019
$ 4
54
(5)
—
0
10
0
—
$64
(1) These components of net periodic pension costs are included in other (income) and expense in the Consolidated Income Statement.
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
127
The following table presents the changes in benefit obligations and plan assets of the company’s retirement-related benefit plans,
excluding DC plans.
($ in millions)
Change in benefit obligation
Benefit obligation at January 1
Service cost
Interest cost
Plan participants' contributions
Acquisitions/divestitures, net
Actuarial losses/(gains)
Benefits paid from trust
Direct benefit payments
Foreign exchange impact
Amendments/curtailments/
settlements/other
Benefit obligation at December 31
Change in plan assets
Fair value of plan assets at January 1
Actual return on plan assets
Employer contributions
Acquisitions/divestitures, net
Plan participants' contributions
Benefits paid from trust
Foreign exchange impact
Amendments/curtailments/
settlements/other
Defined Benefit Pension Plans
Nonpension Postretirement Benefit Plans
U.S. Plans
Non-U.S. Plans
U.S. Plan
Non-U.S. Plans
2021
2020
2021
2020
2021
2020
2021
2020
$52,237 $50,232 $50,447 $45,947 $ 3,791
7
65
50
—
(141)
(369)
(1)
—
328
541
18
63
2,794
(1,908)
(391)
3,085
—
1,501
—
1
4,071
(3,445)
(123)
—
300
424
19
(70)
(876)
(2,090)
(516)
(2,548)
—
1,109
—
—
(1,582)
(3,459)
(125)
—
3
$48,182 $52,237 $45,097 $50,447 $ 3,404
(29)
0
7
1
$54,386 $51,784 $42,308 $38,891 $
924
—
—
—
(3,459)
—
6,046
—
1
—
(3,445)
—
1,686
86
(87)
19
(2,090)
(1,939)
2,559
166
106
18
(1,908)
2,479
15
—
313
—
50
(369)
—
$ 3,857
9
103
56
—
135
(369)
0
—
$ 756
4
27
—
6
(78)
(6)
(28)
(42)
$ 830
4
35
—
0
(2)
(4)
(24)
(83)
—
$ 3,791
(1)
$ 638
(1)
$ 756
$
3
0
325
—
56
(369)
—
0
$
15
$(3,776)
N/A
$ 40
(14)
6
—
—
(6)
6
0
$ 31
$(607)
N/A
$ 52
2
—
—
—
(4)
(10)
0
$ 40
$(716)
N/A
Fair value of plan assets at December 31 $51,852 $54,386 $39,979 $42,308 $
Funded status at December 31
Accumulated benefit obligation*
0
8
$ 3,671 $ 2,149 $ (5,118) $ (8,140) $(3,395)
N/A
$48,182 $52,237 $44,628 $50,019
(2)
(4)
—
1
* Represents the benefit obligation assuming no future participant compensation increases.
N/A–Not applicable
The following table presents the net funded status recognized in the Consolidated Balance Sheet.
($ in millions)
At December 31:
Prepaid pension assets
Current liabilities—compensation and
Defined Benefit Pension Plans
Nonpension Postretirement Benefit Plans
U.S. Plans
Non-U.S. Plans
U.S. Plan
Non-U.S. Plans
2021
2020
2021
2020
$ 5,395 $ 4,011 $ 4,455 $ 3,546 $
2021
0
$
2020
0
2021
0
$
2020
0
$
benefits
(123)
(122)
(359)
(342)
(364)
(346)
(19)
(46)
Noncurrent liabilities—retirement and
nonpension postretirement benefit
obligations
Funded status—net
(1,601)
(3,031)
(9,215)
$ 3,671 $ 2,149 $(5,118) $ (8,140) $ (3,395)
(11,344)
(1,740)
(3,430)
$ (3,776)
(588)
$ (607)
(670)
$ (716)
The following table presents the pre-tax net loss, prior service costs/(credits) and transition (assets)/liabilities recognized in OCI
and the changes in the pre-tax net loss, prior service costs/(credits) and transition (assets)/liabilities recognized in AOCI for the
retirement-related benefit plans.
128
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
($ in millions)
Net loss at January 1
Current period loss/(gain)
Curtailments and settlements
Amortization of net loss included in net
periodic (income)/cost
Net loss at December 31
Prior service costs/(credits) at January 1
Current period prior service costs/(credits)
Curtailments, settlements and other
Amortization of prior service (costs)/credits
included in net periodic (income)/cost
Prior service costs/(credits) at December 31
Transition (assets)/liabilities at January 1
Amortization of transition assets/(liabilities)
$
$
included in net periodic (income)/cost
Transition (assets)/liabilities at December 31 $
Total loss recognized in accumulated other
Defined Benefit Pension Plans
Nonpension Postretirement Benefit Plans
U.S. Plans
Non-U.S. Plans
U.S. Plan
Non-U.S. Plans
2021
2020
2021
2020
2021
$ 15,972 $ 16,608 $ 16,310 $ 16,361 $ 656
(141)
—
1,334
(49)
(1,411)
(94)
(704)
—
194
—
2020
$551
135
—
2021
2020
$263 $284
0
0
(65)
0
(996)
(829)
(1,392)
(52)
$ 14,273 $ 15,972 $ 13,412 $ 16,310 $ 464
280 $ 30
$
—
—
325 $
60
—
41 $
—
—
24 $
—
—
36
0
(1,336)
(29)
$656
$ 34
—
—
(15)
(21)
$183 $263
$ (4) $ (4)
—
—
0
—
(16)
8 $
— $
(16)
24 $
— $
12
397 $
0 $
9
(4)
325 $ 26
0 $ —
(4)
$ 30
$ —
0
0
$ (4) $ (4)
0 $ 0
$
—
— $
—
— $
—
0 $
0
—
0 $ —
—
$ —
0
0
0 $ 0
$
comprehensive income/(loss)*
$ 14,281 $ 15,997 $ 13,809 $ 16,635 $ 490
$687
$179 $259
* Refer to note T, “Equity Activity,” for the total change in AOCI, and the Consolidated Statement of Comprehensive Income for the components of net
periodic (income)/cost, including the related tax effects, recognized in OCI for the retirement-related benefit plans.
Assumptions Used to Determine Plan Financial Information
Underlying both the measurement of benefit obligations and net periodic (income)/cost are actuarial valuations. These valuations use
participant-specific information such as salary, age and years of service, as well as certain assumptions, the most significant of which
include estimates of discount rates, expected return on plan assets, rate of compensation increases, interest crediting rates and
mortality rates. The company evaluates these assumptions, at a minimum, annually, and makes changes as necessary.
The following tables present the assumptions used to measure the net periodic (income)/cost and the year-end benefit obligations for
retirement-related benefit plans.
Defined Benefit Pension Plans
2021
U.S. Plans
2020
2019
Non-U.S. Plans
2020
2021
2019
Weighted-average assumptions used to measure net periodic
(income)/cost for the year ended December 31
Discount rate
Expected long-term returns on plan assets
Rate of compensation increase
Interest crediting rate
2.20 %
3.75 %
N/A
1.10 %
3.10 %
4.50 %
N/A
2.70 %
4.10 %
5.25 %
N/A
3.60 %
0.87 %
2.85 %
2.59 %
0.26 %
1.20 %
3.36 %
2.32 %
0.28 %
1.86 %
4.38 %
2.20 %
0.30 %
Weighted-average assumptions used to measure benefit
obligations at December 31
Discount rate
Rate of compensation increase
Interest crediting rate
N/A–Not applicable
2.60 %
N/A
1.10 %
2.20 %
N/A
1.10 %
3.10 %
N/A
2.70 %
1.26 %
3.02 %
0.26 %
0.87 %
2.59 %
0.26 %
1.20 %
2.32 %
0.28 %
Nonpension Postretirement Benefit Plans
2021
U.S. Plan
2020
2019
2021
Non-U.S. Plans
2020
2019
Weighted-average assumptions used to measure net periodic
cost for the year ended December 31
Discount rate
Expected long-term returns on plan assets
Interest crediting rate
Weighted-average assumptions used to measure benefit
obligations at December 31
Discount rate
Interest crediting rate
N/A–Not applicable
1.80 %
N/A
1.10 %
2.80 %
N/A
2.70 %
3.90 %
N/A
3.60 %
4.55 %
6.62 %
N/A
5.08 %
7.73 %
N/A
4.88 %
7.70 %
N/A
2.30 %
1.10 %
1.80 %
1.10 %
2.80 %
2.70 %
5.35 %
N/A
4.55 %
N/A
5.08 %
N/A
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
129
Item
Description of Assumptions
Discount Rate
Changes in discount rate assumptions impact net periodic (income)/cost and the PBO.
For the U.S. and certain non-U.S. countries, a portfolio of high-quality corporate bonds is used to construct a
yield curve. Cash flows from the company’s expected benefit obligation payments are matched to the yield
curve to derive the discount rates.
In other non-U.S. countries where the markets for high-quality long-term bonds are not as well developed, a
portfolio of long-term government bonds is used as a base, and a credit spread is added to simulate corporate
bond yields at these maturities in the jurisdiction of each plan. This is the benchmark for developing the
respective discount rates.
Expected
Long-Term
Returns on
Plan Assets
Represents the expected long-term returns on plan assets based on the calculated market-related value of
plan assets and considers long-term expectations for future returns and the investment policies and strategies
discussed on pages 129 to 130. These rates of return are developed and tested for reasonableness against
historical returns by the company.
The use of expected returns may result in pension income that is greater or less than the actual return of those
plan assets in a given year. Over time, however, the expected long-term returns are designed to approximate
the actual long-term returns, and therefore result in a pattern of income or loss recognition that more closely
matches the pattern of the services provided by the employees.
The difference between actual and expected returns is recognized as a component of net loss or gain in AOCI,
which is amortized as a component of net periodic (income)/cost over the service lives or life expectancy of the
plan participants, depending on the plan, provided such amounts exceed certain thresholds provided by
accounting standards. The market-related value of plan assets recognizes changes in the fair value of plan
assets systematically over a five-year period in the expected return on plan assets line in net periodic
(income)/cost.
The projected long-term rate of return on plan assets for 2022 is 4.0 percent for U.S. and 2.97 percent for non-
U.S. DB Plans.
Compensation rate increases are determined based on the company’s long-term plans for such increases.
These rate increases are not applicable to the U.S. DB pension plans as benefit accruals ceased December 31,
2007.
Mortality assumptions are based on life expectancy and death rates for different types of participants and are
periodically updated based on actual experience.
Benefits for certain participants in the PPP are calculated using a cash balance formula. An assumption
underlying this formula is an interest crediting rate, which impacts both net periodic (income)/cost and the
PBO. This provides the basis for projecting the expected interest rate that plan participants will earn on the
benefits that they are expected to receive in the following year and is based on the average from August to
October of the one-year U.S. Treasury Constant Maturity yield plus one percent.
Rate of
Compensation
Increases and
Mortality
Assumptions
Interest
Crediting Rate
Healthcare
Cost Trend
Rate
For nonpension postretirement benefit plans, the company reviews external data and its own historical trends
for healthcare costs to determine the healthcare cost trend rates. The healthcare cost trend rate has an
insignificant effect on plan costs or the benefit obligation due to the terms of the plan which limit the
company’s obligation to the participants.
The company’s U.S. healthcare cost trend rate assumption for 2022 is 6.0 percent. The company assumes that
trend rate will decrease to 5.0 percent over the next six years.
Plan Assets
Retirement-related benefit plan assets are recognized and measured at fair value. Because of the inherent uncertainty of valuations,
these fair value measurements may not necessarily reflect the amounts the company could realize in current market transactions.
Investment Policies and Strategies
The investment objectives of the Qualified PPP portfolio are designed to generate returns that will enable the plan to meet its future
obligations. The precise amount for which these obligations will be settled depends on future events, including the retirement dates
and life expectancy of the plans’ participants. The obligations are estimated using actuarial assumptions, based on the current
economic environment and other pertinent factors described above. The Qualified PPP portfolio’s investment strategy balances the
requirement to generate returns, using potentially higher yielding assets such as equity securities, with the need to control risk in the
portfolio with less volatile assets, such as fixed-income securities. Risks include, among others, inflation, volatility in equity values and
changes in interest rates that could cause the plan to become underfunded, thereby increasing its dependence on contributions from
the company. To mitigate any potential concentration risk, careful consideration is given to balancing the portfolio among industry
sectors, companies and geographies, taking into account interest rate sensitivity, dependence on economic growth, currency and other
130
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
factors that affect investment returns. There were no significant changes to investment strategy made in 2021 and none are planned
for 2022. The Qualified PPP portfolio’s target allocation is 10 percent equity securities, 82 percent fixed-income securities, 3 percent
real estate and 4 percent other investments.
The assets are managed by professional investment firms and investment professionals who are employees of the company. They are
bound by investment mandates determined by the company’s management and are measured against specific benchmarks. Among
these managers, consideration is given, but not limited to, balancing security concentration, issuer concentration, investment style and
reliance on particular active and passive investment strategies.
Market liquidity risks are tightly controlled, with $4,049 million of the Qualified PPP portfolio as of December 31, 2021 invested in
private market assets consisting of private equities and private real estate investments, which are less liquid than publicly traded
securities. In addition, the Qualified PPP portfolio had $1,066 million in commitments for future investments in private markets to be
made over a number of years. These commitments are expected to be funded from plan assets.
Derivatives are used as an effective means to achieve investment objectives and/or as a component of the plan’s risk management
strategy. The primary reasons for the use of derivatives are fixed income management, including duration, interest rate management
and credit exposure, cash equitization and to manage currency strategies.
Outside the U.S., the investment objectives are similar to those described previously, subject to local regulations. The weighted-
average target allocation for the non-U.S. plans is 16 percent equity securities, 71 percent fixed-income securities, 3 percent real
estate and 10 percent other investments, which is consistent with the allocation decisions made by the company’s management. In
some countries, a higher percentage allocation to fixed income is required to manage solvency and funding risks. In others, the
responsibility for managing the investments typically lies with a board that may include up to 50 percent of members elected by
employees and retirees. This can result in slight differences compared with the strategies previously described. The percentage of non-
U.S. plans investment in assets that are less liquid is consistent with the U.S. plan. The use of derivatives is also consistent with the
U.S. plan and mainly for currency hedging, interest rate risk management, credit exposure and alternative investment strategies.
The company’s nonpension postretirement benefit plans are underfunded or unfunded. For some plans, the company maintains a
nominal, highly liquid trust fund balance to ensure timely benefit payments.
Defined Benefit Pension Plan Assets
The following table presents the company’s defined benefit pension plans’ asset classes and their associated fair value at
December 31, 2021. The U.S. Plan consists of the Qualified PPP and the non-U.S. Plans consist of all plans sponsored by the company’s
subsidiaries.
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
131
($ in millions)
Equity
Equity securities(1)
Equity mutual funds(2)
Fixed income
Level 1
Level 2
Level 3
Total Level 1
Level 2
Level 3
Total
U.S. Plan
Non-U.S. Plans
$ 2,023 $
133
0
—
$ — $ 2,023
133
—
$485 $
0
—
—
$ — $
—
485
0
—
—
—
281
—
104
—
3
—
2,543
21,751
16,246
660
—
—
1,269
—
3
—
39,930
—
598
—
—
—
—
—
—
—
598
21,751
16,844
660
281
—
1,373
—
5
—
43,070
—
—
—
—
—
324
—
61
30
900
9,900
3,842
3
—
5,662
403
—
489
—
20,300
—
—
—
—
—
—
174
—
—
174
9,900
3,842
3
—
5,662
728
174
550
30
21,374
Government and related(3)
Corporate bonds(4)
Mortgage and asset-backed securities
Fixed income mutual funds(5)
Insurance contracts(6)
Cash and short-term investments(7)
Real estate
Derivatives(8)
Other mutual funds(9)
Subtotal
Investments measured at net asset
value using the NAV practical
expedient(10)
Other(11)
Fair value of plan assets
—
—
—
—
$ 2,543 $ 39,930
—
—
9,078
(296)
$598 $ 51,852
—
—
—
—
$900 $ 20,300
—
—
18,652
(47)
$ 174 $ 39,979
(1) Represents U.S. and international securities. The U.S. Plan includes IBM common stock of $2 million. Non-U.S. Plans include IBM common stock of $2
million.
(2) Invests in predominantly equity securities.
(3) Includes debt issued by national, state and local governments and agencies.
(4) The U.S. Plans include IBM corporate bonds of $19 million. Non-U.S. Plans include IBM corporate bonds of $4 million.
(5) Invests predominantly in fixed-income securities.
(6) Primarily represents insurance policy contracts (Buy-In) in certain non-U.S. plans.
(7) Includes cash, cash equivalents and short-term marketable securities.
(8) Includes interest-rate derivatives, forwards, exchange-traded and other over-the-counter derivatives.
(9) Invests in both equity and fixed-income securities.
(10)Investments measured at fair value using the net asset value (NAV) per share (or its equivalent) as a practical expedient, including commingled funds,
hedge funds, private equity and real estate partnerships.
(11)Represents net unsettled transactions, relating primarily to purchases and sales of plan assets.
The U.S. nonpension postretirement benefit plan assets of $8 million were invested primarily in cash equivalents, categorized as Level
1 in the fair value hierarchy. The non-U.S. nonpension postretirement benefit plan assets of $31 million, primarily in Brazil, and, to a
lesser extent, in Mexico and South Africa, were invested primarily in government and related fixed-income securities and corporate
bonds, categorized as Level 2 in the fair value hierarchy.
The following table presents the company’s defined benefit pension plans’ asset classes and their associated fair value at
December 31, 2020. The U.S. Plan consists of the Qualified PPP and the non-U.S. Plans consist of all plans sponsored by the company’s
subsidiaries.
132
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
($ in millions)
Equity
Equity securities(1)
Equity mutual funds(2)
Fixed income
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
U.S. Plan
Non-U.S. Plans
$ 2,714 $
105
0
—
$ — $ 2,714
105
—
$466 $
0
0
—
$ — $
—
466
0
—
—
—
470
—
76
—
(3)
—
3,363
21,375
18,217
612
—
—
1,001
—
18
—
41,222
—
542
—
—
—
—
—
—
—
542
21,375
18,759
612
470
—
1,077
—
15
—
45,128
—
—
—
—
—
337
—
66
21
891
9,599
3,690
3
—
6,378
651
—
510
—
20,832
2
—
—
—
—
—
298
—
—
300
9,601
3,690
3
—
6,378
988
298
575
21
22,023
Government and related(3)
Corporate bonds(4)
Mortgage and asset-backed securities
Fixed income mutual funds(5)
Insurance contracts(6)
Cash and short-term investments(7)
Real estate
Derivatives(8)
Other mutual funds(9)
Subtotal
Investments measured at net asset
value using the NAV practical
expedient(10)
Other(11)
Fair value of plan assets
—
—
—
—
$ 3,363 $ 41,222
—
—
9,579
(321)
$542 $ 54,386
—
—
—
—
$891 $20,832
—
—
20,321
(37)
$300 $ 42,308
(1) Represents U.S. and international securities. The U.S. Plan includes IBM common stock of $6 million. Non-U.S. Plans include IBM common stock of $1
million.
(2) Invests in predominantly equity securities.
(3) Includes debt issued by national, state and local governments and agencies.
(4) Non-U.S. Plans include IBM corporate bonds of $5 million.
(5) Invests in predominantly fixed-income securities.
(6) Primarily represents insurance policy contracts (Buy-In) in certain non-U.S. plans.
(7) Includes cash, cash equivalents and short-term marketable securities.
(8) Includes interest-rate derivatives, forwards, exchange-traded and other over-the-counter derivatives.
(9) Invests in both equity and fixed-income securities.
(10)Investments measured at fair value using the net asset value (NAV) per share (or its equivalent) as a practical expedient, including commingled funds,
hedge funds, private equity and real estate partnerships.
(11)Represents net unsettled transactions, relating primarily to purchases and sales of plan assets.
The U.S. nonpension postretirement benefit plan assets of $15 million were invested in cash equivalents, categorized as Level 1 in the
fair value hierarchy. The non-U.S. nonpension postretirement benefit plan assets of $40 million, primarily in Brazil, and, to a lesser
extent, in Mexico and South Africa, were invested primarily in government and related fixed-income securities and corporate bonds,
categorized as Level 2 in the fair value hierarchy.
The following tables present the reconciliation of the beginning and ending balances of Level 3 assets for the years ended December 31,
2021 and 2020 for the U.S. Plan.
($ in millions)
Balance at January 1, 2021
Return on assets held at end of year
Return on assets sold during the year
Purchases, sales and settlements, net
Transfers, net
Balance at December 31, 2021
* Corporate bonds.
($ in millions)
Balance at January 1, 2020
Return on assets held at end of year
Return on assets sold during the year
Purchases, sales and settlements, net
Transfers, net
Balance at December 31, 2020
* Corporate bonds.
Total *
$542
(15)
1
63
6
$598
Total *
$518
29
0
(5)
0
$542
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
133
The following tables present the reconciliation of the beginning and ending balances of Level 3 assets for the years ended December 31,
2021 and 2020 for the non-U.S. Plans.
($ in millions)
Balance at January 1, 2021
Return on assets held at end of year
Return on assets sold during the year
Purchases, sales and settlements, net
Transfers, net
Foreign exchange impact
Balance at December 31, 2021
($ in millions)
Balance at January 1, 2020
Return on assets held at end of year
Return on assets sold during the year
Purchases, sales and settlements, net
Transfers, net
Foreign exchange impact
Balance at December 31, 2020
Valuation Techniques
Government
and Related
Private
Real Estate
$ 2
0
0
(2)
—
0
$ —
$ 298
(43)
58
(138)
—
(1)
$ 174
Government
and Related
Private
Real Estate
$ 2
0
—
—
—
0
$ 2
$ 328
(29)
2
(14)
4
7
$ 298
Total
$ 300
(43)
58
(140)
—
(1)
$ 174
Total
$ 330
(29)
2
(14)
4
7
$ 300
The following is a description of the valuation techniques used to measure plan assets at fair value. There were no changes in valuation
techniques during 2021 and 2020.
Equity securities are valued at the closing price reported on the stock exchange on which the individual securities are traded. IBM
common stock is valued at the closing price reported on the New York Stock Exchange. Mutual funds are typically valued based on
quoted market prices. These assets are generally classified as Level 1.
The fair value of fixed-income securities is typically estimated using pricing models, quoted prices of securities with similar
characteristics or discounted cash flows and are generally classified as Level 2. If available, they are valued using the closing price
reported on the major market on which the individual securities are traded.
Cash includes money market accounts that are valued at their cost plus interest on a daily basis, which approximates fair value. Short-
term investments represent securities with original maturities of one year or less. These assets are classified as Level 1 or Level 2.
Real estate valuations require significant judgment due to the absence of quoted market prices, the inherent lack of liquidity and the
long-term nature of such assets. These assets are initially valued at cost and are reviewed periodically utilizing available and relevant
market data, including appraisals, to determine if the carrying value of these assets should be adjusted. These assets are classified as
Level 3.
Exchange-traded derivatives are valued at the closing price reported on the exchange on which the individual securities are traded,
while forward contracts are valued using a mid-close price. Over-the-counter derivatives are typically valued using pricing models. The
models require a variety of inputs, including, for example, yield curves, credit curves, measures of volatility and foreign exchange rates.
These assets are classified as Level 1 or Level 2 depending on availability of quoted market prices.
Certain investments are measured at fair value using the net asset value (NAV) per share (or its equivalent) as a practical expedient.
These investments, which include commingled funds, hedge funds, private equity and real estate partnerships, are typically valued
using the NAV provided by the administrator of the fund and reviewed by the company. The NAV is based on the value of the underlying
assets owned by the fund, minus liabilities and divided by the number of shares or units outstanding.
Contributions and Direct Benefit Payments
It is the company’s general practice to fund amounts for pensions sufficient to meet the minimum requirements set forth in applicable
employee benefits laws and local tax laws. From time to time, the company contributes additional amounts as it deems appropriate.
The following table presents the contributions made to the non-U.S. DB plans, nonpension postretirement benefit plans, multi-
employer plans, DC plans and direct payments for 2021 and 2020. The cash contributions to the multi-employer plans represent the
134
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
annual cost included in the net periodic (income)/cost recognized in the Consolidated Income Statement. The company’s participation
in multi-employer plans has no material impact on the company’s financial statements.
($ in millions)
For the years ended December 31:
Non-U.S. DB plans
Nonpension postretirement benefit plans
Multi-employer plans
DC plans
Direct benefit payments
Total
$
2021
86
319
17
992
671
$2,085
2020
$ 166
325
23
1,015
538
$ 2,066
In 2021 and 2020, $416 million and $452 million, respectively, of contributions to the non-U.S. DB plans and nonpension
postretirement benefit plans were made in U.S. Treasury securities. Additionally, in 2021 and 2020, contributions of $424 million and
$288 million, respectively, were made to the Active Medical Trust in U.S. Treasury securities. Contributions made with U.S. Treasury
securities are considered a non-cash transaction.
Defined Benefit Pension Plans
In 2022, the company is not legally required to make any contributions to the U.S. defined benefit pension plans. However, depending
on market conditions, or other factors, the company may elect to make discretionary contributions to the Qualified PPP during the year.
In 2022, the company estimates contributions to its non-U.S. defined benefit and multi-employer plans to be approximately $200
million, the largest of which will be contributed to defined benefit pension plans in Spain and Japan. This amount generally represents
legally mandated minimum contributions.
Financial market performance in 2022 could increase the legally mandated minimum contribution in certain countries which
require monthly or daily remeasurement of the funded status. The company could also elect to contribute more than the legally
mandated amount based on market conditions or other factors.
Expected Benefit Payments
Defined Benefit Pension Plan Expected Payments
The following table presents the total expected benefit payments to defined benefit pension plan participants. These payments have
been estimated based on the same assumptions used to measure the plans’ PBO at December 31, 2021 and include benefits
attributable to estimated future compensation increases, where applicable.
($ in millions)
2022
2023
2024
2025
2026
2027-2031
Qualified
U.S. Plan
Payments
$ 3,488
3,450
3,419
3,348
3,244
14,524
Nonqualified
U.S. Plans
Payments
$124
123
121
119
116
532
Qualified
Non-U.S. Plans
Nonqualified
Non-U.S. Plans
Payments
$ 1,968
1,949
1,959
1,976
1,972
9,438
Payments
$ 342
320
328
331
337
1,624
Total Expected
Benefit
Payments
$ 5,922
5,842
5,827
5,774
5,670
26,117
Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
135
The 2022 expected benefit payments to defined benefit pension plan participants not covered by the respective plan assets
(underfunded plans) represent a component of compensation and benefits, within current liabilities, in the Consolidated Balance Sheet.
Nonpension Postretirement Benefit Plan Expected Payments
The following table presents the total expected benefit payments to nonpension postretirement benefit plan participants. These
payments have been estimated based on the same assumptions used to measure the plans’ APBO at December 31, 2021.
($ in millions)
2022
2023
2024
2025
2026
2027-2031
U.S. Plan
Payments
$ 377
380
363
339
316
1,156
Qualified
Non-U.S. Plans
Nonqualified
Non-U.S. Plans
Payments
$ 16
17
18
19
20
115
Payments
$ 25
25
24
24
24
115
Total Expected
Benefit
Payments
$ 418
422
405
382
360
1,386
The 2022 expected benefit payments to nonpension postretirement benefit plan participants not covered by the respective plan assets
represent a component of compensation and benefits, within current liabilities, in the Consolidated Balance Sheet.
Other Plan Information
The following table presents information for defined benefit pension plans with accumulated benefit obligations (ABO) in excess of
plan assets. For a more detailed presentation of the funded status of the company’s defined benefit pension plans, see the table on
page 127.
($ in millions)
At December 31:
Plans with PBO in excess of plan assets
Plans with ABO in excess of plan assets
Plans with plan assets in excess of PBO
2021
Benefit
Obligation
$25,204
24,853
68,075
Plan
Assets
$13,908
13,908
77,924
2020
Benefit
Obligation
$31,805
31,465
70,879
Plan
Assets
$18,257
18,257
78,436
The following table presents information for the nonpension postretirement benefit plan with APBO in excess of plan assets. For a more
detailed presentation of the funded status of the company’s nonpension postretirement benefit plans, see the table on page 127.
($ in millions)
At December 31:
Plans with APBO in excess of plan assets
Plans with plan assets in excess of APBO
NOTE X. SUBSEQUENT EVENTS
2021
Benefit
Obligation
$4,042
—
Plan
Assets
$40
—
2020
Benefit
Obligation
$4,537
9
Plan
Assets
$45
9
On February 1, 2022, the company announced that the Board of Directors approved a quarterly dividend of $1.64 per common share.
The dividend is payable March 10, 2022 to shareholders of record on February 11, 2022.
On February 9, 2022, the company issued $2.3 billion of Euro fixed-rate notes in tranches with maturities ranging from 8 to 12 years
and coupons ranging from 0.875 to 1.25 percent and $1.8 billion of U.S. dollar fixed-rate notes with maturities ranging from 5 to 30
years and coupons ranging from 2.20 to 3.43 percent.
136
Performance Graph
International Business Machines Corporation and Subsidiary Companies
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN FOR IBM, S&P 500 STOCK INDEX AND S&P INFORMATION
TECHNOLOGY INDEX
The following graph compares the five-year cumulative total returns for IBM common stock with the comparable cumulative returns of
certain Standard & Poor’s (S&P) indices. Due to the fact that IBM is a company included in the S&P 500 Stock Index, the SEC’s rules
require the use of that index for the required five-year graph. Under those rules, the second index used for comparison may be a
published industry or line-of-business index. The S&P Information Technology Index is such an index. IBM is also included in this index.
The graph assumes $100 invested on December 31 (of the initial year shown in the graph) in IBM common stock and $100 invested on
the same date in each of the S&P indices. The comparisons assume that all dividends are reinvested. On November 3, 2021, we
completed the separation of Kyndryl. IBM stockholders received one share of common stock in Kyndryl 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 effect of the Kyndryl
transaction is reflected in the cumulative total return as reinvested dividends.
400
350
300
250
200
150
100
50
0
12/16
12/17
12/18
12/19
12/20
12/21
(U.S. Dollar)
International Business Machines
S & P 500
S & P Information Technology
• • • •
- - - -
2016
2017
2021
$ 100.00 $ 96.02 $ 74.38 $ 91.92 $ 90.83 $ 106.10
233.41
402.73
100.00
100.00
116.49
138.43
121.83
138.83
181.35
299.37
153.17
208.05
2019
2018
2020
Selected Quarterly Data
International Business Machines Corporation and Subsidiary Companies
137
This section provides summarized quarterly data for 2021 and 2020. In the fourth quarter of 2021, the separation of Kyndryl was
completed and the historical results of Kyndryl are now reported as discontinued operations. The quarterly results presented below
have been reclassified to conform to this presentation and allow for a meaningful comparison of continuing operations. Refer to note
C, “Separation of Kyndryl,” for additional details.
($ in millions except per share amounts)
2021
Revenue
Gross profit
Income from continuing operations
Income/(loss) from discontinued operations, net of tax
Net income
Operating (non-GAAP) earnings*
Earnings/(loss) per share of common stock**
Assuming dilution:
Continuing operations
Discontinued operations
Total
Basic:
Continuing operations
Discontinued operations
Total
Diluted operating (non-GAAP)*
($ in millions except per share amounts)
2020
Revenue
Gross profit
Income from continuing operations
Income/(loss) from discontinued operations, net of tax
Net income
Operating (non-GAAP) earnings*
Earnings/(loss) per share of common stock**
Assuming dilution:
Continuing operations
Discontinued operations
Total
Basic:
Continuing operations
Discontinued operations
Total
Diluted operating (non-GAAP)*
First
Quarter
$ 13,187
$ 7,027
403
$
552
$
$
955
$ 1,013
Second
Quarter
$ 14,218
$ 7,852
810
$
$
515
$ 1,325
$ 1,456
Third
Quarter
$ 13,251
$ 7,106
$ 1,037
$
93
$ 1,130
$ 1,670
Fourth
Quarter
$ 16,695
$ 9,500
$ 2,462
$
(129)
$ 2,332
$ 3,035
Full
Year
$ 57,350
$ 31,486
$ 4,712
$ 1,030
$ 5,743
$ 7,174
$ 0.45
$ 0.61
$ 1.06
$ 0.90
$ 0.57
$ 1.47
$ 1.14
$ 0.10
$ 1.25
$ 2.72
$
(0.14)
$ 2.57
$ 5.21
$ 1.14
$ 6.35
$ 0.45
$ 0.62
$ 1.07
$ 1.12
$ 0.91
$ 0.57
$ 1.48
$ 1.61
$ 1.16
$ 0.10
$ 1.26
$ 1.84
$ 2.74
$
(0.14)
$ 2.60
$ 3.35
$ 5.26
$ 1.15
$ 6.41
$ 7.93
First
Quarter
$ 12,956
$ 6,779
787
$
$
388
$ 1,175
$ 1,279
Second
Quarter
$ 13,604
$ 7,610
919
$
$
442
$ 1,361
$ 1,502
Third
Quarter
$ 12,937
$ 7,237
$ 1,036
$
662
$ 1,698
$ 1,653
Fourth
Quarter
$ 15,682
$ 9,238
$ 1,190
$
166
$ 1,356
$ 1,686
Full
Year
$ 55,179
$ 30,865
$ 3,932
$ 1,658
$ 5,590
$ 6,120
$ 0.88
$ 0.43
$ 1.31
$ 1.03
$ 0.49
$ 1.52
$ 1.15
$ 0.74
$ 1.89
$ 1.32
$ 0.19
$ 1.51
$ 4.38
$ 1.85
$ 6.23
$ 0.89
$ 0.44
$ 1.32
$ 1.43
$ 1.03
$ 0.50
$ 1.53
$ 1.68
$ 1.16
$ 0.74
$ 1.90
$ 1.84
$ 1.33
$ 0.19
$ 1.52
$ 1.88
$ 4.42
$ 1.86
$ 6.28
$ 6.82
* Refer to page 138 under the heading "GAAP Reconciliation" for the reconciliation of non-GAAP financial information for the first three quarterly periods
of 2021 and 2020. Also see "GAAP Reconciliation," on pages 36 and 29 for the reconciliation of non-GAAP financial information for the fourth-quarter
and full-year 2021 and 2020, respectively.
** Earnings Per Share (EPS) in each quarter is computed using the weighted-average number of shares outstanding during that quarter while EPS for the full
year is computed using the weighted-average number of shares outstanding during the year. Thus, the sum of the four quarters' EPS does not equal the
full-year EPS.
138
Selected Quarterly Data
International Business Machines Corporation and Subsidiary Companies
GAAP Reconciliation
The table below provides a reconciliation of our income and diluted earnings per share from continuing operations 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.
($ in millions except per share amounts)
Acquisition- Retirement-
Related
Adjustments
Related
Adjustments
U.S. Tax
Reform
Impacts
Operating
(non-GAAP)
GAAP
2021
First Quarter
Income from continuing operations
Diluted earnings per share from continuing operations
$ 403
$ 0.45
Second Quarter
Income from continuing operations
Diluted earnings per share from continuing operations
$ 810
$ 0.90
Third Quarter
Income from continuing operations
Diluted earnings per share from continuing operations
$ 1,037
$ 1.14
2020
First Quarter
Income from continuing operations
Diluted earnings per share from continuing operations
$ 787
$ 0.88
Second Quarter
Income from continuing operations
Diluted earnings per share from continuing operations
$ 919
$ 1.03
Third Quarter
Income from continuing operations
Diluted earnings per share from continuing operations
$ 1,036
$ 1.15
$ 330
$ 0.37
$ 368
$ 0.41
$ 370
$ 0.41
$ 362
$ 0.40
$ 362
$ 0.40
$ 352
$ 0.39
$ 299
$ 0.33
$ 264
$ 0.29
$ 262
$ 0.29
$ 278
$ 0.31
$ 220
$ 0.25
$ 244
$ 0.27
$ (19)
$(0.02)
14
$
$ 0.01
$
$
—
—
$ (149)
$(0.17)
$
$
—
—
$
21
$ 0.02
$1,013
$ 1.12
$1,456
$ 1.61
$1,670
$ 1.84
$1,279
$ 1.43
$1,502
$ 1.68
$1,653
$ 1.84
Stockholder Information
International Business Machines Corporation and Subsidiary Companies
139
IBM Stockholder Services
Stockholders with questions about their accounts should contact:
Computershare Trust Company, N.A., P.O. Box 505005, Louisville, Kentucky 40233-5005, (888) IBM-6700.
Investors residing outside the United States, Canada and Puerto Rico should call (781) 575-2727.
Stockholders can also reach Computershare Trust Company, N.A. via e-mail at: ibm@computershare.com
Hearing-impaired stockholders with access to a telecommunications device (TDD) can communicate directly with Computershare Trust
Company, N.A., by calling (800) 490-1493. Stockholders residing outside the United States, Canada and Puerto Rico should call
(781) 575-2694.
IBM on the Internet
Topics featured in this Annual Report can be found online at www.ibm.com. Financial results, news on IBM products, services and
other activities can also be found at that website.
IBM files reports with the Securities and Exchange Commission (SEC), including the annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K and any other filings required by the SEC.
IBM’s website (www.ibm.com/investor) contains a significant amount of information about IBM, including the company’s annual report
on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports filed or furnished
pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after such material is
electronically filed with or furnished to the SEC. These materials are available free of charge on or through IBM’s website.
The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding
issuers that file electronically with the SEC.
Computershare Investment Plan (CIP)
(formerly IBM Investor Services Program)
The Computershare Investment Plan brochure outlines a number of services provided for IBM stockholders and potential IBM
investors, including the reinvestment of dividends, direct purchase and the deposit of IBM stock certificates for safekeeping. The
brochure is available at www.computershare.com/ibmcip or by calling (888) IBM-6700. Investors residing outside the United
States, Canada and Puerto Rico should call (781) 575-2727.
Investors with other requests may write to: IBM Stockholder Relations, New Orchard Road, M/D 325, Armonk, New York 10504.
IBM Stock
IBM common stock is listed on the New York Stock Exchange and the NYSE Chicago under the symbol “IBM”.
Stockholder Communications
Stockholders can get quarterly financial results and voting results from the Annual Meeting by calling (914) 499-7777, by sending an
e-mail to infoibm@us.ibm.com, or by writing to IBM Stockholder Relations, New Orchard Road, M/D 325, Armonk, New York 10504.
Annual Meeting
The IBM Annual Meeting of Stockholders will be held on Tuesday, April 26, 2022, at 10 a.m. (ET).
Literature for IBM Stockholders
The literature mentioned below on IBM is available without charge from:
Computershare Trust Company, N.A., P.O. Box 505005, Louisville, Kentucky 40233-5005 (888) IBM-6700.
Investors residing outside the United States, Canada and Puerto Rico should call (781) 575-2727.
The company’s annual report on Form 10-K and the quarterly reports on Form 10-Q provide additional information on IBM’s business.
The 10-K report is released by the end of February; 10-Q reports are released by early May, August and November.
An audio recording of the 2021 Annual Report will be available for sight-impaired stockholders in June 2022.
The IBM Corporate Responsibility Report reflects IBM’s belief that corporate responsibility drives long-term value not just in our
business, but also for IBM stakeholders. Highlights from the Corporate Responsibility Report are available online at
www.ibm.org/responsibility/2020.
General Information
Stockholders of record can receive account information and answers to frequently asked questions regarding stockholder accounts
online at www.ibm.com/investor. Stockholders of record can also consent to receive future IBM Annual Reports and Proxy Statements
online through this site.
For answers to general questions about IBM from within the continental United States, call (800) IBM-4YOU. From outside the United
States, Canada and Puerto Rico, call (914) 499-1900.
140
Board of Directors and Senior Leadership
International Business Machines Corporation and Subsidiary Companies
BOARD OF DIRECTORS
Thomas Buberl
Chief Executive Officer
AXA S.A.
Michael L. Eskew*
Retired Chairman and
Chief Executive Officer
United Parcel Service, Inc.
David N. Farr
Retired Chairman
Emerson Electric Co.
Alex Gorsky
Executive Chairman and
Retired Chief Executive Officer
Johnson & Johnson
Michelle J. Howard
Retired Admiral
United States Navy
SENIOR LEADERSHIP
Jonathan H. Adashek
Chief Communications Officer and
Senior Vice President
Marketing and Communications
Simon J. Beaumont
Vice President
Tax and Treasurer
Howard Boville
Senior Vice President
IBM Hybrid Cloud
Michelle H. Browdy
Senior Vice President
Legal and Regulatory Affairs,
and General Counsel
Kelly C. Chambliss
Senior Vice President and
Chief Operating Officer
IBM Consulting
Gary D. Cohn
Vice Chairman
Robert F. Del Bene
Vice President and Controller
Arvind Krishna
Chairman and Chief Executive Officer
IBM
Andrew N. Liveris
Retired Chairman and
Chief Executive Officer
The Dow Chemical Company
Frederick William McNabb III
Retired Chairman and
Chief Executive Officer
The Vanguard Group, Inc.
Martha E. Pollack
President
Cornell University
Joseph R. Swedish
Retired Chairman, President and
Chief Executive Officer
Anthem, Inc.
Peter R. Voser
Retired Chief Executive Officer
Royal Dutch Shell plc
Chairman
ABB Ltd.
Frederick H. Waddell
Retired Chairman and
Chief Executive Officer
Northern Trust Corporation
Alfred W. Zollar
Executive Advisor
Siris Capital Group, LLC
* Term on the Board ends
on April 26, 2022
Obed Louissaint
Senior Vice President
Transformation and Culture
Thomas W. Rosamilia
Senior Vice President
IBM Software, and
Chairman, North America
Frank Sedlarcik
Vice President
Assistant General Counsel
and Secretary
Robert D. Thomas
Senior Vice President
IBM Global Markets
Mark Foster
Chairman
IBM Consulting
Darío Gil
Senior Vice President and Director
IBM Research
John Granger
Senior Vice President
IBM Consulting
James J. Kavanaugh
Senior Vice President and
Chief Financial Officer
Arvind Krishna
Chairman and Chief Executive Officer
Nickle J. LaMoreaux
Senior Vice President and
Chief Human Resources Officer
Ric Lewis
Senior Vice President
IBM Systems
Robert W. Lord
Senior Vice President
The Weather Company and Alliances
International Business Machines Corporation
New Orchard Road, Armonk, New York 10504
914-499-1900
Db2, Global Business Services, Expertus, IBM, IBM Cloud, IBM Cloud for
Financial Services, IBM Cloud for Telecommunications, IBM Cloud Pak,
IBM Garage, IBM Q Network, IBM Z, Instana, Nordcloud, Power,
7Summits, Taos, Turbonomic, Waeg, Watson, WebSphere, z15, z/OS
and Z Systems are trademarks of International Business Machines
Corporation or its wholly owned subsidiaries. Kyndryl is a trademark
of Kyndryl, Inc. Azure and Microsoft Edge are trademarks of Microsoft.
The registered trademark Linux is used pursuant to a sublicense from
the Linux Foundation, the exclusive licensee of Linus Torvalds, owner
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