Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2022

Snapshot

Financial Results Summary — Three Months Ended June 30:

​​​​​​​​​​
​​​Yr. to Yr.
​​​​​​​​Percent/
(Dollars and shares in millions except per share amounts)​​​​​​​Margin
For the three months ended June 30:​2022​2021​Change
Revenue​$15,535​$14,2189.3%*
Gross profit margin​53.4%55.2%(1.9)pts.
Total expense and other (income)​$6,568​$6,940(5.4)%
Income from continuing operations before income taxes​$1,722​$91288.8%
Provision for income taxes from continuing operations​$257​$101153.2%
Income from continuing operations​$1,465​$81080.8%
Income from continuing operations margin​9.4%5.7%3.7pts.
Income/(loss) from discontinued operations, net of tax​$(73)​$515​nm​
Net income​$1,392​$1,3255.1%
Earnings per share from continuing operations - assuming dilution​$1.61​$0.9078.9%
Consolidated earnings per share - assuming dilution​$1.53​$1.47​4.1%
Weighted-average shares outstanding - assuming dilution​910.7​904.20.7%
  • 15.6 percent adjusted for currency.

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Organization of Information:

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

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

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

Management Discussion – (continued)

These changes impacted the company’s reportable segments but did not impact the Consolidated Financial Statements. Refer to note 5, “Segments,” for additional information on the company’s reportable segments. The segments are reported on a comparable basis for all periods.

To provide useful decision-making information for management and shareholders, the company defines and measures hybrid cloud revenue as end-to-end cloud capabilities within hybrid cloud environments, which includes technology (software and hardware), services and solutions to enable clients to implement cloud solutions across public, private and multi-clouds. The definition of hybrid cloud revenue is consistent with the prior methodology for cloud revenue historically presented. This spans across IBM’s Consulting, Software and Infrastructure segments. Examples include (but are not limited to) Red Hat Enterprise Linux (RHEL), Red Hat OpenShift, Cloud Paks, as-a-service offerings, service engagements related to cloud deployment of technology and applications, and infrastructure used in cloud deployments.

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

Currency:

The references to “adjusted for currency” or “at constant currency” in the Management Discussion do not include operational impacts that could result from fluctuations in foreign currency rates. When we refer to growth rates at constant currency or adjust such growth rates for currency, it is done so that certain financial results can be viewed without the impact of fluctuations in foreign currency exchange rates, thereby facilitating period-to-period comparisons of business performance. Financial results adjusted for currency are calculated by translating current period activity in local currency using the comparable prior-year period’s currency conversion rate. This approach is used for countries where the functional currency is the local currency. Generally, when the dollar either strengthens or weakens against other currencies, the growth at constant currency rates or adjusting for currency will be higher or lower than growth reported at actual exchange rates. Refer to “Currency Rate Fluctuations” for additional information.

Operating (non-GAAP) Earnings:

In an effort to provide better transparency into the operational results of the business, supplementally, management separates business results into operating and non-operating categories. Operating earnings from continuing operations is a non-GAAP measure that excludes the effects of certain acquisition-related charges, intangible asset amortization, expense resulting from basis differences on equity method investments, retirement-related costs, certain impacts from the Kyndryl separation and their related tax impacts. Due to the unique, non-recurring nature of the enactment of the U.S. Tax Cuts and Jobs Act (U.S. tax reform), management characterizes the one-time provisional charge recorded in the fourth quarter of 2017 and adjustments to that charge as non-operating. Adjustments include true-ups, accounting elections and any changes to regulations, laws, audit adjustments, etc. that affect the recorded one-time charge. Management also characterizes direct and incremental charges incurred related to the Kyndryl separation as non-operating given their unique and non-recurring nature. These charges primarily relate to any net unrealized gains or losses on the Kyndryl common stock and the related cash-settled swap with a third-party financial institution, which are recorded in other (income) and expense in the Consolidated Income Statement. The Kyndryl shares 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

Management Discussion – (continued)

non-operating, consistent with GAAP. We include defined benefit plan and nonpension postretirement benefit plan service costs, multi-employer plan costs and the cost of defined contribution plans in operating earnings. Non-operating retirement-related costs include defined benefit plan and nonpension postretirement benefit plan amortization of prior service costs, interest cost, expected return on plan assets, amortized actuarial gains/losses, the impacts of any plan curtailments/settlements and pension insolvency costs and other costs. Non-operating retirement-related costs are primarily related to changes in pension plan assets and liabilities which are tied to financial market performance, and the company considers these costs to be outside of the operational performance of the business.

Overall, management believes that supplementally providing investors with a view of operating earnings as described above provides increased transparency and clarity into both the operational results of the business and the performance of the company’s pension plans; improves visibility to management decisions and their impacts on operational performance; enables better comparison to peer companies; and allows the company to provide a long-term strategic view of the business going forward. In addition, these non-GAAP measures provide a perspective consistent with areas of interest we routinely receive from investors and analysts. Our reportable segment financial results reflect pre-tax operating earnings from continuing operations, consistent with our management and measurement system.

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

​​​​​​​​​​
​​​Yr. to Yr.
(Dollars in millions except per share amounts)​​​​​​​Percent
For the three months ended June 30:​2022​2021​Change
Net income as reported​$1,392​$1,3255.1%
Income/(loss) from discontinued operations, net of tax​(73)​515nm​
Income from continuing operations​$1,465​$81080.8%
Non-operating adjustments (net of tax):​​​​
Acquisition-related charges​$345​$368(6.2)%
Non-operating retirement-related costs/(income)​​146​​264​(44.8)​
U.S. tax reform impacts​4​14(70.4)​
Kyndryl-related impacts​145​—nm​
Operating (non-GAAP) earnings*​$2,105​$1,45644.6%
Diluted operating (non-GAAP) earnings per share*​$2.31​$1.6143.5%
  • Refer to page 91 for a more detailed reconciliation of net income to operating earnings and operating earnings per share.

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​

Macroeconomic Environment:

​

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

​

The Russian war in Ukraine resulted in the U.S., UK, and the European Union member governments, among others, placing economic sanctions on numerous Russian entities, specific Russian-controlled entities, as well as Belarus. In March 2022, IBM announced the suspension of its business activities in Russia. As the uncertainty about the long-term ramifications of the war grew, in May 2022, IBM made the decision to carry out an orderly wind-down of its Russian operations. For the period ended June 30, 2022, we assessed certain accounting-related matters that generally require consideration of current information reasonably available to us and forecasted financial data in the context of unknown future impacts to IBM as a result of the wind-down. These assessments resulted in certain immaterial asset and restructuring charges for the quarter ended June 30, 2022. These charges, together with the year-to-year lost business due to the wind-down, impacted our pre-tax income by approximately $100 million for the three months ended June 30,

Management Discussion – (continued)

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

​

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

​

Financial Performance Summary — Three Months Ended June 30:

In the second quarter of 2022, we reported $15.5 billion in revenue, income from continuing operations of $1.5 billion and operating (non-GAAP) earnings of $2.1 billion. Diluted earnings per share from continuing operations was $1.61 as reported and $2.31 on an operating (non-GAAP) basis. On a consolidated basis, we generated $1.3 billion in cash from operations and $2.1 billion in free cash flow. We delivered shareholder returns of $1.5 billion in dividends. These results reflect the investments, portfolio actions and operational changes we have made to execute our hybrid cloud and AI strategy and the strong demand for our solutions. Our balance sheet continues to provide us with the flexibility to support our business needs.

​

Total revenue grew 9.3 percent as reported and 16 percent adjusted for currency compared to the prior-year period. This includes incremental sales to Kyndryl which contributed approximately 5 points to the revenue growth. Software delivered revenue growth of 6.4 percent as reported and 12 percent adjusted for currency, including approximately 7 points of growth from incremental sales to Kyndryl. Within Software, Hybrid Platform & Solutions increased 4.3 percent as reported and 9 percent adjusted for currency, with incremental sales to Kyndryl contributing approximately 1.5 points of this growth. There was solid performance across all business areas, led by continued strong double-digit growth in Red Hat. Transaction Processing grew 11.9 percent as reported and 19 percent adjusted for currency, including approximately 22 points of growth from incremental Kyndryl sales. Consulting revenue increased 9.8 percent as reported and 18 percent adjusted for currency, with strong growth across all three business lines and geographies. Infrastructure revenue increased 19.0 percent year to year as reported and 25 percent adjusted for currency reflecting the solid execution around our new z16 program. The Infrastructure revenue performance also includes approximately 7 points of growth from incremental sales to Kyndryl. Across the segments, total hybrid cloud revenue of $5.9 billion in the second quarter of 2022 grew 18 percent as reported and 24 percent adjusted for currency. Over the trailing 12 months, total hybrid cloud revenue was $21.7 billion, up 16 percent as reported (19 percent adjusted for currency) year to year.

​

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

​

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

​

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

Management Discussion – (continued)

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

​

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

​

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

​

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

​

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

​

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

Management Discussion – (continued)

Financial Results Summary —Six Months Ended June 30:

​​​​​​​​​​
​​​Yr. to Yr.
​​​​​​​​Percent/
(Dollars and shares in millions except per share amounts)​​​​​​​Margin
For the six months ended June 30:​2022​2021​Change
Revenue​$29,732​$27,4058.5%*
Gross profit margin​52.6%54.3%(1.7)pts.
Total expense and other (income)​$13,280​$13,724(3.2)%
Income from continuing operations before income taxes​$2,345​$1,155103.0%
Provision for/(benefit from) income taxes from continuing operations​$218​$(58)nm​
Income from continuing operations​$2,127​$1,21375.3%
Income from continuing operations margin​7.2%4.4%2.7pts.
Income/(loss) from discontinued operations, net of tax​$(2)​$1,067​nm​
Net income​$2,125​$2,280(6.8)%
Earnings per share from continuing operations - assuming dilution​$2.34​$1.3474.6%
Consolidated earnings per share - assuming dilution​$2.34​$2.52​(7.1)%
Weighted-average shares outstanding - assuming dilution​910.0​903.00.8%
​​​​​​​​​​
​​At 6/30/2022​At 12/31/2021​​​
Assets​$127,503​$132,001(3.4)%
Liabilities​$108,026​$113,005(4.4)%
Equity​$19,476​$18,9962.5%
  • 13.3 percent adjusted for currency.

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​

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

​​​​​​​​​​
​​​Yr. to Yr.
(Dollars in millions except per share amounts)​​​​​Percent
For the six months ended June 30:​2022​2021​Change
Net income as reported​$2,125​$2,280(6.8)%
Income/(loss) from discontinued operations, net of tax​(2)​1,067nm​
Income from continuing operations​$2,127​$1,21375.3%
Non-operating adjustments (net of tax):​​​​
Acquisition-related charges​$704​$6990.8%
Non-operating retirement-related costs/(income)​​290​​563​(48.5)​
U.S. tax reform impacts​(112)​(6)nm​
Kyndryl-related impacts​367​—nm​
Operating (non-GAAP) earnings*​$3,376​$2,46936.7%
Diluted operating (non-GAAP) earnings per share*​$3.71​$2.7335.9%
  • Refer to page 92 for a more detailed reconciliation of net income to operating earnings and operating earnings per share.

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Financial Performance Summary —Six Months Ended June 30:

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

​

Management Discussion – (continued)

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

​

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

​

Gross margin of 52.6 percent decreased 1.7 points year to year, however, gross profit dollars grew compared to the prior-year period. Overall, gross margin was impacted by the significant investments we are making to drive our hybrid cloud and AI strategy and by higher labor and component costs. Operating (non-GAAP) gross margin of 53.8 percent decreased 1.8 points versus the prior year for similar reasons.

​

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

​

Pre-tax income from continuing operations of $2.3 billion increased 103.0 percent and pre-tax margin was 7.9 percent, an increase of 3.7 points versus the first six months of 2021. The continuing operations provision for income taxes in the first six months of 2022 was $218 million, compared to a benefit from income taxes of $58 million in the first six months of 2021. The increase in the continuing operations tax provision in the first six months of 2022 compared to the prior year was primarily driven by tax impacts from the resolution of certain tax audits in the first quarter of 2021. Net income from continuing operations of $2.1 billion increased 75.3 percent and the net income from continuing operations margin was 7.2 percent, up 2.7 points year to year.

​

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

​

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

​

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

​

Management Discussion – (continued)

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

​

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

​

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

​

●A decrease in receivables of $1.9 billion ($1.0 billion adjusted for currency) primarily due to collections of higher year-end balances;
●A decrease in goodwill and net intangible assets of $1.5 billion ($0.4 billion adjusted for currency) primarily driven by currency impacts, intangibles amortization and derecognition of goodwill and intangible assets of $0.6 billion related to the divestiture of our healthcare software assets; and
●A decrease in net property, plant and equipment and operating right-of-use assets of $0.8 billion ($0.5 billion adjusted for currency); partially offset by
●An increase in cash and cash equivalents, restricted cash and marketable securities of $0.2 billion ($0.6 billion adjusted for currency).

Total liabilities decreased $5.0 billion ($0.6 billion adjusted for currency) from December 31, 2021 driven by:

​

●A decrease in total debt of $1.4 billion ($0.1 billion adjusted for currency) primarily driven by maturities and currency impacts, partially offset by issuances;
●A decrease in retirement and nonpension postretirement benefit obligations of $1.3 billion ($0.6 billion adjusted for currency); and
●A decrease in taxes payable of $0.5 billion ($0.4 billion adjusted for currency) primarily due to indirect tax payments.

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

​

●Net income of $2.1 billion;
●A decrease in accumulated other comprehensive losses of $1.1 billion driven by retirement-related benefit plans, cash flow hedges and foreign currency translation adjustments; and
●Common stock of $0.4 billion; partially offset by
●Dividends paid of $3.0 billion.

Our cash flows from operating, investing and financing activities, as reflected in the Consolidated Statement of Cash Flows, include the cash flows of discontinued operations. On a consolidated basis, cash provided by operating activities was $4.6 billion in the first six months of 2022, a decrease of $3.0 billion compared to the first six months of 2021, primarily driven by a decrease in cash provided by financing receivables. Net cash used in investing activities of $1.2 billion decreased $3.5 billion compared to the prior-year period. Financing activities were a net use of cash of $2.8 billion in the first six months of 2022 compared to $8.9 billion in the first six months of 2021.

​

​

Management Discussion – (continued)

Second Quarter and First Six Months in Review

Results of Continuing Operations

As discussed in the “Organization of Information” section, with the completion of the separation on November 3, 2021, results of Kyndryl are reported as discontinued operations. Prior periods have been reclassified to conform to this presentation in the Management Discussion to allow for a meaningful comparison of continuing operations.

Segment Details

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

​​​​​​​​​​​​
​​​Yr. to Yr.
​​​​​​​​​​Percent
​​​​​​​​Yr. to Yr.​Change
(Dollars in millions)​​​​​Percent/Margin​Adjusted For
For the three months ended June 30:​2022​2021*​Change​Currency
Revenue:​​​
Software​$6,166​$5,795​6.4%11.6%
Gross margin​79.2%79.7%(0.5)pts.​
Consulting​4,809​4,378​9.8%17.8%
Gross margin​24.2%27.6%(3.4)pts.​
Infrastructure​4,235​3,56019.0%25.4%
Gross margin​53.8%57.1%(3.3)pts.​
Financing​146​209(29.9)%(26.6)%
Gross margin​35.3%29.9%5.3pts.​
Other​180​277​(34.9)%(31.1)%
Gross margin​(49.3)%(25.2)%(24.1)pts.​
Total revenue​$15,535​$14,2189.3%15.6%
Total gross profit​$8,290​$7,8525.6%​
Total gross margin​53.4%55.2%(1.9)pts.​
Non-operating adjustments:​​​
Amortization of acquired intangible assets​​180​1790.6%​
Operating (non-GAAP) gross profit​$8,470​$8,0315.5%​
Operating (non-GAAP) gross margin​54.5%56.5%(2.0)pts.​
  • Recast to reflect segment changes.

Management Discussion – (continued)

​​​​​​​​​​​​
​​​Yr. to Yr.
​​​​​​​​​​Percent
​​​​​​​​Yr. to Yr.​Change
(Dollars in millions)​​​​​Percent/Margin​Adjusted For
For the six months ended June 30:​2022​2021*​Change​Currency
Revenue:​​​
Software​$11,938​$10,933​9.2%13.4%
Gross margin​79.0%78.8%0.3pts.​
Consulting​9,637​8,641​11.5%17.6%
Gross margin​24.3%27.7%(3.5)pts.​
Infrastructure​7,453​6,8538.8%13.4%
Gross margin​52.4%56.7%(4.4)pts.​
Financing​300​417(28.0)%(25.5)%
Gross margin​36.5%32.7%3.8pts.​
Other​404​561​(28.0)%(25.0)%
Gross margin​(40.2)%(27.4)%(12.8)pts.​
Total revenue​$29,732​$27,4058.5%13.3%
Total gross profit​$15,625​$14,8795.0%​
Total gross margin​52.6%54.3%(1.7)pts.​
Non-operating adjustments:​​​
Amortization of acquired intangible assets​361​3532.3%​
Operating (non-GAAP) gross profit​$15,986​$15,2325.0%​
Operating (non-GAAP) gross margin​53.8%55.6%(1.8)pts.​
  • Recast to reflect segment changes.

​

Software

​​​​​​​​​​​​
​​​Yr. to Yr.
​​​​​​​​​​Percent
​​​​​​​​Yr. to Yr.​Change
(Dollars in millions)​​​​​Percent​Adjusted For
For the three months ended June 30:​2022​2021*​Change​Currency
Software revenue:​$6,166​$5,7956.4%11.6%
Hybrid Platform & Solutions​$4,390​$4,2084.3%9.0%
Red Hat​​​​​​​11.9​16.9​
Automation​​​​​​​3.6​8.4​
Data & AI​​​​​​​0.4​4.5​
Security​​​​​​​0.0​5.0​
Transaction Processing​​1,776​1,58711.918.7​
  • Recast to reflect segment changes.

Management Discussion – (continued)

​​​​​​​​​​​​
​​​Yr. to Yr.
​​​​​​​​​​Percent
​​​​​​​​Yr. to Yr.​Change
(Dollars in millions)​​​​​Percent​Adjusted For
For the six months ended June 30:​2022​2021*​Change​Currency
Software revenue:​$11,938​$10,9339.2%13.4%
Hybrid Platform & Solutions​$8,470​$8,0085.8%9.5%
Red Hat​​​​​​​14.9​18.9​
Automation​​​​​​​3.3​7.0​
Data & AI​​​​​​​1.2​4.4​
Security​​​​​​​2.5​6.5​
Transaction Processing​​3,468​2,92518.624.1​
  • Recast to reflect segment changes.

​

Software revenue of $6,166 million increased 6.4 percent as reported (12 percent adjusted for currency) in the second quarter of 2022 compared to the prior-year period. This includes incremental sales to Kyndryl which contributed approximately 7 points to the revenue growth. Software subscription and support renewal rates continued to grow this quarter, contributing to our solid and growing recurring revenue base. Within Software, over the trailing 12 months, hybrid cloud revenue of $9,044 million grew 20 percent as reported (23 percent adjusted for currency) year to year, driven by growth in our hybrid cloud and AI capabilities.

​

Hybrid Platform & Solutions revenue of $4,390 million increased 4.3 percent as reported (9 percent adjusted for currency) in the second quarter of 2022 compared to the prior-year period. Incremental sales to Kyndryl contributed approximately 1.5 points to the revenue growth. We had solid performance across all business areas. Red Hat revenue grew 11.9 percent as reported (17 percent adjusted for currency) in the second quarter of 2022, reflecting new adoption and expansion of RHEL and OpenShift. Automation revenue grew 3.6 percent as reported (8 percent adjusted for currency), reflecting solid performance in AIOps and Management and Integration, which demonstrates the importance of automation in the IT journeys of our clients. We had strength in offerings, such as Turbonomic and Instana for observability, Cloud Pak for Watson AIOps, and our modern integration platform, Cloud Pak for Integration. Data & AI revenue increased 0.4 percent as reported (4 percent adjusted for currency), led by demand for Data Fabric, Data Management, and Asset & Supply Chain Management solutions. Security revenue was flat as reported, but grew 5 percent adjusted for currency, driven by growth in Threat Management and Identity, as enterprises continue to adopt a zero-trust security strategy and implement additional identity controls.

​

For the second quarter of 2022, Hybrid Platform & Solutions grew annual recurring revenue (ARR) by 8 percent compared to the prior-year period. ARR is a key performance metric management uses to assess the health and growth trajectory of our Hybrid Platform & Solutions business within the Software segment. ARR is calculated by estimating the current quarter’s recurring, committed value for certain types of active contracts as of the period-end date and then multiplying that value by four. This value is based on each arrangement’s contract value and start date, mitigating fluctuations during the contract term, and includes the following consumption models: (1) software subscription agreements, including committed term licenses, (2) as-a-service arrangements such as SaaS and PaaS, (3) maintenance and support contracts, and (4) security managed services contracts. ARR should be viewed independently of revenue as this performance metric and its inputs may not represent the amount of revenue recognized in the period and therefore is not intended to represent current period revenue or revenue that will be recognized in future periods. ARR is calculated at estimated constant currency.

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

Management Discussion – (continued)

For the first six months of 2022, Software revenue of $11,938 million increased 9.2 percent as reported (13 percent adjusted for currency) compared to the same period in 2021. Incremental sales to Kyndryl contributed approximately 8 points to the revenue growth. We had growth in Hybrid Platform & Solutions and Transaction Processing during the first six months of 2022, with all of the Transaction Processing revenue growth driven by sales to Kyndryl.

​

​​​​​​​​​​
​​​Yr. to Yr.
​​​​​​​​Percent/
(Dollars in millions)​​​​​Margin
For the three months ended June 30:​2022​2021*​Change
Software:​​​
Gross profit​$4,884​$4,6175.8%
Gross profit margin​79.2%79.7%(0.5)pts.
Pre-tax income​$1,375​$1,05929.9%
Pre-tax margin​22.3%18.3%4.0pts.
  • Recast to reflect segment changes.

​

​​​​​​​​​​
​​​Yr. to Yr.
​​​​​​​​Percent/
(Dollars in millions)​​​​​Margin
For the six months ended June 30:​2022​2021*​Change
Software:​​​
Gross profit​$9,434​$8,6129.5%
Gross profit margin​79.0%78.8%0.3pts.
Pre-tax income​$2,509​$1,71746.2%
Pre-tax margin​21.0%15.7%5.3pts.
  • Recast to reflect segment changes.

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

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

Consulting

​​​​​​​​​​​​
​​​Yr. to Yr.
​​​​​​​​​​Percent
​​​​​​​​Yr. to Yr.​Change
(Dollars in millions)​​​​​Percent​Adjusted For
For the three months ended June 30:​2022​2021*​Change​Currency
Consulting revenue:​$4,809​$4,378​9.8%17.8%
Business Transformation​$2,227​$2,049​8.7%16.1%
Technology Consulting​928​814​14.022.6​
Application Operations​1,653​1,514​9.217.4​
  • Recast to reflect segment change.

Management Discussion – (continued)

​​​​​​​​​​​​
​​​Yr. to Yr.
​​​​​​​​​​Percent
​​​​​​​​Yr. to Yr.​Change
(Dollars in millions)​​​​​Percent​Adjusted For
For the six months ended June 30:​2022​2021*​Change​Currency
Consulting revenue:​$9,637​$8,641​11.5%17.6%
Business Transformation​$4,482​$4,002​12.0%17.7%
Technology Consulting​1,884​​1,649​14.220.7​
Application Operations​3,272​​2,989​9.515.8​
  • Recast to reflect segment change.

​

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

​

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

​

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

​

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

​

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

​

​​​​​​​​​​
​​​Yr. to Yr.
​​​​​​​​Percent/
(Dollars in millions)​​​​​Margin
For the three months ended June 30:​2022​2021*​Change
Consulting:​​​
Gross profit​$1,163​$1,209(3.8)%
Gross profit margin​24.2%27.6%(3.4)pts.
Pre-tax income​$343​$27026.9%
Pre-tax margin​7.1%6.2%1.0pts.
  • Recast to reflect segment change.

Management Discussion – (continued)

​​​​​​​​​​
​​​Yr. to Yr.
​​​​​​​​Percent/
(Dollars in millions)​​​​​Margin
For the six months ended June 30:​2022​2021*​Change
Consulting:​​​
Gross profit​$2,339​$2,396(2.4)%
Gross profit margin​24.3%27.7%(3.5)pts.
Pre-tax income​$691​$54726.3%
Pre-tax margin​7.2%6.3%0.8pts.
  • Recast to reflect segment change.

​

Consulting gross profit margin of 24.2 percent decreased 3.4 points in the second quarter of 2022 compared to the same period in 2021, reflecting the significant investments we have been making to capture demand and fuel our revenue growth. We continued to invest in our partner ecosystem, scale acquisitions and add skills. Our Consulting business is most impacted by the inflationary labor market and increasing labor costs to acquire new talent and increase capacity. We are starting to capture these higher costs in our pricing, however, given the timing between contract signing and revenue recognition, it takes time to realize the impacts in our margin performance. For the first six months of 2022, Consulting gross profit margin of 24.3 percent decreased 3.5 points compared to the prior-year period, reflecting the same dynamics described above.

​

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

​

Consulting Signings and Book-to-Bill

​​​​​​​​​​​​
​​​​​​​​​​Yr. to Yr.
​​​​​​​​​​Percent
​​​​​​​​Yr. to Yr.​Change
(Dollars in millions)​​​​​​​Percent​Adjusted For
For the three months ended June 30:20222021ChangeCurrency
Total Consulting signings​$4,654​$4,6550.0%7.4%

​

​​​​​​​​​​​​
​​​​​​​​​​Yr. to Yr.
​​​​​​​​​​Percent
​​​​​​​​Yr. to Yr.​Change
(Dollars in millions)​​​​​​​Percent​Adjusted For
For the six months ended June 30:20222021ChangeCurrency
Total Consulting signings​$9,791​$8,45115.9%22.4%

Signings are management’s initial estimate of the value of a client’s commitment under a services contract within IBM Consulting. There are no third-party standards or requirements governing the calculation of signings. The calculation used by management involves estimates and judgments to gauge the extent of a client’s commitment, including the type and duration of the agreement, and the presence of termination charges or wind-down costs.

Contract extensions and increases in scope are treated as signings only to the extent of the incremental new value. Total signings can vary over time due to a variety of factors including, but not limited to, the timing of signing a small number of larger contracts. Signings associated with an acquisition will be recognized on a prospective basis.

Management believes the estimated values of signings disclosed provide an indication of our forward-looking revenue. Signings are used to monitor the performance of the business and viewed as useful information for management and shareholders. The conversion of signings into revenue may vary based on the types of services and solutions,

Management Discussion – (continued)

contract duration, customer decisions, and other factors, which may include, but are not limited to, the macroeconomic environment.

Book-to-bill represents the ratio of IBM Consulting signings to its revenue over the same period. The metric is a useful indicator of the demand of our business over time. This definition should be read in conjunction with the signings definition noted above.

Infrastructure

​​​​​​​​​​​​
​​​​​​​​​​Yr. to Yr.
​​​​​​​​​​Percent
​​​​​​​​Yr. to Yr.​Change
(Dollars in millions)​​​​​​​Percent​Adjusted For
For the three months ended June 30:20222021*ChangeCurrency
Infrastructure revenue:​$4,235​$3,56019.0%25.4%
Hybrid Infrastructure​$2,760​$2,05934.1%40.7%
zSystems​​​69.176.9​
Distributed Infrastructure​​11.517.4​
Infrastructure Support​1,474​1,501(1.8)4.5​
  • Recast to reflect segment change.

​

​​​​​​​​​​​​
​​​​​​​​​​Yr. to Yr.
​​​​​​​​​​Percent
​​​​​​​​Yr. to Yr.​Change
(Dollars in millions)​​​​​​​Percent​Adjusted For
For the six months ended June 30:20222021*ChangeCurrency
Infrastructure revenue:​$7,453​$6,8538.8%13.4%
Hybrid Infrastructure​$4,461​$3,84116.1%20.7%
zSystems​​27.632.4​
Distributed Infrastructure​​8.613.0​
Infrastructure Support​2,993​3,012(0.7)4.1​
  • Recast to reflect segment change.

​

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

​

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

Management Discussion – (continued)

Infrastructure Support revenue of $1,474 million decreased 1.8 percent as reported, but grew 5 percent adjusted for currency in the second quarter of 2022 compared to the prior-year period. This includes incremental sales to Kyndryl which contributed approximately 8 points of revenue growth for the quarter.

​

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

​

​​​​​​​​​​
​​​​​​​​Yr. to Yr.
​​​​​​​​Percent/
(Dollars in millions)​​​​​​​Margin
For the three months ended June 30:20222021*Change
Infrastructure:​​​​
Gross profit​$2,280​$2,03312.1%
Gross profit margin​53.8%57.1%(3.3)pts.
Pre-tax income​$757​$48954.8%
Pre-tax margin​17.9%13.7%4.1pts.
  • Recast to reflect segment change.

​

​​​​​​​​​​
​​​​​​​​Yr. to Yr.
​​​​​​​​Percent/
(Dollars in millions)​​​​​​​Margin
For the six months ended June 30:20222021*Change
Infrastructure:​​​
Gross profit​$3,905​$3,8890.4%
Gross profit margin​52.4%56.7%(4.4)pts.
Pre-tax income​$956​$78022.5%
Pre-tax margin​12.8%11.4%1.4pts.
  • Recast to reflect segment change.

​

Infrastructure gross profit margin decreased 3.3 points to 53.8 percent in the second quarter of 2022 compared to the prior-year period, driven primarily by profit margin declines and product mix across Hybrid Infrastructure and Infrastructure Support. For the first six months of 2022, gross profit margin decreased 4.4 points to 52.4 percent compared to the prior-year period, driven by the same factors as the second quarter.

​

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

Financing

See pages 87 through 90 for a discussion of Financing’s segment results.

Management Discussion – (continued)

Geographic Revenue

In addition to the revenue presentation by reportable segment, we also measure revenue performance on a geographic basis.

​​​​​​​​​​​​
​​​​​​​​​​​
​​​​​​​​​​Yr. to Yr.​
​​​​​​​​​​Percent
​​​​​​​​Yr. to Yr.​Change
(Dollars in millions)​​​​​​​Percent​Adjusted For
For the three months ended June 30:20222021ChangeCurrency
Total Revenue​$15,535​$14,2189.3%15.6%
Americas​$8,142​$7,12214.3%14.7%
Europe/Middle East/Africa (EMEA)​4,526​4,3144.917.4​
Asia Pacific​2,868​2,7823.115.1​

​

​​​​​​​​​​​​
​​​​​​​​​​​
​​​​​​​​​​Yr. to Yr.​
​​​​​​​​​​Percent
​​​​​​​​Yr. to Yr.​Change
(Dollars in millions)​​​​​​​Percent​Adjusted For
For the six months ended June 30:20222021ChangeCurrency
Total Revenue​$29,732​$27,4058.5%13.3%
Americas​$15,198​$13,59911.8%12.0%
Europe/Middle East/Africa (EMEA)​8,757​8,2426.315.7​
Asia Pacific​5,778​5,5633.913.2​

​

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

​

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

​

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

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

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

​

Management Discussion – (continued)

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

​

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

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

Expense

Total Expense and Other (Income)

​​​​​​​​​​
​​​​​​​​Yr. to Yr.
(Dollars in millions)​​​​​​​Percent
For the three months ended June 30:20222021Change
Total expense and other (income)​$6,568​$6,940(5.4)%
Non-operating adjustments:​​​
Amortization of acquired intangible assets​$(278)​$(276)​0.6%
Acquisition-related charges​(2)​​(18)​(90.8)​
Non-operating retirement-related (costs)/income​​(192)​​(317)​(39.5)​
Kyndryl-related impacts​(145)​​—​nm​
Operating (non-GAAP) expense and other (income)​$5,952​$6,329​(6.0)%
Total expense-to-revenue ratio​42.3%​48.8%(6.5)pts.
Operating (non-GAAP) expense-to-revenue ratio​38.3%​44.5%(6.2)pts.

nm - not meaningful

​​​​​​​​​​
​​​​​​​​Yr. to Yr.
(Dollars in millions)​​​​​​​Percent
For the six months ended June 30:20222021Change
Total expense and other (income)​$13,280​$13,724(3.2)%
Non-operating adjustments:​​​
Amortization of acquired intangible assets​$(558)​$(549)1.5%
Acquisition-related charges​(9)​(34)(74.8)​
Non-operating retirement-related (costs)/income​​(394)​(649)(39.4)​
Kyndryl-related impacts​(367)​—nm​
Operating (non-GAAP) expense and other (income)​$11,953​$12,491(4.3)%
Total expense-to-revenue ratio​44.7%50.1%(5.4)pts.
Operating (non-GAAP) expense-to-revenue ratio​40.2%45.6%(5.4)pts.

nm - not meaningful

Management Discussion – (continued)

Total expense and other (income) decreased 5.4 percent in the second quarter of 2022 versus the prior-year period primarily driven by the effects of currency, a gain from the divestiture of our healthcare software assets, lower non-operating retirement-related costs and benefits from the actions taken to streamline operations and simplify our go-to-market model, partially offset by impacts related to the Kyndryl retained shares and higher spending reflecting our continuing investment in innovation, our ecosystem and talent. Total operating (non-GAAP) expense and other (income) decreased 6.0 percent year to year, driven primarily by the factors described above excluding the lower non-operating retirement-related costs and the impacts related to the Kyndryl retained shares.

​

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

​

Selling, General and Administrative Expense

​​​​​​​​​​
​​​​​​​​Yr. to Yr.
(Dollars in millions)​​​​​​​Percent
For the three months ended June 30:20222021Change
Selling, general and administrative expense:​​​
Selling, general and administrative — other​$3,996​$3,9541.1%
Advertising and promotional expense​395​3930.7​
Workforce rebalancing charges​28​107(74.3)​
Amortization of acquired intangible assets​277​2760.6​
Stock-based compensation​153​1418.2​
Provision for/(benefit from) expected credit loss expense​6​(22)nm​
Total selling, general and administrative expense​$4,855​$4,8490.1%
Non-operating adjustments:​​​
Amortization of acquired intangible assets​$(277)​$(276)0.6%
Acquisition-related charges​​(2)​(18)(90.8)​
Kyndryl-related impacts​0​​—​nm​
Operating (non-GAAP) selling, general and administrative expense​$4,576​$4,5550.4%

nm - not meaningful

​​​​​​​​​​
​​​​​​​​Yr. to Yr.
(Dollars in millions)​​​​​​​Percent
For the six months ended June 30:20222021Change
Selling, general and administrative expense:​​​
Selling, general and administrative — other​$7,820​$7,844(0.3)%
Advertising and promotional expense​732​737(0.8)​
Workforce rebalancing charges​33​201(83.7)​
Amortization of acquired intangible assets​557​5481.5​
Stock-based compensation​289​25612.9​
Provision for/(benefit from) expected credit loss expense​22​(49)nm​
Total selling, general and administrative expense​$9,452​$9,536(0.9)%
Non-operating adjustments:​​​
Amortization of acquired intangible assets​$(557)​$(548)1.5%
Acquisition-related charges​​(9)​(34)(74.8)​
Kyndryl-related impacts​0​—nm​
Operating (non-GAAP) selling, general and administrative expense​$8,887​$8,954(0.8)%

nm - not meaningful

Management Discussion – (continued)

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

●Higher spending (7 points) reflecting our continuing investment to drive our hybrid cloud and AI strategy, expenses of acquired businesses and higher travel and commission expense, partially offset by benefits from the actions taken to streamline operations and simplify our go-to-market model and lower spending for shared services transferred to Kyndryl; partially offset by
●The effects of currency (4 points); and
●Lower workforce rebalancing charges (2 points).

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

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

●The effects of currency (3 points); and
●Lower workforce rebalancing charges (2 points); partially offset by
●Higher spending (4 points) driven primarily by the same factors described above.

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

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

Research, Development and Engineering

​​​​​​​​​​
​​​​​​​​Yr. to Yr.
(Dollars in millions)​​​​​​​Percent
For the three months ended June 30:20222021Change
Research, development and engineering expense​$1,673​$1,6411.9%

​

​​​​​​​​​​
​​​​​​​​Yr. to Yr.
(Dollars in millions)​​​​​​​Percent
For the six months ended June 30:20222021Change
Research, development and engineering expense​$3,352​$3,2572.9%

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

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

Management Discussion – (continued)

Intellectual Property and Custom Development Income

​​​​​​​​​​
​​​​​​​​Yr. to Yr.
(Dollars in millions)​​​​​​​Percent
For the three months ended June 30:20222021Change
Intellectual property and custom development income:​​​
Licensing of intellectual property including royalty-based fees​$113​$6671.7%
Custom development income​57​64(10.9)​
Sales/other transfers of intellectual property​6​470.4​
Total​$176​$13332.2%

​

​​​​​​​​​​
​​​​​​​​Yr. to Yr.
(Dollars in millions)​​​​​​​Percent
For the six months ended June 30:20222021Change
Intellectual property and custom development income:​​​
Licensing of intellectual property including royalty-based fees​$184​$14031.6%
Custom development income​105​129(18.7)​
Sales/other transfers of intellectual property​8​10(20.5)​
Total​$297​$2786.5%

​

Total intellectual property and custom development income increased 32.2 percent year to year in the second quarter, and 6.5 percent in the first six months of 2022 compared to the prior-year period. The timing and amount of licensing, sales or other transfers of IP may vary significantly from period to period depending upon the timing of licensing agreements, economic conditions, industry consolidation and the timing of new patents and know-how development.

​

Other (Income) and Expense

​​​​​​​​​​
​​​​​​​​Yr. to Yr.
(Dollars in millions)​​​​​​​Percent
For the three months ended June 30:20222021Change
Other (income) and expense:​​​
Foreign currency transaction losses/(gains)​$(494)​$(15)nm​
(Gains)/losses on derivative instruments​439​79454.6%
Interest income​(28)​(11)147.9​
Net (gains)/losses from securities and investment assets​54​0nm​
Retirement-related costs/(income)​192​317(39.5)​
Other​(243)​(68)255.4​
Total other (income) and expense​$(81)​$302nm​
Non-operating adjustments:​​​
Amortization of acquired intangible assets​$(1)​$(1)—​
Non-operating retirement-related (costs)/income​​(192)​​(317)​(39.5)%
Kyndryl-related impacts​(145)​—nm​
Operating (non-GAAP) other (income) and expense​$(418)​$(16)nm​

nm - not meaningful

Management Discussion – (continued)

​​​​​​​​​​
​​​​​​​​Yr. to Yr.
(Dollars in millions)​​​​​​​Percent
For the six months ended June 30:20222021Change
Other (income) and expense:​​​
Foreign currency transaction losses/(gains)​$(670)​$(124)441.1%
(Gains)/losses on derivative instruments​541​239126.3​
Interest income​(46)​(25)82.6​
Net (gains)/losses from securities and investment assets​273​(6)nm​
Retirement-related costs/(income)​394​649(39.4)​
Other​(327)​(87)276.7​
Total other (income) and expense​$166​$647(74.4)%
Non-operating adjustments:​​​
Amortization of acquired intangible assets​$(1)​$(1)—​
Non-operating retirement-related (costs)/income​​(394)​​(649)​(39.4)%
Kyndryl-related impacts​(367)​—nm​
Operating (non-GAAP) other (income) and expense​$(596)​$(3)nm​

nm - not meaningful

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

●Higher gains on divestitures ($243 million) primarily driven by the divestiture of our healthcare software assets (included in “Other”);
●Net exchange gains (including derivative instruments) in the current year versus net exchange losses in the prior year ($120 million). The current year includes a loss on the cash-settled swap related to the Kyndryl retained shares ($88 million); and
●Lower non-operating retirement-related costs ($125 million). Refer to “Retirement-Related Plans” for additional information; partially offset by
●Net unrealized losses related to the Kyndryl retained shares ($56 million).

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

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

●Lower non-operating retirement-related costs ($256 million). Refer to “Retirement-Related Plans” for additional information;
●Net exchange gains (including derivative instruments) in the current year versus net exchange losses in the prior year ($244 million). The current year includes a loss on the cash-settled swap related to the Kyndryl retained shares ($88 million); and
●Higher gains on divestitures ($275 million) primarily driven by the divestiture of our healthcare software assets (included in “Other”); partially offset by

Management Discussion – (continued)

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

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

Interest Expense

​​​​​​​​​​
​​​​​​​​Yr. to Yr.
(Dollars in millions)​​​​​​​Percent
For the three months ended June 30:20222021Change
Interest expense​$297​$2815.5%

​

​​​​​​​​​​
​​​​​​​​Yr. to Yr.
(Dollars in millions)​​​​​​​Percent
For the six months ended June 30:20222021Change
Interest expense​$607​$5618.2%

​

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

Retirement-Related Plans

The following tables provide the total pre-tax cost for all retirement-related plans. The operating cost amounts are included in the Consolidated Income Statement within the caption (e.g., Cost, SG&A, RD&E) relating to the job function of the plan participants. The non-operating cost amounts are included in other (income) and expense.

​​​​​​​​​​
​​​​​​​​Yr. to Yr.
(Dollars in millions)​​​​​​​Percent
For the three months ended June 30:20222021Change
Retirement-related plans — cost:​​​
Service cost​$61​$71(13.3)%
Multi-employer plans​3​5(29.7)​
Cost of defined contribution plans​233​252(7.5)​
Total operating costs​$298​$327(9.1)%
Interest cost​$460​$41012.2%
Expected return on plan assets​(734)​(731)0.4​
Recognized actuarial losses​442​617(28.4)​
Amortization of prior service costs/(credits)​6​0nm​
Curtailments/settlements​11​16(32.1)​
Other costs​6​372.0​
Total non-operating costs/(income)​$192​$317(39.5)%
Total retirement-related plans — cost​$489​$644(24.1)%

nm - not meaningful

Management Discussion – (continued)

​​​​​​​​​​
​​​​​​​​Yr. to Yr.
(Dollars in millions)​​​​​​​Percent
For the six months ended June 30:20222021Change
Retirement-related plans — cost:​​​
Service cost​$127​$139(8.6)%
Multi-employer plans​7​11(31.5)​
Cost of defined contribution plans​472​508(7.1)​
Total operating costs​$606​$658(7.8)%
Interest cost​$927​$82013.1%
Expected return on plan assets​(1,483)​(1,461)1.5​
Recognized actuarial losses​902​1,239(27.2)​
Amortization of prior service costs/(credits)​13​4257.5​
Curtailments/settlements​19​34(43.9)​
Other costs​15​155.6​
Total non-operating costs/(income)​$394​$649(39.4)%
Total retirement-related plans — cost​$1,000​$1,307(23.5)%

​

Total pre-tax retirement-related plan cost decreased by $155 million compared to the second quarter of 2021 primarily driven by a decrease in recognized actuarial losses ($175 million) and lower cost of defined contribution plans ($19 million), partially offset by higher interest costs ($50 million). Total cost for the first six months of 2022 decreased $307 million compared to the first six months of 2021, primarily driven by a decrease in recognized actuarial losses ($337 million), lower cost of defined contribution plans ($36 million) and higher expected return on plan assets ($22 million) partially offset by higher interest costs ($108 million).

​

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

Taxes

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

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

The continuing operations provision for income taxes for the first six months of 2022 was primarily driven by the impacts of foreign tax credit regulations, geographical mix of income, incentives and changes in unrecognized tax benefits. The continuing operations benefit from income taxes for the first six months of 2021 was primarily related to the tax impacts from the resolution of certain tax audits in the first quarter of 2021. The increase in the operating (non-GAAP) income tax provision in the first six months of 2022, compared to the prior year was primarily driven by tax impacts from the resolution of certain tax audits in the first quarter of 2021.

Management Discussion – (continued)

IBM’s full-year tax provision and effective tax rate are impacted by recurring factors including the geographic mix of income before taxes, incentives, changes in unrecognized tax benefits and discrete tax events, such as the settlement of income tax audits and changes in or new interpretations of tax laws. The GAAP tax provision and effective tax rate could also be affected by adjustments to the previously recorded charges for U.S. tax reform attributable to any changes in law, new regulations and guidance, and audit adjustments, among others.

During the fourth quarter of 2020, the U.S. Internal Revenue Service (IRS) concluded its examination of the company’s U.S. income tax returns for 2013 and 2014, which had a specific focus on certain cross-border transactions that occurred in 2013 and issued a final Revenue Agent’s Report (RAR). The IRS’ proposed adjustments relative to these cross-border transactions, if sustained, would result in additional taxable income of approximately $4.5 billion. The company strongly disagrees with the IRS on these specific matters and filed its IRS Appeals protest in the first quarter of 2021. In the third quarter of 2018, the IRS commenced its audit of the company’s U.S. tax returns for 2015 and 2016. The company anticipates that this audit will be completed in 2022. In the fourth quarter of 2021, the IRS commenced its audit of the company’s U.S. tax returns for 2017 and 2018. With respect to major U.S. state and foreign taxing jurisdictions, the company is generally no longer subject to tax examinations for years prior to 2015. The company is no longer subject to income tax examination of its U.S. federal tax return for years prior to 2013. The open years contain matters that could be subject to differing interpretations of applicable tax laws and regulations as it relates to the amount and/or timing of income, deductions, and tax credits. Although the outcome of tax audits is always uncertain, the company believes that adequate amounts of tax, interest and penalties have been provided for any adjustments that are expected to result for these years.

The company is involved in a number of income tax-related matters in India as a result of tax assessments issued by the India Tax Authorities. At June 30, 2022, the company had recorded $676 million as prepaid income taxes in India. A significant portion of this balance represents cash tax deposits paid over time to protect the company’s right to appeal various income tax assessments made by the India Tax Authorities. Although the outcome of tax audits is always uncertain, the company believes that adequate amounts of tax, interest and penalties have been provided for any adjustments that are expected to result for these years.

The amount of unrecognized tax benefits at June 30, 2022 is $8,597 million which can be reduced by $540 million associated with timing adjustments, U.S. tax credits, potential transfer pricing adjustments, and state income taxes. The net amount of $8,057 million, if recognized, would favorably affect the company’s effective tax rate.

​

Management Discussion – (continued)

Earnings Per Share

Basic earnings per share is computed on the basis of the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share is computed on the basis of the weighted-average number of shares of common stock outstanding plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options and stock awards.

​​​​​​​​​​
​​​​​​​​Yr. to Yr.
​​​​​​​​Percent
For the three months ended June 30:20222021Change
Earnings per share of common stock from continuing operations:​​​
Assuming dilution​$1.61​$0.9078.9%
Basic​$1.62​$0.9178.0%
Diluted operating (non-GAAP)​$2.31​$1.6143.5%
Weighted-average shares outstanding: (in millions)​​​
Assuming dilution​910.7​904.20.7%
Basic​901.5​895.00.7%

​

​​​​​​​​​​
​​​​​​​​Yr. to Yr.
​​​​​​​​Percent
For the six months ended June 30:20222021Change
Earnings per share of common stock from continuing operations:​​​
Assuming dilution​$2.34​$1.3474.6%
Basic​$2.36​$1.3673.5%
Diluted operating (non-GAAP)​$3.71​$2.7335.9%
Weighted-average shares outstanding: (in millions)​​​
Assuming dilution​910.0​903.00.8%
Basic​900.4​894.30.7%

​

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

Financial Position

Dynamics

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

Cash, restricted cash and marketable securities at June 30, 2022 were $7,778 million, an increase of $222 million from December 31, 2021. Total debt of $50,309 million at June 30, 2022 decreased $1,394 million from December 31, 2021 primarily driven by currency impacts. We continue to manage our debt levels while being acquisitive and without sacrificing investments in our business or our solid dividend policy.

Our cash flow is presented on a consolidated basis and includes discontinued operations. Refer to note 3, “Separation of Kyndryl,” for additional information. In the first six months of 2022, we generated $4,569 million in cash from operating activities, compared to $7,539 million in the first six months of 2021, primarily due to financing receivables. We also invested $958 million in acquisitions and returned $2,963 million to shareholders through dividends in the first six months of 2022. Our cash generation permits us to invest and deploy capital to areas with the most attractive long-term opportunities.

Management Discussion – (continued)

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

IBM Working Capital

​​​​​​​
​​At June 30,​At December 31,
(Dollars in millions)20222021
Current assets​$27,896​$29,539
Current liabilities​31,844​33,619
Working capital​$(3,948)​$(4,080)
Current ratio​0.88:1​0.88:1

​

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

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

●A decline in receivables of $1,760 million ($1,120 million adjusted for currency) mainly due to collections of higher year-end balances; partially offset by
●An increase of $222 million ($555 million adjusted for currency) in cash, restricted cash and marketable securities.

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

●A decrease in short-term debt of $805 million ($812 million adjusted for currency) due to maturities of $3,891 million; partially offset by reclassifications of $3,120 million from long-term debt to reflect upcoming maturities;
●A decrease in taxes payable of $547 million ($428 million adjusted for currency) primarily due to indirect tax payments;
●A decrease in accounts payable of $248 million ($121 million adjusted for currency) primarily due to declines from seasonally higher year-end balances; and
●A decrease in other accrued expenses and liabilities of $211 million (an increase of $490 million adjusted for currency) primarily due to payments of $374 million for workforce rebalancing actions, partially offset by an increase in derivatives of $206 million; partially offset by
●An increase in deferred income of $4 million or $523 million adjusted for currency primarily driven by annual customer billings and an increase in software renewal rates.

Receivables and Allowances

Roll Forward of Total IBM Receivables Allowance for Credit Losses

​​​​​​​​​​​​​​
(Dollars in millions)​​​​​​​​​​​​
January 1, 2022**Additions / (Releases) *****Write-offs ****Foreign currency and otherJune 30, 2022
$443​$29​$(40)​$(12)​$420
*Additions/(Releases) for Allowance for Credit Losses are recorded in expense.
**Refer to note A, “Significant Accounting Policies,” in our 2021 Annual Report for additional information regarding allowance for credit loss write-offs.

Management Discussion – (continued)

Excluding receivables classified as held for sale, the total IBM receivables provision coverage was 2.2 percent at June 30, 2022, an increase of 10 basis points compared to December 31, 2021. The increase was primarily driven by the decline in total receivables. The majority of the write-offs during the six months ended June 30, 2022 related to receivables which had been previously reserved.

Financing Segment Receivables and Allowances

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

​​​​​​​​
​​At June 30,​At December 31,
(Dollars in millions)20222021
Amortized cost *​$12,123​$12,859​
Specific allowance for credit losses​135​159​
Unallocated allowance for credit losses​37​42​
Total allowance for credit losses​172​201​
Net financing receivables​$11,951​$12,658​
Allowance for credit losses coverage​1.4%1.6%
  • Includes deferred initial direct costs which are expensed in IBM’s consolidated financial results.

​

The percentage of Financing segment receivables reserved decreased from 1.6 percent at December 31, 2021, to 1.4 percent at June 30, 2022, primarily driven by write-offs of previously reserved receivables.

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

​​​​​​​​​​​​​​
(Dollars in millions)​​​​
January 1, 2022​Additions / (Releases)*​**Write-offs ****​Foreign currency and other​June 30, 2022
$201​$(10)​$(18)​$0​$172
*Additions/(Releases) for Allowance for Credit Losses are recorded in expense.
**Refer to note A, “Significant Accounting Policies,” in our 2021 Annual Report for additional information regarding allowance for credit loss write-offs.

Financing’s expected credit loss expense (including reserves for off-balance sheet commitments which are recorded in other liabilities) was a net release of $2 million and $12 million for the three and six months ended June 30, 2022, respectively, compared to a net release of $12 million and $29 million for the three and six months ended June 30, 2021, respectively. The declines in net releases in both periods of 2022 were primarily driven by lower unallocated reserve requirements in the prior year in Americas due to sales of receivables.

Noncurrent Assets and Liabilities

​​​​​​​
​​At June 30,​At December 31,
(Dollars in millions)20222021
Noncurrent assets​$99,607​$102,462
Long-term debt​$44,328​$44,917
Noncurrent liabilities (excluding debt)​$31,855​$34,469

​

​

Management Discussion – (continued)

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

●A decrease in goodwill and net intangible assets of $1,544 million ($426 million adjusted for currency) primarily driven by currency impacts, intangibles amortization and derecognition of goodwill and intangible assets of $647 million related to the divestiture of our healthcare software assets, partially offset by additions from new acquisitions; and
●A decrease in net property, plant and equipment and operating right-of-use assets of $793 million ($500 million adjusted for currency).

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

●Reclassifications to short-term debt of $3,120 million to reflect upcoming maturities and currency impacts; partially offset by
●Issuances of $4,085 million.

Noncurrent liabilities (excluding debt) decreased $2,615 million ($1,189 million adjusted for currency) due to:

●A decrease in retirement and postretirement benefit obligations of $1,317 million ($550 million adjusted for currency);
●A decrease of $510 million in other liabilities primarily due to currency impacts of $391 million;
●A decrease of $508 million ($348 million adjusted for currency) in deferred income reflecting seasonal reductions from higher year-end balances; and
●A decrease in long-term operating lease liabilities of $280 million ($172 million adjusted for currency) related primarily to real estate leases.

Debt

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

​​​​​​​
​​At June 30,​At December 31,
(Dollars in millions)20222021
Total company debt​$50,309​$51,703
Financing segment debt*​$12,265​$13,929
Non-Financing debt​$38,044​$37,775
  • Financing segment debt includes debt of $1,140 million at June 30, 2022 and $1,345 million at December 31, 2021 to support intercompany financing receivables and other intercompany assets. Refer to Financing’s “Financial Position” on page 88 for additional details.

​

Total debt of $50,309 million decreased $1,394 million ($72 million adjusted for currency) from December 31, 2021, primarily driven by maturities of $3,941 million and currency impacts, partially offset by issuances of $4,419 million.

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

Management Discussion – (continued)

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

Financing provides financing solutions predominantly for IBM’s external client assets, and the debt used to fund Financing assets is primarily composed of intercompany loans. Total debt changes generally correspond with the level of client and commercial financing receivables, the level of cash and cash equivalents, the change in intercompany and external payables and the change in intercompany investment from IBM. The terms of the intercompany loans are set by the company to substantially match the term, currency and interest rate variability underlying the financing receivable and are based on arm’s-length pricing. The Financing debt-to-equity ratio remained at 9.0 to 1 at June 30, 2022.

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

Equity

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

Cash Flow

Our cash flows from operating, investing and financing activities, as reflected in the Consolidated Statement of Cash Flows on page 7, are summarized in the table below and include the cash flows of discontinued operations. These amounts also include the cash flows associated with the Financing business.

​​​​​​​
(Dollars in millions)​​​​​​
For the six months ended June 30:20222021
Net cash provided by/(used in):​​
Operating activities​$4,569​$7,539
Investing activities​(1,186)​(4,671)
Financing activities​(2,819)​(8,914)
Effect of exchange rate changes on cash, cash equivalents and restricted cash​(267)​(65)
Net change in cash, cash equivalents and restricted cash​$297​$(6,110)

​

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

●A decrease of cash provided by financing receivables of $3,396 million primarily driven by higher prior-year sales of receivables and z16 product cycle dynamics; partially offset by
●A decrease in workforce rebalancing payments of $685 million; and
●An increase in cash from working capital improvements of $484 million.

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

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

Management Discussion – (continued)

●An increase in cash provided by divestitures of $1,293 million; and
●A decrease in cash used in net capital expenditures of $346 million.

Net cash used in financing activities decreased $6,094 million driven primarily by:

●A decrease in net cash used in debt transactions of $6,233 million primarily driven by higher maturities in the prior year and net issuances in the current year.

Results of Discontinued Operations

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

Looking Forward

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

Hybrid Cloud and AI Progress

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

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

Critical to our platform-centric strategy is our ecosystem of partners. We continue to expand and extend our partnerships, through strategic collaboration agreements and in the second quarter of 2022, revenue from these partnerships grew solid double digits.

Management Discussion – (continued)

We continue to invest, both organically and inorganically, to deliver innovation for our clients. Our ability to deliver next generation technologies remains essential. Quantum is an example of our commitment to advance the future of technology. We continue to build on our progress toward our roadmap to deliver a 1,000+ qubit system in 2023 and a 4,000+ qubit system in 2025. In addition, technology developed by IBM and our collaborators has been selected by the National Institute of Standards and Technology (NIST) as the basis of the next generation of quantum-safe encryption protocols. Another example of innovation is our z16 system which became generally available in the second quarter of 2022. The z16 brings to our clients the power of embedded AI at scale, cyber-resilient security and cloud-native development for hybrid cloud. We also made another two acquisitions in the second quarter of 2022 to strengthen our portfolio, including Randori, a leading attack surface management (ASM) and cybersecurity provider, building on the recent acquisitions of ReaQta and launch of QRadar XDR.

We are confident in the strategy that we are executing and in the fundamentals of our business. Our balance sheet and liquidity position remain strong. At June 30, 2022 we had $7.8 billion of cash and cash equivalents, restricted cash and marketable securities and we continue to manage our debt levels while being acquisitive and without sacrificing investments in our business or our solid dividend policy. IBM is now a more focused, faster-growing and higher-value company. We expect to continue our progress as a leading hybrid cloud and AI company with a focus on revenue growth and cash generation while maintaining our solid and modestly growing dividend policy. Our mid-term financial model was previously communicated at our investor briefing on October 4, 2021.

Retirement-Related Plans

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

Currency Rate Fluctuations

​

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

The combination of the rate and velocity of movements in currency, and the fact that we do not hedge 100 percent of our currency exposures, will result in a currency impact to our profit and cash flows in 2022. We maintain currency hedging programs for cash management purposes which temporarily mitigate, but do not eliminate, the volatility of currency impacts on our financial results. During periods of sustained movements in currency, the marketplace and competition adjust to the changing rates over time.

We translate revenue, cost and expense in our non-U.S. operations at current exchange rates in the reported period. References to “adjusted for currency” or “constant currency” reflect adjustments based upon a simple mathematical formula. However, this constant currency methodology that we utilize to disclose this information does not incorporate any operational actions that management could take to mitigate fluctuating currency rates, such as updates to pricing and sourcing. Currency movements impacted our year-to-year revenue and earnings per share growth in the first six months of 2022. Based on the currency rate movements in the first six months of 2022, total revenue increased 8.5 percent as reported and 13.3 percent at constant currency versus the first six months of 2021. On an income from continuing

Management Discussion – (continued)

operations before income taxes basis, these translation impacts, mitigated by the net impact of hedging activities, resulted in a theoretical maximum (assuming no pricing or sourcing actions) decrease of approximately $200 million in the first six months of 2022 on an as-reported basis and a decrease of approximately $160 million on an operating (non-GAAP) basis. The same mathematical exercise resulted in an increase of approximately $65 million in the first six months of 2021 on an as-reported basis and an increase of $100 million on an operating (non-GAAP) basis. We view these amounts as a theoretical maximum impact to our as-reported financial results. Considering the operational responses mentioned above, movements of exchange rates, and the nature and timing of hedging instruments, it is difficult to predict future currency impacts on any particular period.

For non-U.S. subsidiaries and branches that operate in U.S. dollars or whose economic environment is highly inflationary, translation adjustments are reflected in results of operations. Generally, we manage currency risk in these entities by linking prices and contracts to U.S. dollars.

Liquidity and Capital Resources

In our 2021 Annual Report, on pages 47 to 49, there is a discussion of our liquidity including two tables that present three years of data. The table presented on page 47 includes net cash from operating activities, cash and cash equivalents, restricted cash and short-term marketable securities, and the size of our global credit facilities for each of the past three years. For the six months ended, or at, as applicable, June 30, 2022, those amounts are $4.6 billion of net cash from operating activities, $7.8 billion of cash and cash equivalents, restricted cash and short-term marketable securities and $10.0 billion in global credit facilities, respectively. While we have no current plans to draw on these credit facilities, they are available as back-up liquidity. On June 30, 2022, the company amended its existing $2.5 billion Three-Year Credit Agreement and $7.5 billion Five-Year Credit Agreement (the Credit Agreements) to extend the maturity dates to June 20, 2025 and June 22, 2027, respectively, and to replace the London Interbank Offered Rate (LIBOR) interest rate provisions with customary provisions based on the Secured Overnight Financing Rate (SOFR). Refer to note 12, “Borrowings,” for additional details on these credit facilities.

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

​​​​​
​​STANDARD​MOODY’S
​​AND​INVESTORS
IBM RATINGS:POOR’SSERVICE
Senior long-term debtA-A3
Commercial paperA-2Prime-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 $1.4 billion from December 31, 2021, primarily driven by currency, and $22.7 billion from our peak levels at June 30, 2019 (immediately preceding the Red Hat acquisition).

We do not have “ratings trigger” provisions in our debt covenants or documentation, which would allow the holders to declare an event of default and seek to accelerate payments thereunder in the event of a change in credit rating. Our debt covenants are well within the required levels. Our contractual agreements governing derivative instruments contain standard market clauses which can trigger the termination of the agreement if our credit rating were to fall below investment grade. At June 30, 2022, the fair value of those instruments that were in a liability position was $551 million, before any applicable netting, and this position is subject to fluctuations in fair value period to period based on the level of our outstanding instruments and market conditions. We have no other contractual arrangements that, in the event of a change in credit rating, would result in a material adverse effect on our financial position or liquidity.

Effective December 31, 2021, the use of LIBOR was substantially eliminated for purposes of any new financial contract executions. The UK’s Financial Conduct Authority (FCA) extended the phase out of LIBOR in the case of U.S. dollar settings for certain tenors until the end of June 2023. Any legacy USD LIBOR based financial contracts are

Management Discussion – (continued)

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

We prepare our Consolidated Statement of Cash Flows in accordance with applicable accounting standards for cash flow presentation on page 7 of this Form 10-Q and highlight causes and events underlying sources and uses of cash in that format on pages 82 and 83. For the purpose of running its business, IBM manages, monitors and analyzes cash flows in a different manner.

Management uses free cash flow as a measure to evaluate its operating results, plan shareholder return levels, strategic investments and assess its ability and need to incur and service debt. The entire free cash flow amount is not necessarily available for discretionary expenditures. We define free cash flow as net cash from operating activities less the change in Financing receivables and net capital expenditures, including the investment in software. A key objective of the Financing business is to generate strong returns on equity, and our Financing receivables are the basis for that growth. Accordingly, management considers Financing receivables as a profit-generating investment, not as working capital that should be minimized for efficiency. Therefore, management includes presentations of both free cash flow and net cash from operating activities that exclude the effect of Financing receivables.

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

​​​​​​​
(Dollars in millions)​​​​​​
For the six months ended June 30:20222021
Net cash from operating activities per GAAP*​$4,569​$7,539
Less: change in Financing receivables​367​3,763
Net cash from operating activities, excluding Financing receivables​$4,202​$3,776
Capital expenditures, net​(871)​(1,217)
Free cash flow​$3,331​$2,559
Acquisitions​(958)​(2,866)
Divestitures​1,268​(25)
Common stock repurchases for tax withholdings​(315)​(234)
Dividends​(2,963)​(2,924)
Non-Financing debt​1,740​(2,331)
Other (includes Financing net receivables and Financing debt)​(1,882)​(288)
Change in cash, cash equivalents, restricted cash and short-term marketable securities​$221​$(6,110)
  • Includes cash flows of discontinued operations. See note 3, “Separation of Kyndryl,” for additional information.

​

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

Events that could temporarily change the historical cash flow dynamics discussed previously and in our 2021 Annual Report include significant changes in operating results, material changes in geographic sources of cash, unexpected adverse impacts from litigation, future pension funding requirements, periods of severe downturn in the capital markets or the timing of tax payments. Whether any litigation has such an adverse impact will depend on a number of variables, which are more completely described in note 14, “Contingencies,” in this Form 10-Q. With respect to pension funding, we expect to make legally mandated pension plan contributions to certain non-U.S. defined benefit plans of approximately $200 million in 2022. Contributions related to all retirement-related plans are expected to be approximately $2.1 billion in 2022. Financial market performance could increase the legally mandated minimum contributions in certain non-U.S. countries that require more frequent remeasurement of the funded status. We are not

Management Discussion – (continued)

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

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

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

Financing

Financing is a reportable segment that is measured as a stand-alone entity. Financing facilitates IBM clients’ acquisition of information technology systems, software and services by providing financing solutions in the areas where the company has the expertise, while generating solid returns on equity.

Results of Operations

​​​​​​​​​​
​​​​​​​​​​
​​​​​​​​Yr. to Yr.​
(Dollars in millions)​​​​​​​Percent​
For the three months ended June 30:20222021*Change​
Revenue​$146​$209(29.9)%
Pre-tax income​$102​$131(22.4)%
  • Recast to reflect 2021 segment changes.
​​​​​​​​​​
​​​​​​​​Yr. to Yr.​
(Dollars in millions)​​​​​​​Percent​
For the six months ended June 30:20222021*Change​
Revenue​$300​$417(28.0)%
Pre-tax income​$186​$229(18.9)%
  • Recast to reflect 2021 segment changes.

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

Financing pre-tax income decreased 22.4 percent to $102 million in the second quarter of 2022, compared to the prior year and the pre-tax margin of 69.7 percent increased 6.8 points year to year. For the six months ended June 30, 2022, Financing pre-tax income decreased 18.9 percent to $186 million compared to the prior year and the pre-tax margin of 62.0 percent increased 7.0 points year to year. The decreases in pre-tax income in both periods in 2022 were primarily driven by the strategic actions described above.

Management Discussion – (continued)

Financial Position

​​​​​​​
​​At June 30,​At December 31,
(Dollars in millions)20222021
Cash and cash equivalents​$700​$1,359
Client financing receivables:​​​​​​
Net investment in sales-type and direct financing leases(1)​3,888​3,396
Client loans​7,891​8,818
Total client financing receivables​$11,779​$12,215
Commercial financing receivables:​​​​
Held for investment​​171​​444
Held for sale​​614​​793
Other receivables​​53​​61
Total external receivables(2)​$12,618​$13,512
Intercompany financing receivables(3) (4)​664​778
Other assets(5)​​1,046​​1,231
Total assets​$15,028​$16,880
​​​​​​​
Intercompany payables(3)​$394​$467
Debt(6)​​12,265​​13,929
Other liabilities​​1,006​​937
Total liabilities​$13,665​$15,333
Total equity​$1,363​$1,547
Total liabilities and equity​$15,028​$16,880
(1)Includes deferred initial direct costs which are expensed in IBM’s consolidated financial results.
(2)The difference between the decrease in total external receivables of $0.9 billion (from $13.5 billion in December 2021 to $12.6 billion in June 2022) and the $0.4 billion change in Financing segment’s receivables disclosed in the free cash flow presentation on page 86 is primarily attributable to currency impacts.
(3)This entire amount is eliminated for purposes of IBM’s consolidated financial results and therefore does not appear in the Consolidated Balance Sheet.
(4)These assets, along with all other financing assets in this table, are leveraged at the value in the table using Financing segment debt.
(5)Includes $0.6 billion of other intercompany assets in June 2022 and $0.7 billion in December 2021.
(6)Financing segment debt is primarily composed of intercompany loans.

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

At June 30, 2022, we continue to apply our rigorous credit policies. Approximately 71 percent of the total external portfolio was with investment-grade clients with no direct exposure to consumers, an increase of 7 points year to year and an increase of 3 points compared to March 31, 2022. This investment grade percentage is based on the credit ratings of the companies in the portfolio and reflects certain mitigating actions taken to reduce the risk to IBM.

We have a long-standing practice of taking mitigation actions, in certain circumstances, to transfer credit risk to third parties. These actions may include credit insurance, financial guarantees, nonrecourse borrowings, transfers of receivables recorded as true sales in accordance with accounting guidance or sales of equipment under operating lease. Sale of receivables arrangements are also utilized in the normal course of business as part of our cash and liquidity management.

Throughout 2021, sales of client financing receivables were utilized as part of the company’s cash and liquidity management as well as for credit mitigation. In the first half of 2022, sales of client financing receivables were largely focused on credit mitigation. In addition, the company has an existing agreement with a third-party investor to sell IBM

Management Discussion – (continued)

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

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

​​​​​​​
(Dollars in millions)​
For the six months ended June 30:​2022​2021
Client financing receivables:​​​​​​
Lease receivables​$15​$732
Loan receivables​2​1,359
Total client financing receivables transferred​$17​$2,091
Commercial financing receivables:​​​​​​
Receivables transferred during the period​$3,914​$2,621
Receivables uncollected at end of period*​$815​$821
*Of the total amount of commercial financing receivables sold and derecognized from the Consolidated Balance Sheet, the amounts presented remained uncollected from the business partners as of June 30, 2022 and 2021.

For additional information relating to financing receivables refer to note 9, “Financing Receivables.” Refer to pages 26 through 30 for additional information related to Financing segment receivables, allowance for credit losses and debt.

Return on Equity Calculation

​​​​​​​​​​​​​​
​​For Three Months Ended​For Six Months Ended​
​​June 30,​June 30,​
(Dollars in millions)​2022​2021*​20222021*
Numerator​​​​​​​​​​
Financing after-tax income**​$84​$97​$153​$169​
Annualized after-tax income (1)​$336​$388​$305​$339​
Denominator​​​​​​​​​
Average Financing equity (2)+​$1,358​$1,978​$1,421​$2,100​
Financing return on equity (1)/(2)​24.8%19.6%21.5%16.1%
*Recast to reflect 2021 segment changes.

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

ÈAverage of the ending equity for Financing for the last two quarters and three quarters, for the three months ended June 30 and for the six months ended June 30, respectively.

​

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

Residual Value

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

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

Management Discussion – (continued)

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

Unguaranteed Residual Value

​​​​​​​​​​​​​​​​​​​
​​At​At​Estimated Run Out of June 30, 2022 Balance
​​December 31,​June 30,​​​​​​​​​​2025 and
(Dollars in millions)20212022202220232024Beyond
Sales-type and direct financing leases​$335​$383​$59​$112​$72​$140
Operating leases​13​8​5​2​0​0
Total unguaranteed residual value​$348​$390​$64​$114​$72​$141

​

​

Management Discussion – (continued)

​

GAAP Reconciliation

The tables below provide a reconciliation of our income statement results as reported under GAAP to our operating earnings presentation which is a non-GAAP measure. Management’s calculation of operating (non-GAAP) earnings, as presented, may differ from similarly titled measures reported by other companies. Refer to the “Operating (non-GAAP) Earnings” section for management’s rationale for presenting operating earnings information.

​​​​​​​​​​​​​​​​​​​​
​​​​​Acquisition-​Retirement-​U.S.​Kyndryl-​​​
(Dollars in millions except per share amounts)​​​​Related​Related​Tax Reform​Related​Operating
For the three months ended June 30, 2022:GAAPAdjustmentsAdjustmentsImpactsImpacts​(non-GAAP)
Gross profit​$8,290​$180​$—​$—​$—​$8,470​
Gross profit margin​53.4%1.2pts.—pts.—pts.​—pts.54.5%
S,G&A​$4,855​$(279)​$—​$—​$0​$4,576​
Other (income) and expense​(81)​(1)​(192)​—​​(145)​(418)​
Total expense and other (income)​6,568​(280)​(192)​—​​(145)​5,952​
Pre-tax income from continuing operations​1,722​460​192​—​​145​2,518​
Pre-tax margin from continuing operations​11.1%3.0pts.1.2pts.—pts.​0.9pts.16.2%
Provision for (benefit from) income taxes*​$257​$115​$46​$(4)​$—​$413​
Effective tax rate​14.9%1.8pts.0.7pts.(0.2)pts.​(0.9)pts.16.4%
Income from continuing operations​$1,465​$345​$146​$4​$145​$2,105​
Income margin from continuing operations​9.4%2.2pts.0.9pts.0.0pts.​0.9pts.13.5%
Diluted earnings per share from continuing operations​$1.61​$0.38​$0.16​$0.00​$0.16​$2.31​

​

​​​​​​​​​​​​​​​​​​​​
​​​​​Acquisition-​Retirement-​U.S.​Kyndryl-​​​
(Dollars in millions except per share amounts)​​​​Related​Related​Tax Reform​Related​Operating
For the three months ended June 30, 2021:GAAPAdjustmentsAdjustmentsImpactsImpacts​(non-GAAP)
Gross profit​$7,852​$179​$—​$—​$—​$8,031​
Gross profit margin​55.2%1.3pts.—pts.—pts.​—pts.56.5%
S,G&A​$4,849​$(294)​$—​$—​$—​$4,555​
Other (income) and expense​302​(1)​(317)​—​​—​(16)​
Total expense and other (income)​6,940​(294)​(317)​—​​—​6,329​
Pre-tax income from continuing operations​912​474​317​—​​—​1,702​
Pre-tax margin from continuing operations​6.4%3.3pts.2.2pts.—pts.​—pts.12.0%
Provision for (benefit from) income taxes*​$101​$105​$53​$(14)​$—​$246​
Effective tax rate​11.1%3.1pts.1.0pts.(0.8)pts.​—pts.14.5%
Income from continuing operations​$810​$368​$264​$14​$—​$1,456​
Income margin from continuing operations​5.7%2.6pts.1.9pts.0.1pts.​—pts.10.2%
Diluted earnings per share from continuing operations​$0.90​$0.41​$0.29​$0.01​$—​$1.61​
  • The tax impact on operating (non-GAAP) pre-tax income from continuing operations is calculated under the same accounting principles applied to the GAAP pre-tax income which employs an annual effective tax rate method to the results.

​

​

Management Discussion – (continued)

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

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

​

Management Discussion – (continued)

Forward-Looking and Cautionary Statements

Except for the historical information and discussions contained herein, statements contained in this Form 10-Q may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on the company’s current assumptions regarding future business and financial performance. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, including, but not limited to, the following: a downturn in economic environment and client spending budgets; a failure of the company’s innovation initiatives; damage to the company’s reputation; risks from investing in growth opportunities; failure of the company’s intellectual property portfolio to prevent competitive offerings and the failure of the company to obtain necessary licenses; the company’s ability to successfully manage acquisitions, alliances and dispositions, including integration challenges, failure to achieve objectives, the assumption of liabilities, and higher debt levels; fluctuations in financial results; impact of local legal, economic, political, health and other conditions; the company’s failure to meet growth and productivity objectives; ineffective internal controls; the company’s use of accounting estimates; impairment of the company’s goodwill or amortizable intangible assets; the company’s ability to attract and retain key employees and its reliance on critical skills; impacts of relationships with critical suppliers; product quality issues; impacts of business with government clients; reliance on third party distribution channels and ecosystems; cybersecurity and data privacy considerations; adverse effects related to climate change and environmental matters, tax matters; legal proceedings and investigatory risks; the company’s pension plans; currency fluctuations and customer financing risks; impact of changes in market liquidity conditions and customer credit risk on receivables; potential failure of the separation of Kyndryl to qualify for tax-free treatment; risk factors related to IBM securities; and other risks, uncertainties and factors discussed in the company’s Form 10-Qs, Form 10-K and in the company’s other filings with the U.S. Securities and Exchange Commission or in materials incorporated therein by reference. Any forward-looking statement in this Form 10-Q speaks only as of the date on which it is made. Except as required by law, the company assumes no obligation to update or revise any forward-looking statements.

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