UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTER ENDED MARCH 31, ~~2020~~2021

1-2360

(Commission file number)

INTERNATIONAL BUSINESS MACHINES CORPORATION

(Exact name of registrant as specified in its charter)

New York	13-0871985
(State of incorporation)	(IRS employer identification number)

One New Orchard Road Armonk, New York	10504
(Address of principal executive offices)	(Zip Code)

914-499-1900

(Registrant’s telephone number)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading symbol	Name of each exchange on which registered
Capital stock, par value $.20 per share	IBM	New York Stock Exchange
		NYSE Chicago
~~2.750% Notes due 2020~~	~~IBM 20B~~	~~New York Stock Exchange~~
~~1.875% Notes due 2020~~	~~IBM 20A~~	~~New York Stock Exchange~~
0.500% Notes due 2021	IBM 21B	New York Stock Exchange
2.625% Notes due 2022	IBM 22A	New York Stock Exchange
1.250% Notes due 2023	IBM 23A	New York Stock Exchange
0.375% Notes due 2023	IBM 23B	New York Stock Exchange
1.125% Notes due 2024	IBM 24A	New York Stock Exchange
2.875% Notes due 2025	IBM 25A	New York Stock Exchange
0.950% Notes due 2025	IBM 25B	New York Stock Exchange
0.875% Notes due 2025	IBM 25C	New York Stock Exchange
0.300% Notes due 2026	IBM 26B	New York Stock Exchange
1.250% Notes due 2027	IBM 27B	New York Stock Exchange
0.300% Notes due 2028	IBM 28B	New York Stock Exchange
1.750% Notes due 2028	IBM 28A	New York Stock Exchange
1.500% Notes due 2029	IBM 29	New York Stock Exchange
1.750% Notes due 2031	IBM 31	New York Stock Exchange
0.650% Notes due 2032	IBM 32A	New York Stock Exchange
1.200% Notes due 2040	IBM 40	New York Stock Exchange
7.00% Debentures due 2025	IBM 25	New York Stock Exchange
6.22% Debentures due 2027	IBM 27	New York Stock Exchange
6.50% Debentures due 2028	IBM 28	New York Stock Exchange
7.00% Debentures due 2045	IBM 45	New York Stock Exchange
7.125% Debentures due 2096	IBM 96	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section l3 or l5(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☒	Accelerated filer ☐
Non-accelerated filer ☐	Smaller reporting company ☐
	Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The registrant had ~~887,891,957~~893,522,828 shares of common stock outstanding at March 31, ~~2020.~~2021.

Table of Contents

Index

9
	Page
~~Part I - Financial Information~~:

~~Item 1. Consolidated Financial Statements (Unaudited)~~:

~~Consolidated Income Statement for the three months ended March 31, 2020 and 2019~~	3

~~Consolidated Statement of Comprehensive Income for the three months ended March 31, 2020 and 2019~~	4

~~Consolidated Balance Sheet at March 31, 2020 and December 31, 2019~~	5

~~Consolidated Statement of Cash Flows for the three months ended March 31, 2020 and 2019~~	7

~~Consolidated Statement of Equity for the three months ended March 31, 2020 and 2019~~	8

~~Notes to Consolidated Financial Statements~~	9

~~Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition~~	44

~~Item 4. Controls and Procedures~~	74

~~Part II - Other Information~~:

~~Item 1. Legal Proceedings~~	75

~~Item 2. Unregistered Sales of Equity Securities and Use of Proceeds and Issuer Repurchases of Equity Securities~~	75

~~Item 6. Exhibits~~	76

~~Table of Contents~~

Part I - Financial Information:

Item 1. Consolidated Financial ~~Statements:~~Statements (Unaudited):

~~INTERNATIONAL BUSINESS MACHINES CORPORATION~~

~~AND SUBSIDIARY COMPANIES~~

~~CONSOLIDATED INCOME STATEMENT~~

~~(UNAUDITED)~~

Three Months Ended March 31,

(Dollars in millions except per share amounts)

2020

2019

Revenue:





Services

$
11,373

$
11,915
*
Sales

5,895

5,862
*
Financing

302

404

Total revenue

17,571

18,182

Cost:





Services

7,843

8,272
*
Sales

1,624

1,603
*
Financing

181

264

Total cost

9,649

10,139

Gross profit

7,922

8,043

Expense and other (income):





Selling, general and administrative

5,955

4,691

Research, development and engineering

1,625

1,433

Intellectual property and custom development income

(116)

(101)

Other (income) and expense

182

(73)

Interest expense

326

210

Total expense and other (income)

7,972

6,160

Income/(loss) from continuing operations before income taxes

(49)

1,883

Provision for/(benefit from) income taxes

(1,226)

289

Income from continuing operations

$
1,176

$
1,593

Income/(loss) from discontinued operations, net of tax

(1)

(2)

Net income

$
1,175

$
1,591

Earnings/(loss) per share of common stock:





Assuming dilution:





Continuing operations

$
1.31

$
1.78

Discontinued operations

0.00

0.00

Total

$
1.31

$
1.78

Basic:





Continuing operations

$
1.32

$
1.79

Discontinued operations

0.00

0.00

Total

$
1.32

$
1.79

Weighted-average number of common shares outstanding: (millions)





Assuming dilution

895.0

893.9

Basic

888.0

889.6

* Reclassified

Consolidated Income Statement for the three months ended March 31, 2021 and 2020

Consolidated Statement of Comprehensive Income for the three months ended March 31, 2021 and 2020

Consolidated Balance Sheet at March 31, 2021 and December 31, 2020

Consolidated Statement of Cash Flows for the three months ended March 31, 2021 and 2020

Consolidated Statement of Equity for the three months ended March 31, 2021 and 2020

Notes to ~~conform to current period presentation. Refer to note 1, “Basis~~Consolidated Financial Statements

Item 2. Management’s Discussion and Analysis of ~~Presentation,” for additional information.~~Results of Operations and Financial Condition

Item 4. Controls and Procedures

Part II - Other Information:

Item 1. Legal Proceedings

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds and Issuer Repurchases of Equity Securities

Item 6. Exhibits

Table of Contents

Part I - Financial Information

Item 1. Consolidated Financial Statements:

INTERNATIONAL BUSINESS MACHINES CORPORATION

AND SUBSIDIARY COMPANIES

CONSOLIDATED INCOME STATEMENT

(UNAUDITED)


	Three Months Ended March 31,
(Dollars in millions except per share amounts)	2021		2020
Revenue:
Services	$	11,404	$	11,373
Sales		6,083		5,895
Financing		242		302
Total revenue		17,730		17,571
Cost:
Services		7,775		7,843
Sales		1,585		1,624
Financing		165		181
Total cost		9,525		9,649
Gross profit		8,204		7,922
Expense and other (income):
Selling, general and administrative		5,174		5,955
Research, development and engineering		1,630		1,625
Intellectual property and custom development income		(147)		(116)
Other (income) and expense		362		182
Interest expense		280		326
Total expense and other (income)		7,299		7,972
Income/(loss) from continuing operations before income taxes		905		(49)
Provision for/(benefit from) income taxes		(51)		(1,226)
Income from continuing operations	$	956	$	1,176
Income/(loss) from discontinued operations, net of tax		(1)		(1)
Net income	$	955	$	1,175

Earnings/(loss) per share of common stock:
Assuming dilution:
Continuing operations	$	1.06	$	1.31
Discontinued operations		0.00		0.00
Total	$	1.06	$	1.31
Basic:
Continuing operations	$	1.07	$	1.32
Discontinued operations		0.00		0.00
Total	$	1.07	$	1.32

Weighted-average number of common shares outstanding: (millions)
Assuming dilution		901.7		895.0
Basic		893.6		888.0

(Amounts may not add due to rounding.)

(The accompanying notes are an integral part of the financial statements.)

Table of Contents

INTERNATIONAL BUSINESS MACHINES CORPORATION

AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(UNAUDITED)


	Three Months Ended March 31,				Three Months Ended March 31,
(Dollars in millions)	2020		2019		2021		2020
Net income	$	1,175	$	1,591	$	955	$	1,175
Other comprehensive income/(loss), before tax:
Foreign currency translation adjustments		(919)		171		549		(919)
Net changes related to available-for-sale securities:
Unrealized gains/(losses) arising during the period		0		(1)		0		0
Reclassification of (gains)/losses to net income		—		—		—		—
Total net changes related to available-for-sale securities		0		(1)		0		0
Unrealized gains/(losses) on cash flow hedges:
Unrealized gains/(losses) arising during the period		(180)		(352)		187		(180)
Reclassification of (gains)/losses to net income		91		98		160		91
Total unrealized gains/(losses) on cash flow hedges		(90)		(254)		347		(90)
Retirement-related benefit plans:
Prior service costs/(credits)		(4)		—		0		(4)
Net (losses)/gains arising during the period		8		(4)		20		8
Curtailments and settlements		8		1		17		8
Amortization of prior service (credits)/costs		1		(3)		3		1
Amortization of net (gains)/losses		570		464		648		570
Total retirement-related benefit plans		582		458		689		582
Other comprehensive income/(loss), before tax		(427)		375		1,586		(427)
Income tax (expense)/benefit related to items of other comprehensive income		(260)		(67)		(505)		(260)
Other comprehensive income/(loss), net of tax		(686)		308		1,080		(686)
Total comprehensive income/(loss)	$	489	$	1,899	$	2,036	$	489

(Amounts may not add due to rounding.)

(The accompanying notes are an integral part of the financial statements.)

Table of Contents

INTERNATIONAL BUSINESS MACHINES CORPORATION

AND SUBSIDIARY COMPANIES

CONSOLIDATED BALANCE SHEET

(UNAUDITED)

ASSETS


	At March 31,		At December 31,		At March 31,		At December 31,
(Dollars in millions)	2020		2019		2021		2020
Assets:
Current assets:
Cash and cash equivalents	$	11,218	$	8,172	$	10,531	$	13,212
Restricted cash		152		141		142		463
Marketable securities		647		696		600		600
Notes and accounts receivable — trade (net of allowances of $337 in 2020 and $299 in 2019)		6,927		7,870
Short-term financing receivables (net of allowances of $186 in 2020 and $188 in 2019)		12,126		14,192
Other accounts receivable (net of allowances of $28 in 2020 and $33 in 2019)		1,616		1,733
Notes and accounts receivable — trade (net of allowances of $345 in 2021 and $351 in 2020)						6,458		7,132
Short-term financing receivables (net of allowances of $200 in 2021 and $218 in 2020)						8,822		10,892
Other accounts receivable (net of allowances of $16 in 2021 and $28 in 2020)						787		714
Inventory, at lower of average cost or net realizable value:
Finished goods		298		220		234		190
Work in process and raw materials		1,488		1,399		1,594		1,649
Total inventory		1,786		1,619		1,828		1,839
Deferred costs		1,948		1,896		2,223		2,107
Prepaid expenses and other current assets		2,509		2,101		2,647		2,206
Total current assets		38,931		38,420		34,038		39,165
Property, plant and equipment		31,089		32,028		32,269		33,176
Less: Accumulated depreciation		21,464		22,018		22,817		23,136
Property, plant and equipment — net		9,626		10,010		9,452		10,040
Operating right-of-use assets — net		4,871		4,996		4,483		4,686
Long-term financing receivables (net of allowances of $52 in 2020 and $33 in 2019)		7,708		8,712
Long-term financing receivables (net of allowances of $36 in 2021 and $45 in 2020)						5,922		7,086
Prepaid pension assets		6,933		6,865		7,800		7,610
Deferred costs		2,459		2,472		2,336		2,449
Deferred taxes		8,782		5,182		8,953		9,241
Goodwill		57,517		58,222		59,984		59,617
Intangible assets — net		14,666		15,235		13,535		13,796
Investments and sundry assets		1,911		2,074		2,125		2,282
Total assets	$	153,403	$	152,186	$	148,629	$	155,971

(Amounts may not add due to rounding.)

(The accompanying notes are an integral part of the financial statements.)

Table of Contents

INTERNATIONAL BUSINESS MACHINES CORPORATION

AND SUBSIDIARY COMPANIES

CONSOLIDATED BALANCE SHEET – (CONTINUED)

(UNAUDITED)

LIABILITIES AND EQUITY


	At March 31,		At December 31,		At March 31,		At December 31,
(Dollars in millions except per share amount)	2020		2019
(Dollars in millions except per share amounts)					2021		2020
Liabilities:
Current liabilities:
Taxes	$	2,348	$	2,839	$	2,640	$	3,301
Short-term debt		11,642		8,797		5,198		7,183
Accounts payable		4,172		4,896		4,140		4,908
Compensation and benefits		3,029		3,406		3,256		3,440
Deferred income		13,377		12,026		14,197		12,833
Operating lease liabilities		1,327		1,380		1,337		1,357
Other accrued expenses and liabilities		4,777		4,357		5,775		6,847
Total current liabilities		40,673		37,701		36,542		39,869
Long-term debt		52,685		54,102		51,206		54,355
Retirement and nonpension postretirement benefit obligations		16,474		17,142		17,346		18,248
Deferred income		3,769		3,851		4,153		4,301
Operating lease liabilities		3,799		3,879		3,379		3,574
Other liabilities		15,874		14,526		14,489		14,897
Total liabilities		133,275		131,202		127,116		135,244
Equity:
IBM stockholders’ equity:
Common stock, par value $0.20 per share, and additional paid-in capital		56,092		55,895		56,788		56,556
Shares authorized: 4,687,500,000
Shares issued: 2020 - 2,238,932,461
2019 - 2,237,996,975
Shares issued: 2021 - 2,244,015,188
2020 - 2,242,969,004
Retained earnings		162,626		162,954		162,218		162,717
Treasury stock - at cost		(169,437)		(169,413)		(169,360)		(169,339)
Shares: 2020 - 1,351,040,504
2019 - 1,350,886,521
Shares: 2021 - 1,350,492,360
2020 - 1,350,315,580
Accumulated other comprehensive income/(loss)		(29,283)		(28,597)		(28,257)		(29,337)
Total IBM stockholders’ equity		19,999		20,841		21,389		20,597
Noncontrolling interests		129		144		124		129
Total equity		20,128		20,985		21,513		20,727
Total liabilities and equity	$	153,403	$	152,186	$	148,629	$	155,971

(Amounts may not add due to rounding.)

(The accompanying notes are an integral part of the financial statements.)

Table of Contents

INTERNATIONAL BUSINESS MACHINES CORPORATION

AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)


	Three Months Ended March 31,				Three Months Ended March 31,
(Dollars in millions)	2020		2019		2021		2020
Cash flows from operating activities:
Net income	$	1,175	$	1,591	$	955	$	1,175
Adjustments to reconcile net income to cash provided by operating activities
Depreciation		1,012		1,143		1,052		1,012
Amortization of intangibles		622		303		620		622
Stock-based compensation		189		113		213		189
Net (gain)/loss on asset sales and other		315		(176)		7		315
Changes in operating assets and liabilities, net of acquisitions/divestitures		1,162		1,785		2,066		1,162
Net cash provided by operating activities		4,476		4,759		4,914		4,476

Cash flows from investing activities:
Payments for property, plant and equipment		(630)		(539)		(494)		(630)
Proceeds from disposition of property, plant and equipment		46		81		139		46
Investment in software		(153)		(156)		(175)		(153)
Acquisition of businesses, net of cash acquired		(13)		(1)		(1,120)		(13)
Divestitures of businesses, net of cash transferred		26		33		(15)		26
Non-operating finance receivables — net		(20)		193		(9)		(20)
Purchases of marketable securities and other investments		(1,096)		(1,138)		(875)		(1,096)
Proceeds from disposition of marketable securities and other investments		938		674		549		938
Net cash provided by/(used in) investing activities		(902)		(853)		(2,000)		(902)

Cash flows from financing activities:
Proceeds from new debt		6,055		5,979		51		6,055
Payments to settle debt		(5,285)		(1,768)		(4,261)		(5,285)
Short-term borrowings/(repayments) less than 90 days — net		586		21		(89)		586
Common stock repurchases		—		(920)
Common stock repurchases for tax withholdings		(44)		(61)		(41)		(44)
Financing — other		13		9		15		13
Cash dividends paid		(1,440)		(1,397)		(1,457)		(1,440)
Net cash provided by/(used in) financing activities		(115)		1,863		(5,783)		(115)

Effect of exchange rate changes on cash, cash equivalents and restricted cash		(403)		(102)		(134)		(403)
Net change in cash, cash equivalents and restricted cash		3,057		5,668		(3,002)		3,057

Cash, cash equivalents and restricted cash at January 1		8,314		11,604		13,675		8,314
Cash, cash equivalents and restricted cash at March 31	$	11,371	$	17,272	$	10,673	$	11,371

(Amounts may not add due to rounding.)

(The accompanying notes are an integral part of the financial statements.)

Table of Contents

INTERNATIONAL BUSINESS MACHINES CORPORATION

AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF EQUITY

(UNAUDITED)

Common

Stock and

Accumulated

Additional

Other

Total IBM

Non-

Paid-in

Retained

Treasury

Comprehensive

Stockholders’

Controlling

Total
(Dollars in millions except per share amounts)

Capital

Earnings

Stock

Income/(Loss)

Equity

Interests

Equity
Equity - January 1, 2020

$
55,895

$
162,954

$
(169,413)

$
(28,597)

$
20,841

$
144

$
20,985
Cumulative effect of change in accounting principle*

(66)

(66)

(66)
Net income plus other comprehensive income/(loss):














Net income



1,175





1,175



1,175
Other comprehensive income/(loss)







(686)

(686)



(686)
Total comprehensive income/(loss)









$
489



$
489
Cash dividends paid — common stock ($1.62 per share)



(1,440)





(1,440)



(1,440)
Common stock issued under employee plans (935,486 shares)

197







197



197
Purchases (310,454 shares) and sales (156,471 shares) of treasury stock under employee plans — net



3

(24)



(21)



(21)
Changes in noncontrolling interests











(15)

(15)
Equity – March 31, 2020

$
56,092

$
162,626

$
(169,437)

$
(29,283)

$
19,999

$
129

$
20,128


	Common
	Stock and						Accumulated
	Additional						Other		Total IBM		Non-
	Paid-in		Retained		Treasury		Comprehensive		Stockholders’		Controlling		Total
(Dollars in millions except per share amounts)	Capital		Earnings		Stock		Income/(Loss)		Equity		Interests		Equity
Equity - January 1, 2021	$	56,556	$	162,717	$	(169,339)	$	(29,337)	$	20,597	$	129	$	20,727
Net income plus other comprehensive income/(loss):
Net income				955						955				955
Other comprehensive income/(loss)								1,080		1,080				1,080
Total comprehensive income/(loss)									$	2,036			$	2,036
Cash dividends paid — common stock ($1.63 per share)				(1,457)						(1,457)				(1,457)
Common stock issued under employee plans (1,046,184 shares)		232								232				232
Purchases (339,506 shares) and sales (162,726 shares) of treasury stock under employee plans — net				2		(21)				(18)				(18)
Changes in noncontrolling interests												(6)		(6)
Equity – March 31, 2021	$	56,788	$	162,218	$	(169,360)	$	(28,257)	$	21,389	$	124	$	21,513

*~~Reflects the adoption of the FASB guidance on credit losses. Refer to note 2, “Accounting Changes.”~~


	Common														Common
	Stock and						Accumulated								Stock and						Accumulated
	Additional						Other		Total IBM		Non-				Additional						Other		Total IBM		Non-
	Paid-in		Retained		Treasury		Comprehensive		Stockholders’		Controlling		Total		Paid-in		Retained		Treasury		Comprehensive		Stockholders’		Controlling		Total
(Dollars in millions except per share amounts)	Capital		Earnings		Stock		Income/(Loss)		Equity		Interests		Equity		Capital		Earnings		Stock		Income/(Loss)		Equity		Interests		Equity
Equity - January 1, 2019	$	55,151	$	159,206	$	(168,071)	$	(29,490)	$	16,796	$	134	$	16,929
Equity - January 1, 2020															$	55,895	$	162,954	$	(169,413)	$	(28,597)	$	20,841	$	144	$	20,985
Cumulative effect of change in accounting principle*																		(66)						(66)				(66)
Net income plus other comprehensive income/(loss):
Net income				1,591						1,591				1,591				1,175						1,175				1,175
Other comprehensive income/(loss)								308		308				308								(686)		(686)				(686)
Total comprehensive income/(loss)									$	1,899			$	1,899									$	489			$	489
Cash dividends paid — common stock ($1.57 per share)				(1,397)						(1,397)				(1,397)
Common stock issued under employee plans (1,391,989 shares)		137								137				137
Purchases (454,710 shares) and sales (82,862 shares) of treasury stock under employee plans — net				2		(50)				(48)				(48)
Other treasury shares purchased, not retired (6,856,678 shares)						(900)				(900)				(900)
Changes in other equity				(5)						(5)				(5)
Cash dividends paid — common stock ($1.62 per share)																		(1,440)						(1,440)				(1,440)
Common stock issued under employee plans (935,486 shares)																197								197				197
Purchases (310,454 shares) and sales (156,471 shares) of treasury stock under employee plans — net																		3		(24)				(21)				(21)
Changes in noncontrolling interests												(8)		(8)												(15)		(15)
Equity - March 31, 2019	$	55,287	$	159,396	$	(169,021)	$	(29,182)	$	16,481	$	126	$	16,607
Equity - March 31, 2020															$	56,092	$	162,626	$	(169,437)	$	(29,283)	$	19,999	$	129	$	20,128

* Reflects the adoption of the FASB guidance on credit losses. Refer to note 2, “Accounting Changes.”

(Amounts may not add due to rounding.)

(The accompanying notes are an integral part of the financial statements.)

Table of Contents

Notes to Consolidated Financial Statements

1. Basis of Presentation:

The accompanying Consolidated Financial Statements and footnotes of the International Business Machines Corporation (IBM or the company) have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The financial statements and footnotes are unaudited. In the opinion of the company’s management, these statements include all adjustments, which are only of a normal recurring nature, necessary to present a fair statement of the company’s results of operations, financial position and cash flows.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amount of assets, liabilities, revenue, costs, expenses and other comprehensive income/(loss) that are reported in the Consolidated Financial Statements and accompanying disclosures. These estimates are based on management’s best knowledge of current events, historical experience, actions that the company may undertake in the future and on various other assumptions that are believed to be reasonable under the ~~circumstances.~~circumstances, including the macroeconomic impacts of the COVID-19 pandemic. As a result, actual results may be different from these estimates.

InOn October 8, 2020, the company announced that it will separate the managed infrastructure services unit of its Global Technology Services (GTS) segment into a new public company. The managed infrastructure services unit is comprised of outsourcing and other infrastructure modernization and management services and the name of the new company will be Kyndryl. The separation is expected to be achieved through a U.S. federal tax-free spin-off to IBM shareholders and completed by the end of 2021. It will be subject to customary market, regulatory and other closing conditions, including final IBM Board of Directors’ approval. The announcement did not have any classification impact to the company’s Consolidated Financial Statements or segment reporting. IBM will report the managed infrastructure services unit as discontinued operations after separation.

For the three months ended March 31, 2021, the company reported a benefit from income taxes of $51 million. The tax benefit was primarily driven by the resolution of certain tax audit matters in the first quarter of 2020, the company realigned offerings and the related management system to reflect divestitures completed in the second half of 2019 and tighter integration of certain industry-related consulting services. These changes impacted a few of the company’s reportable segments, but did not impact the Consolidated Financial Statements. Refer to note 4, “Segments,” for additional information on the company’s reportable segments. The periods presented in this Form 10-Q are reported on a comparable basis. On April 6, 2020, Arvind Krishna became Chief Executive Officer of IBM and announced a number of management changes which did not impact the company’s reportable segments.

2021. For the three months ended March 31, 2020, the company ~~recorded~~reported a benefit from income taxes of $1,226 million. The tax benefit was primarily related to the tax impacts of an intra-entity sale of certain of the company’s intellectual property, which required the recognition of a $3,442 million deferred tax asset. The recognition of this deferred tax asset and the related impacts, resulted in a net one-time benefit in the quarter of $939 million. The company also recorded other discrete tax benefits in the quarter primarily related to changes in tax law.~~In the first quarter of 2019, the company reported a provision for income taxes of $289 million.~~

~~On July 9, 2019, the company completed the acquisition of~~ ~~all~~ ~~of the outstanding shares of Red Hat, Inc. (Red Hat). Refer to note 5, “Acquisitions & Divestitures,” and note 10, “Intangible Assets Including Goodwill,” for additional information.~~property.

Noncontrolling interest amounts of ~~$4.5~~$7.6 million and ~~$7.0~~$4.5 million, net of tax, for the three months ended March 31, ~~2020~~2021 and ~~2019,~~2020, respectively, are included as a reduction within other (income) and expense in the Consolidated Income Statement.

Interim results are not necessarily indicative of financial results for a full year. The information included in this Form 10-Q should be read in conjunction with the company’s ~~2019~~2020 Annual Report.

Within the financial statements and tables presented, certain columns and rows may not add due to the use of rounded numbers for disclosure purposes. Percentages presented are calculated from the underlying whole-dollar amounts. Certain prior period amounts have been reclassified to conform to the current period presentation. Specifically, beginning in the third-quarter 2019, revenues and related costs for post-contract support provided for perpetual (one-time charge) software licenses have been reclassified from Services Revenue to Sales Revenue and Services Cost to Sales Cost within the Consolidated Income Statement. The revenue and cost amounts reclassified were $0.5 billion and $0.1 billion, ~~respectively, for the~~ ~~three months~~ ~~ended March 31, 2019.~~ This ~~reclassification had no impact on total revenue, total cost, net income, financial position or cash flows for any periods presented. Other immaterial reclassifications have been~~is annotated where applicable.

~~Table of Contents~~

~~Notes to Consolidated Financial Statements — (continued)~~

2. Accounting Changes:

~~New~~ Standards ~~to be~~ Implemented

Simplifying the Accounting for Income Taxes

Standard/Description–Issuance date: December 2019. This guidance simplifies various aspects of income tax accounting by removing certain exceptions to the general principle of the guidance and also clarifies and amends existing guidance to improve consistency in application.

Effective Date and Adoption Considerations–The guidance iswas effective January 1, 2021 and early adoption iswas permitted. The company adopted the guidance on a prospective basis as of the effective date.

Table of Contents

Notes to Consolidated Financial Statements — (continued)

Effect on Financial Statements or Other Significant Matters–The ~~company is evaluating~~guidance did not have a material impact in the ~~impact of the guidance and adoption date.~~

~~Standards Implemented~~

consolidated financial results.

Reference Rate Reform

Standard/Description–Issuance date: March ~~2020.~~2020, with amendments in 2021. This guidance provides optional expedients and exceptions for applying GAAP to contract modifications, hedging relationships, and other transactions that reference London Interbank Offered Rate (LIBOR) or another reference rate expected to be discontinued, subject to meeting certain criteria.

Effective Date and Adoption Considerations–The guidance is effective as of March 12, 2020 through December 31, 2022.

Effect on Financial Statements or Other Significant Matters–The company made a policy election in the first quarter of 2020 to adopt the practical expedient which allows for the continuation of fair value hedge accounting for interest rate derivative contracts upon the transition from LIBOR to Secured Overnight Financing Rate (SOFR) or another reference rate alternative, without any impact to the Consolidated Income Statement. ~~However, it is still uncertain when the transition from LIBOR to another reference rate will occur or whether SOFR will become the accepted market alternative to LIBOR.~~ The company is continuing to evaluate the potential impact of the replacement of the LIBOR benchmark on its interest rate risk management ~~activities.~~activities; however, it is not expected to have a material impact in the consolidated financial results.

Simplifying the Test for Goodwill Impairment

Standard/Description–Issuance date: January 2017. This guidance simplifies the goodwill impairment test by removing Step 2. It also requires disclosure of any reporting units that have zero or negative carrying amounts if they have goodwill allocated to them.

Effective Date and Adoption Considerations–The guidance was effective January 1, 2020 and early adoption was permitted. The company adopted the guidance on a prospective basis as of the effective date.

Effect on Financial Statements or Other Significant Matters–The guidance did not have a material impact in the consolidated financial results.

Financial Instruments–Credit Losses

Standard/Description–Issuance date: June 2016, with amendments in 2018, 2019 and 2020. This changes the guidance for credit losses based on an expected loss model rather than an incurred loss model. It requires the consideration of all available relevant information when estimating expected credit losses, including past events, current conditions and forecasts and their implications for expected credit losses. It also expands the scope of financial instruments subject to impairment, including off-balance sheet commitments and residual value.

~~Table of Contents~~

~~Notes to Consolidated Financial Statements — (continued)~~

Effective Date and Adoption Considerations–The guidance was effective January 1, 2020 with one-year early adoption permitted. The company adopted the guidance as of the effective date, using the transition ~~option~~methodology whereby prior comparative periods were not retrospectively presented in the Consolidated Financial Statements.

Effect on Financial Statements or Other Significant Matters–At January 1, 2020, an increase in the allowance for credit losses of $81 million was recorded for accounts receivable–trade and financing receivables (inclusive of its related off-balance sheet commitments). Additionally, net deferred taxes were reduced by $14 million in the Consolidated Balance Sheet, resulting in a cumulative-effect net decrease to retained earnings of $66 million. Refer to note 8, “Financing Receivables,” and note 12, “Commitments,” for additional information.

~~Leases~~

~~Standard/Description~~–Issuance date: February 2016, with amendments in 2018 and 2019. This guidance requires lessees to recognize right-of-use (ROU) assets and lease liabilities for most leases in the Consolidated Balance Sheet. For lessors, it also eliminated the use of third-party residual value guarantee insurance in the lease classification test, and overall aligns with revenue recognition guidance. Due to changes in lease termination guidance, when equipment is returned to the company prior to the end of the lease term, the carrying amounts of lease receivables are reclassified to loan receivables. The guidance also requires qualitative and quantitative disclosures to assess the amount, timing and uncertainty of cash flows arising from leases.

~~Effective Date and Adoption Considerations~~–The company adopted the guidance on its effective date of January 1, 2019, using the transition option whereby prior comparative periods were not retrospectively presented in the Consolidated Financial Statements. The company elected the package of practical expedients not to reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs and the lessee practical expedient to combine lease and non-lease components for all asset classes. The company made a policy election to not recognize ROU assets and lease liabilities for short-term leases for all asset classes.

~~Effect on Financial Statements or Other Significant Matters~~–The guidance had a material impact on the Consolidated Balance Sheet as of the effective date. As a lessee, at adoption, the company recognized operating and financing ROU assets of $4.8 billion and $0.2 billion, respectively, and operating and financing lease liabilities of $5.1 billion and $0.2 billion, respectively. The transition adjustment recognized in retained earnings on January 1, 2019 was not material. None of the other changes to the guidance had a material impact in the company’s consolidated financial results at the effective date.

~~For all other standards that the company adopted in 2019, there was no material impact in the consolidated financial results.~~

1110

Table of Contents

Notes to Consolidated Financial Statements — (continued)

3. Revenue Recognition:

Disaggregation of Revenue

The following tables provide details of revenue by major products/service offerings and by geography.

Revenue by Major Products/Service Offerings

(Dollars in millions)

For the three months ended March 31:

2020

2019

Cognitive Applications

$
1,182

$
1,238
*
Cloud & Data Platforms

2,536

1,917

Transaction Processing Platforms

1,520

1,812

Total Cloud & Cognitive Software

5,238

4,967
*
Consulting

2,071

2,001
*
Application Management

1,840

1,908

Global Process Services

225

247

Total Global Business Services

4,136

4,155
*
Infrastructure & Cloud Services

4,916

5,209

Technology Support Services

1,550

1,665

Total Global Technology Services

6,467

6,875

Systems Hardware

997

914

Operating Systems Software

371

414

Total Systems

1,368

1,328

Global Financing**

299

406

Other

62

451
*
Total revenue

$
17,571

$
18,182


(Dollars in millions)
For the three months ended March 31:	2021		2020
Cloud & Data Platforms	$	2,866	$	2,536
Cognitive Applications		1,233		1,182
Transaction Processing Platforms		1,338		1,520
Total Cloud & Cognitive Software	$	5,437	$	5,238
Consulting		2,189		2,071
Application Management		1,770		1,840
Global Process Services		274		225
Total Global Business Services	$	4,234	$	4,136
Infrastructure & Cloud Services		4,853		4,916
Technology Support Services		1,517		1,550
Total Global Technology Services	$	6,370	$	6,467
Systems Hardware		1,114		997
Operating Systems Software		313		371
Total Systems	$	1,427	$	1,368
Global Financing*		240		299
Other		23		62
Total revenue	$	17,730	$	17,571

* Recast to conform to current period presentation. Refer to note 4, “Segments,” for additional information.

** Contains lease and loan/working capital financing arrangements which are not subject to the guidance on revenue from contracts with customers.

Revenue by Geography

(Dollars in millions)

For the three months ended March 31:

2020

2019
Americas

$
8,166

$
8,493
Europe/Middle East/Africa

5,517

5,727
Asia Pacific

3,888

3,961
Total

$
17,571

$
18,182


(Dollars in millions)
For the three months ended March 31:	2021		2020
Americas	$	8,179	$	8,166
Europe/Middle East/Africa		5,641		5,517
Asia Pacific		3,909		3,888
Total	$	17,730	$	17,571

Remaining Performance Obligations

The remaining performance ~~obligations~~obligation (RPO) disclosure provides the aggregate amount of the transaction price yet to be recognized as of the end of the reporting period and an explanation as to when the company expects to recognize these amounts in revenue. It is intended to be a statement of overall work under contract that has not yet been performed and does not include contracts in which the customer is not committed, such as certain as-a-Service, governmental, term software license and services offerings. The customer is not considered committed when they are able to terminate for convenience without payment of a substantive penalty. The disclosure includes estimates of variable consideration, except when the variable consideration is a sales-based or usage-based royalty promised in exchange for a license of intellectual property. Additionally, as a practical expedient, the company does not include contracts that have an original duration of one year or less. RPO estimates are subject to change and are affected by several factors, including terminations, changes in the scope of contracts, periodic revalidations, adjustment for revenue that has not materialized and adjustments for currency.

1211

Table of Contents

Notes to Consolidated Financial Statements — (continued)

~~terminations, changes in the scope of contracts, periodic revalidations, adjustments for revenue that has not materialized and adjustments for currency.~~

At March 31, ~~2020,~~2021, the aggregate amount of the transaction price allocated to RPO related to customer contracts that are unsatisfied or partially unsatisfied was ~~$118~~$114 billion. Approximately 60 percent of the amount ~~was~~is expected to be recognized as revenue in the subsequent two years, approximately 3530 percent in the subsequent three to five years and the balance (mostly Infrastructure & Cloud Services) thereafter.

Revenue Recognized for Performance Obligations Satisfied (or Partially Satisfied) in Prior Periods

For the three months ~~ending~~ended March 31, ~~2020,~~2021, revenue was reduced by ~~$14~~$45 million for performance obligations satisfied (or partially satisfied) in previous periods mainly due to changes in estimates on contracts with cost-to-cost measures of progress.

Reconciliation of Contract Balances

The following table provides information about notes and accounts ~~receivables —~~receivable–trade, contract assets and deferred income balances:


	At March 31,		At December 31,		At March 31,		At December 31,
(Dollars in millions)	2020		2019		2021		2020
Notes and accounts receivable — trade (net of allowances of $337 and $299 at March 31, 2020 and December 31, 2019, respectively)	$	6,927	$	7,870
Contract assets (1)		488		492
Notes and accounts receivable–trade (net of allowances of $345 in 2021 and $351 in 2020)					$	6,458	$	7,132
Contract assets*						522		497
Deferred income (current)		13,377		12,026		14,197		12,833
Deferred income (noncurrent)		3,769		3,851		4,153		4,301

~~(1)~~

~~Included within prepaid expenses and other current assets in the Consolidated Balance Sheet.~~

* Included within prepaid expenses and other current assets in the Consolidated Balance Sheet.

The amount of revenue recognized during the three months ended March 31, ~~2020~~2021 that was included within the deferred income balance at December 31, ~~2019~~2020 was $4.2 billion and was primarily related to services and software.

The following table provides roll forwards of the notes and accounts receivable–trade allowance for expected credit losses for the three months ended March 31, 2021 and the year ended December 31, 2020:


(Dollars in millions)
January 1, 2021		Additions / (Releases)		Write-offs		Other*		March 31, 2021
$	351	$	1	$	(6)	$	(2)	$	345


January 1, 2020		Additions / (Releases)		Write-offs		Other*		December 31, 2020
$	316	$	76	$	(46)	$	5	$	351

*	Primarily represents translation adjustments.

The contract assets allowance for expected credit losses was not material in any of the periods presented.

4. Segments:

~~During~~The following tables reflect the ~~first quarter~~results of ~~2020,~~continuing operations of the company realigned offerings and the related management system to reflect divestitures completed in the second half of 2019 and tighter integration of certain industry-related consulting services. Accordingly, the company updated its Cloud & Cognitive Software segment, Global Business Services segment and the Other – divested businesses category in the first quarter of 2020 and recast the related historical information for consistencycompany’s segments consistent with the ~~go-forward performance. Total recast revenue for full-year 2019 was approximately $0.3 billion~~management and measurement system utilized within the company. Performance measurement is based on pre-tax income from continuing operations. These results are used, in part, by the chief operating decision maker, both in evaluating the performance of, ~~IBM’s total $77 billion. There was no change~~and in allocating resources to, each of the ~~Global Technology Services, Systems or Global Financing segments, and there was no impact to IBM’s consolidated results. The following table displays the segment updates:~~


~~Management System Change~~		~~Resulting Segment Implications~~
~~Divestitures of IBM's Risk Analytics and Regulatory Offerings and Sales Performance Management Offerings~~		~~- Cloud & Cognitive Software (Cognitive Applications)~~
		~~+ Other—divested businesses~~

~~Realignment of certain industry-related consulting offerings to the Global Business Services segment~~		~~- Cloud & Cognitive Software (Cognitive Applications)~~
		~~+ Global Business Services (Consulting)~~

segments.

1312

Table of Contents

Notes to Consolidated Financial Statements — (continued)

SEGMENT INFORMATION

																																			��
	Cloud &			Global			Global												Cloud &			Global			Global
	Cognitive			Business			Technology						Global			Total			Cognitive			Business			Technology						Global			Total
(Dollars in millions)	Software			Services			Services			Systems			Financing			Segments			Software			Services			Services			Systems			Financing			Segments
For the three months ended March 31, 2021:
External revenue																			$	5,437		$	4,234		$	6,370		$	1,427		$	240		$	17,707
Internal revenue																				832			55			313			189			168			1,557
Total revenue																			$	6,269		$	4,289		$	6,683		$	1,616		$	408		$	19,264
Pre-tax income/(loss) from continuing operations																			$	1,428		$	390		$	140		$	(2)		$	166		$	2,122
Revenue year-to-year change																				3.6	%		2.5	%		(1.2)	%		6.6	%		(20.2)	%		1.3	%
Pre-tax income/(loss) year-to-year change																				53.0	%		44.1	%		nm			nm			(14.2)	%		111.6	%
Pre-tax income/(loss) margin																				22.8	%		9.1	%		2.1	%		(0.1)	%		40.8	%		11.0	%

For the three months ended March 31, 2020:
External revenue	$	5,238		$	4,136		$	6,467		$	1,368		$	299		$	17,508		$	5,238		$	4,136		$	6,467		$	1,368		$	299		$	17,508
Internal revenue		813			46			294			148			212			1,514			813			46			294			148			212			1,514
Total revenue	$	6,052		$	4,183		$	6,761		$	1,516		$	511		$	19,023		$	6,052		$	4,183		$	6,761		$	1,516		$	511		$	19,023
Pre-tax income/(loss) from continuing operations	$	933		$	271		$	(178)		$	(217)		$	194		$	1,003		$	933		$	271		$	(178)		$	(217)		$	194		$	1,003
Revenue year-to-year change		4.2	%		(1.1)	%		(5.6)	%		1.7	%		(27.6)	%		(1.9)	%
Pre-tax income year-to-year change		(47.7)	%		(9.1)	%		(164.7)	%		7.6	%		(32.7)	%		(59.0)	%
Pre-tax income/(loss) margin		15.4	%		6.5	%		(2.6)	%		(14.3)	%		37.9	%		5.3	%		15.4	%		6.5	%		(2.6)	%		(14.3)	%		37.9	%		5.3	%

For the three months ended March 31, 2019:
External revenue	$	4,967	*	$	4,155	*	$	6,875		$	1,328		$	406		$	17,731	*
Internal revenue		841			74			290			163			300			1,668
Total revenue	$	5,808	*	$	4,229	*	$	7,164		$	1,491		$	706		$	19,398	*
Pre-tax income/(loss) from continuing operations	$	1,785	*	$	298	*	$	275		$	(202)		$	288		$	2,445	*
Pre-tax income/(loss) margin		30.7	%*		7.0	%*		3.8	%		(13.5)	%		40.8	%		12.6	%*

nm - not meaningful

Reconciliations to IBM as Reported:

(Dollars in millions)






For the three months ended March 31:

2020

2019

Revenue:





Total reportable segments

$
19,023

$
19,398
*
Other—divested businesses

18

377
*
Other revenue

44

74

Eliminations of internal transactions

(1,514)

(1,668)

Total consolidated revenue

$
17,571

$
18,182

Pre-tax income from continuing operations:





Total reportable segments

$
1,003

$
2,445
*
Amortization of acquired intangible assets

(473)

(173)

Acquisition-related (charges)/income

0

(39)

Non-operating retirement-related (costs)/income

(264)

(138)

Eliminations of internal transactions

(55)

(89)

Other—divested businesses

25

(56)
*
Unallocated corporate amounts

(284)

(67)

Total pre-tax income from continuing operations

$
(49)

$
1,883


(Dollars in millions)
For the three months ended March 31:	2021		2020
Revenue:
Total reportable segments	$	19,264	$	19,023
Other–divested businesses		1		18
Other revenue		21		44
Eliminations of internal transactions		(1,557)		(1,514)
Total consolidated revenue	$	17,730	$	17,571

Pre-tax income from continuing operations:
Total reportable segments	$	2,122	$	1,003
Amortization of acquired intangible assets		(452)		(473)
Acquisition-related (charges)/income		(16)		0
Non-operating retirement-related (costs)/income		(343)		(264)
Spin-off related charges		(61)		—
Elimination of internal transactions		(73)		(55)
Other–divested businesses		(8)		25
Unallocated corporate amounts		(263)		(284)
Total pre-tax income/(loss) from continuing operations	$	905	$	(49)

*Recast to conform to current year presentation.

1413

Table of Contents

Notes to Consolidated Financial Statements — (continued)

5. Acquisitions & Divestitures:

Acquisitions

Purchase price consideration for all acquisitions was paid primarily in cash. All acquisitions, except otherwise stated, were for 100 percent of the acquired business and are reported in the Consolidated Statement of Cash Flows, net of acquired cash and cash equivalents.

During the three months ended March 31, ~~2020,~~2021, the company completed ~~1 acquisition in the Cloud & Cognitive Software segment. The acquisition did not have a material impact in the Consolidated Financial Statements.~~

~~On July 9, 2019, the company completed the acquisition of all of the~~ ~~outstanding~~ ~~shares of Red Hat~~3 acquisitions at an aggregate cost of ~~$35 billion.~~$987 million.

The Global Business Services segment completed the acquisition of Nordcloud, a consulting company providing services in cloud implementation, application transformation and managed services; and Taos Mountain, LLC (Taos), a leading cloud professional and managed services provider. The Cloud & Cognitive Software segment, through Red ~~Hat’s~~Hat, completed the acquisition of StackRox, an innovator in container and Kubernetes-native security. Each acquisition is expected to enhance the company’s portfolio of ~~open-source~~products and ~~cloud technologies combined with~~services capabilities and further advance IBM’s ~~innovative~~ hybrid cloud ~~technology~~ and ~~industry expertise are delivering the hybrid multi-cloud capabilities required to address the next chapter of cloud implementations.~~AI strategy.

OnThe purchase consideration for the acquisition ~~date, Red Hat shareholders received $190 per share in cash, representing~~of Nordcloud includes a ~~total equity~~fair value estimate of ~~approximately $34 billion.~~contingent consideration to be paid annually through the first quarter of 2024 upon achieving certain revenue milestones. The ~~company funded the transaction through a combination of cash on hand and proceeds from debt issuances.~~

annual payments are not expected to be material.

The following table reflects the purchase price related to these acquisitions and the resulting purchase price allocation as of March 31, ~~2020. An immaterial net purchase price adjustment was recorded in the first-quarter 2020 related to current tax liabilities.~~2021.


	Amortization	Allocated		Amortization	Total
(Dollars in millions)	Life (in years)	Amount		Life (in years)	Acquisitions
Current assets*		$	3,186
Current assets					$	72
Property, plant and equipment/noncurrent assets			939			4
Intangible assets:
Goodwill	N/A		23,137	N/A		746
Client relationships	10		7,215	7		134
Completed technology	9		4,571	3-7		114
Trademarks	20		1,686	2-6		27
Total assets acquired		$	40,735		$	1,097
Current liabilities**			1,390
Current liabilities						48
Noncurrent liabilities			4,265			62
Total liabilities assumed		$	5,655		$	110
Total purchase price		$	35,080		$	987

*	~~Includes $2.2 billion of cash and cash equivalents.~~

**	Includes $485 million of short-term debt related to the convertible notes acquired from Red Hat that were recognized at their fair value on the acquisition date, which was fully settled as of October 1, 2019.

N/A - not applicable

Table of Contents

Notes to Consolidated Financial Statements — (continued)

The goodwill generated is primarily attributable to the assembled workforce of ~~Red Hat~~the acquired businesses and the increased synergies expected to be achieved from the integration of ~~Red Hat products~~the acquired businesses into the company’s various integrated solutions and services neither of which ~~qualify~~qualifies as an amortizable intangible asset.

The overall weighted-average useful life of the identified amortizable intangible assets acquired was ~~10.9~~6.8 years. These identified intangible assets will be amortized on a straight-line basis over their useful lives, which approximates the pattern that the assets’ economic benefits are expected to be consumed over time. ~~The following table presents the goodwill allocated~~Goodwill of $501 million and $245 million was assigned to the ~~segments as of March 31, 2020.~~

~~Table of Contents~~

~~Notes to Consolidated Financial Statements — (continued)~~

(Dollars in billions)

Goodwill
Segment

Allocated*
Cloud & Cognitive Software

$
18.5
Global Technology Services

3.1
Global Business Services

1.1
Systems

0.4
Total

$
23.1

*	~~It is expected that approximately 7~~Global Business Services segment and Cloud & Cognitive Software segment, respectively. It is expected that approximately 11 percent of the goodwill will be deductible for tax purposes.

The valuation of the assets acquired and liabilities assumed is subject to revision. If additional information becomes available, the company may further revise the purchase price allocation as soon as practical, but no later than one year from ~~Red Hat’s~~the acquisition ~~date. Any such revisions or changes may be material. The primary area of the purchase price allocation that is subject to revision relates to certain tax matters.~~

~~Divestitures~~

~~Select IBM Software Products~~ – On June 30, 2019, IBM and HCL Technologies Limited (HCL) closed a transaction, in which HCL acquired select standalone Cloud & Cognitive Software products for $1,775 million, inclusive of $150 million of contingent consideration. The transaction included commercial software, intellectual property and services offerings. In addition, the transaction includes transition services for IT and other services.

The company received cash of $812 million at closing and $40 million of the contingent consideration in the third quarter of 2019. In addition, during the three months ended March 31, 2020, the company transferred a participating interest in the outstanding receivable to a third-party bank and received $164 million in cash. The company expects to receive the remaining $648 million (net of any additional contingent consideration) by June 30, 2020. The outstanding contingent consideration is expected to be earned within 24 months of the closing. IBM will remit payment to HCL predominantly for servicing certain customer contracts until such contracts are terminated or entitlements are assumed by HCL. Cash of $139 million was remitted during the three months ended March 31, 2020 related to deferred revenue that existed prior to closing. IBM expects to remit an additional $185 million of cash to HCL by the end of 2021. The total pre-tax gain recognized on this transaction as of March 31, 2020 was $625 million. The total gain on sale may change in the future due to contingent consideration or changes in other transaction estimates,date; however, material changes are not expected.

~~Select IBM Marketing Platform and Commerce Offerings~~ – On April 4, 2019, IBM and Centerbridge Partners, L.P. (Centerbridge) announced a definitive agreement, in which Centerbridge would acquire select marketing platform and commerce offerings from IBM.~~The transaction included commercial software and services offerings. In addition,~~At December 31, 2020, the remaining cash to be remitted by the company ~~is providing Centerbridge with transition services including IT, supply chain management, and other services. Upon closing, Centerbridge announced that this business would be re-branded under~~related to certain fourth-quarter 2020 acquisitions was $323 million. This amount was classified as restricted cash in the name Acoustic. The closing completed for the U.S. on June 30, 2019. The company received a net cash payment of $240 million and recognized an immaterial pre-tax gain on the U.S. closing. The company expects to receive an additional $150 million of cash within 36 months of the U.S. closing.

~~A subsequent closing occurred in most other countries on~~Consolidated Balance Sheet at December 31, 2020. At March 31, ~~2020 and the company recognized an immaterial pre-tax gain. The company expects to close~~2021, the remaining ~~countries by May 31, 2020. The timing of the remaining closing is subject~~amount to ~~change as more information becomes available. The amount of the pre-tax gain for the remaining countries will~~be remitted was not ~~be determinable until the valuation of the final balance sheet transferred is completed, however, it is not expected to be~~ material.

~~IBM Risk Analytics and Regulatory Offerings~~ – Divestitures~~On September 24, 2019, IBM and SS&C Technologies Holdings, Inc. (SS&C)~~

In the fourth quarter of 2020, the company entered into a definitive agreement ~~in which SS&C would acquire~~to sell certain ~~Algorithmics and~~remaining OEM commercial financing capabilities reported within the Global Financing segment. The financial terms related ~~assets from IBM.~~to this transaction are not material. The transaction ~~closed~~is expected to be completed in the ~~fourth quarter~~second half of ~~2019. The company recognized an immaterial pre-tax gain on the sale for the year ended December 31, 2019.~~2021.

1615

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Notes to Consolidated Financial Statements — (continued)

~~Sales Performance Management Offerings~~ – On November 20, 2019, IBM and Varicent Parent Holdings Corporation (Varicent) entered into a definitive agreement in which Varicent would acquire certain sales performance management assets from IBM. The initial closing of certain countries was completed on December 31, 2019. The company received a net cash payment of $230 million and recognized a pre-tax gain on the sale of $136 million for the year ended December 31, 2019. A subsequent closing for the remaining countries occurred on March 31, 2020 and the company recognized an immaterial pre-tax gain.

~~The above divested businesses are reported in Other–divested businesses as described in note 4, "Segments."~~

~~The pre-tax gains recognized on the divestitures above were recorded in other (income) and expense in the Consolidated Income Statement.~~

6. Earnings Per Share of Common Stock:

The following table provides the computation of basic and diluted earnings per share of common stock for the three months ended March 31, ~~2020~~2021 and ~~2019.~~2020.


	For the Three Months Ended
	March 31, 2020		March 31, 2019
(Dollars in millions except per share amounts)
For the three months ended March 31:					2021		2020
Number of shares on which basic earnings per share is calculated:
Weighted-average shares outstanding during period		887,969,345		889,581,542		893,630,916		887,969,345
Add — Incremental shares under stock-based compensation plans		5,740,415		3,372,460		6,622,441		5,740,415
Add — Incremental shares associated with contingently issuable shares		1,329,477		956,524		1,492,709		1,329,477
Number of shares on which diluted earnings per share is calculated		895,039,238		893,910,526		901,746,065		895,039,238

Income from continuing operations (millions)	$	1,176	$	1,593
Income/(loss) from discontinued operations, net of tax (millions)		(1)		(2)
Net income on which basic earnings per share is calculated (millions)	$	1,175	$	1,591
Income from continuing operations					$	956	$	1,176
Income/(loss) from discontinued operations, net of tax						(1)		(1)
Net income on which basic earnings per share is calculated					$	955	$	1,175

Income from continuing operations (millions)	$	1,176	$	1,593
Net income applicable to contingently issuable shares (millions)		(2)		—
Income from continuing operations on which diluted earnings per share is calculated (millions)	$	1,174	$	1,593
Income/(loss) from discontinued operations, net of tax, on which basic and diluted earnings per share is calculated (millions)		(1)		(2)
Net income on which diluted earnings per share is calculated (millions)	$	1,173	$	1,591
Income from continuing operations					$	956	$	1,176
Net income applicable to contingently issuable shares						—		(2)
Income from continuing operations on which diluted earnings per share is calculated					$	956	$	1,174
Income/(loss) from discontinued operations, net of tax, on which basic and diluted earnings per share is calculated						(1)		(1)
Net income on which diluted earnings per share is calculated					$	955	$	1,173

Earnings/(loss) per share of common stock:
Assuming dilution
Continuing operations	$	1.31	$	1.78	$	1.06	$	1.31
Discontinued operations		0.00		0.00		0.00		0.00
Total	$	1.31	$	1.78	$	1.06	$	1.31
Basic
Continuing operations	$	1.32	$	1.79	$	1.07	$	1.32
Discontinued operations		0.00		0.00		0.00		0.00
Total	$	1.32	$	1.79	$	1.07	$	1.32

Stock options to purchase ~~1,136,899~~1,510,886 shares and ~~1,137,019~~1,136,899 shares were outstanding as of March 31, ~~2020~~2021 and ~~2019,~~2020, respectively, but were not included in the computation of diluted earnings per share because the ~~options'~~ exercise price of the options during the respective period was greater than the average market price of the common shares, and, therefore, the effect would have been antidilutive.

~~Table of Contents~~

~~Notes to Consolidated Financial Statements — (continued)~~

7. Financial Assets & Liabilities:

Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The company classifies certain assets and liabilities based on the following fair value hierarchy:

●

Level 1—Quoted prices (unadjusted) in active markets for identical assets or liabilities that can be accessed at the measurement date;

Table of Contents

Notes to Consolidated Financial Statements — (continued)

●

Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and

●

Level 3—Unobservable inputs for the asset or liability.

When available, the company uses unadjusted quoted market prices in active markets to measure the fair value and classifies such items as Level 1. If quoted market prices are not available, fair value is based upon internally developed models that use current market-based or independently sourced market parameters such as interest rates and currency rates. Items valued using internally generated models are classified according to the lowest level input or value driver that is significant to the valuation.

The determination of fair value considers various factors including interest rate yield curves and time value underlying the financial instruments. For derivatives and debt securities, the company uses a discounted cash flow analysis using discount rates commensurate with the duration of the instrument.

In determining the fair value of financial instruments, the company considers certain market valuation adjustments to the “base valuations” calculated using the methodologies described below for several parameters that market participants would consider in determining fair value:

●

Counterparty credit risk adjustments are applied to financial instruments, taking into account the actual credit risk of a counterparty as observed in the credit default swap market to determine the true fair value of such an instrument.

●

Credit risk adjustments are applied to reflect the company’s own credit risk when valuing all liabilities measured at fair value. The methodology is consistent with that applied in developing counterparty credit risk adjustments, but incorporates the company’s own credit risk as observed in the credit default swap market.

The company holds investments primarily in time deposits, certificates of deposit, and U.S. government ~~and agency~~ debt ~~and corporate debt securities~~ that are designated as available-for-sale. The primary objective of the company’s cash and debt investment portfolio is to maintain principal by investing in ~~short-term~~very liquid and highly ~~liquid securities with a credit rating of~~rated investment grade ~~Aa2 or higher.~~securities.

Available-for-sale securities are measured for impairment on a recurring basis by comparing the security’s fair value with its amortized cost basis. Effective January 1, 2020 with the adoption of the new standard on credit losses, if the fair value of the security falls below its amortized cost basis, the change in fair value is recognized in the period the impairment is identified when the loss is due to credit factors. The change in fair value due to non-credit factors is recorded in other comprehensive income when the company does not intend to sell and has the ability to hold the investment. The company’s standard practice is to hold all of its debt security investments classified as available-for-sale until maturity. NaN impairment for credit losses and no material non-credit impairment ~~was~~were recorded for the three months ended March 31, ~~2020. Prior~~2021 and 2020, respectively.

Certain non-financial assets such as property, plant and equipment, operating right-of-use assets, land, goodwill and intangible assets are also subject to nonrecurring fair value measurements if they are deemed to be impaired. The impairment models used for non-financial assets depend on the ~~adoption~~type of asset. There were no material impairments of non-financial assets for the ~~new standard,~~ three months ended March 31, 2021 and 2020, respectively.

~~available-for-sale securities were measured for~~

1817

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Notes to Consolidated Financial Statements — (continued)

~~impairment using an other-than-temporary impairment model.~~ ~~NaN impairment was recorded for the three months ended March 31, 2019.~~

Certain non-financial assets such as property, plant and equipment, operating right-of-use assets, land, goodwill and intangible assets are also subject to nonrecurring fair value measurements if they are deemed to be impaired. The impairment models used for non-financial assets depend on the type of asset. There were no material impairments of non-financial assets for the three months ended March 31, 2020 and 2019, respectively.

The following table presents the company’s financial assets and financial liabilities that are measured at fair value on a recurring basis at March 31, ~~2020~~2021 and December 31, ~~2019.~~2020.


	Fair Value									Fair Value
	Hierarchy	At March 31, 2020				At December 31, 2019				Hierarchy	At March 31, 2021				At December 31, 2020
(Dollars in millions)	Level	Assets (7)		Liabilities (8)		Assets (7)		Liabilities (8)		Level	Assets (7)		Liabilities (8)		Assets (7)		Liabilities (8)
Cash equivalents (1)
Cash equivalents: (1)
Time deposits and certificates of deposit (2)	2	$	7,166	$	N/A	$	4,392	$	N/A	2	$	5,943	$	N/A	$	7,668	$	N/A
Money market funds	1		526		N/A		427		N/A	1		141		N/A		148		N/A
U.S. government securities (2)										2		—		N/A		500		N/A
Total cash equivalents		$	7,692	$	N/A	$	4,819	$	N/A		$	6,084	$	N/A	$	8,316	$	N/A
Equity investments (3)	1		1		N/A		0		N/A	1		1		N/A		2		N/A
Debt securities-current (2)(4)	2		647		N/A		696		N/A	2		600		N/A		600		N/A
Debt securities-noncurrent (2)(5)	2		33		N/A		65		N/A	2		6		N/A		7		N/A
Derivatives designated as hedging instruments
Derivatives designated as hedging instruments:
Interest rate contracts	2		104		—		56		—	2		20		—		100		—
Foreign exchange contracts	2		384		446		175		635	2		404		276		111		580
Derivatives not designated as hedging instruments
Derivatives not designated as hedging instruments:
Foreign exchange contracts	2		30		16		10		33	2		13		50		13		47
Equity contracts (6)	1,2		1		50		1		4	1,2		13		6		12		—
Total		$	8,892	$	511	$	5,823	$	673		$	7,141	$	332	$	9,161	$	627

(1)	Included within cash and cash equivalents in the Consolidated Balance Sheet.

(2)	Available-for-sale debt securities with ~~an amortized cost basis~~carrying values that ~~approximates~~approximate fair value.

(3)	Included within investments and sundry assets in the Consolidated Balance Sheet.

(4)	Primarily includes U.S. treasury bills that are reported within marketable securities in the Consolidated Balance Sheet.

(5)	Primarily includes ~~corporate~~government debt securities ~~with a maximum maturity of two years~~ that are reported within investments and sundry assets in the Consolidated Balance Sheet.

(6)	Level 1 includes immaterial amounts related to equity futures contracts.

(7)

The gross balances of derivative assets contained within prepaid expenses and other current assets, and investments and sundry assets in the Consolidated Balance Sheet at March 31, ~~2020~~2021 were ~~$427~~$386 million and ~~$92~~$64 million, respectively, and at December 31, ~~2019~~2020 were ~~$149~~$85 million and ~~$94~~$151 million, respectively.

(8)

The gross balances of derivative liabilities contained within other accrued expenses and liabilities, and other liabilities in the Consolidated Balance Sheet at March 31, ~~2020~~2021 were ~~$253~~$277 million and ~~$259~~$55 million, respectively, and at December 31, ~~2019~~2020 were ~~$167~~$587 million and ~~$506~~$40 million, respectively.

N/A - not applicable

Financial Assets and Liabilities Not Measured at Fair Value

Short-Term Receivables and Payables

Notes and other accounts receivable and other investments are financial assets with carrying values that approximate fair value. Accounts payable, other accrued expenses and short-term debt (excluding the current portion of long-term debt and including short-term finance lease liabilities) are financial liabilities with carrying values that approximate fair value. If measured at fair value in the financial statements, these financial instruments would be classified as Level 3 in the fair value hierarchy, except for short-term debt which would be classified as Level 2.

~~Table of Contents~~

~~Notes to Consolidated Financial Statements — (continued)~~

Loans and Long-Term Receivables

Fair values are based on discounted future cash flows using current interest rates offered for similar loans to clients with similar credit ratings for the same remaining maturities. At March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, the difference between the carrying amount and estimated fair value for loans and long-term receivables was immaterial. If measured at fair value in the financial statements, these financial instruments would be classified as Level 3 in the fair value hierarchy.

Table of Contents

Notes to Consolidated Financial Statements — (continued)

Long-Term Debt

Fair value of ~~publicly-traded~~publicly traded long-term debt is based on quoted market prices for the identical liability when traded as an asset in an active market. For other long-term debt (including long-term finance lease liabilities) for which a quoted market price is not available, an expected present value technique that uses rates currently available to the company for debt with similar terms and remaining maturities is used to estimate fair value. The carrying amount of long-term debt was ~~$52,685~~$51,206 million and ~~$54,102~~$54,355 million, and the estimated fair value was ~~$56,760~~$55,962 million and ~~$58,431~~$61,598 million at March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. If measured at fair value in the financial statements, long-term debt (including the current portion) would be classified as Level 2 in the fair value hierarchy.

8. Financing Receivables:

Financing receivables primarily consist of client loan and installment payment receivables (loans) and investment in sales-type and direct financing leases (collectively referred to as client financing receivables) and commercial financing receivables. Loans are provided primarily to clients to finance the purchase of hardware, software and services. Payment terms on these financing arrangements are generally for terms up to seven years. Investment in sales-type and direct financing leases relate principally to the company’s Systems products and are for terms ranging generally from two to six years. Commercial financing receivables relate primarily to working capital financing for dealers and remarketers of IBM products. Payment terms for working capital financing generally range from 30 to 90 days.

~~Effective January 1,~~A summary of the components of the company’s financing receivables is presented as follows:


	Client Financing Receivables
	Client Loan and		Investment in
	Installment Payment		Sales-Type and		Commercial
(Dollars in millions)	Receivables		Direct Financing		Financing
At March 31, 2021:	(Loans)		Leases		Receivables		Total
Financing receivables, gross	$	10,218	$	3,923	$	1,119	$	15,261
Unearned income		(421)		(290)		0		(711)
Residual value*		—		430		—		430
Amortized cost	$	9,797	$	4,064	$	1,119	$	14,980
Allowance for credit losses		(154)		(74)		(7)		(236)
Total financing receivables, net	$	9,643	$	3,989	$	1,112	$	14,744
Current portion	$	6,050	$	1,660	$	1,112	$	8,822
Noncurrent portion	$	3,592	$	2,329	$	—	$	5,922


	Client Financing Receivables
	Client Loan and		Investment in
	Installment Payment		Sales-Type and		Commercial
(Dollars in millions)	Receivables		Direct Financing		Financing
At December 31, 2020:	(Loans)		Leases		Receivables		Total
Financing receivables, gross	$	12,159	$	4,001	$	2,419	$	18,580
Unearned income		(488)		(335)		0		(823)
Residual value*		—		485		—		485
Amortized cost	$	11,671	$	4,151	$	2,419	$	18,242
Allowance for credit losses		(173)		(82)		(8)		(263)
Total financing receivables, net	$	11,498	$	4,069	$	2,411	$	17,979
Current portion	$	6,955	$	1,525	$	2,411	$	10,892
Noncurrent portion	$	4,542	$	2,544	$	—	$	7,086

* Includes guaranteed and unguaranteed residual value.

Table of Contents

Notes to Consolidated Financial Statements — (continued)

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

Financing receivables pledged as collateral for nonrecourse borrowings were $425 million and $482 million at March 31, 2021 and December 31, 2020, respectively. These borrowings are included in note 11, “Borrowings.”

Transfer of Financial Assets

For the three months ended March 31, 2021, the company sold $995 million of client financing receivables to third parties, consisting of loan and lease receivables of $653 million and $342 million, respectively. More than half of the receivables sold were classified as current assets at the time of sale.

On December 24, 2020, the company ~~adopted~~entered into an agreement with a third-party investor to sell up to $3,000 million of IBM short-term commercial financing receivables, at any one time, on a revolving basis. The company sold $1,167 million of commercial financing receivables under the ~~new accounting standard related to credit losses, using~~agreement for the ~~transition option whereby prior comparative periods were not retrospectively presented~~three months ended March 31, 2021. In addition, the company included $257 million and $383 million of commercial financing receivables classified as held for sale at March 31, 2021 and December 31, 2020, respectively, in short-term financing receivables in the Consolidated ~~Financial Statements. Refer~~Balance Sheet. The carrying value of the receivables classified as held for sale approximates fair value.

The transfers of these receivables qualified as true sales and therefore reduced financing receivables, resulting in a benefit to ~~note 2, “Accounting Changes,”~~cash flows from operating activities. The impacts to the Consolidated Income Statement, including fees and net gain or loss associated with the transfers of these receivables for ~~additional information. Under this new guidance,~~the three months ended March 31, 2021 were not material. The company did not have any sales of financing receivables for the three months ended March 31, 2020.

Financing Receivables by Portfolio Segment

The following tables present the amortized cost basis for client financing receivables at March 31, 2021 and December 31, 2020, further segmented by 3 classes: Americas, Europe/Middle East/Africa (EMEA) and Asia Pacific. The commercial financing receivables portfolio segment is excluded from the tables in the sections below as the receivables are short term in nature and the current estimated risk of aloss and resulting impact to the company’s financial ~~asset~~results are not material.

Table of Contents

Notes to Consolidated Financial Statements — (continued)


(Dollars in millions)
At March 31, 2021:	Americas		EMEA		Asia Pacific		Total
Amortized cost	$	6,867	$	4,244	$	2,750	$	13,861
Allowance for credit losses
Beginning balance at January 1, 2021	$	141	$	77	$	37	$	255
Write-offs		(2)		(1)		(6)		(9)
Recoveries		0		0		0		1
Additions/(releases)		(11)		2		(3)		(12)
Other*		(3)		(3)		0		(6)
Ending balance at March 31, 2021	$	125	$	76	$	27	$	229


(Dollars in millions)
At December 31, 2020:	Americas		EMEA		Asia Pacific		Total
Amortized cost	$	7,758	$	5,023	$	3,042	$	15,822
Allowance for credit losses
Beginning balance at January 1, 2020	$	142	$	69	$	41	$	252
Write-offs	$	(28)	$	(3)	$	(3)	$	(34)
Recoveries		0		0		2		3
Additions/(releases)		33		5		(4)		34
Other*		(6)		6		1		1
Ending balance at December 31, 2020	$	141	$	77	$	37	$	255

* Primarily represents translation adjustments.

IBM continues to monitor the ~~original amount of~~global impacts from the ~~financing receivable (including residual value) adjusted for unearned income, deferred initial direct costs, cash collected, write-offs and any foreign exchange adjustments.~~COVID-19 pandemic as well as its impact on external economic models. The company’s allowance for credit losses ~~represents future expected credit losses over~~at March 31, 2021 and December 31, 2020 reflects the life of the receivables based on past experience, current information and forward-looking economic considerations. Prior to the effective date, financing receivables were measured at recorded investment,qualitative process which ~~does not include residual value. As a result of~~is described further in note A, “Significant Accounting Policies” in the company’s ~~transition option, all prior periods are presented at recorded investment, while current period information is presented at amortized cost.~~2020 Annual Report. Any changes to economic models that occurred after the balance sheet date will be reflected in future periods.

2021

Table of Contents

Notes to Consolidated Financial Statements — (continued)

~~A summary of the components of the company’s financing receivables is presented as follows:~~

Investment in




Client Loan and



Sales-Type and

Commercial

Installment Payment

(Dollars in millions)

Direct Financing

Financing

Receivables

At March 31, 2020:

Leases

Receivables

(Loans)

Total
Financing receivables, gross

$
5,479

$
2,334

$
12,605

$
20,418
Unearned income

(471)

(3)

(517)

(991)
Residual value*

646

—

—

646
Amortized cost

$
5,654

$
2,331

$
12,087

$
20,072
Allowance for credit losses

(79)

(12)

(147)

(238)
Total financing receivables, net

$
5,575

$
2,319

$
11,940

$
19,834
Current portion

$
2,112

$
2,319

$
7,695

$
12,126
Noncurrent portion

$
3,463

$
—

$
4,245

$
7,708

* Includes guaranteed and unguaranteed residual value.

Investment in




Client Loan and



Sales-Type and

Commercial

Installment Payment

(Dollars in millions)

Direct Financing

Financing

Receivables

At December 31, 2019:

Leases

Receivables

(Loans)

Total
Financing receivables, gross

$
6,077

$
3,836

$
13,592

$
23,504
Unearned income

(509)

(4)

(570)

(1,083)
Recorded investment

$
5,567

$
3,831

$
13,022

$
22,421
Allowance for credit losses

(72)

(11)

(138)

(221)
Unguaranteed residual value

652

—

—

652
Guaranteed residual value

53

—

—

53
Total financing receivables, net

$
6,199

$
3,820

$
12,884

$
22,904
Current portion

$
2,334

$
3,820

$
8,037

$
14,192
Noncurrent portion

$
3,865

$
—

$
4,847

$
8,712

The company utilizes certain of its financing receivables as collateral for nonrecourse borrowings. Financing receivables pledged as collateral for borrowings were $914 million and $1,062 million at March 31, 2020 and December 31, 2019, respectively.

~~The company did not have any financing receivables held for sale at March 31, 2020 and December 31, 2019.~~

~~Allowance for Credit Losses – Financing Receivables~~

Refer to note A, “Significant Accounting Policies,” in the company’s 2019 Annual Report for a full description of its accounting policies for trade and financing receivables, contract assets and related allowances. The descriptions below include any changes to those policies due to the new standard.

Effective with the adoption of the new credit losses standard, the company’s estimates of its allowances for expected credit losses include consideration of: past events, including any historical default, historical concessions and resulting troubled debt restructurings, current economic conditions, taking into account any non-freestanding mitigating credit enhancements and certain forward-looking information, including reasonable and supportable forecasts.

~~Collectively Evaluated Financing Receivables~~

The company determines its allowance for credit losses based on 2 portfolio segments: client financing receivables and commercial financing receivables, and further segments the portfolio into 3 classes: Americas, Europe/Middle East/Africa (EMEA) and Asia Pacific.

~~Table of Contents~~

~~Notes to Consolidated Financial Statements — (continued)~~

For client financing receivables, the company uses a credit loss model to calculate allowances based on its internal loss experience and current conditions and forecasts, by class of financing receivable. The company records an unallocated reserve that is calculated by applying a reserve rate to its portfolio, excluding accounts that have been individually evaluated and specifically reserved. This reserve rate is based upon credit rating, probability of default, term and loss history. The allowance is adjusted quarterly for expected recoveries of amounts that were previously written off or are expected to be written off. Recoveries cannot exceed the aggregated amount of the previous write-off or expected write-off.

Macroeconomic variables attributed to the expected credit losses for client financing receivables may vary by class of financing receivables based on historical experiences, portfolio composition and current environment. In addition to a qualitative review of credit risk factors across the portfolio, the company considers forward-looking macroeconomic variables such as gross domestic product, unemployment rates, equity prices and corporate profits when quantifying the impact of economic forecasts on its client financing receivables expected allowance for credit losses. The company also considers the impact of current conditions and economic forecasts relating to specific industries, geographical areas, and client-specific exposures on the portfolio. Under this approach, forecasts of these variables over two years are considered reasonable and supportable. Beyond two years, the company reverts to long-term average loss experience. Forward-looking estimates require the use of judgment, particularly in times of economic uncertainty. With evolving global impacts from the COVID-19 pandemic, external economic models have been revised with increased frequency and with alternative scenarios. The company’s allowances at March 31, 2020, reflect the qualitative process described above. Any changes to economic models that occurred after the balance sheet date will be reflected in future periods.

~~The allowance for commercial financing receivables is estimated based on a combination of write-off history and current economic conditions, excluding any individually evaluated accounts.~~

At January 1, 2020, upon adoption of the new standard, the company recorded an additional allowance for client and commercial financing receivables (including related off-balance sheet commitments) of $64 million. This was primarily driven by an increase in the client financing receivables allowance. Refer to note 12, “Commitments,” for additional information regarding off-balance sheet commitments.

~~Client Financing Receivables~~

The following tables present the amortized cost basis or recorded investment for the client financing receivables portfolio segment at March 31, 2020 and December 31, 2019, further segmented by 3 classes: Americas, Europe/Middle East/Africa (EMEA) and Asia Pacific. The commercial financing receivables portfolio segment is excluded from this presentation, as it is short term in nature and the current estimated risk of loss and resulting impact to the company’s financing results is not material.

~~Table of Contents~~

~~Notes to Consolidated Financial Statements — (continued)~~

(Dollars in millions)












At March 31, 2020:

Americas

EMEA

Asia Pacific

Total
Amortized cost








Lease receivables

$
3,609

$
1,122

$
923

$
5,654
Loan receivables

6,151

3,663

2,273

12,087
Ending balance

$
9,760

$
4,785

$
3,196

$
17,741

Allowance for credit losses








Beginning balance at December 31, 2019

$
120

$
54

$
36

$
210
Adjustment for adoption of new standard

21

15

5

41
Beginning balance at January 1, 2020







Lease receivables

$
44

$
27

$
18

$
89
Loan receivables

98

42

22

163
Total

$
142

$
69

$
41

$
252
Write-offs

$
(16)

$
(1)

$
(2)

$
(19)
Recoveries

0

—

1

1
Provision

3

7

(1)

9
Other*

(13)

(2)

(1)

(16)
Ending balance at March 31, 2020

$
117

$
73

$
36

$
226
Lease receivables

$
41

$
23

$
15

$
79
Loan receivables

$
75

$
50

$
22

$
147

*	~~Primarily represents translation adjustments.~~

~~Table of Contents~~

~~Notes to Consolidated Financial Statements — (continued)~~

(Dollars in millions)












At December 31, 2019:

Americas

EMEA

Asia Pacific

Total
Recorded investment








Lease receivables

$
3,419

$
1,186

$
963

$
5,567
Loan receivables

6,726

3,901

2,395

13,022
Ending balance

$
10,144

$
5,087

$
3,359

$
18,590
Recorded investment collectively evaluated for impairment

$
10,032

$
5,040

$
3,326

$
18,399
Recorded investment individually evaluated for impairment

$
112

$
47

$
32

$
191

Allowance for credit losses








Beginning balance at January 1, 2019








Lease receivables

$
53

$
22

$
24

$
99
Loan receivables

105

43

32

179
Total

$
158

$
65

$
56

$
279
Write-offs

$
(42)

$
(3)

$
(18)

$
(63)
Recoveries

1

0

1

2
Provision

5

(7)

(3)

(5)
Other*

(1)

0

(1)

(2)
Ending balance at December 31, 2019

$
120

$
54

$
36

$
210
Lease receivables

$
33

$
23

$
16

$
72
Loan receivables

$
88

$
31

$
20

$
138

Related allowance, collectively evaluated for impairment

$
25

$
11

$
4

$
39
Related allowance, individually evaluated for impairment

$
96

$
43

$
32

$
171

* Primarily represents translation adjustments.

Write-offs of lease receivables and loan receivables were $16 million and $47 million, respectively, for the year ended December 31, 2019. Provisions for credit losses recorded for lease receivables and loan receivables were a release of $6 million and an addition of $2 million, respectively, for the year ended December 31, 2019.

Past Due Financing Receivables

The company ~~considers a client’s financing receivable balance past due when any installment is aged over 90 days. The following tables summarize~~summarizes information about the amortized cost basis ~~or recorded investment in lease and loan~~for client financing receivables, including amortized cost ~~or recorded investment~~ aged over 90 days and still accruing, billed invoices aged over 90 days and still accruing, and amortized cost ~~or recorded investment~~ not accruing.


					Amortized		Billed		Amortized
	Total		Amortized		Cost		Invoices		Cost
(Dollars in millions)	Amortized		Cost		> 90 Days and		> 90 Days and		Not
At March 31, 2021:	Cost		> 90 Days (1)		Accruing (1)		Accruing		Accruing (2)
Americas	$	6,867	$	271	$	182	$	11	$	94
EMEA		4,244		102		14		3		93
Asia Pacific		2,750		32		9		4		24
Total client financing receivables	$	13,861	$	405	$	205	$	18	$	212

~~Table of Contents~~

~~Notes to Consolidated Financial Statements — (continued)~~


					Amortized		Billed								Amortized		Billed		Amortized
	Total		Amortized		Cost		Invoices		Amortized		Total		Amortized		Cost		Invoices		Cost
(Dollars in millions)	Amortized		Cost		> 90 Days and		> 90 Days and		Cost Not		Amortized		Cost		> 90 Days and		> 90 Days and		Not
At March 31, 2020:	Cost		> 90 Days (1)		Accruing (1)		Accruing		Accruing (2)
At December 31, 2020:											Cost		> 90 Days (1)		Accruing (1)		Accruing		Accruing (2)
Americas	$	3,609	$	144	$	110	$	8	$	40	$	7,758	$	295	$	200	$	12	$	96
EMEA		1,122		20		6		0		16		5,023		119		28		5		95
Asia Pacific		923		24		13		1		10		3,042		42		12		4		32
Total lease receivables	$	5,654	$	188	$	129	$	9	$	65

Americas	$	6,151	$	115	$	62	$	11	$	54
EMEA		3,663		74		7		3		69
Asia Pacific		2,273		27		10		1		17
Total loan receivables	$	12,087	$	215	$	80	$	16	$	140

Total	$	17,741	$	403	$	209	$	26	$	206
Total client financing receivables											$	15,822	$	456	$	241	$	20	$	223

(1)	At a contract level, which includes total billed and unbilled amounts for financing receivables aged greater than 90 days.

(2)	Of the amortized cost not accruing, there was a related allowance of ~~$148 million.~~$167 million and $178 million at March 31, 2021 and December 31, 2020, respectively. Financing income recognized on these receivables was immaterial for the three months ended March 31, ~~2020.~~

Recorded

Billed

Recorded

Total

Recorded

Investment

Invoices

Investment
(Dollars in millions)

Recorded

Investment

> 90 Days and

> 90 Days and

Not
At December 31, 2019:

Investment

> 90 Days (1)

Accruing (1)

Accruing

Accruing (2)
Americas

$
3,419

$
187

$
147

$
11

$
41
EMEA

1,186

28

13

2

17
Asia Pacific

963

19

7

1

11
Total lease receivables

$
5,567

$
234

$
168

$
14

$
69

Americas

$
6,726

$
127

$
71

$
11

$
72
EMEA

3,901

77

8

3

72
Asia Pacific

2,395

26

6

2

21
Total loan receivables

$
13,022

$
231

$
85

$
15

$
166

Total

$
18,590

$
465

$
253

$
29

$
235

~~(1)~~

~~At a contract level, which includes total billed~~2021 and ~~unbilled amounts for financing receivables aged greater than 90 days.~~

~~(2)~~

~~Of the recorded investment not accruing, $191 million was individually evaluated for impairment with a related allowance of $171 million.~~2020, respectively.

Credit Quality Indicators

The company’s credit quality indicators, which are based on rating agency data, publicly available information and information provided by customers, are reviewed periodically based on the relative level of risk. The resulting indicators are a numerical rating system that maps to Moody’s Investors Service credit ratings as shown below. The company uses information provided ~~annually~~ by Moody’s, where available, as one of many inputs in its determination of customer credit ratings. The credit quality of the customer is evaluated based on these indicators and is assigned the same risk rating whether the receivable is a lease or a loan.

The following tables present the amortized cost basis ~~or recorded investment~~ for ~~financing receivables, excluding commercial~~client financing receivables by credit quality indicator at March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. Receivables with a credit quality indicator ranging from Aaa to Baa3 are considered investment grade. All others are considered non-investment grade. ~~Effective January 1, 2020, under the new guidance for credit losses, the company discloses its~~The credit quality indicators reflect mitigating credit enhancement actions taken by ~~year of origination. Additionally, under~~customers which reduces the ~~new guidance, the amortized cost is presented on a gross basis, whereas under the prior guidance, the company presented the recorded investment net of the allowance~~risk to IBM.


(Dollars in millions)	Americas				EMEA				Asia Pacific
At March 31, 2021:	Aaa – Baa3		Ba1 – D		Aaa – Baa3		Ba1 – D		Aaa – Baa3		Ba1 – D
Vintage year:
2021	$	808	$	421	$	310	$	349	$	253	$	105
2020		1,966		923		1,086		887		721		230
2019		871		457		471		431		499		94
2018		666		283		311		166		365		133
2017		206		117		43		103		165		40
2016 and prior		56		92		34		53		109		36
Total	$	4,573	$	2,294	$	2,254	$	1,989	$	2,111	$	639

2522

Table of Contents

Notes to Consolidated Financial Statements — (continued)

~~for credit losses. The credit quality indicators do not reflect any mitigation actions taken to transfer credit risk to third parties.~~

(Dollars in millions)

Americas

EMEA

Asia Pacific
At March 31, 2020:

Aaa – Baa3

Ba1 – D

Aaa – Baa3

Ba1 – D

Aaa – Baa3

Ba1 – D
Vintage year:












2020

$
1,422

$
883

$
633

$
806

$
251

$
163
2019

2,213

1,601

966

1,043

1,607

678
2018

1,148

736

400

359

208

82
2017

722

386

141

191

79

37
2016

292

309

94

68

36

20
2015 and prior

18

30

45

40

20

16
Total

$
5,815

$
3,945

$
2,278

$
2,506

$
2,200

$
996

(Dollars in millions)

Lease Receivables

Loan Receivables
At December 31, 2019:

Americas

EMEA

Asia Pacific

Americas

EMEA

Asia Pacific
Credit rating:












Aaa – Aa3

$
465

$
54

$
43

$
1,028

$
193

$
189
A1 – A3

750

181

454

1,186

395

892
Baa1 – Baa3

955

409

147

1,882

1,527

619
Ba1 – Ba2

746

326

154

1,513

921

388
Ba3 – B1

215

140

101

471

564

205
B2 – B3

242

50

47

522

253

72
Caa – D

13

2

2

36

18

10
Total

$
3,385

$
1,162

$
947

$
6,638

$
3,871

$
2,376


(Dollars in millions)	Americas				EMEA				Asia Pacific
At December 31, 2020:	Aaa – Baa3		Ba1 – D		Aaa – Baa3		Ba1 – D		Aaa – Baa3		Ba1 – D
Vintage year:
2020	$	2,818	$	1,449	$	1,513	$	1,427	$	958	$	351
2019		988		623		668		519		564		123
2018		829		360		329		245		419		167
2017		285		154		70		128		205		52
2016		90		52		33		46		114		33
2015 and prior		28		81		22		22		38		18
Total	$	5,038	$	2,720	$	2,635	$	2,387	$	2,298	$	743

Troubled Debt Restructurings

The company did not have any significant troubled debt restructurings during the three months ended March 31, ~~2020~~2021 or for the year ended December 31, ~~2019.~~2020.

9. Leases:

Accounting for Leases as a Lessor

The following table presents amounts included in the Consolidated Income Statement related to lessor activity:


(Dollars in millions)
For the three months ended March 31:	2020		2019		2021		2020
Lease income — sales-type and direct financing leases
Lease income – sales-type and direct financing leases:
Sales-type lease selling price	$	211	$	149	$	363	$	211
Less: Carrying value of underlying assets, excluding unguaranteed residual value		76		55
Less: Carrying value of underlying assets*						59		76
Gross profit		135		94	$	304	$	135
Interest income on lease receivables		74		79		51		74
Total sales-type and direct financing lease income	$	208	$	172	$	355	$	208
Lease income — operating leases		71		90
Lease income – operating leases						51		71
Variable lease income		30		18	��	57		30
Total lease income	$	310	$	280	$	463	$	310

* Excludes unguaranteed residual value.

2623

Table of Contents

Notes to Consolidated Financial Statements — (continued)

10. Intangible Assets Including Goodwill:

Intangible Assets

The following table presents the company's intangible asset balances by major asset class.


	At March 31, 2020						At March 31, 2021
	Gross Carrying		Accumulated		Net Carrying		Gross Carrying		Accumulated		Net Carrying
(Dollars in millions)	Amount		Amortization		Amount*		Amount		Amortization		Amount*
Intangible asset class
Intangible asset class:
Capitalized software	$	1,760	$	(764)	$	997	$	1,854	$	(837)	$	1,017
Client relationships		8,854		(1,669)		7,185		8,874		(2,275)		6,599
Completed technology		6,225		(1,566)		4,658		5,972		(1,784)		4,188
Patents/trademarks		2,287		(483)		1,804		2,196		(480)		1,717
Other**		56		(33)		22		56		(41)		14
Total	$	19,181	$	(4,515)	$	14,666	$	18,952	$	(5,417)	$	13,535


	At December 31, 2019						At December 31, 2020
	Gross Carrying		Accumulated		Net Carrying		Gross Carrying		Accumulated		Net Carrying
(Dollars in millions)	Amount		Amortization		Amount*		Amount		Amortization		Amount*
Intangible asset class
Intangible asset class:
Capitalized software	$	1,749	$	(743)	$	1,006	$	1,777	$	(814)	$	963
Client relationships		8,921		(1,433)		7,488		8,838		(2,056)		6,783
Completed technology		6,261		(1,400)		4,861		5,957		(1,671)		4,286
Patents/trademarks		2,301		(445)		1,856		2,246		(499)		1,747
Other**		56		(31)		24		56		(39)		16
Total	$	19,287	$	(4,052)	$	15,235	$	18,874	$	(5,079)	$	13,796

* Amounts as of March 31, ~~2020~~2021 and December 31, ~~2019~~2020 include a decrease in net intangible asset balances of ~~$92~~$137 million and ~~$42~~an increase of $279 million, respectively, due to foreign currency translation.

**	Other intangibles are primarily acquired proprietary and non-proprietary business processes, methodologies and systems.

The net carrying amount of intangible assets decreased ~~$569~~$261 million during the first three months of ~~2020,~~2021, primarily due to intangible asset ~~amortization.~~amortization, partially offset by additions of acquired intangibles and capitalized software. The aggregate intangible amortization expense was ~~$622~~$620 million and ~~$303~~$622 million for the ~~first quarter~~quarters ended March 31, 2021 and 2020, ~~and 2019,~~ respectively. The increase in intangible amortization expense was primarily due to an increase in the gross carrying amount of intangible assets from the Red Hat acquisition which closed in the third quarter of 2019. In ~~addition, in~~ the first three months of ~~2020,~~2021, the company retired ~~$154~~$256 million of fully amortized intangible assets, impacting both the gross carrying amount and accumulated amortization by this amount.

The future amortization expense relating to intangible assets currently recorded in the Consolidated Balance Sheet is estimated to be the following at March 31, ~~2020:~~2021:


	Capitalized		Acquired				Capitalized		Acquired
(Dollars in millions)	Software		Intangibles		Total		Software		Intangibles		Total
Remainder of 2020	$	415	$	1,372	$	1,787
2021		399		1,738		2,137
Remainder of 2021							$	469	$	1,379	$	1,848
2022		170		1,676		1,846		368		1,774		2,142
2023		12		1,363		1,375		168		1,459		1,627
2024		0		1,313		1,313		12		1,408		1,420
2025								—		1,389		1,389
Thereafter		—		6,208		6,208		—		5,109		5,109

2724

Table of Contents

Notes to Consolidated Financial Statements — (continued)

Goodwill

The changes in the goodwill balances by segment for the three months ended March 31, ~~2020~~2021 and for the year ended December 31, ~~2019~~2020 are as follows:


									Foreign										Foreign
									Currency										Currency
					Purchase				Translation								Purchase		Translation
(Dollars in millions)	Balance		Goodwill		Price				And Other		Balance		Balance		Goodwill		Price		and Other		Balance
Segment	1/1/2020		Additions		Adjustments		Divestitures		Adjustments**		3/31/2020		1/1/2021		Additions		Adjustments		Adjustments*		3/31/2021
Cloud & Cognitive Software	$	43,037	$	10	$	12	$	—	$	(438)	$	42,620	$	43,934	$	245	$	6	$	(249)	$	43,935
Global Business Services		5,775		—		—		—		(102)		5,672		6,145		501		0		(61)		6,585
Global Technology Services		7,141		—		—		—		(167)		6,974		7,245		—		—		(70)		7,175
Systems		2,270		—		—		—		(19)		2,251		2,293		—		0		(4)		2,289
Other—divested businesses		—		—		—		—		—		—
Total	$	58,222	$	10	$	12	$	—	$	(727)	$	57,517	$	59,617	$	746	$	6	$	(384)	$	59,984


									Foreign										Foreign
									Currency										Currency
					Purchase				Translation								Purchase		Translation
(Dollars in millions)	Balance		Goodwill		Price				And Other		Balance		Balance		Goodwill		Price		and Other		Balance
Segment	1/1/2019		Additions		Adjustments		Divestitures		Adjustments**		12/31/2019		1/1/2020		Additions		Adjustments		Adjustments*		12/31/2020
Cloud & Cognitive Software*	$	24,463	$	18,399	$	133	$	—	$	41	$	43,037
Cloud & Cognitive Software													$	43,037	$	362	$	(139)	$	675	$	43,934
Global Business Services		4,711		1,059		1		(1)		5		5,775		5,775		205		—		165		6,145
Global Technology Services		3,988		3,119		—		—		34		7,141		7,141		—		—		104		7,245
Systems		1,847		525		(110)		—		7		2,270		2,270		8		—		15		2,293
Other—divested businesses*		1,256		—		—		(1,256)		—		—
Total	$	36,265	$	23,102	$	24	$	(1,257)	$	87	$	58,222	$	58,222	$	575	$	(139)	$	960	$	59,617

* ~~Recast to conform to 2020 presentation.~~

** Primarily driven by foreign currency translation.

There were 0 goodwill impairment losses recorded during the first three months of ~~2020~~2021 or ~~full year 2019~~full-year 2020 and the company has 0 accumulated impairment losses. As a result of the changes in the current economic environment related to the COVID-19 pandemic, the company considered whether there was a potential triggering event requiring the evaluation of whether goodwill should be tested for impairment. The company assessed the qualitative risk factors for the Systems reporting unit (given the results of the 2019 annual impairment test) and determined that it was not more likely than not that the fair value of the reporting unit was less than its carrying amount as of March 31, 2020.

Purchase price adjustments recorded in the first three months of ~~2020~~2021 and full-year ~~2019~~2020 were related to acquisitions that were still subject to the measurement period that ends at the earlier of 12 months from the acquisition date or when information becomes available. Net purchase price adjustments recorded during the first three months of ~~2020 and full-year 2019~~2021 were not material. In full-year 2020, net purchase price adjustments recorded to noncurrent tax assets and liabilities were related to the Red Hat acquisition.

11. Borrowings:

Short-Term Debt


	At March 31,		At December 31,		At March 31,		At December 31,
(Dollars in millions)	2020		2019		2021		2020
Commercial paper	$	2,519	$	304
Short-term loans		934		971	$	36	$	130
Long-term debt—current maturities		8,190		7,522
Long-term debt–current maturities						5,162		7,053
Total	$	11,642	$	8,797	$	5,198	$	7,183

The weighted-average interest rate for short-term loans was 5.3 percent and 5.7 percent at March 31, 2021 and December 31, 2020, respectively.

2825

Table of Contents

Notes to Consolidated Financial Statements — (continued)

The weighted-average interest rate for commercial paper at March 31, 2020 and December 31, 2019 was 1.1 percent and 1.6 percent, respectively. The weighted-average interest rate for short-term loans was 4.7 percent and 6.1 percent at March 31, 2020 and December 31, 2019, respectively.

Long-Term Debt

Pre-Swap Borrowing


		Balance		Balance			Balance		Balance
(Dollars in millions)	Maturities	3/31/2020		12/31/2019		Maturities	3/31/2021		12/31/2020
U.S. dollar debt (weighted-average interest rate at March 31, 2020):*
2.3%	2020	$	2,766	$	4,326
2.4%	2021		5,556		8,498
U.S. dollar debt (weighted-average interest rate at March 31, 2021):*
0.7%						2021	$	2,635	$	5,499
2.6%	2022		6,257		6,289	2022		5,712		6,233
3.5%						2023		1,636		2,395
3.3%	2023		2,413		2,388	2024		5,025		5,029
6.8%						2025		626		631
3.3%	2024		5,049		5,045	2026		4,368		4,370
6.7%	2025		645		636
3.3%	2026		4,350		4,350
4.7%	2027		969		969
3.0%						2027		2,219		2,219
6.5%	2028		313		313	2028		313		313
3.5%	2029		3,250		3,250	2029		3,250		3,250
2.0%						2030		1,350		1,350
5.9%	2032		600		600	2032		600		600
8.0%	2038		83		83	2038		83		83
4.5%	2039		2,745		2,745	2039		2,745		2,745
2.9%						2040		650		650
4.0%	2042		1,107		1,107	2042		1,107		1,107
7.0%	2045		27		27	2045		27		27
4.7%	2046		650		650	2046		650		650
4.3%	2049		3,000		3,000	2049		3,000		3,000
3.0%						2050		750		750
7.1%	2096		316		316	2096		316		316
		$	40,097	$	44,594		$	37,062	$	41,218
Other currencies (weighted-average interest rate at March 31, 2020, in parentheses):*
Other currencies (weighted-average interest rate at March 31, 2021, in parentheses):*
Euro (1.1%)	2020–2040	$	18,126	$	14,306	2021–2040	$	17,618	$	18,355
Pound sterling (2.7%)	2020–2022		1,311		1,390
Pound sterling (2.6%)						2022		414		411
Japanese yen (0.3%)	2022–2026		1,349		1,339	2022–2026		1,316		1,409
Other (4.1%)	2020–2022		288		375
Other (4.4%)						2021–2025		299		324
		$	61,170	$	62,003		$	56,708	$	61,718
Finance lease obligations (2.4%)	2021–2030		246		204
Finance lease obligations (1.5%)						2021–2030		317		296
		$	61,417	$	62,207		$	57,025	$	62,013
Less: net unamortized discount			881		881			868		875
Less: net unamortized debt issuance costs			151		142			147		156
Add: fair value adjustment**			491		440			357		426
		$	60,875	$	61,624		$	56,367	$	61,408
Less: current maturities			8,190		7,522			5,162		7,053
Total		$	52,685	$	54,102		$	51,206	$	54,355

* Includes notes, debentures, bank loans and secured borrowings.

** The portion of the company’s fixed-rate debt obligations that ~~was~~is hedged ~~was~~is reflected in the Consolidated Balance Sheet as an amount equal to the sum of the debt’s carrying value and a fair value adjustment representing changes in the fair value of the hedged debt obligations attributable to movements in benchmark interest rates.

The company’s indenture governing its debt securities and its various credit facilities each contain significant covenants which obligate the company to promptly pay principal and interest, limit the aggregate amount of secured indebtedness and sale and leaseback transactions to 10 percent of the company’s consolidated net tangible assets, and restrict the company’s ability to merge or consolidate unless certain conditions are met. The credit facilities also include

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indebtedness and sale and leaseback transactions to 10 percent of the company’s consolidated net tangible assets, and restrict the company’s ability to merge or consolidate unless certain conditions are met. The credit facilities also include a covenant on the company’s consolidated net interest expense ratio, which cannot be less than 2.20 to 1.0, as well as a cross default provision with respect to other defaulted indebtedness of at least $500 million.

The company is in compliance with its debt covenants and provides periodic certifications to its lenders. The failure to comply with its debt covenants could constitute an event of default with respect to the debt to which such provisions apply. If certain events of default were to occur, the principal and interest on the debt to which such event of default applied would become immediately due and payable.

In the first half of 2019, the company issued an aggregate of $20 billion of U.S. dollar fixed- and floating-rate notes and $5.7 billion of Euro fixed-rate notes. The proceeds were primarily used for the acquisition of Red Hat. For additional information on this transaction, refer to note 5, “Acquisitions & Divestitures.” In the first quarter of 2020, the company issued an aggregate of $4.1 billion of Euro fixed-rate notes and the proceeds were primarily used to early redeem outstanding fixed-rate debt which was due in 2021 in the aggregate amount of $2.9 billion. The notes were redeemed at a price equal to 100 percent of the aggregate principal plus a make-whole premium and accrued interest. The company incurred a loss of $49 million upon redemption that was recorded in other (income) and expense in the Consolidated Income Statement.

In the first quarter of 2021, IBM Credit LLC early redeemed all of its outstanding fixed-rate debt in the aggregate amount of $1.75 billion with maturity dates ranging from 2021 to 2023 and deregistered with the U.S. Securities and Exchange Commission. The notes were redeemed at a price equal to 100 percent of the aggregate principal plus a make-whole premium and accrued interest. The company incurred a loss of approximately $22 million upon redemption that was recorded in other (income) and expense in the Consolidated Income Statement.

Pre-swap annual contractual obligations of long-term debt outstanding at March 31, ~~2020,~~2021, are as follows:


(Dollars in millions)	Total		Total
Remainder of 2020	$	5,731
2021		6,897
Remainder of 2021			$	4,060
2022		7,180		6,826
2023		5,342		4,928
2024		6,302		6,442
2025				4,144
Thereafter		29,964		30,625
Total	$	61,417	$	57,025

Interest on Debt


(Dollars in millions)
For the three months ended March 31:	2020		2019		2021		2020
Cost of financing	$	119	$	179	$	106	$	119
Interest expense		326		210		280		326
Interest capitalized		5		2		2		5
Total interest paid and accrued	$	449	$	391	$	388	$	449

Lines of Credit

IBM has a $10.25 billion Five-Year Credit Agreement, ~~with a maturity date of July 20, 2024. In addition, the company and IBM Credit LLC have~~ a $2.5 billion ~~364-day~~Three-Year Credit Agreement and a $2.5 billion ~~Three-Year~~364-day Credit Agreement with respective maturity dates of July ~~16, 2020~~20, 2024, July 20, 2023 and July ~~20, 2022, respectively.~~1, 2021.

At March 31, ~~2020,~~2021, there were 0 borrowings by the company, or its subsidiaries, under these credit facilities.

12. Commitments:

The company’s extended lines of credit to third-party entities include unused amounts of ~~$2.1~~$1.6 billion and ~~$1.8~~$2.1 billion at March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. A portion of these amounts was available to the ~~company’s business partners to support their working capital needs. In addition, the company has committed to provide~~

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company’s business partners to support their working capital needs. In addition, the company has committed to provide future financing to its clients in connection with client purchase agreements for ~~$6.0~~$4.7 billion and ~~$6.3~~$5.2 billion at March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. ~~Effective January 1, 2020,~~The company collectively evaluates the ~~company adopted the new standard on credit losses, which resulted in the recognition of a related~~ allowance for ~~non-cancellable off-balance sheet~~these arrangements using a provision methodology consistent with the portfolio of the commitments. Refer to note ~~2, “Accounting Changes,”~~A, “Significant Accounting Policies” in the company’s 2020 Annual Report for additional information. The allowance for these commitments is recorded in other liabilities in the Consolidated Balance Sheet and was not material at March 31, 2020. The company collectively evaluates the allowance for these arrangements using a provision methodology consistent with the portfolio of the commitments. Refer to note 8, “Financing Receivables,” for additional information.2021.

The company has applied the guidance requiring a guarantor to disclose certain types of guarantees, even if the likelihood of requiring the guarantor’s performance is remote. The following is a description of arrangements in which the company is the guarantor.

The company is a party to a variety of agreements pursuant to which it may be obligated to indemnify the other party with respect to certain matters. Typically, these obligations arise in the context of contracts entered into by the company, under which the company customarily agrees to hold the party harmless against losses arising from a breach of representations and covenants related to such matters as title to the assets sold, certain intellectual property rights, specified environmental matters, third-party performance of nonfinancial contractual obligations and certain income taxes. In each of these circumstances, payment by the company is conditioned on the other party making a claim pursuant to the procedures specified in the particular contract, the procedures of which typically allow the company to challenge the other party’s claims. While ~~typically~~ indemnification provisions typically do not include a contractual maximum on the company’s payment, the company’s obligations under these agreements may be limited in terms of time and/or nature of claim, and in some instances, the company may have recourse against third parties for certain payments made by the company.

It is not possible to predict the maximum potential amount of future payments under these or similar agreements due to the conditional nature of the company’s obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made by the company under these agreements have not had a material effect on the company’s business, financial condition or results of operations.

In addition, the company guarantees certain loans and financial commitments. The maximum potential future payment under these financial guarantees and the fair value of these guarantees recognized in the Consolidated Balance Sheet at March 31, ~~2020~~2021 and December 31, ~~2019~~2020 was not material.

Changes in the company’s warranty liability for standard warranties, which are included in other accrued expenses and liabilities and other liabilities in the Consolidated Balance Sheet, and for extended warranty contracts, which are included in deferred income in the Consolidated Balance Sheet, are presented in the following tables.

Standard Warranty Liability


(Dollars in millions)	2020		2019		2021		2020
Balance at January 1	$	113	$	118	$	83	$	113
Current period accruals		20		19		16		20
Accrual adjustments to reflect actual experience		(6)		(1)		(4)		(6)
Charges incurred		(26)		(29)		(23)		(26)
Balance at March 31	$	100	$	107	$	72	$	100

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Extended Warranty Liability (Deferred Income)


(Dollars in millions)	2020		2019		2021		2020
Balance at January 1	$	477	$	533	$	425	$	477
Revenue deferred for new extended warranty contracts		40		36		18		40
Amortization of deferred revenue		(57)		(64)		(53)		(57)
Other*		(13)		(3)		(6)		(13)
Balance at March 31	$	447	$	503	$	383	$	447
Current portion	$	219	$	242	$	199	$	219
Noncurrent portion	$	228	$	261	$	185	$	228

* Other primarily consists of foreign currency translation adjustments.

13. Contingencies:

As a company with a substantial employee population and with clients in more than 175 countries, IBM is involved, either as plaintiff or defendant, in a variety of ongoing claims, demands, suits, investigations, tax matters and proceedings that arise from time to time in the ordinary course of its business. The company is a leader in the information technology industry and, as such, has been and will continue to be subject to claims challenging its IP rights and associated products and offerings, including claims of copyright and patent infringement and violations of trade secrets and other IP rights. In addition, the company enforces its own IP against infringement, through license negotiations, lawsuits or otherwise. Further, given the rapidly evolving external landscape of cybersecurity, privacy and data protection laws, regulations and threat actors, the company or its clients could become subject to actions or proceedings in various jurisdictions. Also, as is typical for companies of IBM’s scope and scale, the company is party to actions and proceedings in various jurisdictions involving a wide range of labor and employment issues (including matters related to contested employment decisions, country-specific labor and employment laws, and the company’s pension, retirement and other benefit plans), as well as actions with respect to contracts, product liability, securities, foreign operations, competition law and environmental matters. These actions may be commenced by a number of different parties, including competitors, clients, current or former employees, government and regulatory agencies, stockholders and representatives of the locations in which the company does business. Some of the actions to which the company is party may involve particularly complex technical issues, and some actions may raise novel questions under the laws of the various jurisdictions in which these matters arise.

The company records a provision with respect to a claim, suit, investigation or proceeding when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Any recorded liabilities, including any changes to such liabilities for the quarter ended March 31, ~~2020~~2021, were not material to the Consolidated Financial Statements.

In accordance with the relevant accounting guidance, the company provides disclosures of matters for which the likelihood of material loss is at least reasonably possible. In addition, the company also discloses matters based on its consideration of other matters and qualitative factors, including the experience of other companies in the industry, and investor, customer and employee relations considerations.

With respect to certain of the claims, suits, investigations and proceedings discussed herein, the company believes at this time that the likelihood of any material loss is remote, given, for example, the procedural status, court rulings, and/or the strength of the company’s defenses in those matters. With respect to the remaining claims, suits, investigations and proceedings discussed in this note, except as specifically discussed herein, the company is unable to provide estimates of reasonably possible losses or range of losses, including losses in excess of amounts accrued, if any, for the following reasons. Claims, suits, investigations and proceedings are inherently uncertain, and it is not possible to predict the ultimate outcome of these matters. It is the company’s experience that damage amounts claimed in litigation against it are unreliable and unrelated to possible outcomes, and as such are not meaningful indicators of the company’s potential liability. Further, the company is unable to provide such an estimate due to a number of other factors with respect to

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Notes to Consolidated Financial Statements — (continued)

these claims, suits, investigations and proceedings, including considerations of the procedural status of the matter in question, the presence of complex or novel legal theories, and/or the ongoing discovery and development of information

~~Table of Contents~~

~~Notes to Consolidated Financial Statements — (continued)~~

important to the matters. The company reviews claims, suits, investigations and proceedings at least quarterly, and decisions are made with respect to recording or adjusting provisions and disclosing reasonably possible losses or range of losses (individually or in the aggregate), to reflect the impact and status of settlement discussions, discovery, procedural and substantive rulings, reviews by counsel and other information pertinent to a particular matter.

Whether any losses, damages or remedies finally determined in any claim, suit, investigation or proceeding could reasonably have a material effect on the company’s business, financial condition, results of operations or cash flows will depend on a number of variables, including: the timing and amount of such losses or damages; the structure and type of any such remedies; the significance of the impact any such losses, damages or remedies may have in the Consolidated Financial Statements; and the unique facts and circumstances of the particular matter that may give rise to additional factors. While the company will continue to defend itself vigorously, it is possible that the company’s business, financial condition, results of operations or cash flows could be affected in any particular period by the resolution of one or more of these matters.

The following is a summary of the more significant legal matters involving the company.

The company is a defendant in an action filed on March 6, 2003 in state court in Salt Lake City, Utah by the SCO Group (SCO v. IBM). The company removed the case to Federal Court in Utah. Plaintiff is an alleged successor in interest to some of AT&T’s UNIX IP rights, and alleges copyright infringement, unfair competition, interference with contract and breach of contract with regard to the company’s distribution of AIX and Dynix and contribution of code to Linux and the company has asserted counterclaims. On September 14, 2007, plaintiff filed for bankruptcy protection, and all proceedings in this case were stayed. The court in another suit, the SCO Group, Inc. v. Novell, Inc., held a trial in March 2010. The jury found that Novell is the owner of UNIX and UnixWare copyrights; the judge subsequently ruled that SCO is obligated to recognize Novell’s waiver of SCO’s claims against IBM and Sequent for breach of UNIX license agreements. On August 30, 2011, the Tenth Circuit Court of Appeals affirmed the district court’s ruling and denied SCO’s appeal of this matter. In June 2013, the Federal Court in Utah granted SCO’s motion to reopen the SCO v. IBM case. In February 2016, the Federal Court ruled in favor of IBM on all of SCO’s remaining claims, and SCO appealed. On October 30, 2017, the Tenth Circuit Court of Appeals affirmed the dismissal of all but 1 of SCO’s remaining claims, which was remanded to the Federal Court in Utah.

On March 9, 2017, the Commonwealth of Pennsylvania’s Department of Labor and Industry sued IBM in Pennsylvania state court regarding a 2006 contract for the development of a custom software system to manage the Commonwealth’s unemployment insurance benefits programs. The matter is pending in a Pennsylvania court.

In December 2017, CIS General Insurance Limited (CISGIL) sued IBM UK regarding a contract entered into by IBM UK and CISGIL in 2015 to implement and operate an IT insurance platform. The contract was terminated by IBM UK in July 2017 for non-payment by CISGIL. CISGIL alleges wrongful termination, breach of contract and breach of warranty. In February 2021, the Technology & Construction Court in London rejected the majority of CISGIL’s claims and ruled in IBM’s favor on its counterclaim. The ~~matter~~court’s decision requires IBM to pay approximately $20 million in damages, plus interest and litigation costs. CISGIL is ~~pending in~~expected to seek permission from the ~~London High~~ Court ~~with trial beginning in January 2020.~~of Appeal to appeal the judgment.

In May 2015, a putative class action was commenced in the United States District Court for the Southern District of New York related to the company’s October 2014 announcement that it was divesting its global commercial semiconductor technology business, alleging violations of the Employee Retirement Income Security Act (ERISA). Management’s Retirement Plans Committee and 3 current or former IBM executives are named as defendants. On September 29, 2017, the Court granted the defendants’ motion to dismiss the first amended complaint. On December 10, 2018, the Second Circuit Court of Appeals reversed the District Court order. On January 14, 2020, the Supreme Court of the United States vacated the decision and remanded the case to the Second Circuit. On June 22, 2020, the Second

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Notes to Consolidated Financial Statements — (continued)

Circuit reinstated its prior decision and remanded the case to the District Court. In February 2021, the parties reached an agreement to settle the matter subject to court approval.

The company is party to, or otherwise involved in, proceedings brought by U.S. federal or state environmental agencies under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), known as “Superfund,” or laws similar to CERCLA. Such statutes require potentially responsible parties to participate in remediation activities regardless of fault or ownership of sites. The company is also conducting environmental investigations, assessments or remediations at or in the vicinity of several current or former operating sites globally

~~Table of Contents~~

~~Notes to Consolidated Financial Statements — (continued)~~

pursuant to permits, administrative orders or agreements with country, state or local environmental agencies, and is involved in lawsuits and claims concerning certain current or former operating sites.

The company is also subject to ongoing tax examinations and governmental assessments in various jurisdictions. Along with many other U.S. companies doing business in Brazil, the company is involved in various challenges with Brazilian tax authorities regarding non-income tax assessments and non-income tax litigation matters. The total potential amount related to all these matters for all applicable years is approximately ~~$750~~$700 million. The company believes it will prevail on these matters and that this amount is not a meaningful indicator of liability.

14. Equity Activity:

Reclassifications and Taxes Related to Items of Other Comprehensive Income


(Dollars in millions)	Before Tax		Tax (Expense)/		Net of Tax		Before Tax		Tax (Expense)/		Net of Tax
For the three months ended March 31, 2020:	Amount		Benefit		Amount
For the three months ended March 31, 2021:							Amount		Benefit		Amount
Other comprehensive income/(loss):
Foreign currency translation adjustments	$	(919)	$	(122)	$	(1,041)	$	549	$	(228)	$	321
Net changes related to available-for-sale securities:
Unrealized gains/(losses) arising during the period	$	0	$	0	$	0	$	0	$	0	$	0
Reclassification of (gains)/losses to other (income) and expense		—		—		—		—		—		—
Total net changes related to available-for-sale securities	$	0	$	0	$	0	$	0	$	0	$	0
Unrealized gains/(losses) on cash flow hedges:
Unrealized gains/(losses) arising during the period	$	(180)	$	45	$	(135)	$	187	$	(47)	$	140
Reclassification of (gains)/losses to:
Cost of services		(10)		2		(7)		(14)		3		(10)
Cost of sales		(9)		2		(6)		22		(6)		16
Cost of financing		8		(2)		6		6		(2)		4
SG&A expense		(10)		2		(7)		15		(4)		11
Other (income) and expense		89		(22)		67		116		(29)		87
Interest expense		22		(5)		16		16		(4)		12
Total unrealized gains/(losses) on cash flow hedges	$	(90)	$	23	$	(67)	$	347	$	(88)	$	259
Retirement-related benefit plans (1):
Prior service costs/(credits)	$	(4)	$	1	$	(3)	$	0	$	0	$	0
Net (losses)/gains arising during the period		8		(2)		6		20		(6)		14
Curtailments and settlements		8		(3)		6		17		(5)		12
Amortization of prior service (credits)/costs		1		1		1		3		0		3
Amortization of net (gains)/losses		570		(157)		412		648		(177)		471
Total retirement-related benefit plans	$	582	$	(160)	$	422	$	689	$	(189)	$	500
Other comprehensive income/(loss)	$	(427)	$	(260)	$	(686)	$	1,586	$	(505)	$	1,080

(1)	These accumulated other comprehensive ~~income/~~income (AOCI) components are included in the computation of net periodic pension cost. Refer to note 17, “Retirement-Related Benefits,” for additional information.

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Reclassifications and Taxes Related to Items of Other Comprehensive Income


(Dollars in millions)	Before Tax		Tax (Expense)/		Net of Tax		Before Tax		Tax (Expense)/		Net of Tax
For the three months ended March 31, 2019:	Amount		Benefit		Amount
For the three months ended March 31, 2020:							Amount		Benefit		Amount
Other comprehensive income/(loss):
Foreign currency translation adjustments	$	171	$	0	$	172	$	(919)	$	(122)	$	(1,041)
Net changes related to available-for-sale securities:
Unrealized gains/(losses) arising during the period	$	(1)	$	0	$	(1)	$	0	$	0	$	0
Reclassification of (gains)/losses to other (income) and expense		—		—		—		—		—		—
Total net changes related to available-for-sale securities	$	(1)	$	0	$	(1)	$	0	$	0	$	0
Unrealized gains/(losses) on cash flow hedges:
Unrealized gains/(losses) arising during the period	$	(352)	$	84	$	(268)	$	(180)	$	45	$	(135)
Reclassification of (gains)/losses to:
Cost of services		(10)		3		(7)		(10)		2		(7)
Cost of sales		(18)		5		(13)		(9)		2		(6)
Cost of financing		29		(7)		22		8		(2)		6
SG&A expense		(22)		6		(16)		(10)		2		(7)
Other (income) and expense		87		(22)		65		89		(22)		67
Interest expense		33		(8)		24		22		(5)		16
Total unrealized gains/(losses) on cash flow hedges	$	(254)	$	61	$	(193)	$	(90)	$	23	$	(67)
Retirement-related benefit plans (1):
Prior service costs/(credits)							$	(4)	$	1	$	(3)
Net (losses)/gains arising during the period	$	(4)	$	1	$	(2)		8		(2)		6
Curtailments and settlements		1		0		1		8		(3)		6
Amortization of prior service (credits)/costs		(3)		1		(2)		1		1		1
Amortization of net (gains)/losses		464		(130)		334		570		(157)		412
Total retirement-related benefit plans	$	458	$	(128)	$	330	$	582	$	(160)	$	422
Other comprehensive income/(loss)	$	375	$	(67)	$	308	$	(427)	$	(260)	$	(686)

(1)	These AOCI components are included in the computation of net periodic pension cost. Refer to note 17, “Retirement-Related Benefits,” for additional information.

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Notes to Consolidated Financial Statements — (continued)

Accumulated Other Comprehensive Income/(Loss) (net of tax)


					Net Change		Net Unrealized
	Net Unrealized		Foreign		Retirement-		Gains/(Losses)		Accumulated
	Gains/(Losses)		Currency		Related		on Available-		Other
	on Cash Flow		Translation		Benefit		For-Sale		Comprehensive
(Dollars in millions)	Hedges		Adjustments*		Plans		Securities		Income/(Loss)
January 1, 2021	$	(456)	$	(4,665)	$	(24,216)	$	0	$	(29,337)
Other comprehensive income before reclassifications		140		321		14		0		475
Amount reclassified from accumulated other comprehensive income		119		—		486		—		606
Total change for the period	$	259	$	321	$	500	$	0	$	1,080
March 31, 2021	$	(197)	$	(4,343)	$	(23,716)	$	(1)	$	(28,257)

* Foreign currency translation adjustments are presented gross except for any associated hedges which are presented net of tax.


					Net Change		Net Unrealized
	Net Unrealized		Foreign		Retirement-		Gains/(Losses)		Accumulated
	Gains/(Losses)		Currency		Related		on Available-		Other
	on Cash Flow		Translation		Benefit		For-Sale		Comprehensive
(Dollars in millions)	Hedges		Adjustments*		Plans		Securities		Income/(Loss)
January 1, 2020	$	(179)	$	(3,700)	$	(24,718)	$	0	$	(28,597)
Other comprehensive income before reclassifications		(135)		(1,041)		3		0		(1,174)
Amount reclassified from accumulated other comprehensive income		68		—		419		—		488
Total change for the period	$	(67)	$	(1,041)	$	422	$	0	$	(686)
March 31, 2020	$	(246)	$	(4,741)	$	(24,296)	$	0	$	(29,283)

* Foreign currency translation adjustments are presented gross except for any associated hedges which are presented net of tax.

Net Change

Net Unrealized



Net Unrealized

Foreign

Retirement-

Gains/(Losses)

Accumulated

Gains/(Losses)

Currency

Related

on Available-

Other

on Cash Flow

Translation

Benefit

For-Sale

Comprehensive
(Dollars in millions)

Hedges

Adjustments*

Plans

Securities

Income/(Loss)
January 1, 2019

$
284

$
(3,690)

$
(26,083)

$
0

$
(29,490)
Other comprehensive income before reclassifications

(268)

172

(2)

(1)

(99)
Amount reclassified from accumulated other comprehensive income

75

—

333

—

407
Total change for the period

$
(193)

$
172

$
330

$
(1)

$
308
March 31, 2019

$
90

$
(3,519)

$
(25,753)

$
(1)

$
(29,182)

* Foreign currency translation adjustments are presented gross except for any associated hedges which are presented net of tax.

15. Derivative Financial Instruments:

The company operates in multiple functional currencies and is a significant lender and borrower in the global markets. In the normal course of business, the company is exposed to the impact of interest rate changes and foreign currency fluctuations, and to a lesser extent equity and commodity price changes and client credit risk. The company limits these risks by following established risk management policies and procedures, including the use of derivatives, and, where cost effective, financing with debt in the currencies in which assets are denominated. For interest rate exposures, derivatives are used to better align rate movements between the interest rates associated with the company’s lease and other financial assets and the interest rates associated with its financing debt. Derivatives are also used to manage the related cost of debt. For foreign currency exposures, derivatives are used to better manage the cash flow volatility arising from foreign exchange rate fluctuations.

In the Consolidated Balance Sheet, the company does not offset derivative assets against liabilities in master netting arrangements nor does it offset receivables or payables recognized upon payment or receipt of cash collateral against the fair values of the related derivative instruments. ~~The~~NaN amount was recognized ~~in accounts payable~~ for the obligation to return ~~cash collateral at March 31, 2020 was $2 million and 0 amount was recognized at December 31, 2019. NaN amount was recognized in other accounts receivable for~~or the right to reclaim cash collateral at March 31, ~~2020~~2021 and ~~$26 million was recognized at~~ December 31, ~~2019.~~2020. The company restricts the use of cash collateral received to rehypothecation, and therefore reports it in restricted cash in the Consolidated Balance Sheet. NaN amount was rehypothecated at March 31, ~~2020~~2021 and December 31, ~~2019.~~2020. Additionally, if derivative exposures covered by a qualifying master netting agreement had been netted in the Consolidated Balance Sheet at March 31, ~~2020~~ 2021 and December 31, ~~2019~~, 2020, the total derivative asset and liability positions each would have been reduced by ~~$249~~$181 million and ~~$194~~$213 million, respectively.

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Notes to Consolidated Financial Statements — (continued)

In its hedging programs, the company may use forward contracts, futures contracts, interest-rate swaps, cross-currency swaps, equity swaps, and options depending upon the underlying exposure. The company is not a party to leveraged derivative instruments.

A brief description of the major hedging programs, categorized by underlying risk, follows.

Interest Rate Risk

Fixed and Variable Rate Borrowings

The company issues debt in the global capital markets to fund its operations and financing business. Access to cost-effective financing can result in interest rate mismatches with the underlying assets. To manage these mismatches and to reduce overall interest cost, the company may use interest-rate swaps to convert specific fixed-rate debt issuances into variable-rate debt (i.e., fair value hedges) and to convert specific variable-rate debt issuances into fixed-rate debt (i.e., cash flow hedges). At March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, the total notional amount of the company’s interest-rate swaps was $0.4 billion and $3.0 billion, ~~at both periods.~~respectively. In the first quarter of 2021, in addition to the scheduled swap maturities, the company terminated $1.25 billion of interest-rate swaps concurrent with the early redemption of the underlying hedged fixed-rate debt. The weighted-average remaining maturity of these instruments at March 31, ~~2020~~2021 and December 31, ~~2019~~2020 was approximately ~~1.9~~2.0 years and ~~2.2~~1.2 years, respectively. These interest-rate contracts were accounted for as fair value hedges. The company did not have any cash flow hedges relating to this program outstanding at March 31, ~~2020~~2021 and December 31, ~~2019.~~2020.

Forecasted Debt Issuance

The company is exposed to interest rate volatility on future debt issuances. To manage this risk, the company may use instruments such as forward starting interest-rate swaps to lock in the rate on the interest payments related to the forecasted debt issuances. In the second quarter of 2019, the company issued an aggregate of $20 billion of indebtedness (refer to note 11, “Borrowings,” for additional information). Following the receipt of the net proceeds from this debt offering, the company terminated $5.5 billion of forward starting interest-rate swaps. There were 0 instruments outstanding at March 31, ~~2020~~2021 and December 31, ~~2019.~~2020.

In connection with cash flow hedges of forecasted interest payments related to the company's borrowings, the company recorded net losses of ~~$188~~$170 million and net losses of ~~$192~~$174 million (before taxes) at March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively, in AOCI. The company estimates that $18 million (before taxes) of the deferred net losses on derivatives in AOCI at March 31, ~~2020~~2021 will be reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying interest payments.

Foreign Exchange Risk

Long-Term Investments in Foreign Subsidiaries (Net Investment)

A large portion of the company’s foreign currency denominated debt portfolio is designated as a hedge of net investment in foreign subsidiaries to reduce the volatility in stockholders’ equity caused by changes in foreign currency exchange rates in the functional currency of major foreign subsidiaries with respect to the U.S. dollar. At March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, the carrying value of debt designated as hedging instruments was ~~$16.7~~$15.7 billion and ~~$7.3~~$16.4 billion, respectively. ~~The $9.4 billion increase is part of the company’s risk management strategy and is primarily due to the designation of new debt issuances and previously hedged Euro denominated debt.~~ The company also uses cross-currency swaps and foreign exchange forward contracts for this risk management purpose. At March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, the total notional amount of derivative instruments designated as net investment hedges was ~~$8.4~~$8.2 billion and ~~$7.9~~$7.2 billion, respectively. At March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, the weighted-average remaining maturity of these instruments was approximately 0.2 years and ~~0.1~~0.3 years, respectively.

~~Table of Contents~~

~~Notes to Consolidated Financial Statements — (continued)~~

Anticipated Royalties and Cost Transactions

The company’s operations generate significant nonfunctional currency, third-party vendor payments and intercompany payments for royalties and goods and services among the company’s non-U.S. subsidiaries and with the

Table of Contents

Notes to Consolidated Financial Statements — (continued)

company. In anticipation of these foreign currency cash flows and in view of the volatility of the currency markets, the company selectively employs foreign exchange forward contracts to manage its currency risk. These forward contracts are accounted for as cash flow hedges. The maximum remaining length of time over which the company hedged its exposure is approximately ~~four~~three years. At March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, the total notional amount of forward contracts designated as cash flow hedges of forecasted royalty and cost transactions was ~~$9.6~~$7.7 billion and ~~$9.7~~$8.0 billion, respectively. At March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, the weighted-average remaining maturity of these instruments was approximately 0.7 years ~~and 0.8 years, respectively.~~at both periods.

At March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, in connection with cash flow hedges of anticipated royalties and cost transactions, the company recorded net gains of ~~$174~~$115 million and net ~~gains~~losses of ~~$145~~$192 million (before taxes), respectively, in AOCI. The company estimates that ~~$180~~$30 million (before taxes) of deferred net gains on derivatives in AOCI at March 31, ~~2020~~2021 will be reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying anticipated transactions.

Foreign Currency Denominated Borrowings

The company is exposed to exchange rate volatility on foreign currency denominated debt. To manage this risk, the company employs cross-currency swaps to convert fixed-rate foreign currency denominated debt to fixed-rate debt denominated in the functional currency of the borrowing entity. These swaps are accounted for as cash flow hedges. At March 31, ~~2020,~~2021, the maximum length of time remaining over which the company hedged its exposure is approximately ~~eight~~seven years. At March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, the total notional amount of cross-currency swaps designated as cash flow hedges of foreign currency denominated debt was ~~$2.4~~$1.5 billion ~~and $8.2 billion, respectively. The $5.7~~ billion decrease in cross-currency swaps is part of the company’s risk management strategy and the previously hedged foreign currency denominated debt has been designated as a hedge of net investment in foreign subsidiaries.at both periods.

At March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, in connection with cash flow hedges of foreign currency denominated borrowings, the company recorded net losses of ~~$308~~$199 million and net losses of ~~$185~~$236 million (before taxes), respectively, in AOCI. The company estimates that ~~$21~~$24 million (before taxes) of deferred net losses on derivatives in AOCI at March 31, ~~2020~~2021 will be reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying exposure.

Subsidiary Cash and Foreign Currency Asset/Liability Management

The company uses its Global Treasury Centers to manage the cash of its subsidiaries. These centers principally use currency swaps to convert cash flows in a cost-effective manner. In addition, the company uses foreign exchange forward contracts to economically hedge, on a net basis, the foreign currency exposure of a portion of the company’s nonfunctional currency assets and liabilities. The terms of these forward and swap contracts are generally less than one year. The changes in the fair values of these contracts and of the underlying hedged exposures are generally offsetting and are recorded in other (income) and expense in the Consolidated Income Statement. At March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, the total notional amount of derivative instruments in economic hedges of foreign currency exposure was ~~$4.3~~$6.1 billion and ~~$7.1~~$6.8 billion, respectively.

Equity Risk Management

The company is exposed to market price changes in certain broad market indices and in the company’s own stock primarily related to certain obligations to employees. Changes in the overall value of these employee compensation obligations are recorded in SG&A expense in the Consolidated Income Statement. Although not designated as accounting hedges, the company utilizes derivatives, including equity swaps and futures, to economically hedge the exposures related to its employee compensation obligations. The derivatives are linked to the total return on certain broad market indices or the total return on the company’s common stock, and are recorded at fair value with gains or losses also reported in SG&A expense in the Consolidated Income Statement. At March 31, 2021 and December 31, 2020, the total notional amount of derivative instruments in economic hedges of these compensation obligations was $1.3 billion at both periods.

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Notes to Consolidated Financial Statements — (continued)

exposures related to its employee compensation obligations. The derivatives are linked to the total return on certain broad market indices or the total return on the company’s common stock, and are recorded at fair value with gains or losses also reported in SG&A expense in the Consolidated Income Statement. At March 31, 2020 and December 31, 2019, the total notional amount of derivative instruments in economic hedges of these compensation obligations was $1.1 billion and $1.3 billion, respectively.

Cumulative Basis Adjustments for Fair Value Hedges

At March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, the following amounts were recorded in the Consolidated Balance Sheet related to cumulative basis adjustments for fair value hedges:


	March 31,			December 31,			March 31,		December 31,
(Dollars in millions)	2020			2019			2021		2020
Short-term debt:
Carrying amount of the hedged item	$	(1,314)		$	—		$	—	$	(1,302)
Cumulative hedging adjustments included in the carrying amount - assets/(liabilities)		(15)			—
Cumulative hedging adjustments included in the carrying amount — assets/(liabilities)								—		(2)
Long-term debt:
Carrying amount of the hedged item	$	(2,147)		$	(3,411)		$	(781)	$	(2,097)
Cumulative hedging adjustments included in the carrying amount - assets/(liabilities)		(475)	(1)		(440)	(1)
Cumulative hedging adjustments included in the carrying amount — assets/(liabilities)*								(357)		(424)

~~(1)~~

~~Includes ($391) million and ($404) million of hedging adjustments on discontinued hedging relationships at March 31, 2020 and December 31, 2019, respectively.~~

* Includes ($340) million and ($353) million of hedging adjustments on discontinued hedging relationships at March 31, 2021 and December 31, 2020, respectively.

The Effect of Derivative Instruments in the Consolidated Income Statement

The total amounts of income and expense line items presented in the Consolidated Income Statement in which the effects of fair value hedges, cash flow hedges, net investment hedges and derivatives not designated as hedging instruments are recorded and the total effect of hedge activity on these income and expense line items are as follows:

Gains/(Losses) of

(Dollars in millions)

Total

Total Hedge Activity

For the three months ended March 31:

2020

2019

2020

2019

Cost of services

$
7,843

$
8,272
*
$
10

$
10

Cost of sales

1,624

1,603
*

9

18

Cost of financing

181

264

3

(18)

SG&A expense

5,955

4,691

(191)

141

Other (income) and expense

182

(73)

(101)

(69)

Interest expense

326

210

10

(20)

								��
					Gains/(Losses) of
(Dollars in millions)	Total				Total Hedge Activity
For the three months ended March 31:	2021		2020		2021		2020
Cost of services	$	7,775	$	7,843	$	14	$	10
Cost of sales		1,585		1,624		(22)		9
Cost of financing		165		181		2		3
SG&A expense		5,174		5,955		34		(191)
Other (income) and expense		362		182		(160)		(101)
Interest expense		280		326		5		10

* Reclassified to conform to current period presentation.

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Notes to Consolidated Financial Statements — (continued)


	Gain (Loss) Recognized in Consolidated Income Statement									Gain (Loss) Recognized in Consolidated Income Statement
	Consolidated	Recognized on				Attributable to Risk				Consolidated	Recognized on				Attributable to Risk
(Dollars in millions)	Income Statement	Derivatives				Being Hedged (2)				Income Statement	Derivatives				Being Hedged (2)
For the three months ended March 31:	Line Item	2020		2019		2020		2019		Line Item	2021		2020		2021		2020
Derivative instruments in fair value hedges (1):
Interest rate contracts	Cost of financing	$	18	$	36	$	(13)	$	(33)	Cost of financing	$	(1)	$	18	$	7	$	(13)
	Interest expense		49		39		(37)		(36)	Interest expense		(1)		49		18		(37)
Derivative instruments not designated as hedging instruments:
Foreign exchange contracts	Other (income) and expense		(11)		18		N/A		N/A	Other (income) and expense		(44)		(11)		N/A		N/A
Equity contracts	SG&A expense		(201)		119		N/A		N/A	SG&A expense		49		(201)		N/A		N/A
Total		$	(146)	$	212	$	(50)	$	(69)		$	3	$	(146)	$	25	$	(50)


	Gain (Loss) Recognized in Consolidated Income Statement and Other Comprehensive Income													Gain (Loss) Recognized in Consolidated Income Statement and Other Comprehensive Income
(Dollars in millions)					Consolidated	Reclassified				Amounts Excluded from								Consolidated	Reclassified				Amounts Excluded from
For the three months	Recognized in OCI				Income Statement	from AOCI				Effectiveness Testing (3)				Recognized in OCI				Income Statement	from AOCI				Effectiveness Testing (3)
ended March 31:	2020		2019		Line Item	2020		2019		2020		2019		2021		2020		Line Item	2021		2020		2021		2020
Derivative instruments in cash flow hedges:
Interest rate contracts	$	—	$	(171)	Cost of financing	$	(1)	$	—	$	—	$	—	$	—	$	—	Cost of financing	$	(1)	$	(1)	$	—	$	—
					Interest expense		(3)		—		—		—					Interest expense		(3)		(3)		—		—
Foreign exchange contracts		(180)		(181)	Cost of services		10		10		—		—		187		(180)	Cost of services		14		10		—		—
					Cost of sales		9		18		—		—					Cost of sales		(22)		9		—		—
					Cost of financing		(7)		(29)		—		—					Cost of financing		(5)		(7)		—		—
					SG&A expense		10		22		—		—					SG&A expense		(15)		10		—		—
					Other (income) and expense		(89)		(87)		—		—					Other (income) and expense		(116)		(89)		—		—
					Interest expense		(18)		(33)		—		—					Interest expense		(13)		(18)		—		—
Instruments in net investment hedges (4):
Foreign exchange contracts		485		19	Cost of financing		—		—		7		8		907		485	Cost of financing		—		—		2		7
					Interest expense		—		—		20		9					Interest expense		—		—		4		20
Total	$	304	$	(333)		$	(91)	$	(98)	$	27	$	17	$	1,094	$	304		$	(160)	$	(91)	$	6	$	27

(1)	The amount includes changes in clean fair values of the derivative instruments in fair value hedging relationships and the periodic accrual for coupon payments required under these derivative contracts.

(2)	The amount includes basis adjustments to the carrying value of the hedged item recorded during the period and amortization of basis adjustments recorded on de-designated hedging relationships during the period.

(3)	The company’s policy is to recognize all fair value changes in amounts excluded from effectiveness testing in net income each period.

(4)	Instruments in net investment hedges include derivative and non-derivative ~~instruments.~~instruments with the amounts recognized in OCI providing an offset to the translation of foreign subsidiaries.

N/A - not applicable

For the three months ending March 31, ~~2020~~2021 and ~~2019,~~2020, there were no material gains or losses excluded from the assessment of hedge effectiveness (for fair value or cash flow hedges), or associated with an underlying exposure that did not or was not expected to occur (for cash flow hedges); nor are there any anticipated in the normal course of business.

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Notes to Consolidated Financial Statements — (continued)

16. Stock-Based Compensation:

Stock-based compensation cost is measured at grant date, based on the fair value of the award, and is recognized over the employee requisite service period. The following table presents total stock-based compensation cost included in income from continuing operations.


(Dollars in millions)
For the three months ended March 31:	2020		2019		2021		2020
Cost	$	27	$	20	$	41	$	27
Selling, general and administrative		117		74		123		117
Research, development and engineering		45		19		49		45
Pre-tax stock-based compensation cost	$	189	$	113	$	213	$	189
Income tax benefits		(45)		(25)		(52)		(45)
Total net stock-based compensation cost	$	144	$	88	$	161	$	144

Pre-tax stock-based compensation cost for the three months ended March 31, ~~2020~~2021 increased ~~$76~~$24 million compared to the corresponding period in the prior year. This was ~~primarily~~ due to increases ~~related to the conversions of stock-based compensation previously issued by Red Hat~~in performance share units ($6516 million), and restricted stock units ($178 million)~~, partially offset by decreases in~~.

In the first quarter of 2021, the company’s Executive Compensation and Management Resources Committee of the Board of Directors approved changes to certain outstanding performance share ~~units ($6 million).~~unit targets to include the impact of the planned spin-off of Kyndryl, along with actions taken to enable the separation and enable IBM’s growth strategy under current market conditions. The impact under modification accounting was not material.

Total unrecognized compensation cost related to non-vested awards at March 31, ~~2020~~2021 was $1.2 billion and is expected to be recognized over a weighted-average period of approximately ~~2.5~~2.1 years.

Capitalized stock-based compensation cost was not material at March 31, ~~2020~~2021 and ~~2019.~~2020.

17. Retirement-Related Benefits:

The company offers defined benefit pension plans, defined contribution pension plans, as well as nonpension postretirement plans primarily consisting of retiree medical benefits. The following table provides the pre-tax cost for all retirement-related plans.


					Yr. to Yr.						Yr. to Yr.
(Dollars in millions)					Percent						Percent
For the three months ended March 31:	2020		2019		Change		2021		2020		Change
Retirement-related plans — cost
Retirement-related plans — cost:
Defined benefit and contribution pension plans — cost	$	584	$	437	33.7	%	$	672	$	584	15.2	%
Nonpension postretirement plans — cost		52		54	(4.1)			44		52	(14.5)
Total	$	636	$	491	29.5	%	$	717	$	636	12.8	%

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Notes to Consolidated Financial Statements — (continued)

The following table provides the components of the cost/(income) for the company’s pension plans.

Cost/(Income) of Pension Plans


(Dollars in millions)	U.S. Plans				Non-U.S. Plans				U.S. Plan				Non-U.S. Plans
For the three months ended March 31:	2020		2019		2020		2019		2021		2020		2021		2020
Service cost	$	—	$	—	$	95	$	93	$	—	$	—	$	92	$	95
Interest cost (1)		375		472		129		208		277		375		111		129
Expected return on plan assets (1)		(542)		(650)		(309)		(399)		(451)		(542)		(291)		(309)
Amortization of prior service costs/(credits) (1)		4		4		(5)		(6)		4		4		(2)		(5)
Recognized actuarial losses (1)		207		140		342		314		249		207		375		342
Curtailments and settlements (1)		—		—		8		1		—		—		17		8
Multi-employer plans		—		—		7		9		—		—		8		7
Other costs/(credits) (1)		—		—		5		5		—		—		11		5
Total net periodic pension (income)/cost of defined benefit plans	$	44	$	(34)	$	274	$	223	$	80	$	44	$	322	$	274
Cost of defined contribution plans		155		149		110		98		151		155		119		110
Total defined benefit and contribution pension plans cost recognized in the Consolidated Income Statement	$	199	$	115	$	385	$	322	$	231	$	199	$	441	$	385

(1)	These components of net periodic pension cost are included in other (income) and expense in the Consolidated Income Statement.

The following table provides the components of the cost for the company’s nonpension postretirement plans.

Cost of Nonpension Postretirement Plans


(Dollars in millions)	U.S. Plan				Non-U.S. Plans				U.S. Plan				Non-U.S. Plans
For the three months ended March 31:	2020		2019		2020		2019		2021		2020		2021		2020
Service cost	$	2	$	3	$	1	$	1	$	2	$	2	$	1	$	1
Interest cost (1)		26		36		10		12		16		26		8		10
Expected return on plan assets (1)		—		—		(1)		(1)		—		—		(1)		(1)
Amortization of prior service costs/(credits) (1)		1		(1)		0		0		1		1		0		0
Recognized actuarial losses (1)		7		1		6		3		13		7		4		6
Curtailments and settlements (1)		—		—		0		0		—		—		—		0
Total nonpension postretirement plans cost recognized in Consolidated Income Statement	$	36	$	39	$	16	$	15
Total nonpension postretirement plans cost recognized in the Consolidated Income Statement									$	32	$	36	$	12	$	16

(1)These components of net periodic pension cost are included in other (income) and expense in the Consolidated Income Statement.

The company does not anticipate any significant changes to the expected plan contributions in ~~2020~~2021 from the amounts disclosed in the ~~2019~~2020 Annual Report.

The table below includes contributions to the following plans:


(Dollars in millions)	Plan Contributions				Plan Contributions
For the three months ended March 31:	2020		2019		2021		2020
U.S. nonpension postretirement benefit plan	$	136	$	194	$	106	$	136
Non-U.S. DB and multi-employer plans		82		94		66		82
Total plan contributions	$	217	$	288	$	172	$	217

During the three months ended March 31, 2021 and 2020, ~~and 2019, $255~~the company contributed $150 million and ~~$256~~$185 million of U.S Treasury Securities, respectively, ~~was contributed in U.S. Treasury securities, which is considered a non-cash transaction (includes~~to the ~~Active Medical Trust).~~non-U.S. DB plans and nonpension postretirement benefit plans.

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Notes to Consolidated Financial Statements — (continued)

Additionally, during the three months ended March 31, 2021 and 2020, the company contributed $129 million and $70 million of U.S. Treasury Securities, respectively, to the Active Medical Trust. Contributions made with U.S. Treasury securities are considered a non-cash transaction.

18. Subsequent Events:

On April ~~28, 2020,~~27, 2021, the company announced that the Board of Directors approved an increase in the quarterly dividend to ~~$1.63~~$1.64 per common share. The dividend is payable June 10, ~~2020~~2021 to shareholders of record on May ~~8, 2020.~~10, 2021.

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Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

FOR THE THREE MONTHS ENDED MARCH 31, ~~2020~~2021

Snapshot

Financial Results Summary — Three Months Ended March 31:


							Yr. to Yr.								Yr. to Yr.
							Percent/								Percent/
(Dollars and shares in millions except per share amounts)							Margin								Margin
For the three months ended March 31:	2020			2019			Change*		2021			2020			Change
Revenue	$	17,571		$	18,182		(3.4)	%**	$	17,730		$	17,571		0.9	%*
Gross profit margin		45.1	%		44.2	%	0.9	pts.		46.3	%		45.1	%	1.2	pts.
Total expense and other (income)	$	7,972		$	6,160		29.4	%	$	7,299		$	7,972		(8.4)	%
Income/(loss) from continuing operations before income taxes	$	(49)		$	1,883		nm		$	905		$	(49)		nm
Provision for/(benefit from) income taxes from continuing operations	$	(1,226)		$	289		nm		$	(51)		$	(1,226)		(95.9)	%
Income from continuing operations	$	1,176		$	1,593		(26.2)	%	$	956		$	1,176		(18.7)	%
Income from continuing operations margin		6.7	%		8.8	%	(2.1)	pts.		5.4	%		6.7	%	(1.3)	pts.
Net income	$	1,175		$	1,591		(26.1)	%	$	955		$	1,175		(18.7)	%
Earnings per share from continuing operations - assuming dilution	$	1.31		$	1.78		(26.4)	%	$	1.06		$	1.31		(19.1)	%
Weighted-average shares outstanding - assuming dilution		895.0			893.9		0.1	%		901.7			895.0		0.7	%

	At 3/31/2020			At 12/31/2019					At 3/31/2021			At 12/31/2020
Assets	$	153,403		$	152,186		0.8	%	$	148,629		$	155,971		(4.7)	%
Liabilities	$	133,275		$	131,202		1.6	%	$	127,116		$	135,244		(6.0)	%
Equity	$	20,128		$	20,985		(4.1)	%	$	21,513		$	20,727		3.8	%

*	~~2020 results were impacted by Red Hat acquisition-related activity.~~

** (1.9) (2.5) percent adjusted for currency; ~~0.1~~(2.4) percent excluding divested businesses and adjusted for currency.

nm - not meaningful

Organization of Information:

~~In the first quarter of~~On October 8, 2020, we ~~realigned offerings~~announced our plan to separate our managed infrastructure services unit of our Global Technology Services (GTS) segment into a new public company. The managed infrastructure services unit is comprised of outsourcing and other infrastructure modernization and management services and the ~~related management system~~name of the new company will be Kyndryl. The separation is expected to ~~reflect divestitures~~be achieved through a U.S. federal tax-free spin-off to IBM shareholders and completed inby the ~~second half~~end of ~~2019~~2021. It will be subject to customary market, regulatory and ~~tighter integration~~other closing conditions, including final IBM Board of ~~certain industry-specific consulting services. These changes impacted Cloud & Cognitive Software and Global Business Services, but~~Directors’ approval. The announcement did not have any classification impact ~~the~~to our Consolidated Financial Statements. Total recast revenue for full-year 2019 was approximately $0.3 billion of IBM’s total $77 billion. Refer to note 4, “Segments,” for additional information on our reportable segments. The periods presented in this Form 10-Q are reported on a comparable basis.Statements or segment reporting. We provided recast historical segment information reflecting these changes in a Form 8-K dated April 21, 2020. Additionally, on April 6, 2020, Arvind Krishna became Chief Executive Officer of IBM and announced a number of management changes which did not impact our reportable segments.

~~On July 9, 2019, IBM acquired 100 percent of~~will report the outstanding shares of Red Hat, Inc. (Red Hat). Red Hat is reported within the Cloud & Cognitive Software segment, in Cloud & Data Platforms. Compared to the prior-year period, the Consolidated Income Statement for the three months ended March 31, 2020 includes impacts from purchase accounting adjustments, higher interest expense, higher intangible assets amortization and other acquisition-related activities. Refer to note 5, “Acquisitions & Divestitures,” for additional information.managed infrastructure services unit as discontinued operations after separation.

~~Table of Contents~~

~~Management Discussion – (continued)~~

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 ~~the company refers~~we refer to growth rates at constant currency or ~~adjusts~~adjust such growth rates for currency, it is done so that certain financial results can be viewed without the impact of fluctuations in foreign currency exchange rates, thereby facilitating period-to-period comparisons of its business performance. Financial results adjusted for currency are calculated by translating current period activity in local currency using the comparable ~~prior year~~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

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Management Discussion – (continued)

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.

Revenue Adjusted for Divested Businesses and Constant Currency:

To provide better transparency on the recurring performance of the ongoing business, the company provides total revenue, geographic revenue and cloud revenue growth rates excluding divested businesses and at constant currency. These divested businesses are included in the category “Other–divested businesses.”

Operating (non-GAAP) Earnings:

In an effort to provide better transparency into the operational results of the business, supplementally, ~~the company~~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, ~~and~~ discontinued operations and certain managed infrastructure services spin-off charges 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 to accomplish the managed infrastructure services spin-off as non-operating given their unique and non-recurring nature. These charges primarily relate to transaction and third-party support costs, business separation and applicable employee retention fees, pension settlement charges and related tax charges. All other spending for the managed infrastructure services business operations is included in both earnings from continuing operations and in operating (non-GAAP) earnings. For acquisitions, operating (non-GAAP) earnings exclude the amortization of purchased intangible assets and acquisition-related charges such as in-process research and development, transaction costs, applicable retention, restructuring and related expenses, tax charges related to acquisition integration and pre-closing charges, such as financing costs. These charges are excluded as they may be inconsistent in amount and timing from period to period and are significantly impacted by the size, type and frequency of the company’s acquisitions. All other spending for acquired companies is included in both earnings from continuing operations and in operating (non-GAAP) earnings. Throughout the Management Discussion, the impact of acquisitions over the prior 12-month period may be a driver of higher expense year to year. For retirement-related costs, management characterizes certain items as operating and others as non-operating, consistent with GAAP. ~~The company includes~~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. Our reportable segment financial results reflect pre-tax operating earnings from continuing operations, consistent with our management and measurement system. In addition, these non-GAAP measures provide a perspective consistent with areas of interest we routinely receive from investors and analysts.

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Management Discussion – (continued)

The following table provides the company’s operating (non-GAAP) earnings for the first quarter of ~~2020~~2021 and ~~2019.~~2020.


					Yr. to Yr.						Yr. to Yr.
(Dollars in millions except per share amounts)					Percent						Percent
For the three months ended March 31:	2020		2019		Change*		2021		2020		Change
Net income as reported	$	1,175	$	1,591	(26.1)	%	$	955	$	1,175	(18.7)	%
Income/(loss) from discontinued operations, net of tax		(1)		(2)	(58.7)			(1)		(1)	(41.7)
Income from continuing operations	$	1,176	$	1,593	(26.2)	%	$	956	$	1,176	(18.7)	%
Non-operating adjustments (net of tax):
Acquisition-related charges		371		164	126.7		$	335	$	371	(9.8)	%
Non-operating retirement-related costs/(income)		250		111	124.9			282		250	12.4
U.S. tax reform charges		(149)		141	nm
Operating (non-GAAP) earnings**	$	1,649	$	2,009	(17.9)	%
Diluted operating (non-GAAP) earnings per share	$	1.84	$	2.25	(18.2)	%
U.S. tax reform impacts								(19)		(149)	(87.4)
Spin-off-related charges								46		—	nm
Operating (non-GAAP) earnings*							$	1,599	$	1,649	(3.0)	%
Diluted operating (non-GAAP) earnings per share*							$	1.77	$	1.84	(3.8)	%

*	~~2020 results were impacted by Red Hat acquisition-related activity.~~

** Refer to page 7371 for a more detailed reconciliation of net income to operating earnings.

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Separation of Kyndryl:

IBM is redefining its future as a hybrid cloud platform and AI company. The October 8, 2020 announcement of our plan to separate the managed infrastructure services unit of our GTS segment into a new public company will create two industry-leading companies, each with strategic focus and flexibility to capitalize on their respective missions and drive client and shareholder value. IBM will focus on its open hybrid cloud platform and AI capabilities to accelerate clients’ digital transformations. Upon separation, Kyndryl will immediately be the world's leading managed infrastructure services provider and will have greater agility to design, run and modernize the infrastructure of the world’s most important organizations. Both IBM and Kyndryl will have greater ability to focus on their operating and financial models, have more freedom to partner with others and both will align their investments and capital structure to their strategic focus areas. We continue to make good progress on executing the necessary financial, legal and regulatory milestones to enable the separation and remain on track to complete the separation by the end of 2021.

Environmental ~~Dynamics~~Dynamics:

On March 11, 2020, the World Health Organization (WHO) declared the novel coronavirus (COVID-19) a global ~~pandemic. This~~pandemic which resulted in significant governmental measures being initiated around the globe ~~including travel bans and border closings, shelter-in-place orders, closures of non-essential businesses and social distancing requirements in efforts~~ to slow down and control the spread of the virus.

The health of IBM employees, our clients, business partners and community ~~remain~~continue to be our primary focus. We are actively engaged to ensure our ~~preparedness~~ plans ~~and response activities are~~continue to be aligned with recommendations of the WHO, the U.S. Centers for Disease Control and Prevention and governmental regulations.

~~IBM's technical~~This environment has only reinforced the need for clients to modernize their businesses to succeed in this new normal, with hybrid cloud and ~~industry leaders~~AI at the core of their digital transformations. The reliance on technology, particularly hybrid cloud and AI technologies that give clients the scalability and flexibility needed to adjust to the rapid market changes, has become more acute. We are ~~considering all options~~helping to advise, build, move and manage our clients’ journey to the cloud, working with our clients to apply AI, automation and other technologies to make their workflows more intelligent and responsive and partnering with clients to help ~~government~~them enhance employee engagement and ~~health agencies monitor~~productivity, reskill the workforce faster and ~~manage the outbreak. IBM's Summit supercomputer is helping researchers at the U.S. Department~~reimagine ways of Energy identify drug compounds that could disable the coronavirus. IBM's Watson Health unit is working directly with health organizations around the world to better understand the nature of COVID-19. The IBM Clinical Development system has been made available, without charge, to national health agencies to reduce the time and cost of clinical trials by providing data and analysis from web-enabled devices. Our cognitive Operational Risk Insight tool has also been made available to not-for-profit organizations. IBM has extended its online education resources for teachers, students and parents on IBM Skills, offering them the ability to tap into new knowledge, skills and online credentials, anytime, anywhere and for free. We are also working with the City of New York through delivery of 300,000 tablets with educational software and free cellular data connections to help students learn remotely. In just a matter of a few weeks, we have already committed over $200 million in terms of contributions and volunteer time.working.

~~The COVID-19~~

We expect the rate and pace of recovery from the pandemic to differ by geography and industry. However, the overall spending environment is ~~an unprecedented, global challenge~~beginning to improve. For example, we saw improvement in project activity and ~~it has placed every company~~client-based business volumes in ~~uncharted waters.~~ ~~In this current environment,~~ the ~~underlying fundamentals~~first quarter of ~~our business remain sound:~~2021, including some of the industries most affected by the pandemic.

●

~~IBM has always focused on the enterprise space, and within that our business is more concentrated in large enterprises;~~

●

~~We run our clients’ most critical processes, such as core banking systems, supply chains, and claims processing;~~

●

~~From an industry perspective, the majority of our revenue comes from clients in financial services, telecom, and the public sector – including government and healthcare;~~

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Management Discussion – (continued)

●

We have long-term relationships with our clients, in the form of multi-year services contracts, recurring software streams, and financing arrangements. Approximately 60 percent of our annual revenue is in recurring businesses;

●

While we are not immune to disruptions in our transactional content or volume reductions, our client profile and annuity base provide some level of stability, not only in our revenue, but also in profit and cash, as we manage through these challenging times;

●

~~Our innovative technology and our industry-specific expertise are assets to our clients; and,~~

●

~~Our balance sheet remains strong with solid liquidity and access to capital and we remain committed to our dividend to provide value to shareholders.~~

The ~~long-term economic~~underlying fundamentals of our business continue to remain sound and provide some level of stability in our revenue, profit and cash as we continue to manage through this macroeconomic uncertainty. As the world recovers from the effects of the pandemic, ~~remain unknown. However, this environment has only reinforced the need for~~IBM continues to be well positioned to support our clients to modernize their businesses for the new world, with cloud and AI at the core of their digital reinventions. Our hybrid cloud and AI platforms, together with our expertise in running critical processes, ideally position us to guide clients on their journeys.emerge even stronger.

Financial Performance Summary — Three Months Ended March 31:

Overall for the first quarter of 2020, through February we were tracking roughly in line with our expectations. As we proceeded through March and the COVID-19 health situation and resulting social distancing became more widespread, we saw a noticeable change in clients’ priorities. There was effectively a pause as clients understandably dealt with their most pressing needs. This was most pronounced in our software business where the vast majority of transactions typically close in the last two weeks of the quarter. For those clients that did engage at the end of the quarter, there was a shift to maintaining the stability of their operations and preservation of cash. Clients moved ahead with spending that addressed immediate and essential needs, including running mission critical processes and securing a remote workforce.

In the first quarter of ~~2020,~~2021, we reported ~~$17.6~~$17.7 billion in revenue, ~~$1.2~~$1.0 billion in income from continuing operations and operating (non-GAAP) earnings of $1.6 billion, resulting in diluted earnings per share from continuing operations of ~~$1.31~~$1.06 as reported and ~~$1.84~~$1.77 on an operating (non-GAAP) basis. We also generated ~~$4.5~~$4.9 billion in cash from operations, ~~$1.4~~$1.5 billion in free cash flow, which included $0.6 billion of cash impacts from the structural actions initiated in fourth-quarter 2020 and spin-off-related charges, and delivered shareholder returns of ~~$1.4~~$1.5 billion through dividends. These results reflect sequential year-to-year improvement in ~~dividends.~~revenue from the fourth-quarter 2020, gross and pre-tax margin expansion and solid cash generation.

Total consolidated revenue ~~decreased 3.4~~increased 0.9 percent as reported but ~~increased 0.1~~decreased 2 percent ~~excluding divested businesses and~~ adjusted for currency. On a segment basis, Cloud & Cognitive Software returned to growth and increased ~~5.5~~3.8 percent as reported ~~and 7~~(1 percent adjusted for ~~currency with strong performance in Red Hat, Internet of Things (IoT), data and AI and in security services.~~currency). Within this segment, Cloud & Data Platforms ~~which includes Red Hat~~ grew ~~32.2~~13.0 percent ~~(34~~as reported (10 percent adjusted for currency) with continued solid Red Hat performance led by Red Hat Enterprise Linux and our OpenShift hybrid cloud platform. Cognitive Applications revenue grew 4.3 percent as reported (2 percent adjusted for currency) compared to the prior-year period led by strength in Security, while Transaction Processing Platforms declined year to year as client buying behavior continued to focus on operating expense over capital expenditures. Global Business Services (GBS) grew 2.4 percent as reported (decreased 1 percent adjusted for currency), with sequential year-to-year improvement from the fourth-quarter 2020. Within GBS, Consulting returned to growth and Global Process Services (GPS) had strong double-digit growth, while Application Management decreased year to year. GTS decreased 1.5 percent as reported (5 percent adjusted for currency), but ~~was~~had sequential year-to-year improvement from the fourth-quarter 2020 as clients increased their project activity and business volumes, including some clients in industries most impacted by the pandemic. Systems increased 4.3 percent as reported (2 percent adjusted for currency) led by strong performance in IBM Z, partially offset by declines in ~~Cognitive Applications~~Storage and Transaction Processing Platforms. Global Business Services (GBS) decreased 0.5 percent as reported but grew 1 percent adjusted for currency driven by Consulting which grew 3.5 percent (5 percent adjusted for currency). This growth was led by offerings that help clients with their digital reinventions, including cloud advisory and application modernization, and offerings that leverage AI to bring intelligence into business processes. Global Technology Services (GTS) decreased 5.9 percent as reported (4 percent adjusted for currency), with declines in Infrastructure & Cloud Services and Technology Support Services. Systems grew 3.0 percent as reported (4 percent adjusted for currency). In an environment where client behavior shifted at the end of the quarter, our hardware portfolio held up well reflecting the importance of IBM Z and high-end storage for mission-critical operations, as well as product cycle dynamics.Power.

Total cloud revenue ~~was $5.4~~of $6.5 billion in the first quarter of ~~2020 with strong growth of 19~~2021 grew 21 percent as reported 21(17 percent adjusted for ~~currency~~currency) and 2318 percent excluding divested businesses and adjusted for currency. Over the trailing 12 months, total cloud revenue was ~~$22.0~~$26.3 billion, up 1319 percent ~~(15~~as reported (17 percent adjusted for currency) ~~year to year. With the cloud architecture of Linux, containers~~ and ~~Kubernetes, our acquisition~~18 percent excluding divested businesses and ~~integration of Red Hat has bolstered our position in hybrid cloud.~~adjusted for currency.

From a geographic perspective, Americas revenue was essentially flat year to year as reported and adjusted for currency. Europe/Middle East/Africa (EMEA) increased 2.3 percent as reported, but decreased 6 percent adjusted for currency. Asia Pacific increased 0.6 percent year to year as reported, but decreased 4 percent adjusted for currency.

Total consolidated gross margin of 46.3 percent increased 1.2 points year to year, and the operating (non-GAAP) gross margin of 47.3 percent increased 1.1 points compared to the prior year, reflecting our focus on productivity, shift to higher-value offerings and portfolio mix with strong software contribution.

Total expense and other (income) of $7.3 billion decreased 8.4 percent in the first quarter of 2021 versus the prior-year period primarily driven by lower workforce rebalancing charges, reductions in travel and other expenses from COVID-19 restrictions and a decrease in expected credit loss expense, partially offset by the effects of currency, higher non-operating retirement-related costs and spin-off-related charges in the current year. Our expense dynamics also reflect continuing investment in innovation, skills and our ecosystem as we execute our hybrid cloud and AI strategy. Total operating (non-GAAP) expense and other (income) decreased 11.0 percent year to year, driven primarily by the factors above excluding the higher non-operating retirement-related costs and spin-off-related charges.

The pre-tax income from continuing operations was $0.9 billion in the first quarter of 2021 compared to a pre-tax loss of $49 million in the first quarter of 2020. The prior-year period included workforce rebalancing charges of $728

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Management Discussion – (continued)

~~From a geographic perspective, Americas revenue declined 3.8 percent year~~million compared to year as reported but was flat excluding divested businesses and adjusted for currency. Europe/Middle East/Africa (EMEA) decreased 3.7 percent but grew 1 percent excluding divested businesses and adjusted for currency. Asia Pacific declined 1.9 percent year to year as reported but was flat excluding divested businesses and adjusted for currency.

Total consolidated gross margin of 45.1 percent increased 0.9 points year to year, reflecting strong margin performance in our services businesses and the contribution of Red Hat. Operating (non-GAAP) gross margin of 46.2 percent increased 1.5 points versus the prior year, primarily driven by the same factors as above.

~~Total expense and other (income) increased 29.4 percent~~$146 million in the first quarter of 2020 versus the prior-year period primarily driven by higher spending including Red Hat, amortization of intangible assets associated with the acquisition of Red Hat, interest expense, workforce rebalancing charges, and non-operating retirement-related costs, partially offset by lower expense from divested businesses. Total operating (non-GAAP) expense and other (income) increased 26.1 percent year to year, driven primarily by the factors above excluding the higher amortization of intangible assets and non-operating retirement-related costs.

2021. The pre-tax ~~loss~~margin from continuing operations ~~in the first quarter~~was 5.1 percent, an increase of ~~2020 was $49 million, compared to pre-tax income from continuing operations of $1.9 billion in the first quarter of 2019. The pre-tax margin was (0.3) percent, a decrease of 10.6~~5.4 points versus the prior-year period. The current period was impacted by Red Hat acquisition-related spending. It also included charges of approximately $0.9 billion primarily for structural actions to improve competitiveness in GTS and accelerate our shift to a cognitive enterprise. The continuing operations benefit from income taxes in the first quarter of ~~2020~~2021 was ~~$1.2~~$0.1 billion compared to a ~~tax provision~~benefit from income taxes of ~~$0.3~~$1.2 billion in the first quarter of ~~2019.~~ 2020. The ~~current year~~current-year benefit ~~from income taxes~~ was primarily driven by ~~a net~~the resolution of certain tax audit matters. The prior-year benefit was primarily related to the tax impacts of an intra-entity sale of certain of the company’s intellectual ~~property and the related impacts.~~property. Net income from continuing operations in the first quarter of ~~$1.2~~2021 of $1.0 billion decreased ~~26.1~~18.7 percent and the net income margin from continuing operations was ~~6.7~~5.4 percent, a decrease of ~~2.1~~1.3 points year to year.

Operating (non-GAAP) pre-tax income from continuing operations of ~~$0.7~~$1.8 billion ~~decreased 69.2~~increased 158.3 percent ~~year~~compared to ~~year and~~ the prior-year period, primarily due to lower workforce rebalancing impacts of $582 million. The operating (non-GAAP) pre-tax margin from continuing operations ~~decreased 8.4~~increased 6.1 points to ~~3.9~~10.0 percent. The operating (non-GAAP) income tax provision was $0.2 billion in the first quarter of 2021, compared to a benefit from income taxes ~~was~~of $1.0 billion in the first quarter of ~~2020, compared to a tax provision of $0.2 billion in the first quarter of 2019.~~ 2020. The operating (non-GAAP) ~~benefit from~~ income ~~taxes~~tax provision year-to-year change was primarily driven by the same ~~factor~~factors described above. Operating (non-GAAP) income from continuing operations of $1.6 billion decreased ~~17.9~~3.0 percent with an operating (non-GAAP) income margin from continuing operations of ~~9.4~~9.0 percent, down ~~1.7~~0.4 points year to year.

Diluted earnings per share from continuing operations of ~~$1.31~~$1.06 in the first quarter of ~~2020~~2021 decreased ~~26.4~~19.1 percent and operating (non-GAAP) diluted earnings per share of ~~$1.84~~$1.77 decreased ~~18.2~~3.8 percent versus the first quarter of ~~2019.~~2020.

In the first quarter, we continued to take actions to further enhance our balance sheet and liquidity position. At March 31, ~~2020,~~2021, the balance sheet remained strong with ~~the~~ flexibility to support and invest in the ~~business, with a strong~~business. Cash and cash ~~position and ample credit available during these uncertain times. Cash,~~equivalents, restricted cash and marketable securities at ~~quarter end~~March 31, 2021 were ~~$12.0~~$11.3 billion, ~~an increase~~a decrease of $3.0 billion from December 31, ~~2019.~~2020. In line with our overall debt pay down strategy, we have reduced total debt by $5.1 billion from December 31, 2020 and $16.6 billion since the second quarter of 2019 (immediately preceding the Red Hat transaction).

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

Total assets ~~increased $1.2~~decreased $7.3 billion ($~~4.4~~5.5 billion adjusted for currency) from December 31, ~~2019~~2020 driven by:

●

~~An increase~~A decrease in ~~deferred tax assets of $3.6 billion primarily due to an intra-entity sale of IP;~~cash and

●

~~An increase in~~ cash equivalents, restricted cash and marketable securities of $3.0 ~~billion; partially offset by~~billion (2.8 billion adjusted for currency); and

●

A decrease in ~~financing~~ receivables of ~~$3.1~~$3.8 billion ($3.3 billion adjusted for currency) primarily ~~as a result of~~due to collections of seasonally higher year-end ~~balances.~~balances and sales of financing receivables.

Total liabilities decreased $8.1 billion ($5.7 billion adjusted for currency) from December 31, 2020 driven by:

●

A decrease in total debt of $5.1 billion ($4.4 billion adjusted for currency) primarily due to maturities of $4.2 billion, including a $1.8 billion early redemption of outstanding IBM Credit LLC (IBM Credit) debt;

●

A decrease in other accrued expenses and liabilities of $1.1 billion ($0.9 billion adjusted for currency) primarily due to payments of $0.7 billion for workforce rebalancing actions and cash payments related to fourth-quarter 2020 acquisitions; and

●

Decreases in retirement and nonpension postretirement benefit obligations of $0.9 billion ($0.4 billion adjusted for currency) and accounts payable of $0.8 billion ($0.7 billion adjusted for currency); partially offset by

●

An increase in deferred income of $1.2 billion ($1.6 billion adjusted for currency) primarily driven by annual customer billings and higher software renewal rates.

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Management Discussion – (continued)

~~Total liabilities increased $2.1 billion ($4.2 billion adjusted for currency) from December 31, 2019 driven by:~~

●

~~An increase in total debt of $1.4 billion primarily driven by an increase in commercial paper;~~

●

~~An increase in other liabilities of $1.3 billion primarily driven by an increase in deferred tax liabilities related to the intra-entity IP sale; and~~

●

~~An increase in deferred income of $1.3 billion driven by annual customer billings; partially offset by~~

●

~~Decreases in retirement-related liabilities of $0.7 billion and accounts payable of $0.7 billion.~~

Total equity of ~~$20.1~~$21.5 billion ~~decreased $0.9~~increased $0.8 billion from December 31, ~~2019~~2020 as a result of:

●

~~Dividends~~An increase in accumulated other comprehensive income of ~~$1.4~~$1.1 billion primarily related to retirement-related benefit plans and ~~a decrease from~~ foreign currency ~~translation~~translation; and

●

Net income of $1.0 billion; partially offset by

●

~~An increase in net income~~Dividends paid of ~~$1.2~~$1.5 billion.

We generated ~~$4.5~~$4.9 billion in cash flow provided by operating activities, ~~a decrease~~an increase of ~~$0.3~~$0.4 billion compared to the first quarter of ~~2019 which included an increase in interest payments on debt of $0.2 billion.~~2020. In ~~both~~ the first quarter of ~~2020 and the prior-year period,~~2021, investing activities were a net use of cash of ~~$0.9 billion. Financing activities were a use of cash of $0.1~~$2.0 billion ~~in the first quarter of 2020~~ compared to ~~a source of cash $1.9~~$0.9 billion in the prior year. The ~~$2.0~~$1.1 billion change year to year was primarily driven by an increase in cash used for acquisitions. Financing activities were a use of cash of $5.8 billion in the first quarter of 2021 compared to $0.1 billion in the prior-year period. The year-to-year change was driven primarily by a decrease in net cash ~~sourced from~~provided by debt ~~transactions.~~transactions of $5.7 billion.

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Management Discussion – (continued)

First Quarter in Review

Results of Continuing Operations

Segment Details

The following is an analysis of the first quarter of ~~2020~~2021 versus the first quarter of ~~2019~~2020 reportable segment external revenue and gross margin results. Segment pre-tax income/(loss) includes transactions between segments that are intended to reflect an arm’s-length transfer price and excludes certain unallocated corporate items.


									Yr. to Yr.										Yr. to Yr.
									Percent										Percent
							Yr. to Yr.		Change								Yr. to Yr.		Change
(Dollars in millions)							Percent/Margin		Adjusted For								Percent/Margin		Adjusted For
For the three months ended March 31:	2020			2019			Change		Currency		2021			2020			Change		Currency
Revenue:
Cloud & Cognitive Software	$	5,238		$	4,967	*	5.5	%**	6.8	%	$	5,437		$	5,238		3.8	%	0.8	%
Gross margin		75.4	%		75.6	%*	(0.1)	pts.**				76.0	%		75.4	%	0.6	pts.
Global Business Services		4,136			4,155	*	(0.5)	%	0.9	%		4,234			4,136		2.4	%	(1.4)	%
Gross margin		27.2	%		26.2	%*	1.0	pts.				28.2	%		27.2	%	1.0	pts.
Global Technology Services		6,467			6,875		(5.9)	%	(4.0)	%		6,370			6,467		(1.5)	%	(5.3)	%
Gross margin		34.0	%		33.7	%	0.3	pts.				34.5	%		34.0	%	0.6	pts.
Systems		1,368			1,328		3.0	%	4.1	%		1,427			1,368		4.3	%	2.2	%
Gross margin		50.2	%		46.2	%	4.1	pts.				54.5	%		50.2	%	4.3	pts.
Global Financing		299			406		(26.2)	%	(24.9)	%		240			299		(20.0)	%	(21.9)	%
Gross margin		40.7	%		34.9	%	5.8	pts.				31.9	%		40.7	%	(8.8)	pts.
Other		62			451	*	(86.1)	%	(86.1)	%		23			62		(63.8)	%	(64.5)	%
Gross margin		(254.3)	%		29.1	%*	(283.4)	pts.				nm			(254.3)	%	nm
Total consolidated revenue	$	17,571		$	18,182		(3.4)	%***	(1.9)	%	$	17,730		$	17,571		0.9	%*	(2.5)	%
Total consolidated gross profit	$	7,922		$	8,043		(1.5)	%**			$	8,204		$	7,922		3.6	%
Total consolidated gross margin		45.1	%		44.2	%	0.9	pts.				46.3	%		45.1	%	1.2	pts.
Non-operating adjustments:
Amortization of acquired intangible assets		188			76		147.6	%				175			188		(7.0)	%
Acquisition-related charges		—			—		—
Spin-off-related charges												3			—		nm
Operating (non-GAAP) gross profit	$	8,110		$	8,119		(0.1)	%**			$	8,382		$	8,110		3.3	%
Operating (non-GAAP) gross margin		46.2	%		44.7	%	1.5	pts.**				47.3	%		46.2	%	1.1	pts.

*	~~Recast to reflect segment changes.~~

**	~~2020 results were impacted by Red Hat purchase accounting and acquisition-related activity.~~

***0.1 (2.4) percent excluding divested businesses and adjusted for currency.

nm – not meaningful

Cloud & Cognitive Software

Yr. to Yr.

Percent

Yr. to Yr.

Change

(Dollars in millions)





Percent

Adjusted For

For the three months ended March 31:

2020

2019

Change

Currency

Cloud & Cognitive Software external revenue:

$
5,238

$
4,967
*
5.5
%**
6.8
%
Cloud & Data Platforms

$
2,536

$
1,917

32.2
%**
33.8
%
Cognitive Applications

1,182

1,238
*
(4.5)

(3.4)

Transaction Processing Platforms

1,520

1,812

(16.1)

(14.8)


							Yr. to Yr.
							Percent
					Yr. to Yr.		Change
(Dollars in millions)					Percent		Adjusted For
For the three months ended March 31:	2021		2020		Change		Currency
Cloud & Cognitive Software external revenue:	$	5,437	$	5,238	3.8	%	0.8	%
Cloud & Data Platforms	$	2,866	$	2,536	13.0	%	9.7	%
Cognitive Applications		1,233		1,182	4.3		1.6
Transaction Processing Platforms		1,338		1,520	(12.0)		(14.7)

* Recast to reflect segment changes.

** 2020 results were impacted by Red Hat purchase accounting.

5047

Table of Contents

Management Discussion – (continued)

Cloud & Cognitive Software revenue of ~~$5,238~~$5,437 million increased ~~5.5~~3.8 percent as reported (7(1 percent adjusted for currency) in the first quarter of ~~2020~~2021 compared to the prior ~~year.~~year, driven by Cloud & Data Platforms and Cognitive Applications. We ~~had strong performance in Red Hat, IoT, data~~continued to increase our software subscription and ~~AI and in security services. We entered 2020 with a robust offering portfolio and solid pipeline and had strong growth through February. As~~support renewal rates across the global health crisis broadened, in March, software transactions stalled as our clients shifted their focus to resiliency efforts. The most notable impacts were in Cognitive Applications and Transaction Processing Platforms.segment.

In the first quarter, Cloud & Data Platforms revenue of ~~$2,536~~$2,866 million increased ~~32.2~~13.0 percent as reported ~~(34~~(10 percent adjusted for currency) compared to the prior year driven by continued solid performance in Red Hat, led by Red Hat Enterprise Linux and OpenShift, both of which have gained share. With approximately 3,000 hybrid cloud platform clients, we have now tripled the revenue base of OpenShift since we acquired Red Hat.

Cognitive Applications first-quarter revenue of $1,233 million increased 4.3 percent as reported (2 percent adjusted for currency) compared to the prior year, led by ~~Red Hat~~strength across Security software and ~~the synergies we are realizing~~services, which was partially offset by ~~bringing together Red Hat~~declines in our Watson Health offerings. Our Cloud Pak for Security solution helped enterprises manage threats and ~~IBM software. The number~~protect their digital workloads, data and identities across hybrid cloud environments. Our clients opted for accelerated time to value and ease of ~~Red Hat large deals was up from fourth quarter~~operation with QRadar on Cloud to rapidly detect cybersecurity attacks and first quarter included the signing of the two largest deals in its history. The number of clients using Red Hat and IBM container solutions grew to over 2,200 as Red Hat and IBM emerged as the leading container platform.

Cognitive Applications first-quarter revenue of $1,182 million declined 4.5 percent as reported (3 percent adjusted for currency) compared to the prior year. In March, many transformational deals were paused, especially in the retail industry.network breaches.

Transaction Processing Platforms revenue of ~~$1,520~~$1,338 million decreased ~~16.1~~12.0 percent as reported (15 percent adjusted for currency) in the first quarter compared to the prior year. ~~In March,~~We offer clients ~~shifted away from new~~flexibility in how they purchase our software and clients’ buying behaviors have been shifting toward more consumption-based models. As a result, we are seeing a continued preference for operating expense over capital expenditures, putting pressure on our sales of perpetual licenses. In the first quarter, we had strong renewals in our Transaction Processing Platforms’ software, which provides mission-critical capabilities to preserve cash and prioritize their operating cash needs. These are typically large engagements, and in this environment, clients elected to defer purchases which impacted perpetual license sales late in the quarter.our clients.

Within Cloud & Cognitive Software, cloud revenue of ~~$1.3~~$1.8 billion grew 8438 percent as reported ~~(86~~(34 percent adjusted for currency) in the first quarter of ~~2020. We~~2021, reflecting the investments and actions we have ~~modernized our software~~taken to ~~be cloud-native and optimized on OpenShift, which provides a compelling~~capture the hybrid cloud ~~platform for clients on their digital journeys~~opportunity with solutions such as Red Hat OpenShift and Cloud Paks.


							Yr. to Yr.
							Percent/
(Dollars in millions)							Margin
For the three months ended March 31:	2021			2020			Change
Cloud & Cognitive Software:
External gross profit	$	4,132		$	3,951		4.6	%
External gross profit margin		76.0	%		75.4	%	0.6	pts.
Pre-tax income	$	1,428		$	933		53.0	%
Pre-tax margin		22.8	%		15.4	%	7.4	pts.

Cloud & Cognitive Software gross profit margin increased 0.6 points to 76.0 percent in the first quarter of 2021 compared to the ~~cloud. Given~~first-quarter 2020. The gross profit margin expansion was driven primarily by the ~~shift in client software demands, we are focused on areas that facilitate the shift to cloud, including~~contribution from Red Hat and ~~other cloud and data platform offerings, Cloud Paks for operational efficiency and QRadar on Cloud for security threats.~~

Yr. to Yr.

Percent/

(Dollars in millions)





Margin

For the three months ended March 31:

2020

2019*

Change**

Cloud & Cognitive Software:







External gross profit

$
3,951

$
3,753

5.3
%
External gross profit margin

75.4
%

75.6
%
(0.1)
pts.
Pre-tax income

$
933

$
1,785

(47.7)
%
Pre-tax margin

15.4
%

30.7
%
(15.3)
pts.

*	~~Recast to reflect segment changes.~~

** 2020 results were impactedyear-to-year improvement in services margin, partially offset by ~~Red Hat purchase accounting and acquisition-related activity.~~a decline in transaction processing software margin.

In the first quarter, ~~Cloud & Cognitive Software gross profit margin of 75.4 percent was flat on a year-to-year basis.~~

~~Pre-tax~~pre-tax income of ~~$933~~$1,428 million ~~decreased 47.7~~increased 53.0 percent ~~in the first quarter~~year to year and pre-tax margin increased 7.4 points to 22.8 percent compared to the prior year. The pre-tax margin ~~of 15.4 points decreased 15.3 points in the first quarter. The margin decline~~improvement was driven primarily ~~driven~~ by ~~Red Hat acquisition-related activity,~~higher gross profit contribution and lower workforce rebalancing ~~actions taken~~charges year to year, partially offset by our continued investment in ~~the first quarter of 2020 which had 2.7 points of impact on the pre-tax margin.~~new innovation and our software ecosystem.

5148

Table of Contents

Management Discussion – (continued)

Global Business Services

Yr. to Yr.

Percent

Yr. to Yr.

Change

(Dollars in millions)





Percent

Adjusted For

For the three months ended March 31:

2020

2019

Change

Currency

Global Business Services external revenue:

$
4,136

$
4,155
*
(0.5)
%
0.9
%
Consulting

$
2,071

$
2,001
*
3.5
%
4.7
%
Application Management

1,840

1,908

(3.6)

(2.1)

Global Process Services

225

247

(8.8)

(6.9)


							Yr. to Yr.
							Percent
					Yr. to Yr.		Change
(Dollars in millions)					Percent		Adjusted For
For the three months ended March 31:	2021		2020		Change		Currency
Global Business Services external revenue:	$	4,234	$	4,136	2.4	%	(1.4)	%
Consulting	$	2,189	$	2,071	5.7	%	1.9	%
Application Management		1,770		1,840	(3.8)		(7.5)
Global Process Services		274		225	21.8		18.7

* Recast to reflect segment changes.

Global Business Services revenue of ~~$4,136~~$4,234 million ~~decreased 0.5~~increased 2.4 percent as reported, but ~~increased~~decreased 1 percent adjusted for currency in the first quarter of ~~2020~~2021 compared to the prior year, ~~driven primarily by solid~~with growth in ~~Consulting.~~Consulting and Global Process Services, offset by declines in Application Management. GBS revenue improved sequentially year to year compared to the fourth quarter of 2020 both as reported and adjusted for currency. This revenue performance reflects the trend that clients are digitally transforming their businesses using hybrid cloud and AI to capture new growth opportunities, increase productivity and create operating flexibility.

In the first quarter, Consulting revenue of ~~$2,071~~$2,189 million grew ~~3.5~~5.7 percent as reported and 52 percent adjusted for ~~currency, led by~~currency. We had growth in our consulting offerings that advise clients and help ~~clients~~them build and modernize their applications, reflecting our expanding practices with ~~their digital reinventions, including cloud advisory~~our ecosystem partners and ~~application modernization,~~strong momentum in our Red Hat engagements. In the first quarter, the number of Red Hat client engagements doubled year to year to more than 150. In addition, we had double-digit growth in offerings which leverage data and ~~offerings that leverage~~ AI to bring intelligence into business processes. We have standardized our cloud application modernization offerings on OpenShift and built the world’s largest Red Hat consulting practice. In the quarter, we had good growthtransform client processes in many transformational offerings, including next-generation enterprise applications. However, as the pandemic intensified in March, clients began to deprioritize some of these projects. In this environment, we are aligning our business to the near-term opportunity. This includes addressing our clients’ challenges,areas such as ~~engaging customers virtually, modernizing~~finance and ~~migrating applications to the cloud, empowering a remote workforce, and focusing on cybersecurity and IT resiliency.~~supply chain.

Application Management revenue of ~~$1,840~~$1,770 million ~~declined 3.6~~decreased 3.8 percent as reported and 28 percent adjusted for currency compared to the first quarter of ~~2019.~~2020. We had ~~continued~~ growth in ~~Cloud Application Management~~offerings which ~~was~~build and move applications to the cloud, offset by declines in the more traditional on-premise ~~services as certain contracts completed.~~services. Our application incumbency enables GBS to be the partner of choice for a client’s digital transformation, which brings high value to our clients and is an important component of IBM’s hybrid cloud strategy and platform adoption.

Global Process Services first-quarter revenue of ~~$225~~$274 million ~~decreased 8.8~~grew 21.8 percent as reported and 719 percent adjusted for currency.~~As we continued to shift to new platforms around intelligent workflows, we~~ We had ~~modest~~broad-based growth in ~~certain cognitive process automation offerings which was offset by declines in traditional business process outsourcing.~~areas such as finance, and talent and transformation as clients leveraged hybrid cloud to scale their activities to capture productivity and gain insights.

Within GBS, cloud revenue of ~~$1.3~~$1.7 billion grew 633 percent as reported (8(28 percent adjusted for currency) in the first quarter of ~~2020.~~2021. Cloud revenue growth accelerated with the year-to-year growth rate in first-quarter 2021 doubling compared to fourth-quarter 2020, with strong growth across the portfolio.


							Yr. to Yr.
							Percent/
(Dollars in millions)							Margin
For the three months ended March 31:	2021			2020			Change
Global Business Services:
External gross profit	$	1,194		$	1,125		6.2	%
External gross profit margin		28.2	%		27.2	%	1.0	pts.
Pre-tax income	$	390		$	271		44.1	%
Pre-tax margin		9.1	%		6.5	%	2.6	pts.

~~Looking forward in~~ GBS ~~we have~~first-quarter gross profit margin of 28.2 percent grew 1.0 points on a ~~solid base~~year-to-year basis, driven primarily by margin expansion across all three areas of business reflecting our shift to higher-value offerings, increased productivity, improvements in delivery capabilities and a ~~growing backlog, though~~reduction in client-related travel. Pre-tax income increased 44.1 percent to $390 million compared to the prior year. Pre-tax margin increased 2.6 points to 9.1 percent in the ~~near term, we expect customers to continue to delay and replan some projects.~~

Yr. to Yr.

Percent/

(Dollars in millions)





Margin

For the three months ended March 31:

2020

2019*

Change*

Global Business Services:







External gross profit

$
1,125

$
1,087

3.5
%
External gross profit margin

27.2
%

26.2
%
1.0
pts.
Pre-tax income

$
271

$
298

(9.1)
%
Pre-tax margin

6.5
%

7.0
%
(0.6)
pts.

* Recast to reflect segment changes.first-quarter 2021

5249

Table of Contents

Management Discussion – (continued)

~~GBS first-quarter~~compared to the prior-year period, driven primarily by the gross profit margin ~~of 27.2 percent grew 1.0 points on a year-to-year basis, primarily driven by the margin~~ expansion ~~in Consulting with our shift~~and lower workforce rebalancing charges year to ~~higher-value offerings.~~year. We continued to ~~benefit from delivery efficiencies, productivity~~invest, organically and ~~utilization improvement and from currency through the leverage of our global delivery resource model. Pre-tax income decreased~~inorganically, to ~~$271 million and the pre-tax margin decreased 0.6 points to 6.5 percent~~accelerate revenue performance, including closing two acquisitions in the ~~first~~ quarter, ~~of 2020 compared~~building and expanding practices with ecosystem partners and hiring to ~~the prior year, primarily driven by workforce rebalancing actions recorded in the first quarter of 2020, which had 2.4 points of impact on the pre-tax margin.~~expand our sales and delivery capacity.

Global Technology Services


							Yr. to Yr.								Yr. to Yr.
							Percent								Percent
					Yr. to Yr.		Change						Yr. to Yr.		Change
(Dollars in millions)					Percent		Adjusted For						Percent		Adjusted For
For the three months ended March 31:	2020		2019		Change		Currency		2021		2020		Change		Currency
Global Technology Services external revenue:	$	6,467	$	6,875	(5.9)	%	(4.0)	%	$	6,370	$	6,467	(1.5)	%	(5.3)	%
Infrastructure & Cloud Services	$	4,916	$	5,209	(5.6)	%	(3.9)	%	$	4,853	$	4,916	(1.3)	%	(5.5)	%
Technology Support Services		1,550		1,665	(6.9)		(4.6)			1,517		1,550	(2.1)		(4.8)

Global Technology Services revenue of ~~$6,467~~$6,370 million decreased ~~5.9~~1.5 percent as reported (4(5 percent adjusted for currency) in the first quarter of ~~2020~~2021 compared to the prior year, ~~driven by declines in both business areas. GTS continued its actions to accelerate the shift to higher value segments of the market and took structural actions~~reflecting a sequential improvement in the first quarter to improve competitiveness. GTS continued to advance its joint offering and go-to-market capabilities with GBS, which is providing differentiated solutions to our clients. As clients shift mission-critical workloadsyear-to-year growth rate compared to the ~~cloud, they are looking for this integration across the application and infrastructure stack. GTS total signings and cloud signings grew at a double-digit rate.~~fourth quarter of 2020.

In the first quarter, Infrastructure & Cloud Services revenue of ~~$4,916~~$4,853 million decreased ~~5.6~~1.3 percent as reported (4and 5 percent adjusted for ~~currency)~~currency compared to the prior-year period. ~~We are adopting new delivery methods to support our clients as they focus on infrastructure solutions which enhance IT resiliency~~There was an improved trajectory in project activity and ~~business continuity, address new cybersecurity risks, and reconfigure their IT environments for cost efficiency and business agility. While we expect an impact due to lower~~client-based business volumes in the ~~near term, this will ultimately lead~~first-quarter 2021, including with clients in some industries most affected by the pandemic, such as retail and consumer products. Infrastructure services signings were down year to ~~an acceleration~~year, a reflection of the strong signings in the ~~shift~~first-quarter 2020 driven by large renewals. In the first-quarter 2021, we had growth in our mid-sized signings as enterprises continued to recognize the long-term value for GTS to design, run and manage the most modern, efficient and reliable technology infrastructures. We continued to make progress on our plan to separate our managed infrastructure services business by the end of ~~mission-critical workloads~~2021 and are deeply engaged with our clients to ensure a ~~hybrid multi-cloud platform, built on open standards.~~smooth transition.

Technology Support Services (TSS) first-quarter revenue of ~~$1,550~~$1,517 million decreased ~~6.9~~2.1 percent as reported (5 percent adjusted for currency). reflecting the Systems hardware product cycles.

Within GTS, cloud revenue of ~~$2.3~~$2.4 billion grew 106 percent as reported ~~(12~~(2 percent adjusted for currency) in the first quarter of ~~2020.~~2021.


							Yr. to Yr.								Yr. to Yr.
							Percent/								Percent/
(Dollars in millions)							Margin								Margin
For the three months ended March 31:	2020			2019			Change		2021			2020			Change
Global Technology Services:
External gross profit	$	2,196		$	2,316		(5.2)	%	$	2,200		$	2,196		0.2	%
External gross profit margin		34.0	%		33.7	%	0.3	pts.		34.5	%		34.0	%	0.6	pts.
Pre-tax income/(loss)	$	(178)		$	275		nm		$	140		$	(178)		nm
Pre-tax margin		(2.6)	%		3.8	%	(6.5)	pts.		2.1	%		(2.6)	%	4.7	pts.

nm - not meaningful

Global Technology Services gross profit margin increased ~~0.3~~0.6 points to ~~34.0~~34.5 percent in the first quarter of ~~2020~~2021 as compared to the prior year. The increase in project activity and client-based business volumes in the first-quarter 2021 contributed to the expanded gross profit margin ~~was primarily driven by~~reflecting improved utilization of existing resources. The improvement in gross margin also reflects the benefit from the productivity actions taken ~~to improve our competitiveness such~~in 2020 which have not yet been fully realized. GTS had pre-tax income of $140 million in the first quarter of 2021 as ~~continued scaling of our agile services delivery model~~compared to ~~improve productivity. GTS had~~ a pre-tax loss of $178 million in the first quarter of 2020, primarily driven by higher workforce rebalancing charges in the prior year.

5350

Table of Contents

Management Discussion – (continued)

million in the first quarter of 2020 as compared to pre-tax income of $275 million in the first quarter of 2019. A significant portion of the first quarter’s structural actions addressed GTS. This improves our position for the future, but resulted in a pre-tax loss in the first quarter. In this dynamic environment, we are going to continue to evaluate the cost competitiveness of the portfolio and we will take further actions if needed. The workforce rebalancing actions taken in the first quarter of 2020 had 5.8 points of impact on the pre-tax margin.

Services Backlog and Signings

Yr. to Yr.

Percent

Yr. to Yr.

Change

Yr. to Yr.

Change

At March 31,

Percent

Adjusted For

At March 31,

Percent

Adjusted For

(Dollars in billions)

2020

2019

Change

Currency

2021

2020

Change

Currency

Total backlog

107.8

111.6

(3.4)

(0.1)

104.8

107.8

(2.8)

(6.5)

The estimated total services backlog at March 31, ~~2020~~2021 was ~~$107.8~~$104.8 billion, a decrease of ~~3.4~~2.8 percent as reported ~~and flat~~(7 percent adjusted for ~~currency.~~currency).

Total services backlog includes Infrastructure & Cloud Services, Security Services, Consulting, Global Process Services, Application Management and Technology Support Services. Total backlog is intended to be a statement of overall work under contract which is either non-cancellable, or which historically has very low likelihood of termination, given the criticality of certain services to the company’s clients. Total backlog does not include as-a-Service arrangements that allow for termination under contractual commitment terms. Backlog estimates are subject to change and are affected by several factors, including terminations, changes in the scope of contracts, periodic revalidations, adjustments for revenue not materialized and adjustments for currency.


							Yr. to Yr.
							Percent
					Yr. to Yr.		Change
(Dollars in millions)					Percent		Adjusted For
For the three months ended March 31:	2021		2020		Change		Currency
Total signings	$	6,733	$	8,928	(24.6)	%	(27.3)	%

Services signings are management’s initial estimate of the value of a client’s commitment under a services contract. 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.

Signings include Infrastructure & Cloud Services, Security Services, Consulting, Global Process Services and Application Management contracts. Contract extensions and increases in scope are treated as signings only to the extent of the incremental new value. Total ~~Services~~services 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, such as in Infrastructure & Cloud Services or Global Process Services. Technology Support Services ~~(TSS)~~ are generally not included in signings as the maintenance contracts tend to be more steady state, where revenues equal renewals. Certain longer-term TSS contracts that have characteristics similar to outsourcing contracts are included in signings.

Contract portfolios purchased in an acquisition are treated as positive backlog adjustments provided those contracts meet ~~IBM’s~~the company’s requirements for initial signings. A new signing will be recognized if a new services agreement is signed incidental or coincidental to an acquisition or divestiture.

Management believes that the estimated values of services backlog and signings disclosed herein provide insight into our potential future revenue, which is used by management as a tool to monitor the performance of the business and viewed as useful decision-making information for investors. The conversion of signings and backlog into revenue may vary based on the types of services and solutions, customer decisions, and as well as other factors, which may include, but are not limited to, macroeconomic environment or external events.

5451

Table of Contents

Management Discussion – (continued)

Systems

Yr. to Yr.

Percent

Yr. to Yr.

Change

(Dollars in millions)

Percent

Adjusted For

For the three months ended March 31:

2020

2019

Change

Currency

Systems external revenue:

$
1,368

$
1,328

3.0
%
4.1
%
Systems Hardware

$
997

$
914

9.1
%
10.2
%
IBM Z





59.5

60.9

Power Systems





(32.7)

(31.8)

Storage Systems





17.6

18.6

Operating Systems Software

371

414

(10.5)

(9.3)


							Yr. to Yr.
							Percent
					Yr. to Yr.		Change
(Dollars in millions)					Percent		Adjusted For
For the three months ended March 31:	2021		2020		Change		Currency
Systems external revenue:	$	1,427	$	1,368	4.3	%	2.2	%
Systems Hardware	$	1,114	$	997	11.8	%	9.7	%
IBM Z					50.3		48.7
Power Systems					(10.3)		(12.7)
Storage Systems					(11.6)		(14.0)
Operating Systems Software		313		371	(15.7)		(17.9)

Systems revenue of ~~$1,368~~$1,427 million increased ~~3.0~~4.3 percent as reported and 42 percent adjusted for currency in the first quarter of ~~2020~~2021 compared to the prior year. Systems Hardware revenue of ~~$997~~$1,114 million ~~grew 9.1~~increased 11.8 percent as reported and 10 percent adjusted for ~~currency.~~currency, driven by strong performance in IBM Z, partially offset by declines in Power Systems and Storage Systems. Operating Systems Software revenue of ~~$371~~$313 million decreased ~~10.5~~15.7 percent as reported (9and 18 percent adjusted for ~~currency)~~currency compared to the prior ~~year.~~

year driven primarily by declines in IBM Z operating systems due to higher transactional revenue in the prior-year first quarter.

IBM Z revenue ~~grew 59.5~~increased 50.3 percent as reported and 61 percent adjusted for currency year to year, reflecting the strong performance of the z15 mainframe during the second full quarter of its availability. The z15 proved to be a crucial element of our clients’ enterprise operations, providing a stable, secure and scalable platform in this current environment.

~~Power Systems revenue decreased 32.7 percent as reported (32~~(49 percent adjusted for currency) year to ~~year. This decline reflects~~year reflecting very strong growth more than six quarters into the z15 product cycle. In the first quarter of 2021, we had growth in areas such as financial services where robust market volatility drove demand for increased capacity. Clients also purchased z15 for its enterprise-grade security and unmatched reliability for regulatory requirements. The innovations we bring to each new generation of IBM Z continue to spur renewed interest and drive client demand, and as of the end of the first quarter of 2021, z15 has shipped the largest capacity in the platform’s history. The IBM Z platform is an important element in our hybrid cloud strategy, attracting new workloads, integrating cloud-native capabilities including Red Hat, and supporting our industry-specific cloud solutions.

Power Systems revenue decreased 10.3 percent as reported (13 percent adjusted for currency) year to year, reflecting product cycle ~~as well as the fact that this platform is skewed toward smaller enterprises, which were impacted more severely~~dynamics. We had double-digit growth in high-end systems, offset by ~~the dynamics~~declines in ~~March 2020 from the global pandemic.~~

mid-range and low-end systems.

Storage Systems revenue ~~grew 17.6~~decreased 11.6 percent as reported ~~and 19~~(14 percent adjusted for ~~currency,~~currency) driven primarily ~~driven~~ by a decline in high-end storage ~~systems. These~~ systems ~~are specifically designed~~as some clients continued to delay large capital purchases and leverage their existing capacity for ~~our clients’ mission-critical applications operating in a hybrid multi-cloud environment, providing comprehensive next-level cybersecurity, data availability and system resiliency.~~

the near term.

Within Systems, cloud revenue of ~~$0.4~~$0.5 billion increased 923 percent as reported ~~(10~~(21 percent adjusted for currency) in the first quarter of ~~2020.~~2021.


							Yr. to Yr.
							Percent/
(Dollars in millions)							Margin
For the three months ended March 31:	2021			2020			Change
Systems:
External Systems Hardware gross profit	$	528		$	380		39.2	%
External Systems Hardware gross profit margin		47.4	%		38.1	%	9.3	pts.
External Operating Systems Software gross profit	$	249		$	307		(18.9)	%
External Operating Systems Software gross profit margin		79.8	%		82.9	%	(3.1)	pts.
External total gross profit	$	778		$	687		13.2	%
External total gross profit margin		54.5	%		50.2	%	4.3	pts.
Pre-tax loss	$	(2)		$	(217)		nm
Pre-tax margin		(0.1)	%		(14.3)	%	14.2	pts.

nm - not meaningful

~~Table of Contents~~

~~Management Discussion – (continued)~~

Yr. to Yr.

Percent/

(Dollars in millions)

Margin

For the three months ended March 31:

2020

2019

Change

Systems:







External Systems Hardware gross profit

$
380

$
264

43.6
%
External Systems Hardware gross profit margin

38.1
%

28.9
%
9.2
pts.
External Operating Systems Software gross profit

$
307

$
349

(11.9)
%
External Operating Systems Software gross profit margin

82.9
%

84.2
%
(1.3)
pts.
External total gross profit

$
687

$
613

12.1
%
External total gross profit margin

50.2
%

46.2
%
4.1
pts.
Pre-tax loss

$
(217)

$
(202)

7.6
%
Pre-tax margin

(14.3)
%

(13.5)
%
(0.8)
pts.

Systems gross profit margin increased 4.1 points to 50.2 percent in the first quarter of 2020 compared to the prior year, primarily driven by a mix to IBM Z and margin expansion across all three hardware platforms. Systems Hardware margin of 38.1 percent increased 9.2 points compared to the prior year for the same reasons.

The pre-tax loss of $217 million in the first quarter of 2020 increased $15 million compared to the first quarter of 2019. The pre-tax margin decreased 0.8 points to (14.3) points year to year, primarily driven by workforce rebalancing actions taken in the first quarter of 2020 which had 3.5 points of impact on the pre-tax margin.

~~Global Financing~~

Yr. to Yr.

Percent/

(Dollars in millions)

Margin

For the three months ended March 31:

2020

2019

Change

External revenue

$
299

$
406

(26.2)
%
Internal revenue

212

300

(29.4)

Total revenue

$
511

$
706

(27.6)
%
Pre-tax income

$
194

$
288

(32.7)
%

In the first quarter, Global Financing total revenue of $511 million declined 27.6 percent compared to the prior year. External revenue decreased 26.2 percent (25 percent adjusted for currency) due to a decrease in external financing (down 30.0 percent to $235 million) and external used equipment sales (down 7.7 percent to $64 million). Internal revenue decreased 29.4 percent, driven by a decrease in internal used equipment sales (down 31.2 percent to $129 million) and internal financing (down 26.5 percent to $83 million).

The decrease in external financing revenue reflects the wind down of the OEM IT commercial financing operations. The decrease in internal financing revenue in the first quarter of 2020 compared to the same period in 2019 was primarily due to lower average asset balances.

Sales of used equipment represented 37.8 percent of Global Financing’s revenue in the first quarter of 2020 compared to 36.5 percent in the first quarter of 2019. The percentage increase was due to a decline in financing revenue. The gross profit margin on used sales was 52.0 percent and 52.3 percent in the first quarter of 2020 and 2019, respectively.

Global Financing pre-tax income decreased 32.7 percent to $194 million in the first quarter of 2020 compared to the same period in 2019, due to lower gross profit of $115 million as a result of the revenue decline, partially offset by a decrease in expense of $20 million, which was in line with the segment’s revenue performance.

5652

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Management Discussion – (continued)

~~Global Financing return on equity was 29.4~~Systems gross profit margin increased 4.3 points to 54.5 percent ~~for the three months ended March 31, 2020, compared to 13.7 percent for the three months ended March 31, 2019. The increase in return on equity~~ in the first quarter of ~~2020~~2021 compared to the prior year. Systems margin improvement was primarily driven by ~~higher year-to-year net income, as~~IBM Z and Power Systems margin expansion and a mix to IBM Z, partially offset by margin declines in Storage Systems and Operating Systems Software.

The pre-tax loss of $2 million in the first quarter of 2021 decreased $215 million compared to the first-quarter loss in 2020. The pre-tax margin increased 14.2 points year to year to (0.1) points, primarily driven by the Systems Hardware margin expansion and lower workforce rebalancing charges in first-quarter 2021 compared to the prior ~~year included higher tax expense due to U.S. tax reform. Refer to page 72~~year.

Global Financing

See pages 68 through 70 for ~~the details~~a discussion of ~~the after-tax income and return on equity calculation.~~Global Financing’s segment results.

Geographic Revenue

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


									Yr. to Yr.										Yr. to Yr.
							Yr. to Yr.		Percent Change								Yr. to Yr.		Percent Change
							Percent		Excluding Divested								Percent		Excluding Divested
					Yr. to Yr.		Change		Businesses And						Yr. to Yr.		Change		Businesses And
(Dollars in millions)					Percent		Adjusted For		Adjusted For						Percent		Adjusted For		Adjusted For
For the three months ended March 31:	2020		2019		Change		Currency		Currency		2021		2020		Change		Currency		Currency
Total Revenue	$	17,571	$	18,182	(3.4)	%	(1.9)	%	0.1	%	$	17,730	$	17,571	0.9	%	(2.5)	%	(2.4)	%
Americas	$	8,166	$	8,493	(3.8)	%	(2.7)	%	(0.3)	%	$	8,179	$	8,166	0.2	%	0.2	%	0.3	%
Europe/Middle East/Africa (EMEA)		5,517		5,727	(3.7)		(1.1)		0.7			5,641		5,517	2.3		(5.6)		(5.5)
Asia Pacific		3,888		3,961	(1.9)		(1.1)		0.2			3,909		3,888	0.6		(3.7)		(3.6)

Total revenue of ~~$17,571~~$17,730 million ~~decreased 3.4~~increased 0.9 percent as reported, (2but declined 2 percent adjusted for ~~currency), but was flat excluding divested businesses and adjusted for~~ currency ~~in the first quarter~~ compared to the prior year.

Americas revenue of ~~$8,166~~$8,179 million ~~decreased 3.8 percent~~was essentially flat as reported ~~(3 percent adjusted for currency), but was flat excluding divested businesses~~ and adjusted for currency. Within Americas, the U.S. ~~decreased 3.1~~increased 0.7 percent compared to the prior year. Canada increased ~~1.0~~7.6 percent as reported and 21 percent adjusted for currency. Latin America decreased ~~11.9~~9.7 percent as reported and 3 percent adjusted for currency, with Brazil declining ~~15.4~~15.1 percent as reported and 41 percent adjusted for currency.

In EMEA, total revenue of ~~$5,517~~$5,641 million ~~decreased 3.7~~increased 2.3 percent as reported, (1but declined 6 percent ~~adjusted for currency), but grew 1 percent excluding divested businesses and~~ adjusted for currency. Within EMEA, as reported, the UK, ~~decreased 11.8~~Germany and Italy increased 7.1 percent, ~~as reported (10~~3.3 percent ~~adjusted for currency)~~ and ~~Germany~~2.7 percent, respectively, but declined ~~10.7~~1 percent, ~~as reported (8~~5 percent ~~adjusted for currency). Italy decreased 0.4~~and 6 percent, ~~as reported, but grew 3 percent~~respectively, adjusted for currency. France decreased ~~0.9~~4.7 percent as reported ~~but grew 2~~and 12 percent adjusted for currency. ~~The Middle East and Africa region decreased 3.9 percent as reported (2 percent adjusted for currency).~~

Asia Pacific revenue of ~~$3,888~~$3,909 million ~~decreased 1.9~~increased 0.6 percent as reported, (1but declined 4 percent ~~adjusted for currency), but was flat excluding divested businesses and~~ adjusted for currency. Within Asia Pacific, Japan ~~increased 2.3 percent~~was flat as reported, ~~and 1~~but declined 3 percent adjusted for currency compared to the prior year. Australia ~~decreased 16.4~~increased 15.9 percent as reported, (9but decreased 2 percent adjusted for ~~currency),~~currency. As reported, India and China decreased ~~3.7~~11.7 percent ~~as reported (2~~and 10.3 percent, ~~adjusted for currency). India grew 5.5~~respectively, and declined 12 percent ~~as reported~~ and 915 percent, respectively, adjusted for currency.

5753

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Management Discussion – (continued)

Expense

Total Expense and Other (Income)


							Yr. to Yr.								Yr. to Yr.
(Dollars in millions)							Percent								Percent
For the three months ended March 31:	2020			2019			Change*		2021			2020			Change
Total consolidated expense and other (income)	$	7,972		$	6,160		29.4	%	$	7,299		$	7,972		(8.4)	%
Non-operating adjustments:
Amortization of acquired intangible assets	$	(285)		$	(98)		192.0	%	$	(278)		$	(285)		(2.6)	%
Acquisition-related charges		0			(39)		(99.2)			(16)			0		nm
Non-operating retirement-related (costs)/income		(264)			(138)		92.0			(343)			(264)		29.7
Spin-off-related charges										(58)			—		nm
Operating (non-GAAP) expense and other (income)	$	7,422		$	5,886		26.1	%	$	6,604		$	7,422		(11.0)	%
Total consolidated expense-to-revenue ratio		45.4	%		33.9	%	11.5	pts.		41.2	%		45.4	%	(4.2)	pts.
Operating (non-GAAP) expense-to-revenue ratio		42.2	%		32.4	%	9.9	pts.		37.3	%		42.2	%	(5.0)	pts.

* 2020 results were impacted by Red Hat acquisition-related activity.

The following Red Hat-related expenses are included in the current period, with no corresponding expense in the prior-year period: Red Hat operational spending, interest expense from debt issuances to fund the acquisition and other acquisition-related activity, primarily amortization of acquired intangible assets associated with the transaction.nm — not meaningful

Total expense and other (income) ~~increased 29.4~~decreased 8.4 percent in the first quarter of ~~2020~~2021 versus the prior year primarily driven by ~~higher spending including Red Hat, higher amortization of acquired intangible assets associated with the Red Hat transaction, higher~~lower workforce rebalancing charges, reductions in travel and other expenses from COVID-19 restrictions and a decrease in expected credit loss expense, partially offset by the effects of currency, higher non-operating retirement-related costs ~~partially offset by lower~~and spin-off-related charges in the current year. Our expense ~~from divested businesses.~~dynamics also reflect continuing investment in innovation, skills and our ecosystem as we execute our hybrid cloud and AI strategy. Total operating (non-GAAP) expense and other (income) ~~increased 26.1~~decreased 11.0 percent year to year, driven primarily by the factors described above excluding the higher ~~amortization of acquired intangible assets and higher~~ non-operating retirement-related ~~costs.~~costs and spin-off-related charges.

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.						Yr. to Yr.
(Dollars in millions)					Percent						Percent
For the three months ended March 31:	2020		2019		Change		2021		2020		Change
Selling, general and administrative expense:
Selling, general and administrative — other	$	4,341	$	4,048	7.2	%	$	4,306	$	4,341	(0.8)	%
Advertising and promotional expense		428		432	(0.9)			352		428	(17.9)
Workforce rebalancing charges		728		19	nm			146		728	(79.9)
Amortization of acquired intangible assets		284		97	193.2			277		284	(2.6)
Stock-based compensation		117		74	57.3			123		117	5.7
Expected credit loss expense		56		20	188.9
Provision for/(benefit from) expected credit loss expense								(29)		56	nm
Total consolidated selling, general and administrative expense	$	5,955	$	4,691	27.0	%	$	5,174	$	5,955	(13.1)	%
Non-operating adjustments:
Amortization of acquired intangible assets	$	(284)	$	(97)	193.2	%	$	(277)	$	(284)	(2.6)	%
Acquisition-related charges		0		(27)	(98.8)			(16)		0	nm
Spin-off-related charges								(58)		—	nm
Operating (non-GAAP) selling, general and administrative expense	$	5,670	$	4,566	24.2	%	$	4,823	$	5,670	(14.9)	%

nm — not meaningful

Total selling, general and administrative (SG&A) expense ~~increased 27.0~~decreased 13.1 percent in the first quarter of ~~2020~~2021 versus the prior year driven primarily by the following factors:

5854

Table of Contents

Management Discussion – (continued)

●

~~Higher~~Lower workforce rebalancing charges ~~(15~~(9 points);

●

~~Higher~~Lower spending (3 points) including reductions in travel and other expenses associated with COVID-19 restrictions, partially offset by continuing investment in innovation, skills and our ecosystem; and

●

A benefit from ~~Red Hat (12 points), driving up total spending (7 points)~~expected credit loss expense compared to a provision in the prior-year period (1 point); partially offset by

●

The effects of currency (1 point); and

●

~~Higher amortization of acquired intangible assets associated with~~Spin-off-related charges in the ~~Red Hat transaction (4 points)~~current year (1 point).

Operating (non-GAAP) expense ~~increased 24.2~~decreased 14.9 percent year to year primarily driven by the same factors excluding the ~~amortization of acquired intangible assets associated with the Red Hat transaction.~~spin-off-related charges.

~~Expected~~Provisions for expected credit loss expense ~~increased $37~~decreased $86 million year to year in the first three months of ~~2020~~2021 primarily driven by ~~an increase~~higher expense for specific reserves in ~~specific reserves.~~the prior-year period and a decrease in general reserves in the current year. The receivables provision coverage was ~~2.1~~2.6 percent at March 31, ~~2020,~~2021, an increase of 4020 basis points from ~~both~~ December 31, ~~2019~~2020 and ~~March 31, 2019. The higher coverage rate at~~an increase of 50 basis points from March 31, 2020 ~~also reflects~~driven by the ~~adoption of the new guidance for credit losses.~~overall decline in total receivables.

Research, Development and Engineering


					Yr. to Yr.						Yr. to Yr.
(Dollars in millions)					Percent						Percent
For the three months ended March 31:	2020		2019		Change		2021		2020		Change
Research, development and engineering expense	$	1,625	$	1,433	13.4	%	$	1,630	$	1,625	0.3	%
Non-operating adjustment:
Acquisition-related charges	$	—	$	—	—
Operating (non-GAAP) research, development and engineering expense	$	1,625	$	1,433	13.4	%

Research, development and engineering (RD&E) expense was 9.2 percent of revenue in the first quarter of ~~2020 compared to 7.9 percent in~~2021 and the prior-year ~~period.~~period reflecting our continuing investment in innovation.

RD&E expense in the first quarter of ~~2020~~2021 increased ~~13.4~~0.3 percent year to year primarily driven ~~by:~~by the effects of currency (2 points), partially offset by lower spending (1 point).

●

~~Higher spending (14 points) including Red Hat spending (16 points).~~

Intellectual Property and Custom Development Income

Yr. to Yr.

(Dollars in millions)

Percent

For the three months ended March 31:

2020

2019

Change

Intellectual Property and Custom Development Income:







Licensing of intellectual property including royalty-based fees

$
34

$
50

(32.3)
%
Custom development income

76

51

49.1

Sales/other transfers of intellectual property

7

0

nm

Total

$
116

$
101

14.8
%


					Yr. to Yr.
(Dollars in millions)					Percent
For the three months ended March 31:	2021		2020		Change
Intellectual Property and Custom Development Income:
Licensing of intellectual property including royalty-based fees	$	72	$	34	111.1	%
Custom development income		69		76	(9.2)
Sales/other transfers of intellectual property		6		7	(4.6)
Total	$	147	$	116	26.3	%

~~nm — not meaningful~~

Total intellectual property and custom development income increased ~~14.8~~26.3 percent year to year driven by ~~custom development income which grew 49.1 percent driven by new agreements in the first quarter of this year. This was partially offset by a decrease~~an increase in licensing of intellectual property including royalty-based fees. 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.

5955

Table of Contents

Management Discussion – (continued)

Other (Income) and Expense


					Yr. to Yr.						Yr. to Yr.
(Dollars in millions)					Percent						Percent
For the three months ended March 31:	2020		2019		Change		2021		2020		Change
Other (income) and expense:
Foreign currency transaction losses/(gains)	$	(126)	$	(172)	(26.8)	%	$	(109)	$	(126)	(13.8)	%
(Gains)/losses on derivative instruments		101		69	46.2			160		101	59.1
Interest income		(51)		(70)	(27.5)			(14)		(51)	(73.5)
Net (gains)/losses from securities and investment assets		(5)		(4)	33.4			(6)		(5)	8.0
Retirement-related costs/(income)		264		138	92.0			343		264	29.7
Other		0		(32)	nm			(13)		0	nm
Total consolidated other (income) and expense	$	182	$	(73)	nm		$	362	$	182	98.4	%
Non-operating adjustments:
Amortization of acquired intangible assets	$	(1)	$	(1)	—		$	(1)	$	(1)	—
Acquisition-related charges		—		24	(100.0)	%
Non-operating retirement-related (costs)/income		(264)		(138)	92.0			(343)		(264)	29.7	%
Operating (non-GAAP) other (income) and expense	$	(83)	$	(187)	(55.8)	%	$	18	$	(83)	nm

nm - not meaningful

Total consolidated other (income) and expense was expense of ~~$182~~$362 million in the first quarter of ~~2020~~2021 compared to ~~income~~expense of ~~$73~~$182 million in the ~~prior year.~~prior-year period. The year-to-year change was primarily driven by:

●

Higher non-operating retirement-related costs ($~~127~~78 million). Refer to “Retirement-Related Plans” for additional information;

●

Net exchange losses (including derivative instruments) in the current year versus net exchange gains in the prior year ($77 million); and

●

Lower ~~net exchange gains (including derivative instruments) of $78 million. Our hedging programs help mitigate currency impacts~~interest income ($38 million) driven by lower interest rates in the ~~Consolidated Income Statement.~~current-year period.

Operating (non-GAAP) other (income) and expense was ~~income~~expense of ~~$83~~$18 million in the first quarter of ~~2020 and decreased $104~~2021 compared to income of $83 million ~~compared to~~in the prior-year period. The year-to-year change was driven primarily by the ~~lower net exchange gains described above.~~same factors excluding the higher non-operating retirement-related costs.

Interest Expense


					Yr. to Yr.						Yr. to Yr.
(Dollars in millions)					Percent						Percent
For the three months ended March 31:	2020		2019		Change		2021		2020		Change
Interest expense	$	326	$	210	54.8	%	$	280	$	326	(13.9)	%
Non-operating adjustment:
Acquisition-related charges	$	—	$	(36)	(100.0)
Operating (non-GAAP) interest expense	$	326	$	174	86.8	%

Interest expense ~~increased $115~~decreased $45 million in the first quarter of ~~2020~~2021 compared to the prior-year period. Interest expense is presented in cost of financing in the Consolidated Income Statement if the related external borrowings are to support the Global Financing external business. Overall interest expense (excluding capitalized interest) for the first quarter of ~~2020~~2021 was ~~$444~~$386 million, ~~an increase~~a decrease of ~~$55~~$58 million versus the comparable prior-year period, primarily driven by a ~~higher~~lower average debt balance ~~partially offset by~~and lower average interest rates in the current year.

~~Operating (non-GAAP) interest expense increased $151 million in the first quarter of 2020 compared to the prior year. The prior-year period excluded Red Hat pre-closing debt financing costs.~~

6056

Table of Contents

Management Discussion – (continued)

Retirement-Related Plans

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


					Yr. to Yr.						Yr. to Yr.
(Dollars in millions)					Percent						Percent
For the three months ended March 31:	2020		2019		Change		2021		2020		Change
Retirement-related plans — cost:
Service cost	$	99	$	97	1.9	%	$	95	$	99	(3.2)	%
Multi-employer plans		7		9	(13.3)			8		7	3.6
Cost of defined contribution plans		265		248	7.0			271		265	2.1
Total operating costs/(income)	$	371	$	353	5.1	%
Total operating costs							$	374	$	371	0.7	%
Interest cost	$	540	$	728	(25.8)	%	$	413	$	540	(23.5)	%
Expected return on plan assets		(852)		(1,051)	(18.9)			(742)		(852)	(12.9)
Recognized actuarial losses		563		458	23.0			640		563	13.8
Amortization of prior service costs/(credits)		1		(3)	nm			3		1	nm
Curtailments/settlements		8		1	782.5			17		8	106.5
Other costs		5		5	10.8			11		5	106.7
Total non-operating costs/(income)	$	264	$	138	92.0	%	$	343	$	264	29.7	%
Total retirement-related plans — cost	$	636	$	491	29.5	%	$	717	$	636	12.8	%

nm - not meaningful

Total pre-tax retirement-related plan cost increased by ~~$145~~$81 million compared to the first quarter of ~~2019,~~2020, primarily driven by lower expected return on plan assets ($~~198~~110 million) and an increase in recognized actuarial losses ($~~105~~78 million), partially offset by lower interest costs ($~~188~~127 million).

As described in the “Operating (non-GAAP) Earnings” section, management characterizes certain retirement-related costs as operating and others as non-operating. Utilizing this characterization, operating retirement-related costs in the first quarter of ~~2020~~2021 were ~~$371~~$374 million, an increase of ~~$18~~$3 million compared to the first quarter of ~~2019,~~2020, primarily driven by higher defined contribution plans cost ($175 million). Non-operating costs of ~~$264~~$343 million in the first quarter of ~~2020~~2021 increased ~~$127~~$78 million year to year, driven by lower expected return on plan assets ($~~198~~110 million) and an increase in recognized actuarial losses ($~~105~~78 million), partially offset by lower interest costs ($~~188~~127 million).

Taxes

The continuing operations benefit from income taxes for the first quarter of ~~2020~~2021 was ~~$1,226~~$51 million, compared to a ~~tax provision~~benefit from income taxes of ~~$289~~$1,226 million in the first quarter of ~~2019.~~2020. The operating (non-GAAP) ~~benefit from~~ income ~~taxes~~tax provision for the first quarter of ~~2020~~2021 was ~~$961~~$179 million, compared to a ~~tax provision~~benefit from income taxes of ~~$224~~$961 million in the first quarter of ~~2019.~~2020.

The benefit from income taxes in the first quarter of 2021 was primarily driven by the resolution of certain tax audit matters. The benefit from income taxes in the first quarter of 2020 was primarily ~~driven by a net~~related to the tax ~~benefit related to~~impacts of an intra-entity sale of certain of the company’s intellectual ~~property and the related impacts of $939 million and an adjustment to the U.S. tax reform charge due to a foreign tax law change in the first quarter of 2020.~~property. The operating (non-GAAP) ~~benefit from~~ income ~~taxes~~tax provision year-to-year change was primarily driven by the same ~~factors, except for the adjustment to the U.S. tax reform charge.~~factors.

IBM’s full-year tax provision and effective tax rate are impacted by recurring factors including the geographic mix of income before taxes, state and local taxes, the effects of various global income tax strategies and any discrete tax events, such as the settlement of income tax audits and changes in or new interpretations of tax laws. The GAAP tax

6157

Table of Contents

Management Discussion – (continued)

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, audit adjustments, among others.

~~The company is no longer subject to income tax~~During the fourth quarter of 2020, the U.S. Internal Revenue Service (IRS) concluded its examination of ~~its U.S. federal tax returns for years prior to 2013. The~~the company’s U.S. income tax returns for 2013 and 2014, ~~continue to be examined by the IRS with~~which had a specific focus on certain cross-border transactions that occurred in ~~2013.~~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 2021. 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 ~~2014.~~2015. The company is involved in a number of income tax-related matters in India challenging tax assessments issued by the India Tax Authorities. As of March 31, 2020, the company has recorded $704 million as prepaid income taxes representing cash tax deposits paid over timeno longer subject to ~~protect the company’s right to appeal various~~ income tax ~~assessments made by the India Tax Authorities. Tax~~examination of its U.S. federal tax return for years ~~still subject~~prior to ~~examination~~2013. The open years contain matters that could be subject to differing interpretations of applicable tax laws and regulations as it relates to the amount and/or timing of income, deductions and tax credits. Although the outcome of tax audits is always uncertain, the company believes that adequate amounts of tax, interest and penalties have been provided for any adjustments that are expected to result for these years.

The company is involved in a number of income tax-related matters in India challenging tax assessments issued by the India Tax Authorities. As of March 31, 2021, the company had recorded $739 million as prepaid income taxes in India. A significant portion of this balance represents cash tax deposits paid over time to protect the company’s right to appeal various income tax assessments made by the India Tax Authorities. Although the outcome of tax audits are always uncertain, the company believes that adequate amounts of tax, interest and penalties have been provided for any adjustments that are expected to result for these years.

The amount of unrecognized tax benefits at March 31, ~~2020~~2021 is $8,392 million which can be reduced by ~~$585~~$568 million associated with timing adjustments, U.S. tax credits, potential transfer pricing adjustments, and state income taxes. The net amount of ~~$7,807~~$7,824 million, if recognized, would favorably affect the company’s effective tax rate.

Earnings Per Share

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


					Yr. to Yr.						Yr. to Yr.
					Percent						Percent
For the three months ended March 31:	2020		2019		Change		2021		2020		Change
Earnings per share of common stock from continuing operations:
Assuming dilution	$	1.31	$	1.78	(26.4)	%	$	1.06	$	1.31	(19.1)	%
Basic	$	1.32	$	1.79	(26.3)	%	$	1.07	$	1.32	(18.9)	%
Diluted operating (non-GAAP)	$	1.84	$	2.25	(18.2)	%	$	1.77	$	1.84	(3.8)	%
Weighted-average shares outstanding: (in millions)
Assuming dilution		895.0		893.9	0.1	%		901.7		895.0	0.7	%
Basic		888.0		889.6	(0.2)	%		893.6		888.0	0.6	%

Actual shares outstanding at March 31, ~~2020~~2021 were ~~887.9~~893.5 million. The weighted-average number of common shares outstanding assuming dilution during the first quarter of ~~2020~~2021 was ~~1.1~~6.7 million shares ~~(0.1~~(0.7 percent) higher than the same period of ~~2019.~~2020.

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Management Discussion – (continued)

Financial Position

Dynamics

At March 31, ~~2020, the~~2021, our balance sheet remained strong with flexibility to support the business. We continue to manage the investment portfolio to meet our capital preservation and liquidity objectives~~. In this unprecedented environment as a result of the COVID-19 pandemic, while we are supporting our clients~~ and ~~improving the flexibility and competitive position of our operations, we are also taking~~have continued to take actions to enhance our balance sheet strength and liquidity position. We accessed the debt markets in early February 2020 with $4,117 million of issuances, while reducing $4,491 million of current and 2021 refinancing needs. In addition, while we do not rely on commercial paper for our funding requirements, it was prudent in the first quarter to take advantage of our access to the market. At March 31, 2020, we

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~~Management Discussion – (continued)~~

~~had $2,519 million of commercial paper, which increased both our cash and debt balances.~~ Cash, restricted cash and marketable securities at ~~quarter end~~March 31, 2021 were ~~$12,017~~$11,273 million, ~~an increase~~a decrease of ~~$3,008~~$3,002 million from December 31, 2020. Financing receivables declined $3,235 million to $14,744 million since ~~December 31, 2019.~~the end of 2020 primarily resulting from collections of seasonally higher year-end balances and our strategic actions to re-focus our Global Financing portfolio. Total debt of ~~$64,327~~$56,404 million at March 31, ~~2020 increased $1,428~~2021 decreased $5,134 million from December 31, ~~2019. Within total debt, $22,254~~2020 and $16,635 million ~~is Global Financing debt, which is~~since the end of the second quarter of 2019 (immediately preceding the Red Hat acquisition). We have made good progress in ~~support~~deleveraging, without sacrificing investments in our business or our solid dividend policy. We have consistently generated strong cash flow from operations and continue to have access to additional sources of ~~IBM products~~liquidity through the capital markets and ~~services and has a stable~~$15,250 million of our unused credit ~~portfolio.~~facilities. In the first three months of 2021, we generated $4,914 million in net cash from operations, compared to $4,476 million in the first three months of 2020.

Our pension plans were well funded at the end of ~~2019,~~2020, with worldwide qualified plans funded at 102 percent. Overall pension funded status as of the end of March was fairly consistent with year-end ~~2019,~~2020, and we currently have no change to expected plan contributions in ~~2020.~~

In the first three months of 2020, we generated $4,476 million in net cash from operations, compared to $4,759 million in the first three months of 2019. We have consistently generated strong cash flows from operations and continue to have access to additional sources of liquidity through the capital markets and our $15,250 million of unused credit facilities. We do not currently have plans to draw on these facilities, however they are available as back-up liquidity. We expect to continue to be opportunistic in the capital markets and remain fully committed to a target leverage profile consistent with a mid to high single A credit rating. Refer to “Liquidity and Capital Resources” for additional information. In summary, we have a strong cash position and ample credit available during these uncertain times to support and invest in our business.2021.

The assets and debt associated with the Global Financing business are a significant part of our financial position. The financial position amounts appearing on pages 5 and 6 are the consolidated amounts including Global Financing.

The amounts appearing in the separate Global Financing ~~Financial Position Key Metrics:~~

At March 31,

At December 31,
(Dollars in millions)

2020

2019
Cash and cash equivalents

$
1,605

$
1,697
Net investment in sales-type and direct financing leases ⁽¹⁾

5,598

6,224
Equipment under operating leases — external clients ⁽²⁾

197

238
Client loans

11,940

12,884
Total client financing assets

17,735

19,346
Commercial financing receivables

2,319

3,820
Intercompany financing receivables ^(3) (4)

3,771

3,870
Total assets

$
26,566

$
29,568
Debt

$
22,254

$
24,727
Total equity

$
2,472

$
2,749

~~(1)~~

~~Includes deferred initial direct costs which are eliminated in IBM’s consolidated results.~~

~~(2)~~

~~Includes intercompany mark-up, priced on an arm’s-length basis, on products purchased from the company’s product divisions which is eliminated in IBM’s consolidated results.~~

~~(3)~~

~~Entire amount eliminated for purposes of IBM’s consolidated results and therefore does not appear on pages 5 and 6.~~

~~(4)~~

~~These assets, along with all other financing assets in this table, are leveraged at the value in the table using Global Financing debt.~~

~~At March 31, 2020, substantially all client and commercial financing assets were IT related assets, and approximately 58 percent~~section, beginning on page 68, are supplementary data presented to facilitate an understanding of the total external portfolio was with investment grade clients with no direct exposure to consumers, an increase of 3 points year to year. This investment grade percentage is based on the credit ratings of the companies in the portfolio.Global Financing business.

We have a long-standing practice of taking mitigating actions, in certain circumstances, to transfer credit risk to third parties, including credit insurance, financial guarantees, non-recourse borrowings, transfers of receivables recorded as true sales in accordance with accounting guidance or sales of equipment under operating lease.

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~~Management Discussion – (continued)~~

IBM Working Capital


	At March 31,		At December 31,		At March 31,		At December 31,
(Dollars in millions)	2020		2019		2021		2020
Current assets	$	38,931	$	38,420	$	34,038	$	39,165
Current liabilities		40,673		37,701		36,542		39,869
Working capital	$	(1,743)	$	718	$	(2,505)	$	(705)
Current ratio		0.96:1		1.02:1		0.93:1		0.98:1

Working capital decreased ~~$2,461~~$1,800 million from the year-end ~~2019~~2020 position. The key changes are described below:

Current assets ~~increased $511~~decreased $5,127 million ($~~1,739~~4,563 million adjusted for currency) due to:

●

~~An increase~~A decrease of ~~$3,008~~$3,002 million ($~~3,416~~2,798 million adjusted for currency) in cash, restricted cash, and marketable securities; and

●

A decrease in receivables of $2,671 million ($2,311 million adjusted for currency) primarily due collections of higher year-end balances and sales of financing receivables; partially offset by

●

An increase in prepaid expenses and other current assets of ~~$408~~$442 million ($~~516~~380 million adjusted for currency) primarily driven by an increase in derivative ~~assets; partially offset by~~

●

~~A decline in receivables of $3,125 million ($2,514 million adjusted for currency) primarily as a result of collections of higher year-end balances.~~assets.

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Management Discussion – (continued)

Current liabilities ~~increased $2,972~~decreased $3,327 million ($~~3,947~~2,588 million adjusted for currency) as a result of:

●

~~An increase~~A decrease in short-term debt of ~~$2,845~~$1,985 million ($~~2,909~~1,975 million adjusted for currency) due to maturities of $2,952 million, including a $500 million early redemption of IBM Credit debt; partially offset by reclassifications of ~~$3,490~~$1,090 million from long-term debt to reflect upcoming ~~maturities and a net increase in commercial paper of $2,214 million partially offset by maturities of $2,851 million;~~maturities; and

●

~~An increase~~A decrease in ~~deferred income~~other accrued expenses and liabilities of ~~$1,351~~$1,072 million ($~~1,672~~866 million adjusted for currency) ~~driven by annual customer billings; partially offset by~~primarily due to payments of $702 million for workforce rebalancing actions and cash payments related to fourth-quarter 2020 acquisitions; and

●

A decrease in accounts payable of ~~$724~~$768 million ($~~630~~695 million adjusted for currency) reflecting declines from seasonally higher year-end balances; and

●

A decrease in taxes payable of ~~$491~~$661 million ($~~385~~572 million adjusted for currency).; partially offset by

●

An increase in deferred income of $1,363 million ($1,623 million adjusted for currency) 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 ~~(included in Total IBM)~~


(Dollars in millions)	(Dollars in millions)									(Dollars in millions)
January 1, 2020 *		Additions / (Releases) **		Write-offs ***		Other +		March 31, 2020
January 1, 2021										January 1, 2021	Additions / (Releases) *		Write-offs **		Other +		March 31, 2021
$	612	$	56	$	(38)	$	(27)	$	603	644	$	(24)	$	(16)	$	(7)	$	597

* ~~Opening balance does not equal the allowance at December 31, 2019 due to the adoption of the guidance for the allowance for credit losses.~~

~~Refer to note 2, “Accounting Changes,” for additional information.~~

** AdditionsAdditions/(Releases) for Allowance for Credit Losses are ~~charged to~~recorded in expense.

*** Refer to note A, “Significant Accounting Policies,” in our ~~2019~~2020 Annual Report for additional information regarding allowance for credit loss write-offs.

+ Primarily represents translation adjustments.

The total IBM receivables provision coverage was ~~2.1~~2.6 percent at March 31, ~~2020,~~2021, an increase of 3020 basis points compared to ~~January 1,~~December 31, 2020. The increase in coverage and decrease in the allowance was primarily driven by the overall ~~decline~~decrease in ~~gross financing receivables due to seasonally higher balances at year end. New additions in the first three months of 2020 were primarily due to certain~~

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~~Management Discussion – (continued)~~

~~specific reserves.~~total receivables. The majority of the write-offs during the three months ended March 31, ~~2020~~2021 related to receivables which had been previously reserved.

Global Financing Receivables and Allowances

The following table presents external Global Financing receivables excluding ~~the allowance for credit losses and~~ immaterial miscellaneous receivables.


	At March 31,			At December 31,			At March 31,			At December 31,
(Dollars in millions)	2020			2019			2021			2020
Amortized cost/Recorded investment (1)(2)	$	20,096		$	22,446
Amortized cost *							$	15,004		$	18,264
Specific allowance for credit losses		157			177			174			184
Unallocated allowance for credit losses		81			45			63			79
Total allowance for credit losses		238			221			236			263
Net financing receivables	$	19,858		$	22,224		$	14,768		$	18,001
Allowance for credit losses coverage		1.2	%		1.0	%		1.6	%		1.4	%

~~(1)~~

Prior to the January 1, 2020 adoption of the guidance on credit losses, the presentation was recorded investment, subsequent to adoption the presentation is amortized cost. Both presentations include deferred initial direct costs which are eliminated in IBM’s consolidated results.

~~(2)~~

The amortized cost basis of a financial asset represents the original amount of the financing receivable (including residual value) adjusted for unearned income, deferred initial direct costs, cash collected, write-offs and any foreign exchange adjustments. Recorded investment excluded residual value.

* Includes deferred initial direct costs which are expensed in IBM’s consolidated financial results.

The percentage of Global Financing receivables reserved increased from ~~1.0~~1.4 percent at December 31, ~~2019,~~2020, to ~~1.2~~1.6 percent at March 31, ~~2020. The increase in unallocated reserves was impacted~~2021, primarily driven by the ~~adoption~~decline in amortized cost.

Table of ~~the guidance on credit losses in the current year. Specific reserves decreased 11.2 percent from $177 million at December 31, 2019, to $157 million at March 31, 2020.~~Contents

Management Discussion – (continued)

Roll Forward of Global Financing Receivables Allowance for Credit Losses


(Dollars in millions)	(Dollars in millions)									(Dollars in millions)
January 1, 2020*		Additions / (Releases)**		Write-offs ***		Other +		March 31, 2020
January 1, 2021										January 1, 2021	Additions / (Releases)*		Write-offs **		Other +		March 31, 2021
$	262	$	10	$	(19)	$	(16)	$	238	263	$	(12)	$	(9)	$	(5)	$	236

*	Additions/(Releases) for Allowance for Credit Losses are recorded in expense.

**	Refer to note A, “Significant Accounting Policies,” in our 2020 Annual Report for additional information regarding allowance for credit loss write-offs.

* Opening balance does not equal the allowance at December 31, 2019 due to the adoption of the guidance for the allowance for credit losses.

~~Refer to note 2, “Accounting Changes,” for additional information.~~

** Additions for Allowance for Credit Losses are charged to expense.

*** Refer to note A, “Significant Accounting Policies,” in our 2019 Annual Report for additional information regarding allowance for credit loss write-offs.

+ Primarily represents translation adjustments.

Global Financing’s expected credit loss expense (including impacts from off-balance sheet commitments which are recorded in other liabilities) was ~~an addition~~a net release of ~~$11~~$18 million for the three months ended March 31, ~~2020,~~2021, compared to an addition of $3$11 million for the same period in ~~2019.~~2020. The ~~increase~~decrease was primarily driven by ~~higher~~lower unallocated reserves in Americas and EMEA in the current year reflecting lower asset balances at March 31, 2021 when compared to the same period in the prior year.

Noncurrent Assets and Liabilities


	At March 31,		At December 31,		At March 31,		At December 31,
(Dollars in millions)	2020		2019		2021		2020
Noncurrent assets	$	114,473	$	113,767	$	114,591	$	116,806
Long-term debt	$	52,685	$	54,102	$	51,206	$	54,355
Noncurrent liabilities (excluding debt)	$	39,917	$	39,398	$	39,368	$	41,020

Noncurrent assets decreased $2,215 million ($944 million adjusted for currency) due to:

●

A decrease in long-term financing receivables of $1,165 million ($1,006 million adjusted for currency) primarily as a result of reductions from seasonally higher year-end volumes and sales of receivables; and

●

A decrease in net property, plant and equipment of $588 million ($405 million adjusted for currency); partially offset by

●

An increase in goodwill and net intangible assets of $107 million ($629 million adjusted for currency) due to additions from new acquisitions; partially offset by intangibles amortization and currency impacts.

Long-term debt decreased $3,150 million ($2,454 million adjusted for currency) due to:

●

Early redemption of IBM Credit debt of $1,250 million;

●

Reclassifications to short-term debt of $1,090 million to reflect upcoming maturities; and

●

The impacts of currency.

Noncurrent liabilities (excluding debt) decreased $1,652 million ($656 million adjusted for currency) primarily due to:

●

A decrease in retirement and postretirement benefit obligations of $901 million ($379 million adjusted for currency);

●

A decrease in other liabilities of $409 million ($113 million adjusted for currency).

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Management Discussion – (continued)

~~Noncurrent assets increased $706 million ($2,656 million adjusted for currency) due to:~~

●

~~An increase in deferred taxes of $3,600 million ($3,771 million adjusted for currency) primarily due to an intra-entity sale of IP; partially offset by~~

●

~~A decrease in long-term financing receivables of $1,004 million ($821 million adjusted for currency) as a result of reductions from seasonally higher year-end balances; and~~

●

~~A decrease in net intangible assets and goodwill of $1,274 million ($455 million adjusted for currency) resulting from intangibles amortization and currency impacts.~~

~~Long-term debt decreased $1,417 million ($1,186 million adjusted for currency) due to:~~

●

~~Reclassifications to short-term debt of $3,490 million to reflect upcoming maturities; and~~

●

~~Maturities of $2,019 million mainly to early redeem certain outstanding bonds; partially offset by~~

●

~~Issuances of $4,342 million.~~

~~Noncurrent liabilities (excluding debt) increased $518 million ($1,418 million adjusted for currency) due to:~~

●

An increase in other liabilities of $1,348 million ($1,675 million adjusted for currency) primarily driven by an increase in deferred tax liabilities related to the intra-entity IP sale; partially offset by

●

~~A decrease in retirement and postretirement plans of $668 million ($330 million adjusted for currency).~~

Debt

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


	At March 31,		At December 31,		At March 31,		At December 31,
(Dollars in millions)	2020		2019		2021		2020
Total company debt	$	64,327	$	62,899	$	56,404	$	61,538
Total Global Financing segment debt	$	22,254	$	24,727	$	18,307	$	21,167
Debt to support external clients		19,092		21,487		14,941		17,819
Debt to support internal clients		3,162		3,239		3,366		3,348
Non-Global Financing debt	$	42,073	$	38,173	$	38,096	$	40,371

Total debt of ~~$64,327~~$56,404 million ~~increased $1,428~~decreased $5,134 million ($4,428 million adjusted for currency) from December 31, ~~2019,~~2020, driven ~~by new debt issuances of $4,464 million; partially offset~~ by debt maturities and early retirements of ~~$4,870~~$4,241 million. ~~Within total~~Total debt ~~commercial paper was a net increase~~has decreased $16,635 million since the end of ~~$2,214 million.~~the second quarter 2019 (immediately preceding the Red Hat acquisition).

Non-Global Financing debt of ~~$42,073~~$38,096 million ~~increased $3,901~~decreased $2,275 million ($1,842 million adjusted for currency) from December 31, ~~2019 and decreased $5,983 million since June 30, 2019.~~2020 due to scheduled debt maturities in the first quarter of 2021.

Global Financing debt of ~~$22,254~~$18,307 million decreased ~~$2,473~~$2,859 million ($2,586 million adjusted for currency) from December 31, ~~2019,~~2020 primarily due to lower funding ~~requirements.~~requirements associated with financing receivables. In the first quarter of 2021, IBM Credit early redeemed all of its outstanding fixed-rate debt in the aggregate amount of $1.75 billion and deregistered with the U.S Securities and Exchange Commission.

Global Financing provides financing predominantly for IBM’s external client assets, as well as for assets under contract by other IBM units. These assets, primarily for Global Technology Services, generate long-term, stable revenue

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~~Management Discussion – (continued)~~

streams similar to the Global Financing asset portfolio. Based on their attributes, these Global Technology Services assets are leveraged with the balance of the Global Financing asset base. Global Financing's funding of the Global Technology Services assets will wind down with the separation of the managed infrastructure services business as Global Financing refocuses its portfolio to support IBM's open hybrid cloud platform and AI capabilities.

The debt used to fund Global Financing assets is composed primarily of intercompany ~~loans and external debt.~~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 Global Financing debt-to-equity ratio remained at 9.0 to 1 at March 31, ~~2020.~~2021.

We measure Global Financing as a stand-alone entity, and accordingly, interest expense relating to debt supporting Global Financing’s external client and internal business is included in the “Global Financing Results of Operations” and in note 4, “Segments.” In the Consolidated Income Statement, the external debt-related interest expense supporting Global Financing’s internal financing to IBM is reclassified from cost of financing to interest expense.

Equity

Total equity ~~decreased $856~~increased $786 million from December 31, ~~2019,~~2020, primarily due to ~~increases~~an increase in accumulated other comprehensive income of $1,080 million mainly due to retirement-related benefit plans of $500 million and an increase in foreign currency translation ~~losses ($1,041 million) decreases~~gains of $321 million, and an increase from ~~dividends paid ($1,440 million);~~net income of $955 million; partially offset by ~~increases from net income ($1,175 million) and retirement-related plans ($422 million).~~dividends paid of $1,457 million.

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Management Discussion – (continued)

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 following table. These amounts include the cash flows associated with the Global Financing business.


(Dollars in millions)
For the three months ended March 31:	2020		2019		2021		2020
Net cash provided by/(used in) continuing operations:
Operating activities	$	4,476	$	4,759	$	4,914	$	4,476
Investing activities		(902)		(853)		(2,000)		(902)
Financing activities		(115)		1,863		(5,783)		(115)
Effect of exchange rate changes on cash, cash equivalents and restricted cash		(403)		(102)		(134)		(403)
Net change in cash, cash equivalents and restricted cash	$	3,057	$	5,668	$	(3,002)	$	3,057

Net cash provided by operating activities ~~decreased $283~~increased $438 million as compared to the first three months of ~~2019~~2020 driven primarily by:

●

An increase of cash provided by receivables of $262 million primarily driven by sales of financing receivables;

●

A decrease in interest payments on debt of approximately $190 million; and

●

Performance-related ~~declines~~improvements within net ~~income.~~income; partially offset by

●

An increase in workforce rebalancing payments of $585 million.

Net cash used in investing activities increased ~~$49~~$1,098 million driven primarily by:

●

~~A decrease of $212 million~~An increase in cash ~~provided by net non-operating finance receivables;~~used for acquisitions of $1,107 million; and

●

An increase in cash used for net ~~capital expenditures~~purchases of ~~$123~~marketable securities and other investments of $168 million; partially offset by

●

A decrease in cash used for net ~~purchases~~capital expenditures of ~~marketable securities and other investments of $306~~$208 million.

~~Table of Contents~~

~~Management Discussion – (continued)~~

~~Financing~~Net cash used in financing activities ~~were a net use of cash of $115~~increased $5,668 million ~~in the first three months of 2020 compared to a net source of cash of $1,863 million in the first three months of 2019. The year-to-year increase in the use of cash of $1,978 million was~~ driven primarily by:

●

A decrease in net cash provided by debt transactions of ~~$2,876~~$5,656 million primarily driven by a higher level of net additions in the prior ~~year to fund the acquisition of Red Hat;~~year; partially offset by

●

~~A decrease~~ a lower level of maturities in ~~cash used for gross common share repurchases of $920 million.~~the current year consistent with our overall debt pay down strategy.

~~Looking Forward~~

~~Long-term strategic model~~

IBM is focused on chapter 2 of clients’ digital reinventions, which includes shifting mission-critical workloads to the cloud and scaling AI. To address the cloud opportunity, enterprises need to be able to move and manage data, services and workflows across multiple clouds and on-premises. They also need to be able to address security concerns, data protection and protocols, availability and cloud management. This is best addressed with a hybrid, multi-cloud, open approach, based on a foundation of Linux, with containers and Kubernetes. On July 9, 2019, we closed the acquisition of Red Hat, which significantly changed the cloud landscape and will accelerate our high value business model. Together, IBM and Red Hat offer the leading hybrid, multi-cloud platform built on open source technologies.

~~2020~~

On April 20, 2020, given the level of uncertainty around the duration of the COVID-19 health crisis and the potential rate and pace of economic recovery, IBM withdrew full-year 2020 expectations. We expect to reassess this position based on the clarity of the macroeconomic recovery after the second quarter. We maintain confidence in our strategy and our portfolio, which is focused on hybrid cloud and AI and believe the challenges clients are facing today will accelerate their transitions to digital environments. However, we do expect changes to client buying patterns in the near term. In this environment, we have taken quick and prudent actions to manage cost and expense, further improve our liquidity position and focus on opportunities to emerge stronger. While there are a wide range of outcomes for the year, each of which we are prepared for, in each scenario, we expect to have solid free cash flow and ample liquidity to support our business and secure our dividend.

Looking forward to the second quarter of 2020, in services, approximately 80 percent of GBS revenue and 90 percent of GTS revenue in a quarter historically comes from the opening backlog, though our contracts adjust for flexible volumes in our clients’ businesses. We have made progress in our backlog and although it was down on an actual basis, it was essentially flat at constant currency (with GBS up and GTS down modestly) compared to the prior- year period.

Over the last few years, our software transactional content in the second quarter is about 20 to 25 percent of our software revenue. We have a solid pipeline of deals for second-quarter 2020, however, our software performance will depend on how we yield against that pipeline. Since the COVID-19 crisis started to impact our software performance at the end of the first quarter, if that same client buying behavior continues, it is reasonable to expect it could be more impactful to performance in the second quarter.

The Systems hardware business is essentially all transactional. Similar to software, we have a good pipeline in IBM Z and storage. While the current environment is expected to impact closure rates, we expect less of an impact to IBM Z and storage given the essential nature of the purchases and additional capacity requirements, especially in certain industries.

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Management Discussion – (continued)

Looking Forward

~~In cost~~Separation of Kyndryl

On October 8, 2020 we announced our plan to separate the managed infrastructure services unit of our GTS segment into a new public company, to be named Kyndryl. The separation is expected to be achieved through a U.S. federal tax-free spin-off to IBM shareholders and ~~expense,~~be completed by the end of 2021. The separation will create two industry-leading companies, each with strategic focus and flexibility to capitalize on their respective missions and drive client and shareholder value. IBM will accelerate our open hybrid cloud platform growth strategy and AI capabilities to drive clients’ digital transformations. Upon separation, Kyndryl will immediately be the world's leading managed infrastructure services provider and will have greater agility to design, run and modernize the infrastructure of the world’s most important organizations. Both IBM and Kyndryl will have greater ability to focus on their operating and financial models, have more freedom to partner with others and both will align their investments and capital structure to their strategic focus areas. We have made good progress on executing the necessary financial, legal and regulatory milestones to enable the separation and remain on track to complete the separation by the end of 2021.

IBM’s Hybrid Cloud and AI Strategy

We are reshaping our future as a hybrid cloud platform and AI company. Businesses have made significant investments in their IT infrastructure and are dealing with specific constraints such as compliance, data sovereignty and latency needs in their operations. They need an environment that is not only hybrid, but a hybrid platform that is flexible, secure and built from open source innovation. This gives them a credible path to modernizing legacy systems with advanced cloud services and building cloud-native applications. This is what we have built our platform for and why we have such confidence in our strategy.

To accelerate our strategy, we are increasing our investment, both organic and inorganic in skills, ecosystem and innovation. Our hiring is up year to year and we closed six acquisitions since mid-December 2020. We have redesigned our go-to-market model and expect to ~~closely manage~~yield benefits as we move through the year. We are building out pre-sales garages to co-create solutions with our ~~spending~~clients, adding go-to-market delivery capabilities in GBS and ~~capitalize on new~~technical skills in Red Hat and ~~efficient ways of operating.~~ we are increasing R&D in areas like AI and quantum to drive innovation.

We ~~expect~~are executing the structural actions ~~taken~~initiated in the ~~first~~fourth quarter ~~to yield gross annualized savings~~ of ~~approximately $1.8 billion starting in~~2020, which will continue through the ~~second~~first half of ~~2020. We are likely~~2021. While the savings from the structural actions will improve the profit profile of Kyndryl, we expect more of the savings to ~~take additional actions~~be reinvested in ~~the second quarter.~~

As our clients adjust to this crisis, they need a partner they can trust, and IBM is that partner. This is not just about helping our clients navigate this crisis but also ensuring that they emerge even stronger and more resilient. To that end, we have taken concrete steps to focus on near-term opportunities to address the shifting needs of clients, such as leveraging hybrid cloud, using AI for automation and enabling remote work.IBM’s remaining business. We have also ~~quickly mobilized~~taken actions to ~~help with the global battle against COVID-19 with much work already underway.~~

~~For the period ended~~enhance our balance sheet strength and liquidity. At March 31, ~~2020,~~2021, we ~~assessed certain accounting-related matters that generally require consideration~~had $11.3 billion of ~~current information reasonably available to us~~cash and ~~forecasted financial data in~~cash equivalents, restricted cash and marketable securities. We have refocused our Global Financing business on IBM’s hybrid cloud and AI offerings, reducing our capital needs. Debt levels have decreased $16.6 billion from our peak levels at June 30, 2019 (immediately preceding the context of unknown future impacts to IBM as a result of the COVID-19 pandemic. The accounting matters assessed included but were not limited to, the allowances for credit losses, the carrying values of goodwillRed Hat acquisition) and intangible assets and other long-lived assets, our net investments in sales-type or direct financing leases, any significant lease modifications, valuation allowances for tax assets and revenue recognition. These assessments did not result in any material impacts to our consolidated financial results as of and for the quarter ended March 31, 2020. Wewe will continue to ~~assess these matters~~deleverage throughout 2021 utilizing our debt maturities schedule.

Looking forward, there is tremendous opportunity for us to help our clients become digital businesses. We continue to take prudent actions to improve our operating model and accelerate our strategic priorities. We are managing for the long-term and are confident in ~~future periods. However, given~~ the ~~inherent uncertainty~~direction and focus of ~~the future impacts from the magnitude and/or duration of the pandemic, there can be no assurance that impacts will not be material~~our business. We expect to continue our ~~consolidated financial results in future periods.~~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 pension plans are well ~~funded coming into this environment~~funded. Contributions for all retirement-related plans are expected to be approximately $2.3 billion in 2021, an increase of approximately $100 million compared to 2020, of which $0.3 billion generally relates to legally required contributions to non-U.S. defined benefit and ~~our expectations for our retirement-related plan contributions remain consistent with year-end 2019.~~multi-employer plans. We expect ~~2020~~2021 pre-tax retirement-related plan cost to be approximately ~~$2.7~~$2.9 billion, an increase of approximately ~~$600~~$300 million compared to ~~2019.~~2020. This estimate reflects current pension plan assumptions at December 31, ~~2019.~~2020. Within total retirement-related plan cost, operating retirement-related plan cost is expected to be approximately $1.5 billion, approximately flat versus ~~2019.~~ 2020.

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Management Discussion – (continued)

Non-operating retirement-related plan cost is expected to be approximately ~~$1.2~~$1.4 billion, an increase of approximately ~~$600~~$300 million compared to ~~2019,~~2020, primarily driven by lower income from expected return on assets. ~~Contributions for all retirement-related plans are expected to be approximately $2.3 billion in 2020, an increase of approximately $100 million compared to 2019.~~

Currency Rate Fluctuations

Changes in the relative values of non-U.S. currencies to the U.S. dollar (USD) affect our financial results and financial position. At March 31, ~~2020,~~2021, currency changes resulted in assets and liabilities denominated in local currencies being translated into fewer dollars than at year-end ~~2019.~~2020. We use financial hedging instruments to limit specific currency risks related to financing transactions and other foreign currency-based transactions.

During periods of sustained movements in currency, the marketplace and competition adjust to the changing rates. For example, when pricing offerings in the marketplace, we may use some of the advantage from a weakening U.S. dollar to improve our position competitively, and price more aggressively to win the business, essentially passing on a portion of the currency advantage to our customers. Competition will frequently take the same action. Consequently, we believe that some of the currency-based changes in cost impact the prices charged to clients. We also maintain currency hedging programs for cash management purposes which temporarily mitigate, but do not eliminate, the volatility of currency impacts on our financial results.

We translate revenue, cost and expense in our non-U.S. operations at current exchange rates in the reported period. References to “adjusted for currency” or “constant currency” reflect adjustments based upon a simple mathematical formula. However, this constant currency methodology that we utilize to disclose this information does not incorporate any operational actions that management could take to mitigate fluctuating currency rates. Currency movements impacted our year-to-year revenue and earnings per share growth in the first three months of ~~2020.~~2021. Based on the currency rate movements in the first three months of ~~2020,~~2021, total revenue ~~decreased 3.4~~increased 0.9 percent as reported, ~~and 1.9~~but decreased 2.5 percent at constant currency versus the first three months of ~~2019.~~2020. On an income from continuing operations before

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~~Management Discussion – (continued)~~

income tax basis, these translation impacts mitigated by the net impact of hedging activities resulted in a theoretical maximum (assuming no pricing or sourcing actions) increase of approximately ~~$60~~$100 million in the first three months of ~~2020~~2021 on an as-reported basis and an increase of approximately ~~$50~~$125 million on an operating (non-GAAP) basis. The same mathematical exercise also resulted in an increase of approximately $60 million in the first three months of ~~2019~~2020 on an as-reported basis and an increase of approximately $50 million on an operating (non-GAAP) basis. We view these amounts as a theoretical maximum impact to its as-reported financial results. Considering the operational responses mentioned above, movements of exchange rates, and the nature and timing of hedging instruments, it is difficult to predict future currency impacts on any particular period, but we believe it could be substantially less than the theoretical maximum given the competitive pressure in the marketplace.

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

Liquidity and Capital Resources

In our ~~2019~~2020 Annual Report, on pages 5756 to ~~59,~~58, there is a discussion of our liquidity including two tables that present three years of data. The table presented on page 5856 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 three months ended, or at, as applicable, March 31, ~~2020,~~2021, those amounts are ~~$4.5~~$4.9 billion of net cash from operating activities, ~~$12.0~~$11.3 billion of cash and cash equivalents, restricted cash and short-term marketable securities and $15.3 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 July 9, 2019, we closed the acquisition of Red Hat for cash consideration of $34.8 billion. The transaction was funded through a combination of cash on hand and proceeds from debt issuances. In order to reduce this debt and return

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Management Discussion – (continued)

to target leverage ratios within a couple of years, the company suspended its share repurchase program at the time of the Red Hat acquisition closing. ~~Refer to note 11, “Borrowings,” for additional details of financing this transaction.~~

The major rating agencies’ ratings on our debt securities at March 31, ~~2020~~2021 appear in the following table and remain unchanged from December 31, ~~2019.~~2020.

~~Can~~
	STANDARD	MOODY’S
	AND	INVESTORS
IBM ~~and IBM Credit LLC ratings:~~RATINGS:	POOR’S	SERVICE
Senior long-term debt	A	A2
Commercial paper	A-1	Prime-1

~~We remain committed~~IBM has ample financial flexibility, supported by our strong liquidity position and cash flows, to operate at a ~~target leverage profile consistent with a mid to high~~ single A credit ~~rating within a couple of years.~~rating. Debt levels have decreased $5.1 billion from December 31, 2020 and $16.6 billion from our peak levels at June 30, 2019 (immediately preceding the Red Hat acquisition) and we will continue to deleverage throughout 2021 utilizing our debt maturities schedule.

We do not have “ratings trigger” provisions in our debt covenants or documentation, which would allow the holders to declare an event of default and seek to accelerate payments thereunder in the event of a change in credit rating. Our debt covenants are well within the required levels. Our contractual agreements governing derivative instruments contain standard market clauses which can trigger the termination of the agreement if our credit rating were to fall below investment grade. At March 31, ~~2020,~~2021, the fair value of those instruments that were in a liability position was ~~$511~~$332 million, before any applicable netting, and this position is subject to fluctuations in fair value period to period based on the level of our outstanding instruments and market conditions. We have no other contractual arrangements that, in the event of a change in credit rating, would result in a material adverse effect on our financial position or liquidity.

In July 2017, the UK's Financial Conduct Authority (FCA), which regulates the London Interbank Offered Rate (LIBOR), announced that it intends to phase out LIBOR by the end of 2021. In March 2021, the FCA announced an extension of the phase out in the case of U.S. dollar settings for certain tenors until the end of June 2023. Various central bank committees and working groups

~~Table of Contents~~

~~Management Discussion – (continued)~~

continue to discuss replacement of benchmark rates, the process for amending existing LIBOR-based contracts, and the potential economic impacts of different alternatives. The Alternative Reference Rates Committee has identified the Secured Overnight Financing Rate (SOFR) as its preferred alternative rate for USD LIBOR. SOFR is a measure of the cost of borrowing cash overnight, collateralized by U.S. Treasury securities, and is based on directly observable U.S. Treasury-backed repurchase transactions. ~~It is still uncertain when the transition from LIBOR to another reference rate will occur or whether SOFR will become the accepted market alternative to LIBOR.~~ We are continuing to evaluate the potential impact of the replacement of the LIBOR benchmark interest rate, including risk management, internal operational readiness and monitoring the FASB standard-setting process ~~for additional updates~~ to address financial reporting issues that might arise in connection with transition from LIBOR to a new benchmark rate. However, it is not expected to 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 67 and 68.~~page 63. 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 ~~share repurchase~~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 Global Financing receivables and net capital expenditures, including the investment in software. A key objective of the Global Financing business is to generate strong returns on equity, and ~~increasing~~our Global Financing receivables isare the basis for growth. Accordingly, management considers Global 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 Global Financing receivables. ~~Free cash flow guidance is derived using an estimate~~

Table of profit, working capital and operational cash flows. As previously noted, we view Global Financing receivables as a profit-generating investment which we seek to maximize and therefore it is not considered when formulating guidance for free cash flow. As a result, we do not estimate a GAAP Net Cash from Operations expectation metric.Contents

Management Discussion – (continued)

The following is management’s view of cash flows for the first three months of ~~2020~~2021 and ~~2019~~2020 prepared in a manner consistent with the description above.


(Dollars in millions)
For the three months ended March 31:	2020		2019		2021		2020
Net cash from operating activities per GAAP	$	4,476	$	4,759	$	4,914	$	4,476
Less: change in Global Financing receivables		2,381		2,458		2,863		2,381
Net cash from operating activities, excluding Global Financing receivables	$	2,095	$	2,302	$	2,052	$	2,095
Capital expenditures, net		(737)		(614)		(529)		(737)
Free cash flow	$	1,358	$	1,688	$	1,522	$	1,358
Acquisitions		(13)		(1)		(1,120)		(13)
Divestitures		26		33		(15)		26
Share repurchase		—		(920)
Common stock repurchases for tax withholdings		(44)		(61)		(41)		(44)
Dividends		(1,440)		(1,397)		(1,457)		(1,440)
Non-Global Financing debt		3,503		5,890		(1,725)		3,503
Other (includes Global Financing net receivables and Global Financing debt)		(382)		690		(166)		(382)
Change in cash, cash equivalents, restricted cash and short-term marketable securities	$	3,008	$	5,922	$	(3,002)	$	3,008

In the first three months of ~~2020,~~2021, we generated free cash flow of ~~$1.4~~$1.5 billion, ~~a decrease~~an increase of ~~$0.3~~$0.2 billion versus the prior year. The current-year period includes cash impacts from structural actions initiated by the company in the fourth quarter of 2020 and spin-off-related charges in the amount of $0.6 billion. In the first quarter of ~~2020,~~2021, we also continued to return value to shareholders with ~~$1.4~~$1.5 billion in dividends.

Events that could temporarily change the historical cash flow dynamics discussed previously and in our ~~2019~~2020 Annual Report include significant changes in operating results, material changes in geographic sources of cash,

~~Table of Contents~~

~~Management Discussion – (continued)~~

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 13, “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 $300 million in ~~2020.~~2021. Contributions related to all retirement-related plans are expected to be approximately $2.3 billion in ~~2020.~~2021. Financial market performance could increase the legally mandated minimum contributions in certain non-U.S. countries that require more frequent remeasurement of the funded status. We are not quantifying any further impact from pension funding because it is not possible to predict future movements in the capital markets or pension plan funding regulations.

In ~~2020,~~2021, 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 dividend.

~~Global Financing Return on Equity Calculation~~

For Three Months Ended

March 31,

(Dollars in millions)

2020

2019

Numerator

Global Financing after-tax income*

$
192

$
116

Annualized after-tax income (1)

$
766

$
463

Denominator





Average Global Financing equity (2)**

$
2,610

$
3,372

Global Financing return on equity (1)/(2)

29.4
%

13.7
%

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

** Average of the ending equity for Global Financing for the last two quarters.

7267

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Management Discussion – (continued)

Global Financing

Global Financing is a reportable segment that is measured as a stand-alone entity. Global 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.
					Percent/
(Dollars in millions)					Margin
For the three months ended March 31:	2021		2020		Change
External revenue	$	240	$	299	(20.0)	%
Internal revenue		168		212	(20.6)
Total revenue	$	408	$	511	(20.2)	%
Pre-tax income	$	166	$	194	(14.2)	%

Return on Equity Calculation


(Dollars in millions)
For the three months ended March 31:	2021			2020
Numerator
Global Financing after-tax income*	$	123		$	192
Annualized after-tax income (1)	$	492		$	766
Denominator
Average Global Financing equity (2)**	$	2,191		$	2,610
Global Financing return on equity (1)/(2)		22.5	%		29.4	%

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

**	Average of the ending equity for Global Financing for the last two quarters.

We have refocused our Global Financing business on IBM’s products and services. The wind down of our OEM commercial financing operations is complete. In 2020, we entered into agreements to sell certain financing receivables to third parties. While these strategic actions continue to be a driver of the decline in external revenue and pre-tax income on a year-to-year basis, our repositioning of the Global Financing business has strengthened our liquidity position, improved the quality of our portfolio and lowered our debt needs.

Global Financing total revenue decreased 20.2 percent in the first quarter of 2021 compared to the prior year. External revenue decreased 20.0 percent (22 percent adjusted for currency), driven by external financing (down 21.4 percent to $185 million). Internal revenue declined 20.6 percent due to decreases in internal financing (down 55.5 percent to $37 million), partially offset by internal used equipment sales (up 1.8 percent to $131 million). The decreases in external and internal financing were due to lower average asset balances and yields.

Sales of used equipment of $186 million decreased 3.7 percent for the three months ended March 31, 2021 as compared to the prior-year period. The gross profit margin on used equipment sales was 54.0 percent and 52.0 percent for the three months ended March 31, 2021 and 2020, respectively.

Global Financing pre-tax income decreased 14.2 percent year to year primarily driven by a decline in gross profit of $37 million due to lower revenue, partially offset by a decrease in expense of $10 million.

Global Financing return on equity was 22.5 percent for the three months ended March 31, 2021, compared to 29.4 percent for the three months ended March 31, 2020. The decrease in return on equity in the first quarter of 2021 was driven by lower year-to-year net income.

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Management Discussion – (continued)

Financial Position


	At March 31,		At December 31,
(Dollars in millions)	2021		2020
Cash and cash equivalents	$	1,492	$	1,862
Client financing receivables:
Net investment in sales-type and direct financing leases ⁽¹⁾		4,013		4,092
Client loans		9,643		11,498
Total client financing receivables		13,656		15,590
Commercial financing receivables		1,112		2,411
Other receivables		49		91
Total external receivables ⁽²⁾		14,817		18,092
Intercompany financing receivables ^(3) (4)		3,982		3,959
Other assets		1,424		1,162
Total assets	$	21,715	$	25,075

Intercompany payables ⁽³⁾	$	321	$	303
Debt ⁽⁵⁾		18,307		21,167
Other liabilities		1,056		1,254
Total liabilities		19,685		22,723
Total equity		2,030		2,352
Total liabilities and equity	$	21,715	$	25,075

(1)	Includes deferred initial direct costs which are expensed in IBM’s consolidated financial results.

(2)

The difference between the year-to-date decrease in total external receivables of $3.3 billion (from $18.1 billion in 2020 to $14.8 billion in 2021) and the $2.9 billion change in Global Financing receivables disclosed in the free cash flow presentation on page 67 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 Global Financing debt.

(5)	Global Financing debt is comprised primarily of intercompany loans.

At March 31, 2021, approximately 64 percent of the total external portfolio was with investment-grade clients with no direct exposure to consumers, an increase of 2 points year to year. We continue to apply our rigorous credit policies, particularly in industries and countries disrupted by COVID-19, as it relates to the origination of new business. This investment grade percentage is based on the credit ratings of the companies in the portfolio and reflects mitigating credit enhancement actions taken by the client to reduce the risk to IBM.

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

During the three months ended March 31, 2021, the company sold $995 million of client financing receivables to third parties, consisting of loan and lease receivables of $653 million and $342 million, respectively. More than half of the receivables sold were classified as current assets at the time of sale.

In addition, the company sold $1,167 million of commercial financing receivables for the three months ended March 31, 2021 to a third-party investor. The company also classified $257 million and $383 million of IBM commercial financing receivables as held for sale at March 31, 2021 and December 31, 2020, respectively, in short-term financing receivables in the Consolidated Balance Sheet. Payment terms for commercial financing receivables generally range from 30 to 90 days and may be sold to a third-party investor on a revolving basis.

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Management Discussion – (continued)

The reduction of financing receivables due to these sales resulted in a benefit to cash flows from operating activities, however had no impact to free cash flow. The impact to the Consolidated Income Statement, including fees and net gain or loss associated with the transfer of these receivables for the three months ended March 31, 2021, was not material. For additional information relating to the sales of financing receivables refer to note 8, “Financing Receivables.”

Refer to pages 60 through 62 for additional information related to Global Financing receivables, allowance for credit losses and debt.

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. Global Financing has insight into product plans and cycles for IBM products. Based upon this product information, Global Financing continually monitors projections of future equipment values and compares them with the residual values reflected in the portfolio.

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

The following table presents the recorded amount of unguaranteed residual value for sales-type and direct financing leases, as well as operating leases at March 31, 2021 and December 31, 2020. In addition, the table presents the run out of when the unguaranteed residual value assigned to equipment on leases at March 31, 2021 and December 31, 2020, is expected to be returned to the company

Unguaranteed Residual Value


	At		At		Estimated Run Out of March 31, 2021 Balance
	December 31,		March 31,								2024 and
(Dollars in millions)	2020		2021		2021		2022		2023		Beyond
Sales-type and direct financing leases	$	469	$	421	$	68	$	136	$	138	$	80
Operating leases		48		39		31		4		1		3
Total unguaranteed residual value	$	516	$	460	$	99	$	140	$	139	$	83

Table of Contents

Management Discussion – (continued)

GAAP Reconciliation

The tables below provide a reconciliation of ~~the company’s~~our income statement results as reported under GAAP to ~~its~~our operating earnings presentation which is a non-GAAP measure. ~~The company’s~~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 the company’s rationale for presenting operating earnings information.


				Acquisition-			Retirement-			U.S.									Acquisition-			Retirement-			U.S.				Spin-off-
(Dollars in millions except per share amounts)				Related			Related			Tax Reform			Operating						Related			Related			Tax Reform				Related		Operating
For the three months ended March 31, 2020:	GAAP			Adjustments			Adjustments			Impacts			(non-GAAP)
For the three months ended March 31, 2021:																GAAP			Adjustments			Adjustments			Impacts				Charges		(non-GAAP)
Gross profit	$	7,922		$	188		$	—		$	—		$	8,110		$	8,204		$	175		$	—		$	—		$	3		$	8,382
Gross profit margin		45.1	%		1.1	pts.		—	pts.		—	pts.		46.2	%		46.3	%		1.0	pts.		—	pts.		—	pts.		0.0	pts.		47.3	%
S,G&A	$	5,955		$	(285)		$	—		$	—		$	5,670		$	5,174		$	(293)		$	—		$	—		$	(58)		$	4,823
R,D&E		1,625			—			—			—			1,625
Other (income) and expense		182			(1)			(264)			—			(83)			362			(1)			(343)			—			—			18
Interest expense		326			—			—			—			326
Total expense and other (income)		7,972			(285)			(264)			—			7,422			7,299			(294)			(343)			—			(58)			6,604
Pre-tax income/(loss) from continuing operations		(49)			473			264			—			688
Pre-tax income from continuing operations																	905			469			343			—			61			1,777
Pre-tax margin from continuing operations		(0.3)	%		2.7	pts.		1.5	pts.		—	pts.		3.9	%		5.1	%		2.6	pts.		1.9	pts.		—	pts.		0.3	pts.		10.0	%
Provision for (benefit from) income taxes* **	$	(1,226)		$	102		$	14		$	149		$	(961)
Provision for (benefit from) income taxes*																$	(51)		$	134		$	61		$	19		$	15		$	179
Effective tax rate																	(5.6)	%		9.0	pts.		4.5	pts.		1.1	pts.		1.0	pts.		10.1	%
Income from continuing operations	$	1,176		$	371		$	250		$	(149)		$	1,649		$	956		$	335		$	282		$	(19)		$	46		$	1,599
Income margin from continuing operations		6.7	%		2.1	pts.		1.4	pts.		(0.8)	pts.		9.4	%		5.4	%		1.9	pts.		1.6	pts.		(0.1)	pts.		0.3	pts.		9.0	%
Diluted earnings per share from continuing operations	$	1.31		$	0.42		$	0.28		$	(0.17)		$	1.84		$	1.06		$	0.37		$	0.31		$	(0.02)		$	0.05		$	1.77


				Acquisition-			Retirement-			U.S.				Spin-off-
(Dollars in millions except per share amounts)				Related			Related			Tax Reform				Related		Operating
For the three months ended March 31, 2020:	GAAP			Adjustments			Adjustments			Impacts				Charges		(non-GAAP)
Gross profit	$	7,922		$	188		$	—		$	—		$	—		$	8,110
Gross profit margin		45.1	%		1.1	pts.		—	pts.		—	pts.		—	pts.		46.2	%
S,G&A	$	5,955		$	(285)		$	—		$	—		$	—		$	5,670
Other (income) and expense		182			(1)			(264)			—			—			(83)
Total expense and other (income)		7,972			(285)			(264)			—			—			7,422
Pre-tax income/(loss) from continuing operations		(49)			473			264			—			—			688
Pre-tax margin from continuing operations		(0.3)	%		2.7	pts.		1.5	pts.		—	pts.		—	pts.		3.9	%
Provision for (benefit from) income taxes* **	$	(1,226)		$	102		$	14		$	149		$	—		$	(961)
Income from continuing operations	$	1,176		$	371		$	250		$	(149)		$	—		$	1,649
Income margin from continuing operations		6.7	%		2.1	pts.		1.4	pts.		(0.8)	pts.		—	pts.		9.4	%
Diluted earnings per share from continuing operations	$	1.31		$	0.42		$	0.28		$	(0.17)		$	—		$	1.84

* The tax impact on operating (non-GAAP) pre-tax income/(loss) from continuing operations is calculated under the same accounting principles applied to the GAAP pre-tax income/(loss) which employs an annual effective tax rate method to the results.

** The effective tax rate is not displayed, as the calculated rate for the three months ended March 31, 2020 iswas not meaningful.

Acquisition-

Retirement-

U.S.

(Dollars in millions except per share amounts)

Related

Related

Tax Reform

Operating

For the three months ended March 31, 2019:

GAAP

Adjustments

Adjustments

Impacts

(non-GAAP)

Gross profit

$
8,043

$
76

$
—

$
—

$
8,119

Gross profit margin

44.2
%

0.4
pts.

—
pts.

—
pts.

44.7
%
S,G&A

$
4,691

$
(124)

$
—

$
—

$
4,566

R,D&E

1,433

—

—

—

1,433

Other (income) and expense

(73)

23

(138)

—

(187)

Interest expense

210

(36)

—

—

174

Total expense and other (income)

6,160

(137)

(138)

—

5,886

Pre-tax income from continuing operations

1,883

212

138

—

2,233

Pre-tax margin from continuing operations

10.4
%

1.2
pts.

0.8
pts.

—
pts.

12.3
%
Provision for income taxes*

$
289

$
49

$
26

$
(141)

$
224

Effective tax rate

15.4
%

0.7
pts.

0.2
pts.

(6.3)
pts.

10.0
%
Income from continuing operations

$
1,593

$
164

$
111

$
141

$
2,009

Income margin from continuing operations

8.8
%

0.9
pts.

0.6
pts.

0.8
pts.

11.0
%
Diluted earnings per share from continuing operations

$
1.78

$
0.18

$
0.13

$
0.16

$
2.25

7371

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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; ~~the company’s failure to meet growth and productivity objectives;~~ 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; ~~cybersecurity~~the possibility that the proposed separation of the managed infrastructure services unit of the company’s Global Technology Services segment will not be completed within the anticipated time period or at all, the possibility of disruption or unanticipated costs in connection with the proposed separation or the possibility that the separation will not achieve its intended benefits; the company’s ability to successfully manage acquisitions, alliances and ~~data privacy considerations;~~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 ~~health~~other conditions; ~~adverse effects from environmental matters, tax matters and~~ the company’s ~~pension plans;~~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 from 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; reliance on third party distribution channels and ecosystems; 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; legal proceedings and investigatory risks; risk factors related to IBM securities; and other risks, uncertainties and factors discussed in the company’s Form 10-Qs, Form 10-K and in the company’s other filings with the U.S. Securities and Exchange Commission or in materials incorporated therein by reference. Any forward-looking statement in this Form 10-Q speaks only as of the date on which it is made. Except as required by law, the company assumes no obligation to update or revise any forward-looking statements.

Item 4. Controls and Procedures

The company’s management evaluated, with the participation of the Chief Executive Officer and Chief Financial Officer, the effectiveness of the company’s disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the company’s disclosure controls and procedures were effective as of the end of the period covered by this report. There has been no change in the company’s internal control over financial reporting that occurred during the quarter covered by this report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting.

7472

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Part II — Other Information

Item 1. Legal Proceedings

Refer to note 13, “Contingencies,” in this Form 10-Q.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds and Issuer Repurchases of Equity Securities

The following table provides information relating to the company’s repurchase of common stock for the first quarter of ~~2020.~~2021.


				Total Number	Approximate					Total Number	Approximate
				of Shares	Dollar Value					of Shares	Dollar Value
				Purchased as	of Shares that					Purchased as	of Shares that
	Total Number	Average		Part of Publicly	May Yet Be		Total Number	Average		Part of Publicly	May Yet Be
	of Shares	Price Paid		Announced	Purchased Under		of Shares	Price Paid		Announced	Purchased Under
Period	Purchased	per Share		Program	The Program*		Purchased	per Share		Program	The Program*
January 1, 2020 - January 31, 2020	—	$	—	—	$	2,007,611,768
January 1, 2021 - January 31, 2021							—	$	—	—	$	2,007,611,768

February 1, 2020 - February 29, 2020	—	$	—	—	$	2,007,611,768
February 1, 2021 - February 28, 2021							—	$	—	—	$	2,007,611,768

March 1, 2020 - March 31, 2020	—	$	—	—	$	2,007,611,768
March 1, 2021 - March 31, 2021							—	$	—	—	$	2,007,611,768

Total	—	$	—	—			—	$	—	—

* On October 30, 2018, the Board of Directors authorized $4.0 billion in funds for use in the company’s common stock repurchase program. The company stated that it would repurchase shares on the open market or in private transactions depending on market conditions. The common stock repurchase program does not have an expiration date. This table does not include shares tendered to satisfy the exercise price in connection with cashless exercises of employee stock options or shares tendered to satisfy tax withholding obligations in connection with employee equity awards.

The ~~company’s acquisition of Red Hat on July 9, 2019 was funded through a combination of debt and cash, with incremental debt issued earlier this year. The~~ company suspended its share repurchase program at the time of the Red Hat closing. At March 31, ~~2020~~2021 there was approximately $2.0 billion in authorized funds remaining for purchases under this program.

7573

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Item 6. Exhibits


Exhibit Number

10.1		Form of LTPP equity award agreement for performance share units, ~~and the terms and conditions of LTPP Equity Awards,~~ effective ~~March 2, 2020, in connection with the foregoing award agreements.~~January 1, 2021.

31.1		Certification by principal executive officer pursuant to Rule 13A-14(a) or 15D-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification by principal financial officer pursuant to Rule 13A-14(a) or 15D-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification by principal executive officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification by principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS		XBRL Instance Document – the instance document does not appear on the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

104		Cover Page Interactive Data File – the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

7674

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		International Business Machines Corporation
		(Registrant)

Date:	April ~~28, 2020~~27, 2021
		By:	/s/ Robert F. Del Bene
			Robert F. Del Bene
			Vice President and Controller

7775


(Dollars in millions)
At December 31, 2019:	Americas		EMEA		Asia Pacific		Total
Recorded investment
Lease receivables	$	3,419	$	1,186	$	963	$	5,567
Loan receivables		6,726		3,901		2,395		13,022
Ending balance	$	10,144	$	5,087	$	3,359	$	18,590
Recorded investment collectively evaluated for impairment	$	10,032	$	5,040	$	3,326	$	18,399
Recorded investment individually evaluated for impairment	$	112	$	47	$	32	$	191

Allowance for credit losses
Beginning balance at January 1, 2019
Lease receivables	$	53	$	22	$	24	$	99
Loan receivables		105		43		32		179
Total	$	158	$	65	$	56	$	279
Write-offs	$	(42)	$	(3)	$	(18)	$	(63)
Recoveries		1		0		1		2
Provision		5		(7)		(3)		(5)
Other*		(1)		0		(1)		(2)
Ending balance at December 31, 2019	$	120	$	54	$	36	$	210
Lease receivables	$	33	$	23	$	16	$	72
Loan receivables	$	88	$	31	$	20	$	138

Related allowance, collectively evaluated for impairment	$	25	$	11	$	4	$	39
Related allowance, individually evaluated for impairment	$	96	$	43	$	32	$	171


					Recorded		Billed		Recorded
	Total		Recorded		Investment		Invoices		Investment
(Dollars in millions)	Recorded		Investment		> 90 Days and		> 90 Days and		Not
At December 31, 2019:	Investment		> 90 Days (1)		Accruing (1)		Accruing		Accruing (2)
Americas	$	3,419	$	187	$	147	$	11	$	41
EMEA		1,186		28		13		2		17
Asia Pacific		963		19		7		1		11
Total lease receivables	$	5,567	$	234	$	168	$	14	$	69

Americas	$	6,726	$	127	$	71	$	11	$	72
EMEA		3,901		77		8		3		72
Asia Pacific		2,395		26		6		2		21
Total loan receivables	$	13,022	$	231	$	85	$	15	$	166

Total	$	18,590	$	465	$	253	$	29	$	235


(Dollars in millions)	Lease Receivables						Loan Receivables
At December 31, 2019:	Americas		EMEA		Asia Pacific		Americas		EMEA		Asia Pacific
Credit rating:
Aaa – Aa3	$	465	$	54	$	43	$	1,028	$	193	$	189
A1 – A3		750		181		454		1,186		395		892
Baa1 – Baa3		955		409		147		1,882		1,527		619
Ba1 – Ba2		746		326		154		1,513		921		388
Ba3 – B1		215		140		101		471		564		205
B2 – B3		242		50		47		522		253		72
Caa – D		13		2		2		36		18		10
Total	$	3,385	$	1,162	$	947	$	6,638	$	3,871	$	2,376



	For Three Months Ended
	March 31,
(Dollars in millions)	2020			2019
Numerator
Global Financing after-tax income*	$	192		$	116
Annualized after-tax income (1)	$	766		$	463
Denominator
Average Global Financing equity (2)**	$	2,610		$	3,372
Global Financing return on equity (1)/(2)		29.4	%		13.7	%