Quarterly Report (10-q)

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Table of Contents

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 JUNE 30, 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

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 896,320,073 shares of common stock outstanding at June 30, 2021.

Table of Contents

Index

Page

Part I - Financial Information:

Item 1. Consolidated Financial Statements (Unaudited):

Consolidated Income Statement for the three and six months ended June 30, 2021 and 2020

3

Consolidated Statement of Comprehensive Income for the three and six months ended June 30, 2021 and 2020

4

Consolidated Balance Sheet at June 30, 2021 and December 31, 2020

5

Consolidated Statement of Cash Flows for the six months ended June 30, 2021 and 2020

7

Consolidated Statement of Equity for the three and six months ended June 30, 2021 and 2020

8

Notes to Consolidated Financial Statements

10

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

48

Item 4. Controls and Procedures

91

Part II - Other Information:

Item 1. Legal Proceedings

92

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

92

Item 5. Other Information

92

Item 6. Exhibits

93

2

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 June 30, 

 

Six Months Ended June 30, 

(Dollars in millions except per share amounts)

    

2021

    

2020

     

2021

    

2020

Revenue:

 

  

 

  

  

 

  

Services

$

11,485

$

10,937

$

22,889

$

22,311

Sales

 

7,018

 

6,918

 

13,101

 

12,813

Financing

 

242

 

268

 

485

 

570

Total revenue

 

18,745

 

18,123

 

36,474

 

35,694

Cost:

 

  

 

  

 

  

 

  

Services

 

7,871

 

7,520

 

15,646

 

15,363

Sales

 

1,694

 

1,739

 

3,279

 

3,363

Financing

 

176

 

165

 

341

 

345

Total cost

 

9,741

 

9,423

 

19,266

 

19,071

Gross profit

 

9,004

 

8,700

 

17,208

 

16,622

Expense and other (income):

 

  

 

  

 

  

 

  

Selling, general and administrative

 

5,334

 

5,248

 

10,508

 

11,203

Research, development and engineering

 

1,657

 

1,582

 

3,286

 

3,207

Intellectual property and custom development income

 

(135)

 

(203)

 

(282)

 

(319)

Other (income) and expense

 

315

 

179

 

676

 

361

Interest expense

 

281

 

323

 

562

 

649

Total expense and other (income)

 

7,451

 

7,129

 

14,751

 

15,101

Income from continuing operations before income taxes

 

1,552

 

1,571

 

2,457

 

1,522

Provision for/(benefit from) income taxes

 

227

 

209

 

177

 

(1,017)

Income from continuing operations

$

1,325

$

1,362

$

2,281

$

2,538

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

 

 

(1)

 

(1)

 

(2)

Net income

$

1,325

$

1,361

$

2,280

$

2,536

Earnings/(loss) per share of common stock:

 

  

 

  

 

  

 

  

Assuming dilution:

 

  

 

  

 

  

 

  

Continuing operations

$

1.47

$

1.52

$

2.52

$

2.83

Discontinued operations

 

 

0.00

 

0.00

 

0.00

Total

$

1.47

$

1.52

$

2.52

$

2.83

Basic:

 

  

 

  

 

  

 

  

Continuing operations

$

1.48

$

1.53

$

2.55

$

2.85

Discontinued operations

 

 

0.00

 

0.00

 

0.00

Total

$

1.48

$

1.53

$

2.55

$

2.85

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

 

  

 

  

 

  

 

  

Assuming dilution

 

904.2

 

894.9

 

903.0

 

895.0

Basic

 

895.0

 

889.4

 

894.3

 

888.7

(Amounts may not add due to rounding.)

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

3

Table of Contents

INTERNATIONAL BUSINESS MACHINES CORPORATION

AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(UNAUDITED)

Three Months Ended June 30, 

 

Six Months Ended June 30, 

(Dollars in millions)

    

2021

    

2020

     

2021

    

2020

Net income

$

1,325

$

1,361

$

2,280

$

2,536

Other comprehensive income/(loss), before tax:

 

  

 

  

 

  

 

  

Foreign currency translation adjustments

 

28

 

4

 

577

 

(915)

Net changes related to available-for-sale securities:

 

  

 

  

 

  

 

  

Unrealized gains/(losses) arising during the period

 

0

 

1

 

0

 

1

Reclassification of (gains)/losses to net income

 

 

 

 

Total net changes related to available-for-sale securities

 

0

 

1

 

0

 

1

Unrealized gains/(losses) on cash flow hedges:

 

  

 

  

 

  

 

  

Unrealized gains/(losses) arising during the period

 

(34)

 

(36)

 

153

 

(216)

Reclassification of (gains)/losses to net income

 

90

 

(59)

 

251

 

32

Total unrealized gains/(losses) on cash flow hedges

 

56

 

(94)

 

404

 

(184)

Retirement-related benefit plans:

 

  

 

  

 

  

 

  

Prior service costs/(credits)

 

0

 

 

0

 

(4)

Net (losses)/gains arising during the period

 

2

 

57

 

22

 

65

Curtailments and settlements

 

16

 

13

 

34

 

21

Amortization of prior service (credits)/costs

 

1

 

0

 

4

 

1

Amortization of net (gains)/losses

 

643

 

566

 

1,291

 

1,136

Total retirement-related benefit plans

 

661

 

637

 

1,350

 

1,219

Other comprehensive income/(loss), before tax

 

745

 

548

 

2,330

 

121

Income tax (expense)/benefit related to items of other comprehensive income

 

(140)

 

(21)

 

(645)

 

(281)

Other comprehensive income/(loss), net of tax

 

605

 

527

 

1,685

 

(160)

Total comprehensive income

$

1,930

$

1,888

$

3,965

$

2,377

(Amounts may not add due to rounding.)

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

4

Table of Contents

INTERNATIONAL BUSINESS MACHINES CORPORATION

AND SUBSIDIARY COMPANIES

CONSOLIDATED BALANCE SHEET

(UNAUDITED)

ASSETS

    

At June 30, 

    

At December 31, 

(Dollars in millions)

2021

    

2020

Assets:

 

  

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

7,350

$

13,212

Restricted cash

 

215

 

463

Marketable securities

 

600

 

600

Notes and accounts receivable — trade (net of allowances of $300 in 2021 and $351 in 2020)

 

6,827

 

7,132

Short-term financing receivables (net of allowances of $195 in 2021 and $218 in 2020)

 

8,194

 

10,892

Other accounts receivable (net of allowances of $23 in 2021 and $28 in 2020)

 

802

 

714

Inventory, at lower of average cost or net realizable value:

 

 

  

Finished goods

 

213

 

190

Work in process and raw materials

 

1,594

 

1,649

Total inventory

 

1,807

 

1,839

Deferred costs

 

2,211

 

2,107

Prepaid expenses and other current assets

 

2,768

 

2,206

Total current assets

 

30,774

 

39,165

Property, plant and equipment

 

32,575

 

33,176

Less: Accumulated depreciation

 

23,152

 

23,136

Property, plant and equipment — net

 

9,423

 

10,040

Operating right-of-use assets — net

 

4,387

 

4,686

Long-term financing receivables (net of allowances of $33 in 2021 and $45 in 2020)

 

5,674

 

7,086

Prepaid pension assets

 

8,046

 

7,610

Deferred costs

 

2,362

 

2,449

Deferred taxes

 

8,954

 

9,241

Goodwill

 

61,645

 

59,617

Intangible assets — net

 

13,539

 

13,796

Investments and sundry assets

 

2,010

 

2,282

Total assets

$

146,814

$

155,971

(Amounts may not add due to rounding.)

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

5

Table of Contents

INTERNATIONAL BUSINESS MACHINES CORPORATION

AND SUBSIDIARY COMPANIES

CONSOLIDATED BALANCE SHEET – (CONTINUED)

(UNAUDITED)

LIABILITIES AND EQUITY

    

At June 30, 

    

At December 31, 

(Dollars in millions except per share amounts)

2021

    

2020

Liabilities:

Current liabilities:

 

  

 

  

Taxes

$

2,260

$

3,301

Short-term debt

 

6,442

 

7,183

Accounts payable

 

4,214

 

4,908

Compensation and benefits

 

3,846

 

3,440

Deferred income

 

13,272

 

12,833

Operating lease liabilities

 

1,334

 

1,357

Other accrued expenses and liabilities

 

5,249

 

6,847

Total current liabilities

 

36,616

 

39,869

Long-term debt

 

48,735

 

54,355

Retirement and nonpension postretirement benefit obligations

 

17,265

 

18,248

Deferred income

 

4,113

 

4,301

Operating lease liabilities

 

3,278

 

3,574

Other liabilities

 

14,741

 

14,897

Total liabilities

 

124,747

 

135,244

Equity:

 

 

  

IBM stockholders’ equity:

 

 

  

Common stock, par value $0.20 per share, and additional paid-in capital

 

56,912

 

56,556

Shares authorized: 4,687,500,000

 

 

  

Shares issued: 2021 - 2,246,982,842

 

 

  

2020 - 2,242,969,004

 

 

  

Retained earnings

 

162,086

 

162,717

Treasury stock - at cost

 

(169,404)

 

(169,339)

Shares: 2021 - 1,350,662,770

 

 

  

2020 - 1,350,315,580

 

 

  

Accumulated other comprehensive income/(loss)

 

(27,652)

 

(29,337)

Total IBM stockholders’ equity

 

21,942

 

20,597

Noncontrolling interests

 

125

 

129

Total equity

 

22,067

 

20,727

Total liabilities and equity

$

146,814

$

155,971

(Amounts may not add due to rounding.)

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

6

Table of Contents

INTERNATIONAL BUSINESS MACHINES CORPORATION

AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

Six Months Ended June 30, 

(Dollars in millions)

    

2021

    

2020

Cash flows from operating activities:

 

  

 

  

Net income

$

2,280

$

2,536

Adjustments to reconcile net income to cash provided by operating activities

 

  

 

  

Depreciation

 

2,102

 

2,068

Amortization of intangibles

 

1,250

 

1,245

Stock-based compensation

 

457

 

436

Net (gain)/loss on asset sales and other

 

(144)

 

161

Changes in operating assets and liabilities, net of acquisitions/divestitures

 

1,594

 

1,606

Net cash provided by operating activities

 

7,539

 

8,052

Cash flows from investing activities:

 

  

 

  

Payments for property, plant and equipment

 

(1,054)

 

(1,215)

Proceeds from disposition of property, plant and equipment

 

215

 

82

Investment in software

 

(379)

 

(301)

Acquisition of businesses, net of cash acquired

 

(2,866)

 

(19)

Divestitures of businesses, net of cash transferred

 

(25)

 

757

Non-operating finance receivables — net

 

16

 

95

Purchases of marketable securities and other investments

 

(1,890)

 

(3,478)

Proceeds from disposition of marketable securities and other investments

 

1,312

 

1,942

Net cash provided by/(used in) investing activities

 

(4,671)

 

(2,138)

Cash flows from financing activities:

 

  

 

  

Proceeds from new debt

 

243

 

10,190

Payments to settle debt

 

(5,974)

 

(8,423)

Short-term borrowings/(repayments) less than 90 days — net

 

(68)

 

(449)

Common stock repurchases for tax withholdings

 

(234)

 

(211)

Financing — other

 

44

 

43

Cash dividends paid

 

(2,924)

 

(2,890)

Net cash provided by/(used in) financing activities

 

(8,914)

 

(1,739)

Effect of exchange rate changes on cash, cash equivalents and restricted cash

 

(65)

 

(301)

Net change in cash, cash equivalents and restricted cash

 

(6,110)

 

3,874

Cash, cash equivalents and restricted cash at January 1

 

13,675

 

8,314

Cash, cash equivalents and restricted cash at June 30

$

7,565

$

12,188

(Amounts may not add due to rounding.)

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

7

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 - April 1, 2021

$

56,788

$

162,218

$

(169,360)

$

(28,257)

$

21,389

$

124

$

21,513

Net income plus other comprehensive income/(loss):

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Net income

 

  

 

1,325

 

  

 

  

 

1,325

 

  

 

1,325

Other comprehensive income/(loss)

 

  

 

  

 

  

 

605

 

605

 

  

 

605

Total comprehensive income/(loss)

 

  

 

  

 

  

 

  

$

1,930

 

  

$

1,930

Cash dividends paid — common stock ($1.64 per share)

 

  

 

(1,467)

 

  

 

  

 

(1,467)

 

  

 

(1,467)

Common stock issued under employee plans (2,967,655 shares)

 

124

 

  

 

  

 

  

 

124

 

  

 

124

Purchases (1,334,081 shares) and sales (1,163,671 shares) of treasury stock under employee plans — net

 

  

 

11

 

(44)

 

  

 

(33)

 

  

 

(33)

Changes in noncontrolling interests

 

  

 

  

 

  

 

  

 

  

 

1

 

1

Equity – June 30, 2021

$

56,912

$

162,086

$

(169,404)

$

(27,652)

$

21,942

$

125

$

22,067

  

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 - April 1, 2020

$

56,092

$

162,626

$

(169,437)

$

(29,283)

$

19,999

$

129

$

20,128

Net income plus other comprehensive income/(loss):

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Net income

 

  

 

1,361

 

  

 

  

 

1,361

 

  

 

1,361

Other comprehensive income/(loss)

 

  

 

  

 

  

 

527

 

527

 

  

 

527

Total comprehensive income/(loss)

 

  

 

  

 

  

 

  

$

1,888

 

  

$

1,888

Cash dividends paid — common stock ($1.63 per share)

 

  

 

(1,450)

 

  

 

  

 

(1,450)

 

  

 

(1,450)

Common stock issued under employee plans (2,296,269 shares)

 

42

 

  

 

  

 

  

 

42

 

  

 

42

Purchases (1,311,046 shares) and sales (1,701,568 shares) of treasury stock under employee plans — net

 

  

 

22

 

50

 

  

 

72

 

  

 

72

Changes in noncontrolling interests

 

  

 

  

 

  

 

  

 

  

 

8

 

8

Equity - June 30, 2020

$

56,135

$

162,559

$

(169,386)

$

(28,757)

$

20,551

$

137

$

20,688

(Amounts may not add due to rounding.)

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

8

Table of Contents

INTERNATIONAL BUSINESS MACHINES CORPORATION

AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF EQUITY – (CONTINUED)

(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, 2021

$

56,556

$

162,717

$

(169,339)

$

(29,337)

$

20,597

$

129

$

20,727

Net income plus other comprehensive income/(loss):

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Net income

 

  

 

2,280

 

  

 

  

 

2,280

 

  

 

2,280

Other comprehensive income/(loss)

 

  

 

  

 

  

 

1,685

 

1,685

 

  

 

1,685

Total comprehensive income/(loss)

 

  

 

  

 

  

 

  

$

3,965

 

  

$

3,965

Cash dividends paid — common stock ($3.27 per share)

 

  

 

(2,924)

 

  

 

  

 

(2,924)

 

  

 

(2,924)

Common stock issued under employee plans (4,013,839 shares)

 

355

 

  

 

  

 

  

 

355

 

  

 

355

Purchases (1,673,587 shares) and sales (1,326,397 shares) of treasury stock under employee plans — net

 

  

 

13

 

(65)

 

  

 

(51)

 

  

 

(51)

Changes in noncontrolling interests

 

  

 

  

 

  

 

  

 

  

 

(4)

 

(4)

Equity - June 30, 2021

$

56,912

$

162,086

$

(169,404)

$

(27,652)

$

21,942

$

125

$

22,067

  

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

 

  

 

2,536

 

  

 

  

 

2,536

 

  

 

2,536

Other comprehensive income/(loss)

 

  

 

  

 

  

 

(160)

 

(160)

 

  

 

(160)

Total comprehensive income/(loss)

 

  

 

  

 

  

 

  

$

2,377

 

  

$

2,377

Cash dividends paid — common stock ($3.25 per share)

 

  

 

(2,890)

 

  

 

  

 

(2,890)

 

  

 

(2,890)

Common stock issued under employee plans (3,231,755 shares)

 

239

 

  

 

  

 

  

 

239

 

  

 

239

Purchases (1,621,500 shares) and sales (1,858,039 shares) of treasury stock under employee plans — net

 

  

 

24

 

26

 

  

 

50

 

  

 

50

Changes in noncontrolling interests

 

  

 

  

 

  

 

  

 

  

 

(7)

 

(7)

Equity - June 30, 2020

$

56,135

$

162,559

$

(169,386)

$

(28,757)

$

20,551

$

137

$

20,688

* Reflects the adoption of the FASB guidance on current expected 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.)

9

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, including the macroeconomic impacts of the COVID-19 pandemic. As a result, actual results may be different from these estimates.

On 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. The new company will be named 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 Kyndryl as discontinued operations after separation.

For the three and six months ended June 30, 2021, the company reported a provision for income taxes of $227 million and $177 million, respectively. The company reported a tax benefit in the first quarter of 2021 which was primarily driven by the resolution of certain tax audit matters. For the three and six months ended June 30, 2020, the company reported a provision for income taxes of $209 million and a benefit from income taxes of $1,017 million, respectively. The tax benefit was primarily related to the tax impacts of an intra-entity sale of certain of the company’s intellectual property in the first quarter of 2020.

Noncontrolling interest amounts of $6.5 million and $6.8 million, net of tax, for the three months ended June 30, 2021 and 2020, respectively, and $14.1 million and $11.3 million, net of tax, for the six months ended June 30, 2021 and 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 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. This is annotated where applicable.

2. Accounting Changes:

Standards 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.

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Notes to Consolidated Financial Statements — (continued)

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

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

Reference Rate Reform

Standard/Description–Issuance date: March 2020, with amendments in 2021. This guidance provides optional expedients and exceptions for applying GAAP to contract modifications, hedging relationships, and other transactions 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. The company has evaluated the replacement of the LIBOR benchmark on its interest rate risk management activities and does not expect it 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.

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

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

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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

    

    

 

Three Months Ended June 30, 

Six Months Ended June 30, 

 

(Dollars in millions)

2021

2020

2021

2020

 

Cloud & Data Platforms

$

3,120

$

2,797

$

5,986

$

5,333

Cognitive Applications

1,391

1,246

2,624

2,428

Transaction Processing Platforms

 

1,587

 

1,706

 

2,925

 

3,226

Total Cloud & Cognitive Software

$

6,098

$

5,748

$

11,534

$

10,987

Consulting

 

2,236

 

1,936

 

4,425

 

4,007

Application Management

 

1,821

 

1,734

 

3,591

 

3,573

Global Process Services

 

284

 

221

 

559

 

447

Total Global Business Services

$

4,341

$

3,890

$

8,575

$

8,027

Infrastructure & Cloud Services

 

4,836

 

4,813

 

9,689

 

9,729

Technology Support Services

 

1,506

 

1,503

 

3,023

 

3,054

Total Global Technology Services

$

6,342

$

6,316

$

12,712

$

12,783

Systems Hardware

 

1,384

 

1,488

 

2,498

 

2,484

Operating Systems Software

 

333

 

365

 

646

 

736

Total Systems

$

1,717

$

1,852

$

3,144

$

3,220

Global Financing*

 

242

 

265

 

482

 

564

Other

 

5

 

50

 

28

 

113

Total revenue

$

18,745

$

18,123

$

36,474

$

35,694

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

Revenue by Geography

    

Three Months Ended June 30, 

 

Six Months Ended June 30, 

(Dollars in millions)

2021

2020

 

2021

2020

Americas

$

8,820

$

8,450

$

16,999

$

16,617

Europe/Middle East/Africa

 

6,038

 

5,695

 

11,679

 

11,212

Asia Pacific

 

3,887

 

3,977

 

7,797

 

7,865

Total

$

18,745

$

18,123

$

36,474

$

35,694

Remaining Performance Obligations

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

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Notes to Consolidated Financial Statements — (continued)

At June 30, 2021, the aggregate amount of the transaction price allocated to RPO related to customer contracts that are unsatisfied or partially unsatisfied was $115 billion. Approximately 60 percent of the amount is expected to be recognized as revenue in the subsequent two years, approximately 30 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 and six months ended June 30, 2021, revenue was reduced by $34 million and $47 million, respectively, for performance obligations satisfied (or partially satisfied) in previous periods mainly due to changes in estimates on contracts with cost-to-cost measures of progress.

Reconciliation of Contract Balances

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

    

At June 30, 

    

At December 31, 

(Dollars in millions)

2021

2020

Notes and accounts receivable–trade (net of allowances of $300 in 2021 and $351 in 2020)

$

6,827

$

7,132

Contract assets*

 

547

 

497

Deferred income (current)

 

13,272

 

12,833

Deferred income (noncurrent)

 

4,113

 

4,301

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

The amount of revenue recognized during the three and six months ended June 30, 2021 that was included within the deferred income balance at March 31, 2021 and December 31, 2020 was $4.9 billion and $7.2 billion, respectively, 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 six months ended June 30, 2021 and the year ended December 31, 2020:

(Dollars in millions)

    

    

    

    

    

    

    

    

January 1, 2021

Additions / (Releases)

Write-offs 

Other*

June 30, 2021

$

351

$

(37)

$

(15)

$

1

$

300