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Dynamic quotes 
OFFON

INTERNATIONAL BUSINESS MACHINES CORPORATION

(IBM)
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International Business Machines : MANAGEMENT'S DISCUSSION AND ANALYSIS

07/27/2021 | 04:44pm EDT

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION


                FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2021

Snapshot

Financial Results Summary - Three Months Ended June 30:


                                                                                 Yr. to Yr.
                                                                                  Percent/
(Dollars and shares in millions except per share
amounts)                                                                   

Margin

For the three months ended June 30:                      2021         2020 
       Change
Revenue                                                $  18,745$  18,123           3.4 %*
Gross profit margin                                         48.0 %       48.0 %         0.0 pts.
Total expense and other (income)                       $   7,451$   7,129           4.5 %
Income from continuing operations before income
taxes                                                  $   1,552$   1,571         (1.2) %
Provision for income taxes from continuing
operations                                             $     227$     209           8.8 %
Income from continuing operations                      $   1,325$   1,362         (2.7) %
Income from continuing operations margin                     7.1 %        7.5 %       (0.4) pts.
Net income                                             $   1,325$   1,361         (2.7) %
Earnings per share from continuing operations -
assuming dilution                                      $    1.47$    1.52         (3.3) %
Weighted-average shares outstanding - assuming
dilution                                                   904.2        894.9           1.0 %


* (0.6) percent adjusted for currency; (0.5) percent excluding divested businesses and adjusted for currency.

Organization of Information:


On October 8, 2020, we 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 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 our Consolidated
Financial Statements or segment reporting. We will report Kyndryl as
discontinued operations after separation.

Currency:

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

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."


                                       48

  Table of Contents

Management Discussion - (continued)

Operating (non-GAAP) Earnings:

In an effort to provide better transparency into the operational results of the
business, supplementally, management separates business results into operating
and non-operating categories. Operating earnings from continuing operations is a
non-GAAP measure that excludes the effects of certain acquisition-related
charges, intangible asset amortization, expense resulting from basis differences
on equity method investments, retirement-related costs, discontinued operations
and certain Kyndryl separation-related 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 Kyndryl separation 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 Kyndryl 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. 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.

                                       49

  Table of Contents

Management Discussion - (continued)

The following table provides the company's operating (non-GAAP) earnings for the second quarter of 2021 and 2020.



                                                                                    Yr. to Yr.
(Dollars in millions except per share amounts)                             

Percent

For the three months ended June 30:                         2021         2020         Change
Net income as reported                                    $   1,325$   1,361         (2.7) %
Income/(loss) from discontinued operations, net of tax            -          (1)       (100.0)
Income from continuing operations                         $   1,325$   1,362         (2.7) %
Non-operating adjustments (net of tax):
Acquisition-related charges                               $     373$     365           2.0 %
Non-operating retirement-related costs/(income)                 261        
 222          17.4
U.S. tax reform impacts                                          14            -            nm
Separation-related charges                                      131            -            nm
Operating (non-GAAP) earnings*                            $   2,103$   1,949           7.9 %

Diluted operating (non-GAAP) earnings per share* $ 2.33$ 2.18

           6.9 %


* Refer to page 89 for a more detailed reconciliation of net income to operating earnings and operating earnings per share.

nm - not meaningful



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:



On March 11, 2020, the World Health Organization (WHO) declared the novel
coronavirus (COVID-19) a global pandemic which resulted in significant
governmental measures being initiated around the globe to slow down and control
the spread of the virus. The health of IBM employees, our clients, business
partners and community continue to be our primary focus. We are actively engaged
to ensure our plans continue to be aligned with recommendations of the WHO, the
U.S. Centers for Disease Control and Prevention and governmental regulations.



This environment has only reinforced the need for clients to modernize their
businesses to succeed in this new normal, with hybrid cloud and AI at the core
of their digital transformations. 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 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 them enhance employee engagement and productivity, reskill the
workforce faster and reimagine ways of working.



We expect the rate and pace of recovery from the pandemic to differ by geography
and industry. However, the spending environment continues to improve and the
economy is reopening in many parts of the world, such as the U.S., Canada and
several countries in Western Europe. From an industry standpoint, we have seen
meaningful improvement in areas most affected by the pandemic such as travel,
transportation, automotive and industrial products.

                                       50

Table of Contents

Management Discussion - (continued)


The 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, IBM continues to be well positioned to support our clients
to
emerge even stronger.


Financial Performance Summary - Three Months Ended June 30:


In the second quarter of 2021, we reported $18.7 billion in revenue, $1.3
billion in income from continuing operations and operating (non-GAAP) earnings
of $2.1 billion, resulting in diluted earnings per share from continuing
operations of $1.47 as reported and $2.33 on an operating (non-GAAP) basis. We
also generated $2.6 billion in cash from operations, $1.0 billion in free cash
flow, which includes $0.6 billion of cash impacts from the structural actions
initiated in the fourth quarter of 2020 and Kyndryl separation-related charges,
and delivered shareholder returns of $1.5 billion through dividends. These
results reflect continued progress in our revenue performance, gross profit
dollar expansion and our balance sheet and liquidity position remains strong.



Total consolidated revenue increased 3.4 percent as reported but was flat
excluding divested businesses and adjusted for currency compared to the
prior-year period. With the economy reopening in many parts of the world, the
overall spend environment continues to improve, including in some industries
that had been most impacted by the pandemic. On a segment basis, Cloud &
Cognitive Software increased 6.1 percent as reported and 2 percent adjusted for
currency with improvement in year-to-year growth compared to the last quarter.
This performance was led by growth across both Cloud & Data Platforms and
Cognitive Applications, partially offset by a decline in Transaction Processing
Platforms. Cloud & Data Platforms grew 11.5 percent as reported (8 percent
adjusted for currency) led by hybrid cloud platform and Cloud Pak growth.
Cognitive Applications increased 11.6 percent (8 percent adjusted for currency)
led by growth in Security and AI applications. Global Business Services (GBS)
increased 11.6 percent as reported (7 percent adjusted for currency) as clients
accelerate the rate and pace of their digital transformations. GBS revenue
returned to pre-pandemic levels this quarter with growth across all lines of
business. GTS increased 0.4 percent as reported but decreased 4 percent adjusted
for currency with a modest improvement in year-to-year performance compared to
the first quarter of 2021, driven by improving trends in client-based business
volumes and project activity. Systems decreased 7.3 percent as reported (10
percent adjusted for currency) reflecting product cycle dynamics across IBM
Z,
Power and Storage.



Total cloud revenue of $7.0 billion in the second quarter of 2021 grew 13
percent as reported (9 percent adjusted for currency and excluding divested
businesses and adjusted for currency). Over the trailing 12 months, total cloud
revenue was $27.0 billion, up 15 percent as reported (12 percent adjusted for
currency) and 13 percent excluding divested businesses and adjusted for
currency.



From a geographic perspective, Americas revenue grew 4.4 percent year to year as
reported (3 percent adjusted for currency). Europe/Middle East/Africa (EMEA)
increased 6.0 percent as reported but decreased 3 percent adjusted for currency.
Asia Pacific declined 2.3 percent year to year as reported (5 percent adjusted
for currency).



Total consolidated gross margin of 48.0 percent was flat year to year, while
gross profit dollars increased 3.5 percent compared to the prior-year period.
The operating (non-GAAP) gross margin of 49.3 percent increased 0.3 points
versus the prior-year period reflecting actions taken to streamline and simplify
our operating model.



Total expense and other (income) of $7.5 billion increased 4.5 percent in the
second quarter of 2021 versus the prior-year period. Our expense dynamics
reflect a higher level of investment in innovation, skills and our ecosystem as
we execute our hybrid cloud and AI strategy. We are aggressively hiring, scaling
our garage footprint, increasing our research spend in areas including quantum,
hybrid cloud and AI, and expanding our ecosystem. The year-to-year increase in
expense was also driven by the effects of currency, separation-related charges
in the current-year period, lower IP income and higher non-operating
retirement-related costs, partially offset by a benefit from expected credit
loss expense, lower workforce rebalancing charges and lower interest expense in
the current-year period. Total operating (non-GAAP) expense and other (income)
increased 2.1 percent year to year, driven primarily by the factors above
excluding separation-related charges and higher non-operating retirement-related
costs.

                                       51

  Table of Contents

Management Discussion - (continued)

The pre-tax income from continuing operations of $1.6 billion decreased 1.2
percent year to year, and the pre-tax margin from continuing operations was 8.3
percent, a decrease of 0.4 points. The continuing operations provision for
income taxes was $0.2 billion in both the second quarter of 2021 and 2020. Net
income from continuing operations of $1.3 billion decreased 2.7 percent, and the
net income margin from continuing operations was 7.1 percent, a decrease of
0.4
points year to year.



Operating (non-GAAP) pre-tax income from continuing operations of $2.5 billion
increased 9.3 percent year to year and the operating (non-GAAP) pre-tax margin
from continuing operations increased 0.7 points to 13.5 percent. The operating
(non-GAAP) provision for income taxes was $0.4 billion in both the second
quarter of 2021 and 2020. Operating (non-GAAP) income from continuing operations
of $2.1 billion increased 7.9 percent with an operating (non-GAAP) income margin
from continuing operations of 11.2 percent, up 0.5 points year to year.



Diluted earnings per share from continuing operations of $1.47 in the second
quarter of 2021 decreased 3.3 percent and operating (non-GAAP) diluted earnings
per share of $2.33 increased 6.9 percent versus the second quarter of 2020.
Diluted earnings per share from continuing operations includes impacts related
to the amortization of purchased intangibles assets and other
acquisition-related charges, retirement-related charges, U.S. tax reform
enactment impacts and Kyndryl separation-related charges. The impact of the
Kyndryl separation-related charges for second-quarter 2021 was ($0.15) per
share.



We generated $2.6 billion in cash flow provided by operating activities, a
decrease of $1.0 billion compared to the second quarter of 2020, primarily
driven by payroll tax and value-added tax payment deferrals and exemptions of
$0.6 billion in the prior year due to tax relief programs related to COVID-19
and a decline from accounts receivable of $0.3 billion. Net cash from operating
activities includes approximately $0.5 billion of cash impacts from our
structural actions initiated in the fourth quarter of 2020 and Kyndryl
separation-related charges. In the second quarter of 2021, investing activities
were a net use of cash of $2.7 billion, an increase of $1.4 billion compared to
the prior-year period, primarily driven by an increase in cash used for
acquisitions. Financing activities were a use of cash of $3.1 billion in the
second quarter of 2021 compared to $1.6 billion in the second quarter of 2020.
The $1.5 billion change was primarily driven by debt transactions, as we
continued to deleverage in accordance with our debt maturity schedules.



                                       52

  Table of Contents

Management Discussion - (continued)

Financial Results Summary -Six Months Ended June 30:


                                                                                           Yr. to Yr.
                                                                                            Percent/
(Dollars and shares in millions except per share
amounts)                                                                                     Margin
For the six months ended June 30:                          2021              2020            Change
Revenue                                               $       36,474$        35,694           2.2 %*
Gross profit margin                                             47.2 %             46.6 %         0.6 pts.
Total expense and other (income)                      $       14,751$        15,101         (2.3) %
Income from continuing operations before income
taxes                                                 $        2,457    $         1,522          61.5 %
Provision for/(benefit from) income taxes from
continuing operations                                 $          177    $       (1,017)            nm
Income from continuing operations                     $        2,281    $         2,538        (10.2) %
Income from continuing operations margin                         6.3 %              7.1 %       (0.9) pts.
Net income                                            $        2,280    $         2,536        (10.1) %
Earnings per share from continuing operations -
assuming dilution                                     $         2.52    $          2.83        (11.0) %
Weighted-average shares outstanding - assuming
dilution                                                       903.0              895.0           0.9 %

                                                       At 6/30/2021      At 12/31/2020
Assets                                                $      146,814$       155,971         (5.9) %
Liabilities                                           $      124,747$       135,244         (7.8) %
Equity                                                $       22,067$        20,727           6.5 %

* (1.5) percent adjusted for currency; (1.4) percent excluding divested businesses and adjusted for currency.

nm - not meaningful

The following table provides the company's operating (non-GAAP) earnings for the first six months of 2021 and 2020.



                                                                                  Yr. to Yr.
(Dollars in millions except per share amounts)                             

Percent

For the six months ended June 30:                           2021        2020        Change
Net income as reported                                    $  2,280$  2,536        (10.1) %
Income/(loss) from discontinued operations, net of tax         (1)         (2)        (67.4)
Income from continuing operations                         $  2,281$  2,538        (10.2) %
Non-operating adjustments (net of tax):
Acquisition-related charges                               $    707$    736         (3.9) %
Non-operating retirement-related costs/(income)                542        
472          14.8
U.S. tax reform impacts                                        (6)       (149)        (96.3)
Separation-related charges                                     177           -            nm
Operating (non-GAAP) earnings*                            $  3,702$  3,598           2.9 %

Diluted operating (non-GAAP) earnings per share* $ 4.10$ 4.02

           2.0 %


* Refer to page 90 for a more detailed reconciliation of net income to operating earnings and operating earnings per share.

nm - not meaningful

Financial Performance Summary -Six Months Ended June 30:

In the first six months of 2021, we reported $36.5 billion in revenue, $2.3
billion in income from continuing operations and operating (non-GAAP) earnings
of $3.7 billion, resulting in diluted earnings per share from continuing
operations of $2.52 as reported and $4.10 on an operating (non-GAAP) basis. We
generated $7.5 billion in cash from operations, $2.6 billion in free cash flow
and delivered shareholder returns of $2.9 billion through dividends.

Total consolidated revenue increased 2.2 percent as reported but declined 1 percent excluding divested businesses and adjusted for currency. Cloud & Cognitive Software increased 5.0 percent as reported (2 percent adjusted for


                                       53

  Table of Contents

Management Discussion - (continued)

currency). Within this segment, Cloud & Data Platforms grew 12.2 percent as
reported (9 percent adjusted for currency) with continued solid Red Hat
performance led by Red Hat Enterprise Linux (RHEL) and our OpenShift hybrid
cloud platform. Cognitive Applications grew 8.1 percent as reported (5 percent
adjusted for currency), while Transaction Processing Platforms declined 9.3
percent as reported (13 percent adjusted for currency). GBS increased 6.8
percent as reported (3 percent adjusted for currency) with growth in Consulting
and Global Process Services. Application Management increased 0.5 percent as
reported, but declined 4 percent adjusted for currency. GTS decreased 0.6
percent as reported (5 percent adjusted for currency) with declines in
Infrastructure & Cloud Services and Technology Support Services. Systems
decreased 2.4 percent as reported (5 percent adjusted for currency) and was
impacted by product cycle dynamics in the current-year period.

Total cloud revenue of $13.5 billion in the first six months of 2021 grew 17
percent as reported (13 percent adjusted for currency and excluding divested
businesses and adjusted for currency).

From a geographic perspective, Americas revenue grew 2.3 percent year to year as
reported (2 percent adjusted for currency). EMEA increased 4.2 percent as
reported but decreased 4 percent adjusted for currency. Asia Pacific declined
0.9 percent year to year as reported (4 percent adjusted for currency).

Total consolidated gross margin of 47.2 percent increased 0.6 points year to
year with margin expansion in Cloud & Cognitive Software, GTS, GBS and Systems.
Operating (non-GAAP) gross margin of 48.3 percent increased 0.7 points compared
to the prior-year period.

Total expense and other (income) decreased 2.3 percent in the first six months
of 2021 versus the prior-year period. Our expense reflects the higher level of
investment we are making in innovation, skills and our ecosystem, more than
offset by lower workforce rebalancing charges, a benefit from expected credit
loss expense, lower travel expense and lower interest expense in the
current-year period. Expense also reflects an increase from the effects of
currency, separation-related charges in the current-year period and higher
non-operating retirement-related costs. Total operating (non-GAAP) expense and
other (income) decreased 4.9 percent year to year, driven primarily by the
factors above excluding the separation-related charges and non-operating
retirement-related costs.

Pre-tax income from continuing operations of $2.5 billion increased 61.5 percent
compared to the first six months of 2020. The pre-tax margin from continuing
operations was 6.7 percent, an increase of 2.5 points versus the prior-year
period. In the prior-year period, workforce rebalancing charges were $865
million, compared to $241 million in the current year. The continuing operations
provision for income taxes in the first six months of 2021 was $0.2 billion
compared to a benefit from income taxes of $1.0 billion in the first six months
of 2020. The company reported a tax benefit in the first quarter of 2021, which
was primarily driven by 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. Net income from
continuing operations of $2.3 billion decreased 10.2 percent, and the net income
margin from continuing operations was 6.3 percent, a decrease of 0.9 points year
to year.

Operating (non-GAAP) pre-tax income from continuing operations of $4.3 billion
increased 43.4 percent year to year and the operating (non-GAAP) pre-tax margin
from continuing operations increased 3.4 points to 11.8 percent. These results
reflect higher workforce rebalancing charges in 2020 as described above. The
operating (non-GAAP) provision for income taxes was $0.6 billion in the first
six months of 2021, compared to a benefit from income taxes of $0.6 billion in
the first six months of 2020. The prior year operating (non-GAAP) benefit from
income taxes was primarily driven by the same factor described above. Operating
(non-GAAP) income from continuing operations of $3.7 billion increased 2.9
percent with an operating (non-GAAP) income margin from continuing operations of
10.1 percent.

Diluted earnings per share from continuing operations of $2.52 in the first six
months of 2021 decreased 11.0 percent and operating (non-GAAP) diluted earnings
per share of $4.10 increased 2.0 percent versus the first six months of 2020.
Diluted earnings per share from continuing operations includes impacts related
to the amortization of purchased intangibles assets and other
acquisition-related charges, retirement-related charges, U.S. tax reform
enactment impacts

                                       54

  Table of Contents

Management Discussion - (continued)

and Kyndryl separation-related charges. The impact of the Kyndryl separation-related charges for the first six months of 2021 was ($0.20) per share.

In the second quarter, we continued to take actions to further enhance our
balance sheet and liquidity position. At June 30, 2021, the balance sheet
remained strong with the flexibility to support and invest in the business. Cash
and cash equivalents, restricted cash and marketable securities at June 30, 2021
were $8.2 billion, a decrease of $6.1 billion from December 31, 2020, primarily
due to debt reduction payments and acquisitions. In line with our overall debt
pay down strategy, we have reduced total debt by $6.4 billion from December 31,
2020 and $17.9 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 decreased $9.2 billion ($7.9 billion adjusted for currency) from December 31, 2020 driven by:

• A decrease in cash and cash equivalents, restricted cash and marketable

securities of $6.1 billion ($6.0 billion adjusted for currency); and

A decrease in financing receivables of $4.1 billion ($3.9 billion adjusted for • currency) primarily as a result of collections of seasonally higher year-end

balances and sales of receivables; partially offset by

•An increase in goodwill of $2.0 billion ($2.3 billion adjusted for currency).

Total liabilities decreased $10.5 billion ($8.7 billion adjusted for currency) from December 31, 2020 driven by:

• A decrease in total debt of $6.4 billion ($5.8 billion adjusted for currency)

primarily driven by debt maturities and early retirements of $6.0 billion;

A decrease in other accrued expenses and liabilities of $1.6 billion ($1.3 • billion adjusted for currency) primarily due to payments of $1.1 billion for

workforce rebalancing actions;

A decrease in taxes payable of $0.8 billion ($0.7 billion adjusted for • currency) primarily driven by tax payments and decline in reserves as a result

of the resolution of certain tax audit matters;

• A decrease in retirement and nonpension postretirement benefit obligations of

$1.0 billion ($0.6 billion adjusted for currency); and

• A decrease in accounts payable of $0.7 billion ($0.6 billion adjusted for

currency) reflecting declines from seasonally higher year-end balances.

Total equity of $22.1 billion increased $1.3 billion from December 31, 2020 as a result of:

•Net income of $2.3 billion; and

An increase in accumulated other comprehensive income of $1.7 billion primarily • due to retirement-related benefit plans and an increase in foreign currency

translation gains; partially offset by

•Dividends paid of $2.9 billion.





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  Table of Contents

Management Discussion - (continued)

We generated $7.5 billion in cash flow provided by operating activities, a
decrease of $0.5 billion compared to the first six months of 2020. Cash flows
from operating activities includes approximately $1.2 billion of cash impacts
from our structural actions initiated in the fourth quarter of 2020 and Kyndryl
separation-related charges. In the first six months of 2021, investing
activities were a net use of cash of $4.7 billion compared to $2.1 billion in
the prior-year period. The $2.5 billion increase year to year was driven
primarily by an increase in net cash used for acquisitions ($2.8 billion) and a
decrease in cash provided by divestitures ($0.8 billion), partially offset by a
decrease in cash used for net purchases of marketable securities and other
investments ($1.0 billion). Financing activities were a net use of cash of $8.9
billion in the first six months of 2021 compared to $1.7 billion in the
prior-year period. The $7.2 billion increase year to year was primarily driven
by a decrease in net cash provided by debt transactions with a higher level of
net issuances in the prior year.



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  Table of Contents

Management Discussion - (continued)

Second Quarter and First Six Months in Review

Results of Continuing Operations

Segment Details

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


                                                                                            Yr. to Yr.
                                                                                             Percent
                                                                         Yr. to Yr.           Change
(Dollars in millions)                                                  Percent/Margin      Adjusted For
For the three months ended June 30:             2021        2020          
Change            Currency
Revenue:
Cloud & Cognitive Software                    $  6,098$   5,748               6.1 %             2.5 %
Gross margin                                      78.1 %       77.1 %             1.0 pts.
Global Business Services                         4,341        3,890              11.6 %             7.3 %
Gross margin                                      27.9 %       28.4 %           (0.6) pts.
Global Technology Services                       6,342        6,316               0.4 %           (4.1) %
Gross margin                                      35.3 %       34.2 %             1.1 pts.
Systems                                          1,717        1,852             (7.3) %          (10.2) %
Gross margin                                      55.1 %       57.8 %           (2.7) pts.
Global Financing                                   242          265             (8.6) %          (11.6) %
Gross margin                                      27.4 %       38.6 %          (11.2) pts.
Other                                                5           50            (89.6) %          (89.3) %
Gross margin                                        nm      (338.2) %              nm
Total consolidated revenue                    $ 18,745$  18,123               3.4 %*          (0.6) %
Total consolidated gross profit               $  9,004$   8,700               3.5 %
Total consolidated gross margin                   48.0 %       48.0 %             0.0 pts.
Non-operating adjustments:
Amortization of acquired intangible assets         180          187             (3.8) %
Separation-related charges                          58            -        

nm

Operating (non-GAAP) gross profit             $  9,242$   8,887               4.0 %
Operating (non-GAAP) gross margin                 49.3 %       49.0 %      

0.3 pts.

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

nm - not meaningful

                                       57

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Management Discussion - (continued)


                                                                                            Yr. to Yr.
                                                                                             Percent
                                                                         Yr. to Yr.           Change
(Dollars in millions)                                                  Percent/Margin      Adjusted For
For the six months ended June 30:               2021        2020           Change            Currency

Revenue:

Cloud & Cognitive Software                    $ 11,534$  10,987               5.0 %             1.6 %
Gross margin                                      77.1 %       76.3 %             0.8 pts.
Global Business Services                         8,575        8,027               6.8 %             2.8 %
Gross margin                                      28.0 %       27.8 %             0.2 pts.
Global Technology Services                      12,712       12,783        
    (0.6) %           (4.7) %
Gross margin                                      34.9 %       34.1 %             0.8 pts.
Systems                                          3,144        3,220             (2.4) %           (5.0) %
Gross margin                                      54.8 %       54.6 %             0.2 pts.
Global Financing                                   482          564            (14.7) %          (17.1) %
Gross margin                                      29.7 %       39.7 %          (10.0) pts.
Other                                               28          113            (75.3) %          (75.6) %
Gross margin                                        nm      (291.7) %              nm
Total consolidated revenue                    $ 36,474$  35,694               2.2 %*          (1.5) %
Total consolidated gross profit               $ 17,208$  16,622               3.5 %
Total consolidated gross margin                   47.2 %       46.6 %             0.6 pts.
Non-operating adjustments:
Amortization of acquired intangible assets         355          375             (5.4) %
Separation-related charges                          61            -        

nm

Operating (non-GAAP) gross profit             $ 17,624$  16,998               3.7 %
Operating (non-GAAP) gross margin                 48.3 %       47.6 %      

0.7 pts.

* (1.4) 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 June 30:                2021       2020        Change        Currency
Cloud & Cognitive Software external revenue:      $ 6,098$ 5,748
   6.1 %           2.5 %
Cloud & Data Platforms                            $ 3,120$ 2,797          11.5 %           7.9 %
Cognitive Applications                              1,391      1,246          11.6             8.0
Transaction Processing Platforms                    1,587      1,706       
 (7.0)          (10.5)





                                                                                         Yr. to Yr.
                                                                                          Percent
                                                                          Yr. to Yr.       Change
(Dollars in millions)                                                      Percent      Adjusted For
For the six months ended June 30:                   2021        2020        Change        Currency
Cloud & Cognitive Software external revenue:      $ 11,534$ 10,987
     5.0 %           1.6 %
Cloud & Data Platforms                            $  5,986$  5,333          12.2 %           8.8 %
Cognitive Applications                               2,624       2,428           8.1             4.9
Transaction Processing Platforms                     2,925       3,226     
   (9.3)          (12.5)



Cloud & Cognitive Software revenue of $6,098 million increased 6.1 percent as
reported and 2 percent adjusted for currency in the second quarter of 2021
compared to the prior-year period, led by growth in both Cloud & Data Platforms
and Cognitive Applications, partially offset by declines in Transaction
Processing Platforms. We continued to have strong subscription and support
renewal rates this quarter and our software deferred income increased more
than
a billion

                                       58

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Management Discussion - (continued)

dollars year to year. For the first six months of 2021, Cloud & Cognitive Software revenue of $11,534 million increased 5.0 percent as reported and 2 percent adjusted for currency driven by the same factors.




In the second quarter, Cloud & Data Platforms revenue of $3,120 million
increased 11.5 percent as reported and 8 percent adjusted for currency compared
to the prior-year period, led by strength in our hybrid cloud platform and Cloud
Paks. In the quarter, both RHEL and OpenShift continued to deliver strong growth
and gained share in their respective markets. We now have more than 3,200
clients using our hybrid cloud platform, which is approximately four times the
number of clients since we announced the Red Hat acquisition. Cloud Paks
continued to resonate with our clients. In the second quarter, we had strength
in Cloud Pak for Integration, which delivers rapid and cost-saving solutions for
integration development as well as Cloud Pak for Business Automation as clients
leveraged AI-powered automation to solve operational challenges. The acquisition
of Turbonomic in the second quarter further extends our automation offerings.



Cognitive Applications second-quarter revenue of $1,391 million increased 11.6
percent as reported and 8 percent adjusted for currency compared to the
prior-year period. This growth was driven by Security software and services,
Maximo asset management, our Weather offerings and Sterling supply chain. With
the acceleration of cybersecurity attacks, clients are increasingly looking for
modernized security platforms to detect and protect against ransomware and other
attacks. This quarter, we had strength in our integrated software and services
offerings including Cloud Pak for Security, Data Security and X-Force Security
Services. In the area of supply chain, the demand for omnichannel solutions
accelerated requirements for Sterling Order Management in industries such as
retail.



Transaction Processing Platforms revenue of $1,587 million decreased 7.0 percent
as reported and 11 percent adjusted for currency in the second quarter compared
to the prior-year period. We provide flexibility to our clients in how they
purchase this mission-critical software and since early last year, we are seeing
a continued preference for operating expenses over capital expenditures, which
has continued to put pressure on perpetual licenses, in favor of more
consumption-like models. Our continued strong software renewals this quarter
reflect that clients remain committed to our products.

Within Cloud & Cognitive Software, cloud revenue of $2.1 billion grew 29 percent
as reported (25 percent adjusted for currency) in the second quarter of 2021
compared to the prior-year period. For the first six months of 2021, cloud
revenue of $4.0 billion grew 33 percent as reported (29 percent adjusted for
currency) compared to the first six months of the prior year.


                                                             Yr. to Yr.
                                                              Percent/
(Dollars in millions)                                          Margin

For the three months ended June 30: 2021 2020 Change Cloud & Cognitive Software: External gross profit

                  $ 4,761$ 4,432           7.4 %
External gross profit margin              78.1 %     77.1 %         1.0 pts.
Pre-tax income                         $ 1,720$ 1,708           0.7 %
Pre-tax margin                            25.2 %     26.3 %       (1.1) pts.





                                                           Yr. to Yr.
                                                            Percent/
(Dollars in millions)                                        Margin

For the six months ended June 30: 2021 2020 Change Cloud & Cognitive Software: External gross profit

                $ 8,893$ 8,384           6.1 %
External gross profit margin            77.1 %     76.3 %         0.8 pts.
Pre-tax income                       $ 3,147$ 2,641          19.2 %
Pre-tax margin                          24.0 %     21.1 %         3.0 pts.




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Cloud & Cognitive Software gross profit margin increased 1.0 points to 78.1
percent in the second quarter of 2021 compared to the prior-year period driven
primarily by revenue growth and improvement in services margins, partially
offset by the investments we are making in new innovations and our ecosystem.
For the first six months of 2021, gross profit margin increased 0.8 points to
77.1 percent, driven primarily by the same factors.

In the second quarter, pre-tax income of $1,720 million increased 0.7 percent
and pre-tax margin decreased 1.1 points to 25.2 percent compared to the prior
year. The pre-tax income improvement reflects the revenue growth and gross
profit margin expansion in the current year. The pre-tax margin decline reflects
the investments we are making in new innovations and our ecosystem and higher
workforce rebalancing charges year to year, partially offset by the gross margin
expansion. For the first six months of 2021, pre-tax income of $3,147 million
increased 19.2 percent and pre-tax margin of 24.0 percent increased 3.0 points
compared to the prior year, primarily driven by the gross margin expansion and
lower workforce rebalancing charges in the current year.

Global Business Services


                                                                                       Yr. to Yr.
                                                                                        Percent
                                                                        Yr. to Yr.       Change
(Dollars in millions)                                                    Percent      Adjusted For
For the three months ended June 30:                2021       2020        Change        Currency
Global Business Services external revenue:        $ 4,341$ 3,890
  11.6 %           7.3 %
Consulting                                        $ 2,236$ 1,936          15.5 %          11.2 %
Application Management                              1,821      1,734           5.1             0.7
Global Process Services                               284        221          28.4            24.7





                                                                                       Yr. to Yr.
                                                                                        Percent
                                                                        Yr. to Yr.       Change
(Dollars in millions)                                                    Percent      Adjusted For
For the six months ended June 30:                  2021       2020        Change        Currency
Global Business Services external revenue:        $ 8,575$ 8,027
   6.8 %           2.8 %
Consulting                                        $ 4,425$ 4,007          10.4 %           6.4 %
Application Management                              3,591      3,573           0.5           (3.5)
Global Process Services                               559        447          25.0            21.7




Global Business Services revenue of $4,341 million grew 11.6 percent as reported
and 7 percent adjusted for currency in the second quarter of 2021 compared to
the prior-year period, with growth across all three business units. Our revenue
performance reflects the trend that clients are accelerating their rate and pace
of digital transformations. Our Red Hat practice had continued strong results
with more than 170 Red Hat client engagements added this quarter. We continue to
invest in GBS by expanding our skills and investing to integrate and scale our
recent acquisitions. For the first six months of 2021, GBS revenue of $8,575
million increased 6.8 percent as reported and 3 percent adjusted for currency
reflecting strong year-to-year growth in Consulting and Global Process Services.

In the second-quarter 2021, Consulting revenue of $2,236 million grew 15.5
percent as reported and 11 percent adjusted for currency which reflects the
investments we are making in building skills in third-party cloud providers and
in expanding our practices with ecosystem partners. Clients are finding value in
our differentiated garage methodology to co-create solutions for the majority of
our value propositions across Enterprise Resource Planning implementation,
Business Process Outsourcing and Application Modernization.



Application Management revenue of $1,821 million increased 5.1 percent as reported and 1 percent adjusted for currency in the second quarter of 2021 compared to the second-quarter 2020 as we continue to transition from managing applications on-premise to those that run in hybrid multicloud environments.



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Management Discussion - (continued)


Global Process Services second-quarter revenue of $284 million grew 28.4 percent
as reported and 25 percent adjusted for currency compared to the prior-year
period, reflecting strong growth in our intelligent workflow offerings. These
end-to-end offerings, which leverage hybrid cloud and AI to transform client
processes, connect Consulting with Business Process Outsourcing in areas such as
finance, supply chain, customer service and talent transformation.



Within GBS, cloud revenue of $1.9 billion grew 35 percent as reported (30
percent adjusted for currency) in the second quarter of 2021 compared to the
same prior-year period. For the first six months of 2021, cloud revenue of $3.6
billion grew 34 percent as reported (29 percent adjusted for currency) compared
to the same period in 2020.




                                                             Yr. to Yr.
                                                              Percent/
(Dollars in millions)                                          Margin

For the three months ended June 30: 2021 2020 Change Global Business Services: External gross profit

                  $ 1,210$ 1,107           9.3 %
External gross profit margin              27.9 %     28.4 %       (0.6) pts.
Pre-tax income                         $   371$   362           2.5 %
Pre-tax margin                             8.4 %      9.2 %       (0.7) pts.





                                                           Yr. to Yr.
                                                            Percent/
(Dollars in millions)                                        Margin

For the six months ended June 30: 2021 2020 Change Global Business Services: External gross profit

                $ 2,404$ 2,231           7.7 %
External gross profit margin            28.0 %     27.8 %         0.2 pts.
Pre-tax income                       $   761$   633          20.3 %
Pre-tax margin                           8.8 %      7.8 %         1.0 pts.



GBS second-quarter gross profit margin of 27.9 percent decreased 0.6 points on a
year-to-year basis, primarily driven by a decline in our Consulting margin,
partially offset by increased margins in Application Management and Global
Process Services. Our gross margin performance reflects the higher level of
investments we are making to expand our skills and practices to continue to
capture the market opportunity. We are expanding our delivery resources and
adding skilled practitioners in high demand areas. In addition, we are investing
to integrate and scale our recently announced acquisitions.



Pre-tax income of $371 million increased 2.5 percent and pre-tax margin of 8.4
percent decreased 0.7 points in the second quarter of 2021 compared to the
prior-year period. The pre-tax income and margin performance reflects the higher
level of investments described above, and in our go-to-market resources. For the
first six months of 2021, pre-tax income of $761 million increased 20.3 percent
and pre-tax margin of 8.8 percent increased 1.0 points compared to the
prior-year period, driven primarily by gross profit margin expansion due to
lower costs in the current year as a result of prior workforce rebalancing
actions and lower workforce rebalancing charges year to year.



Global Technology Services


                                                                                       Yr. to Yr.
                                                                                        Percent
                                                                        Yr. to Yr.       Change
(Dollars in millions)                                                    Percent      Adjusted For
For the three months ended June 30:               2021        2020        Change        Currency
Global Technology Services external revenue:    $  6,342$  6,316           0.4 %         (4.1) %
Infrastructure & Cloud Services                 $  4,836$  4,813
   0.5 %         (4.2) %
Technology Support Services                        1,506       1,503           0.2           (4.1)




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Management Discussion - (continued)


                                                                                       Yr. to Yr.
                                                                                        Percent
                                                                        Yr. to Yr.       Change
(Dollars in millions)                                                    Percent      Adjusted For
For the six months ended June 30:                 2021        2020        Change        Currency
Global Technology Services external revenue:    $ 12,712$ 12,783         (0.6) %         (4.7) %
Infrastructure & Cloud Services                 $  9,689$  9,729
 (0.4) %         (4.8) %
Technology Support Services                        3,023       3,054         (1.0)           (4.4)



Global Technology Services revenue of $6,342 million increased 0.4 percent as
reported, but declined 4 percent adjusted for currency in the second quarter of
2021 compared to the same prior-year period. This reflects a modest improvement
in year-to-year performance compared to the first-quarter 2021, driven by
improving trends in client-based business volumes and project activity. For the
first six months of 2021, GTS revenue of $12,712 million decreased 0.6 percent
as reported and 5 percent adjusted for currency as compared to the prior-year
period, driven by declines in both Infrastructure & Cloud Services and
Technology Support Services.



In the second-quarter 2021, Infrastructure & Cloud Services revenue of $4,836
million increased 0.5 percent as reported, but declined 4 percent adjusted for
currency compared to the prior-year period. Our current clients continue to
value partnering with Kyndryl to modernize and manage their mission-critical
workloads and services, as reflected in our strong renewal rate. The renewals
this quarter included six deals with a contract value greater than $100 million.
While our performance with existing clients remains strong, the sales cycle for
new logo clients is elongating, as they await additional information related to
Kyndryl.


Technology Support Services (TSS) second-quarter revenue of $1,506 million was flat year to year as reported and declined 4 percent adjusted for currency compared to the prior-year period, reflecting the Systems hardware product cycles.




Within GTS, cloud revenue of $2.4 billion decreased 1 percent as reported and 5
percent adjusted for currency in the second quarter of 2021 compared to the same
period in the prior year. For the first six months of 2021, cloud revenue of
$4.8 billion grew 2 percent as reported, but declined 2 percent adjusted for
currency compared to the first six months of 2020.




                                                             Yr. to Yr.
                                                              Percent/
(Dollars in millions)                                          Margin

For the three months ended June 30: 2021 2020 Change Global Technology Services: External gross profit

                  $ 2,237$ 2,158           3.7 %
External gross profit margin              35.3 %     34.2 %         1.1 pts.
Pre-tax income                         $   381$   250          52.3 %
Pre-tax margin                             5.7 %      3.8 %         1.9 pts.





                                                           Yr. to Yr.
                                                            Percent/
(Dollars in millions)                                        Margin

For the six months ended June 30: 2021 2020 Change Global Technology Services: External gross profit

                $ 4,437$ 4,354           1.9 %
External gross profit margin            34.9 %     34.1 %         0.8 pts.
Pre-tax income                       $   520$    72         624.6 %
Pre-tax margin                           3.9 %      0.5 %         3.4 pts.



Global Technology Services gross profit margin increased 1.1 points to 35.3 percent in the second quarter of 2021 as compared to the prior-year period, driven primarily by margin expansion in Infrastructure & Cloud Services which


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Management Discussion - (continued)

reflects the benefits from the productivity actions taken in 2020 to improve the profit and margin profile of the business in advance of the Kyndryl separation.

Pre-tax income of $381 million increased 52.3 percent and pre-tax margin of 5.7
percent increased 1.9 points in the second quarter of 2021 compared to the same
period in 2020, driven primarily by the gross profit margin expansion due to
lower costs in the current year as a result of workforce rebalancing actions
taken in the prior year. For the first six months of 2021, pre-tax income
increased $448 million to $520 million and pre-tax margin of 3.9 percent
increased 3.4 points compared to the prior-year period, driven primarily by
gross profit margin expansion and lower workforce rebalancing charges in the
current year.

Services Backlog and Signings


                                                                          Yr. to Yr.
                                                                           Percent
                                                           Yr. to Yr.       Change
                         At June 30,      At June 30,       Percent      Adjusted For
(Dollars in billions)        2021             2020           Change        Currency
Total backlog            $       103.7$       107.1         (3.2) %         (6.4) %



The estimated total services backlog at June 30, 2021 was $103.7 billion, a decrease of 3.2 percent as reported (6 percent adjusted for currency) on a year-to-year basis.


Total services backlog includes Infrastructure & Cloud Services, Security
Services, Consulting, Global Process Services, Application Management and TSS.
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 June 30:     2021       2020        Change      
 Currency
Total signings                         $ 9,178$ 8,204          11.9 %           8.1 %





                                                                            Yr. to Yr.
                                                                             Percent
                                                             Yr. to Yr.       Change
(Dollars in millions)                                         Percent      Adjusted For
For the six months ended June 30:      2021        2020        Change      
 Currency
Total signings                       $ 15,911$ 17,132         (7.1) %        (10.3) %




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 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. TSS is generally not included in signings as the maintenance
contracts tend to be more steady state,

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Management Discussion - (continued)

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 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.

Systems


                                                                            Yr. to Yr.
                                                                             Percent
                                                             Yr. to Yr.       Change
(Dollars in millions)                                         Percent      Adjusted For
For the three months ended June 30:     2021       2020        Change      
 Currency
Systems external revenue:              $ 1,717$ 1,852         (7.3) %        (10.2) %
Systems Hardware                       $ 1,384$ 1,488         (7.0) %         (9.9) %
IBM Z                                                            (10.6)          (13.3)
Power Systems                                                     (1.6)           (4.6)
Storage Systems                                                   (6.7)           (9.7)
Operating Systems Software                 333        365         (8.7)          (11.7)





                                                                          Yr. to Yr.
                                                                           Percent
                                                           Yr. to Yr.       Change
(Dollars in millions)                                       Percent      Adjusted For
For the six months ended June 30:     2021       2020        Change       
Currency
Systems external revenue:            $ 3,144$ 3,220         (2.4) %         (5.0) %
Systems Hardware                     $ 2,498$ 2,484           0.5 %         (2.0) %
IBM Z                                                            10.2             7.8
Power Systems                                                   (5.2)           (7.9)
Storage Systems                                                 (8.9)          (11.7)
Operating Systems Software               646        736        (12.2)          (14.8)



Systems revenue of $1,717 million decreased 7.3 percent as reported and 10
percent adjusted for currency in the second quarter of 2021 compared to the
prior-year period. Systems Hardware revenue of $1,384 million declined 7.0
percent as reported and 10 percent adjusted for currency reflecting product
cycle dynamics across IBM Z, Power Systems and Storage Systems. Operating
Systems Software revenue of $333 million decreased 8.7 percent as reported and
12 percent adjusted for currency, driven primarily by a decline in IBM Z
operating systems software due to higher transactional revenue in the prior-year
second quarter. For the first six months of 2021, Systems revenue of $3,144
million decreased 2.4 percent as reported and 5 percent adjusted for currency
compared to the prior-year period. The decline was primarily driven by Storage
Systems and Power Systems and a decline in Operating Systems Software, partially
offset by growth in IBM Z.



IBM Z revenue decreased 10.6 percent as reported and 13 percent adjusted for
currency in the second quarter compared to very strong performance in the
prior-year period. Financial services continued to drive IBM Z performance due
to capacity requirements to address robust market volatility. With focus on
security, purchases were also driven by clients seeking capabilities such as
pervasive encryption and Hyper Protect to secure mission-critical applications
and data, both on premises and in the cloud. During the last eight quarters, the
z15 client value proposition has been

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Management Discussion - (continued)

apparent. The z15 is secure, scalable and reliable, and the z15 program continues to outpace the strong z14 program providing further proof of IBM Z as an enduring platform.




Power Systems revenue decreased 1.6 percent as reported and 5 percent adjusted
for currency in the second quarter of 2021 compared to the prior-year period,
reflecting a sequential year-to-year improvement compared to the first-quarter
2021. The decline in revenue in the second quarter reflects the product cycle
dynamics and was driven primarily by declines in low-end systems, partially
offset by growth in high-end systems.



Storage Systems revenue declined 6.7 percent as reported and 10 percent adjusted for currency in the second-quarter 2021 compared to the prior-year period, driven primarily by a decline in high-end storage systems tied to the IBM Z product cycle.


Within Systems, cloud revenue of $0.7 billion decreased 16 percent as reported
(19 percent adjusted for currency) in the second quarter of 2021 compared to the
same quarter in 2020. For the first six months of 2021, cloud revenue of $1.2
billion decreased 3 percent as reported (5 percent adjusted for currency)
compared to the same prior-year period.


                                                                           Yr. to Yr.
                                                                            Percent/
(Dollars in millions)                                                        Margin
For the three months ended June 30:                  2021        2020      

Change

Systems:

External Systems Hardware gross profit             $    679$    772        (12.0) %
External Systems Hardware gross profit margin          49.1 %      51.9 %       (2.8) pts.
External Operating Systems Software gross
profit                                             $    267$    299        (10.7) %
External Operating Systems Software gross
profit margin                                          80.2 %      82.0 %       (1.8) pts.
External total gross profit                        $    946$  1,071        (11.7) %
External total gross profit margin                     55.1 %      57.8 %  
    (2.7) pts.
Pre-tax income                                     $    176$    248        (28.8) %
Pre-tax margin                                          9.0 %      11.8 %       (2.8) pts.





                                                                           Yr. to Yr.
                                                                            Percent/
(Dollars in millions)                                                        Margin
For the six months ended June 30:                    2021        2020      

Change

Systems:

External Systems Hardware gross profit             $  1,207$  1,151           4.8 %
External Systems Hardware gross profit margin          48.3 %      46.3 %         2.0 pts.
External Operating Systems Software gross
profit                                             $    517$    607        (14.8) %
External Operating Systems Software gross
profit margin                                          80.0 %      82.5 %       (2.4) pts.
External total gross profit                        $  1,724$  1,758         (1.9) %
External total gross profit margin                     54.8 %      54.6 %  
      0.2 pts.
Pre-tax income                                     $    174$     31         466.3 %
Pre-tax margin                                          4.9 %       0.9 %         4.0 pts.




Systems gross profit margin decreased 2.7 points to 55.1 percent in the
second-quarter 2021 compared to the prior-year period. Systems margin
performance was driven by declines in Storage Systems and Operating Systems
Software margins and a revenue mix to Power Systems, partially offset by margin
expansion in Power Systems and IBM Z. For the first six months of 2021, Systems
gross profit margin increased 0.2 points to 54.8 percent compared to the same
period in 2020, primarily driven by a mix to IBM Z and margin expansion in IBM Z
and Power Systems, partially offset by a decline in Storage Systems margin.



In the second quarter of 2021, Systems pre-tax income of $176 million decreased
28.8 percent and pre-tax margin of 9.0 percent decreased 2.8 points compared to
the prior-year period, driven primarily by the portfolio mix and the z15

                                       65

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Management Discussion - (continued)


product cycle, partially offset by lower costs in the current year as a result
of prior workforce rebalancing actions. For the first six months of 2021,
pre-tax income increased $143 million to $174 million and pre-tax margin of 4.9
percent increased 4.0 points compared to the prior-year period, driven primarily
by lower costs in the current year as a result of prior workforce rebalancing
actions and lower workforce rebalancing charges in the current year.

Global Financing

See pages 85 through 88 for a discussion of 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.      Percent Change
                                                                                 Percent      Excluding Divested
                                                                 Yr. to Yr.       Change        Businesses And
(Dollars in millions)                                             Percent      Adjusted For      Adjusted For
For the three months ended June 30:      2021         2020         Change  
     Currency          Currency
Total Revenue                          $  18,745$  18,123           3.4 %         (0.6) %              (0.5) %
Americas                               $   8,820$   8,450           4.4 %           2.9 %                3.0 %
Europe/Middle East/Africa (EMEA)           6,038        5,695           6.0           (3.0)                (2.9)
Asia Pacific                               3,887        3,977         (2.3)           (4.5)                (4.5)





                                                                                                Yr. to Yr.
                                                                              Yr. to Yr.      Percent Change
                                                                               Percent      Excluding Divested
                                                               Yr. to Yr.       Change        Businesses And
(Dollars in millions)                                           Percent      Adjusted For      Adjusted For
For the six months ended June 30:      2021         2020         Change    
   Currency          Currency
Total Revenue                        $  36,474$  35,694           2.2 %         (1.5) %              (1.4) %
Americas                             $  16,999$  16,617           2.3 %           1.6 %                1.7 %
Europe/Middle East/Africa (EMEA)        11,679       11,212           4.2  
        (4.3)                (4.2)
Asia Pacific                             7,797        7,865         (0.9)           (4.1)                (4.1)



Total revenue of $18,745 million increased 3.4 percent as reported and was flat
excluding divested businesses and adjusted for currency in the second quarter of
2021 compared to the prior-year period.



Americas revenue of $8,820 million increased 4.4 percent as reported and 3
percent adjusted for currency. Within Americas, the U.S. increased 1.5 percent
compared to the prior year. Canada increased 34.7 percent as reported and 20
percent adjusted for currency. Latin America decreased 1.7 percent as reported
and 2 percent adjusted for currency, with Brazil revenue flat as reported, but
declining 1 percent adjusted for currency.



In EMEA, total revenue of $6,038 million increased 6.0 percent as reported, but
decreased 3 percent adjusted for currency. Within EMEA, Germany increased 4.2
percent as reported, but declined 4 percent adjusted for currency. As reported,
France, the UK and Italy increased 18.4 percent, 13.9 percent and 11.1 percent,
respectively, and grew 9 percent, 2 percent and 2 percent, respectively,
adjusted for currency.

Asia Pacific revenue of $3,887 million decreased 2.3 percent as reported and 5
percent adjusted for currency. Within Asia Pacific, Japan decreased 2.8 percent
as reported and 1 percent adjusted for currency. As reported, India, Australia
and China decreased 5.1 percent, 4.7 percent and 3.3 percent, respectively, and
declined 8 percent, 18 percent and 10 percent, respectively, adjusted for
currency.

                                       66

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Management Discussion - (continued)


For the first six months of 2021, total revenue of $36,474 million increased 2.2
percent as reported, but declined 1 percent excluding divested businesses and
adjusted for currency compared to the prior-year period.



Americas revenue of $16,999 million increased 2.3 percent as reported and 2
percent adjusted for currency. Within Americas, the U.S. increased 1.1 percent
compared to the prior year. Canada increased 20.7 percent as reported and 10
percent adjusted for currency. Latin America decreased 5.6 percent as reported
and 2 percent adjusted for currency, with Brazil revenue declining 7.2 percent
as reported and 1 percent adjusted for currency.



In EMEA, total revenue of $11,679 million increased 4.2 percent as reported, but
declined 4 percent adjusted for currency. Within EMEA, the UK increased 10.4
percent as reported and grew slightly adjusted for currency. As reported,
France, Italy and Germany increased 6.9 percent, 6.8 percent and 3.8 percent,
respectively, but declined 2 percent, 2 percent and 5 percent, respectively,
adjusted for currency.



Asia Pacific revenue of $7,797 million decreased 0.9 percent as reported and 4
percent adjusted for currency. Within Asia Pacific, Japan decreased 1.4 percent
as reported and 2 percent adjusted for currency. India decreased 8.6 percent as
reported and 10 percent adjusted for currency and China decreased 7.0 percent as
reported and 12 percent adjusted for currency. Australia grew 4.4 percent as
reported, but declined 11 percent adjusted for currency.

Expense

Total Expense and Other (Income)


                                                                         Yr. to Yr.
(Dollars in millions)                                                     Percent
For the three months ended June 30:                 2021       2020       

Change

Total consolidated expense and other (income) $ 7,451$ 7,129

     4.5 %
Non-operating adjustments:
Amortization of acquired intangible assets         $ (281)$ (284)         (1.2) %
Acquisition-related charges                           (18)        (1)      

nm

Non-operating retirement-related (costs)/income (328) (273)

19.8

Separation-related charges                           (117)          -      

nm

Operating (non-GAAP) expense and other (income) $ 6,708$ 6,570

     2.1 %
Total consolidated expense-to-revenue ratio           39.8 %     39.3 %         0.4 pts.
Operating (non-GAAP) expense-to-revenue ratio         35.8 %     36.3 %    
  (0.5) pts.


nm - not meaningful


                                                                           Yr. to Yr.
(Dollars in millions)                                                       Percent
For the six months ended June 30:                    2021        2020      

Change

Total consolidated expense and other (income) $ 14,751$ 15,101

     (2.3) %
Non-operating adjustments:
Amortization of acquired intangible assets         $  (559)$  (569)         (1.9) %
Acquisition-related charges                            (34)         (2)    

nm

Non-operating retirement-related (costs)/income (670) (538)

24.6

Separation-related charges                            (175)           -    

nm

Operating (non-GAAP) expense and other (income) $ 13,313$ 13,992

     (4.9) %
Total consolidated expense-to-revenue ratio            40.4 %      42.3 %       (1.9) pts.
Operating (non-GAAP) expense-to-revenue ratio          36.5 %      39.2 %  
    (2.7) pts.


nm - not meaningful

                                       67

  Table of Contents

Management Discussion - (continued)


Total expense and other (income) increased 4.5 percent in the second quarter of
2021 versus the prior year. Our expense dynamics reflect a higher level of
investment in innovation, skills and our ecosystem as we execute our hybrid
cloud and AI strategy. We are aggressively hiring, scaling our garage footprint,
increasing our research spend in areas including quantum, hybrid cloud and AI,
and expanding our ecosystem. The year-to-year increase in expense was also
driven by the effects of currency, separation-related charges in the
current-year period, lower IP income and higher non-operating retirement-related
costs, partially offset by a benefit from expected credit loss expense, lower
workforce rebalancing charges and lower interest expense in the current-year
period. Total operating (non-GAAP) expense and other (income) increased 2.1
percent year to year, driven primarily by the factors described above excluding
the separation-related charges and higher non-operating retirement-related
costs.



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

Selling, General and Administrative Expense


                                                                              Yr. to Yr.
(Dollars in millions)                                                          Percent
For the three months ended June 30:                   2021         2020    

Change

Selling, general and administrative expense:
Selling, general and administrative - other         $   4,451$   4,239           5.0 %
Advertising and promotional expense                       399          363 

9.9

Workforce rebalancing charges                              95          137 

(30.6)

Amortization of acquired intangible assets                281          284 

(1.2)

Stock-based compensation                                  152          155 

(2.1)

Provision for/(benefit from) expected credit
loss expense                                             (43)           70 

nm

Total consolidated selling, general and
administrative expense                              $   5,334$   5,248           1.6 %
Non-operating adjustments:
Amortization of acquired intangible assets          $   (281)$   (284)
       (1.2) %
Acquisition-related charges                              (18)          (1)            nm
Separation-related charges                              (116)            -            nm
Operating (non-GAAP) selling, general and
administrative expense                              $   4,919$   4,962         (0.9) %


nm - not meaningful


                                                                              Yr. to Yr.
(Dollars in millions)                                                          Percent
For the six months ended June 30:                     2021         2020    

Change

Selling, general and administrative expense:
Selling, general and administrative - other         $   8,757$   8,580           2.1 %
Advertising and promotional expense                       750          791 

(5.1)

Workforce rebalancing charges                             241          865 

(72.1)

Amortization of acquired intangible assets                558          568 

(1.9)

Stock-based compensation                                  275          272 

1.2

Provision for/(benefit from) expected credit
loss expense                                             (73)          126 

nm

Total consolidated selling, general and
administrative expense                              $  10,508$  11,203         (6.2) %
Non-operating adjustments:
Amortization of acquired intangible assets          $   (558)$   (568)
       (1.9) %
Acquisition-related charges                              (34)          (2)            nm
Separation-related charges                              (175)            -            nm
Operating (non-GAAP) selling, general and
administrative expense                              $   9,742$  10,633         (8.4) %


nm - not meaningful

                                       68

  Table of Contents

Management Discussion - (continued)


Total selling, general and administrative (SG&A) expense increased 1.6 percent
in the second quarter of 2021 versus the prior year driven by the higher level
of investments we are making to execute our hybrid cloud and AI strategy, as
well as the following factors:

? The effects of currency (3 points); and

? Separation-related charges in the current-year period (2 points); partially

offset by

? A benefit from expected credit loss expense compared to a provision in the

prior-year period (2 points); and

? Lower workforce rebalancing charges (1 point).

Operating (non-GAAP) expense decreased 0.9 percent year to year, primarily driven by the same factors excluding the separation-related charges.

SG&A expense decreased 6.2 percent in the first six months of 2021 versus the prior year driven primarily by the following factors:

? Lower workforce rebalancing charges (6 points);

? A benefit from expected credit loss expense compared to a provision in the

prior-year period (2 points); and

? Lower spending (1 point) including reductions in travel; partially offset by

? The effects of currency (2 points); and

? Separation-related charges in the current-year period (2 points).

Operating (non-GAAP) expense decreased 8.4 percent year to year, primarily driven by the same factors excluding the separation-related charges.

Provisions for expected credit loss expense decreased $199 million year to year
in the first six months of 2021, primarily driven by decreases in both specific
and general reserves in the current year compared with increases in the
prior-year period. In the prior year, the global pandemic resulted in some
deterioration in customer credit quality and/or bankruptcies which had an impact
to provisions in the first half of 2020. We have started to see improvement in
credit quality and some emergence from bankruptcies in the current year as the
economy begins to reopen in many parts of the world. The receivables provision
coverage was 2.5 percent at June 30, 2021, an increase of 10 basis points from
both December 31, 2020 and June 30, 2020.

Research, Development and Engineering


                                                                              Yr. to Yr.
(Dollars in millions)                                                          Percent
For the three months ended June 30:                   2021         2020    

Change

Research, development and engineering expense $ 1,657$ 1,582

          4.7 %
Non-operating adjustment:
Separation-related charges                          $       0    $       - 

nm

Operating (non-GAAP) research, development and
engineering expense                                 $   1,656$   1,582           4.7 %


nm - not meaningful

                                       69

  Table of Contents

Management Discussion - (continued)


                                                                              Yr. to Yr.
(Dollars in millions)                                                          Percent
For the six months ended June 30:                     2021         2020    

Change

Research, development and engineering expense $ 3,286$ 3,207

          2.5 %
Non-operating adjustment:
Separation-related charges                          $       0    $       - 

nm

Operating (non-GAAP) research, development and
engineering expense                                 $   3,286$   3,207           2.5 %


nm - not meaningful

Research, development and engineering (RD&E) expense was 8.8 percent and 9.0
percent of revenue in the second quarter and first six months of 2021,
respectively, compared to 8.7 percent and 9.0 percent in the prior-year periods,
respectively, reflecting our continuing investment in innovation as we increase
spending in areas including quantum, hybrid cloud and AI.

RD&E expense in the second quarter of 2021 increased 4.7 percent year to year,
primarily driven by higher spending (3 points) and the effects of currency (2
points).

RD&E expense in the first six months of 2021 increased 2.5 percent year to year,
primarily driven by the effects of currency (2 points) and higher spending (1
point).

Intellectual Property and Custom Development Income


                                                                              Yr. to Yr.
(Dollars in millions)                                                          Percent
For the three months ended June 30:                   2021         2020    

Change

Intellectual Property and Custom Development
Income:
Licensing of intellectual property including
royalty-based fees                                  $      64$     128        (49.9) %
Custom development income                                  67           74 

(9.0)

Sales/other transfers of intellectual property              4            1 
       192.3
Total                                               $     135$     203        (33.5) %





                                                                              Yr. to Yr.
(Dollars in millions)                                                          Percent
For the six months ended June 30:                     2021         2020    

Change

Intellectual Property and Custom Development
Income:
Licensing of intellectual property including
royalty-based fees                                  $     136$     162        (16.0) %
Custom development income                                 136          149 

(9.1)

Sales/other transfers of intellectual property             10            8 
        28.2
Total                                               $     282$     319        (11.7) %




Total intellectual property and custom development income decreased 33.5 percent
and 11.7 percent year to year in the second quarter and first six months of
2021, respectively. These decreases were primarily driven by 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.



                                       70

  Table of Contents

Management Discussion - (continued)

Other (Income) and Expense


                                                                              Yr. to Yr.
(Dollars in millions)                                                          Percent
For the three months ended June 30:                   2021         2020    

Change

Other (income) and expense:
Foreign currency transaction losses/(gains)         $    (14)$      62

nm

(Gains)/losses on derivative instruments                   79         (92) 

nm

Interest income                                          (11)         (23)        (50.6) %
Net (gains)/losses from securities and
investment assets                                           0            0 

(29.3)

Retirement-related costs/(income)                         328          273 

19.8

Other                                                    (67)         (43) 

56.0

Total consolidated other (income) and expense $ 315$ 179

         76.1 %
Non-operating adjustments:
Amortization of acquired intangible assets          $     (1)$     (1)             -
Non-operating retirement-related (costs)/income         (328)        (273)          19.8 %
Operating (non-GAAP) other (income) and expense     $    (14)$    (95)
      (85.7) %


nm - not meaningful


                                                                              Yr. to Yr.
(Dollars in millions)                                                          Percent
For the six months ended June 30:                     2021         2020    

Change

Other (income) and expense:
Foreign currency transaction losses/(gains)         $   (123)$    (64)          92.2 %
(Gains)/losses on derivative instruments                  239            9 

nm

Interest income                                          (25)         (74) 

(66.4)

Net (gains)/losses from securities and
investment assets                                         (6)          (5) 

10.9

Retirement-related costs/(income)                         670          538 

24.6

Other                                                    (79)         (42) 

87.0

Total consolidated other (income) and expense $ 676$ 361

         87.3 %
Non-operating adjustments:
Amortization of acquired intangible assets          $     (1)$     (1)             -
Non-operating retirement-related (costs)/income         (670)        (538)          24.6 %
Operating (non-GAAP) other (income) and expense     $       5$   (178)
          nm


nm - not meaningful

Total consolidated other (income) and expense was $315 million of expense in the
second quarter of 2021 compared to $179 million in the prior-year period. The
year-to-year increase was primarily driven by:

Net exchange losses (including derivative instruments) in the current year

? versus net exchange gains (including derivative instruments) in the prior year

($94 million); and

? Higher non-operating retirement-related costs ($54 million). Refer to

"Retirement-Related Plans" for additional information.



Operating (non-GAAP) other (income) and expense was $14 million of income in the
second quarter of 2021 and decreased $82 million compared to the prior-year
period. The year-to-year change was driven primarily by the effects of currency
described above.

                                       71

  Table of Contents

Management Discussion - (continued)

Total consolidated other (income) and expense was $676 million of expense in the first six months of 2021 compared to $361 million in the prior year. The year-to-year increase was primarily driven by:

Net exchange losses (including derivative instruments) in the current year

? versus net exchange gains (including derivative instruments) in the prior year

($171 million);

? Higher non-operating retirement-related costs ($132 million). Refer to

"Retirement-Related Plans" for additional information; and

? Lower interest income ($49 million) primarily due to lower interest rates in

the current-year period.



Operating (non-GAAP) other (income) and expense was $5 million of expense in the
first six months of 2021 compared to income of $178 million in the prior-year
period. The year-to-year change was driven primarily by the effects of currency
and lower interest income described above.

Interest Expense


                                                         Yr. to Yr.
(Dollars in millions)                                     Percent
For the three months ended June 30:    2021     2020       Change
Interest expense                       $ 281$ 323        (12.9) %





                                                       Yr. to Yr.
(Dollars in millions)                                   Percent

For the six months ended June 30: 2021 2020 Change Interest expense

                     $ 562$ 649        (13.4) %




Interest expense decreased $42 million and $87 million year to year in the
second quarter and first six months of 2021, respectively. 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
second quarter and first six months of 2021 was $386 million and $772 million,
respectively, a decrease of $55 million and $113 million versus the comparable
prior-year periods. The decrease for the second quarter was primarily driven by
a lower average debt balance compared to the prior-year period. The year-to-year
decrease for the first six months of 2021 was primarily driven by a lower
average debt balance and lower average interest rates in the current-year
period.

                                       72

  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.
(Dollars in millions)                                                   Percent
For the three months ended June 30:               2021       2020        

Change

Retirement-related plans - cost:
Service cost                                     $    98$    98         (0.2) %
Multi-employer plans                                   7          7        

(1.5)

Cost of defined contribution plans                   265        267        
(0.6)
Total operating costs                            $   370$   372         (0.5) %
Interest cost                                    $   414$   546        (24.2) %
Expected return on plan assets                     (742)      (854)       

(13.1)

Recognized actuarial losses                          636        559        

13.7

Amortization of prior service costs/(credits)          1          0         124.0
Curtailments/settlements                              16         13          24.9
Other costs                                            3          9        (61.5)
Total non-operating costs/(income)               $   328$   273          19.8 %
Total retirement-related plans - cost            $   698$   645
  8.1 %





                                                                           Yr. to Yr.
(Dollars in millions)                                                       Percent
For the six months ended June 30:                  2021         2020       

Change

Retirement-related plans - cost:
Service cost                                     $     193$     197         (1.7) %
Multi-employer plans                                    15           14    

1.1

Cost of defined contribution plans                     536          532    
      0.8
Total operating costs                            $     744$     743           0.1 %
Interest cost                                    $     826$   1,086        (23.9) %
Expected return on plan assets                     (1,484)      (1,706)    

(13.0)

Recognized actuarial losses                          1,276        1,122    

13.7

Amortization of prior service costs/(credits)            4            1    
    398.9
Curtailments/settlements                                34           21          56.8
Other costs                                             15           14           0.9
Total non-operating costs/(income)               $     670$     538          24.6 %
Total retirement-related plans - cost            $   1,414$   1,281
     10.4 %




Total pre-tax retirement-related plan cost increased by $52 million compared to
the second quarter of 2020, primarily driven by lower expected return on plan
assets ($112 million) and an increase in recognized actuarial losses ($76
million), partially offset by lower interest costs ($132 million). Total cost
for the first six months of 2021 increased $133 million versus the first six
months of 2020, primarily driven by lower expected return on plan assets ($222
million) and an increase in recognized actuarial losses ($154 million),
partially offset by lower interest costs ($259 million).



As described in the "Operating (non-GAAP) Earnings" section, management
characterizes certain retirement-related costs as operating and others as
non-operating. Utilizing this characterization, operating retirement-related
costs in the second quarter of 2021 were $370 million, a decrease of $2 million
compared to the second quarter of 2020. For the first six months of 2021,
operating retirement-related costs were $744 million, an increase of $1 million
compared to the prior-year period. Non-operating costs of $328 million in the
second quarter of 2021 increased $54 million year to year

                                       73

Table of Contents

Management Discussion - (continued)

and for the first six months of 2021 were $670 million, an increase of $132 million compared to the prior-year period. These non-operating cost increases were driven primarily by the same factors as described above.

Taxes


The provision for income taxes for the second quarter of 2021 was $227 million,
compared to $209 million in the second quarter of 2020. The operating (non-GAAP)
provision for income taxes for the second quarter of 2021 was $431 million,
compared to $369 million in the second quarter of 2020.

The provision for income taxes for the first six months of 2021 was $177
million, compared to a benefit from income taxes of $1,017 million for the first
six months of 2020. The operating (non-GAAP) provision for income taxes for the
first six months of 2021 was $610 million, compared to a benefit from income
taxes of $592 million for the first six months of 2020. The benefit from income
taxes for the first six months of 2020 was primarily related to the tax impacts
of an intra-entity sale of certain of the company's intellectual property. The
operating (non-GAAP) benefit from income taxes was primarily driven by the same
factor.

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 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.

During the fourth quarter of 2020, the U.S. Internal Revenue Service (IRS)
concluded its examination of the company's U.S. income tax returns for 2013 and
2014, which had a specific focus on certain cross-border transactions that
occurred in 2013 and issued a final Revenue Agent's Report. 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 2015. The company is no
longer subject to income tax examination of its U.S. federal tax returns for
years prior to 2013. The open years contain matters that could be subject to
differing interpretations of applicable tax laws and regulations as it relates
to the amount and/or timing of income, deductions and tax credits. Although the
outcome of tax audits is always uncertain, the company believes that adequate
amounts of tax, interest and penalties have been provided for any adjustments
that are expected to result for these years.

The company is involved in a number of income tax-related matters in India
challenging tax assessments issued by the India Tax Authorities. As of June 30,
2021, the company had recorded $731 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 June 30, 2021 is $8,019 million which
can be reduced by $580 million associated with timing adjustments, U.S. tax
credits, potential transfer pricing adjustments, and state income taxes. The net
amount of $7,439 million, if recognized, would favorably affect the company's
effective tax rate.

                                       74

  Table of Contents

Management Discussion - (continued)

Earnings Per Share


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

                                                                              Yr. to Yr.
                                                                               Percent
For the three months ended June 30:                   2021         2020    

Change

Earnings per share of common stock from
continuing operations:
Assuming dilution                                   $    1.47$    1.52         (3.3) %
Basic                                               $    1.48$    1.53         (3.3) %
Diluted operating (non-GAAP)                        $    2.33$    2.18           6.9 %
Weighted-average shares outstanding: (in
millions)
Assuming dilution                                       904.2        894.9           1.0 %
Basic                                                   895.0        889.4           0.6 %





                                                                              Yr. to Yr.
                                                                               Percent
For the six months ended June 30:                     2021         2020    

Change

Earnings per share of common stock from
continuing operations:
Assuming dilution                                   $    2.52$    2.83        (11.0) %
Basic                                               $    2.55$    2.85        (10.5) %
Diluted operating (non-GAAP)                        $    4.10$    4.02           2.0 %
Weighted-average shares outstanding: (in
millions)
Assuming dilution                                       903.0        895.0           0.9 %
Basic                                                   894.3        888.7           0.6 %




Actual shares outstanding at June 30, 2021 were 896.3 million. The
weighted-average number of common shares outstanding assuming dilution during
the second quarter and first six months of 2021 were 9.3 million (1.0 percent)
and 8.0 million (0.9 percent) shares higher, respectively, than the same periods
of 2020.

Financial Position

Dynamics

At June 30, 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 and have continued to take actions to
enhance our balance sheet strength and liquidity position.

Cash, restricted cash and marketable securities at June 30, 2021 were $8,165
million, a decrease of $6,110 million from December 31, 2020, primarily due to
debt reduction payments and acquisitions. Financing receivables declined $4,111
million to $13,868 million since 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 $55,176 million at
June 30, 2021 decreased $6,362 million from December 31, 2020, and $17,863
million since the end of the second quarter 2019 (immediately preceding the Red
Hat acquisition). We have made good progress in deleveraging while being
acquisitive and without sacrificing investments in our business or our solid
dividend policy. In the first six months of 2021, we generated $7,539 million in
net cash from operations, compared to $8,052 million in the first six months of
2020. We have consistently generated strong cash flow from operations and
continue to have access to additional sources of liquidity through the capital
markets and our unused credit facilities.

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Management Discussion - (continued)


Our pension plans were well funded at the end of 2020, with worldwide qualified
plans funded at 102 percent. Overall pension funded status as of the end of June
was fairly consistent with year-end 2020, and we currently have no change to
expected plan contributions in 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 section, beginning on page 85, are supplementary data presented to facilitate an understanding of the Global Financing business.

IBM Working Capital


                          At June 30,       At December 31,
(Dollars in millions)         2021                2020
Current assets           $       30,774    $           39,165
Current liabilities              36,616                39,869
Working capital          $      (5,842)    $            (705)
Current ratio                    0.84:1                0.98:1



Working capital decreased $5,137 million from the year-end 2020 position. The key changes are described below:

Current assets decreased $8,390 million ($7,987 million adjusted for currency) due to:

? A decrease of $6,110 million ($6,016 million adjusted for currency) in cash,

restricted cash and marketable securities; and

A decrease in financing receivables of $2,698 million ($2,557 million adjusted

? for currency) primarily due to collections of higher year-end balances and

sales of financing receivables; partially offset by

An increase in prepaid expenses and other current assets of $562 million ($590

? million adjusted for currency) primarily driven by an increase in derivative

assets.

Current liabilities decreased $3,253 million ($2,618 million adjusted for currency) as a result of:

A decrease in other accrued expenses and liabilities of $1,598 million ($1,346

? million adjusted for currency) primarily due to payments of $1,059 million for

workforce rebalancing actions;

A decrease in taxes payable of $1,042 million ($967 million adjusted for

? currency) primarily driven by tax payments and decline in reserves as a result

of resolution of certain tax audit matters;

A decrease in short-term debt of $741 million due to maturities of $4,622

? million, including a $500 million early redemption of IBM Credit debt;

partially offset by reclassifications of $3,932 million from long-term debt to

reflect upcoming maturities; and

A decrease in accounts payable of $694 million ($642 million adjusted for

? currency) reflecting declines from seasonally higher year-end balances;

partially offset by

An increase in deferred income of $439 million ($614 million adjusted for

? currency) driven by annual customer billings and an increase in software

   renewal rates.


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Management Discussion - (continued)

Receivables and Allowances

Roll Forward of Total IBM Receivables Allowance for Credit Losses



(Dollars in millions)
January 1, 2021             Additions / (Releases) *      Write-offs **    
 Other +      June 30, 2021
$                   644    $                     (67)    $          (28)    $       1    $           550

* 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.

+ Primarily represents translation adjustments


The total IBM receivables provision coverage was 2.5 percent at June 30, 2021,
an increase of 10 basis points compared to December 31, 2020. The increase in
coverage was primarily driven by the overall decrease in total receivables,
partially offset by a decrease in customer specific provisions. In the prior
year, the global pandemic resulted in some deterioration in customer credit
quality and/or bankruptcies which had an impact to provisions in the first half
of 2020. We have started to see improvement in credit quality and some emergence
from bankruptcies in the current year as the economy begins to reopen in many
parts of the world. The majority of the write-offs during the six months ended
June 30, 2021 related to receivables which had been previously reserved.

Global Financing Receivables and Allowances

The following table presents external Global Financing receivables excluding immaterial miscellaneous receivables.


                                            At June 30,       At December 31,
(Dollars in millions)                           2021                2020
Amortized cost *                           $       14,111    $           18,264
Specific allowance for credit losses                  173                  

184

Unallocated allowance for credit losses                54                  

79

Total allowance for credit losses                     228                  

263

Net financing receivables                  $       13,883    $           

18,001

Allowance for credit losses coverage                  1.6 %                

1.4 %

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

The percentage of Global Financing receivables reserved increased from 1.4 percent at December 31, 2020, to 1.6 percent at June 30, 2021, primarily driven by the decline in amortized cost.

Roll Forward of Global Financing Receivables Allowance for Credit Losses



(Dollars in millions)
January 1, 2021             Additions / (Releases)*      Write-offs **     
Other +      June 30, 2021
$                   263    $                    (23)    $          (12)    $       0    $           228

* 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.

+ 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 a net
release of $12 million and $29 million for the three and six months ended June
30, 2021, respectively, compared to an addition of $28 million and $39 million
for the three and six months ended June 30,

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Management Discussion - (continued)

2020, respectively. The decreases in both periods in 2021 were primarily driven by lower specific and unallocated reserves in Americas.

Noncurrent Assets and Liabilities


                                            At June 30,      At December 31,
(Dollars in millions)                           2021               2020
Noncurrent assets                          $      116,039    $         116,806
Long-term debt                             $       48,735    $          54,355

Noncurrent liabilities (excluding debt) $ 39,396 $ 41,020

Noncurrent assets decreased $767 million (increased $80 million adjusted for currency) due to:

A decrease in long-term financing receivables of $1,412 million ($1,298 million

? adjusted for currency) as a result of reductions from seasonally higher

year-end balances and sales of receivables;

? A decrease in net property, plant and equipment of $617 million ($505 million

adjusted for currency); and

A decrease of $857 million ($628 million adjusted for currency) in total

? operating right-of-use assets, deferred taxes and investments and sundry

assets; partially offset by

An increase in goodwill and net intangible assets of $1,772 million ($2,122

? million adjusted for currency) due to additions from new acquisitions,

partially offset by intangibles amortization; and

? An increase in prepaid pension assets of $436 million ($448 million adjusted

for currency).

Long-term debt decreased $5,620 million ($5,089 million adjusted for currency) due to:

? Reclassifications to short-term debt of $3,932 million to reflect upcoming

maturities; and

? Early redemption of IBM Credit debt of $1,250 million.

Noncurrent liabilities (excluding debt) decreased $1,624 million ($958 million adjusted for currency) due to:

? A decrease in retirement and nonpension postretirement benefit obligations of

$983 million ($596 million adjusted for currency); and

? A decrease in long-term operating lease liabilities of $296 million ($230

   million adjusted for currency) related primarily to real estate leases.


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Management Discussion - (continued)

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 June 30,       At December 31,
(Dollars in millions)                       2021                2020
Total company debt                     $       55,176    $           61,538
Total Global Financing segment debt    $       17,470    $           21,167
Debt to support external clients               14,234                17,819
Debt to support internal clients                3,236                 3,348
Non-Global Financing debt              $       37,706    $           40,371




Total debt of $55,176 million decreased $6,362 million ($5,831 million adjusted
for currency) from December 31, 2020, driven by debt maturities and early
retirements of $5,954 million. Total debt has decreased $17,863 million since
the end of the second quarter 2019 (immediately preceding the Red Hat
acquisition).

Non-Global Financing debt of $37,706 million decreased $2,665 million ($2,330 million adjusted for currency) from December 31, 2020 due to scheduled debt maturities in the first six months of 2021.


Global Financing debt of $17,470 million decreased $3,696 million ($3,500
million adjusted for currency) from December 31, 2020, primarily due to lower
funding 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 the company'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 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 Kyndryl
as Global Financing refocuses its portfolio to support IBM's hybrid cloud
platform and AI capabilities.

The debt used to fund Global Financing assets is primarily composed of
intercompany loans. Total debt changes generally correspond with the level of
client and commercial financing receivables, the level of cash and cash
equivalents, the change in intercompany and external payables and the change in
intercompany investment from IBM. The terms of the intercompany loans are set by
the company to substantially match the term, currency and interest rate
variability underlying the financing receivable and are based on arm's-length
pricing. The Global Financing debt-to-equity ratio remained at 9.0 to 1 at
June 30, 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" on
page 85 and in note 4, "Segments." In the Consolidated Income Statement, the
external debt-related interest expense supporting Global Financing's internal
financing to the company is reclassified from cost of financing to interest
expense.

Equity

Total equity increased $1,341 million from December 31, 2020, primarily due to
an increase from net income of $2,280 million, an increase in accumulated other
comprehensive income of $1,685 million mainly due to retirement-related benefit
plans of $991 million and an increase in foreign currency translation gains of
$393 million, partially offset by dividends paid of $2,924 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 six months ended June 30:                                 2021     

2020

Net cash provided by/(used in) continuing operations:
Operating activities                                            $   7,539$   8,052
Investing activities                                              (4,671)      (2,138)
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

Net cash provided by operating activities decreased $513 million as compared to the first six months of 2020 driven primarily by:

A decrease in payroll tax and value-added tax deferrals of approximately $660

? million primarily driven by prior-year tax relief under the U.S. CARES Act and

   other non-U.S. government assistance programs related to COVID-19; and

? An increase in workforce rebalancing payments of $623 million; partially offset

by

? Performance-related improvements within net income;

A net decrease in cash payments for income taxes of $240 million primarily due

? to a withholding tax payment on intercompany dividends in the second quarter of

2020; and

? A decrease in interest payments on debt of approximately $230 million.

Net cash used in investing activities increased $2,533 million as compared to the first six months of 2020 driven by:

An increase in cash used for acquisitions of $2,847 million to enhance our

? hybrid cloud and AI software capabilities and to add skills in strategic GBS

ecosystem partners; and

? A decrease in cash provided by divestitures of $782 million; partially offset

by

? A decrease in cash used for net purchases of marketable securities and other

investments of $959 million; and

? A decrease in cash used for net capital expenditures of $216 million.

Net cash used in financing activities increased $7,175 million driven primarily by:

A decrease in net cash provided by debt transactions of $7,118 million

? primarily driven by a higher level of net additions in the prior year;

partially offset by a lower level of maturities in the current year consistent

   with our overall debt pay down strategy.


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Management Discussion - (continued)

Looking Forward

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 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


Across every industry, enterprises are using technology to redesign business
processes, whether through automation in manufacturing, telemedicine in
healthcare or omnichannel in retail. These digital transformations are enabled
by a hybrid cloud environment. The technology and services we provide to our
clients enable their business growth and productivity increases and improve
customer experiences. This is why our strategy is focused on hybrid cloud and
AI. Hybrid cloud is the reality for our clients today. They have multiple public
clouds, private clouds, on-premise workloads and are dealing with stringent
regulatory and security requirements. Our hybrid cloud platform gives clients
the ability to flexibly deploy and manage data and applications across any
environment. With hybrid cloud, clients can derive 2.5 times more value in
comparison to other approaches. This is what we have built our platform for and
why we have such confidence in our strategy.

To execute our strategy, we continue to take decisive steps and make the
necessary investments to strengthen our portfolio, both organic and inorganic,
in skills, ecosystem and innovation. During the second quarter of 2021, we
continued to make progress in the execution of our strategy. We announced a
series of products to further differentiate our hybrid cloud and AI
capabilities. To complement these organic investments, we completed several
acquisitions, adding hybrid cloud and AI software capabilities and skills in
strategic GBS ecosystem partners. We are adding delivery capabilities in GBS,
technical skills in Red Hat and go-to-market capabilities across the company. We
are building a more client-centric culture through our ecosystem of partners and
our garage model which provides clients with a more technical and experiential
approach, and we are increasing research and development in quantum, hybrid
cloud and AI to drive innovation.

We have also taken actions to streamline and simplify our operating model and
the fundamentals of our business model remain solid. We executed the structural
actions initiated in the fourth quarter of 2020 to improve the profit profile of
Kyndryl and to create financial flexibility to reinvest in our business. Our
balance sheet and liquidity position remain strong. At June 30, 2021, we had
$8.2 billion of cash and cash equivalents, restricted cash and marketable
securities. We have made good progress in deleveraging, while being acquisitive
and without sacrificing investments in our business or our solid dividend
policy. We have reduced our debt by $17.9 billion from our peak level at June
30, 2019 (immediately preceding the Red Hat acquisition).

Looking forward, there is tremendous opportunity for us to help our clients
become digital businesses. At the same time, the overall spending environment
has continued to improve, and with the economy opening up in many parts of the
world, many markets and industries are getting back on track. We continue to
take prudent actions to improve our operating model and accelerate our strategy.
We are managing for the long-term and are confident in the direction and focus
of our business. We expect to continue our progress as a leading hybrid cloud
and AI company with a focus on revenue growth and cash generation while
maintaining our solid and modestly growing dividend policy.

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Management Discussion - (continued)

Our pension plans are well 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 $0.2 billion generally
relates to legally required contributions to non-U.S. defined benefit and
multi-employer plans. We expect 2021 pre-tax retirement-related plan cost to be
approximately $2.9 billion, an increase of approximately $300 million compared
to 2020. This estimate reflects current pension plan assumptions at December 31,
2020. Within total retirement-related plan cost, operating retirement-related
plan cost is expected to be approximately $1.5 billion, approximately flat
versus 2020. Non-operating retirement-related plan cost is expected to be
approximately $1.4 billion, an increase of approximately $300 million compared
to 2020, primarily driven by lower income from expected return on assets.

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 June 30, 2021, currency
changes resulted in assets and liabilities denominated in local currencies being
translated into fewer dollars than at year-end 2020. We use financial hedging
instruments to limit specific currency risks related to financing transactions
and other foreign currency-based transactions.

During periods of sustained movements in currency, the marketplace and
competition adjust to the changing rates. For example, when pricing offerings in
the marketplace, we may use some of the advantage from a weakening U.S. dollar
to improve our position competitively, and price more aggressively to win the
business, essentially passing on a portion of the currency advantage to our
customers. Competition will frequently take the same action. Consequently, we
believe that some of the currency-based changes in cost impact the prices
charged to clients. We also maintain currency hedging programs for cash
management purposes which 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 six months
of 2021. Based on the currency rate movements in the first six months of 2021,
total revenue increased 2.2 percent as reported but decreased 1.5 percent at
constant currency versus the first six months of 2020. On an income from
continuing operations before 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 $170
million in the first six months of 2021 on an as-reported basis and an increase
of approximately $210 million on an operating (non-GAAP) basis. The same
mathematical exercise resulted in an increase of approximately $160 million in
the first six months of 2020 on an as-reported basis and an increase of
approximately $150 million on an operating (non-GAAP) basis. We view these
amounts as a theoretical maximum impact to our as-reported financial results.
Considering the operational responses mentioned above, movements of exchange
rates, and the nature and timing of hedging instruments, it is difficult to
predict future currency impacts on any particular period, but we believe it
could be substantially less than the theoretical maximum given the competitive
pressure in the marketplace.

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

Liquidity and Capital Resources

In our 2020 Annual Report, on pages 56 to 58, there is a discussion of our
liquidity including two tables that present three years of data. The table
presented on page 56 includes net cash from operating activities, cash and cash
equivalents, restricted cash and short-term marketable securities, and the size
of our global credit facilities for each of the past three years. For the six
months ended, or at, as applicable, June 30, 2021, those amounts are $7.5
billion of net cash from operating activities, $8.2 billion of cash and cash
equivalents, restricted cash and short-term marketable

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Management Discussion - (continued)


securities and $10.0 billion in global credit facilities, respectively. While we
have no current plans to draw on these credit facilities, they are available as
back-up liquidity. On June 22, 2021, the company entered into a new $2.5 billion
Three-Year Credit Agreement and $7.5 billion Five-Year Credit Agreement to
replace the existing $2.5 billion Three-Year and $10.25 billion Five-Year Credit
Agreements and terminated its $2.5 billion 364-Day Credit Agreement. Refer to
note 11, "Borrowings" for additional details on these credit agreements.

On July 9, 2019, we closed the acquisition of Red Hat for cash consideration of
$34.8 billion. The transaction was funded through a combination of cash on hand
and proceeds from debt issuances. In order to reduce this debt and return to
target leverage ratios within a couple of years, we suspended our share
repurchase program at the time of the Red Hat acquisition closing.

The major rating agencies' ratings on our debt securities at June 30, 2021
appear in the following table. In May 2021, Standard and Poor's downgraded our
long-term debt rating from A to A- and our commercial paper rating from A-1
to
A-2.


                         STANDARD     MOODY'S
                           AND       INVESTORS
IBM RATINGS:              POOR'S      SERVICE
Senior long-term debt          A-           A2
Commercial paper              A-2      Prime-1




IBM has ample financial flexibility, supported by our strong liquidity position
and cash flows, to operate at a single A credit rating. Debt levels have
decreased $6.4 billion from December 31, 2020 and $17.9 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 June 30, 2021, the fair value of those
instruments that were in a liability position was $142 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'sFinancial 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 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. We have evaluated the replacement
of the LIBOR benchmark interest rate, including risk management and internal
operational readiness and we are monitoring the FASB standard-setting process 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 page 80. For the purpose of running its business, IBM manages,
monitors and analyzes cash flows in a different manner.

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Management Discussion - (continued)


Management uses free cash flow as a measure to evaluate its operating results,
plan shareholder return levels, strategic investments and assess its ability and
need to incur and service debt. The entire free cash flow amount is not
necessarily available for discretionary expenditures. We define free cash flow
as net cash from operating activities less the change in 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 our Global Financing receivables are 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.

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

Net cash from operating activities and free cash flow in 2021 include significant cash impacts from the workforce rebalancing actions we initiated in the fourth quarter of 2020 and Kyndryl separation-related charges.



(Dollars in millions)
For the six months ended June 30:                                 2021     

2020

Net cash from operating activities per GAAP                     $   7,539$   8,052
Less: change in Global Financing receivables                        3,763  

2,971

Net cash from operating activities, excluding Global
Financing receivables                                           $   3,776$   5,081
Capital expenditures, net                                         (1,217)      (1,434)
Free cash flow                                                  $   2,559$   3,647
Acquisitions                                                      (2,866)         (19)
Divestitures                                                         (25)          757
Common stock repurchases for tax withholdings                       (234)  
     (211)
Dividends                                                         (2,924)      (2,890)
Non-Global Financing debt                                         (2,331)        3,958
Other (includes Global Financing net receivables and Global
Financing debt)                                                     (288)  

(1)

Change in cash, cash equivalents, restricted cash and short-term marketable securities

                                $ (6,110)$   5,241




In the first six months of 2021, we generated free cash flow of $2.6 billion, a
decrease of $1.1 billion versus the prior year. The current-year period includes
cash impacts from structural actions we initiated in the fourth quarter of 2020
and separation-related charges in the amount of $1.2 billion. In the first six
months of 2021, we also continued to return value to shareholders with $2.9
billion in dividends.

Events that could temporarily change the historical cash flow dynamics discussed
previously and in our 2020 Annual Report include significant changes in
operating results, material changes in geographic sources of cash, unexpected
adverse impacts from litigation, future pension funding requirements, periods of
severe downturn in the capital markets or the timing of tax payments. Whether
any litigation has such an adverse impact will depend on a number of variables,
which are more completely described in note 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 $200 million in 2021. Contributions related to all
retirement-related plans are expected to be approximately $2.3 billion in 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 changes in pension plan funding regulations.

In 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 acquisitions, dividends and
debt service. When additional requirements arise, we have several liquidity

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Management Discussion - (continued)


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

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 June 30:    2021     2020       Change
External revenue                       $ 242$ 265         (8.6) %
Internal revenue                         260      241           7.9
Total revenue                          $ 502$ 506         (0.7) %
Pre-tax income                         $ 246$ 176          39.3 %





                                                         Yr. to Yr.
                                                          Percent/
(Dollars in millions)                                      Margin
For the six months ended June 30:    2021      2020        Change
External revenue                     $ 482$   564        (14.7) %
Internal revenue                       428        453         (5.4)
Total revenue                        $ 910$ 1,017        (10.5) %
Pre-tax income                       $ 412$   370          11.3 %


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 began entering into agreements to sell certain financing receivables to third
parties. While these strategic actions continue to impact 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 0.7 percent in the second quarter of
2021 compared to the prior year. External revenue decreased 8.6 percent (12
percent adjusted for currency), driven by external financing (down 23.1 percent
to $160 million), partially offset by external used equipment sales (up 43.8
percent to $82 million). Internal revenue was up 7.9 percent due to increases in
internal used equipment sales (up 23.5 percent to $230 million), partially
offset by declines in internal financing (down 45.7 percent to $29 million).

Global Financing total revenue decreased 10.5 percent in the first six months of
2021 compared to the same period in 2020. External revenue decreased 14.7
percent (17 percent adjusted for currency), driven by a decline in external
financing (down 22.2 percent to $344 million), partially offset by an increase
in external used equipment sales (up 12.8 percent to $137 million). Internal
revenue decreased 5.4 percent, driven by a decline in internal financing (down
51.6 percent to $66 million), partially offset by an increase in internal used
equipment sales (up 14.6 percent to $362 million).

For both the three and six months ended June 30, 2021, the decreases in external
financing were due to a lower average asset balance, partially driven by the
strategic actions, and the decreases in internal financing were due to lower
yields and a lower average asset balance. Internal used equipment sales were up
due to increased sales to GTS.

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Management Discussion - (continued)


Global Financing pre-tax income increased 39.3 percent to $246 million in the
second quarter of 2021 and 11.3 percent to $412 million in the first six months
of 2021, compared to the same periods in 2020. The increase in the second
quarter was primarily driven by improvements in provisions for credit losses and
an increase in gross profit reflecting higher sales of internal used equipment.
The increase in pre-tax income for the first six months of 2021 was primarily
driven by improvements in provisions for credit losses, partially offset by a
decrease in gross profit due to lower revenue as a result of the declining
asset
base.

Return on Equity Calculation



                                               For Three Months Ended         For Six Months Ended
                                                     June 30,                       June 30,
(Dollars in millions)                          2021             2020           2021           2020
Numerator

Global Financing after-tax income* $ 179$ 147$ 302$ 339 Annualized after-tax income (1)

             $       714$       588$       603$     677
Denominator
Average Global Financing equity (2)**       $     1,986$     2,453$     2,108$   2,551
Global Financing return on equity (1)/(2)          36.0 %           24.0 % 

28.6 % 26.5 %

* 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
and three quarters, for the three months ended June 30 and for the six months
ended June 30, respectively.

Global Financing return on equity was 36.0 percent for the three months ended
June 30, 2021, compared to 24.0 percent for the three months ended June 30,
2020. The increase was driven by a lower average equity balance and an increase
in net income. Return on equity was 28.6 percent for the six months ended June
30, 2021, compared to 26.5 percent for the six months ended June 30, 2020. The
increase was driven by a lower average equity balance, partially offset by a
decrease in net income, which included a discrete tax benefit of $40 million in
the first quarter of 2020.

                                       86

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Management Discussion - (continued)

Financial Position


                                                                 At June 30,       At December 31,
(Dollars in millions)                                                2021                2020
Cash and cash equivalents                                       $        1,403    $            1,862
Client financing receivables:
Net investment in sales-type and direct financing leases (1)             3,647                 4,092
Client loans                                                             9,225                11,498
Total client financing receivables                                      12,871                15,590
Commercial financing receivables                                         1,012                 2,411
Other receivables                                                           52                    91
Total external receivables (2)                                          13,936                18,092
Intercompany financing receivables (3) (4)                               3,869                 3,959
Other assets                                                             1,729                 1,162
Total assets                                                    $       20,937    $           25,075
Intercompany payables (3)                                       $         
387    $              303
Debt (5)                                                                17,470                21,167
Other liabilities                                                        1,139                 1,254
Total liabilities                                                       18,996                22,723
Total equity                                                             1,941                 2,352
Total liabilities and equity                                    $       20,937    $           25,075


(1) Includes deferred initial direct costs which are expensed in IBM's

    consolidated financial results.


    The difference between the year-to-date decrease in total external

receivables of $4.2 billion (from $18.1 billion in 2020 to $13.9 billion in (2) 2021) and the $3.8 billion change in Global Financing receivables disclosed

in the free cash flow presentation on page 84 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 primarily composed of intercompany loans.

At June 30, 2021, approximately 64 percent of the total external portfolio was
with investment-grade clients with no direct exposure to consumers, an increase
of 7 points year to year and relatively flat compared to March 31, 2021. 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 our cash and liquidity
management.

For the six months ended June 30, 2021, we sold $2,091 million of client
financing receivables to third parties, consisting of loan and lease receivables
of $1,359 million and $732 million, respectively. More than half of the
receivables sold were classified as current assets at the time of sale. For the
six months ended June 30, 2020, we sold $711 million of client financing
receivables to third parties, consisting of loan and lease receivables of $294
million and $417 million, respectively.

In addition, we sold $2,621 million of commercial financing receivables for the
six months ended June 30, 2021, to a third-party investor. we also classified
$467 million and $383 million of IBM commercial financing receivables as held
for sale at June 30, 2021 and December 31, 2020, respectively, in short-term
financing receivables in the Consolidated

                                       87

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Management Discussion - (continued)

Balance Sheet. Payment terms for commercial financing receivables generally range from 30 to 90 days and sales are made to the investor on a revolving basis. We did not have any sales of commercial financing receivables for the six months ended June 30, 2020.


The transfers of these receivables qualified as true sales and therefore reduced
financing receivables. The cash proceeds from the sales are included in cash
flows from operating activities, with no impact to free cash flow, and the
impacts to the Consolidated Income Statement, including fees and net gain or
loss associated with the transfers of these receivables for the six months ended
June 30, 2021 and June 30, 2020, were not material. For additional information
relating to the sales of financing receivables refer to note 8, "Financing
Receivables."

Refer to pages 77 through 79 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 June
30, 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 June 30,
2021 and December 31, 2020, is expected to be returned to the company.

Unguaranteed Residual Value


                                               At              At                 Estimated Run Out of June 30, 2021 Balance
                                          December 31,      June 30,                                                        2024 and
(Dollars in millions)                         2020            2021          2021             2022              2023          Beyond

Sales-type and direct financing leases $ 469 $ 387 $

      50       $       113$       133$       92
Operating leases                                     48             30           23                 4                 1             2

Total unguaranteed residual value $ 516 $ 417 $

     72       $       117$       133$       95






                                       88

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Management Discussion - (continued)

GAAP Reconciliation


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


                                                              Acquisition-         Retirement-            U.S.            Separation-
(Dollars in millions except per share amounts)                   Related             Related           Tax Reform           Related           Operating
For the three months ended June 30, 2021:           GAAP       Adjustments         Adjustments          Impacts             Charges          (non-GAAP)
Gross profit                                      $  9,004    $         180       $           -       $          -       $          58      $       9,242
Gross profit margin                                   48.0 %            1.0 pts.              - pts.             - pts.            0.3 pts.          49.3 %
S,G&A                                             $  5,334$       (298)       $           -       $          -       $       (116)$       4,919
R,D&E                                                1,657                -                   -                  -                   0              1,656
Other (income) and expense                             315              (1)               (328)                  -                   -               (14)
Total expense and other (income)                     7,451            (299)               (328)                  -               (117)              

6,708

Pre-tax income from continuing operations            1,552              479                 328                  -                 175              

2,534

Pre-tax margin from continuing operations              8.3 %            2.6
pts.            1.7 pts.             - pts.            0.9 pts.          13.5 %
Provision for income taxes*                       $    227    $         107       $          67       $       (14)       $          44      $         431
Effective tax rate                                    14.7 %            1.4 pts.            0.7 pts.         (0.5) pts.            0.7 pts.          17.0 %
Income from continuing operations                 $  1,325    $         373

$ 261 $ 14 $ 131 $ 2,103 Income margin from continuing operations

               7.1 %            2.0 pts.            1.4 pts.           0.1 pts.            0.7 pts.          11.2 %
Diluted earnings per share from continuing
operations                                        $   1.47$        0.41$        0.29$       0.01$        0.15$        2.33





                                                              Acquisition-         Retirement-             U.S.               Separation-
(Dollars in millions except per share amounts)                   Related             Related            Tax Reform              Related            

Operating

For the three months ended June 30, 2020:           GAAP       Adjustments 
       Adjustments            Impacts               Charges           (non-GAAP)
Gross profit                                      $  8,700    $         187       $           -       $             -       $             -      $       8,887
Gross profit margin                                   48.0 %            1.0 pts.              - pts.                - pts.                - pts.          49.0 %
S,G&A                                             $  5,248$       (285)       $           -       $             -       $             -      $       4,962
R,D&E                                                1,582                -                   -                     -                     -              1,582
Other (income) and expense                             179              (1)               (273)                     -                     -               (95)
Total expense and other (income)                     7,129            (286)               (273)                     -                     -             

6,570

Pre-tax income from continuing operations            1,571              473                 273                     -                     -             

2,318

Pre-tax margin from continuing operations              8.7 %            2.6
pts.            1.5 pts.                - pts.                - pts.          12.8 %
Provision for income taxes*                       $    209    $         108       $          52       $             -       $             -      $         369
Effective tax rate                                    13.3 %            1.9 pts.            0.7 pts.                - pts.                - pts.          15.9 %
Income from continuing operations                 $  1,362    $         365       $         222       $             -       $             -      $      

1,949

Income margin from continuing operations               7.5 %            2.0 pts.            1.2 pts.                - pts.                - pts.          10.8 %
Diluted earnings per share from continuing
operations                                        $   1.52$        0.41$        0.25       $             -       $             -      $        2.18


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



                                       89

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Management Discussion - (continued)



                                                               Acquisition-         Retirement-            U.S.            Separation-
(Dollars in millions except per share amounts)                    Related             Related           Tax Reform           Related            

Operating

For the six months ended June 30, 2021:             GAAP        Adjustments
        Adjustments          Impacts             Charges           (non-GAAP)
Gross profit                                      $  17,208    $         355       $           -       $          -       $          61       $      17,624
Gross profit margin                                    47.2 %            1.0 pts.              - pts.             - pts.            0.2 pts.           48.3 %
S,G&A                                             $  10,508$       (591)       $           -       $          -       $       (175)$       9,742
R,D&E                                                 3,286                -                   -                  -                   0               3,286
Other (income) and expense                              676              (1)               (670)                  -                   -                   5
Total expense and other (income)                     14,751            (593)               (670)                  -               (175)           

13,313

Pre-tax income from continuing operations             2,457              948                 670                  -                 236             

4,312

Pre-tax margin from continuing operations               6.7 %            2.6 pts.            1.8 pts.             - pts.            0.6 pts.           11.8 %
Provision for income taxes*                       $     177    $         240       $         128       $          6       $          59       $         610
Effective tax rate                                      7.2 %            4.0 pts.            1.9 pts.           0.1 pts.            1.0 pts.           14.1 %
Income from continuing operations                 $   2,281    $         

707 $ 542 $ (6) $ 177 $

3,702

Income margin from continuing operations                6.3 %            1.9 pts.            1.5 pts.           0.0 pts.            0.5 pts.           10.1 %
Diluted earnings per share from continuing
operations                                        $    2.52$        0.79$        0.60$     (0.01)$        0.20$        4.10





                                                               Acquisition-         Retirement-            U.S.             Separation-
(Dollars in millions except per share amounts)                    Related             Related           Tax Reform            Related              

Operating

For the six months ended June 30, 2020:             GAAP        Adjustments
        Adjustments          Impacts              Charges             (non-GAAP)
Gross profit                                      $  16,622    $         375       $           -       $          -       $              -       $      16,998
Gross profit margin                                    46.6 %            1.1 pts.              - pts.             - pts.                 - pts.           47.6 %
S,G&A                                             $  11,203$       (570)       $           -       $          -       $              -       $      10,633
R,D&E                                                 3,207                -                   -                  -                      -               3,207
Other (income) and expense                              361              (1)               (538)                  -                      -               (178)
Total expense and other (income)                     15,101            (571)               (538)                  -                      -        

13,992

Pre-tax income from continuing operations             1,522              946                 538                  -                      -          

3,006

Pre-tax margin from continuing operations               4.3 %            2.7 pts.            1.5 pts.             - pts.                 - pts.            8.4 %
Provision for (benefit from) income taxes*        $ (1,017)    $         210       $          65       $        149       $              -       $       (592)
Effective tax rate                                   (66.8) %           28.0 pts.           14.1 pts.           5.0 pts.                 - pts.         (19.7) %
Income from continuing operations                 $   2,538    $         736       $         472       $      (149)       $              -       $  

3,598

Income margin from continuing operations                7.1 %            2.1 pts.            1.3 pts.         (0.4) pts.                 - pts.           10.1 %
Diluted earnings per share from continuing
operations                                        $    2.83$        0.83$        0.53$     (0.17)       $              -       $        4.02


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



                                       90

  Table of Contents

Management Discussion - (continued)

Forward-Looking and Cautionary Statements


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

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Financials (USD)
Sales 2021 75 218 M - -
Net income 2021 6 926 M - -
Net Debt 2021 46 531 M - -
P/E ratio 2021 17,8x
Yield 2021 4,82%
Capitalization 123 B 123 B -
EV / Sales 2021 2,26x
EV / Sales 2022 2,19x
Nbr of Employees 345 900
Free-Float 39,8%
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Mean consensus OUTPERFORM
Number of Analysts 16
Last Close Price 137,49 $
Average target price 149,14 $
Spread / Average Target 8,48%
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Managers and Directors
Arvind Krishna Chairman & Chief Executive Officer
James J. Kavanaugh Chief Financial Officer & Senior VP-Operations
Juan Antonio Zufiria Senior VP-Global Technology Services
Kathryn W. Guarini Chief Information Officer
Michael L. Eskew Lead Independent Director
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