IBM 2021 Q2 Form 10-Q Summary
Business context and reporting period
International Business Machines Corporation (IBM) reported unaudited results for the quarter and six months ended June 30, 2021, compared with the corresponding 2020 periods. IBM is focusing on hybrid cloud and AI. Its reportable businesses include Cloud & Cognitive Software, Global Business Services, Global Technology Services, Systems and Global Financing.
Financial results and liquidity
- Second-quarter revenue: $18.745 billion, up 3.4% reported year over year; flat excluding divested businesses and adjusting for currency. Gross profit was $9.004 billion and gross margin was 48.0%, unchanged. Income from continuing operations was $1.325 billion, down 2.7%; diluted continuing-operations EPS was $1.47, down 3.3%. IBM’s non-GAAP operating earnings were $2.103 billion and diluted operating EPS was $2.33, up 7.9% and 6.9%, respectively.
- Six-month results: Revenue was $36.474 billion, up 2.2% reported but down 1.4% excluding divested businesses and adjusting for currency. Gross margin was 47.2%, up 0.6 percentage points. Continuing-operations income was $2.281 billion, down 10.2%, and diluted EPS was $2.52, down 11.0%. Non-GAAP operating earnings were $3.702 billion, up 2.9%, and operating diluted EPS was $4.10, up 2.0%.
- Cash flow: For the first six months, operating cash flow was $7.539 billion versus $8.052 billion a year earlier. Management-defined free cash flow was $2.559 billion versus $3.647 billion, and included approximately $1.2 billion of cash impacts from workforce actions and Kyndryl separation charges. In Q2 alone, operating cash flow was $2.6 billion and free cash flow was $1.0 billion.
- Debt and liquidity: Total debt was $55.176 billion at June 30, down $6.362 billion from year-end 2020. Cash, restricted cash and marketable securities totaled $8.165 billion, down $6.110 billion, primarily due to debt reduction and acquisitions. IBM reported a $5.842 billion working-capital deficit and a 0.84:1 current ratio. It had $10 billion in committed credit facilities and no borrowings under them at quarter-end.
- Shareholder returns: IBM paid $2.924 billion in dividends during the first half. The board approved a $1.64-per-share quarterly dividend payable September 10, 2021. The share repurchase program remained suspended.
Material changes versus the prior comparable period
- Q2 growth was led by Cloud & Cognitive Software (revenue up 6.1% reported) and Global Business Services (up 11.6%); Global Technology Services was up 0.4% reported but down 4.1% adjusted for currency, while Systems declined 7.3% reported. Total cloud revenue was $7.0 billion, up 13% reported.
- For the first half, reported pre-tax income rose 61.5%, but continuing-operations income and EPS fell. Comparability is affected by the prior-year $1.017 billion income-tax benefit, primarily from an intra-entity intellectual-property sale, and by higher 2020 workforce-rebalancing charges ($865 million versus $241 million in 2021).
- First-half investing cash use increased, including $2.866 billion for acquisitions. IBM completed seven acquisitions for aggregate consideration of $2.940 billion, including Turbonomic for $1.834 billion. First-half financing cash use was $8.914 billion, principally reflecting debt repayments and lower net debt issuance than in 2020.
Outlook, management commentary, risks and unusual items
- Management said spending conditions were improving as economies reopened and reiterated its focus on hybrid cloud and AI, revenue growth, cash generation and a “modestly growing” dividend. The filing provides no specific full-year revenue or EPS guidance.
- IBM remained on track to complete a tax-free spin-off of its managed infrastructure services business into Kyndryl by year-end 2021, subject to customary conditions and final board approval. IBM expects to report Kyndryl as discontinued operations after separation. Management noted that uncertainty about Kyndryl had lengthened some GTS new-client sales cycles.
- Management expected approximately $2.3 billion of 2021 retirement-plan contributions and approximately $2.9 billion of pre-tax retirement-related plan cost. It said pension plans were well funded and expected contributions were unchanged from prior expectations.
- Q2 included $175 million of pre-tax Kyndryl separation-related charges; management reported a $0.15-per-share impact. GAAP and non-GAAP results differ for acquisition-related costs, acquired-intangible amortization, retirement costs, tax items and separation charges; non-GAAP measures are company-defined.
- Legal and tax matters: IBM sued GlobalFoundries in June 2021, seeking more than $1.5 billion in damages. A UK court ruling required IBM to pay CISGIL approximately $20 million plus interest and costs; the matter was on appeal. Brazilian non-income-tax disputes have a stated potential amount of approximately $700 million, which IBM says is not a meaningful indicator of liability and expects to contest successfully. Separately, the IRS proposed adjustments that, if sustained, would add approximately $4.5 billion of taxable income for 2013–2014; IBM disputes the proposed adjustments. IBM said it could not estimate reasonably possible losses for many other proceedings.
- Standard & Poor’s downgraded IBM’s long-term debt rating from A to A- and commercial-paper rating from A-1 to A-2 in May 2021. Other disclosed risks include economic and client-spending weakness, execution and integration of acquisitions, completion and benefits of the Kyndryl separation, cybersecurity and privacy, customer credit, pensions, foreign exchange, taxes and litigation.
Important facts for investors to verify
- Track organic, constant-currency revenue and segment trends, particularly software and consulting growth versus GTS and Systems declines.
- Assess cash conversion and free cash flow against acquisition spending, restructuring and separation cash costs, dividends and continued debt repayment.
- Monitor the Kyndryl separation timetable, transaction conditions, transition arrangements and potential effects on GTS renewals and new-client sales.
- Review debt maturities, liquidity, the working-capital deficit and implications of the credit-rating downgrade.
- Follow the IRS and Brazilian tax matters, the GlobalFoundries and CISGIL proceedings, and whether any outcomes could materially affect results or cash flows.