IBM 2021 Q3 Form 10-Q Summary
Business context and reporting period
International Business Machines Corporation (IBM) reported unaudited results for the quarter and nine months ended September 30, 2021, compared with the same 2020 periods. The reported results include IBM’s managed infrastructure services business, Kyndryl. IBM completed Kyndryl’s separation on November 3, 2021; it distributed 80.1% of Kyndryl to IBM shareholders and retained 19.9%, which it intended to sell within 12 months. Kyndryl’s results are to be reported as discontinued operations beginning in Q4 2021.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $17.6 billion | $17.6 billion | $54.1 billion | $53.3 billion |
| Gross margin | 46.4% | 48.0% | 46.9% | 47.0% |
| Income from continuing operations | $1.13 billion | $1.70 billion | $3.41 billion | $4.24 billion |
| Diluted continuing-operations EPS | $1.25 | $1.89 | $3.77 | $4.72 |
| Operating cash flow | $2.7 billion | Not stated in the provided text | $10.25 billion | $12.34 billion |
| Free cash flow (non-GAAP) | $0.6 billion | Not stated in the provided text | $3.16 billion | $4.75 billion |
- Q3 operating (non-GAAP) earnings were $2.29 billion and diluted operating EPS was $2.52, down 1.2% and 2.3%, respectively. Nine-month operating earnings were $5.99 billion and diluted operating EPS was $6.62, up 1.3% and 0.3%.
- At September 30, cash, restricted cash and marketable securities totaled $8.4 billion. Total debt was $54.5 billion, down $7.0 billion from year-end 2020. Debt comprised $7.6 billion short-term and $46.9 billion long-term.
- Current assets were $30.0 billion and current liabilities $35.8 billion; working capital was negative $5.9 billion and the current ratio was 0.84:1. IBM reported $10.0 billion of unused revolving credit facilities and no borrowings under them.
- IBM paid $4.4 billion in dividends during the first nine months. No shares were repurchased under the public program in Q3.
- Remaining performance obligations were $108 billion at quarter-end; approximately 60% was expected to be recognized over the following two years. Services backlog was $99.8 billion, down 7.5% year over year.
Material changes versus the prior comparable period
- Q3 revenue was up 0.3% as reported, but essentially flat excluding divested businesses and adjusted for currency. Nine-month reported revenue rose 1.6%, while it declined 1% excluding divested businesses and adjusted for currency.
- Q3 continuing-operations income fell 33.5%, with diluted EPS down 33.9%. IBM attributed $0.5 billion of Q3 separation-related charges to Kyndryl, reducing diluted EPS by $0.56. For the nine months, separation-related charges were $0.7 billion and reduced diluted EPS by $0.76.
- Q3 gross margin fell 1.6 percentage points. Management cited investment in hybrid cloud and AI and product-cycle dynamics. Nine-month GAAP gross margin was nearly flat; operating gross margin improved 0.1 point.
- Growth was concentrated in software and Global Business Services: Q3 Cloud & Cognitive Software revenue rose 2.5% and Global Business Services rose 11.6%. Global Technology Services fell 4.8% and Systems fell 11.9%. Management said GTS clients paused new project activity before the Kyndryl separation; Systems was affected by product cycles.
- Nine-month operating cash flow fell $2.1 billion and free cash flow fell $1.6 billion. Management cited lower cash generated from receivables, higher workforce-rebalancing payments and reduced payroll-tax deferrals. Cash and equivalents, restricted cash and marketable securities declined $5.9 billion from year-end, primarily due to debt reduction and acquisitions.
- IBM completed ten acquisitions for aggregate consideration of $3.049 billion in the first nine months, including Turbonomic, to expand hybrid-cloud, AI and consulting capabilities.
Outlook, commentary, risks and unusual items
- Management emphasized its strategic focus on hybrid cloud and AI, continued investment in research, skills and ecosystem partnerships, and confidence in long-term revenue growth and cash generation. It did not provide a specific full-year revenue or EPS forecast in the supplied filing text.
- IBM expected 2021 retirement-related contributions of approximately $2.3 billion and pre-tax retirement-plan cost of approximately $2.9 billion. It said expected plan contributions were not significantly changed from prior disclosures.
- IBM reorganized into four reportable segments—Software, Consulting, Infrastructure and Financing—effective with the Kyndryl separation; the new segment reporting begins in Q4 2021.
- Goodwill was $61.4 billion. Preliminary impairment analysis found the Infrastructure Services reporting unit, which included Kyndryl, had fair value approximating its carrying amount and goodwill of $5.8 billion. IBM cautioned that the final analysis could differ significantly.
- Risks include macroeconomic and client-spending uncertainty, execution of the Kyndryl separation and acquisitions, competition and innovation, cybersecurity and privacy, currency and credit risks, pensions, tax matters, and legal proceedings. IBM said it could not estimate possible losses for many proceedings. It disclosed a lawsuit against GlobalFoundries seeking more than $1.5 billion, a pending appeal in a UK contract case involving approximately $20 million in damages, and Brazilian non-income-tax matters with approximately $400 million in potential amounts; IBM said it believes it will prevail in the Brazilian matters.
- The IRS proposed adjustments relating to 2013–2014 cross-border transactions that, if sustained, would result in approximately $4.5 billion of additional taxable income. IBM disputes the proposed adjustments and filed an appeal protest. The filing also reports $8.6 billion in unrecognized tax benefits.
- IBM cited COVID-19 and broader macroeconomic impacts as factors in estimates and business conditions. It reported that disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- How Q4 and future-period revenue, margins, cash flow and segment trends compare after Kyndryl is excluded from continuing operations.
- The separation’s effects on IBM’s retained Kyndryl stake, proceeds or disposition timing, costs, and ongoing commercial relationship.
- Whether cash generation and liquidity remain sufficient given negative working capital, debt maturities, dividends and continued acquisition spending.
- Whether growth in software and consulting offsets declines in legacy transaction processing, infrastructure services and hardware, and whether backlog converts to revenue as expected.
- The final goodwill impairment assessment for the Infrastructure Services reporting unit and developments in the disclosed tax and legal matters.