UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM ~~10 - Q~~10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTER ENDED ~~SEPTEMBER 30, 2017~~MARCH 31, 2023

1-2360

(Commission file number)

INTERNATIONAL BUSINESS MACHINES CORPORATION

(Exact name of registrant as specified in its charter)

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

~~Armonk,~~One New Orchard Road

Armonk, New York

10504

(Address of principal executive offices)

(Zip Code)

~~914-499-1900~~914-499-1900

(Registrant’s telephone number)

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

Title of each class	Trading symbol(s)	Name of each exchange on which registered
Capital stock, par value $.20 per share	IBM	New York Stock Exchange
		NYSE Chicago
1.250% Notes due 2023	IBM 23A	New York Stock Exchange
1.125% Notes due 2024	IBM 24A	New York Stock Exchange
2.875% Notes due 2025	IBM 25A	New York Stock Exchange
0.950% Notes due 2025	IBM 25B	New York Stock Exchange
0.875% Notes due 2025	IBM 25C	New York Stock Exchange
0.300% Notes due 2026	IBM 26B	New York Stock Exchange
1.250% Notes due 2027	IBM 27B	New York Stock Exchange
3.375% Notes due 2027	IBM 27F	New York Stock Exchange
0.300% Notes due 2028	IBM 28B	New York Stock Exchange
1.750% Notes due 2028	IBM 28A	New York Stock Exchange
1.500% Notes due 2029	IBM 29	New York Stock Exchange
0.875% Notes due 2030	IBM 30A	New York Stock Exchange
1.750% Notes due 2031	IBM 31	New York Stock Exchange
3.625% Notes due 2031	IBM 31B	New York Stock Exchange
0.650% Notes due 2032	IBM 32A	New York Stock Exchange
1.250% Notes due 2034	IBM 34	New York Stock Exchange
3.750% Notes due 2035	IBM 35	New York Stock Exchange
4.875% Notes due 2038	IBM 38	New York Stock Exchange
1.200% Notes due 2040	IBM 40	New York Stock Exchange
4.000% Notes due 2043	IBM 43	New York Stock Exchange
7.00% Debentures due 2025	IBM 25	New York Stock Exchange
6.22% Debentures due 2027	IBM 27	New York Stock Exchange
6.50% Debentures due 2028	IBM 28	New York Stock Exchange
5.875% Debentures due 2032	IBM 32D	New York Stock Exchange
7.00% Debentures due 2045	IBM 45	New York Stock Exchange
7.125% Debentures due 2096	IBM 96	New York Stock Exchange

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

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). Yes x☒ No o☐

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

Large accelerated filer x☒		Accelerated filer o☐
Non-accelerated filer ☐		Smaller reporting company ☐
~~Non-accelerated filer~~ o		~~Smaller reporting company~~ o
~~(Do not check if a smaller reporting company)~~
		Emerging growth company o☐

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

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

The registrant had ~~925,791,378~~908,045,414 shares of common stock outstanding at ~~September 30, 2017.~~March 31, 2023.

Table of Contents

Index

~~Index~~

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

Item 1. Consolidated Financial Statements (Unaudited):

Consolidated Income Statement ~~of Earnings~~ for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2023 and ~~2016~~2022	3

Consolidated Statement of Comprehensive Income for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2023 and ~~2016~~2022	4

Consolidated ~~Statement of Financial Position~~Balance Sheet at ~~September 30, 2017~~March 31, 2023 and December 31, ~~2016~~2022	5

Consolidated Statement of Cash Flows for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2023 and ~~2016~~2022	7

Consolidated Statement of ~~Changes in~~ Equity for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2023 and ~~2016~~2022	8

Notes to Consolidated Financial Statements	9

Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition	5041

Item 4. Controls and Procedures	8768

Part II - Other ~~Information:~~Information:

Item 1. Legal Proceedings	8769

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds and Issuer Repurchases of Equity Securities	8769

Item 6. Exhibits	8870

Table of Contents

Part I - Financial Information

Item 1. Consolidated Financial Statements:

INTERNATIONAL BUSINESS MACHINES CORPORATION

AND SUBSIDIARY COMPANIES

CONSOLIDATED INCOME STATEMENT

(UNAUDITED)


	Three Months Ended March 31,
(Dollars in millions except per share amounts)	2023		2022
Revenue:
Services	$	7,524	$	7,703
Sales		6,532		6,339
Financing		196		155
Total revenue		14,252		14,197
Cost:
Services		5,310		5,349
Sales		1,322		1,415
Financing		110		98
Total cost		6,743		6,862
Gross profit		7,509		7,335
Expense and other (income):
Selling, general and administrative		4,853		4,597
Research, development and engineering		1,655		1,679
Intellectual property and custom development income		(180)		(121)
Other (income) and expense		(245)		246
Interest expense		367		311
Total expense and other (income)		6,451		6,712
Income from continuing operations before income taxes		1,058		623
Provision for/(benefit from) income taxes		124		(39)
Income from continuing operations	$	934	$	662
Income/(loss) from discontinued operations, net of tax		(7)		71
Net income	$	927	$	733

Earnings/(loss) per share of common stock:
Assuming dilution:
Continuing operations	$	1.02	$	0.73
Discontinued operations		(0.01)		0.08
Total	$	1.01	$	0.81
Basic:
Continuing operations	$	1.03	$	0.74
Discontinued operations		(0.01)		0.08
Total	$	1.02	$	0.82

Weighted-average number of common shares outstanding: (millions)
Assuming dilution		917.8		909.2
Basic		907.5		899.3

(Amounts may not add due to rounding.)

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

Table of Contents

INTERNATIONAL BUSINESS MACHINES CORPORATION

AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF ~~EARNINGS~~COMPREHENSIVE INCOME

(UNAUDITED)

Three Months Ended September 30,

Nine Months Ended September 30,

(Dollars in millions except per share amounts)

2017

2016

2017

2016

Revenue:

Services

$
12,703

$
12,938

$
37,592

$
38,347

Sales

6,017

5,872

17,744

18,542

Financing

433

417

1,260

1,260

Total revenue

19,153

19,226

56,597

58,149

Cost:

Services

8,426

8,418

25,502

25,492

Sales

1,605

1,536

4,839

4,496

Financing

322

259

890

760

Total cost

10,353

10,213

31,232

30,748

Gross profit

8,800

9,013

25,365

27,401

Expense and other (income):

Selling, general and administrative

4,648

4,732

14,959

16,093

Research, development and engineering

1,342

1,397

4,360

4,320

Intellectual property and custom development income

(308
)
(528
)
(1,118
)
(1,110
)
Other (income) and expense

(114
)
(8
)
(218
)
281

Interest expense

168

158

451

473

Total expense and other (income)

5,735

5,751

18,434

20,056

Income from continuing operations before income taxes

3,065

3,263

6,931

7,345

Provision for/(benefit from) income taxes

339

409

120

(31
)
Income from continuing operations

$
2,726

$
2,854

$
6,811

$
7,375

Loss from discontinued operations, net of tax

0

(1
)
(3
)
(4
)
Net income

$
2,726

$
2,853

$
6,807

$
7,371

Earnings/(loss) per share of common stock:

Assuming dilution:

Continuing operations

$
2.92

$
2.98

$
7.24

$
7.67

Discontinued operations

0.00

0.00

0.00

0.00

Total

$
2.92

$
2.98

$
7.24

$
7.67

Basic:

Continuing operations

$
2.93

$
2.99

$
7.28

$
7.70

Discontinued operations

0.00

0.00

0.00

0.00

Total

$
2.93

$
2.99

$
7.28

$
7.70

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

Assuming dilution

933.2

957.3

940.2

960.7

Basic

929.4

954.0

935.6

957.7

Cash dividend per common share

$
1.50

$
1.40

$
4.40

$
4.10


	Three Months Ended March 31,
(Dollars in millions)	2023		2022
Net income	$	927	$	733
Other comprehensive income/(loss), before tax:
Foreign currency translation adjustments		(87)		442
Net changes related to available-for-sale securities:
Unrealized gains/(losses) arising during the period		15		0
Reclassification of (gains)/losses to net income		—		—
Total net changes related to available-for-sale securities		15		0
Unrealized gains/(losses) on cash flow hedges:
Unrealized gains/(losses) arising during the period		(29)		60
Reclassification of (gains)/losses to net income		(122)		(1)
Total unrealized gains/(losses) on cash flow hedges		(151)		59
Retirement-related benefit plans:
Prior service costs/(credits)		—		(5)
Net (losses)/gains arising during the period		2		9
Curtailments and settlements		(1)		8
Amortization of prior service (credits)/costs		(2)		7
Amortization of net (gains)/losses		131		468
Total retirement-related benefit plans		130		486
Other comprehensive income/(loss), before tax		(93)		987
Income tax (expense)/benefit related to items of other comprehensive income		53		(285)
Other comprehensive income/(loss), net of tax		(40)		703
Total comprehensive income	$	888	$	1,436

(Amounts may not add due to rounding.)

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

Table of Contents

INTERNATIONAL BUSINESS MACHINES CORPORATION

AND SUBSIDIARY COMPANIES

CONSOLIDATED BALANCE SHEET

~~CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME~~(UNAUDITED)

ASSETS


	At March 31,		At December 31,
(Dollars in millions)	2023		2022
Assets:
Current assets:
Cash and cash equivalents	$	9,337	$	7,886
Restricted cash		198		103
Marketable securities		8,057		852
Notes and accounts receivable — trade (net of allowances of $250 in 2023 and $233 in 2022)		5,757		6,541
Short-term financing receivables:
Held for investment (net of allowances of $141 in 2023 and $145 in 2022)		6,057		6,851
Held for sale		605		939
Other accounts receivable (net of allowances of $102 in 2023 and $89 in 2022)		812		817
Inventory, at lower of average cost or net realizable value:
Finished goods		199		158
Work in process and raw materials		1,404		1,394
Total inventory		1,603		1,552
Deferred costs		1,055		967
Prepaid expenses and other current assets		2,501		2,611
Total current assets		35,982		29,118
Property, plant and equipment		18,761		18,695
Less: Accumulated depreciation		13,417		13,361
Property, plant and equipment — net		5,344		5,334
Operating right-of-use assets — net		2,789		2,878
Long-term financing receivables (net of allowances of $23 in 2023 and $28 in 2022)		5,065		5,806
Prepaid pension assets		8,487		8,236
Deferred costs		846		866
Deferred taxes		6,419		6,256
Goodwill		56,193		55,949
Intangible assets — net		10,905		11,184
Investments and sundry assets		1,607		1,617
Total assets	$	133,637	$	127,243

(Amounts may not add due to rounding.)

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

Table of Contents

INTERNATIONAL BUSINESS MACHINES CORPORATION

~~(UNAUDITED)~~AND SUBSIDIARY COMPANIES

CONSOLIDATED BALANCE SHEET – (CONTINUED)

Three Months Ended September 30,

Nine Months Ended September 30,

(Dollars in millions)

2017

2016

2017

2016

Net income

$
2,726

$
2,853

$
6,807

$
7,371

Other comprehensive income/(loss), before tax:

Foreign currency translation adjustments

89

(99
)
213

(109
)
Net changes related to available-for-sale securities:

Unrealized gains/(losses) arising during the period

(1
)
(1
)
2

(36
)
Reclassification of (gains)/losses to net income

0

(1
)
1

36

Total net changes related to available-for-sale securities

(2
)
(2
)
2

0

Unrealized gains/(losses) on cash flow hedges:

Unrealized gains/(losses) arising during the period

(70
)
35

(198
)
(221
)
Reclassification of (gains)/losses to net income

(73
)
15

(347
)
26

Total unrealized gains/(losses) on cash flow hedges

(143
)
50

(545
)
(195
)
Retirement-related benefit plans:

Prior service costs/(credits)

0

—

0

—

Net (losses)/gains arising during the period

1

11

106

(57
)
Curtailments and settlements

2

4

3

19

Amortization of prior service (credits)/costs

(22
)
(28
)
(66
)
(81
)
Amortization of net (gains)/losses

733

696

2,156

2,079

Total retirement-related benefit plans

713

683

2,200

1,960

Other comprehensive income/(loss), before tax

658

632

1,869

1,656

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

11

(192
)
7

(213
)
Other comprehensive income/(loss)

669

440

1,877

1,442

Total comprehensive income/(loss)

$
3,394

$
3,293

$
8,684

$
8,813

(UNAUDITED)

LIABILITIES AND EQUITY


	At March 31,		At December 31,
(Dollars in millions except per share amounts)	2023		2022
Liabilities:
Current liabilities:
Taxes	$	1,650	$	2,196
Short-term debt		4,887		4,760
Accounts payable		3,728		4,051
Compensation and benefits		2,772		3,481
Deferred income		13,220		12,032
Operating lease liabilities		869		874
Other accrued expenses and liabilities		3,866		4,111
Total current liabilities		30,993		31,505
Long-term debt		53,826		46,189
Retirement and nonpension postretirement benefit obligations		9,509		9,596
Deferred income		3,443		3,499
Operating lease liabilities		2,094		2,190
Other liabilities		12,099		12,243
Total liabilities		111,964		105,222
Equity:
IBM stockholders’ equity:
Common stock, par value $0.20 per share, and additional paid-in capital		58,675		58,343
Shares authorized: 4,687,500,000
Shares issued: 2023 - 2,259,497,847
2022 - 2,257,116,920
Retained earnings		149,253		149,825
Treasury stock - at cost		(169,544)		(169,484)
Shares: 2023 - 1,351,452,434
2022 - 1,351,024,943
Accumulated other comprehensive income/(loss)		(16,780)		(16,740)
Total IBM stockholders’ equity		21,604		21,944
Noncontrolling interests		68		77
Total equity		21,672		22,021
Total liabilities and equity	$	133,637	$	127,243

(Amounts may not add due to rounding.)

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

Table of Contents

INTERNATIONAL BUSINESS MACHINES CORPORATION

AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF ~~FINANCIAL POSITION~~CASH FLOWS

(UNAUDITED)


	Three Months Ended March 31,
(Dollars in millions)	2023		2022*
Cash flows from operating activities:
Net income	$	927	$	733
Adjustments to reconcile net income/(loss) to cash provided by operating activities:
Depreciation		527		631
Amortization of intangibles		547		625
Stock-based compensation		268		234
Net (gain)/loss on asset sales and other		(55)		(51)
Changes in operating assets and liabilities, net of acquisitions/divestitures		1,559		1,076
Net cash provided by operating activities		3,774		3,248

Cash flows from investing activities:
Payments for property, plant and equipment		(300)		(281)
Proceeds from disposition of property, plant and equipment		11		72
Investment in software		(168)		(169)
Acquisition of businesses, net of cash acquired		(22)		(698)
Divestitures of businesses, net of cash transferred		—		61
Purchases of marketable securities and other investments		(8,531)		(1,025)
Proceeds from disposition of marketable securities and other investments		1,050		682
Net cash provided by/(used in) investing activities		(7,960)		(1,358)

Cash flows from financing activities:
Proceeds from new debt		9,432		4,084
Payments to settle debt		(2,125)		(1,129)
Short-term borrowings/(repayments) less than 90 days — net		(3)		(8)
Common stock repurchases for tax withholdings		(96)		(80)
Financing — other		(3)		(15)
Cash dividends paid		(1,497)		(1,475)
Net cash provided by/(used in) financing activities		5,708		1,377

Effect of exchange rate changes on cash, cash equivalents and restricted cash		24		(5)
Net change in cash, cash equivalents and restricted cash		1,547		3,263

Cash, cash equivalents and restricted cash at January 1		7,988		6,957
Cash, cash equivalents and restricted cash at March 31	$	9,535	$	10,219

*Includes immaterial cash flows from discontinued operations.

(Amounts may not add due to rounding.)

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

Table of Contents

INTERNATIONAL BUSINESS MACHINES CORPORATION

~~ASSETS~~AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF EQUITY

(UNAUDITED)

At September 30,

At December 31,

(Dollars in millions)

2017

2016

Assets:

Current assets:

Cash and cash equivalents

$
10,915

$
7,826

Marketable securities

600

701

Notes and accounts receivable - trade (net of allowances of $296 in 2017 and $290 in 2016)

8,150

9,182

Short-term financing receivables (net of allowances of $270 in 2017 and $337 in 2016)

18,050

19,006

Other accounts receivable (net of allowances of $39 in 2017 and $48 in 2016)

926

1,057

Inventories, at lower of average cost or market:

Finished goods

430

358

Work in process and raw materials

1,281

1,195

Total inventories

1,711

1,553

Prepaid expenses and other current assets

4,389

4,564

Total current assets

44,742

43,888

Property, plant and equipment

31,937

30,133

Less: Accumulated depreciation

20,880

19,303

Property, plant and equipment — net

11,057

10,830

Long-term financing receivables (net of allowances of $84 in 2017 and $101 in 2016)

8,459

9,021

Prepaid pension assets

4,521

3,034

Deferred taxes

7,289

5,224

Goodwill

36,782

36,199

Intangible assets — net

3,981

4,688

Investments and sundry assets

4,806

4,585

Total assets

$
121,636

$
117,470


	Common
	Stock and						Accumulated
	Additional						Other		Total IBM		Non-
	Paid-in		Retained		Treasury		Comprehensive		Stockholders’		Controlling		Total
(Dollars in millions except per share amounts)	Capital		Earnings		Stock		Income/(Loss)		Equity		Interests		Equity
Equity - January 1, 2023	$	58,343	$	149,825	$	(169,484)	$	(16,740)	$	21,944	$	77	$	22,021
Net income plus other comprehensive income/(loss):
Net income				927						927				927
Other comprehensive income/(loss)								(40)		(40)				(40)
Total comprehensive income/(loss)									$	888			$	888
Cash dividends paid — common stock ($1.65 per share)				(1,497)						(1,497)				(1,497)
Common stock issued under employee plans (2,380,928 shares)		332								332				332
Purchases (711,325 shares) and sales (283,834 shares) of treasury stock under employee plans — net				(2)		(60)				(62)				(62)
Changes in noncontrolling interests												(9)		(9)
Equity – March 31, 2023	$	58,675	$	149,253	$	(169,544)	$	(16,780)	$	21,604	$	68	$	21,672


	Common
	Stock and						Accumulated
	Additional						Other		Total IBM		Non-
	Paid-in		Retained		Treasury		Comprehensive		Stockholders’		Controlling		Total
(Dollars in millions except per share amounts)	Capital		Earnings		Stock		Income/(Loss)		Equity		Interests		Equity
Equity - January 1, 2022	$	57,319	$	154,209	$	(169,392)	$	(23,234)	$	18,901	$	95	$	18,996
Net income plus other comprehensive income/(loss):
Net income				733						733				733
Other comprehensive income/(loss)								703		703				703
Total comprehensive income/(loss)									$	1,436			$	1,436
Cash dividends paid — common stock ($1.64 per share)				(1,475)						(1,475)				(1,475)
Common stock issued under employee plans (1,562,135 shares)		221								221				221
Purchases (595,710 shares) and sales (400,300 shares) of treasury stock under employee plans — net				(3)		(30)				(34)				(34)
Other equity		63		(63)						0				0
Changes in noncontrolling interests												(33)		(33)
Equity - March 31, 2022	$	57,603	$	153,401	$	(169,422)	$	(22,532)	$	19,050	$	62	$	19,112

(Amounts may not add due to rounding.)

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

Table of Contents

~~INTERNATIONAL BUSINESS MACHINES CORPORATION~~
~~AND SUBSIDIARY COMPANIES~~

~~CONSOLIDATED STATEMENT OF FINANCIAL POSITION — (CONTINUED)~~
~~(UNAUDITED)~~

~~LIABILITIES AND EQUITY~~

At September 30,

At December 31,

(Dollars in millions)

2017

2016

Liabilities:

Current liabilities:

Taxes

$
3,038

$
3,235

Short-term debt

4,299

7,513

Accounts payable

5,442

6,209

Compensation and benefits

3,918

3,577

Deferred income

10,649

11,035

Other accrued expenses and liabilities

4,352

4,705

Total current liabilities

31,697

36,275

Long-term debt

41,327

34,655

Retirement and nonpension postretirement benefit obligations

17,554

17,070

Deferred income

3,579

3,600

Other liabilities

7,723

7,477

Total liabilities

101,879

99,078

Equity:

IBM stockholders’ equity:

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

54,395

53,935

Shares authorized: 4,687,500,000

Shares issued: 2017 - 2,228,489,401

2016 - 2,225,116,815

Retained earnings

155,565

152,759

Treasury stock - at cost

(162,812
)
(159,050
)
Shares: 2017 - 1,302,698,023

2016 - 1,279,249,412

Accumulated other comprehensive income/(loss)

(27,521
)
(29,398
)
Total IBM stockholders’ equity

19,627

18,246

Noncontrolling interests

130

146

Total equity

19,757

18,392

Total liabilities and equity

$
121,636

$
117,470

~~(Amounts may not add due to rounding.)~~

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

~~INTERNATIONAL BUSINESS MACHINES CORPORATION~~
~~AND SUBSIDIARY COMPANIES~~

~~CONSOLIDATED STATEMENT OF CASH FLOWS~~

~~(UNAUDITED)~~

Nine Months Ended September 30,

(Dollars in millions)

2017

2016

Cash flows from operating activities:

Net income

$
6,807

$
7,371

Adjustments to reconcile net income to cash provided by operating activities

Depreciation

2,231

2,106

Amortization of intangibles

1,161

1,148

Stock-based compensation

388

403

Net (gain)/loss on asset sales and other

92

100

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

312

1,978
* **
Net cash provided by operating activities

10,991

13,105
* **

Cash flows from investing activities:

Payments for property, plant and equipment

(2,273
)
(2,594
)
Proceeds from disposition of property, plant and equipment

337

234

Investment in software

(411
)
(441
)
Acquisition of businesses, net of cash acquired

(442
)
(5,445
)
Divestitures of businesses, net of cash transferred

35

35

Non-operating finance receivables — net

469

1,441
*
Purchases of marketable securities and other investments

(3,770
)
(4,021
)
Proceeds from disposition of marketable securities and other investments

2,778

3,501

Net cash used in investing activities

(3,278
)
(7,289
)*

Cash flows from financing activities:

Proceeds from new debt

9,355

8,368

Payments to settle debt

(6,252
)
(5,616
)
Short-term borrowings/(repayments) less than 90 days — net

(794
)
(864
)
Common stock repurchases

(3,674
)
(2,632
)
Common stock repurchases for tax withholdings

(153
)
(115
)**
Common stock transactions — other

137

166

Cash dividends paid

(4,119
)
(3,927
)
Net cash used in financing activities

(5,499
)
(4,619
)**

Effect of exchange rate changes on cash and cash equivalents

875

155

Net change in cash and cash equivalents

3,089

1,352

Cash and cash equivalents at January 1

7,826

7,686

Cash and cash equivalents at September 30

$
10,915

$
9,039

* Revised classification of certain financing receivables.

** Reclassified to reflect adoption of the FASB guidance on share-based compensation.

~~(Amounts may not add due to rounding.)~~

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

~~INTERNATIONAL BUSINESS MACHINES CORPORATION~~
~~AND SUBSIDIARY COMPANIES~~
~~CONSOLIDATED STATEMENT OF CHANGES IN EQUITY~~
~~(UNAUDITED)~~

Common

Stock and

Accumulated

Additional

Other

Total IBM

Non-

Paid-in

Retained

Treasury

Comprehensive

Stockholders’

Controlling

Total

(Dollars in millions)

Capital

Earnings

Stock

Income/(Loss)

Equity

Interests

Equity

Equity - January 1, 2017

$
53,935

$
152,759

$
(159,050
)
$
(29,398
)
$
18,246

$
146

$
18,392

Cumulative effect of change in accounting principle *

102

102

102

Net income

6,807

6,807

6,807

Other comprehensive income/(loss)

1,877

1,877

1,877

Total comprehensive income/(loss)

$
8,684

$
8,684

Cash dividends paid — common stock

(4,119
)

(4,119
)

(4,119
)
Common stock issued under employee plans (3,372,586 shares)

460

460

460

Purchases (960,186 shares) and sales (363,335 shares) of treasury stock under employee plans — net

15

(106
)

(91
)

(91
)
Other treasury shares purchased, not retired (22,851,760 shares)

(3,655
)

(3,655
)

(3,655
)
Changes in noncontrolling interests

(16
)
(16
)
Equity - September 30, 2017

$
54,395

$
155,565

$
(162,812
)
$
(27,521
)
$
19,627

$
130

$
19,757

Common

Stock and

Accumulated

Additional

Other

Total IBM

Non-

Paid-in

Retained

Treasury

Comprehensive

Stockholders’

Controlling

Total

(Dollars in millions)

Capital

Earnings

Stock

Income/(Loss)

Equity

Interests

Equity

Equity - January 1, 2016

$
53,262

$
146,124

$
(155,518
)
$
(29,607
)
$
14,262

$
162

$
14,424

Net income

7,371

7,371

7,371

Other comprehensive income/(loss)

1,442

1,442

1,442

Total comprehensive income/(loss)

$
8,813

$
8,813

Cash dividends paid — common stock

(3,927
)

(3,927
)

(3,927
)
Common stock issued under employee plans (3,370,992 shares)

513

513

513

Purchases (787,805 shares) and sales (336,480 shares) of treasury stock under employee plans — net

16

(72
)

(56
)

(56
)
Other treasury shares purchased, not retired (17,793,841 shares)

(2,579
)

(2,579
)

(2,579
)
Changes in other equity

(16
)
0

(17
)

(17
)
Changes in noncontrolling interests

(12
)
(12
)
Equity - September 30, 2016

$
53,759

$
149,585

$
(158,170
)
$
(28,164
)
$
17,010

$
149

$
17,159

* Reflects the adoption of the FASB guidance on intra-entity transfers of assets in the first-quarter 2017.

~~(Amounts may not add due to rounding.)~~

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

Notes to Consolidated Financial ~~Statements:~~Statements

1. Basis of Presentation:

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

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

In the fourth quarter of 2022, the company completed its annual assessment of the useful lives of its property, plant and equipment. Due to advances in technology, the company determined it should increase the estimated useful lives of its server and network equipment from five to six years for new assets and from three to four years for used assets. This change in accounting estimate was effective beginning January 1, 2023. Based on the carrying amount of server and network equipment included in property, plant and equipment-net in the company’s ~~2016 Annual Report on pages 71 to 74, for a discussion~~Consolidated Balance Sheet as of December 31, 2022, the ~~company’s critical accounting estimates.~~

~~The company revised the classification~~effect of ~~certain financing receivables~~this change in estimate was an increase in income from continuing operations before income taxes of $74 million or $0.06 per both basic and diluted share for the three ~~and nine~~ months ended ~~September 30, 2016, decreasing net cash provided by operating activities and net cash used in investing activities in~~March 31, 2023.

For the ~~amount of $99 million and $311 million, respectively, which~~three months ended March 31, 2023, the company ~~concluded to be immaterial to the periods presented. The twelve-month revision~~recorded a provision for ~~the period ended December 31, 2016 was provided in the company’s 2016 Annual Report on page 26. There was no impact to total GAAP cash flows or free cash flow.~~

~~In the first quarter of 2017, the company reported a benefit from~~ income taxes of ~~$329~~$124 million and its effective tax rate was ~~(23.1)~~11.7 percent. This was primarily driven by a discrete tax benefit of $582 million from a first-quarter 2017 transaction accounted for under the new Financial Accounting Standards Board (FASB) guidance related to intra-entity transfers of assets. This benefit was partially offset by a discrete tax charge related to foreign audit activity of $99 million. The company had additional discrete tax benefits of $170 million in second-quarter 2017. For the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2022, the company ~~reported~~recorded a ~~provision for~~benefit from income taxes of ~~$120~~$39 million and its effective tax rate was 1.7 percent, primarily as a result of the first and second quarter discrete items. For the nine months ended September 30, 2016, the company reported a benefit from income taxes of $31 million and its effective tax rate was (0.4)(6.3) percent. The ~~negative effective~~rates are driven by many factors including the geographical mix of income, incentives, and changes in unrecognized tax benefits. The prior-year rate inalso reflects the ~~comparable period~~impact of ~~2016 was due~~updates to the ~~resolution of a long-standing Japan~~foreign tax ~~matter in February 2016. Refer to note 2, “Accounting Changes,” and the Taxes section of the Management Discussion for additional information.~~credit regulations.

Noncontrolling interest amounts of ~~$4.4~~$4.6 million and ~~$3.1~~$4.9 million, net of tax, for the three months ended ~~September 30, 2017~~March 31, 2023 and ~~2016, respectively, and $11.5 million and $7.5 million, net of tax, for the nine months ended September 30, 2017 and 2016,~~2022, respectively, are included as a reduction within other (income) and expense in the Consolidated ~~Statement~~Income Statement.

The company has supplier finance programs with third-party financial institutions where the company agrees to pay the financial institutions the stated amounts of ~~Earnings.~~

invoices from participating suppliers on the originally invoiced maturity date, which have an average term of 90 days. The financial institutions offer earlier payment of the invoices at the sole discretion of the supplier for a discounted amount. The company does not provide secured legal assets or other forms of guarantees under the arrangements. The company is not a party to the arrangement between its suppliers and the financial institutions. These obligations are recognized as accounts payable in the Consolidated Balance Sheet. The obligations outstanding under these programs at March 31, 2023 and December 31, 2022 were $113 million and $60 million, respectively.

Interim results are not necessarily indicative of financial results for a full year. The information included in this
Form 10-Q should be read in conjunction with the company’s ~~2016~~2022 Annual Report.

Within the financial statements and tables presented, certain columns and rows may not add due to the use of rounded numbers for disclosure purposes. Percentages presented are calculated from the underlying whole-dollar amounts. Certain prior ~~year~~period amounts have been reclassified to conform to the current ~~year~~period presentation. This is annotated where applicable.

Table of Contents

2. ~~Accounting Changes:~~

~~New Standards to be Implemented~~

In August 2017, the FASB issued guidance to simplify the application of current hedge accounting in certain areas, better portray the economic results of an entity’s risk management activities in its financial statements and make targeted improvements to presentation and disclosure requirements. The guidance is effective January 1, 2019 with early adoption permitted. The company plans to adopt the guidance as of January 1, 2018. The guidance is not expected to have a material impact in the consolidated financial results.

In March 2017, the FASB issued guidance that impacts the presentation of net periodic pension and postretirement benefit costs. Under the guidance, the service cost component of net benefit cost will continue to be presented in the same line items as other employee compensation costs, unless eligible for capitalization in the Consolidated Statement of Financial Position. The other components of net benefit costs will be presented separately from service cost as non-operating costs in the Consolidated Statement of Earnings or Notes to the Consolidated Financial Statements. The guidance is effective

Notes to Consolidated Financial Statements — (continued)

2. Accounting Changes:

Standards Implemented

Disclosures of Supplier Finance Program Obligations

Standard/Description–Issuance date: September 2022. This guidance requires an entity to provide certain interim and annual disclosures about the use of supplier finance programs in connection with the purchase of goods or services.

Effective Date and Adoption Considerations–The guidance was effective January 1, ~~2018~~2023 with certain annual disclosures required beginning in 2024 and early adoption was permitted. The company ~~will adopt~~adopted the guidance as of the effective date. ~~The guidance is primarily a change in financial statement presentation and is not expected to have a material impact in the consolidated financial results.~~

~~In June 2016, the FASB issued guidance for credit impairment based~~Effect on an expected loss model rather than an incurred loss model. The guidance requires the consideration of all available relevant information when estimating expected credit losses, including past events, current conditions and forecasts and their implications for expected credit losses. The guidance is effective January 1, 2020 with a one year early adoption permitted. The company is evaluating the impact of the new guidance.

In February 2016, the FASB issued guidance which changes the accounting for leases. The guidance requires lessees to recognize right-of-use assets and lease liabilities for most leases in the Consolidated Statement of Financial Position. The guidance makes some changes to lessor accounting, including the elimination of the use of third-party residual value guarantee insurance in the capital lease test, and overall aligns with the new revenue recognition guidance. The guidance also requires qualitative and quantitative disclosures to assess the amount, timing and uncertainty of cash flows arising from leases. The guidance is effective January 1, 2019 and early adoption is permitted. The company will adopt the guidance as of the effective date. A cross-functional implementation team has been established which is evaluating the lease portfolio, system, process and policy change requirements. The company is currently evaluating the impact of the new guidance on its consolidated financial results and expects it will have a material impact on the Consolidated Statement of Financial Position. The company’s operating lease commitments were $6.9 billion at December 31, 2016. In 2016, the use of third-party residual value guarantee insurance resulted in the company recognizing $220 million of sales-type lease revenue that would otherwise have been recognized over the lease period as operating lease revenue.

In January 2016, the FASB issued guidance which addresses aspects of recognition, measurement, presentation and disclosure of financial instruments. Certain equity investments will be measured at fair value with changes recognized in net income. The amendment also simplifies the impairment test of equity investments that lack readily determinable fair value. The guidance is effective January 1, 2018 and early adoption is not permitted except for limited provisions. The guidance is not expected to have a material impact in the consolidated financial results.

The FASB issued guidance on the recognition of revenue from contracts with customers in May 2014 with amendments in 2015 and 2016. Revenue recognition will depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented, or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). The company will adopt the guidance on January 1, 2018 and apply the cumulative catch-up transition method. The transition adjustment to be recorded to stockholders’ equity upon adoption of the new standard is not expected to be material.

Given the scope of work required to implement the recognition and disclosure requirements under the new standard, the company began its assessment process in 2014 and has identified changes to policy, processes, systems and controls. This also includes the assessment of data availability and presentation necessary to meet the additional disclosure requirements of the guidance in the Notes to the Consolidated Financial Statements.

The company expects revenue recognition for its broad portfolio of hardware, software and services offerings to remain largely unchanged. However, the guidance is expected to change the timing of revenue recognition in certain areas, including accounting for certain software licenses. These impacts are not expected to be material. The company expects to continue to recognize revenue for term license (recurring license charge) software arrangements on a monthly basis over the period that the client is entitled to use the license due to the contractual terms in these arrangements.

Since the company currently expenses sales commissions as incurred, the requirement in the new standard to capitalize certain in-scope sales commissions will result in an accounting change for the company. However, the impact to the consolidated financial statements is not expected to be material, with no impact to cash flows.

~~The company continues to assess all potential impacts of the guidance and given normal ongoing business dynamics, preliminary conclusions are subject to change.~~

~~Notes to Consolidated~~ Financial Statements ~~— (continued)~~
~~Standards Implemented~~
In January 2017, the FASB issued guidance which clarifies the definition of a business. The guidance provides a more robust framework to use in determining when a set of assets and activities acquired or sold is a business. The guidance is effective January 1, 2018 and early adoption is permitted. The company adopted the guidance effective January 1, 2017, and it did not have a material impact in the consolidated financial results.
In October 2016, the FASB issued guidance which requires an entity to recognize the income tax consequences of intra-entity transfers of assets, other than inventory, at the time of transfer. Assets within the scope of the guidance include intellectual property and property, plant and equipment. The guidance is effective January 1, 2018 and early adoption is permitted. The company adopted the guidance on January 1, 2017 using the required modified retrospective method. At adoption, $95 million and $47 million were reclassified from investments and sundry assets and prepaid expenses and other current assets, respectively into retained earnings. Additionally, net deferred taxes of $244 million were established in deferred taxes in the Consolidated Statement of Financial Position, resulting in a cumulative-effect net credit to retained earnings of $102 million. In January 2017, the company had one transaction that generated a $582 million benefit to income tax expense, income from continuing operations and net income and a benefit to both basic and diluted earnings per share of $0.62 per share for the nine months ended September 30, 2017. There was no impact in the consolidated financial results for the three months ended September 30, 2017. The ongoing impact of this guidance will be dependent on any transaction that is within its scope.
In March 2016, the FASB issued guidance which changes the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification in the Consolidated Statement of Cash Flows. The guidance was effective and adopted by the company on January 1, 2017, and it did not have a material impact in the Consolidated Statement of Financial Position. The ongoing impact of the guidance could result in increased volatility in the provision for income taxes and earnings per share in the Consolidated Statement of Earnings, depending on the company’s share price at exercise or vesting of share-based awards compared to grant date, however these impacts are not expected to be material. These impacts are recorded on a prospective basis. See note 5, “Stock-Based Compensation,” for additional information. The company continues to estimate forfeitures in conjunction with measuring stock-based compensation cost. The guidance also requires cash payments on behalf of employees for shares directly withheld for taxes to be presented as financing outflows in the Consolidated Statement of Cash Flows. Prior to adoption, the company reported this activity as an operating cash outflow and as a result, prior periods have been reclassified as required. The FASB also issued guidance in May 2017, which relates to the accounting for modifications of share-based payment awards. The company adopted the guidance in the second quarter of 2017. The guidance had no impact in the consolidated financial results.

In September 2015, the FASB issued guidance eliminating the requirement that an acquirer in a business combination account for a measurement-period adjustment retrospectively. Instead, an acquirer will recognize a measurement-period adjustment during the period in which the amount of the adjustment is determined. In addition, the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date should be presented separately on the face of the income statement or disclosed in the notes. The guidance was effective January 1, 2016 on a prospective basis. Other Significant Matters–The guidance did not have a material impact in the consolidated financial results. Refer to note 1, “Basis of Presentation,” for additional information.

Troubled Debt Restructurings and Vintage Disclosures

~~In May 2015,~~Standard/Description–Issuance date: March 2022. This eliminates the ~~FASB issued~~accounting guidance ~~which removed~~for troubled debt restructurings and requires an entity to apply the ~~requirement~~general loan modification guidance to ~~categorize within~~all loan modifications, including those made to customers experiencing financial difficulty, to determine whether the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The amendments also removed the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. Rather, those disclosures are limited to investments for which the entity has elected to measure the fair value using that practical expedient.modification results in a new loan or a continuation of an existing loan. The guidance also requires presenting current period gross write-offs by year of origination for financing receivables and net investment in leases.

Effective Date and Adoption Considerations–The amendment was effective January 1, ~~2016.~~2023 and early adoption was permitted. The ~~guidance was a change in disclosure only and did not have an impact in the consolidated financial results.~~

In April 2015, the FASB issued guidance about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a services contract. All software licenses recognized under this guidance will be accounted for consistent with other licenses of intangible assets. The guidance was effective January 1, 2016 and the company adopted itthe guidance on a prospective ~~basis.~~ basis as of the effective date.

Effect on Financial Statements or Other Significant Matters–The guidance did not have a material impact in the consolidated financial results. Refer to note 9, “Financing Receivables,” for additional information.

3. Revenue Recognition:

Disaggregation of Revenue

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

Revenue by Major Products/Service Offerings


(Dollars in millions)
For the three months ended March 31:	2023		2022
Hybrid Platform & Solutions	$	4,179	$	4,080
Transaction Processing		1,742		1,692
Total Software	$	5,921	$	5,772
Business Transformation		2,283		2,255
Application Operations		1,736		1,619
Technology Consulting		943		955
Total Consulting	$	4,962	$	4,829
Hybrid Infrastructure		1,709		1,700
Infrastructure Support		1,389		1,519
Total Infrastructure	$	3,098	$	3,219
Financing*		196		154
Other		75		224
Total revenue	$	14,252	$	14,197

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

Table of Contents

Notes to Consolidated Financial Statements — (continued)

Revenue by Geography


(Dollars in millions)
For the three months ended March 31:	2023		2022
Americas	$	7,078	$	7,056
Europe/Middle East/Africa		4,331		4,231
Asia Pacific		2,843		2,910
Total	$	14,252	$	14,197

Remaining Performance Obligations

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

At March 31, 2023, the aggregate amount of the transaction price allocated to RPO related to customer contracts that are unsatisfied or partially unsatisfied was $58 billion. Approximately 71 percent of the amount is expected to be recognized as revenue in the subsequent two years, approximately 27 percent in the subsequent three to five years and the balance thereafter.

3. ~~Financial Instruments:~~Revenue Recognized for Performance Obligations Satisfied (or Partially Satisfied) in Prior Periods

For the three months ended March 31, 2023, revenue was reduced by $47 million for performance obligations satisfied (or partially satisfied) in previous periods mainly due to changes in estimates on contracts with cost-to-cost measures of progress.

Reconciliation of Contract Balances

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


	At March 31,		At December 31,
(Dollars in millions)	2023		2022
Notes and accounts receivable — trade (net of allowances of $250 in 2023 and $233 in 2022)	$	5,757	$	6,541
Contract assets*	$	461	$	464
Deferred income (current)	$	13,220	$	12,032
Deferred income (noncurrent)	$	3,443	$	3,499

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

The amount of revenue recognized during the three months ended March 31, 2023 that was included within the deferred income balance at December 31, 2022 was $3.9 billion and was primarily related to services and software.

Table of Contents

Notes to Consolidated Financial Statements — (continued)

The following table provides roll forwards of the notes and accounts receivable–trade allowance for expected credit losses for the three months ended March 31, 2023 and the year ended December 31, 2022.


(Dollars in millions)
January 1, 2023		Additions / (Releases)		Write-offs		Foreign currency and other		March 31, 2023
$	233	$	23	$	(8)	$	1	$	250


January 1, 2022		Additions / (Releases)		Write-offs		Foreign currency and other		December 31, 2022
$	218	$	59	$	(31)	$	(14)	$	233

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

4.Segments:

The following tables reflect the results of continuing operations of the company’s segments consistent with the management and measurement system utilized within the company. Performance measurement is based on pre-tax income from continuing operations. These results are used by the chief operating decision maker, both in evaluating the performance of, and in allocating resources to, each of the segments.

Table of Contents

Notes to Consolidated Financial Statements — (continued)

SEGMENT INFORMATION


													Total
(Dollars in millions)	Software			Consulting			Infrastructure			Financing			Segments
For the three months ended March 31, 2023:
Revenue	$	5,921		$	4,962		$	3,098		$	196		$	14,177
Pre-tax income from continuing operations	$	1,164		$	382		$	216		$	100		$	1,863
Revenue year-to-year change		2.6	%		2.8	%		(3.7)	%		27.3	%		1.5	%
Pre-tax income year-to-year change		2.7	%		9.6	%		8.5	%		19.6	%		5.5	%
Pre-tax income margin		19.7	%		7.7	%		7.0	%		51.3	%		13.1	%

For the three months ended March 31, 2022:
Revenue	$	5,772		$	4,829		$	3,219		$	154		$	13,973
Pre-tax income from continuing operations	$	1,134		$	348		$	199		$	84		$	1,766
Pre-tax income margin		19.7	%		7.2	%		6.2	%		54.6	%		12.6	%

Reconciliations to IBM as Reported:


(Dollars in millions)
For the three months ended March 31:	2023		2022
Revenue:
Total reportable segments	$	14,177	$	13,973
Other‒divested businesses		0		154
Other revenue		75		70
Total consolidated revenue	$	14,252	$	14,197

Pre-tax income/(loss) from continuing operations:
Total reportable segments	$	1,863	$	1,766
Amortization of acquired intangible assets		(392)		(461)
Acquisition-related (charges)/income		(3)		(7)
Non-operating retirement-related (costs)/income		5		(202)
Kyndryl-related impacts		—		(222)	*
Workforce rebalancing charges**		(259)		—
Other‒divested businesses		(4)		(52)
Unallocated corporate amounts and other		(151)		(199)	^È
Total pre-tax income from continuing operations	$	1,058	$	623

* Unrealized loss on Kyndryl retained shares. See note 5, “Acquisitions & Divestitures,” for additional information.

Beginning in the first quarter of 2023, the company updated its measure of segment pre-tax income, consistent with its management system, to no longer allocate workforce rebalancing charges to its segments. Workforce rebalancing charges in the first quarter of 2022 of $5 million were included in the segments.

^È	Recast to conform to 2023 presentation.

Table of Contents

Notes to Consolidated Financial Statements — (continued)

5. Acquisitions & Divestitures:

Acquisitions

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

During the three months ended March 31, 2023, the company completed three acquisitions at an aggregate cost of $226 million. Each acquisition is expected to enhance the company’s portfolio of products and services capabilities and further advance IBM’s hybrid cloud and AI strategy.


Acquisition	Segment	Description of Acquired Business
StepZen, Inc.	Software	Developer of GraphQL to help build application programming interfaces (APIs)
Uptake Technologies, Inc.	Software	Provider of advanced data analytics and content for heavy industries
NS1	Software	Leading provider of network automation SaaS solutions

At March 31, 2023, the remaining cash to be remitted by the company related to certain first-quarter 2023 acquisitions was $187 million. Of the amount outstanding, $173 million was recorded as restricted cash in the Consolidated Balance Sheet and is expected to be paid in 2023 with the remaining $14 million expected to be paid in the first quarter of 2024. The unremitted cash associated with these acquisitions is a non-cash investing activity for purposes of the company’s Consolidated Statement of Cash Flows as of March 31, 2023.

The following table reflects the purchase price related to these acquisitions and the resulting purchase price allocation as of March 31, 2023.


	Amortization	Total
(Dollars in millions)	Life (in years)	Acquisitions
Current assets		$	27
Property, plant and equipment/noncurrent assets			9
Intangible assets:
Goodwill	N/A		141
Client relationships	7		34
Completed technology	5-7		35
Trademarks	2-5		2
Total assets acquired		$	247
Current liabilities			19
Noncurrent liabilities			2
Total liabilities assumed		$	21
Total purchase price		$	226

N/A - not applicable

The goodwill generated was assigned to the Software segment and is primarily attributable to the assembled workforce of the acquired businesses and the increased synergies expected to be achieved from the integration of the

Table of Contents

Notes to Consolidated Financial Statements — (continued)

acquired businesses into the company’s various integrated solutions and services, neither of which qualifies as an amortizable intangible asset. It is expected that none of the goodwill will be deductible for tax purposes.

The overall weighted-average useful life of the identified amortizable intangible assets acquired was 6.6 years. The identified intangible assets will be amortized on a straight-line basis over their useful lives, which approximates the pattern that the assets’ economic benefits are expected to be consumed over time.

The valuation of the assets acquired and liabilities assumed is subject to revision. If additional information becomes available, the company may further revise the purchase price allocation as soon as practical, but no later than one year from the acquisition date; however, material changes are not expected.

In April 2023, the company acquired Ahana Cloud, Inc. (Ahana), an expert in open-source-based, managed cloud-native data analytics solutions. Ahana will be integrated into the Software segment. At the date of issuance of the financial statements, the initial purchase accounting for Ahana was not complete.

Divestitures

Separation of Kyndryl — On November 3, 2021, the company completed the separation of its managed infrastructure services unit into a new public company with the distribution of 80.1 percent of the outstanding common stock of Kyndryl Holdings, Inc. (Kyndryl) to IBM stockholders on a pro rata basis. The company retained 19.9 percent of the shares of Kyndryl common stock immediately following the separation. During 2022, the company fully disposed of its retained interest in Kyndryl common stock pursuant to exchange agreements with a third-party financial institution, which were completed within twelve months of separation. As of November 2, 2022, the company no longer held an ownership interest in Kyndryl.

Loss from discontinued operations, net of tax for the three months ended March 31, 2023 of $7 million reflects the net impact of changes in separation-related estimates and the settlement of assets and liabilities in accordance with the separation and distribution agreement. Income from discontinued operations, net of tax for the three months ended March 31, 2022 of $71 million reflects the same drivers above and also reflects a gain on sale of a joint venture historically managed by Kyndryl, which transferred to Kyndryl in the first quarter of 2022 upon receiving regulatory approval.

6. Other (Income) and Expense:

Components of other (income) and expense are as follows:


(Dollars in millions)
For the three months ended March 31:	2023		2022
Other (income) and expense:
Foreign currency transaction losses/(gains)*	$	88	$	(176)
(Gains)/losses on derivative instruments		(142)		102
Interest income		(170)		(17)
Net (gains)/losses from securities and investment assets		5		218	**
Retirement-related costs/(income)		(5)		202
Other^È		(22)		(83)
Total other (income) and expense	$	(245)	$	246

The company uses financial hedging instruments to limit specific currency risks related to foreign currency-based transactions. The hedging program does not hedge 100 percent of currency exposures and defers, versus eliminates, the impact of currency. Refer to note 16, “Derivative Financial Instruments,” for additional information on foreign exchange risk.

** Includes an unrealized loss on Kyndryl retained shares of $222 million. See note 5, “Acquisitions & Divestitures,” for additional information.

^È Other primarily consists of (gains)/losses from divestitures and dispositions of land/buildings.

Table of Contents

Notes to Consolidated Financial Statements — (continued)

7. Earnings Per Share of Common Stock:

The following table provides the computation of basic and diluted earnings per share of common stock for the three months ended March 31, 2023 and 2022.


(Dollars in millions except per share amounts)
For the three months ended March 31:	2023		2022
Number of shares on which basic earnings per share is calculated:
Weighted-average shares outstanding during period		907,526,887		899,316,026
Add — Incremental shares under stock-based compensation plans		8,609,239		8,375,246
Add — Incremental shares associated with contingently issuable shares		1,709,153		1,534,864
Number of shares on which diluted earnings per share is calculated		917,845,279		909,226,136

Income from continuing operations	$	934	$	662
Income/(loss) from discontinued operations, net of tax		(7)		71
Net income on which basic earnings per share is calculated	$	927	$	733

Income from continuing operations	$	934	$	662
Net income applicable to contingently issuable shares		—		—
Income from continuing operations on which diluted earnings per share is calculated	$	934	$	662
Income/(loss) from discontinued operations, net of tax, on which diluted earnings per share is calculated		(7)		71
Net income on which diluted earnings per share is calculated	$	927	$	733

Earnings/(loss) per share of common stock:
Assuming dilution
Continuing operations	$	1.02	$	0.73
Discontinued operations		(0.01)		0.08
Total	$	1.01	$	0.81
Basic
Continuing operations	$	1.03	$	0.74
Discontinued operations		(0.01)		0.08
Total	$	1.02	$	0.82

Stock options to purchase 960,929 shares and 1,163,321 shares were outstanding as of March 31, 2023 and 2022, respectively, but were not included in the computation of diluted earnings per share because the exercise price of the options during the respective period was greater than the average market price of the common shares, and therefore, the effect would have been antidilutive.

Table of Contents

Notes to Consolidated Financial Statements — (continued)

8. Financial Assets & Liabilities:

Fair Value Measurements

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

●

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

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

●

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

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

●

Level 3—Unobservable inputs for the asset or liability.

· ~~Level 3—Unobservable inputs for the asset or liability.~~

~~The guidance requires the use of observable market data if such data is available without undue cost and effort.~~

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

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

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

●

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

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

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

The company holds investments primarily in time deposits, certificates of deposit, and U.S. government debt that are designated as available-for-sale. The primary objective of the company’s ~~own~~cash and debt investment portfolio is to protect principal by investing in very liquid investment securities with highly rated counterparties.

The company’s standard practice is to hold all of its debt security investments classified as available-for-sale until maturity. No impairment for credit risk when valuing all liabilities measured at fair value. The methodology is consistent with that applied in developing counterparty credit risk adjustments, but incorporates the company’s own credit risk as observed in the credit default swap market.

~~As an example, the fair value of derivatives is derived utilizing a discounted cash flow model that uses observable market inputs such as known notional value amounts, yield curves, spot~~losses and ~~forward exchange rates as well as discount rates. These inputs relate to liquid, heavily traded currencies with active markets which are available~~no material non-credit impairments were recorded for the ~~full term of the derivative.~~three months ended March 31, 2023 and 2022, respectively.

Certain financial assets are measured at fair value on a nonrecurring basis. These assets include equity method investments that are recognized at fair value at the measurement date to the extent that they are deemed to be other-than-temporarily impaired. Certain assets that are measured at fair value on a recurring basis can be subject to nonrecurring fair value measurements. These assets include available-for-sale equity investments that are deemed to be other-than-temporarily impaired. In the event of an other-than-temporary impairment of a financial investment, fair value is measured using a model described above.

~~Non-financial~~non-financial assets such as property, plant and equipment, operating right-of-use assets, land, goodwill and intangible assets are also subject to nonrecurring fair value measurements if they are deemed to be impaired. The impairment models used for ~~nonfinancial~~non-financial assets depend on the type of asset. ~~During the nine months ended September 30, 2016, a pre-tax impairment charge related to certain property, plant and equipment of $218 million was recorded.~~ There were no material impairments of non-financial assets for the ~~nine~~three months ended ~~September 30, 2017.~~March 31, 2023 and 2022, respectively.

Table of Contents

Accounting guidance permits the measurement of eligible financial assets, financial liabilities and firm commitments at fair value, on an instrument-by-instrument basis, that are otherwise not permittedNotes to ~~be accounted for at fair value under other accounting standards. This election is irrevocable. The company has not applied the fair value option to any eligible assets or liabilities.~~Consolidated Financial Statements — (continued)

The following ~~tables present~~table presents the company’s financial assets and financial liabilities that are measured at fair value on a recurring basis at ~~September 30, 2017~~March 31, 2023 and December 31, ~~2016.~~

~~Notes to Consolidated Financial Statements — (continued)~~2022.

(Dollars in millions)

At September 30, 2017

Level 1

Level 2

Level 3

Total

Assets:

Cash equivalents (1)

Time deposits and certificates of deposit

$
—

$
5,553

$
—

$
5,553

Money market funds

1,375

—

—

1,375

U.S. government securities

—

200

—

200

Canadian government securities

—

460

—

460

Total

1,375

6,214

—

7,589
(6)
Debt securities - current (2)

—

599

—

599
(6)
Debt securities - noncurrent (3)

4

7

—

11

Available-for-sale equity investments (3)

5

—

—

5

Derivative assets (4)

Interest rate contracts

—

517

—

517

Foreign exchange contracts

—

416

—

416

Equity contracts

—

23

—

23

Total

—

957

—

957
(7)
Total assets

$
1,384

$
7,775

$
—

$
9,159
(7)
Liabilities:

Derivative liabilities (5)

Foreign exchange contracts

$
—

$
333

$
—

$
333

Equity contracts

—

4

—

4

Interest rate contracts

—

15

—

15

Total liabilities

$
—

$
352

$
—

$
352
(7)


	Fair Value
	Hierarchy	At March 31, 2023				At December 31, 2022
(Dollars in millions)	Level	Assets (5)		Liabilities (6)		Assets (5)		Liabilities (6)
Cash equivalents: (1)
Time deposits and certificates of deposit (2)	2	$	3,896	$	N/A	$	3,712	$	N/A
Money market funds	1		817		N/A		306		N/A
Total cash equivalents		$	4,713	$	N/A	$	4,018	$	N/A
Equity investments	1		1		N/A		—		N/A
Debt securities-current (2)(3)	2		8,057		N/A		852		N/A
Debt securities-noncurrent (2)(4)	2,3		33		N/A		31		N/A
Derivatives designated as hedging instruments:
Interest rate contracts	2		19		281		3		336
Foreign exchange contracts	2		111		388		184		674
Derivatives not designated as hedging instruments:
Foreign exchange contracts	2		10		50		42		16
Equity contracts	2		28		12		49		8
Total		$	12,971	$	731	$	5,179	$	1,034

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

(2)	Available-for-sale debt securities with carrying values that approximate fair value.

(3)	U.S. treasury bills and term deposits that are reported within marketable securities in the Consolidated Balance Sheet. The March 31, 2023 balance includes proceeds from the first quarter 2023 debt issuances. See note 12, “Borrowings,” for additional information.

(4)	Includes immaterial activity related to private company investments reported within investments and sundry assets in the Consolidated Balance Sheet.

(5)

The gross balances of derivative assets contained within prepaid expenses and other current assets, and investments and sundry assets in the Consolidated Balance Sheet at March 31, 2023 were $145 million and $23 million, respectively, and at December 31, 2022 were $271 million and $7 million, respectively.

(6)

The gross balances of derivative liabilities contained within other accrued expenses and liabilities, and other liabilities in the Consolidated Balance Sheet at March 31, 2023 were $248 million and $483 million, respectively, and at December 31, 2022 were $546 million and $488 million, respectively.

~~(1) Included within cash and cash equivalents in the Consolidated Statement of Financial Position.~~

~~(2) U.S. government securities reported as marketable securities in the Consolidated Statement of Financial Position.~~N/A - not applicable

~~(3) Included within investments and sundry assets in the Consolidated Statement of Financial Position.~~

~~(4) The gross balances of derivative assets contained within prepaid expenses and other current assets, and investments~~ ~~and sundry assets in the Consolidated Statement of Financial Position at September 30, 2017 were $269 million and $687 million, respectively.~~

~~(5) The gross balances of derivative liabilities contained within other accrued expenses and liabilities, and other~~ ~~liabilities in the Consolidated Statement of Financial Position at September 30, 2017 were $332 million and $20 million, respectively.~~

~~(6) Available-for-sale securities with carrying values that approximate fair value.~~

~~(7) If derivative exposures covered by a qualifying master netting agreement had been netted in the Consolidated~~ ~~Statement of Financial Position, the total derivative asset and liability positions each would have been reduced by $274 million.~~

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

(Dollars in millions)

At December 31, 2016

Level 1

Level 2

Level 3

Total

Assets:

Cash equivalents (1)

Time deposits and certificates of deposit

$
—

$
3,629

$
—

$
3,629

Money market funds

1,204

—

—

1,204

Total

1,204

3,629

—

4,832
(6)
Debt securities - current (2)

—

699

—

699
(6)
Debt securities - noncurrent (3)

1

6

—

8

Available-for-sale equity investments (3)

7

—

—

7

Derivative assets (4)

Interest rate contracts

—

555

—

555

Foreign exchange contracts

—

560

—

560

Equity contracts

—

11

—

11

Total

—

1,126

—

1,126
(7)
Total assets

$
1,212

$
5,460

$
—

$
6,672
(7)
Liabilities:

Derivative liabilities (5)

Foreign exchange contracts

$
—

$
188

$
—

$
188

Equity contracts

—

10

—

10

Interest rate contracts

—

8

—

8

Total liabilities

$
—

$
206

$
—

$
206
(7)

~~(1) Included within cash and cash equivalents in the Consolidated Statement of Financial Position.~~

~~(2) U.S government securities reported as marketable securities in the Consolidated Statement of Financial Position.~~

~~(3) Included within investments and sundry assets in the Consolidated Statement of Financial Position.~~

~~(4) The gross balances of derivative assets contained within prepaid expenses and other current assets, and investments~~ ~~and sundry assets in the Consolidated Statement of Financial Position at December 31, 2016 were $532 million and $594 million, respectively.~~

~~(5) The gross balances of derivative liabilities contained within other accrued expenses and liabilities, and other~~ ~~liabilities in the Consolidated Statement of Financial Position at December 31, 2016 were $145 million and $61 million, respectively.~~

~~(6) Available-for-sale securities with carrying values that approximate fair value.~~

~~There were no transfers between Levels 1 and 2 for the nine months ended September 30, 2017 and the year ended December 31, 2016.~~

Financial Assets and Liabilities Not Measured at Fair Value

Short-Term Receivables and Payables

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

Loans and ~~Long-term~~Long-Term Receivables

Fair values are based on discounted future cash flows using current interest rates offered for similar loans to clients with similar credit ratings for the same remaining maturities. At ~~September 30, 2017~~March 31, 2023 and December 31, ~~2016,~~2022, the difference between the carrying amount and estimated fair value for loans and long-term receivables was immaterial. If measured at fair value in the financial statements, these financial instruments would be classified as Level 3 in the fair value hierarchy.

Table of Contents

Notes to Consolidated Financial Statements — (continued)

Long-Term Debt

Fair value of ~~publicly-traded~~publicly traded long-term debt is based on quoted market prices for the identical liability when traded as an asset in an active market. For other long-term debt (including long-term finance lease liabilities) for which a quoted market price is not available, an expected present value technique that uses rates currently available to the company for debt with similar terms and remaining maturities is used to estimate fair value. The carrying amount of long-term debt was ~~$41,327~~$53,826 million and ~~$34,655~~$46,189 million, and the estimated fair value was ~~$43,623~~$50,811 million and ~~$36,838~~$42,514 million at ~~September 30, 2017~~March 31, 2023 and December 31, ~~2016,~~2022, respectively. If measured at fair value in the financial statements, long-term debt (including the current portion) would be classified as Level 2 in the fair value hierarchy.

~~Debt and Marketable Equity Securities~~9. Financing Receivables:

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

~~The~~A summary of the components of the company’s ~~cash equivalents and current debt securities are considered available-for-sale and recorded at fair value, which~~financing receivables is ~~not materially different from~~presented as follows:


	Client Financing Receivables
	Client Loan and		Investment in
	Installment Payment		Sales-Type and		Commercial Financing Receivables
(Dollars in millions)	Receivables		Direct Financing		Held for		Held for
At March 31, 2023:	(Loans)		Leases		Investment		Sale*		Total
Financing receivables, gross	$	7,558	$	3,853	$	250	$	605	$	12,265
Unearned income		(410)		(363)		—		—		(773)
Unguaranteed residual value		—		400		—		—		400
Amortized cost	$	7,148	$	3,890	$	250	$	605	$	11,891
Allowance for credit losses		(100)		(58)		(6)		—		(164)
Total financing receivables, net	$	7,047	$	3,831	$	244	$	605	$	11,727
Current portion	$	4,369	$	1,445	$	244	$	605	$	6,662
Noncurrent portion	$	2,678	$	2,387	$	—	$	—	$	5,065

* The carrying value inof the ~~Consolidated Statement~~receivables classified as held for sale approximates fair value.

Table of ~~Financial Position.~~Contents

The following tables summarize the company’s noncurrent debt and marketable equity securities which are considered available-for-sale and recorded at fair value in the Consolidated Statement of Financial Position.

Gross

Gross

(Dollars in millions)

Adjusted

Unrealized

Unrealized

Fair

At September 30, 2017:

Cost

Gains

Losses

Value

Debt securities — noncurrent(1)

$
7

$
3

$
—

$
11

Available-for-sale equity investments(1)

$
1

$
4

$
0

$
5

~~(1) Included within investments and sundry assets in the Consolidated Statement of Financial Position.~~

Gross

Gross

(Dollars in millions)

Adjusted

Unrealized

Unrealized

Fair

At December 31, 2016:

Cost

Gains

Losses

Value

Debt securities — noncurrent(1)

$
5

$
3

$
—

$
8

Available-for-sale equity investments(1)

$
3

$
5

$
0

$
7

~~(1) Included within investments and sundry assets in the Consolidated Statement of Financial Position.~~

~~Sales of debt and available-for-sale equity investments during the period were as follows:~~

(Dollars in millions)

For the three months ended September 30:

2017

2016

Proceeds

$
0

$
1

Gross realized gains (before taxes)

0

1

Gross realized losses (before taxes)

—

—

(Dollars in millions)

For the nine months ended September 30:

2017

2016

Proceeds

$
5

$
150

Gross realized gains (before taxes)

1

1

Gross realized losses (before taxes)

2

37

The after-tax net unrealized holding gains/(losses) on available-for-sale debt and equity securities that have been included in other comprehensive income/(loss) for the period and after-tax net (gains)/losses reclassified from accumulated other comprehensive income/(loss) to net income were as follows:

Notes to Consolidated Financial Statements — (continued)


	Client Financing Receivables
	Client Loan and		Investment in
	Installment Payment		Sales-Type and		Commercial Financing Receivables
(Dollars in millions)	Receivables		Direct Financing		Held for		Held for
At December 31, 2022:	(Loans)		Leases		Investment		Sale*		Total
Financing receivables, gross	$	8,875	$	4,023	$	299	$	939	$	14,136
Unearned income		(439)		(351)		—		—		(790)
Unguaranteed residual value		—		422		—		—		422
Amortized cost	$	8,437	$	4,094	$	299	$	939	$	13,769
Allowance for credit losses		(108)		(60)		(5)		—		(173)
Total financing receivables, net	$	8,329	$	4,034	$	293	$	939	$	13,596
Current portion	$	5,073	$	1,485	$	293	$	939	$	7,790
Noncurrent portion	$	3,256	$	2,549	$	—	$	—	$	5,806

* The carrying value of the receivables classified as held for sale approximates fair value.

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

Financing receivables pledged as collateral for secured borrowings were $283 million and $349 million at March 31, 2023 and December 31, 2022, respectively. These borrowings are included in note 12, “Borrowings.”

Transfer of Financial Assets

(Dollars in millions)

For the three months ended September 30:

2017

2016

Net unrealized gains/(losses) arising during the period

$
1

$
(1
)
Net unrealized (gains)/losses reclassified to net income*

0

(1
)

*The company has an existing agreement with a third-party investor to sell IBM short-term commercial financing receivables on a revolving basis. In addition, the company enters into agreements with third-party financial institutions to sell certain of its client financing receivables, including both loan and lease receivables, for cash proceeds. There were no ~~writedowns~~material client financing receivables transferred for the three months ended ~~September 30, 2017~~March 31, 2023 and ~~2016,~~2022.

The following table presents the total amount of commercial financing receivables transferred.


(Dollars in millions)
For the three months ended March 31:	2023		2022
Commercial financing receivables:
Receivables transferred during the period	$	2,233	$	1,989
Receivables uncollected at end of period*	$	780	$	724

*	Of the total amount of commercial financing receivables sold and derecognized from the Consolidated Balance Sheet, the amounts presented remained uncollected from the business partners as of March 31, 2023 and 2022.

The transfer 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. The impacts to the Consolidated Income Statement, including fees and net loss associated with the transfer of commercial financing receivables for the three months ending March 31, 2023 and 2022 were $24 million and $11 million, respectively.

(Dollars in millions)

For the nine months ended September 30:

2017

2016

Net unrealized gains/(losses) arising during the period

$
1

$
(22
)
Net unrealized (gains)/losses reclassified to net income*

0

22

Table of Contents

Notes to Consolidated Financial Statements — (continued)

Financing Receivables by Portfolio Segment

The following tables present the amortized cost basis for client financing receivables at March 31, 2023 and December 31, 2022, further segmented by three classes: Americas, Europe/Middle East/Africa (EMEA) and Asia Pacific. The commercial financing receivables portfolio segment is excluded from the tables in the sections below as the receivables are short term in nature and the current estimated risk of loss and resulting impact to the company’s financial results are not material.


(Dollars in millions)
At March 31, 2023:	Americas		EMEA		Asia Pacific		Total
Amortized cost	$	6,394	$	3,082	$	1,561	$	11,037
Allowance for credit losses:
Beginning balance at January 1, 2023	$	88	$	60	$	20	$	168
Write-offs		0		0		—		0
Recoveries		—		0		0		0
Additions/(releases)		0		(13)		(1)		(13)
Other*		4		0		0		4
Ending balance at March 31, 2023	$	93	$	47	$	19	$	159


(Dollars in millions)
At December 31, 2022:	Americas		EMEA		Asia Pacific		Total
Amortized cost	$	7,281	$	3,546	$	1,704	$	12,531
Allowance for credit losses:
Beginning balance at January 1, 2022	$	111	$	61	$	23	$	195
Write-offs		(20)		(3)		(2)		(25)
Recoveries		1		0		4		5
Additions/(releases)		(5)		6		(4)		(3)
Other*		2		(5)		(2)		(4)
Ending balance at December 31, 2022	$	88	$	60	$	20	$	168

* Primarily represents translation adjustments.

When determining the allowances, financing receivables are evaluated either on an individual or a collective basis. For the company’s policy on determining allowances for credit losses, refer to note A, “Significant Accounting Policies,” in the company’s 2022 Annual Report.

Table of Contents

Notes to Consolidated Financial Statements — (continued)

Past Due Financing Receivables

The company summarizes information about the amortized cost basis for client financing receivables, including amortized cost aged over 90 days and still accruing, billed invoices aged over 90 days and still accruing, and amortized cost not accruing.


					Amortized		Billed		Amortized
	Total		Amortized		Cost		Invoices		Cost
(Dollars in millions)	Amortized		Cost		> 90 Days and		> 90 Days and		Not
At March 31, 2023:	Cost		> 90 Days*		Accruing*		Accruing		Accruing**
Americas	$	6,394	$	183	$	107	$	15	$	76
EMEA		3,082		47		16		16		32
Asia Pacific		1,561		26		9		3		17
Total client financing receivables	$	11,037	$	257	$	133	$	33	$	124


					Amortized		Billed		Amortized
	Total		Amortized		Cost		Invoices		Cost
(Dollars in millions)	Amortized		Cost		> 90 Days and		> 90 Days and		Not
At December 31, 2022:	Cost		> 90 Days*		Accruing*		Accruing		Accruing**
Americas	$	7,281	$	272	$	198	$	22	$	74
EMEA		3,546		52		8		1		46
Asia Pacific		1,704		20		3		1		17
Total client financing receivables	$	12,531	$	344	$	208	$	23	$	137

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

** Of the amortized cost not accruing, there was a related allowance of $121 million and $122 million at March 31, 2023 and December 31, 2022, respectively. Financing income recognized on these receivables was immaterial for the three months ended March 31, 2023 and 2022, respectively.

Credit Quality Indicators

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

The following tables present the amortized cost basis for client financing receivables by credit quality indicator at March 31, 2023 and December 31, 2022, respectively. Receivables with a credit quality indicator ranging from Aaa to Baa3 are considered investment grade. All others are considered non-investment grade. The credit quality indicators reflect mitigating credit enhancement actions taken by customers which reduce the risk to IBM. Gross write-offs by vintage year at March 31, 2023 were not material.


(Dollars in millions)	Americas				EMEA				Asia Pacific
At March 31, 2023:	Aaa – Baa3		Ba1 – D		Aaa – Baa3		Ba1 – D		Aaa – Baa3		Ba1 – D
Vintage year:
2023	$	295	$	231	$	157	$	130	$	115	$	48
2022		2,840		764		1,130		618		617		84
2021		1,001		262		381		133		189		58
2020		401		194		170		127		183		37
2019		205		60		94		78		103		18
2018 and prior		72		68		23		42		77		31
Total	$	4,815	$	1,579	$	1,955	$	1,127	$	1,285	$	276

Table of Contents

Notes to Consolidated Financial Statements — (continued)


(Dollars in millions)	Americas				EMEA				Asia Pacific
At December 31, 2022:	Aaa – Baa3		Ba1 – D		Aaa – Baa3		Ba1 – D		Aaa – Baa3		Ba1 – D
Vintage year:
2022	$	3,316	$	1,097	$	1,447	$	704	$	799	$	96
2021		1,197		323		451		159		203		65
2020		559		217		258		158		210		49
2019		251		91		161		99		127		22
2018		128		26		42		16		84		21
2017 and prior		32		45		14		38		12		17
Total	$	5,482	$	1,800	$	2,373	$	1,173	$	1,434	$	269

Modifications and Troubled Debt Restructurings

The company did not have any significant modifications due to financial difficulty during the three months ended March 31, 2023. The company did not have any significant troubled debt restructurings during the year ended December 31, 2022.

10. Leases:

Accounting for Leases as a Lessor

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


(Dollars in millions)
For the three months ended March 31:	2023		2022
Lease income — sales-type and direct financing leases:
Sales-type lease selling price	$	90	$	54
Less: Carrying value of underlying assets*		(30)		(19)
Gross profit	$	61	$	36
Interest income on lease receivables		59		45
Total sales-type and direct financing lease income	$	119	$	81
Lease income — operating leases		26		30
Variable lease income		21		28
Total lease income	$	166	$	138

* Excludes unguaranteed residual value.

Table of Contents

Notes to Consolidated Financial Statements — (continued)

11. Intangible Assets Including Goodwill:

Intangible Assets

The following tables present the company's intangible asset balances by major asset class.


	At March 31, 2023
	Gross Carrying		Accumulated		Net Carrying
(Dollars in millions)	Amount		Amortization		Amount*
Intangible asset class:
Capitalized software	$	1,638	$	(675)	$	962
Client relationships		8,327		(2,890)		5,438
Completed technology		5,097		(2,025)		3,073
Patents/trademarks		1,799		(370)		1,429
Other**		19		(15)		4
Total	$	16,880	$	(5,976)	$	10,905


	At December 31, 2022
	Gross Carrying		Accumulated		Net Carrying
(Dollars in millions)	Amount		Amortization		Amount*
Intangible asset class:
Capitalized software	$	1,650	$	(705)	$	945
Client relationships		8,559		(2,951)		5,608
Completed technology		5,220		(2,045)		3,175
Patents/trademarks		2,140		(688)		1,452
Other**		19		(15)		4
Total	$	17,588	$	(6,404)	$	11,184

* Amounts as of March 31, 2023 and December 31, 2022 include an increase in net intangible asset balances of $30 million and a decrease of $198 million, respectively, due to foreign currency translation.

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

The net carrying amount of intangible assets decreased $279 million during the first three months of 2023, primarily due to intangible asset amortization, partially offset by additions of capitalized software and acquired intangibles. The aggregate intangible amortization expense was $547 million and $625 million for the three months ended March 31, 2023 and 2022, respectively. In the first three months of 2023, the company retired $992 million of fully amortized intangible assets, impacting both the gross carrying amount and accumulated amortization by this amount.

The future amortization expense relating to intangible assets currently recorded in the Consolidated Balance Sheet is estimated to be the following at March 31, 2023:


	Capitalized		Acquired
(Dollars in millions)	Software		Intangibles		Total
Remainder of 2023	$	441	$	1,173	$	1,615
2024		374		1,553		1,927
2025		138		1,535		1,673
2026		9		1,512		1,520
2027		—		1,492		1,492
Thereafter		—		2,678		2,678

Table of Contents

Notes to Consolidated Financial Statements — (continued)

Goodwill

The changes in the goodwill balances by segment for the three months ended March 31, 2023 and for the year ended December 31, 2022 are as follows:


									Foreign
									Currency
					Purchase				Translation
(Dollars in millions)	Balance		Goodwill		Price				and Other		Balance
Segment	1/1/2023		Additions		Adjustments		Divestitures		Adjustments*		3/31/2023
Software	$	43,657	$	141	$	1	$	—	$	66	$	43,865
Consulting		7,928		—		5		—		29		7,962
Infrastructure		4,363		—		—		—		2		4,366
Other		—		—		—		—		—		—
Total	$	55,949	$	141	$	6	$	—	$	97	$	56,193


									Foreign
									Currency
					Purchase				Translation
(Dollars in millions)	Balance		Goodwill		Price				and Other		Balance
Segment	1/1/2022		Additions		Adjustments		Divestitures		Adjustments*		12/31/2022
Software	$	43,966	$	568	$	(118)	$	—	$	(760)	$	43,657
Consulting		6,797		1,366		(42)		—		(192)		7,928
Infrastructure		4,396		—		—		(1)		(32)		4,363
Other**		484		—		—		(484)		—		—
Total	$	55,643	$	1,934	$	(159)	$	(485)	$	(984)	$	55,949

*	Primarily driven by foreign currency translation.

**	The company derecognized goodwill related to the divestiture of its healthcare software assets in the second quarter of 2022.

There were no ~~writedowns~~goodwill impairment losses recorded during the first three months of 2023 or full-year 2022 and the company has no accumulated impairment losses. Purchase price adjustments recorded in the first three months of 2023 and full-year 2022 were related to acquisitions that were still subject to the measurement period that ends at the earlier of 12 months from the acquisition date or when information becomes available. Net purchase price adjustments recorded during the first three months of 2023 were not material. Net purchase price adjustments recorded in 2022 primarily related to deferred tax assets and liabilities associated with the Turbonomic acquisition.

12. Borrowings:

Short-Term Debt


	At March 31,		At December 31,
(Dollars in millions)	2023		2022
Short-term loans	$	6	$	8
Long-term debt — current maturities		4,881		4,751
Total	$	4,887	$	4,760

The weighted-average interest rate for short-term loans was 7.4 percent and 7.6 percent at March 31, 2023 and December 31, 2022, respectively.

Table of Contents

Notes to Consolidated Financial Statements — (continued)

Long-Term Debt

Pre-Swap Borrowing


		Balance		Balance
(Dollars in millions)	Maturities	3/31/2023		12/31/2022
U.S. dollar debt (weighted-average interest rate at March 31, 2023):*
3.4%	2023	$	1,514	$	1,529
3.3%	2024		5,007		5,009
5.1%	2025		1,603		1,603
3.5%	2026		5,201		4,351
3.1%	2027		3,620		3,620
5.0%	2028		1,313		313
3.5%	2029		3,250		3,250
2.0%	2030		1,350		1,350
4.4%	2032		1,850		1,850
4.8%	2033		750		—
8.0%	2038		83		83
4.5%	2039		2,745		2,745
2.9%	2040		650		650
4.0%	2042		1,107		1,107
7.0%	2045		27		27
4.7%	2046		650		650
4.3%	2049		3,000		3,000
3.0%	2050		750		750
4.2%	2052		1,400		1,400
5.1%	2053		650		—
7.1%	2096		316		316
		$	36,836	$	33,605
Other currencies (weighted-average interest rate at March 31, 2023, in parentheses):*
Euro (1.8%)	2023–2043	$	20,103	$	17,087
Pound sterling (4.9%)	2038		928		—
Japanese yen (0.5%)	2024–2028		1,327		694
Other (16.1%)	2023–2026		305		361
		$	59,499	$	51,747
Finance lease obligations (3.6%)	2023–2030		232		239
		$	59,731	$	51,986
Less: net unamortized discount			866		835
Less: net unamortized debt issuance costs			170		138
Add: fair value adjustment**			11		(73)
		$	58,707	$	50,940
Less: current maturities			4,881		4,751
Total		$	53,826	$	46,189

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

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

The company’s indenture governing its debt securities and its various credit facilities each contain significant covenants which obligate the company to promptly pay principal and interest, limit the aggregate amount of secured indebtedness and sale and leaseback transactions to 10 percent of the company’s consolidated net tangible assets, and

Table of Contents

Notes to Consolidated Financial Statements — (continued)

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

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

In the first quarter of 2023, the company issued $0.7 billion of Japanese yen floating-rate syndicated bank loans with a maturity of 5 years; $4.6 billion of Euro fixed-rate notes in tranches with maturities ranging from 4 to 20 years and coupons ranging from 3.375 to 4 percent; $0.9 billion of Pound sterling fixed-rate notes with a maturity of 15 years and a coupon of 4.875 percent; and $3.25 billion of U.S. dollar fixed-rate notes in tranches with maturities ranging from 3 to 30 years and coupons ranging from 4.5 to 5.1 percent.

Pre-swap annual contractual obligations of long-term debt outstanding at March 31, 2023, are as follows:


(Dollars in millions)	Total
Remainder of 2023	$	2,812
2024		6,378
2025		4,935
2026		5,550
2027		5,812
Thereafter		34,243
Total	$	59,731

Interest on Debt


(Dollars in millions)
For the three months ended March 31:	2023		2022
Cost of financing	$	90	$	82
Interest expense		367		311
Interest capitalized		4		2
Total interest paid and accrued	$	462	$	395

Lines of Credit

The company has a $2.5 billion Three-Year Credit Agreement and a $7.5 billion Five-Year Credit Agreement with maturity dates of June 20, 2025 and June 22, 2027, respectively. The Credit Agreements permit the company and its subsidiary borrowers to borrow up to $10 billion on a revolving basis. At March 31, 2023, there were no borrowings by the company, or its subsidiaries, under these credit facilities.

Table of Contents

Notes to Consolidated Financial Statements — (continued)

13. Commitments:

The company’s extended lines of credit to third-party entities include unused amounts of $1.4 billion and $1.6 billion at March 31, 2023 and December 31, 2022, respectively. A portion of these amounts was available to the company’s business partners to support their working capital needs. In addition, the company has committed to provide future financing to its clients in connection with client purchase agreements for $1.7 billion and $2.1 billion at March 31, 2023 and December 31, 2022, respectively. The reduction in the future financing commitments is primarily due to lower services financing in the current quarter. The company collectively evaluates the allowance for these arrangements using a provision methodology consistent with the portfolio of the commitments. Refer to note A, “Significant Accounting Policies,” in the company’s 2022 Annual Report for additional information. The allowance for these commitments is recorded in other liabilities in the Consolidated Balance Sheet and was not material at March 31, 2023.

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

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

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

In addition, the company guarantees certain loans and financial commitments. The maximum potential future payment under these financial guarantees and the fair value of these guarantees recognized in the Consolidated Balance Sheet at March 31, 2023 and December 31, 2022 was not material.

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

Standard Warranty Liability


(Dollars in millions)	2023		2022
Balance at January 1	$	79	$	77
Current period accruals		17		14
Accrual adjustments to reflect actual experience		(17)		(2)
Charges incurred		(21)		(20)
Balance at March 31	$	58	$	69

Table of Contents

Notes to Consolidated Financial Statements — (continued)

Extended Warranty Liability (Deferred Income)


(Dollars in millions)	2023		2022
Balance at January 1	$	272	$	350
Revenue deferred for new extended warranty contracts		9		18
Amortization of deferred revenue		(37)		(44)
Other*		1		(1)
Balance at March 31	$	244	$	323
Current portion	$	129	$	155
Noncurrent portion	$	116	$	168

* Other primarily consists of foreign currency translation adjustments.

14.Contingencies:

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

The company records a provision with respect to a claim, suit, investigation or proceeding when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Any recorded liabilities, including any changes to such liabilities for the ~~nine months~~quarter ended ~~September 30, 2017~~March 31, 2023 were not material to the Consolidated Financial Statements.

In accordance with the relevant accounting guidance, the company provides disclosures of matters for which the likelihood of material loss is at least reasonably possible. In addition, the company also discloses matters based on its consideration of other matters and ~~2016, respectively.~~qualitative factors, including the experience of other companies in the industry, and investor, customer and employee relations considerations.

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

Table of Contents

Notes to Consolidated Financial Statements — (continued)

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

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

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

On June 8, 2021, IBM sued GlobalFoundries U.S. Inc. (GF) in New York State Supreme Court for claims including fraud and breach of contract relating to a long-term strategic relationship between IBM and GF for researching, developing, and manufacturing advanced semiconductor chips for IBM. GF walked away from its obligations and IBM is now suing to recover amounts paid to GF, and other compensatory and punitive damages, totaling more than $1.5 billion. On September 14, 2021, the court ruled on GF’s motion to dismiss. On April 7, 2022, the Appellate Division unanimously reversed the lower court’s dismissal of IBM’s fraud claim. IBM’s claims for breaches of contract, promissory estoppel, and fraud are proceeding.

On April 5, 2022, a putative securities law class action was commenced in the United States District Court for the Southern District of New York alleging that during the period from April 4, 2017 through October 20, 2021, certain strategic imperatives revenues were misclassified. The company, two current IBM senior executives, and two former IBM senior executives are named as defendants. On June 23, 2022, the court entered an order appointing Iron Workers Local 580 Joint Funds as lead plaintiff. On September 21, 2022, the plaintiff voluntarily dismissed the case, without prejudice. On January 13, 2023, a putative securities law class action making allegations substantially ~~all available-for-sale debt securities~~similar to those in the dismissed case was filed in the same court. On April 4, 2023, the court entered an order appointing June E. Adams Irrevocable Trust Dated 7/21/14 FBO Edward Adams, the same entity that filed the since-dismissed April 5, 2022 class action, as lead plaintiff. On March 25, 2022, the Board of Directors received a shareholder demand letter making similar allegations and demanding that the company’s Board of Directors take action to assert the company’s rights. A special committee of independent directors was formed to investigate the issues raised in the letter. The special committee has completed its investigation and recommended that no claims should be asserted on behalf of the company. The independent directors of the company’s Board of Directors unanimously adopted that recommendation.

On June 2, 2022, a putative class action lawsuit was filed in the United States District Court for the Southern District of New York alleging that the IBM Pension Plan miscalculated certain joint and survivor annuity pension benefits by using outdated actuarial tables in violation of the Employee Retirement Income Security Act of 1974. IBM, the Plan Administrator Committee, and the IBM Pension Plan are ~~less than one year at September~~named as defendants.

As disclosed in the Kyndryl Form 10 and subsequent Kyndryl public filings, in 2017 BMC Software, Inc. (BMC) filed suit against IBM in the United States District Court for the Southern District of Texas in a dispute involving IBM’s former managed infrastructure services business. On May 30, ~~2017.~~2022, the trial court awarded BMC $718 million in direct damages and $718 million in punitive damages, plus interest and fees. IBM filed a notice of appeal. IBM does not believe it has any material exposure relating to this litigation. No material liability or related indemnification asset has been recorded by IBM.

Table of Contents

Notes to Consolidated Financial Statements — (continued)

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

The company is also subject to ongoing tax examinations and governmental assessments in various jurisdictions. Along with many other U.S. companies doing business in Brazil, the company is involved in various challenges with Brazilian tax authorities regarding non-income tax assessments and non-income tax litigation matters. The total potential amount related to all these matters for all applicable years is approximately $400 million. The company believes it will prevail on these matters and that this amount is not a meaningful indicator of liability.

15. Equity Activity:

Reclassifications and Taxes Related to Items of Other Comprehensive Income


(Dollars in millions)	Before Tax		Tax (Expense)/		Net of Tax
For the three months ended March 31, 2023:	Amount		Benefit		Amount
Other comprehensive income/(loss):
Foreign currency translation adjustments	$	(87)	$	56	$	(30)
Net changes related to available-for-sale securities:
Unrealized gains/(losses) arising during the period	$	15	$	(4)	$	11
Reclassification of (gains)/losses to other (income) and expense		—		—		—
Total net changes related to available-for-sale securities	$	15	$	(4)	$	11
Unrealized gains/(losses) on cash flow hedges:
Unrealized gains/(losses) arising during the period	$	(29)	$	6	$	(23)
Reclassification of (gains)/losses to:
Cost of services		2		0		2
Cost of sales		(14)		4		(10)
Cost of financing		5		(1)		4
SG&A expense		(10)		3		(7)
Other (income) and expense		(126)		32		(94)
Interest expense		21		(5)		16
Total unrealized gains/(losses) on cash flow hedges	$	(151)	$	38	$	(113)
*Retirement-related benefit plans:**
Prior service costs/(credits)	$	—	$	1	$	1
Net (losses)/gains arising during the period		2		0		2
Curtailments and settlements		(1)		0		(1)
Amortization of prior service (credits)/costs		(2)		1		(2)
Amortization of net (gains)/losses		131		(38)		93
Total retirement-related benefit plans	$	130	$	(38)	$	92
Other comprehensive income/(loss)	$	(93)	$	53	$	(40)

*	These accumulated other comprehensive income (AOCI) components are included in the computation of net periodic pension cost. Refer to note 18, “Retirement-Related Benefits,” for additional information.

Table of Contents

Notes to Consolidated Financial Statements — (continued)

Reclassifications and Taxes Related to Items of Other Comprehensive Income


(Dollars in millions)	Before Tax		Tax (Expense)/		Net of Tax
For the three months ended March 31, 2022:	Amount		Benefit		Amount
Other comprehensive income/(loss):
Foreign currency translation adjustments	$	442	$	(136)	$	306
Net changes related to available-for-sale securities:
Unrealized gains/(losses) arising during the period	$	0	$	0	$	0
Reclassification of (gains)/losses to other (income) and expense		—		—		—
Total net changes related to available-for-sale securities	$	0	$	0	$	0
Unrealized gains/(losses) on cash flow hedges:
Unrealized gains/(losses) arising during the period	$	60	$	(16)	$	44
Reclassification of (gains)/losses to:
Cost of services		(15)		4		(11)
Cost of sales		(12)		4		(9)
Cost of financing		5		(1)		4
SG&A expense		(6)		2		(4)
Other (income) and expense		7		(2)		5
Interest expense		21		(5)		15
Total unrealized gains/(losses) on cash flow hedges	$	59	$	(15)	$	44
*Retirement-related benefit plans:**
Prior service costs/(credits)	$	(5)	$	5	$	0
Net (losses)/gains arising during the period		9		(4)		5
Curtailments and settlements		8		(2)		6
Amortization of prior service (credits)/costs		7		(2)		5
Amortization of net (gains)/losses		468		(131)		337
Total retirement-related benefit plans	$	486	$	(134)	$	352
Other comprehensive income/(loss)	$	987	$	(285)	$	703

*	These AOCI components are included in the computation of net periodic pension cost. Refer to note 18, “Retirement-Related Benefits,” for additional information.

Table of Contents

Notes to Consolidated Financial Statements — (continued)

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


					Net Change		Net Unrealized
	Net Unrealized		Foreign		Retirement-		Gains/(Losses)		Accumulated
	Gains/(Losses)		Currency		Related		on Available-		Other
	on Cash Flow		Translation		Benefit		For-Sale		Comprehensive
(Dollars in millions)	Hedges		Adjustments*		Plans		Securities		Income/(Loss)
January 1, 2023	$	(135)	$	(3,591)	$	(13,013)	$	(1)	$	(16,740)
Other comprehensive income before reclassifications		(23)		(30)		2		11		(39)
Amount reclassified from accumulated other comprehensive income/(loss)		(90)		—		90		—		0
Total change for the period	$	(113)	$	(30)	$	92	$	11	$	(40)
March 31, 2023	$	(248)	$	(3,621)	$	(12,921)	$	10	$	(16,780)


					Net Change		Net Unrealized
	Net Unrealized		Foreign		Retirement-		Gains/(Losses)		Accumulated
	Gains/(Losses)		Currency		Related		on Available-		Other
	on Cash Flow		Translation		Benefit		For-Sale		Comprehensive
(Dollars in millions)	Hedges		Adjustments*		Plans		Securities		Income/(Loss)
January 1, 2022	$	(18)	$	(3,362)	$	(19,854)	$	(1)	$	(23,234)
Other comprehensive income before reclassifications		44		306		5		0		355
Amount reclassified from accumulated other comprehensive income/(loss)		0		—		348		—		348
Total change for the period	$	44	$	306	$	352	$	0	$	703
March 31, 2022	$	26	$	(3,056)	$	(19,502)	$	(1)	$	(22,532)

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

16. Derivative Financial ~~Instruments~~Instruments:

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

As a result of the use of derivative instruments, the company is exposed to the risk that counterparties to derivative contracts will fail to meet their contractual obligations. To mitigate the counterparty credit risk, the company has a policy of only entering into contracts with carefully selected major financial institutions based upon their overall credit profile. The company’s established policies and procedures for mitigating credit risk on principal transactions include reviewing and establishing limits for credit exposure and continually assessing the creditworthiness of counterparties. The right of set-off that exists under certain of these arrangements enables the legal entities of the company subject to the arrangement to net amounts due to and from the counterparty reducing the maximum loss from credit risk in the event of counterparty default.

The company is also a party to collateral security arrangements with most of its major derivative counterparties. These arrangements require the company to hold or post collateral (cash or U.S. Treasury securities) when the derivative fair values exceed contractually established thresholds. Posting thresholds can be fixed or can vary based on credit default swap pricing or credit ratings received from the major credit agencies. The aggregate fair value of all derivative instruments under these collateralized arrangements that were in a liability position at September 30, 2017 and December 31, 2016 was $45 million and $11 million, respectively, for which no collateral was posted at either date. Full collateralization of these agreements would be required in the event that the company’s credit rating falls below investment grade or if its credit default swap spread exceeds 250 basis points, as applicable, pursuant to the terms of the collateral security arrangements. The aggregate fair value of derivative instruments in asset positions as of September 30, 2017 and December 31, 2016 was $957 million and $1,126 million, respectively. This amount represents the maximum exposure to loss at the reporting date if the counterparties failed to perform as contracted. This exposure was reduced by $274 million and $116 million at September 30, 2017 and December 31, 2016, respectively, of liabilities included in master netting arrangements with those counterparties. Additionally, at September 30, 2017 and December 31, 2016, this exposure was reduced by $123 million and $141 million of cash collateral, respectively, and $35 million of non-cash collateral in U.S. Treasury securities at December 31, 2016. There were no non-cash collateral balances in U.S. Treasury securities at September 30, 2017. At September 30, 2017 and December 31, 2016, the net exposure related to derivative assets recorded in the Consolidated Statement of Financial Position was $559 million and $834 million, respectively. At September 30, 2017 and December 31, 2016, the net position related to derivative liabilities recorded in the Consolidated Statement of Financial Position was $78 million and $90 million, respectively.

In the Consolidated ~~Statement of Financial Position,~~Balance Sheet, the company does not offset derivative assets against liabilities in master netting arrangements nor does it offset receivables or payables recognized upon payment or receipt of cash collateral

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

against the fair values of the related derivative instruments. NoAt March 31, 2023 and December 31, 2022, the amount ~~was~~ recognized in other ~~receivables at September 30, 2017 or December 31, 2016~~accounts receivable for the right to reclaim cash ~~collateral. The~~collateral was $42 million and $140 million, respectively. At March 31, 2023, there was no amount recognized in accounts payable for the obligation to return cash ~~collateral was $123 million and $141 million at September 30, 2017 and~~collateral. At December 31, ~~2016, respectively.~~2022, the amount recognized in accounts payable for such obligation was $8 million. The company restricts the use of cash collateral received to rehypothecation, and therefore reports it in ~~prepaid expenses and other current assets~~restricted cash in the Consolidated ~~Statement of Financial Position. No amount~~Balance Sheet. There was no cash collateral rehypothecated at ~~September 30, 2017 and~~March 31, 2023. At December 31, ~~2016.~~

~~The company may employ~~2022, the amount rehypothecated was $8 million. Additionally, if derivative instruments to hedge the volatility in stockholders’ equity resulting from changes in currency exchange rates of significant foreign subsidiaries of the company with respect to the U.S. dollar. These instruments, designated as net investment hedges, expose the company to liquidity risk as the derivatives have an immediate cash flow impact upon maturity which is not offsetexposures covered by a cash flow from the translation of the underlying hedged equity. The company monitors this cash loss potential on an ongoing basis and may discontinue some of these hedging relationships by de-designating or terminating the derivative instrument in order to manage the liquidity risk. Although not designated as accounting hedges, the company may utilize derivatives to offset the changesqualifying master netting agreement had been netted in the ~~fair value~~Consolidated Balance Sheet at March 31, 2023 and December 31, 2022, the total derivative asset and liability positions each would have been reduced by $157 million and $220 million, respectively.

Table of ~~the de-designated instruments from the date of de-designation until maturity.~~Contents

Notes to Consolidated Financial Statements — (continued)

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

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

Interest Rate Risk

Fixed and Variable Rate Borrowings

The company issues debt in the global capital markets to fund its operations and financing business. Access to cost-effective financing can result in interest rate mismatches with the underlying assets. To manage these mismatches and to reduce overall interest cost, the company ~~uses~~may use interest-rate swaps to convert specific fixed-rate debt issuances into variable-rate debt (i.e., fair value hedges) and to convert specific variable-rate debt issuances into fixed-rate debt (i.e., cash flow hedges). At ~~September 30, 2017~~March 31, 2023 and December 31, ~~2016,~~2022, the total notional amount of the company’s ~~interest rate~~interest-rate swaps was ~~$9.1~~$6.9 billion and ~~$7.3~~$6.5 billion, respectively. The weighted-average remaining maturity of these instruments at ~~September 30, 2017~~both March 31, 2023 and December 31, ~~2016~~2022 was approximately ~~5.0 years~~6 years. These interest-rate contracts were accounted for as fair value hedges. The company did not have any cash flow hedges relating to this program outstanding at March 31, 2023 and ~~6.2 years, respectively.~~

December 31, 2022.

Forecasted Debt Issuance

The company is exposed to interest rate volatility on future debt issuances. To manage this risk, the company may use instruments such as forward starting interest-rate swaps to lock in the rate on the interest payments related to the forecasted debt ~~issuance. These swaps are accounted for as cash flow hedges. The company did not have any derivative~~issuances. There were no instruments ~~relating to this program~~ outstanding at ~~September 30, 2017~~March 31, 2023 and December 31, ~~2016.~~2022.

~~At December 31, 2016, net gains of less than $1 million (before taxes) were recorded in accumulated other comprehensive income/(loss) in~~In connection with cash flow hedges of forecasted interest payments related to the ~~company’s borrowings. During 2017, all gains~~company's borrowings, the company recorded net losses (before taxes) of $135 million and $139 million at March 31, 2023 and December 31, 2022, respectively, in AOCI. The company estimates that $18 million of the deferred net losses ~~associated with this program that were recorded~~(before taxes) on derivatives in ~~other comprehensive income/(loss) were~~AOCI at March 31, 2023 will be reclassified to net income ~~and there are no gains and losses remaining in accumulated other comprehensive income/(loss) at September 30, 2017.~~

within the next 12 months, providing an offsetting economic impact against the underlying interest payments.

Foreign Exchange Risk

Long-Term Investments in Foreign Subsidiaries (Net Investment)

A large portion of the company’s foreign currency denominated debt portfolio is designated as a hedge of net investment in foreign subsidiaries to reduce the volatility in stockholders’ equity caused by changes in foreign currency exchange rates in the functional currency of major foreign subsidiaries with respect to the U.S. dollar. At March 31, 2023 and December 31, 2022, the carrying value of debt designated as hedging instruments was $15.2 billion and $13.4 billion, respectively. The company also uses cross-currency swaps and foreign exchange forward contracts for this risk management purpose. At ~~September 30, 2017~~March 31, 2023 and December 31, ~~2016,~~2022, the total notional amount of derivative instruments designated as net investment hedges was ~~$8.8~~$5.0 billion and ~~$6.7~~$4.7 billion, respectively. At ~~September 30, 2017~~March 31, 2023 and December 31, ~~2016,~~2022, the weighted-average remaining maturity of these instruments was approximately 0.2 years and 0.1 years, ~~and 0.2 years,~~ respectively.

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

Anticipated Royalties and Cost Transactions

The company’s operations generate significant nonfunctional currency, third-party vendor payments and intercompany payments for royalties and goods and services among the company’s non-U.S. subsidiaries and with the company. In anticipation of these foreign currency cash flows and in view of the volatility of the currency markets, the company selectively employs foreign exchange forward contracts to manage its currency risk. These forward contracts

Table of Contents

Notes to Consolidated Financial Statements — (continued)

are accounted for as cash flow hedges. ~~The~~At March 31, 2023, the maximum remaining length of time over which the company ~~has~~ hedged its exposure ~~to the variability in future cash flows~~ is ~~four~~approximately two years. At ~~September 30, 2017~~March 31, 2023 and December 31, ~~2016,~~2022, the total notional amount of forward contracts designated as cash flow hedges of forecasted royalty and cost transactions was ~~$7.9~~$8.4 billion and ~~$8.3~~$8.1 billion, respectively. ~~The~~At both March 31, 2023 and December 31, 2022, the weighted-average remaining maturity of these instruments ~~at September 30, 2017~~was approximately 0.6 years.

At March 31, 2023 and December 31, ~~2016 was 0.7 years at both periods.~~

~~At September 30, 2017 and December 31, 2016,~~2022, in connection with cash flow hedges of anticipated royalties and cost transactions, the company recorded net losses ~~of $70 million~~ and net gains ~~of $462 million~~ (before taxes), of $24 million and $66 million, respectively, in ~~accumulated other comprehensive income/(loss). Within these amounts, $161~~AOCI. The company estimates that $85 million of deferred net losses ~~and $397 million of gains, respectively, are expected to~~(before taxes) on derivatives in AOCI at March 31, 2023 will be reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying anticipated transactions.

Foreign Currency Denominated Borrowings

The company is exposed to exchange rate volatility on foreign currency denominated debt. To manage this risk, the company employs cross-currency swaps to convert fixed-rate foreign currency denominated debt to fixed-rate debt denominated in the functional currency of the borrowing entity. These swaps are accounted for as cash flow hedges. ~~The~~At March 31, 2023, the maximum length of time remaining over which the company ~~has~~ hedged its exposure ~~to the variability in future cash flows~~ is approximately ~~nine~~eight years. At ~~September 30, 2017~~March 31, 2023 and December 31, ~~2016,~~2022, the total notional amount of cross-currency swaps designated as cash flow hedges of foreign currency denominated debt was ~~$1.4~~$4.0 billion ~~at both periods.~~

and $3.1 billion, respectively.

At ~~September 30, 2017~~March 31, 2023 and December 31, ~~2016,~~2022, in connection with cash flow hedges of foreign currency denominated borrowings, the company recorded net ~~gains~~losses (before taxes) of ~~$16~~$166 million and $101 million, respectively, in AOCI. The company estimates that $41 million of deferred net gains ~~of $29 million~~ (before taxes)~~, respectively,~~ on derivatives in ~~accumulated other comprehensive income/(loss). Within these amounts, $34 million of gains and $27 million of gains, respectively, are expected to~~AOCI at March 31, 2023 will be reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying exposure.

Subsidiary Cash and Foreign Currency Asset/Liability Management

The company uses its Global Treasury Centers to manage the cash of its subsidiaries. These centers principally use currency swaps to convert cash flows in a cost-effective manner. In addition, the company uses foreign exchange forward contracts to economically hedge, on a net basis, the foreign currency exposure of a portion of the company’s nonfunctional currency assets and liabilities. The terms of these forward and swap contracts are generally less than one year. The changes in the fair values of these contracts and of the underlying hedged exposures are generally offsetting and are recorded in other (income) and expense in the Consolidated ~~Statement of Earnings.~~Income Statement. At ~~September 30, 2017~~March 31, 2023 and December 31, ~~2016,~~2022, the total notional amount of derivative instruments in economic hedges of foreign currency exposure was ~~$10.8~~$8.4 billion and ~~$12.7~~$5.9 billion, respectively.

Equity Risk Management

The company is exposed to market price changes in certain broad market indices and in the company’s own stock primarily related to certain obligations to employees. Changes in the overall value of these employee compensation obligations are recorded in ~~selling, general and administrative (SG&A)~~SG&A expense in the Consolidated ~~Statement of Earnings.~~Income Statement. Although not designated as accounting hedges, the company utilizes ~~derivatives, including~~ equity ~~swaps and futures,~~swap derivatives to economically hedge the exposures related to its employee compensation obligations. The derivatives are linked to the total return on certain broad market indices or the total return on the company’s common stock, and are recorded at fair value with gains or losses also reported in SG&A expense in the Consolidated ~~Statement of Earnings.~~Income Statement. At ~~September 30, 2017~~both March 31, 2023 and December 31, ~~2016,~~2022, the total notional amount of derivative instruments in economic hedges of these compensation obligations was ~~$1.2 billion at both periods.~~$1.1 billion.

Table of Contents

Notes to Consolidated Financial Statements — (continued)

Cumulative Basis Adjustments for Fair Value Hedges

~~Other Risks~~

The company may hold warrants to purchase shares of common stock in connection with various investments that are deemed derivatives because they contain net share or net cash settlement provisions. The company recordsAt March 31, 2023 and December 31, 2022, the ~~changes in the fair value of these warrants in other (income) and expense~~following amounts were recorded in the Consolidated ~~Statement~~Balance Sheet related to cumulative basis adjustments for fair value hedges.


	March 31,		December 31,
(Dollars in millions)	2023		2022
Short-term debt:
Carrying amount of the hedged item	$	(204)	$	(199)
Cumulative hedging adjustments included in the carrying amount — assets/(liabilities)*	$	(4)	$	1
Long-term debt:
Carrying amount of the hedged item	$	(6,693)	$	(6,216)
Cumulative hedging adjustments included in the carrying amount — assets/(liabilities)*	$	(8)	$	72

* Includes ($238) million and ($250) million of ~~Earnings. The company did not have any warrants qualifying as derivatives outstanding~~hedging adjustments on discontinued hedging relationships at ~~September 30, 2017~~March 31, 2023 and December 31, ~~2016.~~

The company is exposed to a potential loss if a client fails to pay amounts due under contractual terms. The company may utilize credit default swaps to economically hedge its credit exposures. The swaps are recorded at fair value with gains and losses reported in other (income) and expense in the Consolidated Statement of Earnings. The company did not have any derivative instruments relating to this program outstanding at September 30, 2017 and December 31, 2016.

The company is exposed to market volatility on certain investment securities. The company may utilize options or forwards to economically hedge its market exposure. The derivatives are recorded at fair value with gains and losses reported in other (income) and expense in the Consolidated Statement of Earnings. At September 30, 2017 and December 31, 2016, the company did not have any derivative instruments relating to this program outstanding.

The following tables provide a quantitative summary of the derivative and non-derivative instrument-related risk management activity as of September 30, 2017 and December 31, 2016, as well as for the three and nine months ended September 30, 2017 and 2016,2022, respectively.

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

~~Fair Values of Derivative Instruments in the Consolidated Statement of Financial Position~~

~~As of September 30, 2017 and December 31, 2016~~

Fair Value of Derivative Assets

Fair Value of Derivative Liabilities

Balance Sheet

Balance Sheet

(Dollars in millions)

Classification

9/30/2017

12/31/2016

Classification

9/30/2017

12/31/2016

Designated as hedging instruments:

Interest rate contracts:

Prepaid expenses and other current assets

$
—

$
—

Other accrued expenses and liabilities

$
1

$
—

Investments and sundry assets

517

555

Other liabilities

15

8

Foreign exchange contracts:

Prepaid expenses and other current assets

208

421

Other accrued expenses and liabilities

272

46

Investments and sundry assets

170

17

Other liabilities

5

35

Fair value of derivative assets

$
896

$
993

Fair value of derivative liabilities

$
292

$
89

Not designated as hedging instruments:

Foreign exchange contracts:

Prepaid expenses and other current assets

$
38

$
100

Other accrued expenses and liabilities

$
56

$
89

Investments and sundry assets

—

22

Other liabilities

—

18

Equity contracts:

Prepaid expenses and other current assets

23

11

Other accrued expenses and liabilities

4

10

Investments and sundry assets

—

—

Other liabilities

—

—

Fair value of derivative assets

$
61

$
133

Fair value of derivative liabilities

$
60

$
117

Total Derivatives

$
957

$
1,126

$
352

$
206

Total debt designated as hedging instruments(1):

Short-term debt

N/A

N/A

$
377

$
1,125

Long-term debt

N/A

N/A

11,469

7,844

N/A

N/A

$
11,846

$
8,969

Total

$
957

$
1,126

$
12,198

$
9,175

~~N/A - not applicable~~

~~(1)~~ ~~Debt designated as hedging instruments are reported at carrying value.~~

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

The Effect of Derivative Instruments in the Consolidated Income Statement

The total amounts of ~~Earnings~~

~~For the three months ended September 30, 2017~~income and ~~2016~~

Gain (Loss) Recognized in Earnings

Consolidated

Recognized on

Attributable to Risk

(Dollars in millions)

Statement of

Derivatives

Being Hedged(2)

For the three months ended September 30:

Earnings Line Item

2017

2016

2017

2016

Derivative instruments in fair value hedges(1)(5):

Interest rate contracts

Cost of financing

$
(3
)
$
(20
)
$
20

$
40

Interest expense

(3
)
(21
)
20

43

Derivative instruments not designated as hedging instruments:

Foreign exchange contracts

Other (income) and expense

(35
)
30

N/A

N/A

Interest rate contracts

Other (income) and expense

—

0

N/A

N/A

Equity contracts

SG&A expense

31

45

N/A

N/A

Other (income) and expense

—

0

N/A

N/A

Total

$
(10
)
$
34

$
41

$
83

Gain (Loss) Recognized in Earnings and Other Comprehensive Income

Ineffectiveness and

(Dollars in millions)

Effective Portion

Consolidated

Effective Portion Reclassified

Amounts Excluded from

For the three months

Recognized in OCI

Statement of

from AOCI

Effectiveness Testing(3)

ended September 30:

2017

2016

Earnings Line Item

2017

2016

2017

2016

Derivative instruments in cash flow hedges:

Interest rate contracts

$
—

$
—

Interest expense

$
(7
)
$
(7
)
$
—

$
—

Foreign exchange contracts

(70
)
35

Other (income) and expense

64

(6
)
(1
)
(1
)

Cost of sales*

1

(7
)
—

—

Cost of services*

20

3

—

—

SG&A expense

(6
)
2

—

—

Instruments in net investment hedges(4):

Foreign exchange contracts

(507
)
(131
)
Cost of financing

—

—

0

—

Interest expense

—

—

8

25

Total

$
(577
)
$
(96
)

$
73

$
(15
)
$
7

$
24

* Reclassified to conform to 2017 presentation

~~N/A - not applicable~~

~~Note: OCI represents other comprehensive income/(loss)~~expense line items presented in the Consolidated Income Statement ~~of Comprehensive Income and AOCI represents accumulated other comprehensive income/(loss)~~ in which the ~~Consolidated Statement~~effects of ~~Changes in Equity.~~

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

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

~~(3)~~ ~~The amount of gain/(loss) recognized in income represents ineffectiveness on hedge relationships.~~

~~(4)~~ ~~Instruments in~~hedges, cash flow hedges, net investment hedges ~~include derivative~~ and ~~non-derivative instruments.~~derivatives not designated as hedging instruments are recorded and the total effect of hedge activity on these income and expense line items are as follows:

~~(5)~~ ~~For the three month periods ended September 30, 2017 and 2016, fair value hedges resulted in a loss~~


					Gains/(Losses) of
(Dollars in millions)	Total				Total Hedge Activity
For the three months ended March 31:	2023		2022		2023		2022
Cost of services	$	5,310	$	5,349	$	(2)	$	15
Cost of sales	$	1,322	$	1,415	$	14	$	12
Cost of financing	$	110	$	98	$	(3)	$	(2)
SG&A expense	$	4,853	$	4,597	$	59	$	(70)
Other (income) and expense	$	(245)	$	246	$	142	$	(102)
Interest expense	$	367	$	311	$	(14)	$	(6)

Table of ~~less than $1 million and a loss of $3 million in ineffectiveness, respectively.~~Contents

Notes to Consolidated Financial Statements — (continued)


	Gain (Loss) Recognized in Consolidated Income Statement
	Consolidated	Recognized on				Attributable to Risk
(Dollars in millions)	Income Statement	Derivatives				Being Hedged (2)
For the three months ended March 31:	Line Item	2023		2022		2023		2022
Derivative instruments in fair value hedges (1):
Interest rate contracts	Cost of financing	$	13	$	(1)	$	(17)	$	4
	Interest expense		53		(4)		(68)		16
Derivative instruments not designated as hedging instruments:
Foreign exchange contracts	Other (income) and expense		16		(95)		N/A		N/A
Equity contracts	SG&A expense		49		(76)		N/A		N/A
Total		$	131	$	(176)	$	(84)	$	20

~~The Effect of Derivative Instruments in the Consolidated Statement of Earnings~~

~~For the nine months ended September 30, 2017 and 2016~~

Gain (Loss) Recognized in Earnings

Consolidated

Recognized on

Attributable to Risk

(Dollars in millions)

Statement of

Derivatives

Being Hedged(2)

For the nine months ended September 30:

Earnings Line Item

2017

2016

2017

2016

Derivative instruments in fair value hedges(1)(5):

Interest rate contracts

Cost of financing

$
37

$
195

$
22

$
(127
)

Interest expense

34

214

20

(140
)
Derivative instruments not designated as hedging instruments:

Foreign exchange contracts

Other (income) and expense

74

335

N/A

N/A

Interest rate contracts

Other (income) and expense

—

0

N/A

N/A

Equity contracts

SG&A expense

88

87

N/A

N/A

Other (income) and expense

—

(1
)
N/A

N/A

Total

$
233

$
830

$
42

$
(267
)

Gain (Loss) Recognized in Earnings and Other Comprehensive Income

Ineffectiveness and

(Dollars in millions)

Effective Portion

Consolidated

Effective Portion Reclassified

Amounts Excluded from

For the nine months

Recognized in OCI

Statement of

from AOCI

Effectiveness Testing(3)

ended September 30:

2017

2016

Earnings Line Item

2017

2016

2017

2016

Derivative instruments in cash flow hedges:

Interest rate contracts

$
—

$
—

Interest expense

$
(21
)
$
(17
)
$
—

$
—

Foreign exchange contracts

(198
)
(221
)
Other (income) and expense

275

6

2

(1
)

Cost of sales*

23

(5
)
—

—

Cost of services*

47

(9
)
—

—

SG&A expense

23

(1
)
—

—

Instruments in net investment hedges(4):

Foreign exchange contracts

(1,513
)
(1,071
)
Cost of financing

—

—

0

—

Interest expense

—

—

34

51

Total

$
(1,712
)
$
(1,292
)

$
347

$
(26
)
$
37

$
49


	Gain (Loss) Recognized in Consolidated Income Statement and Other Comprehensive Income
(Dollars in millions)					Consolidated	Reclassified				Amounts Excluded from
For the three months	Recognized in OCI				Income Statement	from AOCI				Effectiveness Testing (3)
ended March 31:	2023		2022		Line Item	2023		2022		2023		2022
Derivative instruments in cash flow hedges:
Interest rate contracts	$	—	$	—	Cost of financing	$	(1)	$	(1)	$	—	$	—
					Interest expense		(3)		(3)		—		—
Foreign exchange contracts		(29)		60	Cost of services		(2)		15		—		—
					Cost of sales		14		12		—		—
					Cost of financing		(4)		(5)		—		—
					SG&A expense		10		6		—		—
					Other (income) and expense		126		(7)		—		—
					Interest expense		(17)		(17)		—		—
Instruments in net investment hedges (4):
Foreign exchange contracts		(224)		541	Cost of financing		—		—		5		1
					Interest expense		—		—		22		2
Total	$	(253)	$	601		$	122	$	1	$	28	$	3

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

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

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

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

* Reclassified to conform to 2017 presentation.

N/~~A-not~~A - not applicable

Note: OCI represents other comprehensive income/(loss) in the Consolidated Statement of Comprehensive Income and AOCI represents accumulated other comprehensive income/(loss) in the Consolidated Statement of Changes in Equity.

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

~~(3)~~ ~~The amount of gain/(loss) recognized in income represents ineffectiveness on hedge relationships.~~

~~(4)~~ ~~Instruments in net investment hedges include derivative and non-derivative instruments.~~

~~(5)~~ ~~For the nine month periods ended September 30, 2017 and 2016, fair value hedges resulted in a loss of less than $1 million and a gain of less than $1 million in ineffectiveness, respectively.~~

For the three ~~and nine~~ months ending ~~September 30, 2017~~March 31, 2023 and ~~2016,~~2022, there were no ~~significant~~material gains or losses excluded from the assessment of hedge effectiveness (for fair value or cash flow hedges), or associated with an underlying exposure that did not or was not expected to occur (for cash flow hedges); nor are there any anticipated in the normal course of business.

Table of Contents

Notes to Consolidated Financial Statements — (continued)

4. ~~Financing Receivables:~~ ~~The following table presents financing receivables, net of allowances for credit losses, including residual values.~~

At September 30,

At December 31,

(Dollars in millions)

2017

2016

Current:

Net investment in sales-type and direct financing leases

$
3,092

$
2,909

Commercial financing receivables

8,563

9,706

Client loan and installment payment receivables (loans)

6,395

6,390

Total

$
18,050

$
19,006

Noncurrent:

Net investment in sales-type and direct financing leases

$
3,579

$
3,950

Client loan and installment payment receivables (loans)

4,879

5,071

Total

$
8,459

$
9,021

Net investment in sales-type and direct financing leases relates principally to the company’s Systems products and are for terms ranging generally from two to six years. Net investment in sales-type and direct financing leases includes unguaranteed residual values of $567 million and $585 million at September 30, 2017 and December 31, 2016, respectively, and is reflected net of unearned income of $459 million and $513 million, and net of allowance for credit losses of $118 million and $133 million at those dates, respectively.

Commercial financing receivables, net of allowance for credit losses of $21 million and $28 million at September 30, 2017 and December 31, 2016, respectively, relate primarily to inventory and accounts receivable financing for dealers and remarketers of IBM and OEM products. Payment terms for inventory and accounts receivable financing generally range from 30 to 90 days.

Client loan and installment payment receivables (loans), net of allowance for credit losses of $215 million and $276 million at September 30, 2017 and December 31, 2016, respectively, are loans that are provided primarily to clients to finance the purchase of hardware, software and services. Payment terms on these financing arrangements are generally for terms up to seven years.

~~Client loan and installment payment financing contracts are priced independently at competitive market rates. The company has a history of enforcing the terms of these financing agreements.~~

The company utilizes certain of its financing receivables as collateral for nonrecourse borrowings. Financing receivables pledged as collateral for borrowings were $640 million and $689 million at September 30, 2017 and December 31, 2016, respectively.

~~The company did not have any financing receivables held for sale as of September 30, 2017 and December 31, 2016.~~

~~Financing Receivables by Portfolio Segment~~

The following tables present financing receivables on a gross basis, excluding the allowance for credit losses and residual value, by portfolio segment and by class, excluding commercial financing receivables and other miscellaneous financing receivables at September 30, 2017 and December 31, 2016. The company determines its allowance for credit losses based on two portfolio segments: lease receivables and loan receivables, and further segments the portfolio into three classes: Americas, Europe/Middle East/Africa (EMEA), and Asia Pacific. This portfolio segmentation was changed from growth markets and major markets in 2017 as the company no longer manages the business under those market delineations. There was no impact to segment reporting or the company’s Consolidated Financial Statements.

~~Notes to Consolidated Financial Statements — (continued)~~17. Stock-Based Compensation:

(Dollars in millions)

At September 30, 2017

Americas

EMEA

Asia Pacific

Total

Financing receivables

Lease receivables

$
3,541

$
1,297

$
1,304

$
6,142

Loan receivables

6,180

3,120

2,189

11,489

Ending balance

$
9,721

$
4,417

$
3,493

$
17,631

Collectively evaluated for impairment

$
9,581

$
4,386

$
3,391

$
17,358

Individually evaluated for impairment

$
140

$
31

$
102

$
273

Allowance for credit losses

Beginning balance at January 1, 2017

Lease receivables

$
54

$
4

$
76

$
133

Loan receivables

169

18

89

276

Total

$
223

$
22

$
165

$
410

Write-offs

$
(49
)
$
0

$
(63
)
$
(112
)
Recoveries

0

0

0

0

Provision

11

9

(4
)
16

Other

12

5

2

19

Ending balance at September 30, 2017

$
197

$
36

$
100

$
333

Lease receivables

$
77

$
6

$
35

$
118

Loan receivables

$
120

$
29

$
65

$
215

Collectively evaluated for impairment

$
66

$
12

$
6

$
85

Individually evaluated for impairment

$
131

$
23

$
94

$
248

(Dollars in millions)

At December 31, 2016:*

Americas

EMEA

Asia Pacific

Total

Financing receivables:

Lease receivables

$
3,830

$
1,171

$
1,335

$
6,336

Loan receivables

6,185

3,309

2,243

11,737

Ending balance

$
10,015

$
4,480

$
3,578

$
18,073

Collectively evaluated for impairment

$
9,847

$
4,460

$
3,419

$
17,726

Individually evaluated for impairment

$
168

$
20

$
159

$
347

Allowance for credit losses

Beginning balance at January 1, 2016

Lease receivables

$
52

$
17

$
143

$
213

Loan receivables

122

55

200

377

Total

$
175

$
72

$
343

$
590

Write-offs

$
(36
)
$
(48
)
$
(154
)
$
(237
)
Recoveries

2

0

0

2

Provision

65

(1
)
(6
)
58

Other

17

(1
)
(18
)
(3
)
Ending balance at December 31, 2016

$
223

$
22

$
165

$
410

Lease receivables

$
54

$
4

$
76

$
133

Loan receivables

$
169

$
18

$
89

$
276

Collectively evaluated for impairment

$
62

$
13

$
15

$
90

Individually evaluated for impairment

$
161

$
9

$
150

$
320

* Reclassified to conform to 2017 presentation.

When determining the allowances, financing receivables are evaluated either on an individual or a collective basis. For individually evaluated receivables, the company determines the expected cash flow for the receivable and calculates an estimate of the potential loss and the probability of loss. For those accounts in which the loss is probable, the company records a specific reserve. In addition, the company records an unallocated reserve that is determined by applying a reserve rate to its different portfolios, excluding accounts that have been specifically reserved. This reserve rate is based upon credit rating, probability of default, term, characteristics (lease/loan) and loss history.

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

~~Financing Receivables on Non-Accrual Status~~

~~The following table presents the recorded investment in financing receivables which were on non-accrual status at September 30, 2017 and December 31, 2016.~~

At September 30,

At December 31,

(Dollars in millions)

2017

2016*

Americas

$
25

$
23

EMEA

0

2

Asia Pacific

4

14

Total lease receivables

$
30

$
40

Americas

$
79

$
128

EMEA

53

5

Asia Pacific

10

12

Total loan receivables

$
142

$
145

Total receivables

$
172

$
185

* Reclassified to conform to 2017 presentation.

~~Impaired Receivables~~

~~The company considers any receivable with an individually evaluated reserve as an impaired receivable. Depending on the level of impairment, receivables will also be placed on non-accrual status.~~

~~The following tables present impaired receivables. This presentation includes both loan and lease receivables.~~

At September 30, 2017

At December 31, 2016*

Recorded

Related

Recorded

Related

(Dollars in millions)

Investment

Allowance

Investment

Allowance

Americas

$
140

$
131

$
168

$
161

EMEA

31

23

20

9

Asia Pacific

102

94

159

150

Total

$
273

$
248

$
347

$
320

* Reclassified to conform to 2017 presentation.

Interest

Average

Interest

Income

(Dollars in millions)

Recorded

Income

Recognized on

For the three months ended September 30, 2017:

Investment

Recognized

Cash Basis

Americas

$
156

$
0

$
—

EMEA

31

0

—

Asia Pacific

101

0

—

Total

$
288

$
0

$
—

Interest

Average

Interest

Income

(Dollars in millions)

Recorded

Income

Recognized on

For the three months ended September 30, 2016:*

Investment

Recognized

Cash Basis

Americas

$
182

$
0

$
—

EMEA

61

0

—

Asia Pacific

302

0

—

Total

$
545

$
0

$
—

* Reclassified to conform to 2017 presentation.

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

Interest

Average

Interest

Income

(Dollars in millions)

Recorded

Income

Recognized on

For the nine months ended September 30, 2017:

Investment

Recognized

Cash Basis

Americas

$
165

$
0

$
—

EMEA

27

0

—

Asia Pacific

131

0

—

Total

$
323

$
0

$
—

Interest

Average

Interest

Income

(Dollars in millions)

Recorded

Income

Recognized on

For the nine months ended September 30, 2016:*

Investment

Recognized

Cash Basis

Americas

$
158

$
0

$
—

EMEA

65

0

—

Asia Pacific

322

0

—

Total

$
545

$
0

$
—

* Reclassified to conform to 2017 presentation.

~~Credit Quality Indicators~~

~~The following tables present the net recorded investment for each class of receivables, by credit quality indicator, at~~ September 30, 2017 and December 31, 2016. Receivables with a credit quality indicator ranging from Aaa to Baa3 are considered investment grade. All others are considered non-investment grade. The credit quality indicators do not reflect mitigation actions that the company takes to transfer credit risk to third parties.

Lease Receivables

Loan Receivables

(Dollars in millions)

Asia

Asia

At September 30, 2017:

Americas

EMEA

Pacific

Americas

EMEA

Pacific

Credit Ratings:

Aaa – Aa3

$
358

$
52

$
56

$
626

$
124

$
94

A1 – A3

715

126

543

1,251

302

908

Baa1 – Baa3

807

404

329

1,412

968

550

Ba1 – Ba2

762

415

172

1,333

993

289

Ba3 – B1

421

197

86

736

473

143

B2 – B3

345

83

69

604

200

116

Caa – D

56

13

15

98

31

25

Total

$
3,465

$
1,290

$
1,269

$
6,059

$
3,091

$
2,124

At September 30, 2017, the industries which made up Global Financing’s receivables portfolio consisted of: Financial (33 percent), Government (14 percent), Manufacturing (14 percent), Services (13 percent), Retail (8 percent), Communications (7 percent), Healthcare (6 percent) and Other (5 percent).

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

Lease Receivables

Loan Receivables

(Dollars in millions)

Asia

Asia

At December 31, 2016:*

Americas

EMEA

Pacific

Americas

EMEA

Pacific

Credit Ratings:

Aaa – Aa3

$
447

$
51

$
53

$
712

$
143

$
90

A1 – A3

782

113

486

1,246

318

832

Baa1 – Baa3

772

366

330

1,230

1,032

565

Ba1 – Ba2

822

350

185

1,309

987

316

Ba3 – B1

574

208

106

914

585

182

B2 – B3

297

71

84

472

201

143

Caa – D

83

9

15

133

25

25

Total

$
3,776

$
1,167

$
1,259

$
6,016

$
3,291

$
2,154

* Reclassified to conform to 2017 presentation.

At December 31, 2016, the industries which made up Global Financing’s receivables portfolio consisted of: Financial (34 percent), Government (14 percent), Manufacturing (13 percent), Services (12 percent), Retail (8 percent), Communications (7 percent), Healthcare (6 percent) and Other (6 percent).

~~Past Due Financing Receivables~~

Fully

<90 Days

Recorded

Total

Reserved

or Unbilled

Total

Investment

(Dollars in millions)

Past Due

Financing

Financing

Financing

> 90 Days and

At September 30, 2017:

> 90 days (1)

Receivables

Receivables

Receivables

Accruing (2)

Americas

$
28

$
51

$
3,463

$
3,541

$
255

EMEA

9

4

1,283

1,297

15

Asia Pacific

5

32

1,266

1,304

19

Total lease receivables

$
42

$
87

$
6,012

$
6,142

$
290

Americas

$
43

$
80

$
6,057

$
6,180

$
401

EMEA

26

19

3,076

3,120

46

Asia Pacific

6

61

2,122

2,189

9

Total loan receivables

$
75

$
160

$
11,255

$
11,489

$
456

Total

$
117

$
247

$
17,267

$
17,631

$
746

~~(1) Only the portion of a financing receivable which is greater than 90 days past due, excluding amounts that are fully reserved.~~

~~(2) At a contract level, which includes total billed and unbilled amounts for aged financing receivables greater than 90 days.~~

Fully

<90 Days

Recorded

Total

Reserved

or Unbilled

Total

Investment

(Dollars in millions)

Past Due

Financing

Financing

Financing

> 90 Days and

At December 31, 2016:*

> 90 days (1)

Receivables

Receivables

Receivables

Accruing (2)

Americas

$
17

$
20

$
3,793

$
3,830

$
66

EMEA

2

10

1,159

1,171

6

Asia Pacific

12

59

1,264

1,335

40

Total lease receivables

$
31

$
89

$
6,216

$
6,336

$
111

Americas

$
19

$
90

$
6,075

$
6,185

$
80

EMEA

5

5

3,299

3,309

15

Asia Pacific

6

87

2,150

2,243

46

Total loan receivables

$
31

$
182

$
11,524

$
11,737

$
141

Total

$
62

$
271

$
17,740

$
18,073

$
253

~~(1) Only the portion of a financing receivable which is greater than 90 days past due, excluding amounts that are fully reserved.~~

~~(2) At a contract level, which includes total billed and unbilled amounts for aged financing receivables greater than 90 days.~~

* Reclassified to conform to 2017 presentation.

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

~~Troubled Debt Restructurings~~

~~The company did not have any significant troubled debt restructurings during the nine months ended~~ ~~September 30, 2017 or for the year ended December 31, 2016.~~

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

	Three Months Ended September 30,						Nine Months Ended September 30,

(Dollars in millions)	2017			2016			2017			2016
For the three months ended March 31:													2023		2022
Cost	$	22		$	23		$	68		$	67		$	46	$	40
Selling, general and administrative	88			105			277			295				149		136
Research, development and engineering	13			14			43			41				74		57
Pre-tax stock-based compensation cost	123			142			388			403			$	268	$	234
Income tax benefits	(41		)	(47		)	(128		)	(131		)		(67)		(57)
Total net stock-based compensation cost	$	82		$	95		$	260		$	272		$	201	$	177

Pre-tax stock-based compensation cost for the three months ended ~~September 30, 2017 decreased $19~~March 31, 2023 increased $35 million compared to the corresponding period in the prior ~~year. This was~~year, including increases in Employees Stock Purchase Plan (ESPP) ($19 million) as a result of ESPP being considered compensatory effective April 1, 2022 and stock options ($14 million) due to ~~decreases related to performance share units ($11 million),~~ the conversion of ~~stock-based awards~~stock options previously issued by acquired entities ~~($7 million)~~ and ~~restricted~~ stock ~~units ($2 million).~~options granted by the company as part of its executive compensation programs.

Pre-tax stock-based compensation cost for the nine months ended September 30, 2017 decreased $15 million compared to the corresponding period in the prior year. This was due to decreases related to the conversion of stock-based awards previously issued by acquired entities ($20 million) and performance share units ($17 million), partially offset by an increase in restricted stock units ($22 million).

The implementation of the new FASB guidance for share-based payment transactions resulted in an immaterial impact to income tax benefits as of the three months and nine months ended September 30, 2017. Refer to note 2, “Accounting Changes,” for additional information.

~~As of September 30, 2017, the total~~Total unrecognized compensation cost ~~of $905 million~~ related to non-vested awards at March 31, 2023 was $1.7 billion and is expected to be recognized over a weighted-average period of approximately 2.6 years.

~~There was no significant capitalized stock-based compensation cost at September 30, 2017 and 2016.~~

6. ~~Segments:~~ The tables on pages 29 and 30 reflect the results of continuing operations of the company’s segments consistent with the management and measurement system utilized within the company. Performance measurement is based on operating pre-tax income from continuing operations. The segments represent components of the company for which separate financial information is available that is utilized on a regular basis by the chief operating decision maker (the chief executive officer) in determining how to allocate resources and evaluate performance.

~~Notes to Consolidated Financial Statements — (continued)~~18. Retirement-Related Benefits:

~~SEGMENT INFORMATION~~

Cognitive Solutions &
Industry Services

Technology

Global

Services &

Cognitive

Business

Cloud

Global

Total

(Dollars in millions)

Solutions

Services

Platforms

Systems

Financing

Segments

For the three months ended September 30, 2017:

External revenue

$
4,400

$
4,093

$
8,457

$
1,721

$
427

$
19,098

Internal revenue

629

92

164

227

272

1,384

Total revenue

$
5,030

$
4,185

$
8,621

$
1,948

$
698

$
20,482

Pre-tax income from continuing operations

$
1,649

$
453

$
1,192

$
339

$
244

$
3,876

Revenue year-to-year change

2.6
%
(2.3
)%
(3.4
)%
12.3
%
(8.5
)%
(0.6
)%
Pre-tax income year-to-year change

4.8
%
(16.8
)%
(7.5
)%
149.7
%
(31.4
)%
(0.5
)%
Pre-tax income margin

32.8
%
10.8
%
13.8
%
17.4
%
34.9
%
18.9
%

For the three months ended September 30, 2016:

External revenue

$
4,235

$
4,191

$
8,748

$
1,558

$
412

$
19,145

Internal revenue

667

93

180

176

352

1,468

Total revenue

$
4,902

$
4,284

$
8,929

$
1,734

$
763

$
20,613

Pre-tax income from continuing operations

$
1,574

$
544

$
1,288

$
136

$
355

$
3,897

Pre-tax income margin

32.1
%
12.7
%
14.4
%
7.8
%
46.5
%
18.9
%

~~Reconciliations to IBM as Reported:~~

(Dollars in millions)

For the three months ended September 30:

2017

2016

Revenue:

Total reportable segments

$
20,482

$
20,613

Eliminations of internal transactions

(1,384
)
(1,468
)
Other revenue

56

81

Total consolidated revenue

$
19,153

$
19,226

Pre-tax income from continuing operations:

Total reportable segments

$
3,876

$
3,897

Amortization of acquired intangible assets

(238
)
(265
)
Acquisition-related (charges)/income

0

(4
)
Non-operating retirement-related (costs)/income

(306
)
(139
)
Eliminations of internal transactions

(126
)
(185
)
Unallocated corporate amounts

(141
)
(42
)
Total pre-tax income from continuing operations

$
3,065

$
3,263

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

~~SEGMENT INFORMATION~~

Cognitive Solutions &
Industry Services

Technology

Global

Services &

Cognitive

Business

Cloud

Global

Total

(Dollars in millions)

Solutions

Services

Platforms

Systems

Financing

Segments

For the nine months ended September 30, 2017:

External revenue

$
13,021

$
12,196

$
25,079

$
4,863

$
1,246

$
56,405

Internal revenue

2,001

271

497

571

925

4,265

Total revenue

$
15,022

$
12,467

$
25,576

$
5,434

$
2,171

$
60,670

Pre-tax income from continuing operations

$
4,539

$
1,065

$
2,888

$
227

$
836

$
9,555

Revenue year-to-year change

1.4
%
(3.3
)%
(3.6
)%
(6.0
)%
(16.0
)%
(3.1
)%
Pre-tax income year-to-year change

12.4
%
(12.0
)%
2.2
%
(35.9
)%
(30.7
)%
(0.8
)%
Pre-tax income margin

30.2
%
8.5
%
11.3
%
4.2
%
38.5
%
15.7
%

For the nine months ended September 30, 2016:

External revenue

$
12,889

$
12,578

$
26,029

$
5,184

$
1,245

$
57,926

Internal revenue

1,929

310

501

594

1,340

4,673

Total revenue

$
14,818

$
12,888

$
26,530

$
5,778

$
2,585

$
62,599

Pre-tax income from continuing operations

$
4,039

$
1,210

$
2,825

$
354

$
1,208

$
9,636

Pre-tax income margin

27.3
%
9.4
%
10.6
%
6.1
%
46.7
%
15.4
%

~~Reconciliations to IBM as Reported:~~

(Dollars in millions)

For the nine months ended September 30:

2017

2016

Revenue:

Total reportable segments

$
60,670

$
62,599

Eliminations of internal transactions

(4,265
)
(4,673
)
Other revenue

192

223

Total consolidated revenue

$
56,597

$
58,149

Pre-tax income from continuing operations:

Total reportable segments

$
9,555

$
9,636

Amortization of acquired intangible assets

(731
)
(742
)
Acquisition-related (charges)/income

(19
)
(1
)
Non-operating retirement-related (costs)/income

(1,065
)
(444
)
Eliminations of internal transactions

(515
)
(873
)
Unallocated corporate amounts

(294
)
(230
)
Total pre-tax income from continuing operations

$
6,931

$
7,345

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

7. ~~Equity Activity:~~

~~Reclassifications and Taxes Related to Items of Other Comprehensive Income~~

(Dollars in millions)

Before Tax

Tax (Expense)/

Net of Tax

For the three months ended September 30, 2017:

Amount

Benefit

Amount

Other comprehensive income/(loss):

Foreign currency translation adjustments

$
89

$
195

$
284

Net changes related to available-for-sale securities:

Unrealized gains/(losses) arising during the period

$
(1
)
$
1

$
0

Reclassification of (gains)/losses to other (income) and expense

0

0

0

Total net changes related to available-for-sale securities

$
(2
)
$
1

$
(1
)
Unrealized gains/(losses) on cash flow hedges:

Unrealized gains/(losses) arising during the period

$
(70
)
$
20

$
(50
)
Reclassification of (gains)/losses to:

Cost of sales

(1
)
1

(1
)
Cost of services

(20
)
8

(12
)
SG&A expense

6

(1
)
4

Other (income) and expense

(64
)
25

(39
)
Interest expense

7

(3
)
4

Total unrealized gains/(losses) on cash flow hedges

$
(143
)
$
49

$
(94
)
Retirement-related benefit plans(1):

Prior service costs/(credits)

$
0

$
0

$
0

Net (losses)/gains arising during the period

1

0

1

Curtailments and settlements

2

(1
)
1

Amortization of prior service (credits)/costs

(22
)
7

(15
)
Amortization of net (gains)/losses

733

(242
)
491

Total retirement-related benefit plans

$
713

$
(235
)
$
479

Other comprehensive income/(loss)

$
658

$
11

$
669

~~(1)~~ ~~These AOCI components are included in the computation of net periodic pension cost. (See note 8, “Retirement-Related Benefits,” for additional information.)~~

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

~~Reclassifications and Taxes Related to Items of Other Comprehensive Income~~

(Dollars in millions)

Before Tax

Tax (Expense)/

Net of Tax

For the three months ended September 30, 2016:

Amount

Benefit

Amount

Other comprehensive income/(loss):

Foreign currency translation adjustments

$
(99
)
$
50

$
(49
)
Net changes related to available-for-sale securities:

Unrealized gains/(losses) arising during the period

$
(1
)
$
0

$
(1
)
Reclassification of (gains)/losses to other (income) and expense

(1
)
0

(1
)
Total net changes related to available-for-sale securities

$
(2
)
$
1

$
(1
)
Unrealized gains/(losses) on cash flow hedges:

Unrealized gains/(losses) arising during the period

$
35

$
(14
)
$
21

Reclassification of (gains)/losses to:

Cost of sales*

7

(3
)
4

Cost of services*

(3
)
1

(2
)
SG&A expense

(2
)
(1
)
(3
)
Other (income) and expense

6

(2
)
4

Interest expense

7

(3
)
4

Total unrealized gains/(losses) on cash flow hedges

$
50

$
(22
)
$
29

Retirement-related benefit plans(1):

Net (losses)/gains arising during the period

$
11

$
(5
)
$
6

Curtailments and settlements

4

(1
)
3

Amortization of prior service (credits)/costs

(28
)
9

(19
)
Amortization of net (gains)/losses

696

(225
)
471

Total retirement-related benefit plans

$
683

$
(222
)
$
461

Other comprehensive income/(loss)

$
632

$
(192
)
$
440

* Reclassified to conform to 2017 presentation.

~~(1)~~ ~~These AOCI components are included in the computation of net periodic pension cost. (See note 8, “Retirement-Related Benefits,” for additional information.)~~

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

~~Reclassifications and Taxes Related to Items of Other Comprehensive Income~~

(Dollars in millions)

Before Tax

Tax (Expense)/

Net of Tax

For the nine months ended September 30, 2017:

Amount

Benefit

Amount

Other comprehensive income/(loss):

Foreign currency translation adjustments

$
213

$
581

$
794

Net changes related to available-for-sale securities:

Unrealized gains/(losses) arising during the period

$
2

$
0

$
1

Reclassification of (gains)/losses to other (income) and expense

1

0

0

Total net changes related to available-for-sale securities

$
2

$
0

$
2

Unrealized gains/(losses) on cash flow hedges:

Unrealized gains/(losses) arising during the period

$
(198
)
$
53

$
(146
)
Reclassification of (gains)/losses to:

Cost of sales

(23
)
6

(17
)
Cost of services

(47
)
18

(29
)
SG&A expense

(23
)
6

(17
)
Other (income) and expense

(275
)
106

(169
)
Interest expense

21

(8
)
13

Total unrealized gains/(losses) on cash flow hedges

$
(545
)
$
180

$
(365
)
Retirement-related benefit plans(1):

Prior service costs/(credits)

$
0

$
0

$
0

Net (losses)/gains arising during the period

106

(36
)
70

Curtailments and settlements

3

(1
)
2

Amortization of prior service (credits)/costs

(66
)
23

(43
)
Amortization of net (gains)/losses

2,156

(739
)
1,417

Total retirement-related benefit plans

$
2,200

$
(754
)
$
1,446

Other comprehensive income/(loss)

$
1,869

$
7

$
1,877

~~(1)~~ ~~These AOCI components are included in the computation of net periodic pension cost. (See note 8, “Retirement-Related Benefits,” for additional information.)~~

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

~~Reclassifications and Taxes Related to Items of Other Comprehensive Income~~

(Dollars in millions)

Before Tax

Tax (Expense)/

Net of Tax

For the nine months ended September 30, 2016:

Amount

Benefit

Amount

Other comprehensive income/(loss):

Foreign currency translation adjustments

$
(109
)
$
411

$
303

Net changes related to available-for-sale securities:

Unrealized gains/(losses) arising during the period

$
(36
)
$
14

$
(22
)
Reclassification of (gains)/losses to other (income) and expense

36

(14
)
22

Total net changes related to available-for-sale securities

$
0

$
0

$
0

Unrealized gains/(losses) on cash flow hedges:

Unrealized gains/(losses) arising during the period

$
(221
)
$
82

$
(139
)
Reclassification of (gains)/losses to:

Cost of sales*

5

(4
)
2

Cost of services*

9

(3
)
5

SG&A expense

1

(3
)
(1
)
Other (income) and expense

(6
)
2

(4
)
Interest expense

17

(6
)
10

Total unrealized gains/(losses) on cash flow hedges

$
(195
)
$
68

$
(127
)
Retirement-related benefit plans(1):

Net (losses)/gains arising during the period

$
(57
)
$
20

$
(37
)
Curtailments and settlements

19

(7
)
12

Amortization of prior service (credits)/costs

(81
)
29

(52
)
Amortization of net (gains)/losses

2,079

(735
)
1,344

Total retirement-related benefit plans

$
1,960

$
(693
)
$
1,267

Other comprehensive income/(loss)

$
1,656

$
(213
)
$
1,442

* Reclassified to conform to 2017 presentation.

~~(1)~~ ~~These AOCI components are included in the computation of net periodic pension cost. (See note 8, “Retirement-Related Benefits,” for additional information.)~~

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

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

Net Change

Net Unrealized

Net Unrealized

Foreign

Retirement-

Gains/(Losses)

Accumulated

Gains/(Losses)

Currency

Related

on Available-

Other

on Cash Flow

Translation

Benefit

For-Sale

Comprehensive

(Dollars in millions)

Hedges

Adjustments*

Plans

Securities

Income/(Loss)

January 1, 2017

$
319

$
(3,603
)
$
(26,116
)
$
2

$
(29,398
)
Other comprehensive income before reclassifications

(146
)
794

72

1

721

Amount reclassified from accumulated other comprehensive income

(219
)
0

1,374

0

1,155

Total change for the period

(365
)
794

1,446

2

1,877

September 30, 2017

$
(46
)
$
(2,809
)
$
(24,670
)
$
4

$
(27,521
)

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

Net Change

Net Unrealized

Net Unrealized

Foreign

Retirement-

Gains/(Losses)

Accumulated

Gains/(Losses)

Currency

Related

on Available-

Other

on Cash Flow

Translation

Benefit

For-Sale

Comprehensive

(Dollars in millions)

Hedges

Adjustments*

Plans

Securities

Income/(Loss)

January 1, 2016

$
100

$
(3,463
)
$
(26,248
)
$
5

$
(29,607
)
Other comprehensive income before reclassifications

(139
)
303

(25
)
(22
)
117

Amount reclassified from accumulated other comprehensive income

12

0

1,292

22

1,326

Total change for the period

(127
)
303

1,267

0

1,442

September 30, 2016

$
(28
)
$
(3,161
)
$
(24,981
)
$
4

$
(28,164
)

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

8. ~~Retirement-Related Benefits:~~The company offers defined benefit (DB) pension plans, defined contribution pension plans, as well as nonpension postretirement plans primarily consisting of retiree medical benefits. The following tables provide the pre-tax cost for all retirement-related plans.

					Yr. to Yr.

											Yr. to Yr.
(Dollars in millions)					Percent						Percent
For the three months ended September 30:	2017		2016		Change
Retirement-related plans — cost
For the three months ended March 31:							2023		2022		Change
Retirement-related plans — cost:
Defined benefit and contribution pension plans — cost	$	592	$	421	40.6	%	$	281	$	478	(41.1)	%
Nonpension postretirement plans — cost	61		64		(5.9	)		32		33	(1.6)
Total	$	653	$	486	34.4	%	$	314	$	510	(38.5)

Yr. to Yr.

(Dollars in millions)

Percent

For the nine months ended September 30:

2017

2016

Change

Retirement-related plans — cost

Defined benefit and contribution pension plans — cost

$
1,915

$
1,315

45.6
%
Nonpension postretirement plans — cost

182

185

(1.6
)
Total

$
2,097

$
1,500

39.8
%

Table of Contents

Notes to Consolidated Financial Statements — (continued)

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

Cost/(Income) of Pension Plans

(Dollars in millions)

U.S. Plans

Non-U.S. Plans

For the three months ended September 30:

2017

2016

2017

2016

Service cost

$
—

$
—

$
106

$
108

Interest cost

478

512

215

257

Expected return on plan assets

(753
)
(922
)
(340
)
(468
)
Amortization of prior service costs/(credits)

4

3

(25
)
(28
)
Recognized actuarial losses

334

328

387

357

Curtailments and settlements

—

—

2

4

Multi-employer plans/other

—

—

(74
)
8

Total net periodic pension (income)/cost of defined benefit plans

63

(79
)
271

239

Cost of defined contribution plans

156

159

102

103

Total defined benefit and contribution plans cost recognized in the Consolidated Statement of Earnings

$
219

$
79

$
373

$
342


(Dollars in millions)	U.S. Plans				Non-U.S. Plans
For the three months ended March 31:	2023		2022		2023		2022
Service cost	$	—	$	—	$	44	$	64
Interest cost*		272		302		288		139
Expected return on plan assets*		(382)		(475)		(356)		(274)
Amortization of prior service costs/(credits)*		—		2		5		4
Recognized actuarial losses*		27		179		102		278
Curtailments and settlements*		—		—		(1)		8
Multi-employer plans		—		—		4		4
Other costs/(credits)*		—		—		9		9
Total net periodic pension (income)/cost of defined benefit plans	$	(82)	$	8	$	95	$	231
Cost of defined contribution plans		172		141		97		98
Total defined benefit and contribution pension plans cost recognized in the Consolidated Income Statement	$	90	$	149	$	192	$	328

(Dollars in millions)

U.S. Plans

Non-U.S. Plans

For the nine months ended September 30:

2017

2016

2017

2016

Service cost

$
—

$
—

$
308

$
318

Interest cost

1,435

1,536

622

787

Expected return on plan assets

(2,260
)
(2,767
)
(985
)
(1,419
)
Amortization of prior service costs/(credits)

12

8

(73
)
(79
)
Recognized actuarial losses

1,003

985

1,120

1,062

Curtailments and settlements

—

—

3

19

Multi-employer plan/other

—

—

(46
)
64

Total net periodic pension (income)/cost of defined benefit plans

190

(238
)
950

751

Cost of defined contribution plans

475

484

301

318

Total defined benefit and contribution plans cost recognized in the Consolidated Statement of Earnings

$
665

$
246

$
1,250

$
1,069

~~On October 12, 2012, the High Court~~* These components of net periodic pension cost are included in ~~London issued a ruling against IBM United Kingdom Limited~~other (income) and IBM United Kingdom Holdings Limited, both wholly-owned subsidiaries of the company, in litigation involving one of IBM UK’s defined benefit plans. As a result of the ruling, the company recorded a pre-tax retirement-related obligation of $162 million in the fourth quarter of 2012 in selling, general and administrative expense in the Consolidated Statement of Earnings. As a result of the final Court of Appeal ruling received in August 2017, the company adjusted its obligation under the plan. This adjustment resulted in a gain of $91 million recorded in selling, general and administrative expense in the Consolidated Statement of Earnings for the three and nine months ended September 30, 2017. This gain is reflected in “Non-U.S. Plans - Multi-employer plans/other” in the tables above. See note 12, “Contingencies” for additional information.

In March 2017, the company initiated a change to the investment strategy of its U.S. defined benefit plan. The 2017 target asset allocation was modified by reducing equity securities from 20 percent to 12 percent, increasing debt securities from 70 percent to 79 percent and other investments largely remained unchanged at 10 percent of total plan assets. This change was designed to reduce the risk associated with the potential negative impact that equity markets might have on the funded status of the U.S. defined benefit plan. The change is expected to reduce the 2018 expected long-term rate of return on assets from 5.75 percent to approximately 5.25 percent. See note S, “Retirement-Related Benefits,” on page 144 in the company’s 2016 Annual Report for additional information regarding the company’s investment strategy.

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

In 2017, the company expects to contribute approximately $400 million to its non-U.S. defined benefit and multi-employer plans, the largest of which will be contributed to the defined benefit pension plans in Japan, Spain and the UK. This amount generally represents the legally mandated minimum contribution. Total contributions to the non-U.S. plans in the first nine months of 2017 were $301 million, of which $124 million was in cash and $176 million in U.S. Treasury securities. Total net contributions to the non-U.S. plans in the first nine months of 2016 were $261 million, of which $97 million was in cash and $164 million in U.S. Treasury securities. The contribution of U.S. Treasury securities is considered a non-cash transaction in the Consolidated Statement of Cash Flows.

Income Statement.

The following ~~tables provide~~table provides the components of the ~~cost/(income)~~cost for the company’s nonpension postretirement plans.

~~Cost~~Pre-Swap Borrowing


		Balance		Balance
(Dollars in millions)	Maturities	3/31/2023		12/31/2022
U.S. dollar debt (weighted-average interest rate at March 31, 2023):*
3.4%	2023	$	1,514	$	1,529
3.3%	2024		5,007		5,009
5.1%	2025		1,603		1,603
3.5%	2026		5,201		4,351
3.1%	2027		3,620		3,620
5.0%	2028		1,313		313
3.5%	2029		3,250		3,250
2.0%	2030		1,350		1,350
4.4%	2032		1,850		1,850
4.8%	2033		750		—
8.0%	2038		83		83
4.5%	2039		2,745		2,745
2.9%	2040		650		650
4.0%	2042		1,107		1,107
7.0%	2045		27		27
4.7%	2046		650		650
4.3%	2049		3,000		3,000
3.0%	2050		750		750
4.2%	2052		1,400		1,400
5.1%	2053		650		—
7.1%	2096		316		316
		$	36,836	$	33,605
Other currencies (weighted-average interest rate at March 31, 2023, in parentheses):*
Euro (1.8%)	2023–2043	$	20,103	$	17,087
Pound sterling (4.9%)	2038		928		—
Japanese yen (0.5%)	2024–2028		1,327		694
Other (16.1%)	2023–2026		305		361
		$	59,499	$	51,747
Finance lease obligations (3.6%)	2023–2030		232		239
		$	59,731	$	51,986
Less: net unamortized discount			866		835
Less: net unamortized debt issuance costs			170		138
Add: fair value adjustment**			11		(73)
		$	58,707	$	50,940
Less: current maturities			4,881		4,751
Total		$	53,826	$	46,189

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

** The portion of ~~Nonpension Postretirement Plans~~

(Dollars in millions)

U.S. Plan

Non-U.S. Plans

For the three months ended September 30:

2017

2016

2017

2016

Service cost

$
4

$
4

$
1

$
1

Interest cost

38

41

14

15

Expected return on plan assets

—

—

(2
)
(2
)
Amortization of prior service costs/(credits)

(2
)
(2
)
0

(1
)
Recognized actuarial losses

5

5

2

2

Curtailments and settlements

—

—

0

0

Total nonpension postretirement plan cost recognized in Consolidated Statement of Earnings

$
45

$
49

$
16

$
16

(Dollars in millions)

U.S. Plan

Non-U.S. Plans

For the nine months ended September 30:

2017

2016

2017

2016

Service cost

$
11

$
13

$
4

$
4

Interest cost

115

124

43

37

Expected return on plan assets

—

—

(6
)
(5
)
Amortization of prior service costs/(credits)

(6
)
(6
)
0

(4
)
Recognized actuarial losses

15

15

5

7

Curtailments and settlements

—

—

0

0

Total nonpension postretirement plan cost recognized in Consolidated Statement of Earnings

$
135

$
146

$
47

$
39

~~The company contributed $259 million in U.S. Treasury securities to~~ the U.S. nonpension postretirement benefit plan during the nine months ended September 30, 2017, and $200 million in U.S. Treasury securities and $40 million in cash during the nine months ended September 30, 2016. The contribution of U.S. Treasury securitiescompany’s fixed-rate debt obligations that is ~~considered a non-cash transaction~~hedged is reflected in the Consolidated ~~Statement~~Balance Sheet as an amount equal to the sum of ~~Cash Flows.~~the debt’s carrying value and a fair value adjustment representing changes in the fair value of the hedged debt obligations attributable to movements in benchmark interest rates.

9. ~~Acquisitions/Divestitures:~~

~~Acquisitions:~~ ~~During the nine months ended September 30, 2017,~~The company’s indenture governing its debt securities and its various credit facilities each contain significant covenants which obligate the company ~~completed four acquisitions at an~~to promptly pay principal and interest, limit the aggregate ~~cost~~amount of ~~$128 million.~~

~~The Technology Services & Cloud Platforms segment completed acquisitions~~secured indebtedness and sale and leaseback transactions to 10 percent of three businesses: in the first quarter, Agile 3 Solutions, LLC (Agile 3 Solutions), a privately held business; in the third quarter, the cloud and managed hosting services business from a large U.S. telecommunications company, and Cloudigo Ltd. (Cloudigo), a privately held business. The Cognitive Solutions segment completed the acquisition of one privately held business: in the second quarter, XCC Web Content & Custom Apps Extension (XCC) from TIMETOACT Software & Consulting GmbH.

~~Each acquisition is expected to enhance~~ the company’s ~~portfolio~~consolidated net tangible assets, and

Table of product and services capabilities. Agile 3 Solutions is a developer of software used by C-Suite and senior executives to better visualize, understand and manage risks associated with the protection of sensitive data and adds capabilities to the company’s security portfolio. The acquisition of the cloud and managed hosting services business strengthens the company’s services portfolio and aligns with its cloud strategy. Cloudigo brings talent and technology that aligns closely with the company’s cloud platform investments in advancedContents

Notes to Consolidated Financial Statements — (continued)

~~network processing. XCC’s technology enhances IBM’s Connections Cloud platform by providing~~restrict the company’s ability to merge or consolidate unless certain conditions are met. The credit facilities also include a ~~single, accessible engagement center for sharing content.~~

~~Purchase price consideration for all acquisitions~~covenant on the company’s consolidated net interest expense ratio, which cannot be less than 2.20 to 1.0, as ~~reflected in the following table, was paid in cash. All acquisitions are reported in the Consolidated Statement~~well as a cross default provision with respect to other defaulted indebtedness of ~~Cash Flows net of acquired cash and cash equivalents.~~

at least $500 million.

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

Pre-swap annual contractual obligations of long-term debt outstanding at March 31, 2023, are as follows:


(Dollars in millions)	Total
Remainder of 2023	$	2,812
2024		6,378
2025		4,935
2026		5,550
2027		5,812
Thereafter		34,243
Total	$	59,731

Interest on Debt


(Dollars in millions)
For the three months ended March 31:	2023		2022
Cost of financing	$	90	$	82
Interest expense		367		311
Interest capitalized		4		2
Total interest paid and accrued	$	462	$	395

Lines of ~~September 30, 2017.~~

Amortization

Total

(Dollars in millions)

Life (in yrs.)

Acquisitions

Current assets

$
18

Fixed assets/noncurrent assets

69

Intangible assets:

Goodwill

N/A

16

Completed technology

5

9

Client relationships

7

62

Patents/trademarks

1-5

1

Total assets acquired

175

Current liabilities

(47
)
Total liabilities assumed

(47
)
Total purchase price

$
128

~~N/A - not applicable~~

Credit

The ~~acquisitions were accounted for as business combinations using~~company has a $2.5 billion Three-Year Credit Agreement and a $7.5 billion Five-Year Credit Agreement with maturity dates of June 20, 2025 and June 22, 2027, respectively. The Credit Agreements permit the ~~acquisition method,~~company and accordingly, the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquired entity were recorded at their estimated fair values at the date of acquisition. The primary items that generated the goodwill are the value of the synergies between the acquired businesses and IBM and the acquired assembled workforce, neither of which qualify as an amortizable intangible asset.

~~The overall weighted-average life of the identified amortizable intangible assets acquired is 6.6 years. These identified intangible assets will be amortized~~its subsidiary borrowers to borrow up to $10 billion on a straight-line basis over their useful lives. Goodwill of $13 million has been assigned to the Technology Services & Cloud Platforms segment and goodwill of $3 million has been assigned to the Cognitive Solutions segment. It is expected that approximately 50 percent of the goodwill will be deductible for tax purposes. Each of the acquisitions was for 100 percent of the acquired businesses.

~~On October 4, 2017,~~revolving basis. At March 31, 2023, there were no borrowings by the company, ~~announced~~or its ~~intent to acquire Vivant Digital (Vivant), a boutique digital and innovation agency. The acquisition extends the strategy and design expertise~~subsidiaries, under these credit facilities.

Table of IBM Interactive Experience (IBM iX) and will help accelerate clients’ digital transformations. The transaction is expected to close in the fourth quarter of 2017 and the business will be integrated within the GBS segment.

Contents

~~Divestitures:~~

~~Microelectronics —~~ On October 20, 2014, IBM and GLOBALFOUNDRIES announced a definitive agreement in which GLOBALFOUNDRIES would acquire the company’s Microelectronics business, including existing semiconductor manufacturing assets and operations in East Fishkill, NY and Essex Junction, VT. The commercial OEM business acquired by GLOBALFOUNDRIES includes custom logic and specialty foundry, manufacturing and related operations. The transaction closed on July 1, 2015.

At September 30, 2014, the company concluded that the Microelectronics business met the criteria for discontinued operations reporting. The disposal group constituted a component under accounting guidance. The continuing cash inflows and outflows with the discontinued component are related to the manufacturing sourcing arrangement and the transition, packaging and test services. These cash flows are not direct cash flows as they are not significant and the company has no significant continuing involvement.

Notes to Consolidated Financial Statements — (continued)

13. Commitments:

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

Changes in the company’s warranty liability for standard warranties, which are included in other accrued expenses and liabilities ~~of the business, classified as held for sale at June 30, 2015, were transferred at closing. The company transferred $515 million of net cash to GLOBALFOUNDRIES~~and other liabilities in the ~~third quarter of 2015. This amount~~Consolidated Balance Sheet, and for extended warranty contracts, which are included ~~$750 million of cash consideration, adjusted by the amount of working capital due from GLOBALFOUNDRIES and other miscellaneous items. A second cash payment~~in deferred income in the ~~amount of $500 million was transferred in December 2016. The remaining cash consideration of $250 million is expected to be transferred in December 2017.~~

~~Summarized financial information for discontinued operations is immaterial.~~

~~Industry Standard Server —~~ On January 23, 2014, IBM and Lenovo Group Limited (Lenovo) announced a definitive agreement in which Lenovo would acquire the company’s industry standard server portfolio (System x) for an adjusted purchase price of $2.1 billion, consisting of approximately $1.8 billion in cash, with the balance in Lenovo common stock. The stock represented less than 5 percent equity ownership in Lenovo. The company sold to Lenovo its System x, BladeCenter and Flex System blade servers and switches, x86-based Flex integrated systems, NeXtScale and iDataPlex servers and associated software, blade networking and maintenance operations. As of March 31, 2016, all Lenovo common stock was sold.

~~The initial closing was completed on October 1, 2014. A subsequent closing occurred in most other countries in which there was a large business footprint on December 31, 2014. The remaining countries closed on March 31, 2015. An assessment of the ongoing contractual terms of the transaction resulted~~Consolidated Balance Sheet, are presented in the ~~recognition~~following tables.

Standard Warranty Liability


(Dollars in millions)	2023		2022
Balance at January 1	$	79	$	77
Current period accruals		17		14
Accrual adjustments to reflect actual experience		(17)		(2)
Charges incurred		(21)		(20)
Balance at March 31	$	58	$	69

Table of ~~pre-tax gains of $63 million, $57 million and $13 million in 2015, 2016 and the first nine months of 2017, respectively.~~Contents

~~Overall, the company expects to recognize a total pre-tax gain on the sale of approximately $1.6 billion~~, which does not include associated costs related to transition and performance-based costs. Net of these charges, the pre-tax gain was approximately $1.3 billion, of which the cumulative gain recorded as of September 30, 2017 is $1.2 billion. The balance of the gain is expected to be recognized in 2019 upon conclusion of the maintenance agreement.

~~Others –~~ In the first quarter of 2017, the company completed one research-related divestiture. The company completed two Cognitive Solutions divestitures in the second quarter of 2017 and one Cognitive Solutions divestiture in the third quarter of 2017. The financial terms related to these transactions were not material. Overall, the company recognized a pre-tax gain of $25 million related to these transactions in 2017.

Notes to Consolidated Financial Statements — (continued)

~~10.~~ ~~Intangible Assets Including Goodwill:~~Extended Warranty Liability (Deferred Income) ~~The following table details the company’s intangible asset balances by major asset class:~~

At September 30, 2017

(Dollars in millions)

Gross Carrying

Accumulated

Net Carrying

Intangible asset class

Amount

Amortization

Amount

Capitalized software

$
1,586

$
(750
)
$
835

Client relationships

2,416

(1,054
)
1,363

Completed technology

2,872

(1,562
)
1,310

Patents/trademarks

707

(267
)
440

Other*

52

(19
)
32

Total

$
7,633

$
(3,652
)
$
3,981


(Dollars in millions)	2023		2022
Balance at January 1	$	272	$	350
Revenue deferred for new extended warranty contracts		9		18
Amortization of deferred revenue		(37)		(44)
Other*		1		(1)
Balance at March 31	$	244	$	323
Current portion	$	129	$	155
Noncurrent portion	$	116	$	168

* Other ~~intangibles are~~ primarily ~~acquired proprietary~~consists of foreign currency translation adjustments.

14.Contingencies:

As a company with a substantial employee population and ~~non-proprietary business processes, methodologies~~with clients in more than 175 countries, IBM is involved, either as plaintiff or defendant, in a variety of ongoing claims, demands, suits, investigations, tax matters and ~~systems.~~

At December 31, 2016

(Dollars in millions)

Gross Carrying

Accumulated

Net Carrying

Intangible asset class

Amount

Amortization

Amount

Capitalized software

$
1,537

$
(661
)
$
876

Client relationships

2,831

(1,228
)
1,602

Completed technology

3,322

(1,668
)
1,654

Patents/trademarks

730

(205
)
525

Other*

46

(15
)
31

Total

$
8,466

$
(3,778
)
$
4,688

* Other intangibles are primarily acquired proprietaryproceedings that arise from time to time in the ordinary course of its business. The company is a leader in the information technology industry and, ~~non-proprietary business processes, methodologies~~as such, has been and ~~systems.~~

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

The ~~net carrying~~company records a provision with respect to a claim, suit, investigation or proceeding when it is probable that a liability has been incurred and the amount of ~~intangible assets decreased $707 million during~~ the ~~first nine months~~loss can be reasonably estimated. Any recorded liabilities, including any changes to such liabilities for the quarter ended March 31, 2023 were not material to the Consolidated Financial Statements.

In accordance with the relevant accounting guidance, the company provides disclosures of ~~2017, primarily~~matters for which the likelihood of material loss is at least reasonably possible. In addition, the company also discloses matters based on its consideration of other matters and qualitative factors, including the experience of other companies in the industry, and investor, customer and employee relations considerations.

Table of 2016, respectively. In addition, in the first nine months of 2017, the company retired $1,255 million of fully amortized intangible assets, impacting both the gross carrying amount and accumulated amortization by this amount.Contents

The amortization expense for each of the five succeeding years relating to intangible assets currently recorded in the Consolidated Statement of Financial Position is estimated to be the following at September 30, 2017:

Capitalized

Acquired

(Dollars in millions)

Software

Intangibles

Total

2017 (for Q4)

$
144

$
216

$
359

2018

441

811

1,252

2019

202

671

873

2020

48

559

607

2021

—

446

446

~~The change in the goodwill balances by reportable segment, for the nine months ended September 30, 2017 and for the year ended December 31, 2016 are as follows:~~

Notes to Consolidated Financial Statements — (continued)

Foreign

Currency

Purchase

Translation

(Dollars in millions)

Balance

Goodwill

Price

And Other

Balance

Segment

01/01/17

Additions

Adjustments

Divestitures

Adjustments*

9/30/17

Cognitive Solutions

$
19,484

$
3

$
(36
)
$
(15
)
$
243

$
19,679

Global Business Services

4,607

—

4

—

186

4,797

Technology Services & Cloud Platforms

10,258

13

(3
)
—

175

10,444

Systems

1,850

—

—

—

13

1,863

Total

$
36,199

$
16

$
(36
)
$
(15
)
$
618

$
36,782

* Primarily driventhese claims, suits, investigations and proceedings, including considerations of the procedural status of the matter in question, the presence of complex or novel legal theories, and/or the ongoing discovery and development of information important to the matters. The company reviews claims, suits, investigations and proceedings at least quarterly, and decisions are made with respect to recording or adjusting provisions and disclosing reasonably possible losses or range of losses (individually or in the aggregate), to reflect the impact and status of settlement discussions, discovery, procedural and substantive rulings, reviews by ~~foreign currency translation.~~counsel and other information pertinent to a particular matter.

Foreign

Currency

Purchase

Translation

(Dollars in millions)

Balance

Goodwill

Price

And Other

Balance

Segment

01/01/16

Additions

Adjustments

Divestitures

Adjustments*

12/31/16

Cognitive Solutions

$
15,621

$
3,821

$
5

$
(12
)
$
48

$
19,484

Global Business Services

4,396

303

4

(1
)
(95
)
4,607

Technology Services & Cloud Platforms

10,156

119

(12
)
(5
)
(1
)
10,258

Systems

1,848

—

(4
)
—

5

1,850

Total

$
32,021

$
4,244

$
(7
)
$
(18
)
$
(42
)
$
36,199

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

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

~~There were no goodwill impairment losses recorded~~On June 8, 2021, IBM sued GlobalFoundries U.S. Inc. (GF) in New York State Supreme Court for claims including fraud and breach of contract relating to a long-term strategic relationship between IBM and GF for researching, developing, and manufacturing advanced semiconductor chips for IBM. GF walked away from its obligations and IBM is now suing to recover amounts paid to GF, and other compensatory and punitive damages, totaling more than $1.5 billion. On September 14, 2021, the court ruled on GF’s motion to dismiss. On April 7, 2022, the Appellate Division unanimously reversed the lower court’s dismissal of IBM’s fraud claim. IBM’s claims for breaches of contract, promissory estoppel, and fraud are proceeding.

On April 5, 2022, a putative securities law class action was commenced in the United States District Court for the Southern District of New York alleging that during the ~~first nine months~~period from April 4, 2017 through October 20, 2021, certain strategic imperatives revenues were misclassified. The company, two current IBM senior executives, and two former IBM senior executives are named as defendants. On June 23, 2022, the court entered an order appointing Iron Workers Local 580 Joint Funds as lead plaintiff. On September 21, 2022, the plaintiff voluntarily dismissed the case, without prejudice. On January 13, 2023, a putative securities law class action making allegations substantially similar to those in the dismissed case was filed in the same court. On April 4, 2023, the court entered an order appointing June E. Adams Irrevocable Trust Dated 7/21/14 FBO Edward Adams, the same entity that filed the since-dismissed April 5, 2022 class action, as lead plaintiff. On March 25, 2022, the Board of ~~2017 or~~Directors received a shareholder demand letter making similar allegations and demanding that the ~~full year~~company’s Board of ~~2016~~Directors take action to assert the company’s rights. A special committee of independent directors was formed to investigate the issues raised in the letter. The special committee has completed its investigation and recommended that no claims should be asserted on behalf of the company. The independent directors of the company’s Board of Directors unanimously adopted that recommendation.

On June 2, 2022, a putative class action lawsuit was filed in the United States District Court for the Southern District of New York alleging that the IBM Pension Plan miscalculated certain joint and survivor annuity pension benefits by using outdated actuarial tables in violation of the Employee Retirement Income Security Act of 1974. IBM, the Plan Administrator Committee, and the ~~company has no accumulated impairment losses.~~IBM Pension Plan are named as defendants.

~~Purchase price adjustments recorded~~As disclosed in the ~~first nine months~~Kyndryl Form 10 and subsequent Kyndryl public filings, in 2017 BMC Software, Inc. (BMC) filed suit against IBM in the United States District Court for the Southern District of ~~2017~~Texas in a dispute involving IBM’s former managed infrastructure services business. On May 30, 2022, the trial court awarded BMC $718 million in direct damages and ~~full year 2016 were~~$718 million in punitive damages, plus interest and fees. IBM filed a notice of appeal. IBM does not believe it has any material exposure relating to this litigation. No material liability or related ~~to acquisitions completed on or prior to June~~ indemnification asset has been recorded by IBM.

30 ~~2017 or September 30, 2016, respectively, and were still subject to the measurement period that ends at the earlier~~

Table of 12 months from the acquisition date or when information becomes available. Net purchase price adjustments of $36 million were recorded during the first nine months of 2017, with the primary drivers being deferred tax assets, other taxes payable and other current liabilities associated with the Truven Health Analytics, Inc. and The Weather Company acquisitions. Net purchase price adjustments of $7 million were recorded during 2016, with the primary drivers being deferred tax assets, accounts receivable, deferred income, inventory and other current liabilities.

Contents

~~11.~~ ~~Borrowings:~~

~~Short-Term Debt~~

At September 30,

At December 31,

(Dollars in millions)

2017

2016

Commercial paper

$
—

$
899

Short-term loans

407

375

Long-term debt — current maturities

3,892

6,239

Total

$
4,299

$
7,513

The weighted-average interest rate for commercial paper at December 31, 2016 was 0.7 percent. The weighted-average interest rate for short-term loans was 5.4 percent and 9.5 percent at September 30, 2017 and December 31, 2016, respectively.

Notes to Consolidated Financial Statements — (continued)

15. Equity Activity:

Reclassifications and Taxes Related to Items of Other Comprehensive Income


(Dollars in millions)	Before Tax		Tax (Expense)/		Net of Tax
For the three months ended March 31, 2023:	Amount		Benefit		Amount
Other comprehensive income/(loss):
Foreign currency translation adjustments	$	(87)	$	56	$	(30)
Net changes related to available-for-sale securities:
Unrealized gains/(losses) arising during the period	$	15	$	(4)	$	11
Reclassification of (gains)/losses to other (income) and expense		—		—		—
Total net changes related to available-for-sale securities	$	15	$	(4)	$	11
Unrealized gains/(losses) on cash flow hedges:
Unrealized gains/(losses) arising during the period	$	(29)	$	6	$	(23)
Reclassification of (gains)/losses to:
Cost of services		2		0		2
Cost of sales		(14)		4		(10)
Cost of financing		5		(1)		4
SG&A expense		(10)		3		(7)
Other (income) and expense		(126)		32		(94)
Interest expense		21		(5)		16
Total unrealized gains/(losses) on cash flow hedges	$	(151)	$	38	$	(113)
*Retirement-related benefit plans:**
Prior service costs/(credits)	$	—	$	1	$	1
Net (losses)/gains arising during the period		2		0		2
Curtailments and settlements		(1)		0		(1)
Amortization of prior service (credits)/costs		(2)		1		(2)
Amortization of net (gains)/losses		131		(38)		93
Total retirement-related benefit plans	$	130	$	(38)	$	92
Other comprehensive income/(loss)	$	(93)	$	53	$	(40)

*	These accumulated other comprehensive income (AOCI) components are included in the computation of net periodic pension cost. Refer to note 18, “Retirement-Related Benefits,” for additional information.

Table of Contents

~~Long-Term Debt~~Notes to Consolidated Financial Statements — (continued)

Reclassifications and Taxes Related to Items of Other Comprehensive Income


(Dollars in millions)	Before Tax		Tax (Expense)/		Net of Tax
For the three months ended March 31, 2022:	Amount		Benefit		Amount
Other comprehensive income/(loss):
Foreign currency translation adjustments	$	442	$	(136)	$	306
Net changes related to available-for-sale securities:
Unrealized gains/(losses) arising during the period	$	0	$	0	$	0
Reclassification of (gains)/losses to other (income) and expense		—		—		—
Total net changes related to available-for-sale securities	$	0	$	0	$	0
Unrealized gains/(losses) on cash flow hedges:
Unrealized gains/(losses) arising during the period	$	60	$	(16)	$	44
Reclassification of (gains)/losses to:
Cost of services		(15)		4		(11)
Cost of sales		(12)		4		(9)
Cost of financing		5		(1)		4
SG&A expense		(6)		2		(4)
Other (income) and expense		7		(2)		5
Interest expense		21		(5)		15
Total unrealized gains/(losses) on cash flow hedges	$	59	$	(15)	$	44
*Retirement-related benefit plans:**
Prior service costs/(credits)	$	(5)	$	5	$	0
Net (losses)/gains arising during the period		9		(4)		5
Curtailments and settlements		8		(2)		6
Amortization of prior service (credits)/costs		7		(2)		5
Amortization of net (gains)/losses		468		(131)		337
Total retirement-related benefit plans	$	486	$	(134)	$	352
Other comprehensive income/(loss)	$	987	$	(285)	$	703

*	These AOCI components are included in the computation of net periodic pension cost. Refer to note 18, “Retirement-Related Benefits,” for additional information.

Table of Contents

Notes to Consolidated Financial Statements — (continued)

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


					Net Change		Net Unrealized
	Net Unrealized		Foreign		Retirement-		Gains/(Losses)		Accumulated
	Gains/(Losses)		Currency		Related		on Available-		Other
	on Cash Flow		Translation		Benefit		For-Sale		Comprehensive
(Dollars in millions)	Hedges		Adjustments*		Plans		Securities		Income/(Loss)
January 1, 2023	$	(135)	$	(3,591)	$	(13,013)	$	(1)	$	(16,740)
Other comprehensive income before reclassifications		(23)		(30)		2		11		(39)
Amount reclassified from accumulated other comprehensive income/(loss)		(90)		—		90		—		0
Total change for the period	$	(113)	$	(30)	$	92	$	11	$	(40)
March 31, 2023	$	(248)	$	(3,621)	$	(12,921)	$	10	$	(16,780)


					Net Change		Net Unrealized
	Net Unrealized		Foreign		Retirement-		Gains/(Losses)		Accumulated
	Gains/(Losses)		Currency		Related		on Available-		Other
	on Cash Flow		Translation		Benefit		For-Sale		Comprehensive
(Dollars in millions)	Hedges		Adjustments*		Plans		Securities		Income/(Loss)
January 1, 2022	$	(18)	$	(3,362)	$	(19,854)	$	(1)	$	(23,234)
Other comprehensive income before reclassifications		44		306		5		0		355
Amount reclassified from accumulated other comprehensive income/(loss)		0		—		348		—		348
Total change for the period	$	44	$	306	$	352	$	0	$	703
March 31, 2022	$	26	$	(3,056)	$	(19,502)	$	(1)	$	(22,532)

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

16. Derivative Financial Instruments:

In the Consolidated Balance Sheet, the company does not offset derivative assets against liabilities in master netting arrangements nor does it offset receivables or payables recognized upon payment or receipt of cash collateral against the fair values of the related derivative instruments. At March 31, 2023 and December 31, 2022, the amount recognized in other accounts receivable for the right to reclaim cash collateral was $42 million and $140 million, respectively. At March 31, 2023, there was no amount recognized in accounts payable for the obligation to return cash collateral. At December 31, 2022, the amount recognized in accounts payable for such obligation was $8 million. The company restricts the use of cash collateral received to rehypothecation, and therefore reports it in restricted cash in the Consolidated Balance Sheet. There was no cash collateral rehypothecated at March 31, 2023. At December 31, 2022, the amount rehypothecated was $8 million. Additionally, if derivative exposures covered by a qualifying master netting agreement had been netted in the Consolidated Balance Sheet at March 31, 2023 and December 31, 2022, the total derivative asset and liability positions each would have been reduced by $157 million and $220 million, respectively.

Table of Contents

Notes to Consolidated Financial Statements — (continued)

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

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

Interest Rate Risk

Fixed and Variable Rate Borrowings

The company issues debt in the global capital markets to fund its operations and financing business. Access to cost-effective financing can result in interest rate mismatches with the underlying assets. To manage these mismatches and to reduce overall interest cost, the company may use interest-rate swaps to convert specific fixed-rate debt issuances into variable-rate debt (i.e., fair value hedges) and to convert specific variable-rate debt issuances into fixed-rate debt (i.e., cash flow hedges). At March 31, 2023 and December 31, 2022, the total notional amount of the company’s interest-rate swaps was $6.9 billion and $6.5 billion, respectively. The weighted-average remaining maturity of these instruments at both March 31, 2023 and December 31, 2022 was approximately 6 years. These interest-rate contracts were accounted for as fair value hedges. The company did not have any cash flow hedges relating to this program outstanding at March 31, 2023 and December 31, 2022.

Forecasted Debt Issuance

In connection with cash flow hedges of forecasted interest payments related to the company's borrowings, the company recorded net losses (before taxes) of $135 million and $139 million at March 31, 2023 and December 31, 2022, respectively, in AOCI. The company estimates that $18 million of the deferred net losses (before taxes) on derivatives in AOCI at March 31, 2023 will be reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying interest payments.

Foreign Exchange Risk

Long-Term Investments in Foreign Subsidiaries (Net Investment)

A large portion of the company’s foreign currency denominated debt portfolio is designated as a hedge of net investment in foreign subsidiaries to reduce the volatility in stockholders’ equity caused by changes in foreign currency exchange rates in the functional currency of major foreign subsidiaries with respect to the U.S. dollar. At March 31, 2023 and December 31, 2022, the carrying value of debt designated as hedging instruments was $15.2 billion and $13.4 billion, respectively. The company also uses cross-currency swaps and foreign exchange forward contracts for this risk management purpose. At March 31, 2023 and December 31, 2022, the total notional amount of derivative instruments designated as net investment hedges was $5.0 billion and $4.7 billion, respectively. At March 31, 2023 and December 31, 2022, the weighted-average remaining maturity of these instruments was approximately 0.2 years and 0.1 years, respectively.

Anticipated Royalties and Cost Transactions

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Notes to Consolidated Financial Statements — (continued)

are accounted for as cash flow hedges. At March 31, 2023, the maximum remaining length of time over which the company hedged its exposure is approximately two years. At March 31, 2023 and December 31, 2022, the total notional amount of forward contracts designated as cash flow hedges of forecasted royalty and cost transactions was $8.4 billion and $8.1 billion, respectively. At both March 31, 2023 and December 31, 2022, the weighted-average remaining maturity of these instruments was approximately 0.6 years.

At March 31, 2023 and December 31, 2022, in connection with cash flow hedges of anticipated royalties and cost transactions, the company recorded net losses and net gains (before taxes) of $24 million and $66 million, respectively, in AOCI. The company estimates that $85 million of deferred net losses (before taxes) on derivatives in AOCI at March 31, 2023 will be reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying anticipated transactions.

Foreign Currency Denominated Borrowings

The company is exposed to exchange rate volatility on foreign currency denominated debt. To manage this risk, the company employs cross-currency swaps to convert fixed-rate foreign currency denominated debt to fixed-rate debt denominated in the functional currency of the borrowing entity. These swaps are accounted for as cash flow hedges. At March 31, 2023, the maximum length of time remaining over which the company hedged its exposure is approximately eight years. At March 31, 2023 and December 31, 2022, the total notional amount of cross-currency swaps designated as cash flow hedges of foreign currency denominated debt was $4.0 billion and $3.1 billion, respectively.

At March 31, 2023 and December 31, 2022, in connection with cash flow hedges of foreign currency denominated borrowings, the company recorded net losses (before taxes) of $166 million and $101 million, respectively, in AOCI. The company estimates that $41 million of deferred net gains (before taxes) on derivatives in AOCI at March 31, 2023 will be reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying exposure.

Subsidiary Cash and Foreign Currency Asset/Liability Management

The company uses its Global Treasury Centers to manage the cash of its subsidiaries. These centers principally use currency swaps to convert cash flows in a cost-effective manner. In addition, the company uses foreign exchange forward contracts to economically hedge, on a net basis, the foreign currency exposure of a portion of the company’s nonfunctional currency assets and liabilities. The terms of these forward and swap contracts are generally less than one year. The changes in the fair values of these contracts and of the underlying hedged exposures are generally offsetting and are recorded in other (income) and expense in the Consolidated Income Statement. At March 31, 2023 and December 31, 2022, the total notional amount of derivative instruments in economic hedges of foreign currency exposure was $8.4 billion and $5.9 billion, respectively.

Equity Risk Management

The company is exposed to market price changes in certain broad market indices and in the company’s own stock primarily related to certain obligations to employees. Changes in the overall value of these employee compensation obligations are recorded in SG&A expense in the Consolidated Income Statement. Although not designated as accounting hedges, the company utilizes equity swap derivatives to economically hedge the exposures related to its employee compensation obligations. The derivatives are linked to the total return on certain broad market indices or the total return on the company’s common stock, and are recorded at fair value with gains or losses also reported in SG&A expense in the Consolidated Income Statement. At both March 31, 2023 and December 31, 2022, the total notional amount of derivative instruments in economic hedges of these compensation obligations was $1.1 billion.

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Notes to Consolidated Financial Statements — (continued)

Cumulative Basis Adjustments for Fair Value Hedges

At March 31, 2023 and December 31, 2022, the following amounts were recorded in the Consolidated Balance Sheet related to cumulative basis adjustments for fair value hedges.


	March 31,		December 31,
(Dollars in millions)	2023		2022
Short-term debt:
Carrying amount of the hedged item	$	(204)	$	(199)
Cumulative hedging adjustments included in the carrying amount — assets/(liabilities)*	$	(4)	$	1
Long-term debt:
Carrying amount of the hedged item	$	(6,693)	$	(6,216)
Cumulative hedging adjustments included in the carrying amount — assets/(liabilities)*	$	(8)	$	72

* Includes ($238) million and ($250) million of hedging adjustments on discontinued hedging relationships at March 31, 2023 and December 31, 2022, respectively.

The Effect of Derivative Instruments in the Consolidated Income Statement

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


					Gains/(Losses) of
(Dollars in millions)	Total				Total Hedge Activity
For the three months ended March 31:	2023		2022		2023		2022
Cost of services	$	5,310	$	5,349	$	(2)	$	15
Cost of sales	$	1,322	$	1,415	$	14	$	12
Cost of financing	$	110	$	98	$	(3)	$	(2)
SG&A expense	$	4,853	$	4,597	$	59	$	(70)
Other (income) and expense	$	(245)	$	246	$	142	$	(102)
Interest expense	$	367	$	311	$	(14)	$	(6)

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Notes to Consolidated Financial Statements — (continued)


	Gain (Loss) Recognized in Consolidated Income Statement
	Consolidated	Recognized on				Attributable to Risk
(Dollars in millions)	Income Statement	Derivatives				Being Hedged (2)
For the three months ended March 31:	Line Item	2023		2022		2023		2022
Derivative instruments in fair value hedges (1):
Interest rate contracts	Cost of financing	$	13	$	(1)	$	(17)	$	4
	Interest expense		53		(4)		(68)		16
Derivative instruments not designated as hedging instruments:
Foreign exchange contracts	Other (income) and expense		16		(95)		N/A		N/A
Equity contracts	SG&A expense		49		(76)		N/A		N/A
Total		$	131	$	(176)	$	(84)	$	20


	Gain (Loss) Recognized in Consolidated Income Statement and Other Comprehensive Income
(Dollars in millions)					Consolidated	Reclassified				Amounts Excluded from
For the three months	Recognized in OCI				Income Statement	from AOCI				Effectiveness Testing (3)
ended March 31:	2023		2022		Line Item	2023		2022		2023		2022
Derivative instruments in cash flow hedges:
Interest rate contracts	$	—	$	—	Cost of financing	$	(1)	$	(1)	$	—	$	—
					Interest expense		(3)		(3)		—		—
Foreign exchange contracts		(29)		60	Cost of services		(2)		15		—		—
					Cost of sales		14		12		—		—
					Cost of financing		(4)		(5)		—		—
					SG&A expense		10		6		—		—
					Other (income) and expense		126		(7)		—		—
					Interest expense		(17)		(17)		—		—
Instruments in net investment hedges (4):
Foreign exchange contracts		(224)		541	Cost of financing		—		—		5		1
					Interest expense		—		—		22		2
Total	$	(253)	$	601		$	122	$	1	$	28	$	3

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

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

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

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

N/A - not applicable

For the three months ending March 31, 2023 and 2022, there were no material gains or losses excluded from the assessment of hedge effectiveness (for fair value or cash flow hedges), or associated with an underlying exposure that did not or was not expected to occur (for cash flow hedges); nor are there any anticipated in the normal course of business.

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Notes to Consolidated Financial Statements — (continued)

17. Stock-Based Compensation:

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


(Dollars in millions)
For the three months ended March 31:	2023		2022
Cost	$	46	$	40
Selling, general and administrative		149		136
Research, development and engineering		74		57
Pre-tax stock-based compensation cost	$	268	$	234
Income tax benefits		(67)		(57)
Total net stock-based compensation cost	$	201	$	177

Pre-tax stock-based compensation cost for the three months ended March 31, 2023 increased $35 million compared to the corresponding period in the prior year, including increases in Employees Stock Purchase Plan (ESPP) ($19 million) as a result of ESPP being considered compensatory effective April 1, 2022 and stock options ($14 million) due to the conversion of stock options previously issued by acquired entities and stock options granted by the company as part of its executive compensation programs.

Total unrecognized compensation cost related to non-vested awards at March 31, 2023 was $1.7 billion and is expected to be recognized over a weighted-average period of approximately 2.6 years.

18. Retirement-Related Benefits:

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


					Yr. to Yr.
(Dollars in millions)					Percent
For the three months ended March 31:	2023		2022		Change
Retirement-related plans — cost:
Defined benefit and contribution pension plans — cost	$	281	$	478	(41.1)	%
Nonpension postretirement plans — cost		32		33	(1.6)
Total	$	314	$	510	(38.5)

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Notes to Consolidated Financial Statements — (continued)

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

Cost/(Income) of Pension Plans


(Dollars in millions)	U.S. Plans				Non-U.S. Plans
For the three months ended March 31:	2023		2022		2023		2022
Service cost	$	—	$	—	$	44	$	64
Interest cost*		272		302		288		139
Expected return on plan assets*		(382)		(475)		(356)		(274)
Amortization of prior service costs/(credits)*		—		2		5		4
Recognized actuarial losses*		27		179		102		278
Curtailments and settlements*		—		—		(1)		8
Multi-employer plans		—		—		4		4
Other costs/(credits)*		—		—		9		9
Total net periodic pension (income)/cost of defined benefit plans	$	(82)	$	8	$	95	$	231
Cost of defined contribution plans		172		141		97		98
Total defined benefit and contribution pension plans cost recognized in the Consolidated Income Statement	$	90	$	149	$	192	$	328

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

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

Pre-Swap Borrowing

Balance

Balance

(Dollars in millions)

Maturities

9/30/2017

12/31/2016

U.S. dollar debt (average interest rate at September 30, 2017):*

2.7%

2017

$
2

$
5,104

3.0%

2018–2019

10,208

8,856

2.0%

2020–2021

7,416

4,941

2.4%

2022

3,492

1,901

3.4%

2023

1,529

1,500

3.6%

2024

2,000

2,000

7.0%

2025

600

600

3.5%

2026

1,350

1,350

4.7%

2027

969

469

6.5%

2028

313

313

5.9%

2032

600

600

8.0%

2038

83

83

5.6%

2039

745

745

4.0%

2042

1,107

1,107

7.0%

2045

27

27

4.7%

2046

650

650

7.1%

2096

316

316

$
31,408

$
30,563

Other currencies (average interest rate at September 30, 2017, in parentheses):*

Euros (1.5%)

2019–2029

$
10,342

$
7,122

Pound sterling (2.7%)

2020–2022

1,409

1,296

Japanese yen (0.9%)

2017–2026

1,669

1,576

Canadian (2.2%)

2017

—

373

Other (7.4%)

2018–2020

694

215

$
45,522

$
41,145

Less: net unamortized discount

833

839

Less: net unamortized debt issuance costs

99

82

Add: fair value adjustment**

627

669

$
45,218

$
40,893

Less: current maturities

3,892

6,239

Total

$
41,327

$
34,655


		Balance		Balance
(Dollars in millions)	Maturities	3/31/2023		12/31/2022
U.S. dollar debt (weighted-average interest rate at March 31, 2023):*
3.4%	2023	$	1,514	$	1,529
3.3%	2024		5,007		5,009
5.1%	2025		1,603		1,603
3.5%	2026		5,201		4,351
3.1%	2027		3,620		3,620
5.0%	2028		1,313		313
3.5%	2029		3,250		3,250
2.0%	2030		1,350		1,350
4.4%	2032		1,850		1,850
4.8%	2033		750		—
8.0%	2038		83		83
4.5%	2039		2,745		2,745
2.9%	2040		650		650
4.0%	2042		1,107		1,107
7.0%	2045		27		27
4.7%	2046		650		650
4.3%	2049		3,000		3,000
3.0%	2050		750		750
4.2%	2052		1,400		1,400
5.1%	2053		650		—
7.1%	2096		316		316
		$	36,836	$	33,605
Other currencies (weighted-average interest rate at March 31, 2023, in parentheses):*
Euro (1.8%)	2023–2043	$	20,103	$	17,087
Pound sterling (4.9%)	2038		928		—
Japanese yen (0.5%)	2024–2028		1,327		694
Other (16.1%)	2023–2026		305		361
		$	59,499	$	51,747
Finance lease obligations (3.6%)	2023–2030		232		239
		$	59,731	$	51,986
Less: net unamortized discount			866		835
Less: net unamortized debt issuance costs			170		138
Add: fair value adjustment**			11		(73)
		$	58,707	$	50,940
Less: current maturities			4,881		4,751
Total		$	53,826	$	46,189

*Includes notes, debentures, bank loans and secured ~~borrowings and capital lease obligations.~~borrowings.

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

There are no debt securities issued and outstanding by IBM International Group Capital LLC, which is an indirect, 100 percent owned finance subsidiary of International Business Machines Corporation, the parent. Any debt securities issued by IBM International Group Capital LLC, would be fully and unconditionally guaranteed by the parent.

During the third quarter of 2017, IBM Credit LLC, a wholly owned subsidiary of the company, filed a shelf registration statement with the Securities and Exchange Commission (SEC) allowing it to offer for sale public debt securities. IBM Credit LLC issued fixed and floating rate debt securities in the aggregate amount of $3.0 billion with maturity dates ranging from 2019 to 2022. This debt is included in the long-term debt table above.

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Notes to Consolidated Financial Statements — (continued)

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

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

Pre-swap annual contractual ~~maturities~~obligations of long-term debt outstanding at ~~September 30, 2017,~~March 31, 2023, are as follows:

(Dollars in millions)

Total

2017 (for Q4)

$
468

2018

5,140

2019

7,034

2020

6,155

2021

5,155

2022 and beyond

21,569

Total

$
45,522


(Dollars in millions)	Total
Remainder of 2023	$	2,812
2024		6,378
2025		4,935
2026		5,550
2027		5,812
Thereafter		34,243
Total	$	59,731

Interest on Debt


(Dollars in millions)
For the nine months ended September 30:	2017			2016
For the three months ended March 31:							2023		2022
Cost of financing	$	496		$	432		$	90	$	82
Interest expense	485			523				367		311
Net investment derivative activity	(34		)	(51		)
Interest capitalized	(1		)	3				4		2
Total interest paid and accrued	$	947		$	907		$	462	$	395

Lines of Credit

~~In 2016, the~~The company ~~increased the size of its five-year~~has a $2.5 billion Three-Year Credit Agreement ~~(the “Credit Agreement”) from $10~~and a $7.5 billion ~~to $10.25 billion~~Five-Year Credit Agreement with maturity dates of June 20, 2025 and ~~extended the term by one year to November 10, 2021.~~June 22, 2027, respectively. The Credit ~~Agreement permits~~Agreements permit the company and its ~~Subsidiary Borrowers~~subsidiary borrowers to borrow up to ~~$10.25~~$10 billion on a revolving basis. Borrowings of the Subsidiary Borrowers will be unconditionally backed by the company. The company may also, upon the agreement of either existing lenders, or of the additional banks not currently party to the Credit Agreement, increase the commitments under the Credit Agreement up to an additional $1.75 billion. Subject to certain terms of the Credit Agreement, the company and Subsidiary Borrowers may borrow, prepay and reborrow amounts under the Credit Agreement at any time during the Credit Agreement term. Interest rates on borrowings under the Credit Agreement will be based on prevailing market interest rates, as further described in the Credit Agreement. The Credit Agreement contains customary representations and warranties, covenants, events of default, and indemnification provisions. The company believes that circumstances that might give rise to breach of these covenants or an event of default, as specified in the Credit Agreement, are remote. As of September 30, 2017,At March 31, 2023, there were no borrowings by the company, or its subsidiaries, under ~~the Credit Agreement.~~these credit facilities.

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The company also has other committed lines of credit in some of the geographies which are not significant in the aggregate. Interest rates and other terms of borrowing under these lines of credit vary from country to country, depending on local market conditions.

On July 20, 2017, the company and IBM Credit LLC, (the Borrowers), entered into a $2.5 billion 364-Day Credit Agreement, and a $2.5 billion Three-Year Credit Agreement (the New Credit Agreements, and together with the Credit Agreement, the Credit Facilities). IBM also entered into the Third Amendment to its Credit Agreement. The New Credit Agreements permit the Borrowers to borrow up to an aggregate of $5 billion on a revolving basis. Neither Borrower is a guarantor or co-obligor of the other Borrower under the New Credit Agreements. Subject to certain conditions stated in the New Credit Agreements, the Borrowers may borrow, prepay and re-borrow amounts under the New Credit Agreements at any time during the term of the New Credit Agreements. Funds borrowed may be used for the general corporate purposes of the Borrowers. Interest rates on borrowings under the New Credit Agreements will be based on prevailing market interest rates, as further described in the New Credit Agreements. The New Credit Agreements contain customary representations and warranties, covenants, events of default, and indemnification provisions. The Amendment to the Credit Agreement adds and restates various provisions in order to provide the company with the opportunity in 2018 to request that the lenders extend the termination date of the Credit Agreement to July 20, 2023.

Notes to Consolidated Financial Statements — (continued)

13. Commitments:

~~12.~~ Standard Warranty Liability


(Dollars in millions)	2023		2022
Balance at January 1	$	79	$	77
Current period accruals		17		14
Accrual adjustments to reflect actual experience		(17)		(2)
Charges incurred		(21)		(20)
Balance at March 31	$	58	$	69

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Notes to Consolidated Financial Statements — (continued)

Extended Warranty Liability (Deferred Income)


(Dollars in millions)	2023		2022
Balance at January 1	$	272	$	350
Revenue deferred for new extended warranty contracts		9		18
Amortization of deferred revenue		(37)		(44)
Other*		1		(1)
Balance at March 31	$	244	$	323
Current portion	$	129	$	155
Noncurrent portion	$	116	$	168

* Other primarily consists of foreign currency translation adjustments.

14.Contingencies:

The company records a provision with respect to a claim, suit, investigation or proceeding when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Any recorded liabilities, including any changes to such liabilities for the quarter ended ~~September 30, 2017~~March 31, 2023 were not material to the Consolidated Financial Statements.

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

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Notes to Consolidated Financial Statements — (continued)

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

~~The company is a defendant~~On June 8, 2021, IBM sued GlobalFoundries U.S. Inc. (GF) in ~~an action filed on March 6, 2003 in state court in Salt Lake City, Utah by the SCO Group (SCO v. IBM). The company removed the case to Federal~~New York State Supreme Court ~~in Utah. Plaintiff is an alleged successor in interest to some of AT&T’s UNIX IP rights, and alleges copyright infringement, unfair competition, interference with contract~~for claims including fraud and breach of contract ~~with regard~~relating to ~~the company’s distribution of AIX~~a long-term strategic relationship between IBM and ~~Dynix~~GF for researching, developing, and ~~contribution of code~~manufacturing advanced semiconductor chips for IBM. GF walked away from its obligations and IBM is now suing to ~~Linux~~recover amounts paid to GF, and ~~the company has asserted counterclaims.~~other compensatory and punitive damages, totaling more than $1.5 billion. On September 14, ~~2007, plaintiff filed for bankruptcy protection, and all proceedings in this case were stayed. The~~2021, the court ~~in another suit, the SCO Group, Inc. v. Novell, Inc., held a trial in March 2010. The jury found that Novell is the owner of UNIX and UnixWare copyrights; the judge subsequently~~ ruled ~~that SCO is obligated to recognize~~

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

Novell’s waiver of SCO’s claims against IBM and Sequent for breach of UNIX license agreements. On August 30, 2011, the Tenth Circuit Court of Appeals affirmed the district court’s ruling and denied SCO’s appeal of this matter. In June 2013, the Federal Court in Utah granted SCO’son GF’s motion to ~~reopen~~dismiss. On April 7, 2022, the ~~SCO v. IBM case. In February 2016,~~Appellate Division unanimously reversed the ~~Federal Court ruled in favor of IBM on all of SCO’s remaining claims, and SCO appealed. On October 30, 2017, the Tenth Circuit Court of Appeals affirmed the~~lower court’s dismissal of ~~all but one~~IBM’s fraud claim. IBM’s claims for breaches of ~~SCO’s remaining claims, which was remanded to the Federal Court in Utah.~~

~~On May 13, 2010, IBM~~contract, promissory estoppel, and the State of Indiana (acting on behalf of the Indiana Family and Social Services Administration) sued one another in a dispute over a 2006 contract regarding the modernization of social service program processing in Indiana. After six weeks of trial, on July 18, 2012, the Indiana Superior Court in Marion County rejected the State’s claims in their entirety and awarded IBM $52 million plus interest and costs. On February 13, 2014, the Indiana Court of Appeals reversed portions of the trial judge’s findings, found IBM in material breach, and ordered the case remanded to the trial judge to determine the State’s damages, if any. The Indiana Court of Appeals also affirmed approximately $50 million of the trial court’s award of damages to IBM. On March 22, 2016, the Indiana Supreme Court affirmed the outcome of the Indiana Court of Appeals and remanded the case to the Indiana Superior Court. On August 7, 2017, the Indiana Superior Court awarded the State $128 million, which it then offset against IBM’s previously affirmed award of $50 million, resulting in a $78 million award to the State, plus interest. IBM appealed to the Indiana Court of Appeals and the matter remains pending.

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

On October 29, 2013, Bridgestone Americas, Inc. (Bridgestone) sued IBM regarding a 2009 contract for the implementation of an SAP-based, enterprise-wide order management system. IBM counterclaimed against Bridgestone and its parent, Bridgestone Corp. The case is pending in the Middle District of Tennessee.

fraud are proceeding.

On April 16, 2014, Iusacell SA de C.V. (Iusacell) sued IBM, claiming that IBM made fraudulent misrepresentations that induced Iusacell to enter into an agreement with IBM Mexico. Iusacell claimed damages for lost profits. Iusacell’s complaint related to5, 2022, a contractual dispute in Mexico, which was the subject of a pending arbitration proceeding in Mexico initiated by IBM Mexico against Iusacell for breach of the underlying agreement. On August 31, 2017, the parties entered into an agreement releasing all claims against each other, resolving both the lawsuit and the arbitration proceeding.

IBM United Kingdom Limited (IBM UK) initiated legal proceedings in May 2010 before the High Court in London against the IBM UK Pensions Trust (the UK Trust) and two representative beneficiaries of the UK Trust membership. IBM UK sought a declaration that it acted lawfully both in notifying the Trustee of the UK Trust that it was closing its UK defined benefit plans to future accruals for most participants and in implementing the company’s new retirement policy. In April 2014, the High Court acknowledged that the changes made to its UK defined benefit plans were within IBM’s discretion, but ruled that IBM breached its implied duty of good faith both in implementing these changes and in the manner in which it consulted with employees. Proceedings to determine remedies were held in July 2014, and in February 2015 the High Court held that for IBM to make changes to accruals under the plan would require a new consultation of the participants, but other changes (including to early retirement policy) would not require such consultation. IBM UK appealed both the breach and remedies judgments. In August 2017, the Appeal Court reversed the High Court, holding that IBM UK was not in breach of its implied duties of good faith and that the changes made to the plans were lawful. The time to appeal has expired and the Appeal Court judgment is final. In addition, IBM UK is a defendant in approximately 290 individual actions brought since early 2010 by participants of the defined benefits plans who left IBM UK. These actions, which allege constructive dismissal and age discrimination, are pending before the Employment Tribunal in Southampton UK.

In early 2012, IBM notified the SEC of an investigation by the Polish Central Anti-Corruption Bureau involving allegations of illegal activity by a former IBM Poland employee in connection with sales to the Polish government. IBM cooperated with the SEC and Polish authorities in this matter. In April 2013, IBM learned that the U.S. Department of Justice (DOJ) was also investigating allegations related to the Poland matter, as well as allegations relating to transactions in Argentina, Bangladesh and Ukraine. The DOJ was seeking information regarding the company’s global FCPA compliance program and its public sector business. The company cooperated with the DOJ in this matter. In June 2017, the DOJ and the SEC each informed IBM that based on the information to date, they closed their respective investigations into these matters without pursuing any enforcement action against the company.

~~In May 2015, a~~ putative securities law class action was commenced in the United States District Court for the Southern District of New York ~~related~~alleging that during the period from April 4, 2017 through October 20, 2021, certain strategic imperatives revenues were misclassified. The company, two current IBM senior executives, and two former IBM senior executives are named as defendants. On June 23, 2022, the court entered an order appointing Iron Workers Local 580 Joint Funds as lead plaintiff. On September 21, 2022, the plaintiff voluntarily dismissed the case, without prejudice. On January 13, 2023, a putative securities law class action making allegations substantially similar to those in the dismissed case was filed in the same court. On April 4, 2023, the court entered an order appointing June E. Adams Irrevocable Trust Dated 7/21/14 FBO Edward Adams, the same entity that filed the since-dismissed April 5, 2022 class action, as lead plaintiff. On March 25, 2022, the Board of Directors received a shareholder demand letter making similar allegations and demanding that the company’s ~~October 2014 announcement~~Board of Directors take action to assert the company’s rights. A special committee of independent directors was formed to investigate the issues raised in the letter. The special committee has completed its investigation and recommended that itno claims should be asserted on behalf of the company. The independent directors of the company’s Board of Directors unanimously adopted that recommendation.

On June 2, 2022, a putative class action lawsuit was ~~divesting its global commercial semiconductor technology business,~~filed in the United States District Court for the Southern District of New York alleging ~~violations~~that the IBM Pension Plan miscalculated certain joint and survivor annuity pension benefits by using outdated actuarial tables in violation of the Employee Retirement Income Security Act ~~(“ERISA”). The company,~~of 1974. IBM, the Plan Administrator Committee, and the IBM Pension Plan are named as defendants.

As disclosed in the Kyndryl Form 10 and subsequent Kyndryl public filings, in 2017 BMC Software, Inc. (BMC) filed suit against IBM in the United States District Court for the Southern District of Texas in a dispute involving IBM’s former managed infrastructure services business. On May 30, 2022, the trial court awarded BMC $718 million in direct damages and $718 million in punitive damages, plus interest and fees. IBM filed a notice of appeal. IBM does not believe it has any material exposure relating to this litigation. No material liability or related indemnification asset has been recorded by IBM.

Table of Contents

Notes to Consolidated Financial Statements — (continued)

management’s Retirement Plans Committee, and three current or former IBM executives were named as defendants. On September 7, 2016, the Court granted the company’s motion to dismiss the plaintiffs’ claims. On October 21, 2016, the plaintiffs filed an amended complaint, dropping the company as a defendant. On September 29, 2017, the Court granted the defendants’ motion to dismiss. Plaintiffs have filed a notice of appeal to the Second Circuit Court of Appeals and the matter remains pending.

In August 2015, IBM learned that the SEC is conducting an investigation relating to revenue recognition with respect to the accounting treatment of certain transactions in the U.S., UK and Ireland. The company is cooperating with the SEC in this matter.

The company is also subject to ongoing tax examinations and governmental assessments in various jurisdictions. Along with many other U.S. companies doing business in Brazil, the company is involved in various challenges with Brazilian tax authorities regarding non-income tax assessments and non-income tax litigation matters. The total potential amount related to all these matters for all applicable years is approximately ~~$1.1 billion.~~$400 million. The company believes it will prevail on these matters and that this amount is not a meaningful indicator of liability.

~~13.~~ ~~Commitments:~~ The company’s extended lines of credit to third-party entities include unused amounts of $8,016 million and $6,542 million at September 30, 2017 and December 31, 2016, respectively. A portion of these amounts was available to the company’s business partners to support their working capital needs. In addition, the company has committed to provide future financing to its clients in connection with client purchase agreements for approximately $3,063 million and $2,463 million at September 30, 2017 and December 31, 2016, respectively.

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

In addition, the company guarantees certain loans and financial commitments. The maximum potential future payment under these financial guarantees was $21 million and $34 million at September 30, 2017 and December 31, 2016, respectively. The fair value of the guarantees recognized in the Consolidated Statement of Financial Position is not material.

15. Equity Activity:

Reclassifications and Taxes Related to Items of Other Comprehensive Income


(Dollars in millions)	Before Tax		Tax (Expense)/		Net of Tax
For the three months ended March 31, 2023:	Amount		Benefit		Amount
Other comprehensive income/(loss):
Foreign currency translation adjustments	$	(87)	$	56	$	(30)
Net changes related to available-for-sale securities:
Unrealized gains/(losses) arising during the period	$	15	$	(4)	$	11
Reclassification of (gains)/losses to other (income) and expense		—		—		—
Total net changes related to available-for-sale securities	$	15	$	(4)	$	11
Unrealized gains/(losses) on cash flow hedges:
Unrealized gains/(losses) arising during the period	$	(29)	$	6	$	(23)
Reclassification of (gains)/losses to:
Cost of services		2		0		2
Cost of sales		(14)		4		(10)
Cost of financing		5		(1)		4
SG&A expense		(10)		3		(7)
Other (income) and expense		(126)		32		(94)
Interest expense		21		(5)		16
Total unrealized gains/(losses) on cash flow hedges	$	(151)	$	38	$	(113)
*Retirement-related benefit plans:**
Prior service costs/(credits)	$	—	$	1	$	1
Net (losses)/gains arising during the period		2		0		2
Curtailments and settlements		(1)		0		(1)
Amortization of prior service (credits)/costs		(2)		1		(2)
Amortization of net (gains)/losses		131		(38)		93
Total retirement-related benefit plans	$	130	$	(38)	$	92
Other comprehensive income/(loss)	$	(93)	$	53	$	(40)

*	These accumulated other comprehensive income (AOCI) components are included in the computation of net periodic pension cost. Refer to note 18, “Retirement-Related Benefits,” for additional information.

Table of Contents

Notes to Consolidated Financial Statements — (continued)

~~Changes in the company’s warranty liability for standard warranties and deferred income for extended warranty are presented in the following tables.~~

~~Standard Warranty Liability~~

(Dollars in millions)

2017

2016

Balance at January 1

$
156

$
181

Current period accruals

107

107

Accrual adjustments to reflect actual experience

(3
)
4

Charges incurred

(126
)
(132
)
Balance at September 30

$
134

$
160

~~Extended Warranty Liability~~

(Dollars in millions)

2017

2016

Aggregate deferred revenue at January 1

$
531

$
538

Revenue deferred for new extended warranty contracts

175

176

Amortization of deferred revenue

(198
)
(198
)
Other*

24

12

Aggregate deferred revenue at September 30

$
533

$
528

Current portion

$
258

$
287

Noncurrent portion

$
275

$
241

* Other primarily consists of foreign currency translation adjustments.

Reclassifications and Taxes Related to Items of Other Comprehensive Income


(Dollars in millions)	Before Tax		Tax (Expense)/		Net of Tax
For the three months ended March 31, 2022:	Amount		Benefit		Amount
Other comprehensive income/(loss):
Foreign currency translation adjustments	$	442	$	(136)	$	306
Net changes related to available-for-sale securities:
Unrealized gains/(losses) arising during the period	$	0	$	0	$	0
Reclassification of (gains)/losses to other (income) and expense		—		—		—
Total net changes related to available-for-sale securities	$	0	$	0	$	0
Unrealized gains/(losses) on cash flow hedges:
Unrealized gains/(losses) arising during the period	$	60	$	(16)	$	44
Reclassification of (gains)/losses to:
Cost of services		(15)		4		(11)
Cost of sales		(12)		4		(9)
Cost of financing		5		(1)		4
SG&A expense		(6)		2		(4)
Other (income) and expense		7		(2)		5
Interest expense		21		(5)		15
Total unrealized gains/(losses) on cash flow hedges	$	59	$	(15)	$	44
*Retirement-related benefit plans:**
Prior service costs/(credits)	$	(5)	$	5	$	0
Net (losses)/gains arising during the period		9		(4)		5
Curtailments and settlements		8		(2)		6
Amortization of prior service (credits)/costs		7		(2)		5
Amortization of net (gains)/losses		468		(131)		337
Total retirement-related benefit plans	$	486	$	(134)	$	352
Other comprehensive income/(loss)	$	987	$	(285)	$	703

*	These AOCI components are included in the computation of net periodic pension cost. Refer to note 18, “Retirement-Related Benefits,” for additional information.

Table of Contents

Notes to Consolidated Financial Statements — (continued)

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


					Net Change		Net Unrealized
	Net Unrealized		Foreign		Retirement-		Gains/(Losses)		Accumulated
	Gains/(Losses)		Currency		Related		on Available-		Other
	on Cash Flow		Translation		Benefit		For-Sale		Comprehensive
(Dollars in millions)	Hedges		Adjustments*		Plans		Securities		Income/(Loss)
January 1, 2023	$	(135)	$	(3,591)	$	(13,013)	$	(1)	$	(16,740)
Other comprehensive income before reclassifications		(23)		(30)		2		11		(39)
Amount reclassified from accumulated other comprehensive income/(loss)		(90)		—		90		—		0
Total change for the period	$	(113)	$	(30)	$	92	$	11	$	(40)
March 31, 2023	$	(248)	$	(3,621)	$	(12,921)	$	10	$	(16,780)


					Net Change		Net Unrealized
	Net Unrealized		Foreign		Retirement-		Gains/(Losses)		Accumulated
	Gains/(Losses)		Currency		Related		on Available-		Other
	on Cash Flow		Translation		Benefit		For-Sale		Comprehensive
(Dollars in millions)	Hedges		Adjustments*		Plans		Securities		Income/(Loss)
January 1, 2022	$	(18)	$	(3,362)	$	(19,854)	$	(1)	$	(23,234)
Other comprehensive income before reclassifications		44		306		5		0		355
Amount reclassified from accumulated other comprehensive income/(loss)		0		—		348		—		348
Total change for the period	$	44	$	306	$	352	$	0	$	703
March 31, 2022	$	26	$	(3,056)	$	(19,502)	$	(1)	$	(22,532)

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

~~14.~~ ~~Earnings Per Share~~16. Derivative Financial Instruments:

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

For the Three Months Ended

September 30, 2017

September 30, 2016

Number of shares on which basic earnings per share is calculated:

Weighted-average shares outstanding during period

929,437,441

953,995,828

Add — Incremental shares under stock-based compensation plans

2,236,234

2,357,365

Add — Incremental shares associated with contingently issuable shares

1,553,754

964,091

Number of shares on which diluted earnings per share is calculated

933,227,429

957,317,284

Income from continuing operations (millions)

$
2,726

$
2,854

Loss from discontinued operations, net of tax (millions)

0

(1
)
Net income on which basic earnings per share is calculated (millions)

$
2,726

$
2,853

Income from continuing operations (millions)

$
2,726

$
2,854

Net income applicable to contingently issuable shares (millions)

0

—

Income from continuing operations on which diluted earnings per share is calculated (millions)

$
2,726

$
2,854

Loss from discontinued operations, net of tax, on which basic and diluted earnings per share is calculated (millions)

0

(1
)
Net income on which diluted earnings per share is calculated (millions)

$
2,726

$
2,853

Earnings/(loss) per share of common stock:

Assuming dilution

Continuing operations

$
2.92

$
2.98

Discontinued operations

0.00

0.00

Total

$
2.92

$
2.98

Basic

Continuing operations

$
2.93

$
2.99

Discontinued operations

0.00

0.00

Total

$
2.93

$
2.99

~~Stock options to purchase 399,844 shares and 29,033 shares were outstanding as of September 30, 2017 and 2016, respectively, but were not included~~therefore reports it in restricted cash in the ~~computation of diluted earnings per share because~~Consolidated Balance Sheet. There was no cash collateral rehypothecated at March 31, 2023. At December 31, 2022, the ~~options’ exercise price during~~amount rehypothecated was $8 million. Additionally, if derivative exposures covered by a qualifying master netting agreement had been netted in the ~~respective period was greater than~~Consolidated Balance Sheet at March 31, 2023 and December 31, 2022, the ~~average market price of the common shares,~~total derivative asset and ~~therefore, the effect~~liability positions each would have been ~~antidilutive.~~reduced by $157 million and $220 million, respectively.

Table of Contents

Notes to Consolidated Financial Statements — (continued)

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

Interest Rate Risk

For the Nine Months Ended

September 30, 2017

September 30, 2016

Number of shares on which basic earnings per share is calculated:

Weighted-average shares outstanding during period

935,600,777

957,693,385

Add — Incremental shares under stock compensation plans

3,213,758

2,258,854

Add — Incremental shares associated with contingently issuable shares

1,394,930

771,943

Number of shares on which diluted earnings per share is calculated

940,209,466

960,724,182

Income from continuing operations (millions)

$
6,811

$
7,375

Loss from discontinued operations, net of tax (millions)

(3
)
(4
)
Net income on which basic earnings per share is calculated (millions)

$
6,807

$
7,371

Income from continuing operations (millions)

$
6,811

$
7,375

Net income applicable to contingently issuable shares (millions)

(2
)
—

Income from continuing operations on which diluted earnings per share is calculated (millions)

$
6,809

$
7,375

Loss from discontinued operations, net of tax, on which basic and diluted earnings per share is calculated (millions)

(3
)
(4
)
Net income on which diluted earnings per share is calculated (millions)

$
6,806

$
7,371

Earnings/(loss) per share of common stock:

Assuming dilution

Continuing operations

$
7.24

$
7.67

Discontinued operations

0.00

0.00

Total

$
7.24

$
7.67

Basic

Continuing operations

$
7.28

$
7.70

Discontinued operations

0.00

0.00

Total

$
7.28

$
7.70

Fixed and Variable Rate Borrowings

~~Stock~~The company issues debt in the global capital markets to fund its operations and financing business. Access to cost-effective financing can result in interest rate mismatches with the underlying assets. To manage these mismatches and to reduce overall interest cost, the company may use interest-rate swaps to convert specific fixed-rate debt issuances into variable-rate debt (i.e., fair value hedges) and to convert specific variable-rate debt issuances into fixed-rate debt (i.e., cash flow hedges). At March 31, 2023 and December 31, 2022, the total notional amount of the company’s interest-rate swaps was $6.9 billion and $6.5 billion, respectively. The weighted-average remaining maturity of these instruments at both March 31, 2023 and December 31, 2022 was approximately 6 years. These interest-rate contracts were accounted for as fair value hedges. The company did not have any cash flow hedges relating to this program outstanding at March 31, 2023 and December 31, 2022.

Forecasted Debt Issuance

Foreign Exchange Risk

Long-Term Investments in Foreign Subsidiaries (Net Investment)

A large portion of the company’s foreign currency denominated debt portfolio is designated as a hedge of net investment in foreign subsidiaries to reduce the volatility in stockholders’ equity caused by changes in foreign currency exchange rates in the functional currency of major foreign subsidiaries with respect to the U.S. dollar. At March 31, 2023 and December 31, 2022, the carrying value of debt designated as hedging instruments was $15.2 billion and $13.4 billion, respectively. The company also uses cross-currency swaps and foreign exchange forward contracts for this risk management purpose. At March 31, 2023 and December 31, 2022, the total notional amount of derivative instruments designated as net investment hedges was $5.0 billion and $4.7 billion, respectively. At March 31, 2023 and December 31, 2022, the weighted-average remaining maturity of these instruments was approximately 0.2 years and 0.1 years, respectively.

Anticipated Royalties and Cost Transactions

Table of Contents

Notes to Consolidated Financial Statements — (continued)

Foreign Currency Denominated Borrowings

The company is exposed to exchange rate volatility on foreign currency denominated debt. To manage this risk, the company employs cross-currency swaps to convert fixed-rate foreign currency denominated debt to fixed-rate debt denominated in the functional currency of the borrowing entity. These swaps are accounted for as cash flow hedges. At March 31, 2023, the maximum length of time remaining over which the company hedged its exposure is approximately eight years. At March 31, 2023 and December 31, 2022, the total notional amount of cross-currency swaps designated as cash flow hedges of foreign currency denominated debt was $4.0 billion and $3.1 billion, respectively.

Subsidiary Cash and Foreign Currency Asset/Liability Management

The company uses its Global Treasury Centers to manage the cash of its subsidiaries. These centers principally use currency swaps to convert cash flows in a cost-effective manner. In addition, the company uses foreign exchange forward contracts to economically hedge, on a net basis, the foreign currency exposure of a portion of the company’s nonfunctional currency assets and liabilities. The terms of these forward and swap contracts are generally less than one year. The changes in the fair values of these contracts and of the underlying hedged exposures are generally offsetting and are recorded in other (income) and expense in the Consolidated Income Statement. At March 31, 2023 and December 31, 2022, the total notional amount of derivative instruments in economic hedges of foreign currency exposure was $8.4 billion and $5.9 billion, respectively.

Equity Risk Management

The company is exposed to market price changes in certain broad market indices and in the company’s own stock primarily related to certain obligations to employees. Changes in the overall value of these employee compensation obligations are recorded in SG&A expense in the Consolidated Income Statement. Although not designated as accounting hedges, the company utilizes equity swap derivatives to economically hedge the exposures related to its employee compensation obligations. The derivatives are linked to the total return on certain broad market indices or the total return on the company’s common stock, and are recorded at fair value with gains or losses also reported in SG&A expense in the Consolidated Income Statement. At both March 31, 2023 and December 31, 2022, the total notional amount of derivative instruments in economic hedges of these compensation obligations was $1.1 billion.

Table of Contents

Notes to Consolidated Financial Statements — (continued)

Cumulative Basis Adjustments for Fair Value Hedges

At March 31, 2023 and December 31, 2022, the following amounts were recorded in the Consolidated Balance Sheet related to cumulative basis adjustments for fair value hedges.


	March 31,		December 31,
(Dollars in millions)	2023		2022
Short-term debt:
Carrying amount of the hedged item	$	(204)	$	(199)
Cumulative hedging adjustments included in the carrying amount — assets/(liabilities)*	$	(4)	$	1
Long-term debt:
Carrying amount of the hedged item	$	(6,693)	$	(6,216)
Cumulative hedging adjustments included in the carrying amount — assets/(liabilities)*	$	(8)	$	72

* Includes ($238) million and ($250) million of hedging adjustments on discontinued hedging relationships at March 31, 2023 and December 31, 2022, respectively.

The Effect of Derivative Instruments in the Consolidated Income Statement


					Gains/(Losses) of
(Dollars in millions)	Total				Total Hedge Activity
For the three months ended March 31:	2023		2022		2023		2022
Cost of services	$	5,310	$	5,349	$	(2)	$	15
Cost of sales	$	1,322	$	1,415	$	14	$	12
Cost of financing	$	110	$	98	$	(3)	$	(2)
SG&A expense	$	4,853	$	4,597	$	59	$	(70)
Other (income) and expense	$	(245)	$	246	$	142	$	(102)
Interest expense	$	367	$	311	$	(14)	$	(6)

Table of Contents

Notes to Consolidated Financial Statements — (continued)


	Gain (Loss) Recognized in Consolidated Income Statement
	Consolidated	Recognized on				Attributable to Risk
(Dollars in millions)	Income Statement	Derivatives				Being Hedged (2)
For the three months ended March 31:	Line Item	2023		2022		2023		2022
Derivative instruments in fair value hedges (1):
Interest rate contracts	Cost of financing	$	13	$	(1)	$	(17)	$	4
	Interest expense		53		(4)		(68)		16
Derivative instruments not designated as hedging instruments:
Foreign exchange contracts	Other (income) and expense		16		(95)		N/A		N/A
Equity contracts	SG&A expense		49		(76)		N/A		N/A
Total		$	131	$	(176)	$	(84)	$	20


	Gain (Loss) Recognized in Consolidated Income Statement and Other Comprehensive Income
(Dollars in millions)					Consolidated	Reclassified				Amounts Excluded from
For the three months	Recognized in OCI				Income Statement	from AOCI				Effectiveness Testing (3)
ended March 31:	2023		2022		Line Item	2023		2022		2023		2022
Derivative instruments in cash flow hedges:
Interest rate contracts	$	—	$	—	Cost of financing	$	(1)	$	(1)	$	—	$	—
					Interest expense		(3)		(3)		—		—
Foreign exchange contracts		(29)		60	Cost of services		(2)		15		—		—
					Cost of sales		14		12		—		—
					Cost of financing		(4)		(5)		—		—
					SG&A expense		10		6		—		—
					Other (income) and expense		126		(7)		—		—
					Interest expense		(17)		(17)		—		—
Instruments in net investment hedges (4):
Foreign exchange contracts		(224)		541	Cost of financing		—		—		5		1
					Interest expense		—		—		22		2
Total	$	(253)	$	601		$	122	$	1	$	28	$	3

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

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

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

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

N/A - not applicable

Table of Contents

Notes to Consolidated Financial Statements — (continued)

17. Stock-Based Compensation:

Stock-based compensation cost for stock awards and stock options ~~to purchase 146,795 shares~~is measured at grant date, based on the fair value of the award, and ~~533,089 shares (average of first, second and third quarter share amounts) were outstanding as of September 30, 2017 and 2016, respectively, but were not~~is recognized over the employee requisite service period. The following table presents total stock-based compensation cost included in income from continuing operations.


(Dollars in millions)
For the three months ended March 31:	2023		2022
Cost	$	46	$	40
Selling, general and administrative		149		136
Research, development and engineering		74		57
Pre-tax stock-based compensation cost	$	268	$	234
Income tax benefits		(67)		(57)
Total net stock-based compensation cost	$	201	$	177

Pre-tax stock-based compensation cost for the ~~computation~~three months ended March 31, 2023 increased $35 million compared to the corresponding period in the prior year, including increases in Employees Stock Purchase Plan (ESPP) ($19 million) as a result of ~~diluted earnings per share because~~ESPP being considered compensatory effective April 1, 2022 and stock options ($14 million) due to the ~~options’ exercise price~~conversion of stock options previously issued by acquired entities and stock options granted by the company as part of its executive compensation programs.

Total unrecognized compensation cost related to non-vested awards at March 31, 2023 was $1.7 billion and is expected to be recognized over a weighted-average period of approximately 2.6 years.

18. Retirement-Related Benefits:


					Yr. to Yr.
(Dollars in millions)					Percent
For the three months ended March 31:	2023		2022		Change
Retirement-related plans — cost:
Defined benefit and contribution pension plans — cost	$	281	$	478	(41.1)	%
Nonpension postretirement plans — cost		32		33	(1.6)
Total	$	314	$	510	(38.5)

Table of Contents

Notes to Consolidated Financial Statements — (continued)

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

Cost/(Income) of Pension Plans


(Dollars in millions)	U.S. Plans				Non-U.S. Plans
For the three months ended March 31:	2023		2022		2023		2022
Service cost	$	—	$	—	$	44	$	64
Interest cost*		272		302		288		139
Expected return on plan assets*		(382)		(475)		(356)		(274)
Amortization of prior service costs/(credits)*		—		2		5		4
Recognized actuarial losses*		27		179		102		278
Curtailments and settlements*		—		—		(1)		8
Multi-employer plans		—		—		4		4
Other costs/(credits)*		—		—		9		9
Total net periodic pension (income)/cost of defined benefit plans	$	(82)	$	8	$	95	$	231
Cost of defined contribution plans		172		141		97		98
Total defined benefit and contribution pension plans cost recognized in the Consolidated Income Statement	$	90	$	149	$	192	$	328

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

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

Cost of Nonpension Postretirement Plans


(Dollars in millions)	U.S. Plan				Non-U.S. Plans
For the three months ended March 31:	2023		2022		2023		2022
Service cost	$	1	$	1	$	1	$	1
Interest cost*		29		18		9		9
Expected return on plan assets*		—		—		(1)		0
Amortization of prior service costs/(credits)*		(7)		1		0		0
Recognized actuarial losses*		—		2		0		1
Curtailments and settlements*		—		—		—		—
Total nonpension postretirement plans cost recognized in the Consolidated Income Statement	$	23	$	23	$	9	$	10

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

Table of Contents

Notes to Consolidated Financial Statements — (continued)

The company does not anticipate any significant changes to the expected plan contributions in 2023 from the amounts disclosed in the 2022 Annual Report.

The table below includes contributions to the following plans:


(Dollars in millions)	Plan Contributions
For the three months ended March 31:		2023	2022
U.S. nonpension postretirement benefit plan	$	109	$	120
Non-U.S. DB and multi-employer plans*		7		35
Total plan contributions	$	117	$	154

*	Amounts reported net of refunds.

During the three months ended March 31, 2023 and 2022, the company contributed $109 million and $105 million of U.S. Treasury Securities, respectively, to the U.S. nonpension postretirement benefit plan. Additionally, during the ~~respective periods was greater than~~three months ended March 31, 2023 and 2022, the ~~average market price~~company contributed $192 million and $156 million of U.S. Treasury Securities, respectively, to the ~~common shares, and, therefore, the effect would have been antidilutive.~~Active Medical Trust. Contributions made with U.S. Treasury securities are considered a non-cash transaction.

~~15.~~ 19. Subsequent Events:

On ~~October 31, 2017,~~April 25, 2023, the company announced that the Board of Directors approved aan increase in the quarterly dividend ~~of $1.50~~to $1.66 per common share. The dividend is payable ~~December 9, 2017~~June 10, 2023 to shareholders of record on ~~November~~May 10, ~~2017.~~2023.

~~On October 31, 2017, the company announced that the Board~~

Table of ~~Directors authorized $3.0 billion in additional funds for use in the company’s stock repurchase program.~~Contents

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

FOR THE THREE ~~AND NINE~~ MONTHS ENDED ~~SEPTEMBER 30, 2017~~MARCH 31, 2023

Snapshot

~~Snapshot~~

~~Financial Results Summary — Three Months Ended September 30:~~

Yr. to Yr.

Percent/

(Dollars and shares in millions except per share amounts)

Margin

For the three months ended September 30:

2017

2016

Change

Revenue

$
19,153

$
19,226

(0.4
)%*
Gross profit margin

45.9
%
46.9
%
(0.9
)pts.
Total expense and other (income)

$
5,735

$
5,751

(0.3
)%
Total expense and other (income)-to-revenue ratio

29.9
%
29.9
%
0.0
pts.
Income from continuing operations, before income taxes

$
3,065

$
3,263

(6.1
)%
Provision for income taxes from continuing operations

$
339

$
409

(17.1
)%
Income from continuing operations

$
2,726

$
2,854

(4.5
)%
Income from continuing operations margin

14.2
%
14.8
%
(0.6
)pts.
Loss from discontinued operations, net of tax

$
0

$
(1
)
(79.3
)%
Net income

$
2,726

$
2,853

(4.5
)%
Earnings per share from continuing operations:

Assuming dilution

$
2.92

$
2.98

(2.0
)%
Basic

$
2.93

$
2.99

(2.0
)%
Consolidated earnings per share - assuming dilution

$
2.92

$
2.98

(2.0
)%
Weighted-average shares outstanding:

Assuming dilution

933.2

957.3

(2.5
)%
Basic

929.4

954.0

(2.6
)%

* (1.0) percent adjusted for currency.

Organization of Information:

In ~~October 2014,~~ the ~~company announced a definitive agreement to divest its Microelectronics business and manufacturing operations. The operating results~~fourth quarter of 2022, we completed our annual assessment of the ~~Microelectronics business~~useful lives of our property, plant and equipment. Due to advances in technology, we determined we should increase the estimated useful lives of our server and network equipment from five to six years for new assets and from three to four years for used assets. This change in accounting estimate was effective beginning January 1, 2023. Based on the carrying amount of server and network equipment included in property, plant and equipment-net in our Consolidated Balance Sheet as of December 31, 2022, the effect of this change in estimate was an increase in income from continuing operations before income taxes of $74 million or $0.06 per both basic and diluted share for the three months ended March 31, 2023.

In the first quarter of 2023, we initiated a workforce rebalancing action to address remaining stranded costs from portfolio actions over the last couple of years resulting in a charge to pre-tax income from continuing operations of approximately $260 million. In addition, beginning in the first quarter of 2023, we updated our measure of segment pre-tax income to no longer allocate workforce rebalancing actions to our segments, consistent with our management system. Workforce rebalancing charges in the first quarter of 2022 of $5 million were included in the segments.

Within the tables presented, certain columns and rows may not add due to the use of rounded numbers for disclosure purposes. Percentages presented are ~~reported as discontinued operations. The transaction closed on July 1, 2015.~~calculated from the underlying whole-dollar amounts. Certain prior-period amounts have been reclassified to conform to the current period presentation. This is annotated where applicable.

Currency:

The references to “adjusted for currency” or “at constant currency” in the Management Discussion do not include operational impacts that could result from fluctuations in foreign currency rates. When ~~the company refers~~we refer to growth rates at constant currency or ~~adjusts~~adjust such growth rates for currency, it is done so that certain financial results can be viewed without the impact of fluctuations in foreign currency exchange rates, thereby facilitating period-to-period comparisons of its business performance. Financial results adjusted for currency are calculated by translating current period activity in local currency using the comparable ~~prior year~~prior-year period’s currency conversion rate. This approach is used for countries where the functional currency is the local currency. Generally, when the dollar either strengthens or weakens against other currencies, the growth at constant currency rates or adjusting for currency will be higher or lower than growth reported at actual exchange rates. ~~See~~Refer to “Currency Rate Fluctuations” ~~on page 81~~ for additional information.

~~Management Discussion — (continued)~~

Operating (non-GAAP) Earnings:

In an effort to provide better transparency into the operational results of the business, ~~the company~~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~~certain impacts from the Kyndryl separation 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 primarily include true-ups, accounting elections and any changes to regulations, laws, audit adjustments that affect the recorded one-time charge. Management characterizes direct and incremental charges incurred related to the Kyndryl separation as non-operating given their unique and non-recurring nature. These charges primarily relate to any net gains or losses on the Kyndryl common stock and the related cash-settled swap with a third-party financial institution, which were recorded in other (income) and expense in the Consolidated Income Statement. As of November 2, 2022, the company no longer held an

Table of Contents

Management Discussion – (continued)

ownership interest in Kyndryl. 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, ~~and~~ tax charges related to acquisition ~~integration.~~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 ~~dependent on~~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 & Analysis, the impact of acquisitions over the prior 12-month period may be a driver of higher expenses year to year.~~ For retirement-related costs, ~~the company~~management characterizes certain items as operating and others as ~~non-operating. The company includes~~non-operating, consistent with GAAP. We include defined benefit plan and nonpension postretirement benefit plan service ~~cost, amortization of prior service cost~~costs, multi-employer plan costs and the cost of defined contribution plans in operating earnings. Non-operating retirement-related ~~cost includes~~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 ~~multi-employer plan costs,~~ 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, ~~the company~~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 ~~comparisons~~comparison to peer companies; and allows the company to provide a long-term strategic view of the business going forward. ~~The company’s~~In addition, these non-GAAP measures provide a perspective consistent with areas of interest we routinely receive from investors and analysts. Our reportable segment financial results reflect pre-tax operating earnings from continuing operations, consistent with ~~the company’s~~our management and measurement system.

Table of Contents

Management Discussion – (continued)

Financial Results Summary — Three Months Ended March 31:


							Yr. to Yr.
							Percent/
(Dollars and shares in millions except per share amounts)							Margin
For the three months ended March 31:	2023			2022			Change
Revenue	$	14,252		$	14,197		0.4	%*
Gross profit margin		52.7	%		51.7	%	1.0	pts.
Total expense and other (income)	$	6,451		$	6,712		(3.9)	%
Income from continuing operations before income taxes	$	1,058		$	623		69.8	%
Provision for/(benefit from) income taxes from continuing operations	$	124		$	(39)		nm
Income from continuing operations	$	934		$	662		41.1	%
Income from continuing operations margin		6.6	%		4.7	%	1.9	pts.
Income/(loss) from discontinued operations, net of tax	$	(7)		$	71		nm
Net income	$	927		$	733		26.5	%
Earnings per share from continuing operations - assuming dilution	$	1.02		$	0.73		39.7	%
Consolidated earnings per share - assuming dilution	$	1.01		$	0.81		24.7	%
Weighted-average shares outstanding - assuming dilution		917.8			909.2		0.9	%

	At 3/31/2023			At 12/31/2022
Assets	$	133,637		$	127,243		5.0	%
Liabilities	$	111,964		$	105,222		6.4	%
Equity	$	21,672		$	22,021		(1.6)	%

* 4.4 percent adjusted for currency.

nm - not meaningful

The following table provides the company’s operating (non-GAAP) ~~operating~~ earnings for the ~~third~~first quarter of ~~2017~~2023 and ~~2016.~~2022.

Yr. to Yr.

(Dollars in millions except per share amounts)

Percent

For the three months ended September 30:

2017

2016

Change

Net income as reported

$
2,726

$
2,853

(4.5
)%
Loss from discontinued operations, net of tax

0

(1
)
(79.3
)
Income from continuing operations

$
2,726

$
2,854

(4.5
)%
Non-operating adjustments (net of tax):

Acquisition-related charges

159

197

(19.1
)
Non-operating retirement-related costs/(income)

193

99

96.1

Operating (non-GAAP) earnings*

$
3,079

$
3,149

(2.2
)%
Diluted operating (non-GAAP) earnings per share

$
3.30

$
3.29

0.3
%


					Yr. to Yr.
(Dollars in millions except per share amounts)					Percent
For the three months ended March 31:	2023		2022		Change
Net income as reported	$	927	$	733	26.5	%
Income/(loss) from discontinued operations, net of tax		(7)		71	nm
Income from continuing operations	$	934	$	662	41.1	%
Non-operating adjustments (net of tax):
Acquisition-related charges	$	305	$	359	(15.1)	%
Non-operating retirement-related costs/(income)		5		144	(96.5)
U.S. tax reform impacts		5		(116)	nm
Kyndryl-related impacts		—		222	(100.0)
Operating (non-GAAP) earnings*	$	1,249	$	1,271	(1.8)	%
Diluted operating (non-GAAP) earnings per share*	$	1.36	$	1.40	(2.9)	%

* ~~See~~Refer to page 8567 for a more detailed reconciliation of net income to operating earnings.

nm - not meaningful

Macroeconomic Environment:

Our business profile positions us well in challenging times. Our diversification across geographies, industries, clients and business mix and our recurring revenue base provides some stability in revenue, profit and cash generation.

We had a good start to 2023 and saw progress from the actions we have taken to mitigate the impacts of escalating labor and component costs and a strong U.S. dollar. Consulting pre-tax margin increased in the first quarter of 2023 as we continue to benefit from pricing and productivity actions. And across our product-based businesses, we announced a

Table of Contents

Management Discussion – (continued)

series of price increases reflecting the value we provide to our clients. We expect these actions to continue to contribute to margin improvement throughout 2023. In the current environment, clients are prioritizing digital transformation projects that focus on cost reduction and productivity. While demand for our offerings that support these priorities remains solid, we are seeing some deceleration in Consulting from the previous robust growth levels, especially in the U.S. The strength of the U.S. dollar continued to impact our reported revenue and pre-tax profit. We execute hedging programs which defer but do not eliminate the impact of currency. The (gains)/losses from these hedging programs are reflected primarily in other income and expense. See “Currency Rate Fluctuations,” for additional information.

In March 2023, the bank failures of Silicon Valley Bank and Signature Bank created significant market disruption and uncertainty within the U.S. banking sector, in particular with respect to regional banks. We hold minimal cash balances with regional banks in the U.S. We have a robust and disciplined cash management process to protect our cash and maintain financial stability. Further, while we serve many clients in the Financial Services Sector (FSS), less than one percent of our total revenue comes from regional banks. We have not seen any notable changes in the client buying behaviors of our FSS clients in the U.S. We continue to monitor the impacts of this situation but do not anticipate a significant impact on our future results of operations or financial position.

Financial Performance Summary — Three Months Ended ~~September 30:~~March 31:

In the ~~third~~first quarter of ~~2017, the company~~2023, we reported ~~$19.2~~$14.3 billion in revenue, ~~$2.7 billion in~~ income from continuing operations ~~and $3.1~~of $0.9 billion inand operating (non-GAAP) earnings ~~resulting in diluted~~of $1.2 billion. Diluted earnings per share from continuing operations ~~of $2.92~~was $1.02 as reported and ~~$3.30~~$1.36 on an operating (non-GAAP) basis. ~~The company~~We generated ~~$3.6~~$3.8 billion in cash from operations and ~~$2.5~~$1.3 billion in free cash flow ~~in the third quarter of 2017~~ and delivered shareholder returns of ~~$2.3~~$1.5 billion in ~~gross common stock repurchases and~~ dividends.

Total consolidated revenue decreased 0.4 percent year to year as reported and 1.0 percent adjusted for currency in the third quarter of 2017, with sequential improvement of 4.3 points as reported and 2.3 points adjusted for currency from the second-quarter year-to-year rates. The Cognitive Solutions segment and the Systems segment both had revenue growth year to year in the third quarter as reported and adjusted for currency. The year-to-year effect of currency in the third quarter (0.6 points help) improved from the second quarter impact (1.4 points hurt).

~~Management Discussion — (continued)~~

The company is embedding cloud and cognitive capabilities across the business and the strategic imperatives are a signpost of the progress being made in helping enterprise clients extract value from data and become digital businesses. In the third quarter of 2017, the company We continued to ~~deliver solid~~invest in innovation while transforming our business processes and driving productivity. Our first-quarter results reflect progress in our key growth areas as clients continue to accelerate their digital transformations, modernize their applications, automate their workflows and create flexible and secure hybrid cloud environments.

Total revenue ~~growth in its strategic imperatives - cloud, analytics, mobile, security and social, which together generated $8.8 billion of revenue and~~ grew 11 percent as reported and 10 percent adjusted for currency, with double-digit growth in cloud and security. Strategic imperatives growth in the third quarter largely represented organic growth as the acquisitive content has leveled on a year-to-year basis. Total Cloud revenue of $4.1 billion increased 20 percent as reported and adjusted for currency, with as-a-Service revenue up 25 percent (24 percent adjusted for currency). The annual exit run rate for as-a-Service revenue increased to $9.4 billion in the third quarter of 2017 compared to $7.5 billion in the third quarter of 2016. Analytics revenue of $5.0 billion increased 5 percent both as reported and adjusted for currency. Mobile revenue increased 7 percent as reported and adjusted for currency and Security revenue increased 51 percent (49 percent adjusted for currency), driven by security software solutions and strong demand for the pervasive encryption capabilities in the new z14 mainframe.

From a segment perspective, in the third quarter, Cognitive Solutions revenue increased 3.9 percent as reported and 3 percent adjusted for currency with growth in Solutions Software and Transaction Processing Software as reported and adjusted for currency. Performance in the third quarter included growth in annuity revenue, including as-a-Service solutions, as well as growth in software transactional performance. Global Business Services (GBS) revenue decreased 2.3 percent as reported and 2 percent adjusted for currency, primarily driven by declines in both Application Management and Global Process Services, partially offset by growth in Consulting. The GBS business continued to shift resources and move into the high-value strategic areas of digital, cloud and analytics. GBS strategic imperatives revenue increased 10 percent (11 percent adjusted for currency) year to year. Technology Services & Cloud Platforms revenue decreased 3.30.4 percent as reported and 4 percent adjusted for currency ~~primarily driven~~compared to the prior-year period led by ~~a decline in Infrastructure Services. However, within Technology Services & Cloud Platforms, strategic imperatives~~our growth areas of Software and Consulting. Software delivered revenue ~~was up 12~~growth of 2.6 percent as reported and adjusted for currency year to year, driven by hybrid cloud services, security and mobile. Systems revenue increased 10.4 percent as reported and 10 percent adjusted for currency driven by strong contribution from the new z14 mainframe and continued growth in Storage Systems.

From a geographic perspective, Americas revenue decreased 2.0 percent (2 percent adjusted for currency) year to year, with the U.S. down 2.6 percent and Latin America down 1.5 percent (2 percent adjusted for currency). Canada was up 2.1 percent as reported, but down 2 percent adjusted for currency. Europe/Middle East/Africa (EMEA) revenue increased 2.4 percent as reported, but decreased 16 percent adjusted for currency, with growth in ~~France, Germany~~both Hybrid Platform & Solutions and ~~Spain and a decline in the UK. Asia Pacific~~Transaction Processing. Hybrid Platform & Solutions revenue ~~decreased 1.2~~was up 2.4 percent as reported ~~but increased 2~~and 5 percent adjusted for currency. ~~Within Asia Pacific, Japan decreased 4.0~~We continue to see client demand for broad capabilities across Red Hat, Automation, Data & AI and Security. Transaction Processing revenue grew 2.9 percent as reported ~~but increased 4~~and 7 percent adjusted for currency as this software remains core to our clients’ hybrid cloud strategies. Consulting revenue increased 2.8 percent as reported and ~~China increased 3.9~~8 percent (4adjusted for currency, with growth led by data and customer experience transformation projects, in addition to cloud application development and management. Infrastructure revenue decreased 3.7 percent as reported and was flat adjusted for currency, with revenue growth in Hybrid Infrastructure led by zSystems, more than offset by a decline in Infrastructure Support revenue.

From a geographic perspective, Americas revenue grew 0.3 percent year to year as reported (1 percent adjusted for currency). Europe/Middle East/Africa (EMEA) increased 2.4 percent (8 percent adjusted for currency). Asia Pacific decreased 2.3 percent but grew 7 percent adjusted for currency.

~~The consolidated gross profit~~Gross margin of ~~45.9~~52.7 percent ~~decreased 0.9~~increased 1.0 point year to year with margin expansion across all reportable segments and a strong portfolio mix overall. Operating (non-GAAP) gross margin of 53.7 percent increased 0.8 points year to year driven by continued investments, mix and higher retirement-related costs, partially offset by benefits from productivity. The operating (non-GAAP) gross margin of 47.6 percent decreased 0.4 points compareddue to the ~~prior year driven primarily by the~~ same factors, excluding the impact of higher non-operating retirement-related costs. The consolidated gross margin and the operating (non-GAAP) gross margin both improved 0.4 points compared to the second-quarter 2017 gross margins.dynamics.

Total expense and other (income) decreased ~~0.3~~3.9 percent in the ~~third~~first quarter of ~~2017 compared to~~2023 versus the ~~prior year. The year-to-year decrease was~~prior-year period primarily driven by an unrealized loss from Kyndryl retained shares in the ~~result~~first-quarter 2022, lower non-operating retirement-related costs, higher interest income, the effects of ~~lower operational spending (4 points), largely~~currency and benefits from productivity and transformation of our business processes. These impacts were partially offset by ~~lower intellectual property income (4 points)~~higher workforce rebalancing charges and higher net spending ~~related to acquisitions completed~~reflecting our continuing investment in ~~the prior 12 months. The expense dynamics reflect continued efficiency in the underlying spending offset by continued investment to build~~innovation, our ecosystem and ~~reinvent new solutions and platforms.~~talent. Total operating (non-GAAP) expense and other (income) ~~decreased 0.8~~increased 3.5 percent year to year, driven primarily by the ~~same factors.~~factors described

Table of Contents

Management Discussion – (continued)

above excluding the prior-year unrealized loss on Kyndryl stock and the lower non-operating retirement-related costs in the current year.

Pre-tax income from continuing operations of ~~$3.1~~$1.1 billion inincreased 69.8 percent and pre-tax margin was 7.4 percent, an increase of 3.0 points versus the ~~third~~first quarter of ~~2017 decreased 6.1 percent year to year~~2022. Performance this quarter benefitted from the expense dynamics described above, improvements in business mix and ongoing productivity initiatives, partially offset by currency and workforce rebalancing charges. The first-quarter 2023 workforce rebalancing charge of approximately $260 million impacted the pre-tax income from continuing operations year-to-year performance by approximately 40 points and the pre-tax margin ~~was 16.0 percent, a decrease of 1.0 points compared to the third quarter of 2016.~~by 1.8 points. The continuing operations ~~effective tax rate~~provision for income taxes in the ~~third~~first quarter of ~~2017~~2023 was ~~11.0 percent, a decrease of 1.5 points~~$124 million, compared to a benefit of $39 million in the ~~third~~first quarter of ~~2016,~~2022. The prior-year benefit was primarily driven by ~~an increase in~~the impact of updates to the foreign tax ~~credits, partially offset by a benefit related to tax audit activity in the prior year period. Income~~credit regulations. Net income from continuing operations of ~~$2.7~~$0.9 billion ~~decreased 4.5~~increased 41.1 percent and the net income from continuing operations margin was ~~14.2~~6.6 percent, a decrease of 0.6 points. Losses from discontinued operations, net of tax, were $0.2 million in the third quarter of 2017 and $1.0 million in the third quarter of 2016. Net income of $2.7 billion decreased 4.5 percentup 1.9 points year to year. The workforce rebalancing charge impacted net income from continuing operations year-to-year performance by approximately 30 points and pre-tax margin by 1.4 points.

Operating (non-GAAP) pre-tax income from continuing operations of ~~$3.6~~$1.4 billion decreased ~~1.7~~4.4 percent year to year. Operating (non-GAAP) pre-tax margin from continuing operations decreased 0.2 points to 18.8 percent. Operating (non-GAAP) income from continuing operations of $3.1 billion decreased 2.2 percent and the operating (non-GAAP) income

~~Management Discussion — (continued)~~

margin from continuing operations of 16.1 percent decreased 0.3 points. The operating (non-GAAP) effective tax rate from continuing operations in the third quarter of 2017 was 14.7 percent versus 14.2 percent in the prior year.

Diluted earnings per share from continuing operations of $2.92 in the third quarter of 2017 decreased 2.0 percent year to year. In the third quarter of 2017, the company repurchased 6.6 million shares of its common stock at a cost of $0.9 billion and had $1.5 billion remaining in the share repurchase authorization at September 30, 2017. Operating (non-GAAP) diluted earnings per share of $3.30 increased 0.3 percent versus the third quarter of 2016.

~~The company generated $3.6 billion in cash flow from operating activities in the third quarter of 2017, a decrease of $0.5 billion~~ compared to the third quarter of 2016. Net cash used in investing activities of $1.9 billion was $1.0 billion higher than the prior year, primarily driven by a reduction in cash sourced from non-operating finance receivables ($0.4 billion) and an increase in cash used from net purchases of marketable securities and other investments ($0.4 billion). Net cash used in financing activities of $2.8 billion decreased $1.4 billion compared to the prior year, primarily driven by higher net debt issuances ($1.6 billion).

In January 2017, the company disclosed that it expected GAAP earnings per share from continuing operations of at least $11.95 and operating (non-GAAP) earnings of at least $13.80 per diluted share for 2017. The company also disclosed that it expected 2017 free cash flow to be consistent with 2016. Refer to page 82 in the Liquidity and Capital Resources section for additional information on this non-GAAP measure. In October 2017, the company disclosed that it continues to maintain these expectations. Refer to the Looking Forward section on pages 80 and 81 for additional information on the company’s expectations.

~~Financial Results Summary - Nine Months Ended September 30:~~

Yr. to Yr.

Percent/

(Dollars and shares in millions except per share amounts)

Margin

For the nine months ended September 30:

2017

2016

Change

Revenue

$
56,597

$
58,149

(2.7
)%*
Gross profit margin

44.8
%
47.1
%
(2.3
)pts.
Total expense and other (income)

$
18,434

$
20,056

(8.1
)%
Total expense and other (income)-to-revenue ratio

32.6
%
34.5
%
(1.9
)pts.
Income from continuing operations, before income taxes

$
6,931

$
7,345

(5.6
)%
Provision for/(benefit from) income taxes from continuing operations

$
120

$
(31
)
nm
%
Income from continuing operations

$
6,811

$
7,375

(7.7
)%
Income from continuing operations margin

12.0
%
12.7
%
(0.6
)pts.
Loss from discontinued operations, net of tax

$
(3
)
$
(4
)
(17.5
)%
Net income

$
6,807

$
7,371

(7.6
)%
Earnings per share from continuing operations:

Assuming dilution

$
7.24

$
7.67

(5.6
)%
Basic

$
7.28

$
7.70

(5.5
)%
Consolidated earnings per share - assuming dilution

$
7.24

$
7.67

(5.6
)%
Weighted-average shares outstanding:

Assuming dilution

940.2

960.7

(2.1
)%
Basic

935.6

957.7

(2.3
)%

9/30/17

12/31/16

Assets

$
121,636

$
117,470

3.5
%
Liabilities

$
101,879

$
99,078

2.8
%
Equity

$
19,757

$
18,392

7.4
%

* (2.2) percent adjusted for currency

~~nm - not meaningful~~

~~The following table provides the company’s (non-GAAP) operating earnings for the first nine months of 2017 and 2016.~~

~~Management Discussion — (continued)~~

Yr. to Yr.

(Dollars in millions except per share amounts)

Percent

For the nine months ended September 30:

2017

2016

Change

Net income as reported

$
6,807

$
7,371

(7.6
)%
Loss from discontinued operations, net of tax

(3
)
(4
)
(17.5
)
Income from continuing operations

$
6,811

$
7,375

(7.7
)%
Non-operating adjustments (net of tax):

Acquisition-related charges

537

542

(0.7
)
Non-operating retirement-related costs/(income)

777

338

129.9

Operating (non-GAAP) earnings*

$
8,125

$
8,255

(1.6
)%
Diluted operating (non-GAAP) earnings per share

$
8.64

$
8.59

0.6
%

* See page 86 for a more detailed reconciliation of net income to operating earnings.

~~Financial Performance Summary — Nine Months Ended September 30:~~

In the first nine months of 2017, the company reported $56.6 billion in revenue, and delivered $6.8 billion in income from continuing operations, resulting in diluted earnings per share from continuing operations of $7.24 as reported and $8.64 on an operating (non-GAAP) basis. The company generated $11.0 billion in cash from operations and $6.2 billion in free cash flow in the first nine months of 2017 and shareholder returns of $7.8 billion in gross common stock repurchases and dividends.

~~Total consolidated revenue decreased 2.7 percent year to year as reported and 2.2 percent adjusted for currency in the first nine months of 2017.~~

In the first nine months of 2017, the company’s strategic imperatives revenue grew 9 percent year to year as reported and 10 percent adjusted for currency. Total Cloud revenue of $11.6 billion was up 22 percent year to year as reported and 23 percent adjusted for currency, with as-a-Service revenue up 36 percent (37 percent adjusted for currency). Analytics revenue of $14.5 billion increased 5 percent as reported and 6 percent adjusted for currency. Mobile revenue was up 17 percent year to year (19 percent adjusted for currency) and Security revenue increased 21 percent as reported and adjusted for currency.

From a segment perspective, for the first nine months, Cognitive Solutions revenue increased 1.0 percent as reported and 1 percent adjusted for currency. On an as reported and adjusted for currency basis, Solutions Software increased year to year, while Transaction Processing Software declined. GBS revenue decreased 3.0 percent as reported and 2 percent adjusted for currency with declines in Application Management , Consulting and Global Process Services. GBS strategic imperatives revenue increased 10 percent (11 percent adjusted for currency) year to year. Technology Services & Cloud Platforms revenue decreased 3.7 percent as reported and 3 percent adjusted for currency, primarily driven by Infrastructure Services which declined 4.4 percent (4 percent adjusted for currency). Technology Services & Cloud Platforms strategic imperatives revenue was up 20 percent (21 percent adjusted for currency) year to year, led by hybrid cloud services. Systems revenue decreased 6.2 percent as reported (6 percent adjusted for currency) with declines in z Systems and Power Systems, both due to product refresh cycle dynamics, partially offset by growth in Storage Systems.

From a geographic perspective, Americas revenue decreased 1.8 percent (2 percent adjusted for currency) year to year with the U.S. down 3.0 percent, partially offset by growth in Latin America (4.5 percent as reported, 1 percent adjusted for currency). EMEA revenue decreased 4.7 percent (3 percent adjusted for currency) driven primarily by declines in the UK and Germany. Asia Pacific revenue decreased 1.9 percent (1 percent adjusted for currency), with Japan down 1.8 percent as reported, but up 2 percent adjusted for currency.

The consolidated gross margin of 44.8 percent decreased 2.3 points year to year and reflects investments, mix and higher retirement-related costs, partially offset by benefits from productivity. The operating (non-GAAP) gross margin of 46.5 percent decreased 1.7 points versus the prior year primarily driven by the same factors, excluding the impact of higher non-operational retirement-related costs.

Total expense and other (income) decreased $1.6 billion or 8.1 percent in the first nine months of 2017 compared to the prior year. The year-to-year decrease was primarily the result of continued focus on efficiency in spending and reduced expenses for workforce transformation. This included a lower level of workforce rebalancing charges (4 points), a prior-year charge for real estate actions (2 points) and lower operational spending (2 points). In addition, the effects of currency (1 point) contributed to the year-to-year decline. The year-to-year decrease in expense and other (income) was partially offset by

~~Management Discussion — (continued)~~

spending related to acquisitions (2 points) completed in the prior 12 months. Total operating (non-GAAP) expense and other (income) decreased 9.9 percent year to year, driven primarily by the same factors.

Pre-tax income from continuing operations of $6.9 billion decreased 5.6 percent and the pre-tax margin was 12.2 percent, a decrease of 0.4 points versus the first nine months of 2016. The continuing operations effective tax rate for the first nine months of 2017 was 1.7 percent compared to (0.4) percent in the prior year. The tax rate in the first nine months of 2017 benefitted from discrete tax items, including the first-quarter intra-entity transfer of assets ($0.6 billion) and certain second-quarter discrete items. The prior year negative tax rate was primarily the result of a refund ($1.2 billion) of previously paid non-U.S. taxes plus interest in the first quarter of 2016. Income from continuing operations of $6.8 billion decreased 7.7 percent and the net income margin was 12.0 percent, a decrease of 0.6 points compared to the first nine months of 2016. Losses from discontinued operations, net of tax, were $3.5 million in the first nine months of 2017 and $4.2 million in the prior-year period. Net income of $6.8 billion decreased 7.6 percent year to year. Operating (non-GAAP) pre-tax income from continuing operations of $8.7 billion increased 2.5 percent year to yearperiod and the operating (non-GAAP) pre-tax margin from continuing operations ~~increased 0.8~~decreased 0.5 points to ~~15.5~~10.2 percent. The workforce rebalancing charge impacted operating (non-GAAP) pre-tax income from continuing operations year-to-year performance by approximately 17 points and operating (non-GAAP) pre-tax margin by 1.8 points. The operating (non-GAAP) income tax provision for the first quarter of 2023 was $200 million, compared to a provision for income taxes of $244 million in the first quarter of 2022. Operating (non-GAAP) income from continuing operations of ~~$8.1~~$1.2 billion decreased ~~1.6~~1.8 percent and the operating (non-GAAP) income margin from continuing operations of ~~14.4~~8.8 percent ~~increased~~was down 0.2 ~~points.~~points year to year. The workforce rebalancing charge impacted operating (non-GAAP) ~~effective tax rate~~income from continuing operations ~~in the first nine months of 2017 was 7.1 percent versus 3.2 percent in the first nine months of 2016.~~year-to-year performance by approximately 16 points and operating (non-GAAP) pre-tax margin by 1.4 points.

Diluted earnings per share from continuing operations of ~~$7.24 decreased 5.6 percent year to year. In~~$1.02 in the first ~~nine months~~quarter of ~~2017, the company repurchased 22.9 million shares of its common stock~~2023 increased 39.7 percent and ~~had $1.5 billion remaining in the current share repurchase authorization at September 30, 2017. Operating~~operating (non-GAAP) diluted earnings per share of ~~$8.64 increased 0.6~~$1.36 decreased 2.9 percent versus the ~~prior year.~~prior-year period. The workforce rebalancing charge resulted in an impact of ($0.22) both to diluted earnings per share from continuing operations and diluted operating (non-GAAP) earnings per share.

At ~~September 30, 2017,~~March 31, 2023, the balance sheet ~~remains~~remained strong ~~and~~ with the ~~newly reorganized financing entity, IBM Credit LLC, the company is better positioned~~flexibility to support and invest in the ~~business over the long term.~~business. Cash and cash equivalents, restricted cash and marketable securities at ~~quarter end were $11.5~~March 31, 2023 of $17.6 billion ~~an increase of $3.0~~increased $8.8 billion from December 31, ~~2016. Key drivers in the balance sheet~~2022 and ~~total cash flows were:~~debt of $58.7 billion at March 31, 2023 increased $7.8 billion, both increases driven primarily by net debt issuances.

Total assets increased ~~$4.2~~$6.4 billion ~~(decreased $0.4~~($5.9 billion adjusted for currency) from December 31, ~~2016~~2022 primarily driven ~~by:~~

· ~~Increases~~by the increase in cash and cash equivalents, restricted cash and marketable ~~securities ($3.0 billion), deferred taxes ($2.1 billion), retirement plan assets ($1.5 billion) and goodwill ($0.6 billion);~~securities; partially offset by

· ~~Decreases~~ a decrease in ~~total receivables ($2.7 billion) and intangible assets ($0.7 billion).~~

receivables. Total liabilities increased ~~$2.8~~$6.7 billion ~~(decreased $1.5~~($6.2 billion adjusted for currency) from December 31, ~~2016~~2022 primarily driven ~~by:~~

· ~~Increases~~by the increase in ~~total~~ debt ~~($3.5 billion);~~and an increase in deferred income; partially offset by

· ~~Decreases~~ decreases in ~~accounts payable ($0.8 billion).~~

compensation and benefits and taxes payable. Total equity of ~~$19.8~~$21.7 billion ~~increased $1.4~~decreased $0.3 billion from December 31, ~~2016~~2022 as a result ~~of:~~

· ~~Increases from~~of dividends paid, partially offset by first-quarter 2023 net income ~~($6.8 billion), retirement-related ($1.4 billion)~~ and ~~equity translation adjustments ($0.8 billion); partially offset by~~common stock issuances.

· ~~Decreases from dividends ($4.1 billion) and share repurchases ($3.7 billion).~~

~~The company generated $11.0 billion in cash flow~~Cash provided by operating activities ~~a decrease~~was $3.8 billion in the first three months of ~~$2.1~~2023, an increase of $0.5 billion compared to the ~~first nine months of 2016, driven primarily by the~~ prior-year ~~tax refund and a decrease in cash provided by financing receivables.~~period. Net cash used in investing activities of ~~$3.3~~$8.0 billion ~~was $4.0~~increased $6.6 billion ~~lower than the prior year, primarily driven~~and net cash provided by ~~a decrease in cash used for acquisitions ($5.0 billion). Net cash used in~~ financing activities of ~~$5.5~~$5.7 billion increased ~~$0.9~~$4.3 billion compared to the first ~~nine~~three months of ~~2016, driven primarily by increased gross common share repurchases ($1.0 billion).~~2022.

Table of Contents

Management Discussion —– (continued)

First Quarter in Review

~~Third Quarter and First Nine Months in Review~~

Results of Continuing Operations

Segment Details

The ~~following is~~table below presents each reportable segment’s revenue and gross margin results, followed by an analysis of the ~~third~~first quarter ~~and first nine months~~ of ~~2017~~2023 versus the ~~third~~first quarter ~~and first nine months~~ of ~~2016~~2022 reportable ~~segment external revenue and gross margin~~segments results. ~~Segment pre-tax income includes transactions between the 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 March 31:	2023			2022			Change		Currency
Revenue:
Software	$	5,921		$	5,772		2.6	%	5.6	%
Gross margin		79.5	%		78.8	%	0.6	pts.
Consulting		4,962			4,829		2.8	%	8.2	%
Gross margin		25.2	%		24.3	%	0.9	pts.
Infrastructure		3,098			3,219		(3.7)	%	0.1	%
Gross margin		51.7	%		50.5	%	1.2	pts.
Financing		196			154		27.3	%	31.0	%
Gross margin		43.9	%		37.7	%	6.2	pts.
Other		75			224		(66.6)	%	(65.2)	%
Gross margin		(182.3)	%		(32.9)	%	(149.4)	pts.
Total revenue	$	14,252		$	14,197		0.4	%	4.4	%
Total gross profit	$	7,509		$	7,335		2.4	%
Total gross margin		52.7	%		51.7	%	1.0	pts.
Non-operating adjustments:
Amortization of acquired intangible assets		148			181		(18.0)	%
Operating (non-GAAP) gross profit	$	7,658		$	7,516		1.9	%
Operating (non-GAAP) gross margin		53.7	%		52.9	%	0.8	pts.

Yr. to Yr.

Percent

Yr. to Yr.

Change

(Dollars in millions)

Percent/Margin

Adjusted For

For the three months ended September 30:

2017

2016

Change

Currency

Revenue:

Cognitive Solutions

$
4,400

$
4,235

3.9
%
3.0
%
Gross margin

78.7
%
80.4
%
(1.7
)pts.

Global Business Services

4,093

4,191

(2.3
)%
(2.2
)%
Gross margin

27.3
%
28.8
%
(1.5
)pts.

Technology Services & Cloud Platforms

8,457

8,748

(3.3
)%
(4.1
)%
Gross margin

41.1
%
42.0
%
(1.0
)pts.

Systems

1,721

1,558

10.4
%
9.6
%
Gross margin

53.6
%
51.1
%
2.6
pts.

Global Financing

427

412

3.7
%
2.8
%
Gross margin

25.2
%
37.8
%
(12.6
)pts.

Other

56

81

(31.8
)%
(32.8
)%
Gross margin

(511.4
)%
(279.2
)%
(232.2
)pts.

Total consolidated revenue

$
19,153

$
19,226

(0.4
)%
(1.0
)%
Total consolidated gross profit

$
8,800

$
9,013

(2.4
)%

Total consolidated gross margin

45.9
%
46.9
%
(0.9
)pts.

Non-operating adjustments:

Amortization of acquired intangible assets

114

129

(12.2
)%

Retirement-related costs/(income)

203

79

158.7
%

Operating (non-GAAP) gross profit

$
9,116

$
9,221

(1.1
)%

Operating (non-GAAP) gross margin

47.6
%
48.0
%
(0.4
)pts.

~~Management Discussion — (continued)~~Software


							Yr. to Yr.
							Percent
					Yr. to Yr.		Change
(Dollars in millions)					Percent		Adjusted For
For the three months ended March 31:	2023		2022		Change		Currency
Software revenue:	$	5,921	$	5,772	2.6	%	5.6	%
Hybrid Platform & Solutions	$	4,179	$	4,080	2.4	%	5.2	%
Red Hat					8.3		10.8
Automation					(0.9)		2.1
Data & AI					0.8		3.4
Security					(1.2)		2.0
Transaction Processing		1,742		1,692	2.9		6.5

Yr. to Yr.

Percent

Yr. to Yr.

Change

(Dollars in millions)

Percent/Margin

Adjusted For

For the nine months ended September 30:

2017

2016

Change

Currency

Revenue:

Cognitive Solutions

$
13,021

$
12,889

1.0
%
1.3
%
Gross margin

78.4
%
81.5
%
(3.1
)pts.

Global Business Services

12,196

12,578

(3.0
)%
(1.9
)%
Gross margin

25.3
%
27.0
%
(1.7
)pts.

Technology Services & Cloud Platforms

25,079

26,029

(3.7
)%
(3.3
)%
Gross margin

40.2
%
41.5
%
(1.3
)pts.

Systems

4,863

5,184

(6.2
)%
(5.9
)%
Gross margin

51.5
%
55.1
%
(3.6
)pts.

Global Financing

1,246

1,245

0.1
%
(0.4
)%
Gross margin

29.2
%
39.6
%
(10.4
)pts.

Other

192

223

(14.2
)%
(14.3
)%
Gross margin

(456.0
)%
(295.2
)%
(160.8
)pts.

Total consolidated revenue

$
56,597

$
58,149

(2.7
)%
(2.2
)%
Total consolidated gross profit

$
25,365

$
27,401

(7.4
)%

Total consolidated gross margin

44.8
%
47.1
%
(2.3
)pts.

Non-operating adjustments:

Amortization of acquired intangible assets

349

371

(5.7
)%

Retirement-related costs/(income)

591

238

148.2
%

Operating (non-GAAP) gross profit

$
26,305

$
28,010

(6.1
)%

Operating (non-GAAP) gross margin

46.5
%
48.2
%
(1.7
)pts.

~~Cognitive Solutions~~

Yr. to Yr.

Percent

Yr. to Yr.

Change

(Dollars in millions)

Percent

Adjusted For

For the three months ended September 30:

2017

2016

Change

Currency

Cognitive Solutions external revenue:

$
4,400

$
4,235

3.9
%
3.0
%
Solutions Software

$
3,029

$
2,919

3.8
%
2.9
%
Transaction Processing Software

1,371

1,316

4.2

3.2

Yr. to Yr.

Percent

Yr. to Yr.

Change

(Dollars in millions)

Percent

Adjusted For

For the nine months ended September 30:

2017

2016

Change

Currency

Cognitive Solutions external revenue:

$
13,021

$
12,889

1.0
%
1.3
%
Solutions Software

$
9,015

$
8,842

2.0
%
2.3
%
Transaction Processing Software

4,006

4,048

(1.0
)
(0.8
)

~~Cognitive Solutions~~Software revenue of ~~$4,400~~$5,921 million ~~grew 3.9~~increased 2.6 percent as reported ~~and 3~~(6 percent adjusted for ~~currency~~currency) in the ~~third~~first quarter of ~~2017~~2023 compared to the ~~prior year~~prior-year period with growth in both Hybrid Platform & Solutions ~~Software~~ and Transaction ~~Processing Software. For~~Processing. This performance reflects the ~~first nine months~~benefits of our growing recurring revenue and continued strong renewal rates. This, together with the ~~year, Cognitive~~growth in transactional software this quarter, demonstrates clients’ commitment to our hybrid cloud and AI platforms.

Table of Contents

Management Discussion – (continued)

Hybrid Platform & Solutions revenue of ~~$13,021~~$4,179 million ~~grew 1.0~~increased 2.4 percent as reported ~~and 1 percent adjusted for currency with growth in Solutions Software, partially offset by declines in Transaction Processing Software both as reported and adjusted for currency.~~

Cognitive Solutions third-quarter annuity revenue grew as reported and adjusted for currency including strong Software-as-a-Service (SaaS) performance with continued double-digit revenue growth as reported and adjusted for currency. There was growth, as reported and adjusted for currency, in software services which support solutions offerings through industry and product expertise. Transactional revenue also grew this quarter as reported and adjusted for currency compared to the

~~Management Discussion — (continued)~~

~~prior year as clients commit to the platform long term. Within the segment, third-quarter revenue growth was driven by organic performance as acquisitive content has leveled on a year-to-year basis.~~

~~In the third quarter, Solutions Software revenue of $3,029 million grew 3.8 percent as reported (3~~(5 percent adjusted for currency) in the first quarter of 2023 compared to the ~~prior year. Transaction Processing Software revenue of $1,371 million grew 4.2 percent as reported (3 percent adjusted~~prior-year period reflecting continued client demand for currency) compared to the third quarter of 2016. Within Solutions Software, third quarter year-to-year growth was led by offerings in security and analytics. Security software grew double digits as reported and adjusted for currency year to year in the third quarter with strong performanceour broad capabilities across the portfolio as cognitive capabilities continue to be embedded into these offerings. Analytics revenue growth was broad-based as the company continues to reinvent these offerings. With new offerings and new clients added to the platform this quarter, Internet of Things (IoT)all business areas. Red Hat revenue grew double digits in the third quarter both as reported and adjusted for currency. Within Transaction Processing Software, the year-to-year growth reflects clients’ ongoing long-term commitment and the value the company’s platform provides to them. This portfolio predominately runs on-premise mission critical workloads running on z Systems in industries such as banking, airlines and retail.

Cognitive Solutions total third-quarter strategic imperatives revenue of $2.9 billion grew 5 percent year to year as reported and adjusted for currency. Cloud revenue of $0.6 billion grew 10 percent as reported and adjusted for currency, with an as-a-Service exit run rate of $2.0 billion. For the first nine months of the year, total strategic imperatives revenue of $8.5 billion grew 4 percent as reported and adjusted for currency year to year. Cloud revenue of $1.8 billion grew 24 percent as reported and adjusted for currency.

Yr. to Yr.

Percent/

(Dollars in millions)

Margin

For the three months ended September 30:

2017

2016

Change

Cognitive Solutions:

External gross profit

$
3,465

$
3,407

1.7
%
External gross profit margin

78.7
%
80.4
%
(1.7
)pts.
Pre-tax income

$
1,649

$
1,574

4.8
%
Pre-tax margin

32.8
%
32.1
%
0.7
pts.

Yr. to Yr.

Percent/

(Dollars in millions)

Margin

For the nine months ended September 30:

2017

2016

Change

Cognitive Solutions:

External gross profit

$
10,207

$
10,509

(2.9
)%
External gross profit margin

78.4
%
81.5
%
(3.1
)pts.
Pre-tax income

$
4,539

$
4,039

12.4
%
Pre-tax margin

30.2
%
27.3
%
3.0
pts.

Cognitive Solutions gross profit margin decreased 1.7 points to 78.7 percent in the third quarter of 2017 compared to the prior year. For the first nine months of the year, gross profit margin decreased 3.1 points to 78.4 percent. The gross profit margin decline year to year is driven by continued investment and an increasing mix toward SaaS.

In the third quarter, pre-tax income of $1,649 million increased 4.8 percent compared to the prior year with a pre-tax margin improvement of 0.7 points to 32.8 percent. For the first nine months of the year, pre-tax income of $4,539 million increased 12.4 percent compared to the prior year with a pre-tax margin improvement of 3.0 points to 30.2 percent. The company continues to embed cognitive into offerings, scale platforms and build high value vertical solutions. The year-to-year benefit in the nine-month period also reflects a lower level of charges related to workforce rebalancing and real estate actions year to year.

~~Management Discussion — (continued)~~

~~Global Business Services~~

Yr. to Yr.

Percent

Yr. to Yr.

Change

(Dollars in millions)

Percent

Adjusted For

For the three months ended September 30:

2017

2016

Change

Currency

Global Business Services external revenue:

$
4,093

$
4,191

(2.3
)%
(2.2
)%
Consulting

$
1,803

$
1,799

0.2
%
0.9
%
Global Process Services

314

354

(11.3
)
(11.9
)
Application Management

1,976

2,038

(3.0
)
(3.2
)

Yr. to Yr.

Percent

Yr. to Yr.

Change

(Dollars in millions)

Percent

Adjusted For

For the nine months ended September 30:

2017

2016

Change

Currency

Global Business Services external revenue:

$
12,196

$
12,578

(3.0
)%
(1.9
)%
Consulting

$
5,394

$
5,520

(2.3
)%
(0.9
)%
Global Process Services

948

1,048

(9.6
)
(9.2
)
Application Management

5,855

6,011

(2.6
)
(1.6
)

Global Business Services revenue of $4,093 million decreased 2.3 percent as reported and 2 percent adjusted for currency in the third quarter of 2017 compared to the prior year. The company continues to transform this business and shift its practices to where there is opportunity, which is around digital, cognitive, cloud and automation. GBS signings grew for the third consecutive quarter as reported and adjusted for currency, and strategic imperatives revenue grew double digits year to year as reported and adjusted for currency. However, this growth continues to be more than offset by declines in the more traditional areas that the company is shifting away from. For the first nine months of the year, Global Business Services revenue of $12,196 million decreased 3.0 percent as reported and 2 percent adjusted for currency.

In the third quarter, Consulting revenue of $1,803 million increased 0.2 percent as reported (1 percent adjusted for currency) with continued improvement on a sequential basis led by the company’s digital strategy and iX platform. The Consulting backlog returned to growth as reported and adjusted for currency in the third quarter versus the prior year. Global Process Services (GPS) revenue of $314 million decreased 11.3 percent as reported (12 percent adjusted for currency) compared to the prior year. Application Management revenue of $1,976 million decreased 3.0 percent as reported (3 percent adjusted for currency). The company continues to help clients implement new cloud-centric architectures in their critical applications. Overall performance was impacted by areas of this business that are not as differentiated and are experiencing pricing pressure.

~~Third-quarter 2017 GBS strategic imperatives revenue of $2.5 billion grew 10~~8.3 percent as reported (11 percent adjusted for currency) ~~year~~in the first quarter of 2023 with growth across all major offerings. We had strength in OpenShift, our hybrid cloud platform, and Ansible, our IT automation solution, both of which continued to ~~year. Cloud~~take market share this quarter. Automation revenue ~~of $1.0 billion grew 35~~decreased 0.9 percent as reported, ~~and adjusted for currency, with an as-a-Service exit run rate of $1.2 billion. For the first nine months of the year, total strategic imperatives revenue of $7.2 billion~~but grew ~~10 percent as reported (11 percent adjusted for currency) year to year. Cloud revenue of $2.9 billion grew 41 percent as reported (43 percent adjusted for currency).~~

~~Management Discussion — (continued)~~

Yr. to Yr.

Percent/

(Dollars in millions)

Margin

For the three months ended September 30:

2017

2016

Change

Global Business Services:

External gross profit

$
1,117

$
1,206

(7.4
)%
External gross profit margin

27.3
%
28.8
%
(1.5
)pts.
Pre-tax income

$
453

$
544

(16.8
)%
Pre-tax margin

10.8
%
12.7
%
(1.9
)pts.

Yr. to Yr.

Percent/

(Dollars in millions)

Margin

For the nine months ended September 30:

2017

2016

Change

Global Business Services:

External gross profit

$
3,083

$
3,393

(9.2
)%
External gross profit margin

25.3
%
27.0
%
(1.7
)pts.
Pre-tax income

$
1,065

$
1,210

(12.0
)%
Pre-tax margin

8.5
%
9.4
%
(0.8
)pts.

GBS third quarter gross profit margin decreased 1.5 points to 27.3 percent year to year with a decline similar to the second quarter 2017. In the third quarter of 2017, pre-tax income of $453 million decreased 16.8 percent year to year. The pre-tax margin declined 1.9 points to 10.8 percent, however it improved more than 3 points sequentially compared to the second quarter 2017. For the first nine months of the year, pre-tax income of $1,065 million decreased 12.0 percent and the pre-tax margin declined 0.8 points to 8.5 percent. Pre-tax income performance for the first nine months of 2017 includes a lower level of charges related to workforce rebalancing and real estate actions as compared to the prior year.

~~The GBS margin has been impacted by investments to drive transformation and reflects pricing and profit pressure in the more traditional IT services.~~ The company will continue to focus on improving productivity with a streamlined practice model and new project management approaches. As it grows its practices around cloud, analytics and mobility services, the company will continue to invest in skills necessary to drive this transformation.

~~Technology Services & Cloud Platforms~~

Yr. to Yr.

Percent

Yr. to Yr.

Change

(Dollars in millions)

Percent

Adjusted For

For the three months ended September 30:

2017

2016

Change

Currency

Technology Services & Cloud Platforms external revenue:

$
8,457

$
8,748

(3.3
)%
(4.1
)%
Infrastructure Services

$
5,665

$
5,901

(4.0
)%
(4.8
)%
Technical Support Services

1,801

1,831

(1.6
)
(2.1
)
Integration Software

990

1,016

(2.6
)
(3.4
)

Yr. to Yr.

Percent

Yr. to Yr.

Change

(Dollars in millions)

Percent

Adjusted For

For the nine months ended September 30:

2017

2016

Change

Currency

Technology Services & Cloud Platforms external revenue:

$
25,079

$
26,029

(3.7
)%
(3.3
)%
Infrastructure Services

$
16,695

$
17,458

(4.4
)%
(3.9
)%
Technical Support Services

5,357

5,446

(1.6
)
(1.5
)
Integration Software

3,027

3,126

(3.2
)
(2.7
)

~~Technology Services & Cloud Platforms revenue of $8,457 million decreased 3.3 percent as reported and 4~~2 percent adjusted for currency driven by growth in ~~the third quarter of 2017 compared to the prior year. In the third quarter, there were declines across~~

~~Management Discussion — (continued)~~

~~all lines of business, however there was double-digit growth~~offerings such as ~~reported~~integration and ~~adjusted~~application servers given client demand for ~~currency in strategic imperatives revenue. Global Technology Services (GTS) signings also grew more than 25 percent year to year. For the first nine months of the year, Technology Services~~improved IT performance and ~~Cloud Platforms~~cost. Data & AI revenue ~~of $25,079 million decreased 3.7 percent as reported and 3 percent adjusted for currency.~~

In the third quarter, Infrastructure Services revenue of $5,665 million declined 4.0 percent as reported (5 percent adjusted for currency) compared to the prior year. This decline reflects the continued impact associated with contract conclusions at the end of 2016 and the shift away from certain lower value work within this business. The full year-to-year benefit from certain larger contracts signed in second-quarter 2017 are not yet providing offsetting growth. However, in the third quarter, there was strong signings performance both as reported and adjusted for currency as clients contract to implement hybrid cloud environments.

Technical Support Services third-quarter revenue of $1,801 million decreased 1.6 percent as reported (2 percent adjusted for currency) year to year. Within this line of business, the company is focused on growing its multi-vendor support services which provide clients with a single source of expertise and visibility across different vendor solutions. Integration Software third quarter revenue of $990 million decreased 2.6increased 0.8 percent as reported (3 percent adjusted for currency), reflecting growth across Data Management, Business Analytics, and Asset and Supply Chain Management. Many of these offerings, such as DB2, serve as the underpinnings for modern AI and mission-critical workloads. Security revenue decreased 1.2 percent as reported, but grew 2.0 percent adjusted for currency compared to the prior year. ~~There~~

Across Hybrid Platform & Solutions, our annual recurring revenue (ARR) was ~~continued~~$13.5 billion. ARR is a key performance metric management uses to assess the health and growth trajectory of our Hybrid Platform & Solutions business within the Software segment. ARR is calculated by estimating the current quarter’s recurring, committed value for certain types of active contracts as of the period-end date and then multiplying that value by four. This value is based on each arrangement’s contract value and start date, mitigating fluctuations during the contract term, and includes the following consumption models: (1) software subscription agreements, including committed term licenses, (2) as-a-service arrangements such as SaaS and PaaS, (3) maintenance and support contracts, and (4) security managed services contracts. ARR should be viewed independently of revenue as this performance metric and its inputs may not represent the amount of revenue recognized in the period and therefore is not intended to represent current period revenue or revenue that will be recognized in future periods.

Transaction Processing revenue of $1,742 million increased 2.9 percent as reported (7 percent adjusted for currency) in the first quarter of 2023 compared to the prior-year period. This software remains core to our clients’ hybrid cloud strategies. The strong performance of the last two zSystems cycles drove significant capacity growth. This growth translates to software opportunity and contributed to growth in ~~SaaS across~~both recurring and transactional revenue. Together with price increases, this performance contributed to good revenue growth this quarter.


							Yr. to Yr.
							Percent/
(Dollars in millions)							Margin
For the three months ended March 31:	2023			2022			Change
Software:
Gross profit	$	4,705		$	4,550		3.4	%
Gross profit margin		79.5	%		78.8	%	0.6	pts.
Pre-tax income	$	1,164		$	1,134		2.7	%
Pre-tax margin		19.7	%		19.7	%	0.0	pts.

Software gross profit margin increased 0.6 points to 79.5 percent in the ~~portfolio~~first quarter of 2023 compared to the prior-year period, reflecting the solid revenue performance in the quarter. Pre-tax income of $1,164 million increased 2.7 percent year to year and pre-tax margin of 19.7 percent was flat compared to the prior-year first quarter, reflecting the higher profit contribution from revenue, partially offset by the impact of currency.

Table of Contents

Management Discussion – (continued)

Consulting


							Yr. to Yr.
							Percent
					Yr. to Yr.		Change
(Dollars in millions)					Percent		Adjusted For
For the three months ended March 31:	2023		2022		Change		Currency
Consulting revenue:	$	4,962	$	4,829	2.8	%	8.2	%
Business Transformation	$	2,283	$	2,255	1.3	%	6.5	%
Technology Consulting		943		955	(1.3)		4.2
Application Operations		1,736		1,619	7.3		13.0

Consulting revenue of $4,962 million increased 2.8 percent as reported and 8 percent adjusted for currency in the ~~company helps clients implement~~first quarter of 2023 compared to strong growth in the first quarter of 2022. Clients continue to leverage IBM’s hybrid cloud ~~environments. This~~leadership and deep expertise to accelerate their digital transformations. More recently, clients are prioritizing digital transformation projects that focus on cost take out and productivity. While total Consulting revenue growth remained solid, we saw some deceleration in revenue growth particularly among U.S. clients with respect to more discretionary projects, impacting backlog realization within the quarter. Our hybrid cloud expertise and the depth and breadth of our strategic partnerships differentiates IBM Consulting in the market. In the first quarter of 2023, we had solid growth in our Red Hat consulting practice and our strategic partnerships continued to make strong contributions to our total Consulting revenue growth.

Business Transformation revenue of $2,283 million increased 1.3 percent as reported and 6 percent adjusted for currency in the first quarter of 2023 compared to the prior-year period led by growth in data and customer experience transformation projects.

Technology Consulting revenue of $943 million decreased 1.3 percent as reported, but grew 4 percent adjusted for currency on a year-to-year basis led by growth in our engagements around cloud application development.

Application Operations revenue of $1,736 million increased 7.3 percent as reported and 13 percent adjusted for currency compared to the first quarter of 2022 led by growth in cloud application management.


							Yr. to Yr.
							Percent/
(Dollars in millions)							Margin
For the three months ended March 31:	2023			2022			Change
Consulting:
Gross profit	$	1,252		$	1,176		6.5	%
Gross profit margin		25.2	%		24.3	%	0.9	pts.
Pre-tax income	$	382		$	348		9.6	%
Pre-tax margin		7.7	%		7.2	%	0.5	pts.

Consulting first-quarter gross profit margin of 25.2 percent increased 0.9 points on a year-to-year basis. Pre-tax income increased 9.6 percent to $382 million in the first quarter of 2023 and pre-tax margin increased 0.5 points to 7.7 percent compared to the prior-year period. Our gross profit margin expansion and pre-tax margin performance continued to benefit from the pricing and productivity actions we have taken during the past year.

Consulting Signings and Book-to-Bill


							Yr. to Yr.
							Percent
					Yr. to Yr.		Change
(Dollars in millions)					Percent		Adjusted For
For the three months ended March 31:	2023		2022		Change		Currency
Total Consulting signings	$	5,193	$	5,136	1.1	%	6.5	%

Table of Contents

Management Discussion – (continued)

Our book-to-bill ratio over the last twelve months was ~~offset by declines~~1.07. In the first quarter of 2023, Consulting signings grew 1.1 percent as reported and 7 percent adjusted for currency. We continued to see broad demand for projects that deliver technology-driven transformations leveraging a hybrid cloud environment. Within the quarter, we saw solid demand for cloud modernization offerings and had one of our largest-ever Red Hat signings quarters. Clients’ focus on driving productivity and cost reductions has contributed to signings growth from digital transformations in areas such as ~~on premise DevOps~~talent, finance and ~~IT service management.~~supply chain transformations.

~~Technology Services & Cloud Platforms third-quarter 2017 strategic imperatives~~Book-to-bill represents the ratio of IBM Consulting signings to its revenue ~~of $2.6 billion grew 12 percent year to year as reported~~over the same period and ~~adjusted for currency. Cloud revenue of $1.8 billion grew 16 percent as reported and adjusted for currency, with an as-a-Service exit run rate of $6.2 billion. For the first nine months~~is a useful indicator of the ~~year, total strategic imperatives revenue of $7.4 billion grew 20 percent as reported (21 percent adjusted~~demand for ~~currency) year to year. Cloud revenue of $5.1 billion grew 24 percent as reported (25 percent adjusted for currency).~~

Yr. to Yr.

Percent/

(Dollars in millions)

Margin

For the three months ended September 30:

2017

2016

Change

Technology Services & Cloud Platforms:

External Technology Services gross profit

$
2,667

$
2,825

(5.6
)%
External Technology Services gross profit margin

35.7
%
36.5
%
(0.8
)pts.
External Integration Software gross profit

$
805

$
851

(5.4
)%
External Integration Software gross profit margin

81.3
%
83.8
%
(2.4
)pts.
External total gross profit

$
3,473

$
3,676

(5.5
)%
External total gross profit margin

41.1
%
42.0
%
(1.0
)pts.
Pre-tax income

$
1,192

$
1,288

(7.5
)%
Pre-tax margin

13.8
%
14.4
%
(0.6
)pts.

Yr. to Yr.

Percent/

(Dollars in millions)

Margin

For the nine months ended September 30:

2017

2016

Change

Technology Services & Cloud Platforms:

External Technology Services gross profit

$
7,630

$
8,176

(6.7
)%
External Technology Services gross profit margin

34.6
%
35.7
%
(1.1
)pts.
External Integration Software gross profit

$
2,450

$
2,630

(6.9
)%
External Integration Software gross profit margin

80.9
%
84.2
%
(3.2
)pts.
External total gross profit

$
10,080

$
10,806

(6.7
)%
External total gross profit margin

40.2
%
41.5
%
(1.3
)pts.
Pre-tax income

$
2,888

$
2,825

2.2
%
Pre-tax margin

11.3
%
10.6
%
0.6
pts.

Technology Services & Cloud Platforms gross profit margin decreased 1.0 points year to year in the third quarter to 41.1 percent and pre-tax income of $1,192 million decreased 7.5 percent. The pre-tax margin declined 0.6 points year to year to 13.8 percent, but improved sequentially by 2 points compared to the second quarter of 2017. For the first nine months of the year, pre-tax income of $2,888 million increased 2.2 percent and the pre-tax margin improved 0.6 points to 11.3 percent. The

~~Management Discussion — (continued)~~

~~year-to-year performance in the nine months of 2017 compared to the prior year includes a lower level of charges related to workforce and real estate actions.~~

The company continues to yield savings from prior-year workforce transformation, is focused on delivering productivity to clients, and continues to invest to expand its cloud infrastructure which is currently impacting margin. Withour business over ~~sixty cloud centers across nineteen countries, the IBM Cloud provides clients with flexibility in how and where they store their data.~~

~~Services Backlog and~~time. Signings

Yr. to Yr.

Percent

Yr. to Yr.

Change

At September 30,

At September 30,

Percent

Adjusted For

(Dollars in billions)

2017

2016

Change

Currency

Total backlog

$
119.3

$
121.3

(1.6
)%
(2.1
)%

The estimated total services backlog at September 30, 2017 was $119 billion, a decrease of 1.6 percent as reported and 2 percent adjusted for currency with modest growth in GTS as reported (essentially flat adjusted for currency) and a decrease in GBS year to year as reported and adjusted for currency.

Total services backlog includes Infrastructure Services, Consulting, Global Process Services, Application Management and Technical Support Services. Total backlog is intended to be a statement of overall work under contract for these businesses and therefore includes Technical Support Services. It does not include as-a-Service offerings that have flexibility in 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.

~~Services signings~~ are management’s initial estimate of the value of a client’s commitment under a services ~~contract.~~contract within IBM Consulting. 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 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. ~~Technical Support Services is~~Total signings can vary over time due to a variety of factors including, but not ~~included in signings as maintenance contracts tend~~limited to, ~~be more steady state, where revenues equal renewals.~~

~~Contract portfolios purchased in~~the timing of signing a small number of larger contracts. Signings associated with 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 ifon a ~~new~~prospective basis.

Management believes the estimated values of signings disclosed provide an indication of our forward-looking revenue. Signings are used to monitor the performance of the business and viewed as useful information for management and shareholders. The conversion of signings into revenue may vary based on the types of services ~~agreement is signed incidental or coincidental~~and solutions, contract duration, customer decisions, and other factors, which may include, but are not limited to, ~~an acquisition or divestiture.~~the macroeconomic environment.

Infrastructure


							Yr. to Yr.
							Percent
					Yr. to Yr.		Change
(Dollars in millions)					Percent		Adjusted For
For the three months ended March 31:	2023		2022		Change		Currency
Infrastructure revenue:	$	3,098	$	3,219	(3.7)	%	0.1	%
Hybrid Infrastructure	$	1,709	$	1,700	0.5	%	3.8	%
zSystems					7.0		10.7
Distributed Infrastructure					(2.8)		0.3
Infrastructure Support		1,389		1,519	(8.5)		(4.0)

~~Management Discussion — (continued)~~

~~Systems~~

Yr. to Yr.

Percent

Yr. to Yr.

Change

(Dollars in millions)

Percent

Adjusted For

For the three months ended September 30:

2017

2016

Change

Currency

Systems external revenue:

$
1,721

$
1,558

10.4
%
9.6
%
Systems Hardware

$
1,301

$
1,128

15.3
%
14.4
%
z Systems

63.8

61.9

Power Systems

(7.2
)
(7.8
)
Storage Systems

4.9

4.3

Operating Systems Software

420

430

(2.3
)
(2.9
)

Yr. to Yr.

Percent

Yr. to Yr.

Change

(Dollars in millions)

Percent

Adjusted For

For the nine months ended September 30:

2017

2016

Change

Currency

Systems external revenue:

$
4,863

$
5,184

(6.2
)%
(5.9
)%
Systems Hardware

$
3,629

$
3,852

(5.8
)%
(5.5
)%
z Systems

(13.4
)
(13.3
)
Power Systems

(12.7
)
(12.6
)
Storage Systems

6.1

6.6

Operating Systems Software

1,234

1,332

(7.4
)
(7.1
)

~~Systems~~Infrastructure revenue of ~~$1,721~~$3,098 million ~~grew 10.4~~decreased 3.7 percent ~~year to year~~ as reported ~~(10 percent adjusted for currency) in the third quarter of 2017 driven by a combination of strong z14 market acceptance~~ and ~~the third consecutive quarter of growth as reported and~~was flat adjusted for currency in ~~Storage Systems. Systems Hardware~~the first quarter of 2023 compared to the prior-year period, reflecting a decrease in Infrastructure Support revenue year to year, partially offset by revenue growth in Hybrid Infrastructure led by zSystems.

Hybrid Infrastructure revenue of ~~$1,301~~$1,709 million ~~grew 15.3~~increased 0.5 percent as reported (14 percent adjusted for currency) with the growth in z Systems and Storage partially offset by a decrease in Power Systems as reported and adjusted for currency. Operating Systems Software revenue of $420 million decreased 2.3 percent as reported (3(4 percent adjusted for currency) compared to ~~the prior year. For the~~ first ~~nine months~~quarter of ~~2017, Systems~~2022. Within Hybrid Infrastructure, zSystems revenue ~~of $4,863 million decreased 6.2~~increased 7.0 percent as reported ~~(6 percent adjusted for currency) with declines in both Systems Hardware and Operating Systems Software, both as reported and adjusted for currency.~~

Within Systems Hardware, third quarter z Systems revenue grew 63.8 percent as reported (62 percent adjusted for currency) year to year driven by the successful launch of the z14 mainframe in mid-September 2017. This success is due to strong demand for technology that helps address the growing threat of global data breaches and the need for clients to operate within regulated environments. The z14 mainframe has unprecedented encryption capabilities that are widely appealing and the company has already experienced good traction across a broad mix of industries and geographies in the quarter.

~~Power Systems third quarter revenue decreased 7.2 percent as reported (8~~(11 percent adjusted for currency) year to year. This ~~reflects~~was the ~~company’s continued shift~~fourth quarter of z16 availability and the program’s performance has outpaced that of prior cycles. In addition to ~~a growing Linux market while continuing to serve a high value, but declining UNIX market. Linux~~its capabilities around embedded AI at scale, cloud native development for hybrid cloud and cyber-resilient security, clients are also leveraging z16 for its energy efficiency. We also had continued strong growth in shipped MIPs for new Linux workloads on z16. Distributed Infrastructure revenue ~~growth~~decreased 2.8 percent as reported and was flat adjusted for currency. Revenue growth in Storage was offset by declines in Power reflecting the prior-year strong performance following the launch of Power10 high-end systems in the third quarter of 2021.

Infrastructure Support revenue of $1,389 million decreased 8.5 percent as reported and 4 percent adjusted for currency in the ~~third quarter. Although there was growth in UNIX high-end systems this~~first quarter ~~overall UNIX declined as reported and adjusted for currency.~~

~~Storage Systems third quarter revenue increased by 4.9 percent as reported (4 percent adjusted for currency) year~~of 2023 compared to ~~year with growth as reported and adjusted for currency across~~ the ~~major hardware product areas. There was continued growth as reported and adjusted for currency in all-flash array offerings in line with this high-growth market.~~

Third-quarter Systems strategic imperatives revenue of $0.9 billion grew 26 percent year to year as reported (25 percent adjusted for currency). Cloud revenue of $0.7 billion grew 24 percent as reported (23 percent adjusted for currency). For the first nine months of the year, total strategic imperatives revenue of $2.2 billion decreased 3 percent as reported and adjusted for currency year to year, primarily a reflection ofprior-year period, reflecting product cycle dynamics. ~~Cloud revenue~~

Table of ~~$1.7 billion decreased 5 percent as reported and adjusted for currency.~~Contents

Management Discussion —– (continued)


							Yr. to Yr.
							Percent/
(Dollars in millions)							Margin
For the three months ended March 31:	2023			2022			Change
Infrastructure:
Gross profit	$	1,603		$	1,625		(1.4)	%
Gross profit margin		51.7	%		50.5	%	1.2	pts.
Pre-tax income	$	216		$	199		8.5	%
Pre-tax margin		7.0	%		6.2	%	0.8	pts.

Yr. to Yr.

Percent/

(Dollars in millions)

Margin

For the three months ended September 30:

2017

2016

Change

Systems:

External Systems Hardware gross profit

$
557

$
416

33.8
%
External Systems Hardware gross profit margin

42.9
%
36.9
%
5.9
pts.
External Operating Systems Software gross profit

$
366

$
380

(3.7
)%
External Operating Systems Software gross profit margin

87.0
%
88.3
%
(1.2
)pts.
External total gross profit

$
923

$
796

16.0
%
External total gross profit margin

53.6
%
51.1
%
2.6
pts.
Pre-tax income/(loss)

$
339

$
136

149.7
%
Pre-tax margin

17.4
%
7.8
%
9.6
pts.

Yr. to Yr.

Percent/

(Dollars in millions)

Margin

For the nine months ended September 30:

2017

2016

Change

Systems:

External Systems Hardware gross profit

$
1,432

$
1,676

(14.6
)%
External Systems Hardware gross profit margin

39.5
%
43.5
%
(4.0
)pts.
External Operating Systems Software gross profit

$
1,074

$
1,182

(9.2
)%
External Operating Systems Software gross profit margin

87.0
%
88.7
%
(1.7
)pts.
External total gross profit

$
2,506

$
2,858

(12.3
)%
External total gross profit margin

51.5
%
55.1
%
(3.6
)pts.
Pre-tax income/(loss)

$
227

$
354

(35.9
)%
Pre-tax margin

4.2
%
6.1
%
(1.9
)pts.

~~The Systems~~Infrastructure gross profit margin increased ~~2.6~~1.2 points to ~~53.6~~51.7 percent in the ~~third~~first quarter of ~~2017~~2023 compared to the ~~prior year, with sequential improvement compared to the second quarter of 2017. The overall increase year-to-year was~~prior-year period driven by ~~product mix primarily toward the high-margin z Systems. There was also~~ margin ~~improvement~~expansion in z Systems and Storage Systems, with Power Systems essentially flat year to year. For the first nine months of the year, the Systems gross profit margin decreased 3.6 points to 51.5 percent compared to the prior year, with margin declines across all hardware brands and Operating Systems Software, as well as an impact from mix.

In the third quarter of 2017, pre-tax income of $339 million grew 149.7 percent and pre-tax margin increased 9.6 points year to year to 17.4 percent driven by the strong performance in z Systems. For the first nine months of the year, pre-tax income of $227 million decreased 35.9 percent compared to the prior year which also included a higher level of charges related to workforce rebalancing and real estate actions. The company remains focused on continually reinventing this portfolio to address new workloads.

~~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 strong returns on equity. Global Financing also 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. Sales of equipment include equipment returned at the end of a lease, surplus internal equipment and used equipment purchased externally. 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 the IBM products under lease. 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.

~~Management Discussion — (continued)~~

~~Results of Operations~~

Three Months Ended

Nine Months Ended

September 30,

September 30,

(Dollars in millions)

2017

2016

2017

2016

External revenue

$
427

$
412

$
1,246

$
1,245

Internal revenue

272

352

925

1,340

Total revenue

$
698

$
763

$
2,171

$
2,585

Pre-tax income

$
244

$
355

$
836

$
1,208

In the third quarter of 2017, Global Financing total revenue of $698 million decreased 8.5 percent compared to the prior year. This was due to a decline in internal revenue of 22.8 percent, driven by a decrease in internal used equipment sales (down 31.2 percent to $184 million), partially offset by an increase in internal financing (up 4.4 percent to $88 million). External revenue increased 3.7 percent as reported (2.8 percent adjusted for currency), due to an increase in external used equipment sales (up 31.6 percent to $141 million),Hybrid Infrastructure, partially offset by a decrease in ~~external financing (down 6.1~~margin within Infrastructure Support. Pre-tax income increased 8.5 percent to ~~$286 million).~~

The decrease in total revenue in the first nine months of 2017 compared to the same period in 2016 was due to a decline in internal revenue of 30.9 percent, driven by a decrease in internal used equipment sales (down 39.9 percent to $662 million), partially offset by an increase in internal financing (up 10.1 percent to $263 million). External revenue was flat (down 0.4 percent adjusted for currency), with a decline in financing (down 6.3 percent to $877 million), partially offset by an increase in external used equipment sales (up 19.3 percent to $370 million).

The year-to-year increase in internal financing revenue in the third quarter of 2017 was due to higher average asset balances, partially offset by lower asset yields. The year-to-year increase in internal financing revenue in the first nine months of 2017 was due to higher average asset balances and higher asset yields. The decrease in external financing revenue in the third quarter of 2017, compared to the same period in 2016, was due to lower asset yields, partially offset by higher average asset balances. The decrease in external financing revenue in the first nine months of 2017, compared to the same period in 2016 was due to lower asset yields.

Total sales of used equipment represented 46.5 percent and 47.5 percent of Global Financing’s revenue in the third quarter and first nine months of 2017, respectively, and 49.1 percent and 54.6 percent in the third quarter and first nine months of 2016, respectively. The decreases in both periods were due to a lower volume of used equipment sales for internal transactions. The gross profit margin on used sales was 33.2 percent and 54.6 percent in the third quarter of 2017 and 2016, respectively, and 45.4 percent and 60.8 percent in the first nine months of 2017 and 2016, respectively. The decrease in the gross profit margin was driven by a shift in mix away from higher margin internal equipment sales and declines in internal sales margins.

Global Financing pre-tax income decreased 31.4 percent to $244 million in the third quarter of 2017, compared to the same period in 2016, due to lower gross profit ($118 million), partially offset by a decrease in total expenses ($6 million). Pre-tax income decreased 30.8 percent to $836$216 million in the first ~~nine months~~quarter of ~~2017, compared~~2023 and pre-tax margin increased 0.8 points year to year to 7.0 percent. The pre-tax margin performance reflects the ~~same period in 2016, due to lower~~benefits from gross profit ~~($426 million),~~margin performance within Hybrid Infrastructure, reflecting product cycle dynamics, as well as the changes in the useful life of servers and network equipment effective January 1, 2023 and an increase in IP income year to year. These benefits were partially offset by ~~a decrease in total expense ($55 million), including a decrease in financing receivables provisions ($61 million), primarily due to higher Brazil reserve requirements in~~product cycle driven revenue declines and mix within Infrastructure Support and the ~~prior year.~~

Global Financing return on equity was 23.8 percent and 24.6 percent for the three and nine months ended September 30, 2017, respectively, compared to 27.2 percent and 30.3 percent for the three and nine months ended September 30, 2016, respectively. The decrease in return on equity in the third quarter and first nine monthsimpact of 2017 compared to the same periods of 2016, was due to the decrease in net income, partially offset by a decrease in equity. See page 84 for the details of the after-tax income and return on equity calculation.

Total unguaranteed residual value of leases was $668 million as of September 30, 2017. In addition to the unguaranteed residual value, on a limited basis, Global Financing will obtain guarantees of the future value of the equipment to be returned at end of lease. Third-party residual value guarantees increase the minimum lease payments as provided for by accounting standards that are utilized in determining the classification of a lease as a sales-type lease, direct financing lease or operating lease and provide protection against risk of loss arising from declines in equipment values for these assets. The aggregate asset values associated with the guarantees of sales-type leases were $79 million and $43 million for the financingcurrency.

~~Management Discussion — (continued)~~Financing

~~transactions originated during the quarters ended September 30, 2017 and 2016, respectively and $186 million and $201 million~~See pages 64 through 66 for ~~the nine months ended September 30, 2017 and 2016, respectively.~~a discussion of Financing’s segment results.

Geographic Revenue

In addition to the revenue presentation by reportable segment, ~~the company~~we also ~~measures~~measure revenue performance on a geographic basis. ~~The following geographic, regional and country-specific revenue performance excludes OEM revenue.~~


							Yr. to Yr.
							Percent
					Yr. to Yr.		Change
(Dollars in millions)					Percent		Adjusted For
For the three months ended March 31:	2023		2022		Change		Currency
Total Revenue	$	14,252	$	14,197	0.4	%	4.4	%
Americas	$	7,078	$	7,056	0.3	%	1.2	%
Europe/Middle East/Africa (EMEA)		4,331		4,231	2.4		7.9
Asia Pacific		2,843		2,910	(2.3)		7.0

Yr. to Yr.

Percent

Yr. to Yr.

Change

(Dollars in millions)

Percent

Adjusted For

For the three months ended September 30:

2017

2016

Change

Currency

Total Revenue

$
19,153

$
19,226

(0.4
)%
(1.0
)%
Geographies:

$
19,063

$
19,159

(0.5
)%
(1.1
)%
Americas

8,887

9,070

(2.0
)
(2.5
)
Europe/Middle East/Africa (EMEA)

5,989

5,851

2.4

(1.4
)
Asia Pacific

4,187

4,238

(1.2
)
2.2

Yr. to Yr.

Percent

Yr. to Yr.

Change

(Dollars in millions)

Percent

Adjusted For

For the nine months ended September 30:

2017

2016

Change

Currency

Total Revenue

$
56,597

$
58,149

(2.7
)%
(2.2
)%
Geographies:

$
56,343

$
57,932

(2.7
)%
(2.2
)%
Americas

26,727

27,229

(1.8
)
(2.3
)
Europe/Middle East/Africa (EMEA)

17,186

18,032

(4.7
)
(3.3
)
Asia Pacific

12,430

12,671

(1.9
)
(0.6
)

Total ~~geographic~~ revenue of ~~$19,063~~$14,252 million ~~decreased 0.5~~increased 0.4 percent as reported and 1 percent adjusted for currency in the third quarter of 2017 compared to the prior year. Americas revenue of $8,887 million decreased 2.0 percent as reported and 2 percent adjusted for currency. EMEA revenue of $5,989 million increased 2.4 percent as reported, but declined 1 percent adjusted for currency. Asia Pacific revenue of $4,187 million declined 1.2 percent as reported, but grew 2 percent adjusted for currency in the third quarter versus the prior year. Each of the three geographies had year-to-year revenue performance improvement (as reported and at constant currency) compared to the second-quarter 2017 year-to-year performance.

Within Americas, third-quarter revenue in the U.S. decreased 2.6 percent compared to the prior year. Canada increased 2.1 percent as reported but declined 2 percent year to year adjusted for currency. Latin America decreased 1.5 percent as reported and 2 percent adjusted for currency. Within Latin America, Brazil decreased 11.3 percent as reported and 13 percent adjusted for currency while Mexico increased 31.0 percent as reported and 27 percent adjusted for currency.

In the third quarter, within EMEA, the UK declined 9.3 percent (9 percent adjusted for currency). France increased 14.2 percent (8 percent adjusted for currency), Germany increased 8.4 percent (3 percent adjusted for currency), Spain increased 10.9 percent (5 percent adjusted for currency), Norway increased 30.0 percent (24 percent adjusted for currency) and Italy increased 7.3 percent (2 percent adjusted for currency) compared to the same period in the prior year. The Middle East and Africa region increased 3.1 percent as reported and 2 percent adjusted for currency.

~~Within Asia Pacific, Japan revenue decreased 4.0 percent as reported, but grew~~ 4 percent adjusted for currency compared to the same period in the prior year. India grew 14.1 percent as reported (10 percent adjusted for currency) while Australia declined 7.8 percent (11 percent adjusted for currency). China revenue grew 3.9 percent as reported (4 percent adjusted for currency) and Taiwan grew 19.2 percent as reported (14 percent adjusted for currency).

~~Total geographic revenue of $56,343 million decreased 2.7 percent as reported and 2~~ percent adjusted for currency in the first ~~nine months~~quarter of ~~2017~~2023 compared to the prior year.

Americas revenue of ~~$26,727~~$7,078 million decreased 1.8 percent as reported and 2 percent adjusted for currency. EMEA revenue of $17,186 million decreased 4.7 percent as reported and 3 percent adjusted for currency. Asia Pacific revenue of $12,430 million decreased 1.9 percent as reported and 1 percent adjusted for currency.

~~Management Discussion — (continued)~~

~~Within Americas, U.S. revenue decreased 3.0 percent compared to the first nine months of the prior year. Canada~~ increased ~~0.9 percent as reported, which was essentially flat year to year on an adjusted for currency basis. Latin America increased 4.5~~0.3 percent as reported and 1 percent adjusted for currency. ~~Within Latin America, Brazil~~The U.S. decreased 0.6 percent compared to the prior year. The decrease in the U.S. was primarily driven by the divestiture of our healthcare software assets in second-quarter 2022 and declines in Infrastructure. Canada increased ~~5.7~~2.8 percent as reported ~~but declined 2~~and 9 percent adjusted for currency. Latin America increased 7.6 percent as reported and 11 percent adjusted for currency, ~~while Mexico increased 11.3~~with Brazil increasing 13.6 percent as reported and 13 percent adjusted for currency.

~~Within~~In EMEA, ~~the UK decreased 15.6~~total revenue of $4,331 million increased 2.4 percent as reported and 8 percent adjusted for ~~currency compared to the first nine months of the prior year.~~currency. France and Italy increased 3.6 percent and 2.4 percent, respectively, as reported, and increased 8 percent and 7 percent, respectively, adjusted for currency. The UK and Germany decreased ~~4.7~~10.8 percent and 5.4 percent, respectively, as reported, and 2 percent and 1 percent, respectively, adjusted for currency.

Asia Pacific revenue of $2,843 million decreased 2.3 percent as reported, ~~and 5~~but increased 7 percent adjusted for currency. ~~Switzerland~~Japan decreased 12.3 percent as reported and 12 percent adjusted for currency. Spain increased 4.4 percent (5 percent adjusted for currency). The Central and Eastern European region declined 1.7 percent (2 percent adjusted for currency) and the Middle East and Africa region was essentially flat as reported, but down 2 percent adjusted for currency.

~~Within Asia Pacific, Japan declined 1.8~~2.5 percent as reported, but grew 2 percent adjusted for currency compared to the first nine months of the prior year. Australia decreased 6.6 percent as reported and 9 percent adjusted for currency. China decreased 7.8 percent as reported and 6increased 11 percent adjusted for currency. India increased ~~8.9~~ 8.3

Table of Contents

Management Discussion – (continued)

percent as reported and 618 percent adjusted for currency. ~~South Korea increased 5.4~~China and Australia decreased 24.3 percent and 16.0 percent, respectively, as reported, and 320 percent and 11 percent, respectively, adjusted for currency.

Expense

~~Expense~~

Total Expense and Other (Income)

Yr. to Yr.

(Dollars in millions)

Percent

For the three months ended September 30:

2017

2016

Change

Total consolidated expense and other (income)

$
5,735

$
5,751

(0.3
)%
Non-operating adjustments:

Amortization of acquired intangible assets

$
(125
)
$
(136
)
(8.1
)%
Acquisition-related charges

0

(4
)
(101.8
)
Non-operating retirement-related (costs)/income

(103
)
(60
)
71.9

Operating (non-GAAP) expense and other (income)

$
5,507

$
5,550

(0.8
)%
Total consolidated expense-to-revenue ratio

29.9
%
29.9
%
0.0
pts.
Operating (non-GAAP) expense-to-revenue ratio

28.8
%
28.9
%
(0.1
)pts.

Yr. to Yr.

(Dollars in millions)

Percent

For the nine months ended September 30:

2017

2016

Change

Total consolidated expense and other (income)

$
18,434

$
20,056

(8.1
)%
Non-operating adjustments:

Amortization of acquired intangible assets

$
(382
)
$
(371
)
2.8
%
Acquisition-related charges

(19
)
(1
)
nm

Non-operating retirement-related (costs)/income

(474
)
(206
)
130.0

Operating (non-GAAP) expense and other (income)

$
17,559

$
19,478

(9.9
)%
Total consolidated expense-to-revenue ratio

32.6
%
34.5
%
(1.9
)pts.
Operating (non-GAAP) expense-to-revenue ratio

31.0
%
33.5
%
(2.5
)pts.


							Yr. to Yr.
(Dollars in millions)							Percent
For the three months ended March 31:	2023			2022			Change
Total expense and other (income)	$	6,451		$	6,712		(3.9)	%
Non-operating adjustments:
Amortization of acquired intangible assets	$	(244)		$	(280)		(12.8)	%
Acquisition-related charges		(3)			(7)		(50.1)
Non-operating retirement-related (costs)/income		5			(202)		nm
Kyndryl-related impacts		—			(222)		(100.0)
Operating (non-GAAP) expense and other (income)	$	6,209		$	6,001		3.5	%
Total expense-to-revenue ratio		45.3	%		47.3	%	(2.0)	pts.
Operating (non-GAAP) expense-to-revenue ratio		43.6	%		42.3	%	1.3	pts.

nm -— not meaningful

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

~~Management Discussion — (continued)~~

Selling, General and Administrative Expense


					Yr. to Yr.
(Dollars in millions)					Percent
For the three months ended March 31:	2023		2022		Change
Selling, general and administrative expense:
Selling, general and administrative — other	$	3,886	$	3,824	1.6	%
Advertising and promotional expense		314		336	(6.6)
Workforce rebalancing charges		259		5	nm
Amortization of acquired intangible assets		243		279	(12.9)
Stock-based compensation		149		136	9.4
Provision for/(benefit from) expected credit loss expense		2		16	(88.2)
Total selling, general and administrative expense	$	4,853	$	4,597	5.6	%
Non-operating adjustments:
Amortization of acquired intangible assets	$	(243)	$	(279)	(12.9)	%
Acquisition-related charges		(3)		(7)	(63.3)
Kyndryl-related impacts		—		0	(100.0)
Operating (non-GAAP) selling, general and administrative expense	$	4,607	$	4,311	6.9	%

Yr. to Yr.

(Dollars in millions)

Percent

For the three months ended September 30:

2017

2016

Change

Selling, general and administrative expense:

Selling, general and administrative — other

$
3,898

$
3,983

(2.1
)%
Advertising and promotional expense

337

341

(1.4
)
Workforce rebalancing charges

17

25

(31.1
)
Retirement-related costs

175

174

0.7

Amortization of acquired intangible assets

125

136

(8.1
)
Stock-based compensation

88

105

(16.5
)
Bad debt expense

7

(32
)
nm

Total consolidated selling, general and administrative expense

$
4,648

$
4,732

(1.8
)%
Non-operating adjustments:

Amortization of acquired intangible assets

$
(125
)
$
(136
)
(8.1
)%
Acquisition-related charges

0

(3
)
nm

Non-operating retirement-related (costs)/income

(53
)
(53
)
(0.5
)
Operating (non-GAAP) selling, general and administrative expense

$
4,470

$
4,541

(1.6
)%

nm — not meaningful

Yr. to Yr.

(Dollars in millions)

Percent

For the nine months ended September 30:

2017

2016

Change

Selling, general and administrative expense:

Selling, general and administrative — other

$
12,293

$
12,697

(3.2
)%
Advertising and promotional expense

1,090

1,051

3.7

Workforce rebalancing charges

188

1,038

(81.9
)
Retirement-related costs

690

551

25.3

Amortization of acquired intangible assets

382

371

2.8

Stock-based compensation

277

295

(6.1
)
Bad debt expense

40

90

(56.0
)
Total consolidated selling, general and administrative expense

$
14,959

$
16,093

(7.0
)%
Non-operating adjustments:

Amortization of acquired intangible assets

$
(382
)
$
(371
)
2.8
%
Acquisition-related charges

(12
)
6

nm

Non-operating retirement-related (costs)/income

(326
)
(183
)
78.0

Operating (non-GAAP) selling, general and administrative expense

$
14,240

$
15,545

(8.4
)%

~~nm - not meaningful~~

Total selling, general and administrative (SG&A) expense ~~decreased 1.8~~increased 5.6 percent in the ~~third~~first quarter of ~~2017~~2023 versus the prior-year period driven primarily by the following factors:

●

Higher workforce rebalancing charges (6 points) to address remaining stranded costs from portfolio actions; and

Table of Contents

· ~~Lower spending from increased focus on driving expense efficiency (3 points); partially offset by~~Management Discussion – (continued)

· ~~The effects of currency (1 point); and~~

· ~~The impact of acquisitions completed in the prior 12-month period (1 point).~~

●

Higher spending (2 points) reflecting our continuing investment to drive our hybrid cloud and AI strategy, partially offset by benefits from productivity and the actions taken to transform our operations; partially offset by

●

The effects of currency (2 points).

Operating (non-GAAP) expense ~~decreased 1.6~~increased 6.9 percent year to year ~~driven~~ primarily ~~by the same factors, excluding higher non-operating retirement-related costs net of the one-time non-operating UK gain.~~

~~SG&A expense decreased 7.0 percent in the first nine months of 2017 versus the first nine months of 2016~~ driven ~~primarily by the following factors:~~

~~Management Discussion — (continued)~~

· ~~Lower workforce rebalancing charges (5 points);~~

· ~~Lower spending (2 points); and~~

· ~~The effects of currency (1 point); partially offset by~~

· ~~The impact of acquisitions completed in the prior 12-month period (1 point).~~

~~Operating (non-GAAP) expense decreased 8.4 percent year to year driven primarily~~ by the same factors.

Third-quarter SG&A reflects a year-to-year impact of $105 million related to several commercial disputes and a benefit of $91 million resulting from the favorable resolution of pension-related litigation in the UK. Operating (non-GAAP) SG&A does not include the benefit from the pension litigation.

~~Bad debt~~The provision for expected credit loss expense decreased ~~$51~~$14 million year to year, ~~in the first nine months of 2017,~~ primarily driven by ~~increased~~a higher release of general reserves and lower additions to specific reserves in ~~Brazil in~~ the ~~prior year.~~current-year period. The receivables provision coverage was ~~1.9~~2.8 percent at ~~September 30, 2017, a decrease~~March 31, 2023, excluding receivables classified as held for sale, an increase of 1040 basis points compared to December 31, ~~2016 and a decrease of 100 basis points from September 30, 2016.~~2022. The ~~decrease year to year~~increase in ~~the receivables provision~~ coverage was ~~due~~ primarily driven by the overall decrease in total receivables and, to ~~write-offs of previously reserved receivables~~a lesser extent, an increase in ~~December 2016.~~specific reserves.

Research, Development and Engineering


					Yr. to Yr.
(Dollars in millions)					Percent
For the three months ended March 31:	2023		2022		Change
Research, development and engineering expense	$	1,655	$	1,679	(1.4)	%

Yr. to Yr.

(Dollars in millions)

Percent

For the three months ended September 30:

2017

2016

Change

Total consolidated research, development and engineering expense

$
1,342

$
1,397

(3.9
)%
Non-operating adjustment:

Non-operating retirement-related (costs)/income

$
(51
)
$
(7
)
615.0
%
Operating (non-GAAP) research, development and engineering expense

$
1,291

$
1,390

(7.1
)%

Yr. to Yr.

(Dollars in millions)

Percent

For the nine months ended September 30:

2017

2016

Change

Total consolidated research, development and engineering expense

$
4,360

$
4,320

0.9
%
Non-operating adjustment:

Non-operating retirement-related (costs)/income

$
(148
)
$
(23
)
547.8
%
Operating (non-GAAP) research, development and engineering expense

$
4,212

$
4,297

(2.0
)%

Research, development and engineering (RD&E) expense ~~was 7.0 percent and 7.7 percent of revenue~~ in the ~~third quarter and~~ first nine months of 2017, respectively, compared to 7.3 percent and 7.4 percent in prior year periods, respectively. The company continues to invest in research and development as it builds new markets and maintains its leadership in enterprise IT.

~~RD&E expense in the third~~ quarter of ~~2017~~2023 decreased ~~3.9~~1.4 percent year to year primarily ~~driven by:~~

· ~~Lower spending, net of higher retirement-related costs (5 points); partially offset by~~

· ~~The~~due to the effects of currency ~~(1 point).~~

~~Operating (non-GAAP) RD&E expense decreased 7.1 percent~~(2 points) which more than offset higher spending in the ~~third quarter of 2017 compared~~current-year period. We continue to ~~the prior year, driven primarily by the same factors, excluding higher non-operating retirement-related costs.~~invest to deliver innovation in AI, hybrid cloud and emerging areas such as quantum computing.

~~RD&E expense in the first nine months of 2017 increased 0.9 percent year to year primarily driven by:~~

· ~~The impact of acquisitions completed in the prior 12-month period (2 points); partially offset by~~

~~Management Discussion — (continued)~~

· ~~Lower spending, net of higher retirement-related costs.~~

Operating (non-GAAP) RD&E expense decreased 2.0 percent in the first nine months of 2017 compared to the prior year, driven primarily by the same factors, excluding higher non-operating retirement-related costs.

Intellectual Property and Custom Development Income


					Yr. to Yr.
(Dollars in millions)					Percent
For the three months ended March 31:	2023		2022		Change
Intellectual property and custom development income:
Licensing of intellectual property including royalty-based fees	$	61	$	71	(14.2)	%
Custom development income		115		48	139.1
Sales/other transfers of intellectual property		4		2	119.0
Total	$	180	$	121	48.7	%

Yr. to Yr.

(Dollars in millions)

Percent

For the three months ended September 30:

2017

2016*

Change

Intellectual Property and Custom Development Income:

Licensing of intellectual property including royalty-based fees

$
236

$
474

(50.1
)%
Custom development income

62

53

16.4

Sales/other transfers of intellectual property

10

1

607.5

Total

$
308

$
528

(41.7
)%

* Reclassified to conform to 2017 presentation.

Yr. to Yr.

(Dollars in millions)

Percent

For the nine months ended September 30:

2017

2016*

Change

Intellectual Property and Custom Development Income:

Licensing of intellectual property including royalty-based fees

$
921

$
935

(1.5
)%
Custom development income

186

158

18.2

Sales/other transfers of intellectual property

11

17

(38.4
)
Total

$
1,118

$
1,110

0.7
%

* Reclassified to conform to 2017 presentation.

~~Licensing of~~Total intellectual property ~~including royalty-based fees decreased 50.1~~and custom development income in the first quarter of 2023 increased 48.7 percent year to ~~year~~year. The increase was primarily driven by a three-year joint development and licensing agreement signed in the ~~third~~fourth quarter of ~~2017 and decreased 1.5 percent in the first nine months of 2017 compared~~2022 with a Japanese consortium to ~~the prior-year period.~~ The company entered into new partnership agreements in the first nine months of 2017, which included two transactions with period income greater than $100 million. The company is licensing IP to partners who are allocating their skills to extend the value of assets that are high value, but may be in mature markets. The licensing ofleverage our intellectual property ~~for the first nine months of 2016 included three transactions with period income greater than $100 million.~~ and expertise on advanced semiconductors.

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.

Table of Contents

Management Discussion —– (continued)

Other (Income) and Expense

Yr. to Yr.

(Dollars in millions)

Percent

For the three months ended September 30:

2017

2016

Change

Other (income) and expense:

Foreign currency transaction losses/(gains)

$
37

$
93

(60.3
)%
(Gains)/losses on derivative instruments

(29
)
(23
)
22.0

Interest income

(38
)
(22
)
72.7

Net (gains)/losses from securities and investment assets

(6
)
(5
)
20.9

Other

(79
)
(51
)
54.9

Total consolidated other (income) and expense

$
(114
)
$
(8
)
nm
%
Non-operating adjustment:

Acquisition-related charges

$
0

$
(2
)
(100.0
)%
Operating (non-GAAP) other (income) and expense

$
(114
)
$
(10
)
nm
%


					Yr. to Yr.
(Dollars in millions)					Percent
For the three months ended March 31:	2023		2022		Change
Other (income) and expense:
Foreign currency transaction losses/(gains)	$	88	$	(176)	nm
(Gains)/losses on derivative instruments		(142)		102	nm
Interest income		(170)		(17)	nm
Net (gains)/losses from securities and investment assets		5		218	(97.6)	%
Retirement-related costs/(income)		(5)		202	nm
Other		(22)		(83)	(73.9)
Total other (income) and expense	$	(245)	$	246	nm
Non-operating adjustments:
Amortization of acquired intangible assets	$	(1)	$	(1)	—
Acquisition-related charges		(1)		—	nm
Non-operating retirement-related (costs)/income		5		(202)	nm
Kyndryl-related impacts		—		(222)	(100.0)	%
Operating (non-GAAP) other (income) and expense	$	(242)	$	(179)	35.3	%

nm - not meaningful

Yr. to Yr.

(Dollars in millions)

Percent

For the nine months ended September 30:

2017

2016

Change

Other (income) and expense:

Foreign currency transaction losses/(gains)

$
374

$
514

(27.2
)%
(Gains)/losses on derivative instruments

(351
)
(339
)
3.5

Interest income

(102
)
(76
)
35.5

Net (gains)/losses from securities and investment assets

(16
)
29

nm

Other

(123
)
153

nm

Total consolidated other (income) and expense

$
(218
)
$
281

nm
%
Non-operating adjustment:

Acquisition-related charges

$
(7
)
$
(7
)
(1.0
)%
Operating (non-GAAP) other (income) and expense

$
(225
)
$
274

nm
%

~~nm - not meaningful~~

Total ~~consolidated~~ other (income) and expense was income of ~~$114~~$245 million in the ~~third~~first quarter of ~~2017~~2023 compared to ~~income~~expense of $8$246 million in the ~~third quarter of 2016.~~prior-year period. The ~~increase in income of $106 million year to year~~year-to-year change was primarily driven by:

●

An unrealized loss on the Kyndryl retained shares ($222 million) in the prior-year period;

●

Non-operating retirement-related income in the first quarter of 2023 compared to cost in the prior-year period ($207 million). Refer to “Retirement-Related Plans” for additional information; and

●

Higher interest income ($152 million) driven by higher average interest rates and a higher average cash balance in the current year; partially offset by

●

Lower gains from divestitures and dispositions of land/buildings ($56 million).

· ~~Lower foreign currency transaction losses ($56 million);~~

· ~~Higher gains on real estate transactions (reflected in Other in the table above) ($19 million); and~~

· ~~Higher interest income ($16 million).~~

~~The consolidated~~Operating (non-GAAP) other (income) and expense was income of ~~$218~~$242 million ~~in the first nine months of 2017 compared to expense of $281 million in the first nine months of 2016. The increase in income of $499 million year over year was primarily driven by:~~

· ~~Real estate capacity charges (reflected in Other in the table above) in the prior year related to workforce transformation ($328 million);~~

· ~~Lower foreign currency transaction losses ($140 million);~~

· ~~Reduced losses from securities and investment assets ($45 million), primarily related to the sale of Lenovo shares~~ in the first quarter of ~~2016; and~~

· ~~Higher~~2023 compared to income of $179 million in the prior-year period. The year-to-year increase was driven primarily by the higher interest income, ~~($27 million);~~ partially offset by the lower gains from divestitures and dispositions of land/buildings.

· ~~Lower gains on divestitures ($42 million).~~

~~Management Discussion — (continued)~~

Interest Expense


					Yr. to Yr.
(Dollars in millions)					Percent
For the three months ended March 31:	2023		2022		Change
Interest expense	$	367	$	311	18.3	%

Yr. to Yr.

(Dollars in millions)

Percent

For the three months ended September 30:

2017

2016

Change

Interest expense

$
168

$
158

6.4
%

Yr. to Yr.

(Dollars in millions)

Percent

For the nine months ended September 30:

2017

2016

Change

Interest expense

$
451

$
473

(4.6
)%

Interest expense increased ~~$10 million year to year in the third quarter, but decreased $22~~$57 million in the first ~~nine months~~quarter of ~~2017.~~2023 compared to the prior-year period. Interest expense is presented in cost of financing in the Consolidated Income Statement ~~of Earnings~~ if the related external borrowings are to support the ~~Global~~ Financing external business. Overall interest expense (excluding capitalized interest) for the ~~third~~first quarter ~~and first nine months~~ of ~~2017~~2023 was ~~$335~~$458 million, ~~and $947 million, respectively,~~ an increase of ~~$29~~$65 million ~~and $43 million, respectively,~~ versus the ~~comparable~~ prior-year ~~periods, primarily~~period, driven by higher average interest rates and a higher average debt ~~balance.~~balance in the current year.

Table of Contents

Management Discussion – (continued)

Retirement-Related Plans

The following ~~tables provide~~table provides the total pre-tax cost for all retirement-related plans. ~~These~~The operating cost amounts are included in the Consolidated Income Statement ~~of Earnings~~ 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 September 30:

2017

2016

Change

Retirement-related plans — cost:

Service cost

$
111

$
114

(2.5
)%
Amortization of prior service costs/(credits)

(22
)
(28
)
(21.3
)
Cost of defined contribution plans

258

262

(1.4
)
Total operating costs/(income)

$
347

$
347

(0.2
)%
Interest cost

$
746

$
826

(9.6
)%
Expected return on plan assets

(1,096
)
(1,392
)
(21.3
)
Recognized actuarial losses

728

692

5.2

Curtailments/settlements

2

4

(55.8
)
Multi-employer plan/other

(74
)
8

nm

Total non-operating costs/(income)

$
306

$
139

121.1
%
Total retirement-related plans — cost

$
653

$
486

34.4
%

~~nm - not meaningful~~

~~Management Discussion — (continued)~~

Yr. to Yr.

(Dollars in millions)

Percent

For the nine months ended September 30:

2017

2016

Change

Retirement-related plans — cost:

Service cost

$
323

$
335

(3.6
)%
Amortization of prior service costs/(credits)

(66
)
(81
)
(18.5
)
Cost of defined contribution plans

776

802

(3.3
)
Total operating costs/(income)

$
1,033

$
1,056

(2.2
)%
Interest cost

$
2,215

$
2,483

(10.8
)%
Expected return on plan assets

(3,250
)
(4,190
)
(22.4
)
Recognized actuarial losses

2,143

2,069

3.5

Curtailments/settlements

3

19

(81.6
)
Multi-employer plans/other

(46
)
64

nm

Total non-operating costs/(income)

$
1,065

$
444

139.8
%
Total retirement-related plans — cost

$
2,097

$
1,500

39.8
%


					Yr. to Yr.
(Dollars in millions)					Percent
For the three months ended March 31:	2023		2022		Change
Retirement-related plans — cost:
Service cost	$	46	$	66	(29.6)	%
Multi-employer plans		4		4	(6.3)
Cost of defined contribution plans		269		239	12.5
Total operating costs	$	319	$	309	3.3	%
Interest cost	$	599	$	467	28.2	%
Expected return on plan assets		(739)		(749)	(1.4)
Recognized actuarial losses		129		460	(71.9)
Amortization of prior service costs/(credits)		(2)		7	nm
Curtailments/settlements		(1)		8	nm
Other costs		9		9	(6.4)
Total non-operating costs/(income)	$	(5)	$	202	(102.5)	%
Total retirement-related plans — cost	$	314	$	510	(38.5)	%

nm - not meaningful

~~In the third quarter of 2017, total~~Total pre-tax retirement-related ~~plan~~ cost ~~increased~~decreased by ~~$167~~$197 million compared to the ~~third~~first quarter of ~~2016,~~2022, primarily driven by ~~lower expected return on plan assets ($296 million) and an increase~~a decrease in recognized actuarial losses ($36331 million); and lower service cost ($19 million), partially offset by ~~lower~~higher interest costs ($79132 million) and ~~a reduction in other~~higher cost of defined contribution plans ($83 million), driven by the pension obligation adjustment recorded related to the UK pension litigation ($91 million). Total cost for the first nine months of 2017 increased by $597 million versus the first nine months of 2016, primarily driven by lower expected return on plan assets ($940 million) and an increase in recognized actuarial losses ($73 million); partially offset by lower interest costs ($268 million) and other costs ($10930 million).

As ~~discussed~~described in the ~~“Snapshot” on page 51, the company~~“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 ~~third~~first quarter of ~~2017~~2023 were ~~$347~~$319 million, ~~flat~~an increase of $10 million compared to the ~~third~~first quarter of ~~2016.~~2022, primarily driven by higher cost of defined contribution plans ($30 million), partially offset by lower service cost ($19 million). Non-operating costs/(income) was $5 million of income in the first quarter of 2023 compared to cost of $202 million in the prior-year period. The year-to-year change was primarily driven by a decrease in recognized actuarial losses ($331 million), partially offset by higher interest costs ($132 million).

The year-to-year decrease in recognized actuarial losses was primarily driven by the December 2022 remeasurement of ~~$306 million~~our retirement and postretirement plans which resulted in a significant reduction to our pension plan benefit obligations and an improvement in our overall funded status primarily due to higher discount rates. In addition, we transferred $16 billion of our U.S. Qualified PPP obligations and related plan assets to third-party insurers in 2022 to further reduce the risk profile of our plans. The transfer resulted in a pre-tax pension settlement charge of $5.9 billion in the third quarter of ~~2017 increased $168 million year~~2022 primarily related to ~~year, driven primarily by lower expected return on plan assets ($296 million) and an increase in recognized~~the accelerated recognition of actuarial ~~losses ($36 million); partially offset by lower interest costs ($79 million) and other costs ($83 million). For~~losses.

Table of Contents

Management Discussion – (continued)

Taxes

The continuing operations provision for income taxes for the first ~~nine months~~quarter of ~~2017, operating retirement-related costs were $1,033 million, a decrease of $24~~2023 was $124 million, compared to ~~the first nine months~~a benefit from income taxes of ~~2016, primarily driven by lower defined contribution plan costs ($26 million). Non-operating costs of $1,065 million increased $621~~$39 million in the first nine months of 2017 compared to the prior year, driven primarily by lower expected return on plan assets ($940 million) and an increase in recognized actuarial losses ($73 million); partially offset by lower interest costs ($268 million) and other costs ($109 million), driven by the third-quarter pension obligation adjustment in the UK.

~~Taxes~~

~~The continuing operations effective tax rate for the third~~ quarter of ~~2017 was 11.0 percent, a decrease of 1.5 points compared to the third quarter of 2016.~~2022. The continuing operations effective tax rate for the first nine months of 2017 was 1.7 percent, an increase of 2.2 points compared to the first nine months of 2016. The operating (non-GAAP) tax rate for the third quarter of 2017 was 14.7 percent, an increase of 0.5 points compared to the third quarter of 2016. The operating (non-GAAP) tax rate for the first nine months of 2017 was 7.1 percent, an increase of 3.9 points compared to the first nine months of 2016.

~~The change in the continuing operations effective tax rate for the third quarter of 2017 compared to 2016 was driven by an increase in foreign tax credits, partially offset by a prior year tax~~prior-year benefit ~~related to foreign tax audit activity. The change in the operating (non-GAAP) tax rate for the third quarter was driven by the same factors.~~

~~The change in the continuing operations effective tax rate for the first nine months of 2017 compared to 2016~~ was primarily driven by the ~~year-to-year benefits above, as well as a discrete tax benefit related~~impact of updates to the ~~intra-entity transfer recognized~~foreign tax credit regulations. The operating (non-GAAP) income tax provision for the first quarter of 2023 was $200 million, compared to a provision for income taxes of $244 million in the first quarter of ~~2017~~2022.

IBM’s full-year tax provision and ~~other net~~effective tax rate are impacted by recurring factors including the geographical mix of income before taxes, incentives, changes in unrecognized tax benefits and discrete ~~period impacts~~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, and 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 (RAR). The IRS’ proposed adjustments relative to these cross-border transactions, if sustained, would result in additional taxable income of approximately $4.5 billion. The company strongly disagrees with the IRS on these specific matters and filed its IRS Appeals protest in the first ~~two quarters~~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 2023. In the fourth quarter of 2021, the IRS commenced its audit of the company’s U.S. tax returns for 2017 primarily related to foreign tax audit activity. These benefits were more than offset by a prior year tax benefit related to the Japan tax matter (a refund of $1.0 billion plus interest of $0.2 billion). The change in the operating (non-GAAP) tax rate was driven by the same factors.

~~Management Discussion — (continued)~~

and 2018. 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 ~~2012.~~2015. The company is no longer subject to income tax examination of its U.S. federal tax return 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 ~~interest~~penalties have been provided for any adjustments that are expected to result for these years.

In the first quarter of 2016, the IRS commenced its audit of the company’s U.S. tax returns for 2013 and 2014. The company anticipates that this audit will be completed by the end of the first quarter of 2018.

~~The amount of unrecognized tax benefits at December 31, 2016 increased by $108 million in the third quarter of 2017 and increased by $466 million in the first nine months of 2017 to $4,206 million~~. The overall increase for the nine months ended September 30, 2017 was primarily related to potential U.S. audit matters. The total amount of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate was $3,107 million at September 30, 2017.

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 ~~September 30, 2017,~~March 31, 2023, the company ~~has~~had recorded ~~$566~~$657 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 ~~Indian~~India Tax Authorities. ~~The~~Although the outcome of tax audits are always uncertain, the company believes ~~it will prevail on~~that adequate amounts of tax, interest and penalties have been provided for any adjustments that are expected to result for these ~~matters.~~years.

The amount of unrecognized tax benefits at March 31, 2023 is $8,741 million which can be reduced by $539 million associated with timing adjustments, potential transfer pricing adjustments, and state income taxes. The net amount of $8,202 million, if recognized, would favorably affect the company’s effective tax rate.

Earnings Per Share

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

Yr. to Yr.

Percent

For the three months ended September 30:

2017

2016

Change

Earnings per share of common stock from continuing operations:

Assuming dilution

$
2.92

$
2.98

(2.0
)%
Basic

$
2.93

$
2.99

(2.0
)%
Diluted operating (non-GAAP)

$
3.30

$
3.29

0.3
%
Weighted-average shares outstanding: (in millions)

Assuming dilution

933.2

957.3

(2.5
)%
Basic

929.4

954.0

(2.6
)%

Table of Contents

Yr. to Yr.

Percent

For the nine months ended September 30:

2017

2016

Change

Earnings per share of common stock from continuing operations:

Assuming dilution

$
7.24

$
7.67

(5.6
)%
Basic

$
7.28

$
7.70

(5.5
)%
Diluted operating (non-GAAP)

$
8.64

$
8.59

0.6
%
Weighted-average shares outstanding: (in millions)

Assuming dilution

940.2

960.7

(2.1
)%
Basic

935.6

957.7

(2.3
)%

Management Discussion – (continued)


					Yr. to Yr.
					Percent
For the three months ended March 31:	2023		2022		Change
Earnings per share of common stock from continuing operations:
Assuming dilution	$	1.02	$	0.73	39.7	%
Basic	$	1.03	$	0.74	39.2	%
Diluted operating (non-GAAP)	$	1.36	$	1.40	(2.9)	%
Weighted-average shares outstanding: (in millions)
Assuming dilution		917.8		909.2	0.9	%
Basic		907.5		899.3	0.9	%

Actual shares outstanding at ~~September 30, 2017~~March 31, 2023 were ~~925.8~~908.0 million. The weighted-average number of common shares outstanding assuming dilution during the ~~third~~first quarter ~~and first nine months~~ of ~~2017 were 24.1 million and 20.5~~2023 was 8.6 million shares ~~lower~~(0.9 percent) higher than the same ~~periods~~period of ~~2016. The decrease was primarily the result of the common stock repurchase program.~~2022.

~~Management Discussion — (continued)~~

Financial Position

Dynamics

~~Dynamics~~

~~At September 30, 2017, the~~Our balance sheet ~~remains strong, and~~at March 31, 2023 continues to provide us with ~~the newly reorganized financing entity, IBM Credit LLC, the company is better positioned~~flexibility to support and invest in the ~~business over the long term.~~ business.

Cash and cash equivalents, restricted cash and marketable securities at ~~quarter end~~March 31, 2023 were ~~$11,515 million. The company continues~~$17,592 million, an increase of $8,752 million compared to ~~manage the investment portfolio to meet its capital preservation and liquidity objectives.~~December 31, 2022. Total debt of ~~$45,625~~$58,712 million at March 31, 2023 increased ~~$3,457~~$7,764 million from December 31, ~~2016, driven by~~2022 primarily due to new debt ~~issuances~~issuances. We were opportunistic in accessing the debt market and issued $9,463 million of ~~$9,336 million, partially offset by maturities~~debt in the first quarter of ~~$6,259 million. Within total~~2023 to prudently plan for our debt ~~$29,390 million,~~maturity obligations through 2024. We continue to manage our debt levels while being acquisitive and without sacrificing investments in our business or ~~approximately 64 percent, is in support of the Global Financing business. This includes IBM Credit LLC’s first public debt issuance of $3,000 million in September 2017.~~ our secure and modestly growing dividend policy.

In the first ~~nine~~three months of ~~2017, the company~~2023, we generated ~~$10,991~~$3,774 million in cash from operations. The company has consistently generated strong cash flow from operations and continues to have access to additional sources of liquidity through the capital markets and its Credit Facilities.

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

~~Global Financing Financial Position Key Metrics:~~

At September 30,

At December 31,

(Dollars in millions)

2017

2016

Cash and cash equivalents

$
1,919

$
1,844

Net investment in sales-type and direct financing leases

6,700

6,893

Equipment under operating leases — external clients (1)

504

548

Client loans

11,269

11,478

Total client financing assets

18,473

18,920

Commercial financing receivables

8,561

9,700

Intercompany financing receivables (2) (3)

4,897

4,959

Total assets

$
36,498

$
36,492

Debt

$
29,390

$
27,859

Total equity

$
3,278

$
3,812

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

~~(2)Entire amount eliminated for purposes of IBM’s consolidated results and therefore does not appear on pages 5 and 6.~~

~~(3)These assets, along with all other financing assets in this table, are leveraged at the value in the table using Global Financing debt.~~

At September 30, 2017, substantially all client and commercial financing assets were IT related assets, and approximately 52 percent of the total external portfolio was with investment grade clients with no direct exposure to consumers. The increase in investment grade year to year (2 points) was driven primarily by rating changes within the existing portfolio, not by changing the company’s approach to the market. This investment grade percentage is based on the credit ratings of the companies in the portfolio. Additionally, the company takes actions to transfer exposure to third parties. On that basis, the investment grade content would increase by 15 points to 67 percent,operating activities, an increase of ~~2 points year~~$525 million compared to the first three months of 2022. Our free cash flow at March 31, 2023 was $1,340 million, an increase of $100 million versus the prior year. See pages 62 and 63 for additional information on free cash flow. Our solid cash generation supports investment and deployment of capital to areas with the most attractive long-term opportunities. We completed three acquisitions and returned $1,497 million to shareholders through dividends in the first quarter of 2023.

Our pension plans were well funded at the end of 2022, with worldwide qualified plans funded at 114 percent. Overall pension funded status as of the end of March 2023 was fairly consistent with year-end 2022, and we currently have no change to expected plan contributions in 2023.

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

~~Management Discussion — (continued)~~

IBM Working Capital


	At March 31,		At December 31,
(Dollars in millions)	2023		2022
Current assets	$	35,982	$	29,118
Current liabilities		30,993		31,505
Working capital	$	4,989	$	(2,387)
Current ratio		1.16:1		0.92:1

At September 30,

At December 31,

(Dollars in millions)

2017

2016

Current assets

$
44,742

$
43,888

Current liabilities

31,697

36,275

Working capital

$
13,045

$
7,613

Current ratio

1.41:1

1.21:1

Working capital increased ~~$5,432~~$7,376 million from the year-end ~~2016~~2022 position. ~~The key changes are described below:~~

Current assets increased ~~$854~~$6,864 million ~~(decreased $1,534~~($6,730 million adjusted for currency) ~~due to:~~

· ~~An increase~~primarily in cash and cash equivalents, ~~of $3,089 million ($2,214 million adjusted for currency);~~and marketable securities mainly driven by new debt issuances; partially offset by

· ~~A decline~~ a decrease in receivables mainly from collections of ~~$2,118~~seasonally higher year-end balances. Current liabilities decreased $512 million ($~~3,365~~670 million adjusted for currency) primarily ~~as a result~~in compensation

Table of ~~collections of higher year-end balances.~~Contents

Management Discussion – (continued)

~~Current liabilities decreased $4,578 million ($6,173 million adjusted for currency) as a result of:~~

· ~~A decrease in short-term debt of $3,214 million ($3,230 million adjusted for currency) primarily as a result of maturities of $6,258 million; partially offset~~and benefits driven by ~~reclassifications of $3,670 million from long-term debt~~payments related to ~~reflect upcoming maturities~~prior year performance-based compensation, and a decrease in ~~commercial paper of $899 million; and~~taxes payable; partially offset by an increase in deferred income mainly driven by annual customer billings.

· ~~A decrease in accounts payable of $767 million ($969 million adjusted for currency) reflecting declines from typically higher year-end balances.~~

Receivables and Allowances

Roll Forward of Total IBM Receivables Allowance for Credit Losses

(Dollars in millions)

January 1, 2017

Additions *

Write-offs **

Other***

September 30, 2017

$
776

$
37

$
(157
)
$
33

$
689


(Dollars in millions)
January 1, 2023		Additions / (Releases) *		Write-offs **		Foreign currency and other+		March 31, 2023
$	495	$	4	$	(8)	$	26	$	516

* ~~Additions~~ Additions/(Releases) for ~~Allowance~~allowance for ~~Credit Losses~~credit losses are ~~charged to~~recorded in expense.

**Refer to note A, “Significant Accounting Policies,” in ~~the company’s 2016~~our 2022 Annual Report ~~on pages 98 and 99~~ for additional information regarding allowance for credit loss write-offs.

~~***~~ ~~Primarily represents translation adjustments.~~+ Other includes additions/(releases) related to discontinued operations.

~~The~~Excluding receivables classified as held for sale, the total IBM receivables provision coverage was ~~1.9~~2.8 percent at ~~September 30, 2017, a decrease~~March 31, 2023, an increase of 1040 basis points compared to December 31, ~~2016.~~2022. The increase in coverage was primarily driven by the overall decrease in total receivables and, to a lesser extent, an increase in specific reserves. The majority of the write-offs during the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2023 related to ~~Global Financing~~ receivables which had been previously reserved.

~~Global~~ Financing Segment Receivables and Allowances

The following table presents external ~~financing~~Financing segment receivables excluding ~~residual values,~~receivables classified as held for sale, and ~~the allowance for credit losses.~~immaterial miscellaneous receivables.


	At March 31,			At December 31,
(Dollars in millions)	2023			2022
Amortized cost *	$	11,301		$	12,843
Specific allowance for credit losses		126			127
Unallocated allowance for credit losses		38			46
Total allowance for credit losses		164			173
Net financing receivables	$	11,137		$	12,670
Allowance for credit losses coverage		1.5	%		1.3	%

~~Management Discussion — (continued)~~* Includes deferred initial direct costs which are expensed in IBM’s consolidated financial results.

At September 30,

At December 31,

(Dollars in millions)

2017

2016

Gross financing receivables

$
26,405

$
28,043

Specific allowance for credit losses

258

335

Unallocated allowance for credit losses

96

103

Total allowance for credit losses

354

438

Net financing receivables

$
26,051

$
27,605

Allowance for credit losses coverage

1.3
%
1.6
%

The percentage of ~~Global~~ Financing segment receivables reserved ~~decreased~~increased from ~~1.6~~1.3 percent at December 31, ~~2016,~~2022, to ~~1.3~~1.5 percent at ~~September 30, 2017. The decline was~~March 31, 2023, primarily driven by the ~~2017 write-offs of $119 million of receivables previously reserved, partially offset by the overall~~ decline in gross receivables. Specific reserves decreased 23 percent from $335 million at December 31, 2016, to $258 million at September 30, 2017. Unallocated reserves decreased 7 percent from $103 million at December 31, 2016, to $96 million at September 30, 2017.

amortized cost.

Roll Forward of ~~Global~~ Financing Segment Receivables Allowance for Credit Losses

(Dollars in millions)

January 1, 2017

Additions *

Write-offs **

Other ***

September 30, 2017

$
438

$
14

$
(119
)
$
20

$
354

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

** ~~Refer to note A, “Significant Accounting Policies,”~~ (included in ~~the company’s 2016~~Total IBM)


(Dollars in millions)
January 1, 2023		Additions / (Releases)*		Write-offs **		Foreign currency and other		March 31, 2023
$	173	$	(13)	$	0	$	5	$	164

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

**	Refer to note A, “Significant Accounting Policies,” in our 2022 Annual Report ~~on pages 98 and 99~~ for additional information regarding allowance for credit loss write-offs.

Financing’s expected credit loss ~~write-offs.~~

~~***~~ ~~Primarily represents translation adjustments.~~

~~Global Financing’s bad debt~~ expense (including reserves for off-balance sheet commitments which are recorded in other liabilities) was a net release of $1$15 million for the three months ended ~~September 30, 2017,~~March 31, 2023, compared to a net release of $2$10 million for the same period in ~~2016~~. ~~Global Financing’s bad debt expense~~2022. The increase in net releases was ~~$14 million for the nine months ended September 30, 2017, compared to $75 million for the same period in 2016, due to higher~~primarily driven by lower unallocated and specific reserve requirements in ~~Brazil~~the current year in ~~the prior year.~~EMEA.

Table of Contents

Management Discussion – (continued)

Noncurrent Assets and Liabilities


	At March 31,		At December 31,
(Dollars in millions)	2023		2022
Noncurrent assets	$	97,654	$	98,125
Long-term debt	$	53,826	$	46,189
Noncurrent liabilities (excluding debt)	$	27,146	$	27,528

At September 30,

At December 31,

(Dollars in millions)

2017

2016

Noncurrent assets

$
76,894

$
73,582

Long-term debt

$
41,327

$
34,655

Noncurrent liabilities (excluding debt)

$
28,856

$
28,147

The ~~increase~~decrease in noncurrent assets of ~~$3,313~~$470 million ($~~1,153~~790 million adjusted for currency) was ~~driven by:~~primarily due to long-term financing receivables as a result of declines from seasonally higher year-end balances.

· ~~An increase of $2,065~~Long-term debt increased $7,636 million ~~in deferred taxes~~ ($~~1,731~~7,424 million adjusted for currency) primarily driven by ~~increases in the U.S. ($998 million) and the first-quarter 2017 intra-entity transfer, including the cumulative effect of adoption of the~~ new ~~FASB guidance ($827 million); and~~debt issuances, partially offset by reclassifications to short-term debt to reflect upcoming maturities.

· ~~An increase in retirement plans assets of $1,487~~Noncurrent liabilities (excluding debt) decreased $382 million ($~~1,262~~555 million adjusted for currency) primarily driven by ~~the expected returns on plan assets, partially offset by interest costs; partially offset by~~

· Aa decrease ~~of $562 million~~ in ~~long-term financing receivables ($888 million adjusted for currency) reflecting seasonal reductions from higher year-end balances.~~

~~Long-term debt increased $6,671 million ($5,662 million adjusted for currency) from the year-end balance primarily driven by:~~

· ~~Issuances of $9,124 million; partially offset by~~

· ~~Reclassification to short-term debt of $3,670 million to reflect upcoming maturities.~~deferred taxes and operating lease liabilities.

~~Management Discussion — (continued)~~Debt

~~The increase in noncurrent liabilities (excluding debt) of $708 million (a decrease of $944 million adjusted for currency) was driven by:~~

· An increase in retirement and nonpension postretirement liabilities of $483 million (decreased $598 million adjusted for currency) driven by currency impacts and higher interest and service costs; partially offset by contributions.

~~Debt~~

~~The company’s~~Our funding requirements are continually monitored ~~and~~as we execute our strategies ~~are executed~~ to manage the overall asset and liability profile. Additionally, ~~the company maintains~~we maintain sufficient flexibility to access global funding sources as needed.


	At March 31,		At December 31,
(Dollars in millions)	2023		2022
Total debt	$	58,712	$	50,949
Financing segment debt*	$	10,522	$	12,872
Non-Financing debt	$	48,191	$	38,077

* Refer to Financing’s “Financial Position” on page 65 for additional details.

At September 30,

At December 31,

(Dollars in millions)

2017

2016

Total company debt

$
45,625

$
42,169

Total Global Financing segment debt

$
29,390

$
27,859

Debt to support external clients

25,433

24,034

Debt to support internal clients

3,957

3,825

Non-Global Financing debt

$
16,235

$
14,309

Total debt of ~~$45,625~~$58,712 million increased ~~$3,457~~$7,764 million ($7,542 million adjusted for currency) from December 31, ~~2016.~~2022, primarily driven by proceeds from issuances of $9,407 million; partially offset by maturities of $2,016 million.

Non-Financing debt of $48,191 million increased $10,114 million ($9,930 million adjusted for currency) from December 31, 2022, primarily driven by our first quarter debt issuances to plan for debt maturities obligations through 2024.

~~Global~~ Financing segment debt of $10,522 million decreased $2,350 million ($2,388 million adjusted for currency) from December 31, 2022, primarily due to lower funding requirements associated with financing receivables.

Financing provides financing solutions predominantly for ~~the company’s~~IBM’s external client assets, ~~as well as for assets under contract by other IBM units. These assets, primarily for Technology Services & Cloud Platforms, generate long-term, stable revenue streams similar to~~and the Global Financing asset portfolio. Based on their attributes, these Technology Services & Cloud Platforms assets are leveraged with the balance of the Global Financing asset base. The increase in debt is consistent with the company’s expectations at year-end 2016 to increase leverage in the Global Financing business.

~~Non-Global Financing debt of $16,235 million was up $1,926 million from December 31, 2016 and down $116 million from September 30, 2016.~~

~~Consolidated debt-to-capitalization ratio at September 30, 2017 was 69.8 percent versus 69.6 percent at December 31, 2016 and 71.2 percent at September 30, 2016.~~

Given the significant leverage, the company also presents a debt-to-capitalization ratio which excludes Global Financing debt and equity as management believes this is more representative of the company’s core business operations. This ratio can vary from period to period as the company manages its global cash and debt positions. “Core” debt-to-capitalization ratio (excluding Global Financing debt and equity) was 49.6 percent at September 30, 2017 compared to 49.5 percent at December 31, 2016 and 54.6 percent at September 30, 2016.

~~Global Financing debt-to-equity ratio~~

At September 30,

At December 31,

2017

2016

Global Financing debt-to-equity ratio

9.0
x
7.3
x

~~The~~ debt used to fund ~~Global~~ Financing assets is primarily composed of intercompany ~~loans and external debt.~~loans. Total debt changes generally correspond with the level of client and commercial financing receivables, the level of cash and cash equivalents, the change in intercompany and external payables and the change in intercompany investment from IBM. The terms of the intercompany loans are set by the company to substantially match the term, currency and ~~currency~~interest rate variability underlying the financing ~~receivable and are based on arm’s-length pricing.~~receivable. The Financing debt-to-equity ratio remained at 9.0 to 1 at March 31, 2023.

~~Global Financing provides financing predominantly for the company’s external client assets, as well as for assets under contract by other IBM units. As previously stated, the company~~ ~~measures Global~~We measure 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~~“Financing Results of Operations” ~~on page 65~~ and in ~~“Segment Information” on pages 29 and 30.~~note 4, “Segments.”

Table of Contents

Management Discussion —– (continued)

In the company’s Consolidated Statement of Earnings, 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 by $1,365~~decreased $349 million from December 31, ~~2016 as a result~~2022, primarily driven by dividends paid of ~~an increase in retained earnings of $2,806~~$1,497 million, ~~an increase in retirement-related amounts of $1,446 million and an increase of $794 million related to currency translation,~~ partially offset by an increase ~~in treasury~~from net income of $927 million and common stock of ~~$3,762 million primarily due to common stock repurchases.~~$332 million.

Cash Flow

~~The company’s~~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.~~table below. These amounts also include the cash flows associated with the ~~Global~~ Financing business.


(Dollars in millions)
For the three months ended March 31:	2023		2022
Net cash provided by/(used in):
Operating activities	$	3,774	$	3,248
Investing activities		(7,960)		(1,358)
Financing activities		5,708		1,377
Effect of exchange rate changes on cash, cash equivalents and restricted cash		24		(5)
Net change in cash, cash equivalents and restricted cash	$	1,547	$	3,263

(Dollars in millions)

For the nine months ended September 30:

2017

2016

Net cash provided by/(used in) continuing operations:

Operating activities

$
10,991

$
13,105
* **
Investing activities

(3,278
)
(7,289
)*
Financing activities

(5,499
)
(4,619
)**
Effect of exchange rate changes on cash and cash equivalents

875

155

Net change in cash and cash equivalents

$
3,089

$
1,352

* Revised classification of certain financing receivables. Refer to note 1, “Basis of Presentation,” for additional information.

** Reclassified to reflect adoption of the FASB guidance on share-based compensation.

Net cash provided by operating activities ~~decreased by $2,114~~increased $525 million as compared to the first ~~nine~~three months of ~~2016 driven by the following factors:~~

· An2022. This was due to an increase ~~in net income tax payments of $1,211 million, driven by the prior year Japan tax refund received;~~

· ~~A decrease~~ in cash provided by financing receivables, ~~of $868 million;~~a decrease in workforce rebalancing payments, and

· ~~Performance-related declines within net income;~~ improvements in sales cycle working capital, partially offset by an increase in performance-based compensation payments given our strong results in 2022.

· ~~Working capital improvements of $1,009 million driven by strong cash collections.~~

Net cash used in investing activities ~~decreased $4,011~~increased $6,602 million ~~as compared to the first nine months~~mainly driven by net purchases of ~~2016 driven by:~~

· ~~A decrease in net cash used related to acquisitions of $5,002 million.~~

marketable securities and other investments.

Net cash ~~used in~~provided by financing activities increased ~~$880~~$4,331 million ~~as compared~~mainly due to ~~the first nine months of 2016 driven by:~~

· ~~An increase in common stock repurchases of $1,043 million; partially offset by~~

· Anan increase in net cash ~~sourced from~~provided by debt transactions of ~~$422~~$4,357 million primarily driven by a higher level of ~~issuances which exceeded higher maturities.~~net additions in the current year.

Results of Discontinued Operations

Loss from discontinued operations, net of tax, was $7 million in the first quarter of 2023 compared to income of $71 million in the prior-year period. The results for both periods reflect the net impact of changes in separation-related estimates and the settlement of assets and liabilities in accordance with the separation and distribution agreement. The prior-year income also reflects a gain on sale of a joint venture historically managed by Kyndryl, which transferred to Kyndryl in the first quarter of 2022, upon receiving regulatory approval.

Table of Contents

Management Discussion —– (continued)

Looking Forward

As technology remains a fundamental source of competitive advantage, we continue to see strong demand for our hybrid cloud and AI solutions. Clients continue to accelerate their digital transformations, modernize their applications, automate their workflows and create flexible and secure hybrid cloud environments. Technology is helping clients scale and enhance productivity which is especially important in the face of inflation, demographic shifts, cybersecurity, supply chain issues and sustainability goals. We are helping our clients seize new business opportunities, overcome today’s challenges and emerge stronger. We are building a stronger, more focused company that is closely aligned to the needs of our clients. We have continued to focus our portfolio in hybrid cloud and AI, invest in our offerings, technical talent and ecosystem and streamline our go-to-market model.

Hybrid Cloud and AI Strategy

We believe hybrid cloud and AI are the two most transformational enterprise technologies for business. These technologies work together to drive business outcomes and innovation. Hybrid cloud is the most prominent form of IT architecture and our approach is platform centric. Red Hat OpenShift is the leading container platform. It enables our clients to leverage the latest innovations in open-source software. Our software and infrastructure technologies have been tailored for this platform and our global team of consultants leverage their vast technical and business knowledge to accelerate clients’ digital transformation processes. We have been co-creating with clients to unlock business value from a hybrid cloud approach.

The ~~company’s strategies, investments~~second element of our strategy, AI is projected to add $16 trillion to the global economy by 2030. AI for business is different than AI for consumers given the need for accurate results, trusted data and ~~actions~~governance tools. Productivity gains will come from enterprises automating their business workflows. Foundational models, large language models and generative AI will also greatly enhance productivity. We are ~~all taken~~helping clients turn their workflows into simpler, automated processes with ~~an objective of optimizing long-term performance. A long-term perspective ensures~~AI and helping them deploy AI into business areas such as IT operations, customer care, cybersecurity and digital labor.

To bring our hybrid cloud and AI strategy to market, our partner ecosystem continues to play a critical role. We continue to expand and extend the work we do with partners to serve our joint clients through strategic collaboration agreements. We also continue to invest, both organically and inorganically, to deliver new innovation that matters for our clients and to shape the ~~company is well-positioned to take advantage~~technologies of the ~~major shifts~~future. To complement our innovations, we closed three acquisitions in ~~technology, business and~~ the ~~global economy.~~

~~Within the IT industry, there are major shifts occurring—driven by cognitive, including data and analytics,~~first quarter of 2023 to extend our capabilities in hybrid cloud and ~~changes~~AI. We also continue to engage in projects that have a positive impact on society. Many clients are leveraging our technology and expertise to advance their sustainability agendas.

We are digitally transforming IBM, much in the ~~ways individuals~~same way we are helping our clients with their transformations by reimagining and ~~enterprises~~transforming the way we work. This includes optimizing our infrastructure and application environments, as well as redesigning our end-to-end business processes. These productivity initiatives free up spending for reinvestments and contribute to margin expansion.

In the current environment, clients are ~~engaging. The company is bringing together its cognitive technologies~~prioritizing digital transformation projects that focus on ~~cloud platforms to create industry-based solutions~~cost reduction and productivity. While demand for our offerings that support these priorities remains solid, we saw some deceleration in ~~order to solve enterprise clients’ real problems. The company continues to address~~Consulting from the ~~higher value areas of enterprise IT and is amassing a unique set of capabilities and is differentiating itself from other technology providers as it moves into new spaces,~~previous robust growth levels, especially in the U.S.

We remain confident in our strategy and in ~~some cases, creating entirely new markets. IBM is more than a hardware, software~~the fundamentals of our business. Our balance sheet and ~~services company; it has emerged~~liquidity position remain strong. At March 31, 2023 we had $17.6 billion of cash and cash equivalents, restricted cash and marketable securities. We issued $9.5 billion of debt in the first quarter of 2023 to prudently plan for our debt maturity obligations through 2024 and we continued to manage our debt levels while being acquisitive and without sacrificing investments in our business or our secure and modestly growing dividend policy. We expect to continue our progress as a ~~cognitive solutions~~leading hybrid cloud and ~~cloud platform~~AI company ~~focused~~with a focus on ~~industry differentiation. The company’s strategic imperatives represent~~ revenue ~~from its cloud, analytics, mobile, social and security solutions, across its segments, and are a signpost of progress in addressing these market shifts.~~

In 2017, the company is continuing to embed cognitive and cloud across the business, to build new platforms and solutions and reinvent core capabilities. This is fueling the shift toward strategic imperatives revenue. Consistent with the long-term model, over the course of 2017, the company has continued to acquire and integrate key capabilities, remix skills, invest in areas of growth and ~~return value to shareholders. This is~~cash generation.

Table of Contents

Management Discussion – (continued)

Retirement-Related Plans

Our pension plans are well funded. Contributions for all taken into account in the full-year view. Overall, the company continues to expect GAAP earnings per share from continuing operations for 2017 to be at least $11.95. Excluding acquisition-related charges of $0.75 per share and non-operating retirement-related ~~items of $1.10 per share, operating (non-GAAP) earnings per share is expected to be at least $13.80.~~

Overall, looking forward to the fourth quarter of 2017, as a result of the typical large transactional base in the fourth quarter, there is a range of possible scenarios. In 2016, the company increased revenue by $2.5 billion from third to fourth quarter. In 2017, the company expects stronger sequential performance than the typical third to fourth quarter increase, with potentially $300 million to $400 million more revenue, depending on currency, due in part to the mainframe cycle. The company’s GAAP and operating (non-GAAP) gross margins have shown good progression in recent quarters, driven by mix and some moderation in the headwinds from investment. In the fourth quarter of 2017, the company expects GAAP and operating (non-GAAP) gross margins to be consistent with the sequential improvement the company has experienced the last few years of an approximate 2.5 to 3.5 point increase in gross margins from third to fourth quarter. In expense, the company expects to continue to drive efficiency in spending, however with the weaker U.S. dollar, currency hedgesplans are ~~expected to have an impact. The company continues to have a strong pipeline of IP income opportunities. At mid-October spot rates, the currency impact to revenue growth for the fourth-quarter 2017 is~~ expected to be approximately ~~a three-point tailwind,~~$2.1 billion in 2023, an increase of approximately $100 million compared to 2022, of which ~~would result in a neutral~~$0.2 billion generally relates to ~~a one-point tailwind~~legally required contributions to ~~full-year 2017.~~

~~Free cash flow realization,~~non-U.S. defined ~~as free cash flow to income from continuing operations (GAAP), was 96 percent over the last twelve months~~benefit and ~~is again expected to be in line with the longer-term model of over 90 percent in 2017. The company continues to~~multi-employer plans. We expect full year free cash flow to be relatively flat year to year, as the first half year-to-year headwind shifts to a tailwind driven by lower tax and workforce rebalancing payments in 2017. This also reflects the level of profit consistent with the company’s full year expectations of earnings per share.

The company’s tax rate reflects its mix of business, both country and product mix. The company continues to expect that the 2017 GAAP tax rate will be approximately 3 points lower than the operating (non-GAAP) tax rate expectation. Expectations for the operating (non-GAAP) tax rate are approximately 15 percent plus or minus three points, excluding discrete items. This range was widened in 2017 due to mix variables and tax reform discussions underway in the U.S, which could result in planning actions this year. The tax rates for the first nine months of 2017, excluding discrete items, were in line with the company’s January 2017 expectations. The company may have discrete tax items in the fourth quarter of 2017, however the amount and timing is unknown and any benefits may be mitigated by other actions. The rate will change year to year based on nonrecurring events, such as the settlement of income tax audits and changes in tax laws, as well as recurring factors including the geographic mix of income before taxes, the timing and amount of foreign dividend repatriation, state and local taxes and the effects of various global income tax strategies.

In January 2017, the company reorganized its client and commercial financing business as a wholly owned subsidiary, IBM Credit LLC. As announced, the financing business target leverage was increased from 7:1 to 9:1. The subsidiary began accessing the capital markets directly in September 2017, with its first public debt issuance. At September 30, 2017, this business continues to be leveraged at a debt-to-equity ratio of 9:1.

~~Management Discussion — (continued)~~

~~The company expects 2017~~2023 pre-tax retirement-related plan cost to be approximately ~~$2.9~~$1.2 billion, ~~an increase~~a decrease of approximately ~~$900 million~~$6.5 billion compared to ~~2016.~~2022. The decrease is primarily driven by a $5.9 billion settlement charge in the third quarter of 2022 resulting from the transfer of a portion of the U.S. Qualified PPP to insurance companies. This estimate reflects current pension plan assumptions at December 31, ~~2016.~~2022. Within total retirement-related plan cost, operating retirement-related plan cost is expected to be approximately ~~$1.4~~$1.2 billion, approximately flat versus ~~2016.~~2022. Non-operating retirement-related plan cost is expected to be approximately ~~$1.5~~$0.1 billion, ~~an increase~~a decrease of approximately ~~$900 million~~$6.5 billion compared to ~~2016,~~2022, primarily driven by the third-quarter 2022 settlement charge and lower ~~income from expected return on assets. Contributions for all retirement-related plans are expected to be approximately $2.4 billion in 2017, approximately flat compared to 2016.~~recognized actuarial losses, partially offset by higher interest cost.

Currency Rate Fluctuations

Changes in the relative values of non-U.S. currencies to the ~~U.S. dollar (USD)~~USD affect ~~the company’s~~our financial results and financial position. At ~~September 30, 2017,~~March 31, 2023, currency changes resulted in assets and liabilities denominated in local currencies being translated into more dollars than at year-end ~~2016. The company uses~~2022. We use financial hedging instruments to limit specific currency risks related to ~~financing transactions and other~~ foreign currency-based transactions.

Movements in currency, and the fact that we do not hedge 100 percent of our currency exposures, will result in a currency impact to our revenues, profit and cash flows throughout 2023. We execute a hedging program which defers, versus eliminates, the volatility of currency impacts on our financial results. During periods of sustained movements in currency, the marketplace and competition adjust to the changing rates. For example, when pricing offerings in the marketplace, the company may use some of the advantage from a weakening U.S. dollar to improve its position competitively, and price more aggressively to win the business, essentially passing on a portion of the currency advantage to its customers. Competition will frequently take the same action. Consequently, the company believes that some of the currency-based changes in cost impact the prices charged to clients. The company also maintains currency hedging programs for cash management purposes which temporarily mitigate, but do not eliminate, the volatility of currency impacts on the company’s financial results.rates over time.

~~The company translates~~We translate revenue, cost and expense in ~~its~~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 ~~the company utilizes~~we utilize to disclose this information does not incorporate any operational actions that management could take to mitigate fluctuating currency rates. ~~Currency movements impacted the company’s year-to-year revenue and earnings per share growth in the first nine months of 2017.~~ Based on the currency rate movements in the first ~~nine~~three months of ~~2017, total~~2023, revenue ~~decreased 2.7~~from continuing operations increased 0.4 percent as reported and ~~decreased 2.2~~4.4 percent at constant currency versus the first ~~nine~~three months of ~~2016. On an income from continuing operations before income tax basis, these~~2022. Currency translation ~~impacts offset~~and hedging impacted year-to-year pre-tax profit growth by ~~the net impact of hedging activities resulted in a theoretical maximum (assuming no pricing or sourcing actions) decrease of~~ approximately ~~$10~~$150 million and operating (non-GAAP) pre-tax profit growth by approximately $160 million in the first nine months of 2017 on an as-reported basis and a decrease of $20 million on an operating (non-GAAP) basis. The same mathematical exercise resulted in an increase of approximately $50 million in the first nine months of 2016 on an as-reported basis and an increase of $75 million on an operating (non-GAAP) basis. The company viewsquarter 2023. We view these amounts as a theoretical maximum impact to ~~its~~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 the company believes it could be substantially less than the theoretical maximum given the competitive pressure in the marketplace.~~

period.

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

Table of Contents

The company continues to monitor the economic conditions in Venezuela. In mid-February 2016, changes to the currency exchange systems were announced which eliminated the SICAD exchange rate and replaced the SIMADI rate with DICOM, which is expected to be a floating exchange rate. The company recorded a pre-tax loss of $43 million in the first quarter of 2016 in other (income) and expense in the Consolidated Statement of Earnings as a result of the elimination of the SICAD and devaluation in the new exchange. Total pre-tax loss for the first nine months of 2017 was $9 million compared to $46 million in the first nine months of 2016. The company’s net assets denominated in local currency were $8 million at September 30, 2017. The company’s operations in Venezuela comprised less than 1 percent of total 2016 and 2015 revenue, respectively.Management Discussion – (continued)

Liquidity and Capital Resources

In ~~the company’s 2016~~our 2022 Annual Report, on pages 6833 to ~~71,~~35, there is a discussion of ~~the company’s~~our liquidity including two tables that present ~~five~~three years of data. The table presented on page 6833 includes consolidated net cash from operating activities, cash and cash equivalents, restricted cash and short-term marketable securities, and the size of ~~the company’s~~our global credit facilities for each of the past ~~five~~three years. For the ~~nine~~three months

~~Management Discussion — (continued)~~

ended, or ~~as of,~~at, as applicable, ~~September 30, 2017,~~March 31, 2023, those amounts are ~~$11.0~~$3.8 billion ~~for~~of net cash from operating activities, ~~$11.5~~$17.6 billion of cash and cash equivalents, restricted cash and short-term marketable securities and ~~$10.25~~$10.0 billion in global credit facilities, respectively. ~~On July 20, 2017, the company and IBM Credit entered into a $2.5 billion 364-day Credit Agreement and a $2.5 billion three-year Credit Agreement. These new agreements permit borrowings up~~ While we have no current plans to ~~an aggregate of $5 billion~~draw on ~~a revolving basis.~~these credit facilities, they are available as back-up liquidity.

The major rating agencies’ ratings on ~~the company’s~~our debt securities at ~~September 30, 2017~~March 31, 2023 appear in the following table ~~below. The Fitch ratings were reaffirmed on September 30, 2016~~ and remain unchanged from December 31, 2016. On May 3, 2017, Moody’s Investors Service lowered its rating on the company’s senior long-term debt from Aa3 to A1, while reaffirming its rating on commercial paper. On May 5, 2017, Standard and Poor’s lowered its ratings on the company’s senior long-term debt to A+ from AA- and commercial paper to A-1 from A-1+. 2022.


	STANDARD	MOODY’S
	AND	INVESTORS
IBM RATINGS:	POOR’S	SERVICE
Senior long-term debt	A-	A3
Commercial paper	A-2	Prime-2

IBM ~~remains a strong investment grade company with significant~~has ample financial flexibility, supported by our strong liquidity position and cash flows, to ~~execute its strategy and capital allocation plans. The company does~~operate at a single A credit rating. Debt levels have increased $7.8 billion from December 31, 2022 primarily driven by debt issuances. In the first quarter of 2023, we issued $9.5 billion of debt primarily to plan for our debt maturity obligations through 2024.

We do not have “ratings trigger” provisions in ~~its~~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. ~~The company’s~~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 ~~the company’s~~our credit rating were to fall below investment grade. At ~~September 30, 2017,~~March 31, 2023, the fair value of those instruments that were in a liability position was ~~$352~~$731 million, before any applicable netting, and this position is subject to fluctuations in fair value period to period based on the level of ~~the company’s~~our outstanding instruments and market conditions. ~~The company has~~We have no other contractual arrangements that, in the event of a change in credit rating, would result in a material adverse effect on ~~its~~our financial position or liquidity.

	~~STANDARD~~	~~MOODY’S~~
	~~AND~~	~~INVESTORS~~	~~FITCH~~
~~IBM and IBM Credit LLC ratings:~~	~~POOR’S~~	~~SERVICE~~	~~RATINGS~~
~~Senior long-term debt~~	A+	A1	A+
~~Commercial paper~~	~~A-1~~	~~Prime-1~~	F1

Effective December 31, 2021, the use of LIBOR was substantially eliminated for purposes of any new financial contract executions. The ~~company prepares its~~UK’s Financial Conduct Authority (FCA) extended the phase out of LIBOR in the case of U.S. dollar settings for certain tenors until the end of June 2023. Any legacy USD LIBOR based financial contracts are expected to be addressed using the LIBOR rates published through the June 2023 extension period. The replacement of the LIBOR benchmark within the company’s risk management activities did not 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 ~~highlights~~highlight causes and events underlying sources and uses of cash in that format on page ~~79.~~59. For the purpose of running its business, ~~the company~~IBM manages, monitors and analyzes cash flows in a different manner.

Management uses free cash flow as a measure to evaluate its operating results, plan ~~share repurchase~~shareholder return levels, ~~make~~ 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. ~~The company defines~~We define free cash flow as net cash from operating activities less the change in ~~Global~~ Financing receivables and net capital expenditures, including the investment in software. A key objective of the ~~Global~~ Financing business is to generate strong returns on equity, and ~~increasing~~our Financing receivables isare the basis for that 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. F~~ree cash flow guidance is derived using an estimate~~

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

Management Discussion —– (continued)

The following is management’s view of cash flows for the first ~~nine~~three months of ~~2017~~2023 and ~~2016~~2022 prepared in a manner

consistent with the description above.

(Dollars in millions)

For the nine months ended September 30:

2017

2016

Net cash from operating activities per GAAP

$
10,991

$
13,105
* **
Less: change in Global Financing receivables

2,468

3,336
*
Net cash from operating activities, excluding Global Financing receivables

8,523

9,769
**
Capital expenditures, net

(2,347
)
(2,801
)
Free cash flow (FCF)

6,176

6,969
**
Acquisitions

(442
)
(5,445
)
Divestitures

35

35

Share repurchase

(3,674
)
(2,632
)
Common stock repurchases for tax withholdings

(153
)
(115
)**
Dividends

(4,119
)
(3,927
)
Non-Global Financing debt

1,896

3,365

Other (includes Global Financing receivables and Global Financing debt)

3,270

3,523

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

$
2,988

$
1,773


(Dollars in millions)
For the three months ended March 31:	2023		2022
Net cash from operating activities per GAAP	$	3,774	$	3,248
Less: change in Financing receivables		1,977		1,631
Net cash from operating activities, excluding Financing receivables	$	1,797	$	1,618
Capital expenditures, net		(457)		(378)
Free cash flow	$	1,340	$	1,240
Acquisitions		(22)		(698)
Divestitures		—		61
Dividends		(1,497)		(1,475)
Non-Financing debt		9,692		4,675
Other (includes Financing receivables and Financing debt)		(762)		(590)	*
Change in cash, cash equivalents, restricted cash and short-term marketable securities	$	8,752	$	3,213

* ~~Revised classification of certain financing receivables.~~Recast to conform to current-year presentation.

** Reclassified to reflect adoption of the FASB guidance on share-based compensation.

In the first ~~nine~~three months of ~~2017, the company~~2023, we generated free cash flow of ~~$6.2~~$1.3 billion, ~~a decrease~~an increase of ~~$0.8~~$0.1 billion versus the ~~prior year.~~prior-year period. The ~~year-to-year decrease~~increase was driven ~~primarily~~ by ~~a cash tax refund related to the Japan tax matter in the prior year. In addition,~~lower payments for structural actions, working capital ~~contributed to the free cash flow~~efficiencies and our profit performance, partially offset by higher performance-based compensation payments given our strong results in ~~the first nine months of 2017. Net~~2022 and an increase in capital ~~expenditures of $2.3 billion included investments to expand the company’s cloud and cognitive capabilities.~~expenditures. In the first ~~nine months~~quarter of ~~2017, the company~~2023, we also continued to ~~focus its cash utilization on returning~~return value to shareholders ~~including $4.1~~with $1.5 billion in ~~dividends and $3.7 billion in gross common stock repurchases.~~

dividends.

Events that could temporarily change the historical cash flow dynamics discussed previously and in ~~the company’s 2016~~our 2022 Annual Report include significant changes in operating results, material changes in geographic sources of cash, unexpected adverse impacts from litigation, future pension funding requirements, ~~during~~ 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 ~~12,~~14, “Contingencies,” in this Form 10-Q. With respect to pension funding, ~~the company expects~~we expect to make legally mandated pension plan contributions to certain non-U.S. defined benefit plans of approximately ~~$400~~$200 million in ~~2017.~~2023. Contributions related to all retirement-related plans are expected to be approximately ~~$2.4~~$2.1 billion in ~~2017.~~2023. 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. ~~The company is~~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 2023, we are not legally required to make any contributions to the U.S. defined benefit pension plans.

~~The company’s U.S.~~Our cash flows ~~continue to be~~are sufficient to fund ~~its~~our current ~~domestic~~ operations and obligations, including investing and financing activities such as dividends and debt service. ~~The company’s U.S. operations generate substantial cash flows, and, in those circumstances where the company has~~When additional ~~cash~~ requirements ~~in the U.S., the company has~~arise, we have several liquidity options available. These options may include the ability to borrow additional funds at reasonable interest rates ~~utilizing its Credit Facilities, repatriating certain foreign earnings~~ and utilizing ~~intercompany loans with certain foreign subsidiaries.~~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 secure and modestly growing dividend policy.

Table of Contents

Management Discussion – (continued)

Financing

~~The~~Financing is a reportable segment that is measured as a stand-alone entity. Financing facilitates IBM clients' acquisition of IBM information technology systems, software and services by providing financing solutions in the areas where the company ~~does earn a significant amount~~has the expertise, while generating solid returns on equity.

Results of ~~its~~Operations



					Yr. to Yr.
(Dollars in millions)					Percent
For the three months ended March 31:	2023		2022		Change
Revenue	$	196	$	154	27.3	%
Pre-tax income	$	100	$	84	19.6	%

For the three months ended March 31, 2023, financing revenue increased 27.3 percent (31 percent adjusted for currency) to $196 million compared to the prior year, driven by an increase in Client Financing asset yields.

Financing pre-tax income ~~outside the U.S. The company’s policy is~~increased 19.6 percent to indefinitely reinvest the undistributed earnings of its foreign subsidiaries, and accordingly, no provision for federal income taxes has been made on accumulated earnings of foreign subsidiaries. The company periodically repatriates a portion of these earnings$100 million compared to the ~~extent~~prior year and the pre-tax margin of 51.3 percent decreased 3.3 points year to year. The increase in pre-tax income was driven by an improvement in expense, partially offset by a lower gross profit. The improvement in expense was primarily driven by settlements on non-accrual assets, lower foreign exchange net losses and a decrease in selling, general and administrative expenses. The lower gross profit was driven by an increase in intercompany interest cost.

Table of Contents

Management Discussion – (continued)

Financial Position


	At March 31,		At December 31,
(Dollars in millions)	2023		2022
Cash and cash equivalents	$	564	$	699
Client financing receivables:
Net investment in sales-type and direct financing leases⁽¹⁾		3,846		4,047
Client loans		7,047		8,329
Total client financing receivables	$	10,893	$	12,376
Commercial financing receivables:
Held for investment		244		293
Held for sale		605		939
Other receivables		38		66
Total external receivables⁽²⁾	$	11,779	$	13,674
Intercompany assets⁽³⁾		325		988	⁽⁴⁾
Other assets		361		395	⁽⁴⁾
Total assets	$	13,029	$	15,757

Intercompany payables⁽³⁾	$	424	$	637
Debt⁽⁵⁾		10,522		12,872
Other liabilities		915		814
Total liabilities	$	11,861	$	14,323
Total equity	$	1,168	$	1,433
Total liabilities and equity	$	13,029	$	15,757

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

(2)

The difference between the decrease in total external receivables of $1.9 billion (from $13.7 billion in December 2022 to $11.8 billion in March 2023) and the $2.0 billion change in Financing segment’s receivables disclosed in the free cash flow presentation on page 63 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)	Prior period amounts have been recast to conform to 2023 presentation.

(5)	Financing segment debt is primarily composed of intercompany loans.

Total external receivables decreased $1,895 million primarily due to collections of higher year-end balances. Intercompany assets decreased $663 million primarily driven by intercompany financing receivables at December 31, 2022 that ~~it does not incur an additional U.S. tax liability. Quantification~~settled in the first quarter of 2023. These declines had corresponding reductions in debt funding.

We continue to apply our rigorous credit policies. Approximately 73 percent of the ~~deferred tax liability, if any, associated~~total external portfolio was with ~~indefinitely reinvested earnings~~investment-grade clients with no direct exposure to consumers at both March 31, 2023 and December 31, 2022; a year-to-year increase of 4 points as compared to March 31, 2022. This investment grade percentage is ~~not practicable. While~~based on the ~~company currently does not~~credit ratings of the companies in the portfolio and reflects certain mitigating actions taken to reduce the risk to IBM.

We have a ~~need~~long-standing practice of taking mitigation actions, in certain circumstances, to ~~repatriate funds held by its foreign subsidiaries, if these funds~~transfer credit risk to third parties. 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 ~~needed for operations and obligations~~also utilized in the ~~U.S., the company could elect~~normal course of business as part of our cash and liquidity management. For additional information relating to ~~repatriate these funds which could result in a reassessment~~financing receivables refer to note 9, “Financing Receivables.” Refer to pages 57 through 58 for additional information related to Financing segment receivables, allowance for credit losses and debt.

Table of ~~the company’s policy and increased tax expense.~~Contents

Management Discussion —– (continued)

~~Global Financing~~ Return on Equity Calculation

Three Months Ended

Nine Months Ended

September 30,

September 30,

(Dollars in millions)

2017

2016

2017

2016

Numerator

Global Financing after-tax income*

$
194

$
244

$
621

$
829

Annualized after-tax income (a)

$
776

$
977

$
828

$
1,106

Denominator

Average Global Financing equity (b)**

$
3,255

$
3,595

$
3,372

$
3,647

Global Financing return on equity (a)/(b)

23.8
%
27.2
%
24.6
%
30.3
%


(Dollars in millions)
For the three months ended March 31:	2023			2022
Numerator
Financing after-tax income*	$	82		$	69
Annualized after-tax income (1)	$	329		$	275
Denominator
Average Financing equity (2)**	$	1,301		$	1,450
Financing return on equity (1)/(2)		25.3	%		19.0	%

* 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 Financing for the last two quarters.

** Average of the endingReturn on equity ~~for Global Financing for the last 2 quarters and 3 quarters,~~was 25.3 percent compared to 19.0 percent for the three months ended ~~September 30,~~March 31, 2023 and 2022, respectively. The increase was primarily driven by an increase in net income, and a lower average equity balance.

Residual Value

The estimated residual value represents the estimated fair value of the equipment under lease at the end of the lease. The company estimates the future fair value of leased equipment by using historical models, analyzing the current market for new and used equipment and obtaining forward-looking product information such as marketing plans and technology innovations.

The company optimizes the ~~nine months ended September 30, respectively.~~recovery of residual values by extending lease arrangements with, or selling leased equipment to existing clients and periodically reassesses the realizable value of its lease residual values.

The following table presents the recorded amount of unguaranteed residual value for sales-type and direct financing leases at March 31, 2023 and December 31, 2022. In addition, the table presents the run out of when the unguaranteed residual value assigned to equipment on leases at March 31, 2023 is expected to be returned to the company. The unguaranteed residual value for operating leases at March 31, 2023 and December 31, 2022 was not material.

Unguaranteed Residual Value


	At		At		Estimated Run Out of March 31, 2023 Balance
	December 31,		March 31,								2026 and
(Dollars in millions)	2022		2023		2023		2024		2025		Beyond
Sales-type and direct financing leases	$	422	$	400	$	46	$	60	$	141	$	153

Table of Contents

Management Discussion —– (continued)

GAAP Reconciliation

The tables below provide a reconciliation of ~~the company’s~~our income statement results as reported under GAAP to ~~its~~our operating earnings presentation which is a non-GAAP measure. ~~The company’s~~Management’s calculation of operating (non-GAAP) earnings, as presented, may differ from similarly titled measures reported by other companies. ~~Refer~~Please refer to the ~~“Snapshot”~~“Operating (non-GAAP) Earnings” section ~~on page 51~~ for ~~the company’s~~management’s rationale for presenting operating earnings information.


				Acquisition-			Retirement-			U.S.			Kyndryl-
(Dollars in millions except per share amounts)				Related			Related			Tax Reform			Related			Operating
For the three months ended March 31, 2023:	GAAP			Adjustments			Adjustments			Impacts			Impacts			(non-GAAP)
Gross profit	$	7,509		$	148		$	—		$	—		$	—		$	7,658
Gross profit margin		52.7	%		1.0	pts.		—	pts.		—	pts.		—	pts.		53.7	%
SG&A	$	4,853		$	(246)		$	—		$	—		$	—		$	4,607
Other (income) and expense	$	(245)		$	(2)		$	5		$	—		$	—		$	(242)
Total expense and other (income)	$	6,451		$	(247)		$	5		$	—		$	—		$	6,209
Pre-tax income from continuing operations	$	1,058		$	396		$	(5)		$	—		$	—		$	1,449
Pre-tax margin from continuing operations		7.4	%		2.8	pts.		0.0	pts.		—	pts.		—	pts.		10.2	%
Provision for income taxes*	$	124		$	91		$	(10)		$	(5)		$	—		$	200
Effective tax rate		11.7	%		3.1	pts.		(0.7)	pts.		(0.3)	pts.		—	pts.		13.8	%
Income from continuing operations	$	934		$	305		$	5		$	5		$	—		$	1,249
Income margin from continuing operations		6.6	%		2.1	pts.		0.0	pts.		0.0	pts.		—	pts.		8.8	%
Diluted earnings per share from continuing operations	$	1.02		$	0.33		$	0.01		$	0.01		$	—		$	1.36

(Dollars in millions except per share amounts)

Acquisition-related

Retirement-related

Operating

For the three months ended September 30, 2017

GAAP

adjustments

adjustments

(Non-GAAP)

Gross profit

$
8,800

$
114

$
203

$
9,116

Gross profit margin

45.9
%
0.6
pts.
1.1
pts.
47.6
%
S,G&A

$
4,648

$
(125
)
$
(53
)
$
4,470

R,D&E

1,342

—

(51
)
1,291

Other (income) and expense

(114
)
—

—

(114
)
Total expense and other (income)

5,735

(125
)
(103
)
5,507

Pre-tax income from continuing operations

3,065

238

306

3,609

Pre-tax margin from continuing operations

16.0
%
1.2
pts.
1.6
pts.
18.8
%
Provision for income taxes*

$
339

$
79

$
113

$
531

Effective tax rate

11.0
%
1.5
pts.
2.2
pts.
14.7
%
Income from continuing operations

$
2,726

$
159

$
193

$
3,079

Income margin from continuing operations

14.2
%
0.8
pts.
1.0
pts.
16.1
%
Diluted earnings per share from

continuing operations

$
2.92

$
0.17

$
0.21

$
3.30


				Acquisition-			Retirement-			U.S.			Kyndryl-
(Dollars in millions except per share amounts)				Related			Related			Tax Reform			Related			Operating
For the three months ended March 31, 2022:	GAAP			Adjustments			Adjustments			Impacts			Impacts			(non-GAAP)
Gross profit	$	7,335		$	181		$	—		$	—		$	—		$	7,516
Gross profit margin		51.7	%		1.3	pts.		—	pts.		—	pts.		—	pts.		52.9	%
SG&A	$	4,597		$	(286)		$	—		$	—		$	0		$	4,311
Other (income) and expense	$	246		$	(1)		$	(202)		$	—		$	(222)		$	(179)
Total expense and other (income)	$	6,712		$	(287)		$	(202)		$	—		$	(222)		$	6,001
Pre-tax income from continuing operations	$	623		$	468		$	202		$	—		$	222		$	1,515
Pre-tax margin from continuing operations		4.4	%		3.3	pts.		1.4	pts.		—	pts.		1.6	pts.		10.7	%
Provision for/(benefit from) income taxes*	$	(39)		$	109		$	58		$	116		$	—		$	244
Effective tax rate		(6.3)	%		9.1	pts.		4.6	pts.		7.7	pts.		0.9	pts.		16.1	%
Income from continuing operations	$	662		$	359		$	144		$	(116)		$	222		$	1,271
Income margin from continuing operations		4.7	%		2.5	pts.		1.0	pts.		(0.8)	pts.		1.6	pts.		9.0	%
Diluted earnings per share from continuing operations	$	0.73		$	0.39		$	0.16		$	(0.13)		$	0.24		$	1.40

* 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.

(Dollars in millions except per share amounts)

Acquisition-related

Retirement-related

Operating

For the three months ended September 30, 2016

GAAP

adjustments

adjustments

(Non-GAAP)

Gross profit

$
9,013

$
129

$
79

$
9,221

Gross profit margin

46.9
%
0.7
pts.
0.4
pts.
48.0
%
S,G&A

$
4,732

$
(138
)
$
(53
)
$
4,541

R,D&E

1,397

—

(7
)
1,390

Other (income) and expense

(8
)
(2
)
—

(10
)
Total expense and other (income)

5,751

(140
)
(60
)
5,550

Pre-tax income from continuing operations

3,263

269

139

3,671

Pre-tax margin from continuing operations

17.0
%
1.4
pts.
0.7
pts.
19.1
%
Provision for income taxes*

$
409

$
73

$
40

$
521

Effective tax rate

12.5
%
1.1
pts.
0.6
pts.
14.2
%
Income from continuing operations

$
2,854

$
197

$
99

$
3,149

Income margin from continuing operations

14.8
%
1.0
pts.
0.5
pts.
16.4
%
Diluted earnings per share from

continuing operations

$
2.98

$
0.21

$
0.10

$
3.29

Management Discussion – (continued)

~~Management Discussion — (continued)~~

(Dollars in millions except per share amounts)

Acquisition-related

Retirement-related

Operating

For the nine months ended September 30, 2017

GAAP

adjustments

adjustments

(Non-GAAP)

Gross profit

$
25,365

$
349

$
591

$
26,305

Gross profit margin

44.8
%
0.6
pts.
1.0
pts.
46.5
%
S,G&A

$
14,959

$
(393
)
$
(326
)
$
14,240

R,D&E

4,360

—

(148
)
4,212

Other (income) and expense

(218
)
(7
)
—

(225
)
Total expense and other (income)

18,434

(401
)
(474
)
17,559

Pre-tax income from continuing operations

6,931

750

1,065

8,746

Pre-tax margin from continuing operations

12.2
%
1.3
pts.
1.9
pts.
15.5
%
Provision for income taxes*

$
120

$
212

$
288

$
621

Effective tax rate

1.7
%
2.3
pts.
3.1
pts.
7.1
%
Income from continuing operations

$
6,811

$
537

$
777

$
8,125

Income margin from continuing operations

12.0
%
0.9
pts.
1.4
pts.
14.4
%
Diluted earnings per share from

continuing operations

$
7.24

$
0.57

$
0.83

$
8.64

(Dollars in millions except per share amounts)

Acquisition-related

Retirement-related

Operating

For the nine months ended September 30, 2016

GAAP

adjustments

adjustments

(Non-GAAP)

Gross profit

$
27,401

$
371

$
238

$
28,010

Gross profit margin

47.1
%
0.6
pts.
0.4
pts.
48.2
%
S,G&A

$
16,093

$
(365
)
$
(183
)
$
15,545

R,D&E

4,320

—

(23
)
4,297

Other (income) and expense

281

(7
)
—

274

Total expense and other (income)

20,056

(372
)
(206
)
19,478

Pre-tax income from continuing operations

7,345

743

444

8,532

Pre-tax margin from continuing operations

12.6
%
1.3
pts.
0.8
pts.
14.7
%
Provision for/(benefit from) income taxes*

$
(31
)
$
201

$
106

$
277

Effective tax rate

(0.4
)%
2.4
pts.
1.3
pts.
3.2
%
Income from continuing operations

$
7,375

$
542

$
338

$
8,255

Income margin from continuing operations

12.7
%
0.9
pts.
0.6
pts.
14.2
%
Diluted earnings per share from

continuing operations

$
7.67

$
0.57

$
0.35

$
8.59

~~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 ~~the~~ economic environment and client spending budgets; ~~the company’s failure to meet growth and productivity objectives;~~ a failure of the company’s innovation initiatives; damage to the company’s reputation; risks from investing in growth opportunities; failure of the company’s intellectual property portfolio to prevent competitive offerings and the failure of the company to obtain necessary licenses; ~~cybersecurity~~the company’s ability to successfully manage acquisitions, alliances and ~~data privacy considerations;~~dispositions, including integration challenges, failure to achieve objectives, the assumption of liabilities, and higher debt levels; fluctuations in financial results; impact of local legal, economic, political, health and ~~health~~other conditions; ~~adverse effects from environmental matters, tax matters and~~ the company’s ~~pension plans;~~failure to meet growth and productivity objectives; ineffective internal controls; the company’s use of accounting estimates; impairment of the company’s goodwill or amortizable intangible assets; the company’s ability to attract and retain key ~~personnel~~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 related to climate change and environmental matters, tax matters; legal proceedings and investigatory risks; the company’s pension plans; currency fluctuations and customer financing risks; impact of changes in market liquidity conditions and customer credit risk on receivables; ~~reliance on third party distribution channels and ecosystems;~~potential failure of the ~~company’s ability~~separation of Kyndryl to ~~successfully manage acquisitions, alliances and dispositions; risks from legal proceedings;~~qualify for tax-free treatment; 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 ~~(SEC)~~ or in materials incorporated therein ~~or herein~~ by reference. ~~The~~Any forward-looking statement in this Form 10-Q speaks only as of the date on which it is made. Except as required by law, the company assumes no obligation to update or revise any forward-looking statements.

Item 4. Controls and Procedures

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

Table of Contents

Part II — Other Information

Item 1. Legal Proceedings

Refer to note ~~12,~~14, “Contingencies,” ~~on pages 44 to 46 of~~in this Form 10-Q.

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

The following table provides information relating to the company’s repurchase of common stock for the ~~third~~first quarter of ~~2017.~~2023.

Total Number

Approximate

of Shares

Dollar Value

Purchased as

of Shares that

Total Number

Average

Part of Publicly

May Yet Be

of Shares

Price Paid

Announced

Purchased Under

Period

Purchased

per Share

Program

The Program*

July 1, 2017 - July 31, 2017

1,403,534

$
149.09

1,403,534

$
2,191,734,677

August 1, 2017 - August 31, 2017

3,167,041

$
142.65

3,167,041

$
1,739,970,319

September 1, 2017 - September 30, 2017

1,982,071

$
144.56

1,982,071

$
1,453,447,857

Total

6,552,646

$
144.60

6,552,646


				Total Number	Approximate
				of Shares	Dollar Value
				Purchased as	of Shares that
	Total Number	Average		Part of Publicly	May Yet Be
	of Shares	Price Paid		Announced	Purchased Under
Period	Purchased	per Share		Program	The Program*
January 1, 2023 - January 31, 2023	—	$	—	—	$	2,007,611,768

February 1, 2023 - February 28, 2023	—	$	—	—	$	2,007,611,768

March 1, 2023 - March 31, 2023	—	$	—	—	$	2,007,611,768

Total	—	$	—	—

* On October ~~25, 2016,~~30, 2018, the Board of Directors authorized ~~$3.0~~$4.0 billion in funds for use in the company’s common stock repurchase program. The company stated that it would repurchase shares on the open market or in private transactions depending on market conditions. The common stock repurchase program does not have an expiration date. This table does not include shares tendered to satisfy the exercise price in connection with cashless exercises of employee stock options or shares tendered to satisfy tax withholding obligations in connection with employee equity awards.

The company suspended its share repurchase program at the time of the Red Hat closing. At March 31, 2023 there was approximately $2.0 billion in authorized funds remaining for purchases under this program.

Table of Contents

Item 6. Exhibits

~~Exhibit Number~~


Exhibit Number
~~4.1~~		Indenture dated as of October 1, 1993 between IBM and The Bank of New York Mellon, (as successor to The Chase Manhattan Bank (National Association)) as Trustee. *

~~4.2~~		First Supplemental Indenture to Indenture dated as of October 1, 1993 between IBM and The Bank of New York Mellon, (as successor to The Chase Manhattan Bank (National Association)) as Trustee, dated as of December 15, 1995. *

11		~~Statement re: computation of per share earnings.~~

		~~The statement re computation of per share earnings is note [14], “Earnings Per Share of Common Stock,” in this Form 10-Q.~~

12		~~Statement re: computation of ratios.~~

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

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

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

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

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

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

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

* ~~Refiled by the company in electronic format in accordance with SEC Release Nos. 33-10322 and 34-80132 relating to exhibit hyperlinks, which became effective September 1, 2017.~~Table of Contents

SIGNATURE

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


		International Business Machines Corporation
		(Registrant)


Date:	~~October 31, 2017~~April 25, 2023
		By:	/s/ ~~Robert F. Del Bene~~Nicolás A. Fehring
			~~Robert F. Del Bene~~Nicolás A. Fehring
			Vice President and Controller

	At September 30,		At December 31,
(Dollars in millions)	2017		2016
Assets:
Current assets:
Cash and cash equivalents	$	10,915	$	7,826
Marketable securities	600		701
Notes and accounts receivable - trade (net of allowances of $296 in 2017 and $290 in 2016)	8,150		9,182
Short-term financing receivables (net of allowances of $270 in 2017 and $337 in 2016)	18,050		19,006
Other accounts receivable (net of allowances of $39 in 2017 and $48 in 2016)	926		1,057
Inventories, at lower of average cost or market:
Finished goods	430		358
Work in process and raw materials	1,281		1,195
Total inventories	1,711		1,553
Prepaid expenses and other current assets	4,389		4,564
Total current assets	44,742		43,888
Property, plant and equipment	31,937		30,133
Less: Accumulated depreciation	20,880		19,303
Property, plant and equipment — net	11,057		10,830
Long-term financing receivables (net of allowances of $84 in 2017 and $101 in 2016)	8,459		9,021
Prepaid pension assets	4,521		3,034
Deferred taxes	7,289		5,224
Goodwill	36,782		36,199
Intangible assets — net	3,981		4,688
Investments and sundry assets	4,806		4,585
Total assets	$	121,636	$	117,470

(Dollars in millions)
At September 30, 2017	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents (1)
Time deposits and certificates of deposit	$	—	$	5,553	$	—	$	5,553
Money market funds	1,375		—		—		1,375
U.S. government securities	—		200		—		200
Canadian government securities	—		460		—		460
Total	1,375		6,214		—		7,589		(6)
Debt securities - current (2)	—		599		—		599		(6)
Debt securities - noncurrent (3)	4		7		—		11
Available-for-sale equity investments (3)	5		—		—		5
Derivative assets (4)
Interest rate contracts	—		517		—		517
Foreign exchange contracts	—		416		—		416
Equity contracts	—		23		—		23
Total	—		957		—		957		(7)
Total assets	$	1,384	$	7,775	$	—	$	9,159	(7)
Liabilities:
Derivative liabilities (5)
Foreign exchange contracts	$	—	$	333	$	—	$	333
Equity contracts	—		4		—		4
Interest rate contracts	—		15		—		15
Total liabilities	$	—	$	352	$	—	$	352	(7)

(Dollars in millions)
At December 31, 2016	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents (1)
Time deposits and certificates of deposit	$	—	$	3,629	$	—	$	3,629
Money market funds	1,204		—		—		1,204
Total	1,204		3,629		—		4,832		(6)
Debt securities - current (2)	—		699		—		699		(6)
Debt securities - noncurrent (3)	1		6		—		8
Available-for-sale equity investments (3)	7		—		—		7
Derivative assets (4)
Interest rate contracts	—		555		—		555
Foreign exchange contracts	—		560		—		560
Equity contracts	—		11		—		11
Total	—		1,126		—		1,126		(7)
Total assets	$	1,212	$	5,460	$	—	$	6,672	(7)
Liabilities:
Derivative liabilities (5)
Foreign exchange contracts	$	—	$	188	$	—	$	188
Equity contracts	—		10		—		10
Interest rate contracts	—		8		—		8
Total liabilities	$	—	$	206	$	—	$	206	(7)

			Gross		Gross
(Dollars in millions)	Adjusted		Unrealized		Unrealized		Fair
At September 30, 2017:	Cost		Gains		Losses		Value
Debt securities — noncurrent(1)	$	7	$	3	$	—	$	11
Available-for-sale equity investments(1)	$	1	$	4	$	0	$	5

	Fair Value of Derivative Assets					Fair Value of Derivative Liabilities
	Balance Sheet					Balance Sheet
(Dollars in millions)	Classification	9/30/2017		12/31/2016		Classification	9/30/2017		12/31/2016
Designated as hedging instruments:
Interest rate contracts:	Prepaid expenses and other current assets	$	—	$	—	Other accrued expenses and liabilities	$	1	$	—
	Investments and sundry assets	517		555		Other liabilities	15		8
Foreign exchange contracts:	Prepaid expenses and other current assets	208		421		Other accrued expenses and liabilities	272		46
	Investments and sundry assets	170		17		Other liabilities	5		35
	Fair value of derivative assets	$	896	$	993	Fair value of derivative liabilities	$	292	$	89

Not designated as hedging instruments:
Foreign exchange contracts:	Prepaid expenses and other current assets	$	38	$	100	Other accrued expenses and liabilities	$	56	$	89
	Investments and sundry assets	—		22		Other liabilities	—		18
Equity contracts:	Prepaid expenses and other current assets	23		11		Other accrued expenses and liabilities	4		10
	Investments and sundry assets	—		—		Other liabilities	—		—
	Fair value of derivative assets	$	61	$	133	Fair value of derivative liabilities	$	60	$	117

Total Derivatives		$	957	$	1,126		$	352	$	206

Total debt designated as hedging instruments(1):
Short-term debt		N/A		N/A			$	377	$	1,125
Long-term debt		N/A		N/A			11,469		7,844
		N/A		N/A			$	11,846	$	8,969

Total		$	957	$	1,126		$	12,198	$	9,175

	Gain (Loss) Recognized in Earnings
	Consolidated	Recognized on						Attributable to Risk
(Dollars in millions)	Statement of	Derivatives						Being Hedged(2)
For the three months ended September 30:	Earnings Line Item	2017			2016			2017		2016
Derivative instruments in fair value hedges(1)(5):
Interest rate contracts	Cost of financing	$	(3	)	$	(20	)	$	20	$	40
	Interest expense	(3		)	(21		)	20		43
Derivative instruments not designated as hedging instruments:
Foreign exchange contracts	Other (income) and expense	(35		)	30			N/A		N/A
Interest rate contracts	Other (income) and expense	—			0			N/A		N/A
Equity contracts	SG&A expense	31			45			N/A		N/A
	Other (income) and expense	—			0			N/A		N/A
Total		$	(10	)	$	34		$	41	$	83

	Gain (Loss) Recognized in Earnings and Other Comprehensive Income
														Ineffectiveness and
(Dollars in millions)	Effective Portion						Consolidated	Effective Portion Reclassified						Amounts Excluded from
For the three months	Recognized in OCI						Statement of	from AOCI						Effectiveness Testing(3)
ended September 30:	2017			2016			Earnings Line Item	2017			2016			2017			2016
Derivative instruments in cash flow hedges:
Interest rate contracts	$	—		$	—		Interest expense	$	(7	)	$	(7	)	$	—		$	—
Foreign exchange contracts	(70		)	35			Other (income) and expense	64			(6		)	(1		)	(1		)
							Cost of sales*	1			(7		)	—			—
							Cost of services*	20			3			—			—
							SG&A expense	(6		)	2			—			—
Instruments in net investment hedges(4):
Foreign exchange contracts	(507		)	(131		)	Cost of financing	—			—			0			—
							Interest expense	—			—			8			25
Total	$	(577	)	$	(96	)		$	73		$	(15	)	$	7		$	24

(Dollars in millions)
At December 31, 2016:*	Americas			EMEA			Asia Pacific			Total
Financing receivables:
Lease receivables	$	3,830		$	1,171		$	1,335		$	6,336
Loan receivables	6,185			3,309			2,243			11,737
Ending balance	$	10,015		$	4,480		$	3,578		$	18,073
Collectively evaluated for impairment	$	9,847		$	4,460		$	3,419		$	17,726
Individually evaluated for impairment	$	168		$	20		$	159		$	347
Allowance for credit losses
Beginning balance at January 1, 2016
Lease receivables	$	52		$	17		$	143		$	213
Loan receivables	122			55			200			377
Total	$	175		$	72		$	343		$	590
Write-offs	$	(36	)	$	(48	)	$	(154	)	$	(237	)
Recoveries	2			0			0			2
Provision	65			(1		)	(6		)	58
Other	17			(1		)	(18		)	(3		)
Ending balance at December 31, 2016	$	223		$	22		$	165		$	410
Lease receivables	$	54		$	4		$	76		$	133
Loan receivables	$	169		$	18		$	89		$	276

Collectively evaluated for impairment	$	62		$	13		$	15		$	90
Individually evaluated for impairment	$	161		$	9		$	150		$	320

	At September 30, 2017				At December 31, 2016*
	Recorded		Related		Recorded		Related
(Dollars in millions)	Investment		Allowance		Investment		Allowance
Americas	$	140	$	131	$	168	$	161
EMEA	31		23		20		9
Asia Pacific	102		94		159		150
Total	$	273	$	248	$	347	$	320

					Interest
	Average		Interest		Income
(Dollars in millions)	Recorded		Income		Recognized on
For the three months ended September 30, 2017:	Investment		Recognized		Cash Basis
Americas	$	156	$	0	$	—
EMEA	31		0		—
Asia Pacific	101		0		—
Total	$	288	$	0	$	—

	Lease Receivables						Loan Receivables
(Dollars in millions)					Asia						Asia
At September 30, 2017:	Americas		EMEA		Pacific		Americas		EMEA		Pacific
Credit Ratings:
Aaa – Aa3	$	358	$	52	$	56	$	626	$	124	$	94
A1 – A3	715		126		543		1,251		302		908
Baa1 – Baa3	807		404		329		1,412		968		550
Ba1 – Ba2	762		415		172		1,333		993		289
Ba3 – B1	421		197		86		736		473		143
B2 – B3	345		83		69		604		200		116
Caa – D	56		13		15		98		31		25
Total	$	3,465	$	1,290	$	1,269	$	6,059	$	3,091	$	2,124

			Fully		<90 Days				Recorded
	Total		Reserved		or Unbilled		Total		Investment
(Dollars in millions)	Past Due		Financing		Financing		Financing		> 90 Days and
At September 30, 2017:	> 90 days (1)		Receivables		Receivables		Receivables		Accruing (2)
Americas	$	28	$	51	$	3,463	$	3,541	$	255
EMEA	9		4		1,283		1,297		15
Asia Pacific	5		32		1,266		1,304		19
Total lease receivables	$	42	$	87	$	6,012	$	6,142	$	290
Americas	$	43	$	80	$	6,057	$	6,180	$	401
EMEA	26		19		3,076		3,120		46
Asia Pacific	6		61		2,122		2,189		9
Total loan receivables	$	75	$	160	$	11,255	$	11,489	$	456
Total	$	117	$	247	$	17,267	$	17,631	$	746

	Cognitive Solutions & Industry Services
							Technology
				Global			Services &
	Cognitive			Business			Cloud						Global			Total
(Dollars in millions)	Solutions			Services			Platforms			Systems			Financing			Segments
For the three months ended September 30, 2017:
External revenue	$	4,400		$	4,093		$	8,457		$	1,721		$	427		$	19,098
Internal revenue	629			92			164			227			272			1,384
Total revenue	$	5,030		$	4,185		$	8,621		$	1,948		$	698		$	20,482
Pre-tax income from continuing operations	$	1,649		$	453		$	1,192		$	339		$	244		$	3,876
Revenue year-to-year change	2.6		%	(2.3		)%	(3.4		)%	12.3		%	(8.5		)%	(0.6		)%
Pre-tax income year-to-year change	4.8		%	(16.8		)%	(7.5		)%	149.7		%	(31.4		)%	(0.5		)%
Pre-tax income margin	32.8		%	10.8		%	13.8		%	17.4		%	34.9		%	18.9		%

For the three months ended September 30, 2016:
External revenue	$	4,235		$	4,191		$	8,748		$	1,558		$	412		$	19,145
Internal revenue	667			93			180			176			352			1,468
Total revenue	$	4,902		$	4,284		$	8,929		$	1,734		$	763		$	20,613
Pre-tax income from continuing operations	$	1,574		$	544		$	1,288		$	136		$	355		$	3,897

Pre-tax income margin	32.1		%	12.7		%	14.4		%	7.8		%	46.5		%	18.9		%

(Dollars in millions)	Total
2017 (for Q4)	$	468
2018	5,140
2019	7,034
2020	6,155
2021	5,155
2022 and beyond	21,569
Total	$	45,522

	For the Three Months Ended
	September 30, 2017		September 30, 2016
Number of shares on which basic earnings per share is calculated:
Weighted-average shares outstanding during period	929,437,441		953,995,828
Add — Incremental shares under stock-based compensation plans	2,236,234		2,357,365
Add — Incremental shares associated with contingently issuable shares	1,553,754		964,091
Number of shares on which diluted earnings per share is calculated	933,227,429		957,317,284

Income from continuing operations (millions)	$	2,726	$	2,854
Loss from discontinued operations, net of tax (millions)	0		(1		)
Net income on which basic earnings per share is calculated (millions)	$	2,726	$	2,853
Income from continuing operations (millions)	$	2,726	$	2,854
Net income applicable to contingently issuable shares (millions)	0		—
Income from continuing operations on which diluted earnings per share is calculated (millions)	$	2,726	$	2,854
Loss from discontinued operations, net of tax, on which basic and diluted earnings per share is calculated (millions)	0		(1		)
Net income on which diluted earnings per share is calculated (millions)	$	2,726	$	2,853

Earnings/(loss) per share of common stock:
Assuming dilution
Continuing operations	$	2.92	$	2.98
Discontinued operations	0.00		0.00
Total	$	2.92	$	2.98
Basic
Continuing operations	$	2.93	$	2.99
Discontinued operations	0.00		0.00
Total	$	2.93	$	2.99

	For the Nine Months Ended
	September 30, 2017			September 30, 2016
Number of shares on which basic earnings per share is calculated:
Weighted-average shares outstanding during period	935,600,777			957,693,385
Add — Incremental shares under stock compensation plans	3,213,758			2,258,854
Add — Incremental shares associated with contingently issuable shares	1,394,930			771,943
Number of shares on which diluted earnings per share is calculated	940,209,466			960,724,182

Income from continuing operations (millions)	$	6,811		$	7,375
Loss from discontinued operations, net of tax (millions)	(3		)	(4		)
Net income on which basic earnings per share is calculated (millions)	$	6,807		$	7,371
Income from continuing operations (millions)	$	6,811		$	7,375
Net income applicable to contingently issuable shares (millions)	(2		)	—
Income from continuing operations on which diluted earnings per share is calculated (millions)	$	6,809		$	7,375
Loss from discontinued operations, net of tax, on which basic and diluted earnings per share is calculated (millions)	(3		)	(4		)
Net income on which diluted earnings per share is calculated (millions)	$	6,806		$	7,371

Earnings/(loss) per share of common stock:
Assuming dilution
Continuing operations	$	7.24		$	7.67
Discontinued operations	0.00			0.00
Total	$	7.24		$	7.67
Basic
Continuing operations	$	7.28		$	7.70
Discontinued operations	0.00			0.00
Total	$	7.28		$	7.70

	9/30/17		12/31/16
Assets	$	121,636	$	117,470	3.5	%
Liabilities	$	101,879	$	99,078	2.8	%
Equity	$	19,757	$	18,392	7.4	%

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(Dollars in millions)	2017		2016		2017		2016
External revenue	$	427	$	412	$	1,246	$	1,245
Internal revenue	272		352		925		1,340
Total revenue	$	698	$	763	$	2,171	$	2,585
Pre-tax income	$	244	$	355	$	836	$	1,208

(Dollars in millions)
January 1, 2017		Additions *		Write-offs **			Other***		September 30, 2017
$	776	$	37	$	(157	)	$	33	$	689

(Dollars in millions except per share amounts)				Acquisition-related			Retirement-related			Operating
For the three months ended September 30, 2017	GAAP			adjustments			adjustments			(Non-GAAP)
Gross profit	$	8,800		$	114		$	203		$	9,116
Gross profit margin	45.9		%	0.6		pts.	1.1		pts.	47.6		%
S,G&A	$	4,648		$	(125	)	$	(53	)	$	4,470
R,D&E	1,342			—			(51		)	1,291
Other (income) and expense	(114		)	—			—			(114		)
Total expense and other (income)	5,735			(125		)	(103		)	5,507
Pre-tax income from continuing operations	3,065			238			306			3,609
Pre-tax margin from continuing operations	16.0		%	1.2		pts.	1.6		pts.	18.8		%
Provision for income taxes*	$	339		$	79		$	113		$	531
Effective tax rate	11.0		%	1.5		pts.	2.2		pts.	14.7		%
Income from continuing operations	$	2,726		$	159		$	193		$	3,079
Income margin from continuing operations	14.2		%	0.8		pts.	1.0		pts.	16.1		%
Diluted earnings per share from
continuing operations	$	2.92		$	0.17		$	0.21		$	3.30