~~0000051143srt:MinimumMemberus-gaap:FinanceLeasesPortfolioSegmentMember2021-01-012021-09-30~~0000051143exch:XNYSibm:Notes1.25PercentDue2023Member2022-01-012022-09-30

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTER ENDED SEPTEMBER 30, ~~2021~~2022

1-2360

(Commission file number)

INTERNATIONAL BUSINESS MACHINES CORPORATION

(Exact name of registrant as specified in its charter)

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

One New Orchard Road Armonk, New York	10504
(Address of principal executive offices)	(Zip Code)

914-499-1900

(Registrant’s telephone number)

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

Title of each class	Trading symbol(s)	Name of each exchange on which registered
Capital stock, par value $.20 per share	IBM	New York Stock Exchange
		NYSE Chicago
~~2.625% Notes due 2022~~	~~IBM 22A~~	~~New York Stock Exchange~~
1.250% Notes due 2023	IBM 23A	New York Stock Exchange
0.375% Notes due 2023	IBM 23B	New York Stock Exchange
1.125% Notes due 2024	IBM 24A	New York Stock Exchange
2.875% Notes due 2025	IBM 25A	New York Stock Exchange
0.950% Notes due 2025	IBM 25B	New York Stock Exchange
0.875% Notes due 2025	IBM 25C	New York Stock Exchange
0.300% Notes due 2026	IBM 26B	New York Stock Exchange
1.250% Notes due 2027	IBM 27B	New York Stock Exchange
0.300% Notes due 2028	IBM 28B	New York Stock Exchange
1.750% Notes due 2028	IBM 28A	New York Stock Exchange
1.500% Notes due 2029	IBM 29	New York Stock Exchange
0.875% Notes due 2030	IBM 30	New York Stock Exchange
1.750% Notes due 2031	IBM 31	New York Stock Exchange
0.650% Notes due 2032	IBM 32A	New York Stock Exchange
1.250% Notes due 2034	IBM 34	New York Stock Exchange
1.200% Notes due 2040	IBM 40	New York Stock Exchange
7.00% Debentures due 2025	IBM 25	New York Stock Exchange
6.22% Debentures due 2027	IBM 27	New York Stock Exchange
6.50% Debentures due 2028	IBM 28	New York Stock Exchange
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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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

Large accelerated filer ☒	Accelerated filer ☐
Non-accelerated filer ☐	Smaller reporting company ☐
	Emerging growth company ☐

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

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

The registrant had ~~896,800,350~~904,126,363 shares of common stock outstanding at September 30, ~~2021.~~2022.

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 September 30,						Nine Months Ended September 30,
(Dollars in millions except per share amounts)	2022			2021*			2022			2021*
Revenue:
Services	$	7,365		$	7,251		$	22,708		$	21,549
Sales		6,565			5,814	**		20,652			18,502	**
Financing		176			186	**		479			606	**
Total revenue		14,107			13,251			43,840			40,656
Cost:
Services		5,168			4,650			15,915			14,014
Sales		1,389			1,363	**		4,555			4,241	**
Financing		120			132	**		314			416	**
Total cost		6,677			6,145			20,784			18,670
Gross profit		7,430			7,106			23,055			21,985
Expense and other (income):
Selling, general and administrative		4,391			4,306			13,843			13,842
Research, development and engineering		1,611			1,606			4,963			4,863
Intellectual property and custom development income		(121)			(153)			(418)			(431)
Other (income) and expense		5,755			244			5,921			891
Interest expense		295			290			903			852
Total expense and other (income)		11,931			6,293			25,212			20,017
Income/(loss) from continuing operations before income taxes		(4,501)			813			(2,156)			1,968
Provision for/(benefit from) income taxes		(1,287)			(224)			(1,070)			(282)
Income/(loss) from continuing operations	$	(3,214)		$	1,037		$	(1,087)		$	2,250
Income from discontinued operations, net of tax		18			93			16			1,160
Net income/(loss)	$	(3,196)	+	$	1,130		$	(1,071)	+	$	3,410

Earnings/(loss) per share of common stock:
Assuming dilution:
Continuing operations	$	(3.55)		$	1.14		$	(1.21)		$	2.49
Discontinued operations		0.02			0.10			0.02			1.28
Total	$	(3.54)		$	1.25		$	(1.19)		$	3.77
Basic:
Continuing operations	$	(3.55)		$	1.16		$	(1.21)		$	2.51
Discontinued operations		0.02			0.10			0.02			1.30
Total	$	(3.54)		$	1.26		$	(1.19)		$	3.81

Weighted-average number of common shares outstanding: (millions)
Assuming dilution		904.1			906.0			901.6			904.0
Basic		904.1			897.1			901.6			895.3

*	Reclassified to reflect discontinued operations presentation.

**	Reclassified to conform to current year presentation.

+ Includes the impact of a one-time, non-cash pension settlement charge. Refer to note 18, "Retirement-Related Benefits," for additional information.

(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 INCOME STATEMENT~~

~~(UNAUDITED)~~

Three Months Ended September 30,

Nine Months Ended September 30,
(Dollars in millions except per share amounts)

2021

2020

2021

2020
Revenue:








Services

$
11,418

$
11,180

$
34,307

$
33,490
Sales

5,978

6,106

19,079

18,918
Financing

222

275

706

845
Total revenue

17,618

17,560

54,093

53,253
Cost:








Services

7,770

7,357

23,416

22,720
Sales

1,513

1,601

4,792

4,964
Financing

165

172

506

517
Total cost

9,447

9,130

28,714

28,202
Gross profit

8,171

8,430

25,379

25,052
Expense and other (income):








Selling, general and administrative

4,860

4,647

15,368

15,849
Research, development and engineering

1,621

1,515

4,907

4,722
Intellectual property and custom development income

(153)

(134)

(435)

(453)
Other (income) and expense

234

253

911

614
Interest expense

291

323

852

971
Total expense and other (income)

6,852

6,603

21,603

21,704
Income from continuing operations before income taxes

1,319

1,827

3,776

3,348
Provision for/(benefit from) income taxes

188

128

365

(888)
Income from continuing operations

$
1,130

$
1,698

$
3,411

$
4,237
Income/(loss) from discontinued operations, net of tax

—

(1)

(1)

(2)
Net income

$
1,130

$
1,698

$
3,410

$
4,234

Earnings/(loss) per share of common stock:






��


Assuming dilution:








Continuing operations

$
1.25

$
1.89

$
3.77

$
4.72
Discontinued operations

—

0.00

0.00

0.00
Total

$
1.25

$
1.89

$
3.77

$
4.72
Basic:








Continuing operations

$
1.26

$
1.90

$
3.81

$
4.76
Discontinued operations

—

0.00

0.00

0.00
Total

$
1.26

$
1.90

$
3.81

$
4.76

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








Assuming dilution

906.0

897.3

904.0

895.8
Basic

897.1

891.4

895.3

889.6

~~(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 COMPREHENSIVE INCOME

(UNAUDITED)


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in millions)	2021		2020		2021		2020		2022		2021*		2022		2021*
Net income	$	1,130	$	1,698	$	3,410	$	4,234
Net income/(loss)									$	(3,196)	$	1,130	$	(1,071)	$	3,410
Other comprehensive income/(loss), before tax:
Foreign currency translation adjustments		(114)		(439)		463		(1,354)		143		(114)		799		463
Net changes related to available-for-sale securities:
Unrealized gains/(losses) arising during the period		0		(1)		0		0		0		0		(1)		0
Reclassification of (gains)/losses to net income		—		—		—		—		—		—		—		—
Total net changes related to available-for-sale securities		0		(1)		0		0		0		0		(1)		0
Unrealized gains/(losses) on cash flow hedges:
Unrealized gains/(losses) arising during the period		109		(32)		262		(249)		189		109		449		262
Reclassification of (gains)/losses to net income		32		(69)		282		(37)		(12)		32		4		282
Total unrealized gains/(losses) on cash flow hedges		141		(101)		545		(285)		178		141		453		545
Retirement-related benefit plans:
Prior service costs/(credits)		0		(1)		0		(5)		412		0		408		0
Net (losses)/gains arising during the period		1		0		23		65		53		1		63		23
Curtailments and settlements		13		21		46		42		5,913		13		5,931		46
Amortization of prior service (credits)/costs		3		0		8		1		3		3		16		8
Amortization of net (gains)/losses		638		586		1,929		1,722		388		638		1,305		1,929
Total retirement-related benefit plans		656		607		2,006		1,826		6,768		656		7,722		2,006
Other comprehensive income/(loss), before tax		683		66		3,014		187		7,089		683		8,973		3,014
Income tax (expense)/benefit related to items of other comprehensive income		(333)		106		(978)		(175)		(2,058)		(333)		(2,877)		(978)
Other comprehensive income/(loss), net of tax		350		172		2,035		12		5,030		350		6,096		2,035
Total comprehensive income	$	1,480	$	1,870	$	5,446	$	4,247	$	1,834	$	1,480	$	5,025	$	5,446

* Amounts presented have not been recast to exclude discontinued operations.

(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

(UNAUDITED)

ASSETS

At September 30,

At December 31,
(Dollars in millions)

2021

2020
Assets:




Current assets:




Cash and cash equivalents

$
7,455

$
13,212
Restricted cash

352

463
Marketable securities

600

600
Notes and accounts receivable — trade (net of allowances of $277 in 2021 and $351 in 2020)

6,609

7,132
Short-term financing receivables (net of allowances of $183 in 2021 and $218 in 2020)

7,161

10,892
Other accounts receivable (net of allowances of $26 in 2021 and $28 in 2020)

899

714
Inventory, at lower of average cost or net realizable value:


Finished goods

287

190
Work in process and raw materials

1,604

1,649
Total inventory

1,891

1,839
Deferred costs

2,046

2,107
Prepaid expenses and other current assets

2,954

2,206
Total current assets

29,967

39,165
Property, plant and equipment

32,349

33,176
Less: Accumulated depreciation

23,211

23,136
Property, plant and equipment — net

9,138

10,040
Operating right-of-use assets — net

4,253

4,686
Long-term financing receivables (net of allowances of $24 in 2021 and $45 in 2020)

5,046

7,086
Prepaid pension assets

8,197

7,610
Deferred costs

2,248

2,449
Deferred taxes

8,967

9,241
Goodwill

61,378

59,617
Intangible assets — net

13,025

13,796
Investments and sundry assets

1,996

2,282
Total assets

$
144,214

$
155,971


	At September 30,		At December 31,
(Dollars in millions)	2022		2021
Assets:
Current assets:
Cash and cash equivalents	$	7,816	$	6,650
Restricted cash		159		307
Marketable securities		1,753		600
Notes and accounts receivable — trade (net of allowances of $214 in 2022 and $218 in 2021)		5,526		6,754
Short-term financing receivables:
Held for investment (net of allowances of $139 in 2022 and $176 in 2021)		6,280		7,221
Held for sale		395		793
Other accounts receivable (net of allowances of $48 in 2022 and $24 in 2021)		902		1,002
Inventory, at lower of average cost or net realizable value:
Finished goods		209		208
Work in process and raw materials		1,585		1,442
Total inventory		1,794		1,649
Deferred costs		921		1,097
Prepaid expenses and other current assets		3,452		3,466
Total current assets		28,999		29,539
Property, plant and equipment		18,675		20,085
Less: Accumulated depreciation		13,525		14,390
Property, plant and equipment — net		5,150		5,694
Operating right-of-use assets — net		2,740		3,222
Long-term financing receivables (net of allowances of $20 in 2022 and $25 in 2021)		4,781		5,425
Prepaid pension assets		9,695		9,850
Deferred costs		818		924
Deferred taxes		6,868		7,370
Goodwill		54,218		55,643
Intangible assets — net		10,967		12,511
Investments and sundry assets		1,614		1,823
Total assets	$	125,850	$	132,001

(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 – (CONTINUED)

(UNAUDITED)

LIABILITIES AND EQUITY


	At September 30,		At December 31,		At September 30,		At December 31,
(Dollars in millions except per share amounts)	2021		2020		2022		2021
Liabilities:
Current liabilities:
Taxes	$	2,159	$	3,301	$	1,667	$	2,289
Short-term debt		7,575		7,183		5,937		6,787
Accounts payable		4,248		4,908		3,806		3,955
Compensation and benefits		3,780		3,440		3,369		3,204
Deferred income		12,264		12,833		11,139		12,518
Operating lease liabilities		1,285		1,357		844		974
Other accrued expenses and liabilities		4,520		6,847		3,702		3,892
Total current liabilities		35,832		39,869		30,466		33,619
Long-term debt		46,926		54,355		44,942		44,917
Retirement and nonpension postretirement benefit obligations		16,764		18,248		11,760		14,435
Deferred income		3,965		4,301		3,018		3,577
Operating lease liabilities		3,192		3,574		2,103		2,462
Other liabilities		15,179		14,897		13,413		13,996
Total liabilities		121,858		135,244		105,703		113,005
Equity:
IBM stockholders’ equity:
Common stock, par value $0.20 per share, and additional paid-in capital		57,189		56,556		58,117		57,319
Shares authorized: 4,687,500,000
Shares issued: 2021 - 2,247,465,474
2020 - 2,242,969,004
Shares issued: 2022 - 2,255,410,248
2021 - 2,248,577,848
Retained earnings		161,747		162,717		148,611		154,209
Treasury stock - at cost		(169,406)		(169,339)		(169,514)		(169,392)
Shares: 2021 - 1,350,665,124
2020 - 1,350,315,580
Shares: 2022 - 1,351,283,886
2021 - 1,350,509,249
Accumulated other comprehensive income/(loss)		(27,302)		(29,337)		(17,138)		(23,234)
Total IBM stockholders’ equity		22,228		20,597		20,076		18,901
Noncontrolling interests		129		129		71		95
Total equity		22,357		20,727		20,147		18,996
Total liabilities and equity	$	144,214	$	155,971	$	125,850	$	132,001

(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 CASH FLOWS

(UNAUDITED)

Nine Months Ended September 30,
(Dollars in millions)

2021

2020
Cash flows from operating activities:




Net income

$
3,410

$
4,234
Adjustments to reconcile net income to cash provided by operating activities




Depreciation

3,139

3,138
Amortization of intangibles

1,897

1,858
Stock-based compensation

719

658
Net (gain)/loss on asset sales and other

(150)

80
Changes in operating assets and liabilities, net of acquisitions/divestitures

1,238

2,370
Net cash provided by operating activities

10,252

12,337

Cash flows from investing activities:




Payments for property, plant and equipment

(1,612)

(1,940)
Proceeds from disposition of property, plant and equipment

312

147
Investment in software

(555)

(469)
Acquisition of businesses, net of cash acquired

(3,018)

(37)
Divestitures of businesses, net of cash transferred

26

510
Non-operating finance receivables — net

(1)

29
Purchases of marketable securities and other investments

(2,654)

(5,012)
Proceeds from disposition of marketable securities and other investments

2,202

4,302
Net cash provided by/(used in) investing activities

(5,300)

(2,470)

Cash flows from financing activities:




Proceeds from new debt

394

10,337
Payments to settle debt

(7,321)

(8,802)
Short-term borrowings/(repayments) less than 90 days — net

840

(467)
Common stock repurchases for tax withholdings

(252)

(225)
Financing — other

71

72
Cash dividends paid

(4,395)

(4,343)
Net cash provided by/(used in) financing activities

(10,662)

(3,428)

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

(159)

(200)
Net change in cash, cash equivalents and restricted cash

(5,868)

6,239

Cash, cash equivalents and restricted cash at January 1

13,675

8,314
Cash, cash equivalents and restricted cash at September 30

$
7,806

$
14,553


	Nine Months Ended September 30,
(Dollars in millions)	2022		2021
Cash flows from operating activities:
Net income/(loss)	$	(1,071)	$	3,410
Adjustments to reconcile net income/(loss) to cash provided by operating activities:
Pension settlement charge		5,894		—
Depreciation		1,837		3,139
Amortization of intangibles		1,828		1,897
Stock-based compensation		739		719
Net (gain)/loss on asset sales and other		(60)		(150)
Changes in operating assets and liabilities, net of acquisitions/divestitures		(2,695)		1,238
Net cash provided by operating activities		6,470		10,252

Cash flows from investing activities:
Payments for property, plant and equipment		(937)		(1,612)
Proceeds from disposition of property, plant and equipment		98		312
Investment in software		(479)		(555)
Acquisition of businesses, net of cash acquired		(1,020)		(3,018)
Divestitures of businesses, net of cash transferred		1,271		26
Purchases of marketable securities and other investments		(4,474)		(2,655)
Proceeds from disposition of marketable securities and other investments		2,655		2,202
Net cash provided by/(used in) investing activities		(2,883)		(5,300)

Cash flows from financing activities:
Proceeds from new debt		7,797		394
Payments to settle debt		(5,446)		(7,321)
Short-term borrowings/(repayments) less than 90 days — net		221		840
Common stock repurchases for tax withholdings		(329)		(252)
Financing — other		106		71
Cash dividends paid		(4,454)		(4,395)
Net cash provided by/(used in) financing activities		(2,106)		(10,662)

Effect of exchange rate changes on cash, cash equivalents and restricted cash		(463)		(159)
Net change in cash, cash equivalents and restricted cash		1,018		(5,868)

Cash, cash equivalents and restricted cash at January 1		6,957		13,675
Cash, cash equivalents and restricted cash at September 30	$	7,975	$	7,806

Cash flows are presented on an IBM consolidated basis. Refer to note 3, “Separation of Kyndryl,” for additional information related to cash flows from Kyndryl discontinued operations.

(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 EQUITY

(UNAUDITED)


	Common														Common
	Stock and						Accumulated								Stock and						Accumulated
	Additional						Other		Total IBM		Non-				Additional						Other		Total IBM		Non-
	Paid-in		Retained		Treasury		Comprehensive		Stockholders’		Controlling		Total		Paid-in		Retained		Treasury		Comprehensive		Stockholders’		Controlling		Total
(Dollars in millions except per share amounts)	Capital		Earnings		Stock		Income/(Loss)		Equity		Interests		Equity		Capital		Earnings		Stock		Income/(Loss)		Equity		Interests		Equity
Equity - July 1, 2021	$	56,912	$	162,086	$	(169,404)	$	(27,652)	$	21,942	$	125	$	22,067
Net income plus other comprehensive income/(loss):
Net income				1,130						1,130				1,130
Equity - July 1, 2022															$	57,802	$	153,298	$	(169,522)	$	(22,169)	$	19,409	$	67	$	19,476
Net income/(loss) plus other comprehensive income/(loss):
Net income/(loss)																		(3,196)						(3,196)				(3,196)
Other comprehensive income/(loss)								350		350				350								5,030		5,030				5,030
Total comprehensive income/(loss)									$	1,480			$	1,480									$	1,834			$	1,834
Cash dividends paid — common stock ($1.64 per share)				(1,471)						(1,471)				(1,471)
Common stock issued under employee plans (482,632 shares)		277								277				277
Purchases (124,146 shares) and sales (121,792 shares) of treasury stock under employee plans — net				1		(2)				0				0
Cash dividends paid — common stock ($1.65 per share)																		(1,491)						(1,491)				(1,491)
Common stock issued under employee plans (871,676 shares)																315								315				315
Purchases (103,736 shares) and sales (178,069 shares) of treasury stock under employee plans — net																		0		8				8				8
Changes in noncontrolling interests												4		4												4		4
Equity – September 30, 2021	$	57,189	$	161,747	$	(169,406)	$	(27,302)	$	22,228	$	129	$	22,357
Equity – September 30, 2022															$	58,117	$	148,611	$	(169,514)	$	(17,138)	$	20,076	$	71	$	20,147


	Common														Common
	Stock and						Accumulated								Stock and						Accumulated
	Additional						Other		Total IBM		Non-				Additional						Other		Total IBM		Non-
	Paid-in		Retained		Treasury		Comprehensive		Stockholders’		Controlling		Total		Paid-in		Retained		Treasury		Comprehensive		Stockholders’		Controlling		Total
(Dollars in millions except per share amounts)	Capital		Earnings		Stock		Income/(Loss)		Equity		Interests		Equity		Capital		Earnings		Stock		Income/(Loss)		Equity		Interests		Equity
Equity - July 1, 2020	$	56,135	$	162,559	$	(169,386)	$	(28,757)	$	20,551	$	137	$	20,688
Equity - July 1, 2021															$	56,912	$	162,086	$	(169,404)	$	(27,652)	$	21,942	$	125	$	22,067
Net income plus other comprehensive income/(loss):
Net income				1,698						1,698				1,698				1,130						1,130				1,130
Other comprehensive income/(loss)								172		172				172								350		350				350
Total comprehensive income/(loss)									$	1,870			$	1,870									$	1,480			$	1,480
Cash dividends paid — common stock ($1.63 per share)				(1,453)						(1,453)				(1,453)
Common stock issued under employee plans (429,304 shares)		232								232				232
Purchases (110,415 shares) and sales (159,479 shares) of treasury stock under employee plans — net				2		7				9				9
Cash dividends paid — common stock ($1.64 per share)																		(1,471)						(1,471)				(1,471)
Common stock issued under employee plans (482,632 shares)																277								277				277
Purchases (124,146 shares) and sales (121,792 shares) of treasury stock under employee plans — net																		1		(2)				0				0
Changes in noncontrolling interests												(11)		(11)												4		4
Equity - September 30, 2020	$	56,366	$	162,806	$	(169,380)	$	(28,584)	$	21,208	$	126	$	21,334
Equity - September 30, 2021															$	57,189	$	161,747	$	(169,406)	$	(27,302)	$	22,228	$	129	$	22,357

(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 EQUITY – (CONTINUED)

(UNAUDITED)

Common

Stock and

Accumulated

Additional

Other

Total IBM

Non-

Paid-in

Retained

Treasury

Comprehensive

Stockholders’

Controlling

Total
(Dollars in millions except per share amounts)

Capital

Earnings

Stock

Income/(Loss)

Equity

Interests

Equity
Equity - January 1, 2021

$
56,556

$
162,717

$
(169,339)

$
(29,337)

$
20,597

$
129

$
20,727
Net income plus other comprehensive income/(loss):














Net income



3,410





3,410



3,410
Other comprehensive income/(loss)







2,035

2,035



2,035
Total comprehensive income/(loss)









$
5,446



$
5,446
Cash dividends paid — common stock ($4.91 per share)



(4,395)





(4,395)



(4,395)
Common stock issued under employee plans (4,496,470 shares)

632







632



632
Purchases (1,797,733 shares) and sales (1,448,189 shares) of treasury stock under employee plans — net



15

(66)



(52)



(52)
Changes in noncontrolling interests











(1)

(1)
Equity - September 30, 2021

$
57,189

$
161,747

$
(169,406)

$
(27,302)

$
22,228

$
129

$
22,357


	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/(loss) plus other comprehensive income/(loss):
Net income/(loss)				(1,071)						(1,071)				(1,071)
Other comprehensive income/(loss)								6,096		6,096				6,096
Total comprehensive income/(loss)									$	5,025			$	5,025
Cash dividends paid — common stock ($4.94 per share)				(4,454)						(4,454)				(4,454)
Common stock issued under employee plans (6,832,400 shares)		736								736				736
Purchases (2,423,220 shares) and sales (1,648,583 shares) of treasury stock under employee plans — net				(10)		(122)				(133)				(133)
Other equity		63		(63)						0				0
Changes in noncontrolling interests												(23)		(23)
Equity - September 30, 2022	$	58,117	$	148,611	$	(169,514)	$	(17,138)	$	20,076	$	71	$	20,147

Common












Stock and

Accumulated

Additional

Other

Total IBM

Non-

Paid-in

Retained

Treasury

Comprehensive

Stockholders’

Controlling

Total
(Dollars in millions except per share amounts)

Capital

Earnings

Stock

Income/(Loss)

Equity

Interests

Equity
Equity - January 1, 2020

$
55,895

$
162,954

$
(169,413)

$
(28,597)

$
20,841

$
144

$
20,985
Cumulative effect of change in accounting principle*

(66)

(66)

(66)
Net income plus other comprehensive income/(loss):














Net income



4,234





4,234



4,234
Other comprehensive income/(loss)







12

12



12
Total comprehensive income/(loss)









$
4,247



$
4,247
Cash dividends paid — common stock ($4.88 per share)



(4,343)





(4,343)



(4,343)
Common stock issued under employee plans (3,661,059 shares)

471







471



471
Purchases (1,731,915 shares) and sales (2,017,518 shares) of treasury stock under employee plans — net



26

33



59



59
Changes in noncontrolling interests











(18)

(18)
Equity - September 30, 2020

$
56,366

$
162,806

$
(169,380)

$
(28,584)

$
21,208

$
126

$
21,334

* Reflects the adoption of the FASB guidance on current expected credit losses. Refer to note 2, “Accounting Changes.”


	Common
	Stock and						Accumulated
	Additional						Other		Total IBM		Non-
	Paid-in		Retained		Treasury		Comprehensive		Stockholders’		Controlling		Total
(Dollars in millions except per share amounts)	Capital		Earnings		Stock		Income/(Loss)		Equity		Interests		Equity
Equity - January 1, 2021	$	56,556	$	162,717	$	(169,339)	$	(29,337)	$	20,597	$	129	$	20,727
Net income plus other comprehensive income/(loss):
Net income				3,410						3,410				3,410
Other comprehensive income/(loss)								2,035		2,035				2,035
Total comprehensive income/(loss)									$	5,446			$	5,446
Cash dividends paid — common stock ($4.91 per share)				(4,395)						(4,395)				(4,395)
Common stock issued under employee plans (4,496,470 shares)		632								632				632
Purchases (1,797,733 shares) and sales (1,448,189 shares) of treasury stock under employee plans — net				15		(66)				(52)				(52)
Changes in noncontrolling interests												(1)		(1)
Equity - September 30, 2021	$	57,189	$	161,747	$	(169,406)	$	(27,302)	$	22,228	$	129	$	22,357

(Amounts may not add due to rounding.)

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

Table of Contents

Notes to Consolidated Financial Statements

1. Basis of Presentation:

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

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amount of assets, liabilities, revenue, costs, expenses and other comprehensive income/(loss) that are reported in the Consolidated Financial Statements and accompanying disclosures. These estimates are based on management’s best knowledge of current events, historical experience, actions that the company may undertake in the future and on various other assumptions that are believed to be reasonable under the ~~circumstances, including the macroeconomic impacts of the COVID-19 pandemic.~~circumstances. As a result, actual results may be different from these estimates.

On November 3, 2021, the company completed the ~~previously announced~~ 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. To effect the separation, IBM stockholders received one share of Kyndryl common stock for every five shares of IBM common stock held at the close of business on October 25, 2021, the record date for the distribution. The company retained 19.9 percent of the shares of Kyndryl common stock immediately following the separation with the intent to dispose of such shares within twelve months after the distribution. The ~~company’s financial results~~company accounts for the ~~third quarter~~retained Kyndryl common stock as a fair value equity investment included within prepaid expenses and ~~nine months ended~~other current assets in the Consolidated Balance Sheet with subsequent fair value changes included in other (income) and expense in the Consolidated Income Statement. As of September 30, ~~2021 include Kyndryl. With~~2022, the ~~completion~~company transferred all of its 19.9 percent retained interest in Kyndryl common stock pursuant to exchange agreements with a third-party financial institution. Refer to note 8, “Financial Assets & Liabilities,” for additional information.

The accounting requirements for reporting the separation of Kyndryl as a discontinued operation were met when the separation wascompleted. Accordingly, the historical results of Kyndryl ~~will be~~are presented as discontinued operations and, as such, have been excludedfrom continuing operations and segment results for all periods presented. Refer to note 3, “Separation of Kyndryl,” for additional information.

In the first quarter of 2022, the company realigned its management structure to reflect the planned divestiture of its healthcare software assets which was completed in the second quarter of 2022. This change impacted the company’s ~~Consolidated Financial Statements beginning in~~Software segment and Other–divested businesses category. In the fourth quarter of ~~2021.~~

~~Effective~~2021, immediately prior to the separation of Kyndryl, the company made a number of changes to its organizational structure and management system. These changes ~~will impact~~impacted the company’s reportable segments ~~beginning in the fourth quarter of 2021~~ but ~~will~~did not impact the ~~company’s~~ Consolidated Financial Statements. ~~Since these organizational changes did not occur until~~Refer to note 5, “Segments,” for additional information on the ~~fourth quarter of 2021, the periods presented in this Form 10-Q~~company’s reportable segments. The segments are reported ~~under~~on a comparable basis for all periods.

In September 2022, the ~~historical segments. See note 4, "Segments" for~~IBM Qualified Personal Pension Plan (Qualified PPP) purchased two separate nonparticipating single premium group annuity contracts from The Prudential Insurance Company of America and Metropolitan Life Insurance Company (collectively, the Insurers) and irrevocably transferred to the Insurers approximately $16 billion of the Qualified PPP’s defined benefit pension obligations and related plan assets, thereby reducing the company’s pension obligations and assets by the same amount. The group annuity contracts were purchased using assets of the Qualified PPP and no additional ~~information.~~

~~The continuing operations provision for income taxes for~~funding contribution was required from the ~~third quarter~~company. As a result of ~~2021 was~~ ~~$188 million, compared to $128 million~~this transaction the company recognized a one-time, non-cash, pre-tax pension settlement charge of $5.9 billion ($4.4 billion net of tax) in the third quarter of ~~2020. The increase~~2022, primarily ~~relates to higher discrete tax benefits in the prior year. The provision for income taxes for the third quarter of 2021 includes tax charges~~ related to the ~~Kyndryl separation, partially offset by tax benefits associated with third quarter events that resulted in~~accelerated recognition of accumulated actuarial losses of the ~~expected utilization of U.S. foreign tax credits. The continuing operations provision~~Qualified PPP. Refer to note 18, “Retirement-Related Benefits,” for ~~income taxes for~~additional information.

For the ~~first~~three and nine months ~~of 2021 was $365 million, compared to~~ended September 30, 2022, the company reported a benefit from income taxes of ~~$888~~$1,287 million ~~for~~and $1,070 million, respectively. The tax benefits were primarily due to the ~~first~~transfer of a portion of the

Table of Contents

Notes to Consolidated Financial Statements — (continued)

Qualified PPP’s defined benefit pension obligations and related plan assets, as described above. For the three and nine months ~~of 2020. The~~ended September 30, 2021, the company reported a benefit from income taxes ~~for~~of $224 million and $282 million, respectively. The tax benefits were primarily driven by the resolution of certain tax audits in the first ~~nine months~~quarter of ~~2020 was primarily related to the~~2021 as well as third-quarter 2021 events that resulted in additional anticipated utilization of U.S. foreign tax ~~impacts of an intra-entity sale of certain of the company’s intellectual property.~~credits.

Noncontrolling interest amounts of ~~$8.3~~$3.7 million and ~~$3.4~~$5.5 million, net of tax, for the three months ended September 30, ~~2021~~2022 and ~~2020,~~2021, respectively, and ~~$22.4~~$14.2 million and ~~$14.7~~$14.5 million, net of tax, for the nine months ended September 30, ~~2021~~2022 and ~~2020,~~2021, respectively, are included as a reduction within other (income) and expense in the Consolidated Income Statement.

Interim results are not necessarily indicative of financial results for a full year. The information included in this Form 10-Q should be read in conjunction with the company’s ~~2020~~2021 Annual Report.

Within the financial statements and tables presented, certain columns and rows may not add due to the use of rounded numbers for disclosure purposes. Percentages presented are calculated from the underlying whole-dollar amounts. Certain prior-period amounts have been reclassified to conform to the current-period presentation. This is annotated where applicable.In addition, in the first quarter of 2022, an adjustment of $63 million was recorded between common stock and retained earnings related to the issuance of treasury stock in connection with certain previously issued stock-based compensation awards and is reflected in the Consolidated Balance Sheet and Consolidated Statement of Equity at September 30, 2022.

2. Accounting Changes:

New Standards to be 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 is effective January 1, 2023 with certain annual disclosures required beginning in 2024 and early adoption is permitted. The company will adopt the guidance as of the effective date.

Effect on Financial Statements or Other Significant Matters–As the guidance is a change to disclosures only, the company does not expect it to have a material impact in the consolidated financial results. The company’s use of supplier finance programs as of September 30, 2022 was not material.

Disclosures about Government Assistance

Standard/Description–Issuance date: November 2021. This guidance requires an entity to provide certain annual disclosures about government assistance received and accounted for by applying a grant or contribution accounting model by analogy.

Effective Date and Adoption Considerations–The guidance is effective for annual disclosures beginning in 2022 and early adoption was permitted. The company will adopt the guidance as of the effective date.

Troubled Debt Restructurings and Vintage Disclosures

Standard/Description–Issuance date: March 2022. This eliminates the accounting guidance for troubled debt restructurings and requires an entity to apply the general loan modification guidance to all loan modifications, including those made to customers experiencing financial difficulty, to determine whether the modification results in a new loan or

1011

Table of Contents

Notes to Consolidated Financial Statements — (continued)

2. ~~Accounting Changes:~~

~~New Standards to be Implemented~~

~~Revenue Contracts with Customers Acquired~~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 ~~a Business Combination~~

~~Standard/Description~~~~–Issuance date: October 2021. This guidance requires that an acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASC 606,~~ ~~Revenue from Contracts with Customers~~, as if it had originated the contracts. Deferred revenue acquired in a business combination is no longer required to be measured at its fair value, which had historically resulted in a deferred revenue impairment at the date of acquisition.leases.

Effective Date and Adoption Considerations–The amendment is effective January 1, 2023 and early adoption is permitted. The company will adopt the guidance as of the effective date.

Effect on Financial Statements or Other Significant Matters–The ~~company~~guidance is ~~evaluating~~not expected to have a material impact in the ~~impact of the guidance and adoption date.~~consolidated financial results.

~~Lessors-Certain~~

Standards Implemented

Lessors–Certain Leases with Variable Lease Payments

Standard/Description–Issuance date: July 2021. This guidance modifies a lessor’s accounting for certain leases with variable lease payments that resulted in the recognition of a day-one loss even if the lessor expected the arrangement to be profitable overall. The amendment requires these types of lease contracts to be classified as operating leases which eliminates any recognition of a day-one loss.

Effective Date and Adoption Considerations–The amendment iswas effective January 1, 2022 and early adoption iswas permitted. The company ~~will adopt~~adopted the guidance on a prospective basis as of the effective date.

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

~~Standards Implemented~~Revenue Contracts with Customers Acquired in a Business Combination

Standard/Description–Issuance date: October 2021. This guidance requires that an acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with revenue guidance, as if it had originated the contracts. Deferred revenue acquired in a business combination is no longer required to be measured at its fair value, but rather will generally be recognized at the same basis as the acquiree.

Effective Date and Adoption Considerations–The amendment is effective January 1, 2023 and early adoption is permitted including adoption in an interim period. The company adopted the guidance as of October 1, 2021 using the retrospective transition method whereby the new guidance was applied to all business combinations that occurred on or after January 1, 2021.

Effect on Financial Statements or Other Significant Matters–The guidance did not have a material impact in the consolidated financial results. The impact of the guidance in IBM’s future financial results will be dependent on the nature and size of its acquisitions.

Simplifying the Accounting for Income Taxes

Standard/Description–Issuance date: December 2019. This guidance simplifies various aspects of income tax accounting by removing certain exceptions to the general principle of the guidance and also clarifies and amends existing guidance to improve consistency in application.

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

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

~~Reference Rate Reform~~

~~Standard/Description~~–Issuance date: March 2020, with amendments in 2021. This guidance provides optional expedients and exceptions for applying GAAP to contract modifications, hedging relationships, and other transactions that reference London Interbank Offered Rate (LIBOR) or another reference rate expected to be discontinued, subject to meeting certain criteria.

~~Effective Date and Adoption Considerations~~~~–The guidance is effective as of March 12, 2020 through December 31, 2022.~~

~~Effect on Financial Statements or Other Significant Matters~~–The company made a policy election in the first quarter of 2020 to adopt the practical expedient which allows for the continuation of fair value hedge accounting for interest rate derivative contracts upon the transition from LIBOR to Secured Overnight Financing Rate (SOFR) or another reference

~~Table of Contents~~

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

rate alternative, without any impact to the Consolidated Income Statement. The company has evaluated the replacement of the LIBOR benchmark on its interest rate risk management activities and does not expect it to have a material impact in the consolidated financial results.

~~Simplifying the Test for Goodwill Impairment~~

~~Standard/Description~~–Issuance date: January 2017. This guidance simplifies the goodwill impairment test by removing Step 2. It also requires disclosure of any reporting units that have zero or negative carrying amounts if they have goodwill allocated to them.

~~Effective Date and Adoption Considerations~~~~–The guidance was effective January 1, 2020 and early adoption was permitted. The company adopted the guidance on a prospective basis as of the effective date.~~

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

~~Financial Instruments–Credit Losses~~

~~Standard/Description~~–Issuance date: June 2016, with amendments in 2018, 2019 and 2020. This changes the guidance for credit losses based on an expected loss model rather than an incurred loss model. It requires the consideration of all available relevant information when estimating expected credit losses, including past events, current conditions and forecasts and their implications for expected credit losses. It also expands the scope of financial instruments subject to impairment, including off-balance sheet commitments and residual value.

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

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

3. 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 shares of Kyndryl to IBM stockholders on a pro rata basis. The company retained 19.9 percent of the shares of Kyndryl common stock. As of September 30, 2022, the

Table of Contents

Notes to Consolidated Financial Statements — (continued)

company transferred all of its 19.9 percent retained interest in Kyndryl common stock pursuant to exchange agreements with a third-party financial institution. Refer to note 8, “Financial Assets & Liabilities,” for additional information.

The historical results of Kyndryl have been presented as discontinued operations and, as such, have been excluded from continuing operations and segment results for all periods presented. The company’s presentation of discontinued operations excludes general corporate overhead costs which were historically allocated to Kyndryl, consistent with the company’s management system, that did not meet the requirements to be presented in discontinued operations in 2021. Such allocations include labor and non-labor expenses related to IBM’s corporate support functions (e.g., finance, accounting, tax, treasury, IT, HR, legal, among others) that historically provided support to Kyndryl and transferred to Kyndryl at separation. In addition, discontinued operations excludes the historical intercompany purchases and sales between IBM and Kyndryl that were eliminated in consolidation.

IBM will provide transition services to Kyndryl predominantly consisting of information technology services for a period no longer than two years after the separation. The impact of these transition services on the company’s Consolidated Financial Statements for the three and nine months ended September 30, 2022 was not material.

IBM and Kyndryl entered into various commercial agreements pursuant to which Kyndryl will purchase hardware, software and services from IBM and under which IBM will receive hosting and information infrastructure services from Kyndryl. As part of the separation, IBM has also committed to provide upgraded hardware at no cost to Kyndryl over a two-year period after the separation. An estimate of the remaining obligation under the agreement is recorded in other accrued expenses and liabilities in the Consolidated Balance Sheet.

The following table presents the major categories of income/(loss) from discontinued operations, net of tax.


	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in millions)	2022		2021*		2022		2021*
Revenue	$	1	$	4,367	$	7	$	13,437
Cost of sales		2		3,303		19		10,043
Selling, general and administrative expense		(24)		554		42		1,527
RD&E and Other (income) and expense		0		4		(70)		59
Income from discontinued operations before income taxes	$	24	$	506	$	16	$	1,807
Provision for income taxes		6		413		1		648
Income from discontinued operations, net of tax	$	18	$	93	$	16	$	1,160

*	Excludes intercompany transactions between IBM and Kyndryl and general corporate overhead costs transferred to Kyndryl as discussed above.

Income from discontinued operations, net of tax, for the three months ended September 30, 2022 primarily 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 nine months ended September 30, 2022 reflects the same drivers as above and also includes a joint venture historically managed by Kyndryl, which did not transfer at separation due to the transfer being subject to regulatory approval. Upon receiving regulatory approval in the first quarter of 2022, the company sold its majority shares in the joint venture to Kyndryl, resulting in a pre-tax gain on sale of $68 million.

The company did not incur any separation costs during the three months ended September 30, 2022. Separation costs of $543 million incurred during the three months ended September 30, 2021, and $5 million and $739 million incurred during the nine months ended September 30, 2022 and 2021, respectively, are included in income/(loss) from discontinued operations, net of tax, in the Consolidated Income Statement. These charges primarily relate to transaction and third-party support costs, business separation and applicable employee retention fees, pension settlement charges and related tax charges.

Table of Contents

Notes to Consolidated Financial Statements — (continued)

The following table presents selected financial information related to cash flows from discontinued operations.


	Nine Months Ended September 30,
(Dollars in millions)	2022		2021
Net cash provided by/(used in) operating activities	$	—	$	2,167	*
Net cash provided by/(used in) investing activities	$	48	$	(363)

* Excludes intercompany transactions between IBM and Kyndryl and general corporate overhead costs transferred to Kyndryl as discussed above.

3.4. Revenue Recognition:

Disaggregation of Revenue

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

Revenue by Major Products/Service Offerings

Three Months Ended September 30,

Nine Months Ended September 30,

(Dollars in millions)

2021

2020

2021

2020

Cloud & Data Platforms

$
3,046

$
2,775

$
9,032

$
8,108

Cognitive Applications

1,314

1,317

3,938

3,745

Transaction Processing Platforms

1,332

1,461

4,257

4,687

Total Cloud & Cognitive Software

$
5,692

$
5,553

$
17,227

$
16,540

Consulting

2,292

1,966

6,717

5,973

Application Management

1,847

1,758

5,439

5,332

Global Process Services

287

240

846

687

Total Global Business Services

$
4,427

$
3,965

$
13,002

$
11,992

Infrastructure & Cloud Services

4,681

4,933

14,370

14,663

Technology Support Services

1,473

1,528

4,496

4,582

Total Global Technology Services

$
6,154

$
6,462

$
18,866

$
19,245

Systems Hardware

796

919

3,294

3,404

Operating Systems Software

312

338

957

1,074

Total Systems

$
1,107

$
1,257

$
4,251

$
4,477

Global Financing*

220

273

702

837

Other

18

50

45

163

Total revenue

$
17,618

$
17,560

$
54,093

$
53,253



	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in millions)	2022		2021*		2022		2021*
Hybrid Platform & Solutions	$	4,172	$	4,074	$	12,641	$	12,082
Transaction Processing		1,640		1,332		5,107		4,257
Total Software	$	5,811	$	5,406	$	17,749	$	16,339
Business Transformation		2,165		2,068		6,646		6,070
Application Operations		1,593		1,501		4,865		4,489
Technology Consulting		943		889		2,826		2,538
Total Consulting	$	4,700	$	4,457	$	14,337	$	13,098
Hybrid Infrastructure		1,931		1,453		6,392		5,294
Infrastructure Support		1,421		1,468		4,413		4,480
Total Infrastructure	$	3,352	$	2,921	$	10,805	$	9,774
Financing**		174		184		474		601
Other		70		282		475		844
Total revenue	$	14,107	$	13,251	$	43,840	$	40,656

*	Recast to reflect segment changes.

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

Hybrid Cloud Revenue by Segment


	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in millions)	2022		2021*		2022		2021*
Software	$	2,186	$	2,038	$	6,604	$	5,797
Consulting		2,221		1,982		6,642		5,605
Infrastructure		768		558		2,661		2,376
Other		2		77		143		246
Total	$	5,176	$	4,655	$	16,049	$	14,024

* Recast to reflect segment changes.

Table of Contents

Notes to Consolidated Financial Statements — (continued)

Revenue by Geography


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in millions)	2021		2020		2021		2020		2022		2021		2022		2021
Americas	$	8,217	$	8,139	$	25,216	$	24,755	$	7,416	$	6,579	$	22,614	$	20,178
Europe/Middle East/Africa		5,593		5,564		17,272		16,775		3,959		3,939		12,716		12,181
Asia Pacific		3,808		3,857		11,605		11,723		2,732		2,734		8,509		8,297
Total	$	17,618	$	17,560	$	54,093	$	53,253	$	14,107	$	13,251	$	43,840	$	40,656

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.

~~Table of Contents~~

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

At September 30, ~~2021,~~2022, the aggregate amount of the transaction price allocated to RPO related to customer contracts that are unsatisfied or partially unsatisfied was ~~$108~~$53 billion. Approximately 6073 percent of the amount is expected to be recognized as revenue in the subsequent two years, approximately 3025 percent in the subsequent three to five years and the balance ~~(mostly Infrastructure & Cloud Services)~~ thereafter.

Revenue Recognized for Performance Obligations Satisfied (or Partially Satisfied) in Prior Periods

For the three and nine months ended September 30, ~~2021,~~2022, revenue was reduced by ~~$49~~$36 million and ~~$85~~$60 million, respectively, for performance obligations satisfied (or partially satisfied) in previous periods mainly due to changes in estimates on contracts with cost-to-cost measures of progress.

Reconciliation of Contract Balances

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


	At September 30,		At December 31,		At September 30,		At December 31,
(Dollars in millions)	2021		2020		2022		2021
Notes and accounts receivable — trade (net of allowances of $277 in 2021 and $351 in 2020)	$	6,609	$	7,132
Notes and accounts receivable — trade (net of allowances of $214 in 2022 and $218 in 2021)					$	5,526	$	6,754
Contract assets*		566		497	$	522	$	471
Deferred income (current)		12,264		12,833	$	11,139	$	12,518
Deferred income (noncurrent)		3,965		4,301	$	3,018	$	3,577

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

The amount of revenue recognized during the three and nine months ended September 30, ~~2021~~2022 that was included within the deferred income balance at June 30, ~~2021~~2022 and December 31, ~~2020~~2021 was ~~$5.1~~$4.3 billion and ~~$9.5~~$8.8 billion, respectively, 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 –~~ receivable–trade allowance for expected credit losses for the nine months ended September 30, ~~2021~~2022 and the year ended December 31, ~~2020:~~2021.


(Dollars in millions)	(Dollars in millions)									(Dollars in millions)
January 1, 2021		Additions / (Releases)		Write-offs		Other*		September 30, 2021
January 1, 2022										January 1, 2022	Additions / (Releases)		Write-offs		Foreign currency and other		September 30, 2022
$	351	$	(44)	$	(30)	$	0	$	277	218	$	43	$	(28)	$	(19)	$	214

January 1, 2020

Additions / (Releases)

Write-offs

Other*

December 31, 2020
$
316

$
76

$
(46)

$
5

$
351

*~~Primarily represents translation adjustments~~.


January 1, 2021		Additions / (Releases)		Write-offs		Foreign currency and other		December 31, 2021
$	260	$	(15)	$	(28)	$	1	$	218

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

4.5. Segments:

In January 2022, IBM announced the divestiture of its healthcare software assets which closed in the second quarter of 2022. Refer to note 6, “Acquisitions & Divestitures,” for additional information. The company re-aligned its management structure to manage these assets outside of the Software segment prior to the divestiture. Beginning in the first quarter of 2022, the financial results of these assets are presented in Other–divested businesses. In the fourth quarter of 2021, immediately prior to the separation of Kyndryl, the company made a number of changes to its organizational structure and management system to align the company’s operating model to its platform-centric approach to hybrid cloud and AI. With these changes, the company revised its reportable segments, but did not impact its Consolidated Financial Statements.

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.~~company, and the prior-year periods have been recast to reflect the company’s segment changes in the first quarter of 2022 and the fourth quarter of 2021 described above. Performance measurement is based on pre-tax income from continuing operations. These results are used ~~in part,~~ by the chief operating decision maker, both in evaluating the performance of, and in allocating resources to, each of the segments. ~~See note 1, "Basis of Presentation" for additional information about the new operating segments, that will be effective in the fourth quarter of 2021.~~

1416

Table of Contents

Notes to Consolidated Financial Statements — (continued)

SEGMENT INFORMATION

Cloud &

Global

Global









Cognitive

Business

Technology

Global

Total

(Dollars in millions)

Software

Services

Services

Systems

Financing

Segments

For the three months ended September 30, 2021:













External revenue

$
5,692

$
4,427

$
6,154

$
1,107

$
220

$
17,601

Internal revenue

764

53

317

176

153

1,463

Total revenue

$
6,456

$
4,480

$
6,471

$
1,283

$
373

$
19,064

Pre-tax income/(loss) from continuing operations

$
1,675

$
587

$
383

$
(207)

$
206

$
2,644

Revenue year-to-year change

0.4
%

11.6
%

(4.5)
%

(14.3)
%

(22.3)
%

(0.7)
%
Pre-tax income year-to-year change

(8.7)
%

3.0
%

(4.1)
%

nm

5.1
%

(10.7)
%
Pre-tax income/(loss) margin

25.9
%

13.1
%

5.9
%

(16.1)
%

55.1
%

13.9
%

For the three months ended September 30, 2020:













External revenue

$
5,553

$
3,965

$
6,462

$
1,257

$
273

$
17,510

Internal revenue

875

49

312

240

208

1,683

Total revenue

$
6,428

$
4,014

$
6,774

$
1,497

$
480

$
19,193

Pre-tax income/(loss) from continuing operations

$
1,834

$
570

$
399

$
(37)

$
196

$
2,962

Pre-tax income/(loss) margin

28.5
%

14.2
%

5.9
%

(2.5)
%

40.7
%

15.4
%

~~nm – not meaningful~~


													Total
(Dollars in millions)	Software			Consulting			Infrastructure			Financing			Segments
For the three months ended September 30, 2022:
Revenue	$	5,811		$	4,700		$	3,352		$	174		$	14,037
Pre-tax income from continuing operations	$	1,306		$	462		$	280		$	79		$	2,128
Revenue year-to-year change		7.5	%		5.4	%		14.8	%		(5.7)	%		8.2	%
Pre-tax income year-to-year change		31.9	%		(0.8)	%		34.1	%		(40.4)	%		18.4	%
Pre-tax income margin		22.5	%		9.8	%		8.3	%		45.4	%		15.2	%

*For the three months ended September 30, 2021:**
Revenue	$	5,406		$	4,457		$	2,921		$	184		$	12,969
Pre-tax income from continuing operations	$	990		$	466		$	209		$	132		$	1,797
Pre-tax income margin		18.3	%		10.5	%		7.1	%		71.7	%		13.9	%

Reconciliations to IBM as Reported:


(Dollars in millions)
For the three months ended September 30:	2021		2020		2022			2021*
Revenue:
Total reportable segments	$	19,064	$	19,193	$	14,037		$	12,969
Other — divested businesses		(3)		4
Other‒divested businesses						3			189
Other revenue		20		46		68			93
Eliminations of internal transactions		(1,463)		(1,683)
Total consolidated revenue	$	17,618	$	17,560	$	14,107		$	13,251

Pre-tax income from continuing operations:
Pre-tax income/(loss) from continuing operations:
Total reportable segments	$	2,644	$	2,962	$	2,128		$	1,797
Amortization of acquired intangible assets		(475)		(459)		(417)			(469)
Acquisition-related (charges)/income		(4)		(1)		(1)			(4)
Non-operating retirement-related (costs)/income		(328)		(291)		(6,062)	**		(318)
Separation-related charges		(277)		—
Elimination of internal transactions		(57)		(158)
Other — divested businesses		(10)		(20)
Unallocated corporate amounts		(175)		(206)
Total pre-tax income from continuing operations	$	1,319	$	1,827
Kyndryl-related impacts+						14			—
Eliminations of internal transactions						0			1
Other‒divested businesses						0			(41)
Unallocated corporate amounts and other						(163)			(155)
Total pre-tax income/(loss) from continuing operations					$	(4,501)		$	813

*	Recast to conform to current year presentation.

** Includes a one-time, non-cash, pre-tax pension settlement charge of $5.9 billion. See note 18, “Retirement-Related Benefits,” for additional information.

+ Refer to note 8, “Financial Assets & Liabilities,” for additional information.

1517

Table of Contents

Notes to Consolidated Financial Statements — (continued)

SEGMENT INFORMATION

Cloud &

Global

Global









Cognitive

Business

Technology

Global

Total

(Dollars in millions)

Software

Services

Services

Systems

Financing

Segments

For the nine months ended September 30, 2021:













External revenue

$
17,227

$
13,002

$
18,866

$
4,251

$
702

$
54,047

Internal revenue

2,322

166

956

606

581

4,631

Total revenue

$
19,549

$
13,168

$
19,822

$
4,857

$
1,283

$
58,678

Pre-tax income/(loss) from continuing operations

$
4,822

$
1,349

$
903

$
(33)

$
618

$
7,659

Revenue year-to-year change

3.0
%

8.5
%

(1.7)
%

(4.9)
%

(14.3)
%

1.4
%
Pre-tax income year-to-year change

7.8
%

12.1
%

91.9
%

nm

9.1
%

14.2
%
Pre-tax income/(loss) margin

24.7
%

10.2
%

4.6
%

(0.7)
%

48.1
%

13.1
%

For the nine months ended September 30, 2020:













External revenue

$
16,540

$
11,992

$
19,245

$
4,477

$
837

$
53,090

Internal revenue

2,431

150

911

628

660

4,780

Total revenue

$
18,971

$
12,142

$
20,155

$
5,106

$
1,497

$
57,870

Pre-tax income/(loss) from continuing operations

$
4,475

$
1,203

$
471

$
(7)

$
566

$
6,708

Pre-tax income/(loss) margin

23.6
%

9.9
%

2.3
%

(0.1)
%

37.8
%

11.6
%

~~nm – not meaningful~~


													Total
(Dollars in millions)	Software			Consulting			Infrastructure			Financing			Segments
For the nine months ended September 30, 2022:
Revenue	$	17,749		$	14,337		$	10,805		$	474		$	43,365
Pre-tax income from continuing operations	$	3,816		$	1,154		$	1,236		$	265		$	6,470
Revenue year-to-year change		8.6	%		9.5	%		10.6	%		(21.2)	%		8.9	%
Pre-tax income year-to-year change		41.0	%		13.9	%		25.0	%		(26.8)	%		27.6	%
Pre-tax income margin		21.5	%		8.0	%		11.4	%		55.9	%		14.9	%

*For the nine months ended September 30, 2021:**
Revenue	$	16,339		$	13,098		$	9,774		$	601		$	39,812
Pre-tax income from continuing operations	$	2,707		$	1,013		$	989		$	362		$	5,071
Pre-tax income margin		16.6	%		7.7	%		10.1	%		60.1	%		12.7	%

Reconciliations to IBM as Reported:


(Dollars in millions)
For the nine months ended September 30:	2021		2020		2022			2021*
Revenue:
Total reportable segments	$	58,678	$	57,870	$	43,365		$	39,812
Other — divested businesses		(2)		36
Other‒divested businesses						319			583
Other revenue		47		127		156			261
Eliminations of internal transactions		(4,631)		(4,780)
Total consolidated revenue	$	54,093	$	53,253	$	43,840		$	40,656

Pre-tax income from continuing operations:
Pre-tax income/(loss) from continuing operations:
Total reportable segments	$	7,659	$	6,708	$	6,470		$	5,071
Amortization of acquired intangible assets		(1,389)		(1,404)		(1,337)			(1,371)
Acquisition-related (charges)/income		(37)		(3)
Acquisition-related charges						(9)			(37)
Non-operating retirement-related (costs)/income		(998)		(829)		(6,455)	**		(967)
Separation-related charges		(513)		—
Kyndryl-related impacts+						(353)			—
Eliminations of internal transactions		(269)		(334)		(15)			(3)
Other — divested businesses		(34)		(17)
Other‒divested businesses						108	++		(106)
Unallocated corporate amounts		(643)		(773)		(565)			(619)
Total pre-tax income from continuing operations	$	3,776	$	3,348
Total pre-tax income/(loss) from continuing operations					$	(2,156)		$	1,968

*	Recast to conform to current year presentation.

**	Includes a one-time, non-cash, pre-tax pension settlement charge of $5.9 billion. See note 18, “Retirement-Related Benefits,” for additional information.

+	Refer to note 8, “Financial Assets & Liabilities,” for additional information.

++ Includes a gain from the sale of the company’s healthcare software assets. Refer to note 6, “Acquisitions & Divestitures.”

1618

Table of Contents

Notes to Consolidated Financial Statements — (continued)

5.6. Acquisitions & Divestitures:

Acquisitions

Purchase price consideration for all acquisitions was paid primarily in cash. All acquisitions, except as 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 nine months ended September 30, ~~2021,~~2022, the company completed 10six acquisitions at an aggregate cost of ~~$3,049~~$1,102 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
First Quarter

~~Nordcloud~~Envizi	~~Global Business Services~~Software	~~Consulting company providing services in cloud implementation, application transformation~~Data and ~~managed services~~analytics software provider for environmental performance management

~~Taos Mountain, LLC (Taos)~~Sentaca	~~Global Business Services~~Consulting	~~Leading~~Telco consulting services and solutions provider specializing in automation, cloud ~~professional~~migration, and ~~managed services provider~~future networks for telecommunication providers

~~StackRox~~Neudesic	~~Cloud & Cognitive Software~~Consulting	~~Innovator in container~~Application development and ~~Kubernetes-native security~~cloud computing services company
Second Quarter

~~Turbonomic, Inc. (Turbonomic)~~Randori	~~Cloud & Cognitive~~ Software	~~Application Resource Management~~Leading attack surface management (ASM) and ~~Network Performance Management software~~cybersecurity provider

~~ECX Copy Data Management business~~Databand.ai	~~Cloud & Cognitive~~ Software	~~Smart~~Proactive data ~~protection solution~~observability platform that isolates data errors and issues to alert relevant stakeholders
~~from Catalogic Software, Inc.~~

~~Waeg~~	~~Global Business Services~~	~~Leading Salesforce Consulting Partner~~

~~myInvenio~~	~~Cloud & Cognitive Software~~	~~Process mining software company~~

Third Quarter

~~VEVRE~~ Omnio	Software ~~business from Volta, Inc.~~	Developer of software connectors used in the collection of raw data for various Industrial Internet of Things (IoT) applications
	~~Cloud & Cognitive Software~~	~~Cloud-native virtual routing engine~~
~~BoxBoat Technologies~~	~~Global Business Services~~	~~Premier DevOps consultancy and enterprise Kubernetes certified service provider~~
~~Bluetab Solutions Group~~	~~Global Business Services~~	~~Data solutions service provider~~

At September 30, 2022, the remaining cash to be remitted by the company related to certain first half 2022 acquisitions was $90 million, most of which is expected to be paid by the second quarter of 2023.

The following table reflects the purchase price related to these acquisitions and the resulting purchase price allocations as of September 30, 2022.

1719

Table of Contents

Notes to Consolidated Financial Statements — (continued)

~~The following table reflects the purchase price related to these acquisitions and the resulting purchase price allocations as of September 30, 2021.~~


	Amortization			Other		Amortization	Total
(Dollars in millions)	Life (in years)	Turbonomic		Acquisitions		Life (in years)	Acquisitions
Current assets		$	126	$	101		$	63
Property, plant and equipment/noncurrent assets			—		6			3
Intangible assets:
Goodwill	N/A		1,439		912	N/A		857
Client relationships	4-10		290		173	7		151
Completed technology	4-7		117		134	4-7		90
Trademarks	1-6		18		29	2-3		7
Total assets acquired		$	1,990	$	1,356		$	1,171
Current liabilities			49		59			48
Noncurrent liabilities			113		76			22
Total liabilities assumed		$	161	$	135		$	69
Total purchase price		$	1,829	$	1,220		$	1,102

N/A – not applicable

The goodwill generated is primarily attributable to the assembled workforce of the acquired businesses and the increased synergies expected to be achieved from the integration of the acquired businesses into the company’s various integrated solutions and services, neither of which qualifies as an amortizable intangible asset.

The overall weighted-average useful life of the identified amortizable intangible assets acquired was 6.7 years. Goodwill of $432 million and $425 million was assigned to the Software and Consulting segments, respectively. It is expected that 41 percent of the goodwill will be deductible for tax purposes.

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.

~~Turbonomic~~—The overall weighted-average useful life of the identified amortizable intangible assets acquired was 8.9 years. Goodwill of $1,372 million and $67 million was assigned to the Cloud & Cognitive Software and Global Business Services segments, respectively. It is expected that NaN of the goodwill will be deductible for tax purposes.

~~Other acquisitions~~—The overall weighted-average useful life of the identified amortizable intangible assets acquired was 6.5 years. Goodwill of $628 million, $283 million and $2 million was assigned to the Global Business Services, Cloud & Cognitive Software and Global Technology Services segments, respectively. It is expected that approximately 9 percent of the goodwill will be deductible for tax purposes.

InOn October ~~2021,~~3, 2022, the company ~~entered into a definitive agreement to acquire~~acquired Dialexa, a privately held ~~application development and cloud computing~~digital product engineering services ~~company. Upon closing, the acquired business~~firm. Dialexa will be integrated into the ~~Global Business Services~~Consulting segment. At the date of issuance of the financial statements, the initial purchase accounting for Dialexa was not complete.

Divestitures

Healthcare Software Assets — In ~~October 2021, the company also announced it had entered into~~January 2022, IBM and Francisco Partners (Francisco) signed a definitive agreement in which Francisco would acquire IBM’s healthcare data and analytics assets reported within Other‒divested businesses for $1,065 million. Refer to note 5, “Segments,” for additional information. The assets include Health Insights, MarketScan, Clinical Development, Social Program Management, Micromedex, and imaging software offerings. In addition, IBM is providing Francisco with ~~McDonald’s~~transition services including IT and other services. The closing completed for the U.S. and Canada on June 30, 2022 and a subsequent closing occurred in most other countries on September 30, 2022. The company expects to ~~acquire McD Tech Labs to further accelerate~~close the ~~development and deployment~~remaining countries by the first quarter of ~~its Automated Order Taking (AOT) technology. Upon closing, McD Tech Labs will be integrated into the Cloud & Cognitive Software segment. In November 2021,~~2023.

On June 30, 2022, the company ~~announced it had entered into~~received a ~~definitive agreement~~cash payment of $1,065 million. As of September 30, 2022 a total pre-tax gain of $259 million has been recognized in other (income) and expense in the Consolidated Income Statement. Any pre-tax gains related to ~~acquire ReaQta, a provider of endpoint security solutions designed to leverage AI to automatically identify and manage threats. Upon closing, ReaQta will be integrated into~~ the ~~Cloud & Cognitive Software segment. All acquisitions~~subsequent wave closings are not expected to ~~close~~be material. The total gain on sale may change in the ~~fourth quarter of 2021, subject~~future due to ~~customary closing conditions, including regulatory clearance.~~changes in transaction estimates; however, such changes are not expected to be material.

1820

Table of Contents

Notes to Consolidated Financial Statements — (continued)

Other Divestitures

— In the ~~third~~first quarter of ~~2021,~~2022, the ~~company~~Infrastructure segment completed the sale of its remaining OEM commercial financing capabilities reported within the Global Financing segment. In addition, IBM completed 2 divestitures in the Cloud & Cognitive Software segment 1 in the second quarter and 1 in the third quarter of 2021. The financial terms related to each of these transactions were not material.

In October 2021, the company entered into a definitive agreement to sell certain intelligence analysis capabilities reported within the Cloud & Cognitive Software segment. The transaction is expected to close in the fourth quarter of 2021, subject to the satisfaction of applicable regulatory requirements and customary closing ~~conditions.~~ one divestiture. The financial terms related to this transaction ~~are~~were not ~~expected to have a material impact to IBM's consolidated financial statements~~.material.

6.7. ~~Earnings~~Earnings/(Loss) Per Share of Common Stock:

The following tables provide the computation of basic and diluted ~~earnings~~earnings/(loss) per share of common stock for the three and nine months ended September 30, ~~2021~~2022 and ~~2020.~~2021.


(Dollars in millions except per share amounts)
For the three months ended September 30:	2021		2020		2022		2021
Number of shares on which basic earnings per share is calculated:
Weighted-average shares outstanding during period		897,097,073		891,381,032		904,076,831		897,097,073
Add — Incremental shares under stock-based compensation plans		6,946,467		4,595,327		—		6,946,467
Add — Incremental shares associated with contingently issuable shares		1,909,573		1,315,874		—		1,909,573
Number of shares on which diluted earnings per share is calculated		905,953,114		897,292,233		904,076,831		905,953,114

Income from continuing operations	$	1,130	$	1,698
Income/(loss) from continuing operations					$	(3,214)	$	1,037
Income/(loss) from discontinued operations, net of tax		—		(1)		18		93
Net income on which basic earnings per share is calculated	$	1,130	$	1,698
Net income/(loss) on which basic earnings per share is calculated					$	(3,196)	$	1,130

Income from continuing operations	$	1,130	$	1,698
Income/(loss) from continuing operations					$	(3,214)	$	1,037
Net income applicable to contingently issuable shares		—		—		—		—
Income from continuing operations on which diluted earnings per share is calculated	$	1,130	$	1,698
Income/(loss) from discontinued operations, net of tax, on which basic and diluted earnings per share is calculated		—		(1)
Net income on which diluted earnings per share is calculated	$	1,130	$	1,698
Income/(loss) from continuing operations on which diluted earnings per share is calculated					$	(3,214)	$	1,037
Income/(loss) from discontinued operations, net of tax, on which diluted earnings per share is calculated						18		93
Net income/(loss) on which diluted earnings per share is calculated					$	(3,196)	$	1,130

Earnings/(loss) per share of common stock:
Assuming dilution
Continuing operations	$	1.25	$	1.89	$	(3.55)	$	1.14
Discontinued operations		—		0.00		0.02		0.10
Total	$	1.25	$	1.89	$	(3.54)	$	1.25
Basic
Continuing operations	$	1.26	$	1.90	$	(3.55)	$	1.16
Discontinued operations		—		0.00		0.02		0.10
Total	$	1.26	$	1.90	$	(3.54)	$	1.26

Stock options to purchase ~~750,990~~840,544 shares and ~~1,510,886~~750,990 shares were outstanding as of September 30, ~~2021~~2022 and ~~2020,~~2021, respectively, but were not included in the computation of diluted ~~earnings~~earnings/(loss) 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.

Due to the net loss for the three months ended September 30, 2022, otherwise dilutive potential shares of common stock under stock-based compensation plans and contingently issuable shares of 6,696,350 and 2,069,742, respectively, have been excluded from the computation of diluted earnings/(loss) per share as the effect would have been antidilutive.

1921

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Notes to Consolidated Financial Statements — (continued)

(Dollars in millions except per share amounts)

For the nine months ended September 30:

2021

2020
Number of shares on which basic earnings per share is calculated:




Weighted-average shares outstanding during period

895,257,004

889,595,181
Add — Incremental shares under stock-based compensation plans

7,000,190

4,875,369
Add — Incremental shares associated with contingently issuable shares

1,720,345

1,286,300
Number of shares on which diluted earnings per share is calculated

903,977,539

895,756,850

Income from continuing operations

$
3,411

$
4,237
Income/(loss) from discontinued operations, net of tax

(1)

(2)
Net income on which basic earnings per share is calculated

$
3,410

$
4,234

Income from continuing operations

$
3,411

$
4,237
Net income applicable to contingently issuable shares

—

(2)
Income from continuing operations on which diluted earnings per share is calculated

$
3,411

$
4,234
Income/(loss) from discontinued operations, net of tax, on which basic and diluted earnings per share is calculated

(1)

(2)
Net income on which diluted earnings per share is calculated

$
3,410

$
4,232

Earnings/(loss) per share of common stock:




Assuming dilution




Continuing operations

$
3.77

$
4.72
Discontinued operations

0.00

0.00
Total

$
3.77

$
4.72
Basic




Continuing operations

$
3.81

$
4.76
Discontinued operations

0.00

0.00
Total

$
3.81

$
4.76


(Dollars in millions except per share amounts)
For the nine months ended September 30:	2022		2021
Number of shares on which basic earnings per share is calculated:
Weighted-average shares outstanding during period		901,621,217		895,257,004
Add — Incremental shares under stock-based compensation plans		—		7,000,190
Add — Incremental shares associated with contingently issuable shares		—		1,720,345
Number of shares on which diluted earnings per share is calculated		901,621,217		903,977,539

Income/(loss) from continuing operations	$	(1,087)	$	2,250
Income/(loss) from discontinued operations, net of tax		16		1,160
Net income/(loss) on which basic earnings per share is calculated	$	(1,071)	$	3,410

Income/(loss) from continuing operations	$	(1,087)	$	2,250
Net income applicable to contingently issuable shares		—		—
Income/(loss) from continuing operations on which diluted earnings per share is calculated	$	(1,087)	$	2,250
Income/(loss) from discontinued operations, net of tax, on which diluted earnings per share is calculated		16		1,160
Net income/(loss) on which diluted earnings per share is calculated	$	(1,071)	$	3,410

Earnings/(loss) per share of common stock:
Assuming dilution
Continuing operations	$	(1.21)	$	2.49
Discontinued operations		0.02		1.28
Total	$	(1.19)	$	3.77
Basic
Continuing operations	$	(1.21)	$	2.51
Discontinued operations		0.02		1.30
Total	$	(1.19)	$	3.81

Stock options to purchase ~~879,289~~930,788 shares and ~~1,386,591~~879,289 shares (average of first, second and third quarter share amounts) were outstanding as of September 30, ~~2021~~2022 and ~~2020,~~2021, respectively, but were not included in the computation of diluted ~~earnings~~earnings/(loss) 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.

Due to the net loss for the nine months ended September 30, 2022, otherwise dilutive potential shares of common stock under stock-based compensation plans and contingently issuable shares of 7,530,115 and 1,899,113, respectively, have been excluded from the computation of diluted earnings/(loss) per share as the effect would have been antidilutive.

7.8. Financial Assets & Liabilities:

Fair Value Measurements

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. The company 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;

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Notes to Consolidated Financial Statements — (continued)

●

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.

~~Table of Contents~~

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

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.

●

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 cash and debt investment portfolio is to maintain principal by investing in very liquid and highly rated investment grade securities.

The company’s standard practice is to hold all of its debt security investments classified as available-for-sale until maturity. ~~NaN~~No impairments for credit losses and no material non-credit impairments were recorded for the three and nine months ended September 30, ~~2021 and 2020, respectively.~~2022

Certain 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 non-financial assets depend on the type of asset. There were no material impairments of non-financial assets for the three and nine months ended September 30, ~~2021~~2022 and ~~2020,~~2021, respectively.

2123

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Notes to Consolidated Financial Statements — (continued)

The following table presents the company’s financial assets and financial liabilities that are measured at fair value on a recurring basis at September 30, ~~2021~~2022 and December 31, ~~2020.~~2021.


	Fair Value									Fair Value
	Hierarchy	At September 30, 2021				At December 31, 2020				Hierarchy	At September 30, 2022				At December 31, 2021
(Dollars in millions)	Level	Assets (7)		Liabilities (8)		Assets (7)		Liabilities (8)		Level	Assets (8)		Liabilities (9)		Assets (8)		Liabilities (9)
Cash equivalents: (1)
Time deposits and certificates of deposit (2)	2	$	3,030	$	N/A	$	7,668	$	N/A	2	$	4,195	$	N/A	$	1,903	$	N/A
Money market funds	1		130		N/A		148		N/A	1		732		N/A		263		N/A
U.S. government securities (2)	2		—		N/A		500		N/A	2		—		N/A		599		N/A
Total cash equivalents		$	3,160	$	N/A	$	8,316	$	N/A		$	4,927	$	N/A	$	2,766	$	N/A
Equity investments (3)	1		0		N/A		2		N/A	1		—		N/A		0		N/A
Debt securities-current (2)(4)	2		600		N/A		600		N/A
Debt securities-noncurrent (2)(5)	2		6		N/A		7		N/A
Kyndryl common stock (4)										1		184		N/A		807		N/A
Secured borrowing (4)										2		N/A		184		N/A		—
Debt securities-current (2)(5)										2		1,753		N/A		600		N/A
Debt securities-noncurrent (2)(6)										2,3		31		N/A		37		N/A
Derivatives designated as hedging instruments:
Interest rate contracts	2		16		—		100		—	2		1		339		12		—
Foreign exchange contracts	2		367		95		111		580	2		998		531		359		117
Derivatives not designated as hedging instruments:
Foreign exchange contracts	2		42		38		13		47	2		13		31		21		42
Equity contracts (6)	1,2		—		16		12		—
Equity contracts (7)										1,2		—		178		6		4
Total		$	4,191	$	149	$	9,161	$	627		$	7,908	$	1,263	$	4,608	$	162

(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)	Included within investments and sundry assets in the Consolidated Balance Sheet.

(4)	Refer to “Kyndryl Common Stock” below for additional information.

(5)	U.S. treasury bills and term deposits that are reported within marketable securities in the Consolidated Balance Sheet.

~~(5)~~(6)

~~Primarily includes~~Includes corporate and government debt securities that are reported within investments and sundry assets in the Consolidated Balance Sheet.

~~(6)~~(7)

Level 1 includes immaterial amounts related to equity futures contracts.

~~(7)~~(8)

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 September 30, ~~2021~~2022 were ~~$373~~$1,008 million and ~~$52~~$4 million, respectively, and at December 31, ~~2020~~2021 were ~~$85~~$358 million and ~~$151~~$40 million, respectively.

~~(8)~~(9)

The gross balances of derivative liabilities contained within other accrued expenses and liabilities, and other liabilities in the Consolidated Balance Sheet at September 30, ~~2021~~2022 were ~~$69~~$475 million and ~~$80~~$603 million, respectively, and at December 31, ~~2020~~2021 were ~~$587~~$60 million and ~~$40~~$103 million, respectively.

N/A – not applicable

Kyndryl Common Stock

On November 3, 2021, IBM completed the separation of Kyndryl and retained 19.9 percent of the shares of Kyndryl common stock with the intent to dispose of the shares within twelve months of the separation.

On May 18, 2022, the company borrowed an aggregate principal amount of $357 million under a short-term credit facility with a third-party financial institution, the proceeds of which were used to repay certain of the company’s existing indebtedness. On May 23, 2022, the company completed a debt-for-equity exchange where 22.3 million shares of Kyndryl common stock, equal to 9.95 percent or half of the company’s 19.9 percent retained interest (the Shares), were exchanged at a strike price of $13.95 per share to extinguish $311 million of the company’s indebtedness under the short-term credit facility (the May 2022 Exchange). The remaining portion of the short-term credit facility was repaid with $46 million of cash.

In connection with the May 2022 Exchange, the company entered into a cash-settled swap with the lender of the short-term credit facility as the counterparty that maintained IBM’s continued economic exposure in the Shares. Upon

Table of Contents

Notes to Consolidated Financial Statements — (continued)

settlement of the swap, which will occur no later than November 2, 2022, IBM will either receive or pay an amount derived from the difference between the volume-weighted average price (VWAP) of the Kyndryl common stock over the outstanding term of the swap and the strike price of $13.95 per share. As a result, the most significant input into the valuation of the swap is the price of Kyndryl common stock.The fair value of the swap at September 30, 2022 was $85 million and is included within other accrued expenses and liabilities in the Consolidated Balance Sheet. For the three and nine months ended September 30, 2022, an unrealized gain on the swap of $3 million and an unrealized loss on the swap of $85 million, respectively, was recorded in other (income) and expense in the Consolidated Income Statement.

As a result of the swap, the transfer of the Shares pursuant to the May 2022 Exchange did not qualify as a true sale, and therefore the Shares remain on the company’s Consolidated Balance Sheet at September 30, 2022. Relatedly, the portion of the company’s indebtedness under the short-term credit facility that was extinguished pursuant to the May 2022 Exchange has been classified as a secured borrowing within short-term debt in the Consolidated Balance Sheet. The company has elected to record the debt at fair value based on changes in the value of the Shares underlying the debt. The fair value of the debt was $184 million at September 30, 2022. In electing the fair value option, the company recognizes changes in fair value of the debt in other (income) and expense, which amounted to $34 million and $127 million for the three and nine months ended September 30, 2022, respectively. The contractual principal balance of the debt was $311 million at September 30, 2022. Both the Shares and the debt are expected to be entirely derecognized from the company’s Consolidated Balance Sheet upon settlement of the swap, which will occur no later than November 2, 2022.

On August 5, 2022, the company borrowed an aggregate principal amount of $300 million under a short-term credit facility with a third-party financial institution, the proceeds of which will be used to repay certain of the company’s existing indebtedness. On August 11, 2022, the company completed a debt-for-equity exchange through the transfer of the remaining 22.3 million shares of Kyndryl common stock to extinguish $229 million of the company’s indebtedness under the short-term credit facility (the August 2022 Exchange). The remaining portion of the short-term credit facility was repaid with $71 million of cash. As a result of the August 2022 Exchange, the 22.3 million shares of Kyndryl common stock were derecognized from the company’s Consolidated Balance Sheet. The debt-for-equity exchange associated with the August 2022 Exchange is a non-cash financing activity for purposes of the company’s Consolidated Statement of Cash Flows as of September 30, 2022.

The retained interest in the Kyndryl common stock of $184 million and $807 million at September 30, 2022 and December 31, 2021, respectively, is included within prepaid expenses and other current assets in the Consolidated Balance Sheet. For the nine months ended September 30, 2022, the company recorded an unrealized loss of $93 million, net of adjustment for the mark-to-market on the related debt as described above related to the Kyndryl common stock under the May 2022 Exchange. The net mark-to-market impact for the three months ended September 30, 2022 was zero. The company recorded a realized gain of $11 million and a realized loss of $174 million related to the Kyndryl shares under the August 2022 Exchange for the three and nine months ended September 30, 2022, respectively. Gains and losses for both the May and August exchanges as noted above were recorded in other (income) and expense in the Consolidated Income Statement.

Financial Assets and Liabilities Not Measured at Fair Value

Short-Term Receivables and Payables

Notes and other accounts receivable 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 and including short-term finance lease liabilities) 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.

Table of Contents

Notes to Consolidated Financial Statements — (continued)

Loans and 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, ~~2021~~2022 and December 31, ~~2020,~~2021, 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 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 ~~$46,926~~$44,942 million and ~~$54,355~~$44,917 million, and the estimated fair value was ~~$52,150~~$40,944 million and ~~$61,598~~$49,465 million at September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, 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.

8.9. Financing Receivables:

Financing receivables primarily consist of client loan and installment payment receivables (loans) ~~and~~, 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 generally for terms up to seven years. Investment in sales-type and direct financing leases relate principally to the company’s ~~Systems~~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.

A summary of the components of the company’s financing receivables is presented as follows:

Client Financing Receivables


Client Loan and

Investment in






Installment Payment

Sales-Type and

Commercial

(Dollars in millions)

Receivables

Direct Financing

Financing

At September 30, 2021:

(Loans)

Leases

Receivables

Total
Financing receivables, gross

$
8,708

$
3,216

$
727

$
12,651
Unearned income

(355)

(228)

0

(583)
Residual value*

—

345

—

345
Amortized cost

$
8,353

$
3,333

$
727

$
12,413
Allowance for credit losses

(135)

(65)

(6)

(207)
Total financing receivables, net

$
8,218

$
3,268

$
721

$
12,207
Current portion

$
5,022

$
1,419

$
721

$
7,161
Noncurrent portion

$
3,196

$
1,850

$
—

$
5,046


	Client Financing Receivables								Client Financing Receivables
	Client Loan and		Investment in						Client Loan and		Investment in
	Installment Payment		Sales-Type and		Commercial				Installment Payment		Sales-Type and		Commercial Financing Receivables
(Dollars in millions)	Receivables		Direct Financing		Financing				Receivables		Direct Financing		Held for		Held for
At December 31, 2020:	(Loans)		Leases		Receivables		Total
At September 30, 2022:									(Loans)		Leases		Investment		Sale*		Total
Financing receivables, gross	$	12,159	$	4,001	$	2,419	$	18,580	$	7,777	$	3,566	$	169	$	395	$	11,907
Unearned income		(488)		(335)		0		(823)		(330)		(285)		—		—		(615)
Residual value*		—		485		—		485
Unguaranteed residual value										—		323		—		—		323
Amortized cost	$	11,671	$	4,151	$	2,419	$	18,242	$	7,447	$	3,604	$	169	$	395	$	11,616
Allowance for credit losses		(173)		(82)		(8)		(263)		(101)		(53)		(5)		—		(159)
Total financing receivables, net	$	11,498	$	4,069	$	2,411	$	17,979	$	7,346	$	3,551	$	164	$	395	$	11,456
Current portion	$	6,955	$	1,525	$	2,411	$	10,892	$	4,750	$	1,366	$	164	$	395	$	6,676
Noncurrent portion	$	4,542	$	2,544	$	—	$	7,086	$	2,596	$	2,185	$	—	$	—	$	4,781

* ~~Includes guaranteed and unguaranteed residual~~The carrying value of the receivables classified as held for sale approximates fair value.

2326

Table of Contents

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, 2021:	(Loans)		Leases		Investment		Sale*		Total
Financing receivables, gross	$	9,303	$	3,336	$	450	$	793	$	13,881
Unearned income		(353)		(223)		—		—		(576)
Unguaranteed residual value		—		335		—		—		335
Amortized cost	$	8,949	$	3,448	$	450	$	793	$	13,640
Allowance for credit losses		(131)		(64)		(6)		—		(201)
Total financing receivables, net	$	8,818	$	3,384	$	444	$	793	$	13,439
Current portion	$	5,371	$	1,406	$	444	$	793	$	8,014
Noncurrent portion	$	3,447	$	1,978	$	—	$	—	$	5,425

* 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, with enhanced focus due to the current macroeconomic uncertainty.~~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 also utilized in the normal course of business as part of the company’s cash and liquidity management.

Financing receivables pledged as collateral for nonrecourse borrowings were ~~$396~~$386 million and ~~$482~~$408 million at September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively. These borrowings are included in note ~~11,~~12, “Borrowings.”

Transfer of Financial Assets

~~For the nine months ended September 30, 2021, the~~The company sold $2,970 million of client financing receivables to third parties, consisting of loan and lease receivables of $2,189 million and $781 million, respectively. More than half of the receivables sold were classified as current assets at the time of sale. For the nine months ended September 30, 2020, the company sold $1,610 million of client financing receivables to third parties, consisting of loan and lease receivables of $758 million and $852 million, respectively.

~~On December 24, 2020, the company entered into~~has an existing agreement with a third-party investor to sell ~~up to $3,000 million of~~ IBM short-term commercial financing receivables ~~at any one time,~~ on a revolving basis. The company ~~sold $4,465 million of commercial financing receivables under~~has expanded this agreement to other countries and geographies since commencement in the ~~agreement for the nine months ended September 30, 2021.~~U.S. and Canada in 2020. In addition, the company ~~included $400 million~~enters into agreements with third-party financial institutions to sell certain of its client financing receivables, including both loan and ~~$383 million~~lease receivables, for cash proceeds. In the first nine months of 2022, sales of client financing receivables were largely focused on credit mitigation. During 2021, sales of client financing receivables were utilized as part of the company’s cash and liquidity management as well as for credit mitigation.

The following table presents the total amount of client and commercial financing receivables classified as held for sale at September 30, 2021 and December 31, 2020, respectively, in short-term financing receivables in the Consolidated Balance Sheet. The carrying value of the receivables classified as held for sale approximates fair value. The company did 0t have any sales of commercial financing receivables for the nine months ended September 30, 2020.transferred.


(Dollars in millions)
For the nine months ended September 30:	2022		2021
Client financing receivables:
Lease receivables	$	15	$	781
Loan receivables		2		2,189
Total client financing receivables transferred	$	17	$	2,970
Commercial financing receivables:
Receivables transferred during the period	$	6,091	$	4,465
Receivables uncollected at end of period*	$	816	$	707

*	Of the total amount of commercial financing receivables sold and derecognized from the Consolidated Balance Sheet, the amounts presented remained uncollected from business partners as of September 30, 2022 and 2021.

The ~~transfers~~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 and the impacts to the Consolidated Income ~~Statement, including fees and net gain or loss associated with the transfers of these receivables for the nine months ended September 30, 2021 and September 30, 2020, were not material.~~

~~Financing Receivables by Portfolio Segment~~

The following tables present the amortized cost basis of client financing receivables at September 30, 2021 and December 31, 2020, further segmented by 3 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.

2427

Table of Contents

Notes to Consolidated Financial Statements — (continued)

(Dollars in millions)




  ��







At September 30, 2021:

Americas

EMEA

Asia Pacific

Total
Amortized cost

$
5,966

$
3,616

$
2,105

$
11,687
Allowance for credit losses:








Beginning balance at January 1, 2021

$
141

$
77

$
37

$
255
Write-offs

$
(6)

$
(1)

$
(7)

$
(14)
Recoveries

—

—

1

1
Additions/(releases)

(20)

(10)

(6)

(36)
Other*

(2)

(3)

0

(5)
Ending balance at September 30, 2021

$
113

$
64

$
24

$
201

Statement, including fees and net gain or loss associated with the transfers of these receivables for the nine months ended September 30, 2022 and 2021 were not material.

Financing Receivables by Portfolio Segment

The following tables present the amortized cost basis for client financing receivables at September 30, 2022 and December 31, 2021, 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 December 31, 2020:	Americas		EMEA		Asia Pacific		Total
At September 30, 2022:									Americas		EMEA		Asia Pacific		Total
Amortized cost	$	7,758	$	5,023	$	3,042	$	15,822	$	6,900	$	2,731	$	1,420	$	11,051
Allowance for credit losses:
Beginning balance at January 1, 2020	$	142	$	69	$	41	$	252
Beginning balance at January 1, 2022									$	111	$	61	$	23	$	195
Write-offs	$	(28)	$	(3)	$	(3)	$	(34)	$	(20)	$	(1)	$	(2)	$	(23)
Recoveries		0		0		2		3		1		0		4		5
Additions/(releases)		33		5		(4)		34		(6)		(3)		(5)		(13)
Other*		(6)		6		1		1		1		(8)		(2)		(10)
Ending balance at December 31, 2020	$	141	$	77	$	37	$	255
Ending balance at September 30, 2022									$	87	$	49	$	18	$	154


(Dollars in millions)
At December 31, 2021:	Americas		EMEA		Asia Pacific		Total
Amortized cost	$	6,573	$	3,793	$	2,031	$	12,397
Allowance for credit losses:
Beginning balance at January 1, 2021	$	141	$	77	$	37	$	255
Write-offs	$	(8)	$	(2)	$	(7)	$	(17)
Recoveries		0		0		1		1
Additions/(releases)		(19)		(11)		(7)		(38)
Other*		(3)		(3)		0		(7)
Ending balance at December 31, 2021	$	111	$	61	$	23	$	195

* Primarily represents translation adjustments.

~~IBM continues to monitor~~When determining the ~~global impacts from~~allowances, financing receivables are evaluated either on an individual or a collective basis. For the ~~COVID-19 pandemic as well as its impact~~company’s policy on ~~external economic models. The company’s allowance~~determining allowances for credit losses, ~~at September 30, 2021 and December 31, 2020 reflects the qualitative process which is described further in~~refer to note A, “Significant Accounting ~~Policies”~~Policies,” in the company’s ~~2020~~2021 Annual Report. Any changes to economic models that occurred after the balance sheet date will be reflected in future periods.

2528

Table of Contents

Notes to Consolidated Financial Statements — (continued)

Past Due Financing Receivables

The company summarizes information about the amortized cost basis offor 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						Amortized		Billed		Amortized
	Total		Amortized		Cost		Invoices		Cost		Total		Amortized		Cost		Invoices		Cost
(Dollars in millions)	Amortized		Cost		> 90 Days and		> 90 Days and		Not		Amortized		Cost		> 90 Days and		> 90 Days and		Not
At September 30, 2021:	Cost		> 90 Days (1)		Accruing (1)		Accruing		Accruing (2)
At September 30, 2022:											Cost		> 90 Days*		Accruing*		Accruing		Accruing**
Americas	$	5,966	$	179	$	94	$	15	$	88	$	6,900	$	266	$	197	$	22	$	70
EMEA		3,616		89		3		2		89		2,731		81		1		0		81
Asia Pacific		2,105		28		6		3		22		1,420		23		6		1		17
Total client financing receivables	$	11,687	$	296	$	103	$	20	$	200	$	11,051	$	369	$	204	$	23	$	168


					Amortized		Billed		Amortized						Amortized		Billed		Amortized
	Total		Amortized		Cost		Invoices		Cost		Total		Amortized		Cost		Invoices		Cost
(Dollars in millions)	Amortized		Cost		> 90 Days and		> 90 Days and		Not		Amortized		Cost		> 90 Days and		> 90 Days and		Not
At December 31, 2020:	Cost		> 90 Days (1)		Accruing (1)		Accruing		Accruing (2)
At December 31, 2021:											Cost		> 90 Days*		Accruing*		Accruing		Accruing**
Americas	$	7,758	$	295	$	200	$	12	$	96	$	6,573	$	188	$	100	$	6	$	90
EMEA		5,023		119		28		5		95		3,793		99		7		2		95
Asia Pacific		3,042		42		12		4		32		2,031		25		5		2		20
Total client financing receivables	$	15,822	$	456	$	241	$	20	$	223	$	12,397	$	312	$	112	$	10	$	205

~~(1)~~

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

~~(2)~~

Of the amortized cost not accruing, there was a related allowance of ~~$161~~$120 million and ~~$178~~$153 million at September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively. Financing income recognized on these receivables was immaterial for the three and nine months ended September 30, ~~2021,~~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 offor client financing receivables by credit quality indicator at September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, 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 ~~reduces~~reduce the risk to IBM.


(Dollars in millions)	Americas				EMEA				Asia Pacific				Americas				EMEA				Asia Pacific
At September 30, 2021:	Aaa – Baa3		Ba1 – D		Aaa – Baa3		Ba1 – D		Aaa – Baa3		Ba1 – D
At September 30, 2022:													Aaa – Baa3		Ba1 – D		Aaa – Baa3		Ba1 – D		Aaa – Baa3		Ba1 – D
Vintage year:
2022													$	2,475	$	1,012	$	716	$	465	$	471	$	83
2021	$	1,667	$	858	$	746	$	614	$	498	$	174		1,401		387		487		198		210		77
2020		1,177		481		663		427		411		102		660		265		268		168		213		53
2019		657		282		335		341		335		60		310		119		167		110		133		24
2018		420		146		229		108		245		74		147		40		45		37		87		25
2017		137		59		23		62		100		23
2016 and prior		25		57		23		42		57		24
2017 and prior														40		47		15		54		25		18
Total	$	4,083	$	1,883	$	2,020	$	1,595	$	1,647	$	458	$	5,031	$	1,869	$	1,698	$	1,033	$	1,140	$	280

2629

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Notes to Consolidated Financial Statements — (continued)


(Dollars in millions)	Americas				EMEA				Asia Pacific				Americas				EMEA				Asia Pacific
At December 31, 2020:	Aaa – Baa3		Ba1 – D		Aaa – Baa3		Ba1 – D		Aaa – Baa3		Ba1 – D
At December 31, 2021:													Aaa – Baa3		Ba1 – D		Aaa – Baa3		Ba1 – D		Aaa – Baa3		Ba1 – D
Vintage year:
2021													$	2,556	$	1,147	$	1,181	$	778	$	565	$	226
2020	$	2,818	$	1,449	$	1,513	$	1,427	$	958	$	351		1,013		392		506		342		381		86
2019		988		623		668		519		564		123		544		236		287		291		297		51
2018		829		360		329		245		419		167		338		117		189		85		211		64
2017		285		154		70		128		205		52		108		50		15		52		74		17
2016		90		52		33		46		114		33
2015 and prior		28		81		22		22		38		18
2016 and prior														20		53		21		46		38		20
Total	$	5,038	$	2,720	$	2,635	$	2,387	$	2,298	$	743	$	4,579	$	1,994	$	2,198	$	1,595	$	1,567	$	464

Troubled Debt Restructurings

The company did not have any significant troubled debt restructurings during the nine months ended September 30, ~~2021~~2022 or for the year ended December 31, ~~2020.~~2021.

9.10. Leases:

Accounting for Leases as a Lessor

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


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in millions)	2021		2020		2021		2020		2022		2021		2022		2021
Lease income — sales-type and direct financing leases:
Sales-type lease selling price	$	120	$	154	$	877	$	733	$	99	$	119	$	888	$	870
Less: Carrying value of underlying assets*		49		64		211		258		(57)		(48)		(195)		(205)
Gross profit	$	71	$	90	$	666	$	475	$	43	$	70	$	693	$	664
Interest income on lease receivables		44		56		142		195		54		44		144		142
Total sales-type and direct financing lease income	$	115	$	145	$	808	$	670	$	97	$	114	$	838	$	806
Lease income — operating leases		38		65		137		204		29		38		86		136
Variable lease income		18		25		97		82		19		18		75		97
Total lease income	$	171	$	235	$	1,042	$	956	$	145	$	169	$	998	$	1,038

* Excludes unguaranteed residual value.

2730

Table of Contents

Notes to Consolidated Financial Statements — (continued)

~~10.~~11. Intangible Assets Including Goodwill:

Intangible Assets

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


	At September 30, 2021						At September 30, 2022
	Gross Carrying		Accumulated		Net Carrying		Gross Carrying		Accumulated		Net Carrying
(Dollars in millions)	Amount		Amortization		Amount*		Amount		Amortization		Amount*
Intangible asset class:
Capitalized software	$	1,864	$	(881)	$	983	$	1,697	$	(720)	$	977
Client relationships		9,170		(2,746)		6,423		8,051		(2,763)		5,288
Completed technology		6,077		(2,126)		3,951		5,490		(2,242)		3,248
Patents/trademarks		2,217		(560)		1,658		2,093		(645)		1,448
Other**		44		(33)		11		32		(27)		5
Total	$	19,372	$	(6,347)	$	13,025	$	17,364	$	(6,397)	$	10,967


	At December 31, 2020						At December 31, 2021
	Gross Carrying		Accumulated		Net Carrying		Gross Carrying		Accumulated		Net Carrying
(Dollars in millions)	Amount		Amortization		Amount*		Amount		Amortization		Amount*
Intangible asset class:
Capitalized software	$	1,777	$	(814)	$	963	$	1,696	$	(751)	$	945
Client relationships		8,838		(2,056)		6,783		9,021		(2,889)		6,132
Completed technology		5,957		(1,671)		4,286		6,074		(2,259)		3,815
Patents/trademarks		2,246		(499)		1,747		2,196		(586)		1,610
Other**		56		(39)		16		44		(35)		9
Total	$	18,874	$	(5,079)	$	13,796	$	19,031	$	(6,520)	$	12,511

* Amounts as of September 30, ~~2021~~2022 and December 31, ~~2020~~2021 included a decrease in net intangible asset balances of ~~$179~~$389 million and ~~an increase of $279~~$221 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 ~~$771~~$1,544 million during the first nine months of ~~2021,~~2022, primarily due to intangible asset amortization and the impacts of currency, partially offset by additions of acquired intangibles and capitalized software. The aggregate intangible asset amortization expense was ~~$646~~$577 million and ~~$1,897~~$1,828 million for the third quarter and first nine months of 2022, respectively, compared to $640 million and $1,880 million for the third quarter and first nine months of 2021, ~~respectively, compared to $613 million and $1,858 million for the third quarter and first nine months of 2020,~~ respectively. In the first nine months of ~~2021,~~2022, the company retired ~~$581~~$647 million of fully amortized intangible assets, impacting both the gross carrying amount and accumulated amortization by this amount. The company also derecognized intangible assets with a gross carrying amount of $1,313 million and $1,149 million of accumulated amortization as part of the divestiture of its healthcare software assets on June 30, 2022.

The future amortization expense relating to intangible assets currently recorded in the Consolidated Balance Sheet was estimated to be the following at September 30, ~~2021:~~2022:


	Capitalized		Acquired				Capitalized		Acquired
(Dollars in millions)	Software		Intangibles		Total		Software		Intangibles		Total
Remainder of 2021	$	171	$	474	$	645
2022		469		1,830		2,299
Remainder of 2022							$	157	$	405	$	562
2023		268		1,517		1,786		472		1,469		1,941
2024		74		1,467		1,541		286		1,452		1,737
2025		0		1,444		1,444		63		1,434		1,497
2026								—		1,417		1,417
Thereafter		0		5,310		5,310		—		3,813		3,813

2831

Table of Contents

Notes to Consolidated Financial Statements — (continued)

Goodwill

The changes in the goodwill balances by segment for the nine months ended September 30, ~~2021~~2022 and for the year ended December 31, ~~2020~~2021 were as follows:

Foreign



Currency

Purchase

Translation

(Dollars in millions)

Balance

Goodwill

Price

and Other

Balance
Segment

1/1/2021

Additions

Adjustments

Divestitures

Adjustments*

9/30/2021
Cloud & Cognitive Software

$
43,934

$
1,655

$
8

$
(13)

$
(374)

$
45,210
Global Business Services

6,145

695

(11)

—

(101)

6,727
Global Technology Services

7,245

2

—

—

(92)

7,155
Systems

2,293

—

0

—

(7)

2,286
Total

$
59,617

$
2,351

$
(3)

$
(13)

$
(575)

$
61,378


									Foreign												Foreign
									Currency												Currency
					Purchase				Translation								Purchase				Translation
(Dollars in millions)	Balance		Goodwill		Price				and Other		Balance		Balance		Goodwill		Price				and Other		Balance
Segment	1/1/2020		Additions		Adjustments			Divestitures	Adjustments*		12/31/2020		1/1/2022		Additions		Adjustments		Divestitures		Adjustments*		9/30/2022
Cloud & Cognitive Software	$	43,037	$	362	$	(139)	$	—	$	675	$	43,934
Global Business Services		5,775		205		—		—		165		6,145
Global Technology Services		7,141		—		—		—		104		7,245
Systems		2,270		8		—		—		15		2,293
Software													$	43,966	$	442	$	(118)	$	—	$	(1,290)	$	43,001
Consulting														6,797		461		(42)		—		(343)		6,872
Infrastructure														4,396		—		—		(1)		(50)		4,345
Other**														484		—		—		(484)		—		—
Total	$	58,222	$	575	$	(139)	$	—	$	960	$	59,617	$	55,643	$	903	$	(160)	$	(485)	$	(1,683)	$	54,218

* Primarily driven by foreign currency translation.
*
Primarily driven by foreign currency translation.
**
The company derecognized $484 million of goodwill related to the divestiture of its healthcare software assets. Refer to note 6, “Acquisitions & Divestitures,” for additional information.








Foreign



Currency

Purchase

Translation

(Dollars in millions)

Balance

Goodwill

Price

and Other

Balance
Segment

1/1/2021

Additions

Adjustments

Divestitures

Adjustments*

12/31/2021
Software**

$
42,665

$
1,836

$
23

$
(13)

$
(545)

$
43,966
Consulting

6,145

713

(21)

—

(40)

6,797
Infrastructure

4,436

—

0

—

(39)

4,396
Other**

520

—

—

(37)

1

484
Total

$
53,765

$
2,549

$
2

$
(50)

$
(623)

$
55,643

*	Primarily driven by foreign currency translation.

**	Recast to conform to current year presentation.

There were 0no goodwill impairment losses recorded during the first nine months of ~~2021~~2022 or full-year ~~2020~~2021 and the company has 0no accumulated impairment losses. Purchase price adjustments recorded in the first nine months of ~~2021~~2022 and full-year ~~2020~~2021 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 in the first nine months of ~~2021 were not material. In full-year 2020, net purchase price adjustments recorded~~2022 primarily relate to ~~noncurrent~~deferred tax assets and liabilities ~~were related to~~associated with the ~~Red Hat~~Turbonomic acquisition.

At the date of issuance of the financial statements, the company's annual goodwill impairment analysis which is performed during the fourth quarter is not yet complete. In anticipation of the separation of Kyndryl that occurred on November 3, 2021 and the segment changes immediately prior to the separation, the company began performing the quantitative tests of goodwill impairment for all affected reporting units. Preliminary analysis indicates the fair value of the Infrastructure Services reporting unit which includes Kyndryl and is part of the GTS segment, approximates its carrying amount. This reporting unit had goodwill of $5.8 billion as of September 30, 2021. The final goodwill impairment analysis may differ significantly from the company's preliminary result.

~~Based on the preliminary analysis, all of the other reporting units with goodwill had a fair value that was substantially in excess of its carrying value.~~

~~Table of Contents~~

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

~~11.~~12. Borrowings:

Short-Term Debt


	At September 30,		At December 31,		At September 30,		At December 31,
(Dollars in millions)	2021		2020		2022		2021
Commercial paper	$	900	$	—
Short-term loans		43		130	$	196	$	22
Long-term debt — current maturities		6,632		7,053		5,741		6,764
Total	$	7,575	$	7,183	$	5,937	$	6,787

~~The weighted-average interest rate for commercial paper~~Included within short-term debt in the company’s Consolidated Balance Sheet at September 30, ~~2021 was 0.1 percent. The weighted-average interest rate for~~2022 is $184 million of secured borrowings recorded at fair value from the short-term ~~loans was 3.8 percent~~credit facility and ~~5.7 percent at September 30, 2021 and December 31, 2020, respectively.~~the May 2022 Exchange as described in note 8, “Financial Assets & Liabilities.”

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Table of Contents

Notes to Consolidated Financial Statements — (continued)

The weighted-average interest rate for short-term loans excluding the aforementioned secured borrowings was 8.2 percent and 6.7 percent at September 30, 2022 and December 31, 2021, respectively.

Long-Term Debt

Pre-Swap Borrowing


		Balance		Balance			Balance		Balance
(Dollars in millions)	Maturities	9/30/2021		12/31/2020		Maturities	9/30/2022		12/31/2021
U.S. dollar debt (weighted-average interest rate at September 30, 2021):*
0.7%	2021	$	1,107	$	5,499
2.6%	2022		5,682		6,233
U.S. dollar debt (weighted-average interest rate at September 30, 2022):*
2.9%						2022	$	900	$	5,673
3.4%	2023		1,589		2,395	2023		1,536		1,573
3.3%	2024		5,018		5,029	2024		5,011		5,016
6.9%	2025		617		631
5.1%						2025		1,604		608
3.3%	2026		4,498		4,370	2026		4,352		4,356
3.0%	2027		2,222		2,219
3.1%						2027		3,621		2,221
6.5%	2028		313		313	2028		313		313
3.5%	2029		3,250		3,250	2029		3,250		3,250
2.0%	2030		1,350		1,350	2030		1,350		1,350
5.9%	2032		600		600
4.4%						2032		1,850		600
8.0%	2038		83		83	2038		83		83
4.5%	2039		2,745		2,745	2039		2,745		2,745
2.9%	2040		650		650	2040		650		650
4.0%	2042		1,107		1,107	2042		1,107		1,107
7.0%	2045		27		27	2045		27		27
4.7%	2046		650		650	2046		650		650
4.3%	2049		3,000		3,000	2049		3,000		3,000
3.0%	2050		750		750	2050		750		750
4.2%						2052		1,400		—
7.1%	2096		316		316	2096		316		316
		$	35,575	$	41,218		$	34,516	$	34,290
Other currencies (weighted-average interest rate at September 30, 2021, in parentheses):*
Other currencies (weighted-average interest rate at September 30, 2022, in parentheses):*
Euro (1.1%)	2023–2040	$	16,222	$	18,355	2023–2040	$	15,671	$	15,903
Pound sterling (2.6%)	2022		405		411
Pound sterling						2022		—		406
Japanese yen (0.3%)	2022–2026		1,304		1,409	2022–2026		1,005		1,263
Other (7.8%)	2021–2025		354		324
Other (16.0%)						2022–2026		397		378
		$	53,859	$	61,718		$	51,590	$	52,240
Finance lease obligations (1.4%)	2021–2030		357		296
Finance lease obligations (2.8%)						2022–2030		159		99
		$	54,216	$	62,013		$	51,749	$	52,339
Less: net unamortized discount			849		875			841		839
Less: net unamortized debt issuance costs			136		156			140		130
Add: fair value adjustment**			327		426			(84)		311
		$	53,558	$	61,408		$	50,684	$	51,681
Less: current maturities			6,632		7,053			5,741		6,764
Total		$	46,926	$	54,355		$	44,942	$	44,917

* 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.

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Notes to Consolidated Financial Statements — (continued)

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 restrict the company’s ability to merge or consolidate unless certain conditions are met. The credit facilities also include

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

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 ~~2020,~~2022, the company issued ~~an aggregate of $4.1~~$2.3 billion of Euro fixed-rate notes ~~and the proceeds were primarily used to early redeem outstanding fixed-rate debt which was due~~ in 2021 in the aggregate amount of $2.9 billion. The notes were redeemed at a price equal to 100 percent of the aggregate principal plus a make-whole premium and accrued interest. The company incurred a loss of $49 million upon redemption that was recorded in other (income) and expense in the Consolidated Income Statement.

~~In the first quarter of 2021, IBM Credit LLC early redeemed all of its outstanding fixed-rate debt in the aggregate amount of $1.75 billion~~tranches with ~~maturity dates~~maturities ranging from ~~2021~~8 to ~~2023~~12 years and ~~deregistered~~coupons ranging from 0.875 to 1.25 percent, and $1.8 billion of U.S. dollar fixed-rate notes with maturities ranging from 5 to 30 years and coupons ranging from 2.20 to 3.43 percent.

On July 20, 2022, the company issued $3.25 billion of U.S. ~~Securities~~dollar fixed-rate notes in tranches with maturities ranging from 3 to 30 years and ~~Exchange Commission. The notes were redeemed at a price equal~~coupons ranging from 4.00 to 100 percent of the aggregate principal plus a make-whole premium and accrued interest. The company incurred a loss of approximately $22 million upon redemption that was recorded in other (income) and expense in the Consolidated Income Statement.4.90 percent.

Pre-swap annual contractual obligations of long-term debt outstanding at September 30, ~~2021,~~2022, were as follows:


(Dollars in millions)	Total		Total
Remainder of 2021	$	1,189
2022		6,889
Remainder of 2022			$	1,334
2023		4,973		4,490
2024		6,497		6,246
2025		4,142		4,586
2026				4,657
Thereafter		30,526		30,436
Total	$	54,216	$	51,749

Interest on Debt


(Dollars in millions)
For the nine months ended September 30:	2021		2020		2022		2021
Cost of financing	$	312	$	346	$	264	$	312
Interest expense		852		971		903		852
Interest capitalized		3		6		4		3
Total interest paid and accrued	$	1,167	$	1,323	$	1,170	$	1,167

Lines of Credit

~~On June 22, 2021, the~~The company ~~entered into~~has a ~~new~~ $2.5 billion Three-Year Credit Agreement and a $7.5 billion Five-Year Credit Agreement ~~to replace the existing $2.5 billion Three-Year and $10.25 billion Five-Year Credit Agreements. The~~with maturity dates ~~for the new Three-Year and Five-Year Credit Agreements (the Credit Agreements) are~~of June ~~21, 2024,~~20, 2025 and June 22, ~~2026, respectively.~~ 2027, respectively. The Credit Agreements permit the company and its subsidiary borrowers to borrow up to $10 billion on a revolving basis. ~~In connection with entering into the Credit Agreements,~~At September 30, 2022, there were no borrowings by the company, ~~also terminated~~or its ~~$2.5 billion 364-Day Credit Agreement which was scheduled to expire on July 1, 2021. Subject to certain conditions stated in the Credit Agreements, the company may borrow, prepay and re-borrow amounts~~subsidiaries, under ~~the Credit Agreements at any time during the term of such agreements. Funds borrowed may be used for the general corporate purposes of the company.~~these credit facilities.

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Interest rates on borrowings under the Credit Agreements will be based on prevailing market interest rates, as further described in the Credit Agreements. The Credit Agreements contain customary representations and warranties, covenants, events of default, and indemnification provisions.

~~At September 30, 2021, there were 0 borrowings by the company, or its subsidiaries, under these credit facilities.~~

~~12.~~13. Commitments:

The company’s extended lines of credit to third-party entities include unused amounts of ~~$1.7~~$1.5 billion and ~~$2.1~~$1.7 billion at September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, 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 ~~$4.5~~$2.3 billion and ~~$5.2~~$3.2 billion at September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively. Approximately 35 percent of the future financing commitments reported at September 30, 2021 are in support of IBM’s managed infrastructure services unit, and upon the separation of Kyndryl on November 3, 2021, are no ~~longer obligations of IBM.~~ 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”~~Policies,” in the company’s ~~2020~~2021 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 September 30, ~~2021.~~2022.

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 September 30, ~~2021~~2022 and December 31, ~~2020~~2021 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.

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

Standard Warranty Liability


(Dollars in millions)	2021		2020		2022		2021
Balance at January 1	$	83	$	113	$	77	$	83
Current period accruals		50		56		58		50
Accrual adjustments to reflect actual experience		(2)		(15)		(1)		(2)
Charges incurred		(66)		(73)		(62)		(66)
Balance at September 30	$	66	$	80	$	72	$	66

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Notes to Consolidated Financial Statements — (continued)

Extended Warranty Liability


(Dollars in millions)	2021		2020		2022		2021
Balance at January 1	$	425	$	477	$	350	$	425
Revenue deferred for new extended warranty contracts		71		115		103		71
Amortization of deferred revenue		(154)		(169)		(148)		(154)
Other*		(9)		(3)		(21)		(9)
Balance at September 30	$	334	$	419	$	284	$	334
Current portion	$	171	$	196	$	139	$	171
Noncurrent portion	$	163	$	223	$	145	$	163

* Other primarily consists of foreign currency translation adjustments.

~~13.~~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 orand its clients ~~could become~~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 quarter ended September 30, ~~2021~~2022 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)~~

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

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

The company is a defendant 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 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 and breach of contract with regard to the company’s distribution of AIX and Dynix and contribution of code to Linux and the company has asserted counterclaims. On September 14, 2007, plaintiff filed for bankruptcy protection, and all proceedings in this case were stayed. 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 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’s motion to reopen the SCO v. IBM case. In February 2016, 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 dismissal of all but 1 of SCO’s remaining claims, which was remanded to the Federal Court in Utah. In August 2021, the parties reached an agreement to settle the case, which has been approved by the bankruptcy court.

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 was settled in August 2021.

In December 2017, CIS General Insurance Limited (CISGIL) sued IBM UK regarding a contract entered into by IBM UK and CISGIL in 2015 to implement and operate an IT insurance platform. The contract was terminated by IBM UK in July 2017 for non-payment by CISGIL. CISGIL alleges wrongful termination, breach of contract and breach of warranty. In February 2021, the Technology & Construction Court in London rejected the majority of CISGIL’s claims and ruled in IBM’s favor on its counterclaim. The court’s decision required IBM to pay approximately $20 million in

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

damages, plus interest and litigation costs. ~~CISGIL was granted permission to appeal and the matter is now pending at~~In April 2022, the Court of Appeal ~~in London.~~awarded CISGIL additional damages of approximately $89 million, plus interest and litigation costs. IBM filed an application for permission to appeal with the UK Supreme Court.

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~~$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, ~~and~~ 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 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 has been formed to investigate the issues raised in the letter.

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 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

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Notes to Consolidated Financial Statements — (continued)

damages and $718 million in punitive damages, plus interest and fees. IBM filed a notice of appeal, and BMC cross appealed. 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.

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.

~~Table of Contents~~

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

~~14.~~15. Equity Activity:

Reclassifications and Taxes Related to Items of Other Comprehensive Income


(Dollars in millions)	Before Tax		Tax (Expense)/		Net of Tax		Before Tax		Tax (Expense)/		Net of Tax
For the three months ended September 30, 2021:	Amount		Benefit		Amount
For the three months ended September 30, 2022:							Amount		Benefit		Amount
Other comprehensive income/(loss):
Foreign currency translation adjustments	$	(114)	$	(120)	$	(234)	$	143	$	(301)	$	(158)
Net changes related to available-for-sale securities:
Unrealized gains/(losses) arising during the period	$	0	$	0	$	0	$	0	$	0	$	0
Reclassification of (gains)/losses to other (income) and expense		—		—		—		—		—		—
Total net changes related to available-for-sale securities	$	0	$	0	$	0	$	0	$	0	$	0
Unrealized gains/(losses) on cash flow hedges:
Unrealized gains/(losses) arising during the period	$	109	$	(28)	$	82	$	189	$	(49)	$	140
Reclassification of (gains)/losses to:
Cost of services		(12)		3		(9)		(4)		1		(3)
Cost of sales		(1)		1		(1)		(35)		10		(25)
Cost of financing		6		(1)		4		7		(2)		5
SG&A expense		1		0		1		(8)		2		(6)
Other (income) and expense		22		(6)		17		6		(2)		5
Interest expense		16		(4)		12		22		(5)		16
Total unrealized gains/(losses) on cash flow hedges	$	141	$	(35)	$	106	$	178	$	(45)	$	133
Retirement-related benefit plans (1):
*Retirement-related benefit plans:**
Prior service costs/(credits)	$	0	$	0	$	0	$	412	$	(104)	$	309
Net (losses)/gains arising during the period		1		0		1		53		(13)		39
Curtailments and settlements		13		(4)		9		5,913		(1,487)		4,426
Amortization of prior service (credits)/costs		3		0		3		3		(1)		2
Amortization of net (gains)/losses		638		(174)		464		388		(108)		279
Total retirement-related benefit plans	$	656	$	(178)	$	478	$	6,768	$	(1,712)	$	5,056
Other comprehensive income/(loss)	$	683	$	(333)	$	350	$	7,089	$	(2,058)	$	5,030

~~(1)~~

These accumulated other comprehensive income (AOCI) components are included in the computation of net periodic pension ~~cost.~~cost and include the impact of a one-time, non-cash pension settlement charge of $5.9 billion ($4.4 billion net of tax) in the third quarter of 2022. Refer to note ~~17,~~18, “Retirement-Related Benefits,” for additional information.

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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		Before Tax		Tax (Expense)/		Net of Tax
For the three months ended September 30, 2020:	Amount			Benefit		Amount
For the three months ended September 30, 2021:								Amount		Benefit		Amount
Other comprehensive income/(loss):
Foreign currency translation adjustments	$	(439)		$	247	$	(192)	$	(114)	$	(120)	$	(234)
Net changes related to available-for-sale securities:
Unrealized gains/(losses) arising during the period	$	(1)		$	0	$	(1)	$	0	$	0	$	0
Reclassification of (gains)/losses to other (income) and expense		—			—		—		—		—		—
Total net changes related to available-for-sale securities	$	(1)		$	0	$	(1)	$	0	$	0	$	0
Unrealized gains/(losses) on cash flow hedges:
Unrealized gains/(losses) arising during the period	$	(32)		$	8	$	(24)	$	109	$	(28)	$	82
Reclassification of (gains)/losses to:			��
Cost of services		(10)			2		(7)		(12)		3		(9)
Cost of sales		4			(1)		3		(1)		1		(1)
Cost of financing		6			(2)		5		6		(1)		4
SG&A expense		5			(1)		4		1		0		1
Other (income) and expense		(93)			23		(70)		22		(6)		17
Interest expense		19			(5)		14		16		(4)		12
Total unrealized gains/(losses) on cash flow hedges	$	(101)		$	26	$	(75)	$	141	$	(35)	$	106
Retirement-related benefit plans (1):
*Retirement-related benefit plans:**
Prior service costs/(credits)	$	(1)		$	0	$	0	$	0	$	0	$	0
Net (losses)/gains arising during the period		0			0		0		1		0		1
Curtailments and settlements		21			(6)		14		13		(4)		9
Amortization of prior service (credits)/costs		0			1		1		3		0		3
Amortization of net (gains)/losses		586			(161)		425		638		(174)		464
Total retirement-related benefit plans	$	607		$	(167)	$	440	$	656	$	(178)	$	478
Other comprehensive income/(loss)	$	66		$	106	$	172	$	683	$	(333)	$	350

~~(1)~~

These AOCI components are included in the computation of net periodic pension cost. Refer to note ~~17,~~18, “Retirement-Related Benefits,” for additional information.

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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		Before Tax		Tax (Expense)/		Net of Tax
For the nine months ended September 30, 2021:	Amount		Benefit		Amount
For the nine months ended September 30, 2022:							Amount		Benefit		Amount
Other comprehensive income/(loss):
Foreign currency translation adjustments	$	463	$	(304)	$	160	$	799	$	(784)	$	14
Net changes related to available-for-sale securities:
Unrealized gains/(losses) arising during the period	$	0	$	0	$	0	$	(1)	$	0	$	(1)
Reclassification of (gains)/losses to other (income) and expense		—		—		—		—		—		—
Total net changes related to available-for-sale securities	$	0	$	0	$	0	$	(1)	$	0	$	(1)
Unrealized gains/(losses) on cash flow hedges:
Unrealized gains/(losses) arising during the period	$	262	$	(66)	$	196	$	449	$	(118)	$	332
Reclassification of (gains)/losses to:
Cost of services		(33)		8		(25)		(32)		8		(24)
Cost of sales		30		(8)		23		(71)		20		(50)
Cost of financing		17		(4)		13		19		(5)		14
SG&A expense		32		(8)		24		(28)		8		(20)
Other (income) and expense		187		(47)		140		51		(13)		38
Interest expense		48		(12)		36		64		(16)		48
Total unrealized gains/(losses) on cash flow hedges	$	545	$	(138)	$	407	$	453	$	(116)	$	338
Retirement-related benefit plans (1):
*Retirement-related benefit plans:**
Prior service costs/(credits)	$	0	$	0	$	0	$	408	$	(99)	$	309
Net (losses)/gains arising during the period		23		4		27		63		(20)		43
Curtailments and settlements		46		(14)		32		5,931		(1,491)		4,440
Amortization of prior service (credits)/costs		8		0		8		16		(4)		12
Amortization of net (gains)/losses		1,929		(526)		1,403		1,305		(364)		941
Total retirement-related benefit plans	$	2,006	$	(537)	$	1,469	$	7,722	$	(1,978)	$	5,745
Other comprehensive income/(loss)	$	3,014	$	(978)	$	2,035	$	8,973	$	(2,877)	$	6,096

~~(1)~~

These AOCI components are included in the computation of net periodic pension ~~cost.~~cost and include the impact of a one-time, non-cash pension settlement charge of $5.9 billion ($4.4 billion net of tax) in the third quarter of 2022. Refer to note ~~17,~~18, “Retirement-Related Benefits,” for additional information.

3940

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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		Before Tax		Tax (Expense)/		Net of Tax
For the nine months ended September 30, 2020:	Amount		Benefit		Amount
For the nine months ended September 30, 2021:							Amount		Benefit		Amount
Other comprehensive income/(loss):
Foreign currency translation adjustments	$	(1,354)	$	260	$	(1,094)	$	463	$	(304)	$	160
Net changes related to available-for-sale securities:
Unrealized gains/(losses) arising during the period	$	0	$	0	$	0	$	0	$	0	$	0
Reclassification of (gains)/losses to other (income) and expense		—		—		—		—		—		—
Total net changes related to available-for-sale securities	$	0	$	0	$	0	$	0	$	0	$	0
Unrealized gains/(losses) on cash flow hedges:
Unrealized gains/(losses) arising during the period	$	(249)	$	63	$	(186)	$	262	$	(66)	$	196
Reclassification of (gains)/losses to:
Cost of services		(18)		5		(14)		(33)		8		(25)
Cost of sales		(14)		4		(10)		30		(8)		23
Cost of financing		21		(5)		16		17		(4)		13
SG&A expense		(12)		3		(9)		32		(8)		24
Other (income) and expense		(74)		19		(55)		187		(47)		140
Interest expense		60		(15)		45		48		(12)		36
Total unrealized gains/(losses) on cash flow hedges	$	(285)	$	73	$	(212)	$	545	$	(138)	$	407
Retirement-related benefit plans (1):
*Retirement-related benefit plans:**
Prior service costs/(credits)	$	(5)	$	1	$	(3)	$	0	$	0	$	0
Net (losses)/gains arising during the period		65		(24)		41		23		4		27
Curtailments and settlements		42		(12)		30		46		(14)		32
Amortization of prior service (credits)/costs		1		2		3		8		0		8
Amortization of net (gains)/losses		1,722		(473)		1,249		1,929		(526)		1,403
Total retirement-related benefit plans	$	1,826	$	(507)	$	1,319	$	2,006	$	(537)	$	1,469
Other comprehensive income/(loss)	$	187	$	(175)	$	12	$	3,014	$	(978)	$	2,035

~~(1)~~

These AOCI components are included in the computation of net periodic pension cost. Refer to note ~~17,~~18, “Retirement-Related Benefits,” for additional information.

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


					Net Change		Net Unrealized								Net Change			Net Unrealized
	Net Unrealized		Foreign		Retirement-		Gains/(Losses)		Accumulated		Net Unrealized		Foreign		Retirement-			Gains/(Losses)		Accumulated
	Gains/(Losses)		Currency		Related		on Available-		Other		Gains/(Losses)		Currency		Related			on Available-		Other
	on Cash Flow		Translation		Benefit		For-Sale		Comprehensive		on Cash Flow		Translation		Benefit			For-Sale		Comprehensive
(Dollars in millions)	Hedges		Adjustments*		Plans		Securities		Income/(Loss)		Hedges		Adjustments*		Plans			Securities		Income/(Loss)
January 1, 2021	$	(456)	$	(4,665)	$	(24,216)	$	0	$	(29,337)
January 1, 2022											$	(18)	$	(3,362)	$	(19,854)		$	(1)	$	(23,234)
Other comprehensive income before reclassifications		196		160		26		0		382		332		14		352			(1)		697
Amount reclassified from accumulated other comprehensive income		211		—		1,442		—		1,654		6		—		5,393	**		—		5,399
Total change for the period	$	407	$	160	$	1,469	$	0	$	2,035	$	338	$	14	$	5,745		$	(1)	$	6,096
September 30, 2021	$	(49)	$	(4,505)	$	(22,747)	$	(1)	$	(27,302)
September 30, 2022											$	320	$	(3,347)	$	(14,110)		$	(1)	$	(17,138)

* Foreign currency translation adjustments are presented gross except for any associated hedges which are presented net of tax.
*
Foreign currency translation adjustments are presented gross except for any associated hedges which are presented net of tax.
**
Includes the impact of a one-time, non-cash pension settlement charge of $5.9 billion ($4.4 billion net of tax) in the third quarter of 2022. Refer to note 18, “Retirement-Related Benefits,” for additional information.

4041

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Notes to Consolidated Financial Statements — (continued)


					Net Change		Net Unrealized								Net Change		Net Unrealized
	Net Unrealized		Foreign		Retirement-		Gains/(Losses)		Accumulated		Net Unrealized		Foreign		Retirement-		Gains/(Losses)		Accumulated
	Gains/(Losses)		Currency		Related		on Available-		Other		Gains/(Losses)		Currency		Related		on Available-		Other
	on Cash Flow		Translation		Benefit		For-Sale		Comprehensive		on Cash Flow		Translation		Benefit		For-Sale		Comprehensive
(Dollars in millions)	Hedges		Adjustments*		Plans		Securities		Income/(Loss)		Hedges		Adjustments*		Plans		Securities		Income/(Loss)
January 1, 2020	$	(179)	$	(3,700)	$	(24,718)	$	0	$	(28,597)
January 1, 2021											$	(456)	$	(4,665)	$	(24,216)	$	0	$	(29,337)
Other comprehensive income before reclassifications		(186)		(1,094)		37		0		(1,242)		196		160		26		0		382
Amount reclassified from accumulated other comprehensive income		(27)		—		1,281		—		1,255		211		—		1,442		—		1,654
Total change for the period	$	(212)	$	(1,094)	$	1,319	$	0	$	12	$	407	$	160	$	1,469	$	0	$	2,035
September 30, 2020	$	(391)	$	(4,794)	$	(23,399)	$	0	$	(28,584)
September 30, 2021											$	(49)	$	(4,505)	$	(22,747)	$	(1)	$	(27,302)

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

~~15.~~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 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.

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. ~~The~~At September 30, 2022 and December 31, 2021, the amount recognized in other accounts receivables for the right to reclaim cash collateral was $191 million and $2 million, respectively. At September 30, 2022 and December 31, 2021, the amount recognized in accounts payable for the obligation to return cash collateral was ~~$24~~$222 million ~~at September 30, 2021~~ and ~~0 amount was recognized at December 31, 2020. NaN amount was recognized for the right to reclaim cash collateral at September 30, 2021 and December 31, 2020.~~$38 million, respectively. The company restricts the use of cash collateral received to rehypothecation, and therefore reports it in restricted cash in the Consolidated Balance Sheet. ~~NaN amount was rehypothecated at~~At September 30, ~~2021~~2022 and December 31, ~~2020.~~2021, the amount rehypothecated was $158 million and $2 million, respectively. Additionally, if derivative exposures covered by a qualifying master netting agreement had been netted in the Consolidated Balance Sheet at September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the total derivative asset and liability positions each would have been reduced by ~~$91~~$311 million and ~~$213~~$60 million, respectively.

On May 19, 2022, in connection with the disposition of 22.3 million shares of Kyndryl common stock, the company entered into a cash-settled swap with the lender of the short-term credit facility as the counterparty that maintained IBM’s continued economic exposure in those shares pursuant to the May 2022 Exchange. Refer to note 8, “Financial Assets & Liabilities,” for additional information. The notional value of the swap is $311 million. Upon settlement of the swap, no later than November 2, 2022, IBM will receive or pay an amount derived from the difference between the VWAP of the Kyndryl common stock over the outstanding term of the swap and the strike price as of May 19, 2022. The fair value of the swap at September 30, 2022 was $85 million and is included within other accrued expenses and liabilities in the Consolidated Balance Sheet. For the three and nine months ended September 30, 2022, an unrealized gain of $3 million and unrealized loss of $85 million, respectively, was recorded in other (income) and expense in the Consolidated Income Statement.

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.

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

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 September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the total notional amount of the company’s ~~interest-~~

~~Table of Contents~~

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

~~rate~~interest-rate swaps was $6.2 billion and $0.4 billion, ~~and $3.0 billion,~~ respectively. In the first quarter of 2021, in addition to the scheduled swap maturities, the company terminated $1.25 billion of interest-rate swaps concurrent with the early redemption of the underlying hedged fixed-rate debt. The weighted-average remaining maturity of these instruments at September 30, ~~2021~~2022 and December 31, ~~2020~~2021 was approximately ~~1.5~~6.0 years and 1.2 years, respectively. These interest-rate contracts were accounted for as fair value hedges. The company did 0tnot have any cash flow hedges relating to this program outstanding at September 30, ~~2021~~2022 and December 31, ~~2020.~~2021.

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 issuances. There were 0no instruments outstanding at September 30, ~~2021~~2022 and December 31, ~~2020.~~2021.

In connection with cash flow hedges of forecasted interest payments related to the company's borrowings, the company recorded net losses (before taxes) of ~~$161~~$144 million and ~~$174~~$157 million ~~(before taxes)~~ at September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively, in AOCI. The company estimates that $18 million ~~(before taxes)~~ of the deferred net losses (before taxes) on derivatives in AOCI at September 30, ~~2021~~2022 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 September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the carrying value of debt designated as hedging instruments was ~~$15.5~~$12.8 billion and ~~$16.4~~$14.1 billion, respectively. The company also uses cross-currency swaps and foreign exchange forward contracts for this risk management purpose. At September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the total notional amount of derivative instruments designated as net investment hedges was ~~$7.5~~$5.4 billion and ~~$7.2~~$6.8 billion, respectively. At both September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the weighted-average remaining maturity of these instruments was approximately 0.1 ~~years and 0.3 years, respectively.~~year.

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 are accounted for as cash flow hedges. ~~The~~At September 30, 2022, the maximum remaining length of time over which the company hedged its exposure is approximately ~~2.9~~two years. At September 30 ~~2021~~2022 and December 31, ~~2020,~~2021, the total notional amount of forward contracts designated as cash flow hedges of forecasted royalty and cost transactions was ~~$7.5~~

Table of Contents

Notes to Consolidated Financial Statements — (continued)

$8.2 billion and ~~$8.0~~$7.2 billion, respectively. At both September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the weighted-average remaining maturity of these instruments was approximately 0.6 ~~years and 0.7 years, respectively.~~years.

At September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, in connection with cash flow hedges of anticipated royalties and cost transactions, the company recorded net gains (before taxes) of ~~$294~~$693 million and ~~net losses of $192~~$315 million, ~~(before taxes),~~ respectively, in AOCI. The company estimates that ~~$216~~$631 million ~~(before taxes)~~ of deferred net gains (before taxes) on derivatives in AOCI at September 30, ~~2021~~2022 will be reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying anticipated 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 September 30, ~~2021,~~2022, the maximum length of time remaining over which the company hedged its exposure is approximately ~~6.4~~five years. At September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the total notional amount of cross-currency swaps designated as cash flow hedges of foreign currency denominated debt was ~~$1.5~~$3.0 billion ~~at both periods.~~and $2.0 billion, respectively.

InAt September 30, 2022 and December 31, 2021, in connection with cash flow hedges of foreign currency denominated borrowings, the company recorded net losses (before taxes) of ~~$191~~$112 million and ~~$236~~$174 million, ~~(before taxes) at September 30, 2021 and December 31, 2020,~~ respectively, in AOCI. The company estimates that ~~$25~~$17 million ~~(before taxes)~~ of deferred net ~~losses~~gains (before taxes) on derivatives in AOCI at September 30, ~~2021~~2022 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 September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the total notional amount of derivative instruments in economic hedges of foreign currency exposure was ~~$7.8~~$4.3 billion and $6.8 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 derivatives, including equity swaps and futures, 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 September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the total notional amount of derivative instruments in economic hedges of these compensation obligations was ~~$1.4~~$1.2 billion and ~~$1.3~~$1.4 billion, respectively.

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Notes to Consolidated Financial Statements — (continued)

Cumulative Basis Adjustments for Fair Value Hedges

At September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the following amounts were recorded in the Consolidated Balance Sheet related to cumulative basis adjustments for fair value hedges:


	September 30,		December 31,		September 30,		December 31,
(Dollars in millions)	2021		2020		2022		2021
Short-term debt:
Carrying amount of the hedged item	$	—	$	(1,302)	$	(425)	$	(227)
Cumulative hedging adjustments included in the carrying amount — assets/(liabilities)		—		(2)
Cumulative hedging adjustments included in the carrying amount — assets/(liabilities)*					$	0	$	(2)
Long-term debt:
Carrying amount of the hedged item	$	(752)	$	(2,097)	$	(5,631)	$	(508)
Cumulative hedging adjustments included in the carrying amount — assets/(liabilities)*		(327)		(424)	$	84	$	(309)

* Includes ($~~314)~~263) million and ($~~353)~~302) million of hedging adjustments on discontinued hedging relationships at September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, 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									Gains/(Losses) of
(Dollars in millions)	Total				Total Hedge Activity				Total					Total Hedge Activity
For the three months ended September 30:	2021		2020		2021		2020		2022		2021			2022		2021
Cost of services	$	7,770	$	7,357	$	12	$	10	$	5,168	$	4,650		$	4	$	12
Cost of sales		1,513		1,601		1		(4)	$	1,389	$	1,363	*	$	35	$	1
Cost of financing		165		172		(1)		3	$	120	$	132	*	$	1	$	(1)
SG&A expense		4,860		4,647		(14)		58	$	4,391	$	4,306		$	(69)	$	(14)
Other (income) and expense		234		253		(7)		101	$	5,755	$	244		$	(189)	$	(7)
Interest expense		291		323		(2)		8	$	295	$	290		$	4	$	(2)

* Reclassified to conform to current year presentation.

4445

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 September 30:

Line Item

2021

2020

2021

2020
Derivative instruments in fair value hedges (1):










Interest rate contracts

Cost of financing

$
0

$
0

$
4

$
7

Interest expense

0

0

11

20
Derivative instruments not designated as hedging instruments:










Foreign exchange contracts

Other (income) and expense

15

8

N/A

N/A
Equity contracts

SG&A expense

(13)

63

N/A

N/A
Total



$
3

$
71

$
15

$
27


	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 September 30:	Line Item	2022		2021		2022		2021
Derivative instruments in fair value hedges (1):
Interest rate contracts	Cost of financing	$	(64)	$	0	$	68	$	4
	Interest expense		(191)		0		203		11
Derivative instruments not designated as hedging instruments:
Foreign exchange contracts	Other (income) and expense		(186)		15		N/A		N/A
Equity contracts	SG&A expense		(76)		(13)		N/A		N/A
	Other (income) and expense		3		—		N/A		N/A
Total		$	(514)	$	3	$	271	$	15


	Gain (Loss) Recognized in Consolidated Income Statement and Other Comprehensive Income													Gain (Loss) Recognized in Consolidated Income Statement and Other Comprehensive Income
(Dollars in millions)					Consolidated	Reclassified				Amounts Excluded from								Consolidated	Reclassified				Amounts Excluded from
For the three months	Recognized in OCI				Income Statement	from AOCI				Effectiveness Testing (3)				Recognized in OCI				Income Statement	from AOCI				Effectiveness Testing (3)
ended September 30:	2021		2020		Line Item	2021		2020		2021		2020		2022		2021		Line Item	2022		2021		2022		2021
Derivative instruments in cash flow hedges:
Interest rate contracts	$	—	$	—	Cost of financing	$	(1)	$	(1)	$	—	$	—	$	—	$	—	Cost of financing	$	(1)	$	(1)	$	—	$	—
					Interest expense		(3)		(3)		—		—					Interest expense		(3)		(3)		—		—
Foreign exchange contracts		109		(32)	Cost of services		12		10		—		—		189		109	Cost of services		4		12		—		—
					Cost of sales		1		(4)		—		—					Cost of sales		35		1		—		—
					Cost of financing		(5)		(5)		—		—					Cost of financing		(6)		(5)		—		—
					SG&A expense		(1)		(5)		—		—					SG&A expense		8		(1)		—		—
					Other (income) and expense		(22)		93		—		—					Other (income) and expense		(6)		(22)		—		—
					Interest expense		(13)		(15)		—		—					Interest expense		(18)		(13)		—		—
Instruments in net investment hedges (4):
Foreign exchange contracts		477		(983)	Cost of financing		—		—		1		2		1,198		477	Cost of financing		—		—		5		1
					Interest expense		—		—		3		7					Interest expense		—		—		14		3
Total	$	587	$	(1,015)		$	(32)	$	69	$	5	$	9	$	1,387	$	587		$	12	$	(32)	$	19	$	5

(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


						Gains/(Losses) of
(Dollars in millions)	Total					Total Hedge Activity
For the nine months ended September 30:	2022		2021			2022		2021
Cost of services	$	15,915	$	14,014		$	32	$	33
Cost of sales	$	4,555	$	4,241	*	$	71	$	(30)
Cost of financing	$	314	$	416	*	$	0	$	1
SG&A expense	$	13,843	$	13,842		$	(291)	$	88
Other (income) and expense	$	5,921	$	891		$	(730)	$	(246)
Interest expense	$	903	$	852		$	1	$	3

* Reclassified to conform to current year presentation.

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 nine months ended September 30:	Line Item	2022		2021		2022		2021
Derivative instruments in fair value hedges (1):
Interest rate contracts	Cost of financing	$	(76)	$	0	$	89	$	15
	Interest expense		(261)		(1)		305		40
Derivative instruments not designated as hedging instruments:
Foreign exchange contracts	Other (income) and expense		(595)		(59)		N/A		N/A
Equity contracts	SG&A expense		(319)		120		N/A		N/A
	Other (income) and expense		(85)		—		N/A		N/A
Total		$	(1,336)	$	59	$	395	$	55


	Gain (Loss) Recognized in Consolidated Income Statement and Other Comprehensive Income
(Dollars in millions)					Consolidated	Reclassified				Amounts Excluded from
For the nine months	Recognized in OCI				Income Statement	from AOCI				Effectiveness Testing (3)
ended September 30:	2022		2021		Line Item	2022		2021		2022		2021
Derivative instruments in cash flow hedges:
Interest rate contracts	$	—	$	—	Cost of financing	$	(3)	$	(4)	$	—	$	—
					Interest expense		(10)		(10)		—		—
Foreign exchange contracts		449		262	Cost of services		32		33		—		—
					Cost of sales		71		(30)		—		—
					Cost of financing		(16)		(14)		—		—
					SG&A expense		28		(32)		—		—
					Other (income) and expense		(51)		(187)		—		—
					Interest expense		(54)		(38)		—		—
Instruments in net investment hedges (4):
Foreign exchange contracts		3,118		1,207	Cost of financing		—		—		6		4
					Interest expense		—		—		22		11
Total	$	3,567	$	1,470		$	(4)	$	(282)	$	28	$	15

(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 and nine months ended September 30, 2022 and 2021, 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.

Gains/(Losses) of

(Dollars in millions)

Total

Total Hedge Activity

For the nine months ended September 30:

2021

2020

2021

2020

Cost of services

$
23,416

$
22,720

$
33

$
18

Cost of sales

4,792

4,964

(30)

14

Cost of financing

506

517

1

9

SG&A expense

15,368

15,849

88

24

Other (income) and expense

911

614

(246)

92

Interest expense

852

971

3

24

4547

Table of Contents

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.


	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in millions)	2022		2021		2022		2021
Cost	$	40	$	38	$	124	$	106
Selling, general and administrative		138		144		427		399
Research, development and engineering		73		60		188		160
Pre-tax stock-based compensation cost	$	251	$	242	$	739	$	665
Income tax benefits		(51)		(54)		(191)		(166)
Total net stock-based compensation cost	$	200	$	188	$	548	$	499

Effective April 1, 2022, the company increased the discount for eligible participants under its Employees Stock Purchase Plan (ESPP) from 5 percent to 15 percent off the average market price on the date of purchase. With this change, the ESPP is considered compensatory under the accounting requirements for stock-based compensation.

Pre-tax stock-based compensation cost for the three months ended September 30, 2022 increased $10 million compared to the corresponding period in the prior year, including increases in ESPP ($15 million) as a result of the change described above and performance share units ($5 million), partially offset by decreases in stock options ($10 million) primarily due to the conversion of stock options of acquired entities in the prior year.

Pre-tax stock-based compensation cost for the nine months ended September 30, 2022 increased $74 million compared to the corresponding period in the prior year, including increases in restricted stock units ($32 million), ESPP ($30 million) and performance share units ($16 million). The increases are driven by the change in ESPP described above and a change in the timing of the company’s executive grant cycle in 2022.

Total unrecognized compensation cost related to non-vested awards at September 30, 2022 was $1.6 billion and is expected to be recognized over a weighted-average period of approximately 2.7 years.

Capitalized stock-based compensation cost was not material at September 30, 2022 and 2021.

18. Retirement-Related Benefits:

Pre-Tax Cost of Retirement-Related Plans

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.

Table of Contents

Notes to Consolidated Financial Statements — (continued)


						Yr. to Yr.
(Dollars in millions)						Percent
For the three months ended September 30:	2022			2021		Change
Retirement-related plans — cost:
Defined benefit and contribution pension plans — cost	$	6,319	*	$	598	nm
Nonpension postretirement plans — cost		31			44	(30.2)	%
Total	$	6,350		$	642	nm

*	Includes the impact of a one-time, non-cash, pre-tax pension settlement charge of $5.9 billion related to the Qualified PPP, as described below.

nm - not meaningful


						Yr. to Yr.
(Dollars in millions)						Percent
For the nine months ended September 30:	2022			2021		Change
Retirement-related plans — cost:
Defined benefit and contribution pension plans — cost	$	7,252	*	$	1,816	nm
Nonpension postretirement plans — cost		97			133	(26.7)	%
Total	$	7,350		$	1,949	nm

*	Includes the impact of a one-time, non-cash, pre-tax pension settlement charge of $5.9 billion related to the Qualified PPP, as described below.

nm – not meaningful

Cost/(Income) of Pension Plans

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


(Dollars in millions)	U.S. Plans					Non-U.S. Plans
For the three months ended September 30:	2022			2021		2022		2021
Service cost	$	—		$	—	$	57	$	67
Interest cost*		282			277		124		106
Expected return on plan assets*		(432)			(451)		(246)		(274)
Amortization of prior service costs/(credits)*		2			4		3		(2)
Recognized actuarial losses*		132			249		247		347
Curtailments and settlements*		5,894	**		—		19		13
Multi-employer plans		—			—		4		2
Other costs/(credits)*		—			—		8		7
Total net periodic pension (income)/cost of defined benefit plans	$	5,877		$	80	$	216	$	266
Cost of defined contribution plans		134			152		91		100
Total defined benefit and contribution pension plans cost recognized in the Consolidated Income Statement	$	6,012		$	232	$	307	$	366

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

**	Reflects the impact of a one-time, non-cash, pre-tax pension settlement charge related to the Qualified PPP, as described below.

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 nine months ended September 30:

Line Item

2021

2020

2021

2020
Derivative instruments in fair value hedges (1):














Interest rate contracts

Cost of financing

$
0

$
20

$
15

$
(3)

Interest expense

(1)

57

40

(9)
Derivative instruments not designated as hedging instruments:










Foreign exchange contracts

Other (income) and expense

(59)

18

N/A

N/A
Equity contracts

SG&A expense

120

12

N/A

N/A
Total



$
59

$
108

$
55

$
(13)


	Gain (Loss) Recognized in Consolidated Income Statement and Other Comprehensive Income
(Dollars in millions)					Consolidated	Reclassified				Amounts Excluded from				U.S. Plans					Non-U.S. Plans
For the nine months	Recognized in OCI				Income Statement	from AOCI				Effectiveness Testing (3)
ended September 30:	2021		2020		Line Item	2021		2020		2021		2020
Derivative instruments in cash flow hedges:
Interest rate contracts	$	—	$	—	Cost of financing	$	(4)	$	(3)	$	—	$	—
					Interest expense		(10)		(10)		—		—
Foreign exchange contracts		262		(249)	Cost of services		33		18		—		—
					Cost of sales		(30)		14		—		—
					Cost of financing		(14)		(18)		—		—
					SG&A expense		(32)		12		—		—
					Other (income) and expense		(187)		74		—		—
					Interest expense		(38)		(50)		—		—
Instruments in net investment hedges (4):
Foreign exchange contracts		1,207		(1,033)	Cost of financing		—		—		4		13
					Interest expense		—		—		11		37
Total	$	1,470	$	(1,281)		$	(282)	$	37	$	15	$	50
For the nine months ended September 30:														2022			2021		2022		2021
Service cost														$	—		$	—	$	180	$	201
Interest cost*															885			832		394		322
Expected return on plan assets*															(1,382)			(1,352)		(778)		(833)
Amortization of prior service costs/(credits)*															6			12		10		(9)
Recognized actuarial losses*															490			747		784		1,055
Curtailments and settlements*															5,894	**		—		38		46
Multi-employer plans															—			—		11		13
Other costs/(credits)*															—			—		24		21
Total net periodic pension (income)/cost of defined benefit plans														$	5,893		$	239	$	663	$	817
Cost of defined contribution plans															416			455		280		306
Total defined benefit and contribution pension plans cost recognized in the Consolidated Income Statement														$	6,309		$	694	$	943	$	1,122

~~(1)~~

~~The amount includes changes~~These components of net periodic pension cost are included in ~~clean fair values of~~other (income) and expense in the ~~derivative instruments in fair value hedging relationships and the periodic accrual for coupon payments required under these derivative contracts.~~Consolidated Income Statement.

~~(2)~~

~~The amount includes basis adjustments~~Reflects the impact of a one-time, non-cash, pre-tax pension settlement charge related 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.~~Qualified PPP, as described below.

~~(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~~

Cost of Nonpension Postretirement Plans

The following tables provide the components of the cost for the company’s nonpension postretirement plans.


(Dollars in millions)	U.S. Plan				Non-U.S. Plans
For the three months ended September 30:	2022		2021		2022		2021
Service cost	$	1	$	2	$	1	$	1
Interest cost*		21		16		8		8
Expected return on plan assets*		—		—		0		(1)
Amortization of prior service costs/(credits)*		(2)		1		0		0
Recognized actuarial losses*		1		13		1		4
Curtailments and settlements*		—		—		—		—
Total nonpension postretirement plans cost recognized in the Consolidated Income Statement	$	21	$	32	$	10	$	12

~~For the three~~* These components of net periodic pension cost are included in other (income) and nine months ended September 30, 2021 and 2020, 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 anticipatedexpense in the ~~normal course of business.~~Consolidated Income Statement.


(Dollars in millions)	U.S. Plan				Non-U.S. Plans
For the nine months ended September 30:	2022		2021		2022		2021
Service cost	$	4	$	5	$	2	$	3
Interest cost*		58		49		26		25
Expected return on plan assets*		—		—		(2)		(2)
Amortization of prior service costs/(credits)*		(1)		3		0		0
Recognized actuarial losses*		6		39		3		11
Curtailments and settlements*		—		—		—		0
Total nonpension postretirement plans cost recognized in the Consolidated Income Statement	$	67	$	96	$	30	$	37

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

4650

Table of Contents

Notes to Consolidated Financial Statements — (continued)

~~16.~~ ~~Stock-Based Compensation:~~IBM U.S. Pension and Nonpension Postretirement Plan Changes

~~Stock-based compensation cost is measured~~Over the past several years, the company has taken actions to reduce the risk profile of its worldwide retirement-related plans, while at ~~grant date, based on~~ the ~~fair value~~same time increasing the funded status of the ~~award,~~plans. As described in note 1, “Basis of Presentation,” in September 2022, the Qualified PPP irrevocably transferred to the Insurers approximately $16 billion of the Qualified PPP’s defined benefit pension obligations and related plan assets, thereby reducing the company’s pension obligations and assets by the same amount. This transaction further de-risks the company’s retirement-related plans by eliminating the potential for the company to make future cash contributions to fund this portion of pension obligations being transferred to the Insurers. After the transaction, the Qualified PPP remained in an overfunded position as of September 30, 2022.

Upon issuance of the group annuity contracts, the Qualified PPP’s benefit obligations and administration for approximately 100,000 of the company’s retirees and beneficiaries (the Transferred Participants) were transferred to the Insurers. Under the group annuity contracts, each Insurer has made an irrevocable commitment, and will be solely responsible, to pay 50 percent of the pension benefits of each Transferred Participant that are due on and after January 1, 2023. The transaction resulted in no changes to the benefits to be received by the Transferred Participants. The company recognized a one-time, non-cash, pre-tax pension settlement charge of $5.9 billion ($4.4 billion net of tax) in the third quarter of 2022 primarily related to the accelerated recognition of actuarial losses included within AOCI in the Consolidated Statement of Equity. As a result of this transaction, the company was required to remeasure the benefit obligations and plan assets of the Qualified PPP. The remeasurement reflects the use of an updated discount rate and actual return on plan assets as of August 31, 2022, applying the practical expedient to remeasure plan assets and obligations as of the nearest calendar month-end date.

In September 2022, the company amended its U.S. Nonpension Postretirement Plan to transition coverage for Medicare-eligible participants to a new IBM-sponsored group Medicare Advantage program administered by UnitedHealthcare, starting January 1, 2023. The changes are intended to provide an enhanced member experience, better value and more comprehensive benefits to IBM participants. As a result of this amendment, the company was required to remeasure the benefit obligation of this plan. The amendment and remeasurement resulted in a decrease in nonpension postretirement benefit obligations and a corresponding decrease in accumulated other comprehensive loss, which is ~~recognized over~~reflected in the ~~employee requisite service period.~~ changes in benefit obligations from actuarial losses/(gains) in the table below. The remeasurement reflects the use of an updated discount rate and actual return on plan assets as of July 31, 2022, applying the practical expedient to remeasure plan assets and obligations as of the nearest calendar month-end date.

The following table presents ~~total stock-based compensation cost included~~the changes in ~~income from continuing operations.~~

Three Months Ended September 30,

Nine Months Ended September 30,
(Dollars in millions)

2021

2020

2021

2020
Cost

$
45

$
42

$
127

$
109
Selling, general and administrative

156

129

431

401
Research, development and engineering

61

50

160

147
Pre-tax stock-based compensation cost

$
262

$
222

$
719

$
658
Income tax benefits

(58)

(50)

(179)

(146)
Total net stock-based compensation cost

$
204

$
172

$
540

$
512

~~Pre-tax stock-based compensation cost for~~benefit obligations and plan assets of the ~~three months ended September 30, 2021 increased $40 million compared to~~company’s retirement related benefit plans affected by the corresponding period in the prior year. This was due to increases from performance share units ($21 million), conversion of stock options previously issued by acquired entities ($15 million) and restricted stock units ($4 million).

~~Pre-tax stock-based compensation cost~~interim remeasurements described above for the nine months ended September 30, 2021 increased $61 million compared to the corresponding period in the prior year. This was due to increases related to performance share units ($29 million), restricted stock units ($19 million) and conversion of stock options previously issued by acquired entities ($13 million).2022.

~~Total unrecognized compensation cost related to non-vested awards at September 30, 2021 was $1.6 billion and is expected to be recognized over a weighted-average period of approximately 2.5 years.~~

~~Capitalized stock-based compensation cost was not material at September 30, 2021 and 2020.~~

In connection with the separation of Kyndryl, as required by the company’s stock-based incentive award plans, the number of shares underlying remaining unvested stock awards will be adjusted. The company will also adjust the exercise price and number of shares underlying outstanding stock options. All adjustments are made with the intent to preserve the intrinsic value of each award immediately before and after the separation.

~~17.~~ ~~Retirement-Related Benefits:~~

The company offers defined benefit 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 September 30:

2021

2020

Change

Retirement-related plans — cost:







Defined benefit and contribution pension plans — cost

$
647

$
610

6.0
%
Nonpension postretirement plans — cost

45

50

(10.5)

Total

$
692

$
660

4.8
%

4751

Table of Contents

Notes to Consolidated Financial Statements — (continued)

Yr. to Yr.

(Dollars in millions)

Percent

For the nine months ended September 30:

2021

2020

Change

Retirement-related plans — cost:







Defined benefit and contribution pension plans — cost

$
1,972

$
1,789

10.2
%
Nonpension postretirement plans — cost

134

151

(11.8)

Total

$
2,106

$
1,941

8.5
%


				Nonpension
	Qualified PPP			Postretirement Plan
(Dollars in millions)	U.S. Plan			U.S. Plan
Change in benefit obligation:
Benefit obligation at January 1, 2022	$	46,457		$	3,404
Service cost		—			4
Interest cost		853			58
Plan participants' contributions		—			33
Actuarial losses/(gains)*		(6,973)			(624)
Benefits paid from trust		(2,376)			(285)
Direct benefit payments		—			(2)
Amendments/curtailments/settlements/other		(16,644)	**		—
Benefit obligation at September 30, 2022	$	21,316		$	2,588
Change in plan assets:
Fair value of plan assets at January 1, 2022	$	51,851		$	8
Actual return on plan assets		(5,746)			—
Employer contributions		—			272
Plan participants' contributions		—			33
Benefits paid from trust		(2,376)			(285)
Amendments/curtailments/settlements/other		(16,644)	**		—
Fair value of plan assets at September 30, 2022	$	27,085		$	28
Funded status at September 30, 2022	$	5,769		$	(2,560)
Accumulated benefit obligation+	$	21,316			N/A

*	Reflects an increase in the discount rate from 2.60 percent at December 31, 2021 to 4.70 percent at the remeasurement date for the Qualified PPP and from 2.30 percent at December 31, 2021 to 4.10 percent at the remeasurement date for the nonpension postretirement plan.

** Primarily represents the transfer of Qualified PPP pension obligations and related plan assets to the Insurers pursuant to group annuity contracts and lump sum payments to plan participants.

+	Represents the benefit obligation assuming no future participant compensation increases.

~~The following tables provide 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:

2021

2020

2021

2020
Service cost

$
—

$
—

$
94

$
99
Interest cost (1)

277

375

109

142
Expected return on plan assets (1)

(451)

(542)

(286)

(323)
Amortization of prior service costs/(credits) (1)

4

4

(2)

(5)
Recognized actuarial losses (1)

249

207

365

360
Curtailments and settlements (1)

—

—

13

21
Multi-employer plans

—

—

3

7
Other costs/(credits) (1)

—

—

7

6
Total net periodic pension (income)/cost of defined benefit plans

$
80

$
44

$
303

$
307
Cost of defined contribution plans

152

148

112

111
Total defined benefit and contribution pension plans cost recognized in the Consolidated Income Statement

$
232

$
192

$
415

$
418

(Dollars in millions)

U.S. Plans

Non-U.S. Plans
For the nine months ended September 30:

2021

2020

2021

2020
Service cost

$
—

$
—

$
281

$
289
Interest cost (1)

832

1,126

332

408
Expected return on plan assets (1)

(1,352)

(1,627)

(867)

(943)
Amortization of prior service costs/(credits) (1)

12

12

(8)

(14)
Recognized actuarial losses (1)

747

622

1,110

1,041
Curtailments and settlements (1)

—

—

46

42
Multi-employer plans

—

—

17

22
Other costs/(credits) (1)

—

—

21

20
Total net periodic pension (income)/cost of defined benefit plans

$
239

$
133

$
933

$
865
Cost of defined contribution plans

455

457

345

334
Total defined benefit and contribution pension plans cost recognized in the Consolidated Income Statement

$
694

$
590

$
1,278

$
1,200

~~(1) 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)~~Plan Contributions

~~The following tables provide 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 September 30:

2021

2020

2021

2020
Service cost

$
2

$
2

$
1

$
1
Interest cost (1)

16

26

8

8
Expected return on plan assets (1)

—

—

(1)

(1)
Amortization of prior service costs/(credits) (1)

1

1

0

0
Recognized actuarial losses (1)

13

7

4

5
Curtailments and settlements (1)

—

—

—

—
Total nonpension postretirement plans cost recognized in the Consolidated Income Statement

$
32

$
36

$
13

$
14

(Dollars in millions)

U.S. Plan

Non-U.S. Plans
For the nine months ended September 30:

2021

2020

2021

2020
Service cost

$
5

$
7

$
4

$
4
Interest cost (1)

49

77

25

26
Expected return on plan assets (1)

—

—

(2)

(3)
Amortization of prior service costs/(credits) (1)

3

3

0

0
Recognized actuarial losses (1)

39

22

12

16
Curtailments and settlements (1)

—

—

0

0
Total nonpension postretirement plans cost recognized in the Consolidated Income Statement

$
96

$
109

$
38

$
43

~~(1) These components of net periodic pension cost are included in other (income) and expense in the Consolidated Income Statement.~~

~~The company does not anticipate any significant changes to the expected plan contributions in 2021 from the amounts disclosed in the 2020 Annual Report.~~

The table below includes contributions to the following plans:



(Dollars in millions)	Plan Contributions				Plan Contributions
For the nine months ended September 30:		2021	2020			2022	2021
U.S. and non-U.S. nonpension postretirement benefit plans	$	269	$	265	$	272	$	263
Non-U.S. DB and multi-employer plans *		48		127
Non-U.S. DB and multi-employer plans*						85		43
Total plan contributions	$	317	$	392	$	357	$	306

* Amounts reported net of refunds.

During the nine months ended September 30, ~~2021~~2022 and ~~2020,~~2021, the company contributed ~~$307~~$247 million and ~~$315~~$307 million of U.S. Treasury Securities, respectively, to the non-U.S. DB plans and ~~U.S.~~ nonpension postretirement benefit ~~plan.~~plans. Additionally, during the nine months ended September 30, ~~2021~~2022 and ~~2020,~~2021, the company contributed ~~$311~~$366 million and ~~$160~~$311 million in U.S. Treasury securities, respectively, to the Active Medical Trust. Contributions made with U.S. Treasury securities are considered a non-cash transaction.

The company does not anticipate any significant changes to the expected plan contributions in 2022 from the amounts disclosed in the 2021 Annual Report.

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~~18.~~ Notes to Consolidated Financial Statements — (continued)

19. Subsequent Events:

On November 3, 2021, the company completed the separation of its managed infrastructure services business into a new public company, Kyndryl. In addition, immediately preceding the separation of Kyndryl, the company made a

~~Table of Contents~~

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

~~number of changes to its organizational structure and management system. Refer to note 1, “Basis of Presentation” for additional information.~~

On October ~~15, 2021, in preparation for the separation, Kyndryl completed the offering of $2.4 billion in aggregate principal amount of senior unsecured fixed-rate notes with maturities ranging from~~ ~~five~~ to twenty years and coupons ranging from 2.05 to 4.10 percent. On November 1, 2021, Kyndryl entered into a $500 million three-year variable-rate term loan. Cash raised from the debt issuance and term loan was used to fund Kyndryl's opening cash balance, with the remaining proceeds transferred to IBM at separation. Following the completion of the Kyndryl separation on November 3, 2021, the notes and term loan are no longer obligations of IBM.

~~On October 26, 2021,~~25, 2022, the company announced that the Board of Directors approved a quarterly dividend of ~~$1.64~~$1.65 per common share. The dividend is payable December 10, ~~2021~~2022 to shareholders of record on November 10, ~~2021.~~2022.

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Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, ~~2021~~2022

Snapshot

Financial Results Summary — Three Months Ended September 30:


							Yr. to Yr.								Yr. to Yr.
							Percent/								Percent/
(Dollars and shares in millions except per share amounts)							Margin								Margin
For the three months ended September 30:	2021			2020			Change		2022*			2021			Change
Revenue	$	17,618		$	17,560		0.3	%* **	$	14,107		$	13,251		6.5	%**
Gross profit margin		46.4	%		48.0	%	(1.6)	pts.		52.7	%		53.6	%	(1.0)	pts.
Total expense and other (income)	$	6,852		$	6,603		3.8	%	$	11,931		$	6,293		89.6	%
Income from continuing operations before income taxes	$	1,319		$	1,827		(27.8)	%
Provision for income taxes from continuing operations	$	188		$	128		47.0	%
Income from continuing operations	$	1,130	+	$	1,698		(33.5)	%
Income from continuing operations margin		6.4	%		9.7	%	(3.3)	pts.
Net income	$	1,130	+	$	1,698		(33.4)	%
Earnings per share from continuing operations - assuming dilution	$	1.25	+	$	1.89		(33.9)	%
Income/(loss) from continuing operations before income taxes									$	(4,501)		$	813		nm
Provision for/(benefit from) income taxes from continuing operations									$	(1,287)		$	(224)		nm
Income/(loss) from continuing operations									$	(3,214)		$	1,037		nm
Income/(loss) from continuing operations margin										(22.8)	%		7.8	%	(30.6)	pts.
Income from discontinued operations, net of tax									$	18		$	93		(81.1)	%
Net income/(loss)									$	(3,196)		$	1,130		nm
Earnings/(loss) per share from continuing operations - assuming dilution									$	(3.55)		$	1.14		nm
Consolidated earnings/(loss) per share - assuming dilution									$	(3.54)		$	1.25		nm
Weighted-average shares outstanding - assuming dilution		906.0			897.3		1.0	%		904.1			906.0		(0.2)	%

* ~~(0.3) percent adjusted for currency; (0.2) percent excluding divested businesses and adjusted for currency.~~

** 2.5 percent normalized to exclude Kyndryl, 1.8 percent excluding Kyndryl and adjusted for currency, 1.9 percent excluding Kyndryl and divested businesses and adjusted for currency.

+ Includes ~~$0.5~~a one-time, non-cash, pre-tax pension settlement charge of $5.9 billion ($4.4 billion net of ~~Kyndryl separation-related charges~~tax) resulting in an impact of ($4.86) to diluted ~~earnings~~earnings/(loss) per share from continuing operations and an impact of ($~~0.56).~~4.87) to consolidated diluted earnings/(loss) per share. See note 18, “Retirement-Related Benefits,” for additional information.

** 14.6 percent adjusted for currency.

nm - not meaningful

Organization of Information:

On November 3, 2021, we completed the ~~previously announced~~ separation of our 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. To ~~effect~~affect the separation, IBM stockholders received one share of Kyndryl common stock for every five shares of IBM common stock held at the close of business on October 25, 2021, the record date for the distribution. IBM retained 19.9 percent of the shares of Kyndryl common stock immediately following the separation with the intent to dispose of such shares within twelve months after the distribution. ~~Our financial results~~The company accounts for the ~~third quarter~~retained Kyndryl common stock as a fair value investment included within prepaid expenses and other current assets in the ~~nine months ended~~Consolidated Balance Sheet with subsequent fair value changes included in other (income) and expense in the Consolidated Income Statement. As of September 30, ~~2021 include Kyndryl. With~~2022, we transferred all 19.9 percent retained interest in Kyndryl common stock pursuant to exchange agreements with a third-party financial institution. Refer to note 8, “Financial Assets & Liabilities,” for additional information.

The accounting requirements for reporting the ~~completion~~separation of Kyndryl as a discontinued operation were met when the separation was completed. Accordingly, the historical results of Kyndryl ~~will be~~are presented as discontinued operations and, as such, have been excluded from continuing operations and segment results for all periods presented. Consolidated earnings/(loss) per share includes the results of discontinued operations. Refer to note 3, “Separation of Kyndryl,” for additional information.

In the first quarter of 2022, the company realigned its management structure to reflect the planned divestiture of its healthcare software assets which was completed in ~~our Consolidated Financial Statements beginning in~~the second quarter of 2022. This change impacted the company’s Software segment and Other–divested businesses category. In the fourth quarter of ~~2021.~~

~~Effective~~2021, immediately prior to the

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Management Discussion – (continued)

separation of Kyndryl, wethe company made a number of changes to ~~our~~its organizational structure and management system. These changes ~~will impact our~~impacted the company’s reportable segments ~~beginning in the fourth quarter of 2021~~ but ~~will~~did not impact ~~our~~the Consolidated Financial Statements. ~~Since these organizational changes did not occur until~~Refer to note 5, “Segments,” for additional information on the ~~fourth~~company’s reportable segments. The segments are reported on a comparable basis for all periods.

In September 2022, the IBM Qualified Personal Pension Plan (Qualified PPP) purchased two separate nonparticipating single premium group annuity contracts from The Prudential Insurance Company of America and Metropolitan Life Insurance Company (collectively, the Insurers) and irrevocably transferred to the Insurers approximately $16 billion of the Qualified PPP’s defined benefit pension obligations and related plan assets, thereby reducing our pension obligations and assets by the same amount. The group annuity contracts were purchased using assets of the Qualified PPP and no additional funding contribution was required from the company. As a result of this transaction, we recognized a one-time, non-cash, pre-tax pension settlement charge of $5.9 billion ($4.4 billion net of tax) in the third quarter of ~~2021,~~2022, primarily related to the ~~periods presented in this Form 10-Q are reported under~~accelerated recognition of accumulated actuarial losses of the ~~historical segments. See~~Qualified PPP. The company was also required to remeasure the benefit obligation and plan assets of the Qualified PPP. Refer to note ~~4, "Segments"~~18, “Retirement-Related Benefits,” for additional information.

To provide useful decision-making information for management and shareholders, the company defines and measures hybrid cloud revenue as end-to-end cloud capabilities within hybrid cloud environments, which includes technology (software and hardware), services and solutions to enable clients to implement cloud solutions across public, private and multi-clouds. The definition of hybrid cloud revenue is consistent with the prior methodology for cloud revenue historically presented. This spans across IBM’s Consulting, Software and Infrastructure segments. Examples include (but are not limited to) Red Hat Enterprise Linux (RHEL), Red Hat OpenShift, Cloud Paks, as-a-service offerings, service engagements related to cloud deployment of technology and applications, and infrastructure used in cloud deployments.

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

Currency:

The references to “adjusted for currency” or “at constant currency” in the Management Discussion do not include operational impacts that could result from fluctuations in foreign currency rates. When we refer to growth rates at constant currency or adjust such growth rates for currency, it is done so that certain financial results can be viewed without the impact of fluctuations in foreign currency exchange rates, thereby facilitating period-to-period comparisons

~~Table of Contents~~

~~Management Discussion – (continued)~~

of business performance. Financial results adjusted for currency are calculated by translating current period activity in local currency using the comparable prior-year period’s currency conversion rate. This approach is used for countries where the functional currency is the local currency. Generally, when the dollar either strengthens or weakens against other currencies, the growth at constant currency rates or adjusting for currency will be higher or lower than growth reported at actual exchange rates. Refer to “Currency Rate Fluctuations” for additional information.

~~Revenue Adjusted for Divested Businesses and Constant Currency:~~

To provide better transparency on the recurring performance of the ongoing business, the company provides total revenue, geographic revenue and cloud revenue growth rates excluding certain divested businesses and at constant currency. These divested businesses are included in the category “Other–divested businesses.”

~~Revenue Adjusted for Kyndryl:~~

To provide investors with insight on the recurring performance and trends of the ongoing business, the company provides total revenue growth rates excluding an estimate of Kyndryl, which separated on November 3, 2021. The historical results of Kyndryl will be presented as discontinued operations in our Consolidated Financial Statements after separation, beginning in the fourth quarter of 2021.

Operating (non-GAAP) Earnings:

In an effort to provide better transparency into the operational results of the business, supplementally, management separates business results into operating and non-operating categories. Operating earnings from continuing operations is a non-GAAP measure that excludes the effects of certain acquisition-related charges, intangible asset amortization, expense resulting from basis differences on equity method investments, retirement-related costs, ~~discontinued operations and~~ certain impacts from the Kyndryl ~~separation-related charges~~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 include true-ups, accounting elections and any changes to regulations, laws, audit adjustments, etc. that affect the recorded one-time charge. Management also characterizes direct and incremental charges incurred related to ~~accomplish~~ the Kyndryl separation as ~~non-operating~~non-

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Management Discussion – (continued)

operating given their unique and non-recurring nature. These charges primarily relate to ~~transaction~~any net gains or losses on the Kyndryl common stock and the related cash-settled swap with a third-party ~~support costs, business~~financial institution, which are recorded in other (income) and expense in the Consolidated Income Statement. The Kyndryl shares were retained by the company immediately following the separation, and applicable employee retention fees, pension settlement charges and related tax separation charges. All other spending for Kyndryl is included in both earnings from continuing operations and in operating (non-GAAP) earnings.with the intent to dispose of such shares within twelve months after the distribution. For acquisitions, operating (non-GAAP) earnings exclude the amortization of purchased intangible assets and acquisition-related charges such as in-process research and development, transaction costs, applicable retention, restructuring and related expenses, tax charges related to acquisition integration and pre-closing charges, such as financing costs. These charges are excluded as they may be inconsistent in amount and timing from period to period and are significantly impacted by the size, type and frequency of the company’s acquisitions. All other spending for acquired companies is included in both earnings from continuing operations and in operating (non-GAAP) earnings. ~~Throughout the Management Discussion, the impact of acquisitions over the prior 12-month period may be a driver of higher expense year to year.~~ For retirement-related costs, management characterizes certain items as operating and others as non-operating, consistent with GAAP. We include defined benefit plan and nonpension postretirement benefit plan service costs, multi-employer plan costs and the cost of defined contribution plans in operating earnings. Non-operating retirement-related costs include defined benefit plan and nonpension postretirement benefit plan amortization of prior service costs, interest cost, expected return on plan assets, amortized actuarial gains/losses, the impacts of any plan curtailments/settlements including a one-time, non-cash, pre-tax settlement charge of $5.9 billion ($4.4 billion, net of tax) in the third quarter of 2022 and pension insolvency costs and other costs. Non-operating retirement-related costs are primarily related to changes in pension plan assets and liabilities which are tied to financial market performance, and the company considers these costs to be outside of the operational performance of the business.

Overall, management believes that supplementally providing investors with a view of operating earnings as described above provides increased transparency and clarity into both the operational results of the business and the

~~Table of Contents~~

~~Management Discussion – (continued)~~

performance of the company’s pension plans; improves visibility to management decisions and their impacts on operational performance; enables better comparison to peer companies; and allows the company to provide a long-term strategic view of the business going forward. ~~Our reportable segment financial results reflect pre-tax operating earnings from continuing operations, consistent with our management and measurement system.~~In addition, these non-GAAP measures provide a perspective consistent with areas of interest we routinely receive from investors and analysts. Our reportable segment financial results reflect pre-tax operating earnings from continuing operations, consistent with our management and measurement system.

The following table provides the company’s operating (non-GAAP) earnings for the third quarter of ~~2021~~2022 and ~~2020.~~2021.


					Yr. to Yr.							Yr. to Yr.
(Dollars in millions except per share amounts)					Percent							Percent
For the three months ended September 30:	2021		2020		Change		2022			2021		Change
Net income as reported	$	1,130	$	1,698	(33.4)	%
Income/(loss) from discontinued operations, net of tax		—		(1)	(100.0)
Income from continuing operations	$	1,130	$	1,698	(33.5)	%
Net income/(loss) as reported							$	(3,196)	*	$	1,130	nm
Income from discontinued operations, net of tax								18			93	(81.1)	%
Income/(loss) from continuing operations							$	(3,214)	*	$	1,037	nm
Non-operating adjustments (net of tax):
Acquisition-related charges	$	375	$	358	4.6	%	$	315		$	370	(15.0)	%
Non-operating retirement-related costs/(income)		271		237	14.4			4,566	*		262	nm
U.S. tax reform impacts		—		21	(100.0)
Separation-related charges		510		—	nm
Operating (non-GAAP) earnings*	$	2,286	$	2,315	(1.2)	%
Diluted operating (non-GAAP) earnings per share*	$	2.52	$	2.58	(2.3)	%
Kyndryl-related impacts								(14)			—	nm
Operating (non-GAAP) earnings**							$	1,653		$	1,670	(1.0)	%
Diluted operating (non-GAAP) earnings per share**							$	1.81		$	1.84	(1.6)	%

* Includes a one-time, non-cash pension settlement charge of $4.4 billion net of tax.

** Refer to page 9295 for a more detailed reconciliation of net ~~income~~loss to operating earnings and operating earnings per share.

nm - not meaningful

Table of Contents

Management Discussion – (continued)

~~Environmental Dynamics:~~Macroeconomic Environment:

~~On March 11, 2020,~~Throughout 2022, we have seen escalating labor and component costs and a strengthening of the ~~World Health Organization (WHO) declared~~U.S. dollar. Consulting, which makes up well over half of IBM’s workforce, is most impacted by the ~~novel coronavirus (COVID-19)~~labor cost inflation. While those dynamics continue to put pressure on our margin profile, we are seeing progress in the actions we have taken to mitigate the impacts of these higher costs. We have begun to see improved utilization, acquisitions progressing toward margin accretion and priced margin improvements year over year that will benefit our margin profile going forward. Additionally, across all of our product-based businesses, we have executed price increases above our historical level of increases to be more reflective of the labor and component costs we are incurring due to the inflationary environment and to mitigate the impacts of currency. This includes price increases in our support and maintenance agreements for our hardware and software portfolios. The strengthening of the U.S. dollar impacted our reported revenue and gross profit dollars. We execute hedging programs which defer but do not eliminate the impact of currency. The gains from these hedging programs are reflected primarily in other income and expense. With the rate and magnitude of movements, and because we do not hedge all currencies, we do have a ~~global pandemic which~~currency impact to our overall profit and cash flows. See “Currency Rate Fluctuations,” for additional information.

The geopolitical situation in Eastern Europe intensified in February 2022, with Russia’s invasion of Ukraine. The safety and security of our employees and their families in the impacted regions has been our primary focus. The sanctions placed on numerous Russian entities, specific Russian-controlled entities, as well as Belarus and other measures that have been and continue to be imposed as a result of the war have increased the level of economic and political uncertainty. In the second quarter of 2022, we made the decision to carry out an orderly wind-down of our Russian operations. As such, we assessed certain accounting-related matters that generally require consideration of current information reasonably available to us and forecasted financial data in the context of unknown future impacts to IBM that resulted in ~~significant governmental measures being initiated around~~certain immaterial asset and restructuring charges in the ~~globe~~second quarter of 2022. These charges, together with the year-to-year lost business due to ~~slow down and control~~ the ~~spread~~wind-down, impacted our pre-tax income by approximately $180 million for the nine months ended September 30, 2022. The long-term impacts of the ~~virus. The~~Russian war in Ukraine remain uncertain; however, we do not expect a significant impact on the company’s future results of operations or financial position. For full year 2021, Russia, Ukraine and Belarus made up less than one percent of the company’s full year revenue. While the revenue impact is not expected to be material to total consolidated IBM revenue for the full year 2022, the business in Russia has historically been high margin and therefore, will continue to be a headwind to our profit and cash flows.

In the third year of the COVID-19 pandemic, our priority continues to be the health of IBM employees, our clients, business partners and ~~community continue~~community. Our objective in returning to the workplace is to allow IBM locations to safely accommodate in-person working during pandemic conditions that are constantly changing. Our approach has enabled hundreds of locations to safely reopen, adhering to IBM protocols and adjusting capacity levels through periods where conditions may be ~~our primary focus. We are actively engaged to ensure our plans continue to be aligned with recommendations of the WHO, the U.S. Centers for Disease Control and Prevention and governmental regulations.~~

~~This environment~~improving or worsening over time. The pandemic has ~~only~~ reinforced the need for clients to modernize their businesses to succeed in this new normal, with hybrid cloud and AI at the core of their digital transformations. The reliance on technology, particularly hybrid cloud and AI technologies that give clients the scalability and flexibility needed to adjust to the rapid market changes, has become more acute. We are helping to advise, build, move and manage our clients’ journey to the cloud, working with our clients to apply AI, automation and other technologies to make their workflows more intelligent and responsive and partnering with clients to help them enhance employee engagement and productivity, reskill the workforce faster and reimagine ways of working.

~~The~~ spending environment continues to ~~improve~~be strong, and we remain focused on providing the ~~economy is reopening in many parts of the world. From an industry standpoint, we have seen meaningful improvement in areas most affected by~~technology and consulting services that our clients need to accelerate their digital organizations and emerge from the pandemic such as travel, transportation, automotive and industrial products. The underlying fundamentals of our business continue to remain sound and provide some level of stability in our revenue, profit and cash as we continue to manage through this macroeconomic uncertainty. As the world recovers from the effects of the pandemic, IBM continues to be well positioned to support our clients to emerge even stronger.

~~Separation of Kyndryl~~

On November 3, 2021, IBM took an important step in advancing its focus on hybrid cloud and AI with the previously announced separation of its managed infrastructure services unit into a new public company, Kyndryl. The separation of Kyndryl creates two industry-leading companies, which will continue to have a strong commercial

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Management Discussion – (continued)

relationship. Both IBM and Kyndryl will have increased clarity and ability to focus on their respective operating and financial models, including capital deployment, investment strategies, and investment grade capital structures. The separation will also enable greater freedom of action to partner and capture new opportunities. The outcome of all of these actions will be increased value for clients and investors.

Financial Performance Summary — Three Months Ended September 30:

In the third quarter of ~~2021,~~2022, we reported ~~$17.6~~$14.1 billion in revenue, ~~$1.1 billion in income~~a loss from continuing operations of $3.2 billion, which includes the impact of a one-time, non-cash, pre-tax pension settlement charge of $5.9 billion ($4.4 billion net of tax). The pension settlement charge was the result of the transfer to Insurers of a portion of our U.S. benefit pension obligations, an action we took to further reduce the risk profile of our worldwide retirement-related plans. Our operating (non-GAAP) earnings for the three months ended September 30, 2022 were $1.7 billion, which excludes the impact of the pension settlement charge, among other items. Diluted loss per share from continuing operations was $3.55 as reported, including an impact of $4.86 from the pension settlement charge, and diluted earnings per share from continuing operations were $1.25 as reported. Income and diluted earnings per share from continuing operations for the third quarter of 2021 include an impact from Kyndryl separation-related charges of $0.5 billion and ($0.56) per share, respectively. Operating (non-GAAP) earnings were $2.3 billion, resulting in diluted earnings per share from continuing operations of $2.52was $1.81 on an operating (non-GAAP) basis. ~~We also~~On a consolidated basis, we generated ~~$2.7~~$1.9 billion in cash from operations ~~$0.6~~and $0.8 billion in free cash ~~flow, which includes $0.6 billion of cash impacts from the structural actions initiated in the fourth quarter of 2020 and Kyndryl separation-related charges, and~~flow. We delivered shareholder returns of $1.5 billion ~~through dividends. These results reflect progress~~ in our key growth areas driven by strong demand for technology products and services that help our clients advance in their digital transformation journeys. We continue to increase our investments in skills, innovation and our ecosystem,dividends and our balance sheet continues to provide us with the flexibility to support our business needs. These results reflect our continued focus on the execution of our strategy and ~~liquidity position remain strong.~~the solid demand for our hybrid cloud and AI solutions.

Total ~~consolidated~~ revenue ~~increased 0.3~~grew 6.5 percent as reported and ~~was essentially flat excluding divested businesses and~~15 percent adjusted for currency compared to the prior-year ~~period with strong performance in our key~~period. This includes incremental sales to Kyndryl which contributed approximately 5 points to the revenue growth. Software delivered revenue growth ~~areas~~ of ~~Global Business Services (GBS) and software, offset by declines in other areas of the business. On a segment basis, Cloud & Cognitive Software increased 2.5~~7.5 percent as reported and 214 percent adjusted for currency, ~~led by~~including approximately 8 points of growth from ~~Red Hat and our automation and security offerings. Cloud~~incremental sales to Kyndryl. Within Software, Hybrid Platform & ~~Data Platforms grew 9.8~~Solutions increased 2.4 percent as reported (9and 8 percent adjusted for ~~currency), while Cognitive Applications decreased 0.2~~currency, with incremental sales to Kyndryl contributing approximately 1.5 points of this growth. Performance was led by continued strong double-digit growth in Red Hat. Transaction Processing grew 23.1 percent (1as reported and 33 percent adjusted for ~~currency)~~currency, including approximately 26 points of growth from incremental Kyndryl sales. Consulting revenue increased 5.4 percent as reported and ~~Transaction Processing Platforms declined 8.8 percent (9~~16 percent adjusted for ~~currency). GBS grew 11.6 percent as reported (11 percent adjusted for currency)~~currency, with growth across all ~~lines of business. Within GBS, Consulting~~three business lines. Infrastructure revenue increased ~~16.6~~14.8 percent ~~(16~~year to year as reported and 23 percent adjusted for currency) with solid demand as we leverage our skills and ecosystem partners to transform business processes and modernize applications based on OpenShift. GTS decreased 4.8 percent as reported (5 percent adjusted for currency) as clients paused on new project activity in advance of the separation of Kyndryl in the fourth quarter of 2021. Systems decreased 11.9 percent as reported (12 percent adjusted for currency)currency, reflecting ~~product cycle dynamics in IBM Z and Power Systems, partially offset by~~strong double-digit growth in ~~Storage Systems.~~

~~Total~~Hybrid Infrastructure driven primarily by our z16 program. The Infrastructure revenue performance also includes approximately 9 points of growth from incremental sales to Kyndryl. Across the segments, total hybrid cloud revenue of ~~$6.7~~$5.2 billion in the third quarter of ~~2021~~2022 grew 1211 percent as reported ~~(12~~and 19 percent adjusted for ~~currency and excluding divested businesses and adjusted for currency).~~currency. Over the trailing 12 months, total hybrid cloud revenue was ~~$27.8~~$22.2 billion, up 1415 percent as reported ~~(11~~(20 percent adjusted for ~~currency and excluding divested businesses and adjusted for~~ currency). year to year.

From a geographic perspective, Americas revenue grew ~~1.0~~12.7 percent year to year as reported ~~but was flat~~(13 percent adjusted for ~~currency.~~currency). Europe/Middle East/Africa (EMEA) increased 0.5 percent ~~as reported but decreased 1~~(16 percent adjusted for ~~currency.~~currency). Asia Pacific ~~declined 1.3 percent year to year as reported, but~~ was flat year to year but grew 16 percent adjusted for currency.

~~Total consolidated gross~~Gross margin of ~~46.4~~52.7 percent decreased ~~1.6~~1.0 points year to year, ~~and the operating (non-GAAP)~~however, gross ~~margin of 48.0~~profit dollars grew 4.6 percent ~~decreased 1.0 point versus~~compared to the prior-year ~~period.~~period driven by strong revenue performance in our high-value businesses. Overall gross margin was impacted by the ~~significant~~ investments we are making to drive our hybrid cloud and AI strategy, ~~as well as our product cycle dynamics. However, there was improvement~~higher labor and component costs and the impacts of currency, while the mitigating hedging benefits and operational productivity and efficiency we have realized are primarily reflected in ~~the GTS~~expense. Operating (non-GAAP) gross margin ~~reflecting~~of 53.8 percent decreased 1.2 points compared to the ~~benefits from the productivity actions taken in 2020 to improve the margin and profit profile of the business in advance of the Kyndryl separation.~~prior-year period for similar reasons.

Total expense and other (income) ~~of $6.9 billion~~ increased ~~3.8~~89.6 percent in the third quarter of ~~2021~~2022 versus the prior-year ~~period. Our expense dynamics reflect a~~period primarily driven by the pension settlement charge of $5.9 billion and higher ~~level of~~spending reflecting our continuing focus on our portfolio and investment in ~~innovation, skills~~our offerings, technical talent and ecosystem, partially offset by the effects of currency and benefits from the actions taken to streamline operations and our ~~ecosystem, both organically~~go-to-market model. Total operating (non-GAAP) expense and ~~through acquisitions, as we execute our hybrid cloud and AI strategy. We are scaling our garage footprint, increasing our research spend~~other (income) decreased 1.0 percent year to year, driven primarily by the factors described above, excluding the pension settlement charge.

Pre-tax loss from continuing operations was $4.5 billion in ~~areas including quantum, hybrid cloud and AI, and expanding our ecosystem.~~the third quarter of 2022 compared with pre-tax income of $0.8 billion in the prior-year period with the year-to-year decline driven by the $5.9 billion pension settlement charge. Pre-tax margin was down 38.0 points year to year to (31.9) percent reflecting the impact of the charge. The continuing operations benefit from income taxes in the third quarter of 2022 was $1.3 billion compared to a benefit of $0.2 billion in the third quarter of 2021. The current-year tax benefit is primarily due to the pension settlement charge. The prior-year

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Management Discussion – (continued)

~~The year-to-year increase in expense~~tax benefit was ~~also~~primarily driven by ~~$0.2 billion~~events that resulted in additional anticipated utilization of Kyndryl separation-related charges in the current-year period. Total operating (non-GAAP) expense and other (income) increased 0.5 percent year to year, driven primarily by the factors above excluding the separation-related charges.

~~The pre-tax income from continuing operations of $1.3 billion decreased 27.8 percent year to year, and the pre-tax margin~~U.S. foreign tax credits. Net loss from continuing operations was ~~7.5 percent, a decrease~~$3.2 billion compared with net income of ~~2.9 points. Kyndryl separation-related charges impacted pre-tax income by $0.3 billion and pre-tax margin by 1.6 points. The continuing operations provision for income taxes was $0.2~~$1.0 billion in the ~~third quarter of 2021, compared to $0.1 billion in~~prior-year period and the ~~third quarter of 2020. Net income~~net income/(loss) from continuing operations margin of ~~$1.1 billion decreased 33.4~~(22.8) percent ~~and the net income margin from continuing operations~~ was ~~6.4 percent, a decrease of 3.3~~down 30.6 points year to year.

Operating (non-GAAP) pre-tax income from continuing operations of ~~$2.4~~$2.0 billion ~~decreased 6.8~~increased 22.6 percent ~~year~~compared to ~~year~~the prior-year period and the operating (non-GAAP) pre-tax margin from continuing operations ~~decreased 1.0 point~~increased 1.8 points to ~~13.6~~13.9 percent. These profit dynamics reflect our portfolio shift toward higher value, led by software. Our pre-tax profit includes the contribution from incremental sales to Kyndryl and the negative impacts of currency primarily due to the strengthening of the U.S. dollar. The operating (non-GAAP) income tax provision for the third quarter of 2022 was $312 million, compared to a benefit from income taxes ~~was $0.1 billion~~of $67 million in the third quarter of ~~2021, compared to $0.3 billion~~2021. The current-year tax provision was driven by many factors including the impacts of the geographical mix of income, incentives and changes in ~~the third quarter~~unrecognized tax benefits and tax laws. The prior-year tax benefit was primarily driven by events that resulted in additional anticipated utilization of ~~2020.~~U.S. foreign tax credits. Operating (non-GAAP) income from continuing operations of ~~$2.3~~$1.7 billion decreased ~~1.2~~1.0 percent ~~with an~~and the operating (non-GAAP) income margin from continuing operations of ~~13.0~~11.7 percent was down ~~0.2~~0.9 points year to year.

Diluted ~~earnings~~loss per share from continuing operations ~~of $1.25~~was $3.55 in the third quarter of ~~2021 decreased 33.9 percent and operating~~2022, including an impact of $4.86 from the pension settlement charge, compared to diluted earnings per share of $1.14 in the prior-year period. Operating (non-GAAP) diluted earnings per share of ~~$2.52~~$1.81 decreased ~~2.3~~1.6 percent versus the prior-year period.

Consolidated diluted loss per share in the third quarter of ~~2020. Diluted~~2022 was $3.54 compared to diluted earnings per share of $1.25 in the prior-year period. This includes the impact from ~~continuing~~the pension settlement charge and a year-to-year reduction of $0.08 from discontinued operations ~~includes impacts related~~due to the ~~amortization~~separation of purchased intangibles assets and other acquisition-related charges, retirement-related charges, U.S. tax reform enactment impacts and Kyndryl separation-related charges. The impact of the Kyndryl separation-related charges for third-quarter 2021 was ($0.56) per share.Kyndryl.

~~For~~Our cash flows from operating, investing and financing activities, as reflected in the ~~three months ended September 30, 2021,~~Consolidated Statement of Cash Flows, include the cash flows of discontinued operations. On a consolidated basis, in the third quarter of 2022, we generated ~~$2.7~~$1.9 billion in cash flow provided by operating activities, a decrease of ~~$1.6~~$0.8 billion compared to the third quarter of ~~2020,~~2021, primarily driven by a decrease in cash provided by ~~receivables of $1.4 billion.~~financing receivables. Net cash ~~from operating activities also included approximately $0.5 billion of cash impacts from our structural actions initiated~~used in ~~the fourth quarter of 2020 and Kyndryl separation-related charges. In the third quarter of 2021,~~ investing activities ~~were a net use~~ of ~~cash of $0.6~~$1.7 billion ~~an increase of $0.3~~increased $1.1 billion compared to the prior-year period, primarily driven by ~~a decrease~~an increase in cash ~~provided by~~used in net ~~proceeds from~~ marketable ~~securities.~~securities and other investments of $1.3 billion. Financing activities were a net source of cash of $0.7 billion in the third quarter of 2022, compared to a net use of cash of $1.7 billion in the ~~third quarter~~prior-year period primarily due to higher net issuances of ~~2021, essentially flat compared to~~debt in the ~~prior-year period.~~current year.

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Management Discussion – (continued)

Financial Results Summary —Nine Months Ended September 30:


							Yr. to Yr.								Yr. to Yr.
							Percent/								Percent/
(Dollars and shares in millions except per share amounts)							Margin								Margin
For the nine months ended September 30:	2021			2020			Change		2022*			2021			Change
Revenue	$	54,093		$	53,253		1.6	%*	$	43,840		$	40,656		7.8	%**
Gross profit margin		46.9	%		47.0	%	(0.1)	pts.		52.6	%		54.1	%	(1.5)	pts.
Total expense and other (income)	$	21,603		$	21,704		(0.5)	%	$	25,212		$	20,017		25.9	%
Income from continuing operations before income taxes	$	3,776		$	3,348		12.8	%
Income/(loss) from continuing operations before income taxes									$	(2,156)		$	1,968		nm
Provision for/(benefit from) income taxes from continuing operations	$	365		$	(888)		nm		$	(1,070)		$	(282)		nm
Income from continuing operations	$	3,411	**	$	4,237		(19.5)	%
Income from continuing operations margin		6.3	%		8.0	%	(1.6)	pts.
Net income	$	3,410	**	$	4,234		(19.5)	%
Earnings per share from continuing operations - assuming dilution	$	3.77	**	$	4.72		(20.1)	%
Income/(loss) from continuing operations									$	(1,087)		$	2,250		nm
Income/(loss) from continuing operations margin										(2.5)	%		5.5	%	(8.0)	pts.
Income from discontinued operations, net of tax									$	16		$	1,160		(98.7)	%
Net income/(loss)									$	(1,071)		$	3,410		nm
Earnings/(loss) per share from continuing operations - assuming dilution									$	(1.21)		$	2.49		nm
Consolidated earnings/(loss) per share - assuming dilution									$	(1.19)		$	3.77		nm
Weighted-average shares outstanding - assuming dilution		904.0			895.8		0.9	%		901.6			904.0		(0.3)	%

	At 9/30/2021			At 12/31/2020					At 9/30/2022			At 12/31/2021
Assets	$	144,214		$	155,971		(7.5)	%	$	125,850		$	132,001		(4.7)	%
Liabilities	$	121,858		$	135,244		(9.9)	%	$	105,703		$	113,005		(6.5)	%
Equity	$	22,357		$	20,727		7.9	%	$	20,147		$	18,996		6.1	%

* ~~(1.1) percent adjusted for currency; (1.0) percent excluding divested businesses and adjusted for currency.~~

** Includes ~~$0.7~~a one-time, non-cash, pre-tax pension settlement charge of $5.9 billion ($4.4 billion net of ~~Kyndryl separation-related charges~~tax) resulting in an impact of ($4.86) to diluted ~~earnings~~earnings/(loss) per share from continuing operations ~~of ($0.76).~~and consolidated diluted earnings/(loss) per share. See note 18, “Retirement-Related Benefits,” for additional information.

** 13.8 percent adjusted for currency.

nm - not meaningful

The following table provides the company’s operating (non-GAAP) earnings for the first nine months of ~~2021~~2022 and ~~2020.~~2021.


					Yr. to Yr.							Yr. to Yr.
(Dollars in millions except per share amounts)					Percent							Percent
For the nine months ended September 30:	2021		2020		Change		2022			2021		Change
Net income as reported	$	3,410	$	4,234	(19.5)	%
Income/(loss) from discontinued operations, net of tax		(1)		(2)	(76.1)
Income from continuing operations	$	3,411	$	4,237	(19.5)	%
Net income/(loss) as reported							$	(1,071)	*	$	3,410	nm
Income from discontinued operations, net of tax								16			1,160	(98.7)	%
Income/(loss) from continuing operations							$	(1,087)	*	$	2,250	nm
Non-operating adjustments (net of tax):
Acquisition-related charges	$	1,082	$	1,095	(1.1)	%	$	1,019		$	1,069	(4.7)	%
Non-operating retirement-related costs/(income)		813		710	14.6			4,856	*		825	nm
U.S. tax reform impacts		(6)		(128)	(95.7)			(112)			(6)	nm
Separation-related charges		687		—	nm
Operating (non-GAAP) earnings*	$	5,988	$	5,913	1.3	%
Diluted operating (non-GAAP) earnings per share*	$	6.62	$	6.60	0.3	%
Kyndryl-related impacts								353			—	nm
Operating (non-GAAP) earnings**							$	5,029		$	4,139	21.5	%
Diluted operating (non-GAAP) earnings per share**							$	5.52		$	4.58	20.5	%

* Includes a one-time, non-cash pension settlement charge of $4.4 billion net of tax.

** Refer to page 9396 for a more detailed reconciliation of net ~~income~~loss to operating earnings and operating earnings per share.

nm - not meaningful

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

In the first nine months of 2021, we reported $54.1 billion in revenue, $3.4 billion in income from continuing operations and diluted earnings per share from continuing operations were $3.77 as reported. Income and diluted earnings per share from continuing operations for the third quarter of 2021 include an impact from Kyndryl separation-related charges of $0.7 billion and ($0.76) per share, respectively. Operating (non-GAAP) earnings were $6.0 billion, resulting in diluted earnings per share from continuing operations of $6.62 on an operating (non-GAAP) basis. We generated $10.3 billion in cash from operations, $3.2 billion in free cash flow, which included $1.8 billion of cash

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Management Discussion – (continued)

~~impacts from the structural actions initiated in the fourth quarter of 2020 and Kyndryl separation-related charges, and delivered shareholder returns of $4.4 billion through dividends.~~Financial Performance Summary —Nine Months Ended September 30:

Total consolidated revenue increased 1.6 percent as reported but declined 1 percent excluding divested businesses and adjusted for currency. Cloud & Cognitive Software increased 4.2 percent as reported (2 percent adjusted for currency). Within this segment, Cloud & Data Platforms grew 11.4 percent as reported (9 percent adjusted for currency) with continued solid Red Hat performance led by Red Hat Enterprise Linux (RHEL) and our OpenShift hybrid cloud platform. Cognitive Applications grew 5.1 percent as reported (3 percent adjusted for currency), while Transaction Processing Platforms declined 9.2 percent as reported (12 percent adjusted for currency). GBS increased 8.4 percent as reported (6 percent adjusted for currency) with strong growth in Consulting and Global Process Services. Application Management increased 2.0 percent as reported, but declined 1 percent adjusted for currency. GTS decreased 2.0 percent as reported (5 percent adjusted for currency) with declines in Infrastructure & Cloud Services and Technology Support Services. Systems decreased 5.1 percent as reported (7 percent adjusted for currency) and was impacted by product cycle dynamics in the current-year period.

~~Total cloud revenue of $20.3 billion in~~In the first nine months of ~~2021~~2022, we reported $43.8 billion in revenue, a loss from continuing operations of $1.1 billion, including a one-time, non-cash, pre-tax pension settlement charge of $5.9 billion ($4.4 billion net of tax), and operating (non-GAAP) earnings of $5.0 billion, which excludes the impact of the settlement charge. Diluted loss per share from continuing operations was $1.21 as reported, including an impact of $4.86 from the pension settlement charge, and diluted earnings per share was $5.52 on an operating (non-GAAP) basis. On a consolidated basis, we generated $6.5 billion in cash from operations and $4.1 billion in free cash flow. We delivered shareholder returns of $4.5 billion in dividends.

Total revenue grew 157.8 percent as reported ~~(12~~and 14 percent adjusted for currency compared to the prior-year period. This includes incremental sales to Kyndryl which contributed 5 points to the revenue growth. Software delivered revenue growth of 8.6 percent as reported and ~~excluding divested businesses and~~14 percent adjusted for ~~currency).~~currency, with growth in both Hybrid Platform & Solutions and Transaction Processing. The Software revenue performance includes approximately 8 points of growth from incremental sales to Kyndryl. Consulting revenue increased 9.5 percent as reported and 17 percent adjusted for currency, with growth across all three business areas. Infrastructure revenue increased 10.6 percent year to year as reported and 16 percent adjusted for currency, with approximately 8 points of growth from incremental sales to Kyndryl. As the separation of Kyndryl occurred in early November 2021, the impact of these incremental sales to growth was largely in the first three quarters of this year.

From a geographic perspective, Americas revenue grew ~~1.9~~12.1 percent year to year as reported (1(12 percent adjusted for currency). EMEA increased ~~3.0~~4.4 percent ~~as reported but decreased 3~~(16 percent adjusted for ~~currency.~~currency). Asia Pacific ~~declined 1.0~~grew 2.6 percent ~~year to year as reported (3~~(14 percent adjusted for currency).

~~Total consolidated gross~~

Gross margin of ~~46.9~~52.6 percent decreased ~~0.1 point~~1.5 points year to year, ~~with declines~~however, gross profit dollars grew 4.9 percent compared to the prior-year period. Overall gross margin was impacted by the investments we are making to drive our hybrid cloud and AI strategy, higher labor and component costs and the impacts of currency, while the mitigating hedging benefits and operational productivity and efficiency we have realized are primarily reflected in GBS and Systems reflecting investment and product cycle dynamics, offset by margin improvements in Cloud & Cognitive Software and GTS. The improvement in GTS reflects the benefits from the productivity actions taken in 2020 in advance of the Kyndryl separation.expense. Operating (non-GAAP) gross margin of ~~48.2~~53.8 percent ~~increased 0.1 point compared to~~decreased 1.6 points versus the ~~prior-year period.~~prior year for similar reasons.

Total expense and other (income) ~~decreased 0.5~~increased 25.9 percent in the first nine months of ~~2021~~2022 versus the prior-year ~~period. Our expense reflects~~period primarily driven by the pension settlement charge of $5.9 billion, impacts of $0.4 billion related to the Kyndryl retained shares and higher ~~level of~~spending reflecting continuing investment ~~we are making~~ in ~~innovation, skills~~our hybrid cloud and ~~our ecosystem, both organically and through acquisitions, more than~~AI strategy, partially offset by the effects of currency, a gain from the divestiture of our healthcare software assets, lower workforce rebalancing charges ~~a benefit from expected credit loss expense,~~ and ~~lower interest expense in the current-year period. Expense also reflects an increase~~benefits from the ~~effects of currency, Kyndryl separation-related charges in the current-year period~~actions taken to streamline operations and ~~higher non-operating retirement-related costs.~~our go-to-market model. Total operating (non-GAAP) expense and other (income) decreased ~~3.2~~3.3 percent year to year, driven primarily by the factors described above excluding the ~~separation-related charges~~pension settlement charge and ~~non-operating retirement-related costs.~~the impacts related to the Kyndryl retained shares.

Pre-tax ~~income~~loss from continuing operations ~~of $3.8~~was $2.2 billion ~~increased 12.8 percent compared to~~in the first nine months of ~~2020. The~~2022 compared with pre-tax ~~margin from continuing operations was 7.0 percent, an increase~~income of ~~0.7 points versus the prior-year period. In~~$2.0 billion in the prior-year period ~~workforce rebalancing charges were $0.9~~with the year-to-year decline driven by the $5.9 billion ~~compared~~pension settlement charge. Pre-tax margin was down 9.8 points year to ~~$0.2 billion in~~year to (4.9) percent reflecting the ~~current year. The current-year period also includes $0.5 billion~~impact of ~~Kyndryl separation-related charges.~~the charge. The continuing operations ~~provision for~~benefit from income taxes in the first nine months of ~~2021~~2022 was ~~$0.4~~$1.1 billion, compared to a benefit ~~from income taxes~~ of ~~$0.9~~$0.3 billion in the first nine months of ~~2020.~~2021. The increase compared to the prior year ~~tax benefit~~ was primarily ~~related~~due to the ~~tax impacts~~pension settlement charge in the third quarter of ~~an intra-entity sale of certain of the company’s intellectual property.~~2022. Net ~~income from continuing operations of $3.4 billion decreased 19.5 percent, and the net income margin~~loss from continuing operations was ~~6.3~~$1.1 billion compared with net income of $2.3 billion in the prior-year period and the net income/(loss) from continuing operations margin of (2.5) percent ~~a decrease of 1.6~~was down 8.0 points year to year.

Operating (non-GAAP) pre-tax income from continuing operations of ~~$6.7~~$6.0 billion increased ~~20.2~~38.1 percent ~~year~~compared to ~~year~~the prior-year period and the operating (non-GAAP) pre-tax margin from continuing operations increased ~~1.9~~3.0 points to ~~12.4~~13.7 percent. These ~~results~~profit dynamics reflect our portfolio shift toward higher ~~workforce rebalancing charges in 2020 as described above.~~value, led by software. Our pre-tax profit includes the contribution from incremental sales to Kyndryl and the negative impacts of currency primarily due to the strengthening of the U.S. dollar. The operating (non-GAAP) provision for income taxes was ~~$0.7 billion~~$969 million in the first ~~nine months of 2021, compared to a benefit from income taxes of $0.3 billion in the first nine months of 2020. The prior year operating (non-GAAP) benefit from income taxes was~~

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Management Discussion – (continued)

nine months of 2022, compared to $204 million in the first nine months of 2021. The increase compared to the prior year was primarily driven by the ~~same factor described above.~~resolution of certain tax audits in the first quarter of 2021 as well as third-quarter 2021 events that resulted in additional anticipated utilization of U.S. foreign tax credits. Operating (non-GAAP) income from continuing operations of ~~$6.0~~$5.0 billion increased ~~1.3~~21.5 percent ~~with an~~and the operating (non-GAAP) income margin from continuing operations of ~~11.1 percent.~~11.5 percent was up 1.3 points year to year.

Diluted ~~earnings~~loss per share from continuing operations ~~of $3.77~~was $1.21 in the first nine months of ~~2021 decreased 20.1 percent and operating~~2022, including an impact of $4.86 from the pension settlement charge, compared to diluted earnings per share of $2.49 in the prior-year period. Operating (non-GAAP) diluted earnings per share of ~~$6.62~~$5.52 increased ~~0.3~~20.5 percent versus the prior-year period.

Consolidated diluted loss per share in the first nine months of ~~2020. Diluted~~2022 was $1.19 compared to diluted earnings per share of $3.77 in the prior-year period. This includes the impact from ~~continuing~~the pension settlement charge and a year-to-year reduction of $1.26 from discontinued operations ~~includes impacts related~~due to the ~~amortization~~separation of purchased intangibles assets and other acquisition-related charges, retirement-related charges, U.S. tax reform enactment impacts and Kyndryl separation-related charges. The impact of the Kyndryl separation-related charges for the first nine months of 2021 was ($0.76) per share.Kyndryl.

~~In the third quarter, we continued to take actions to further enhance our~~Our balance sheet ~~and liquidity position. At~~at September 30, ~~2021, the balance sheet remained strong~~2022 continues to provide us with the flexibility to support ~~and invest in~~ the business. Cash and cash equivalents, restricted cash and marketable securities at September 30, ~~2021~~2022 were ~~$8.4~~$9.7 billion, ~~a decrease~~an increase of ~~$5.9~~$2.2 billion from December 31, ~~2020, primarily due to~~2021. Total debt ~~reduction payments and acquisitions. In line with our overall~~of $50.9 billion at September 30, 2022 decreased $0.8 billion driven by currency impacts, partially offset by net debt ~~pay down strategy, we have reduced total debt by $7.0 billion from December 31, 2020 and $18.5 billion since the second quarter of 2019 (immediately preceding the Red Hat transaction).~~issuances.

Key drivers in the balance sheet and total cash flows were:

Total assets decreased ~~$11.8~~$6.2 billion (flat adjusted for currency) from December 31, 2021 driven by:

●

A decrease in receivables of $3.3 billion ($1.9 billion adjusted for currency) primarily due to collections of higher year-end balances, partially offset by current-year business volumes;

●

A decrease in goodwill and net intangible assets of $3.0 billion ($0.9 billion adjusted for currency) primarily driven by currency impacts, intangibles amortization and derecognition of goodwill and intangible assets of $0.6 billion related to the divestiture of our healthcare software assets, partially offset by additions from new acquisitions; and

●

A decrease in net property, plant and equipment and operating right-of-use assets of $1.0 billion ($0.5 billion adjusted for currency); partially offset by

●

An increase in cash and cash equivalents, restricted cash and marketable securities of $2.2 billion ($2.7 billion adjusted for currency).

Total liabilities decreased $7.3 billion ($~~9.2~~0.9 billion adjusted for currency) from December 31, ~~2020~~2021 driven by:

●

A decrease in retirement and nonpension postretirement benefit obligations of $2.7 billion ($1.4 billion adjusted for currency) of which $0.6 billion is due to the amendment and remeasurement impact of the U.S. Nonpension Postretirement Plan;

~~A decrease in cash and cash equivalents, restricted cash and marketable securities of $5.9 billion ($5.7 billion adjusted for currency); and~~

●

A decrease in deferred income of $1.9 billion ($0.8 billion adjusted for currency) reflecting seasonal reductions from higher year-end balances;

A decrease in financing receivables of $5.8 billion ($5.3 billion adjusted for currency) primarily as a result of collections of seasonally higher year-end balances and sales of receivables; partially offset by

●

A decrease in total debt of $0.8 billion (an increase of $1.4 billion adjusted for currency) primarily driven by maturities of $5.4 billion and currency impacts, partially offset by issuances of $7.9 billion; and

●

A decrease in taxes payable of $0.6 billion ($0.4 billion adjusted for currency) primarily due to indirect tax payments.

~~An increase in goodwill of $1.8 billion ($2.3 billion adjusted for currency) from new acquisitions.~~

~~Total liabilities decreased $13.4 billion ($10.2 billion adjusted for currency) from December 31, 2020 driven by:~~

~~A decrease in total debt of $7.0 billion ($6.1 billion adjusted for currency) primarily driven by debt maturities and early retirements of $7.3 billion;~~

A decrease in other accrued expenses and liabilities of $2.3 billion ($1.9 billion adjusted for currency) primarily due to payments of $1.4 billion for workforce rebalancing actions and a decrease of $0.5 billion in derivative liabilities;

~~A decrease in retirement and nonpension postretirement benefit obligations of $1.5 billion ($0.8 billion adjusted for currency);~~

A decrease in taxes payable of $1.1 billion ($1.0 billion adjusted for currency) primarily driven by tax payments and a decline in reserves as a result of the resolution of certain tax audit matters; and

~~A decrease in accounts payable of $0.7 billion ($0.6 billion adjusted for currency) reflecting declines from seasonally higher year-end balances.~~

~~Total equity of $22.4 billion increased $1.6 billion from December 31, 2020 as a result of:~~

~~Net income of $3.4 billion; and~~

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Management Discussion – (continued)

Total equity of $20.1 billion increased $1.2 billion from December 31, 2021 as a result of:

●

A decrease in accumulated other comprehensive loss of $6.1 billion driven by retirement-related benefit plans primarily due to the pension settlement charge of $4.4 billion net of tax; and

●

Common stock issuances of $0.7 billion; partially offset by

●

Dividends paid of $4.5 billion; and

●

Net loss of $1.1 billion primarily due to the pension settlement charge.

~~An increase~~Our cash flows from operating, investing and financing activities, as reflected in ~~accumulated other comprehensive income~~the Consolidated Statement of ~~$2.0 billion primarily due to retirement-related benefit plans and~~Cash Flows, include the cash ~~flow hedge derivatives; partially offset by~~

~~Dividends paid~~flows of ~~$4.4 billion.~~

~~We generated $10.3 billion in~~discontinued operations. On a consolidated basis, cash ~~flow~~ provided by operating activities was $6.5 billion in the first nine months of 2022, a decrease of ~~$2.1~~$3.8 billion compared to the first nine months of 2020. Cash flows from operating activities includes approximately $1.7 billion of cash impacts from our structural actions initiated in the fourth quarter of 2020 and Kyndryl separation-related charges. In the first nine months of 2021, ~~investing activities were a net use of cash of $5.3 billion compared~~primarily due to ~~$2.5 billion in the prior-year period. The $2.8 billion increase year to year was driven primarily by an increase in net cash used for acquisitions ($3.0 billion) and~~ a decrease in cash provided by ~~divestitures ($0.5 billion), partially offset~~financing receivables driven by ~~a decrease in~~higher prior-year sales of receivables. Net cash used ~~for capital expenditures ($0.4 billion).~~in investing activities of $2.9 billion decreased $2.4 billion compared to the prior-year period. Financing activities were a net use of cash of $2.1 billion in the first nine months of 2022 compared to $10.7 billion in the first nine months of 2021 compared to $3.4 billion in the prior-year period. The $7.2 billion increase year to year was primarily driven by a decrease in net cash provided by debt transactions consistent with our overall debt pay down strategy.

2021.

Table of Contents

Management Discussion – (continued)

Third Quarter and First Nine Months in Review

Results of Continuing Operations

As discussed in the “Organization of Information” section, with the completion of the separation on November 3, 2021, results of Kyndryl are reported as discontinued operations. Prior periods have been reclassified to conform to this presentation in the Management Discussion to allow for a meaningful comparison of continuing operations.

Segment Details

The following istables present each reportable segment’s revenue and gross margin results, followed by an analysis of the third quarter and first nine months of ~~2021~~2022 versus the third quarter and first nine months of ~~2020~~2021 reportable ~~segment external revenue and gross margin~~segments results. ~~Segment pre-tax income includes transactions between segments that are intended~~Prior-year results have been recast to ~~reflect an arm’s-length transfer price and excludes certain unallocated corporate items.~~conform with the changes as described in the “Organization of Information” section.

							��
									Yr. to Yr.										Yr. to Yr.
									Percent										Percent
							Yr. to Yr.		Change								Yr. to Yr.		Change
(Dollars in millions)							Percent/Margin		Adjusted For								Percent/Margin		Adjusted For
For the three months ended September 30:	2021			2020			Change		Currency		2022			2021*			Change		Currency
Revenue:
Cloud & Cognitive Software	$	5,692		$	5,553		2.5	%	1.9	%
Software											$	5,811		$	5,406		7.5	%	14.2	%
Gross margin		77.0	%		77.1	%	(0.1)	pts.				79.0	%		78.6	%	0.4	pts.
Global Business Services		4,427			3,965		11.6	%	11.0	%
Consulting												4,700			4,457		5.4	%	15.6	%
Gross margin		29.8	%		32.9	%	(3.1)	pts.				26.0	%		29.5	%	(3.5)	pts.
Global Technology Services		6,154			6,462		(4.8)	%	(5.4)	%
Infrastructure												3,352			2,921		14.8	%	23.1	%
Gross margin		36.2	%		35.0	%	1.2	pts.				50.8	%		52.8	%	(2.0)	pts.
Systems		1,107			1,257		(11.9)	%	(12.4)	%
Gross margin		41.3	%		51.2	%	(9.9)	pts.
Global Financing		220			273		(19.2)	%	(19.8)	%
Financing												174			184		(5.7)	%	(0.6)	%
Gross margin		25.6	%		37.5	%	(11.9)	pts.				32.8	%		28.7	%	4.1	pts.
Other		18			50		(64.9)	%	(64.9)	%		70			282		(75.1)	%	(70.5)	%
Gross margin		nm			(336.2)	%	nm					(197.7)	%		(18.5)	%	(179.2)	pts.
Total consolidated revenue	$	17,618		$	17,560		0.3	%*	(0.3)	%
Total consolidated gross profit	$	8,171		$	8,430		(3.1)	%
Total consolidated gross margin		46.4	%		48.0	%	(1.6)	pts.
Total revenue											$	14,107		$	13,251		6.5	%	14.6	%
Total gross profit											$	7,430		$	7,106		4.6	%
Total gross margin												52.7	%		53.6	%	(1.0)	pts.
Non-operating adjustments:
Amortization of acquired intangible assets		184			180		2.2	%				165			183		(10.1)	%
Acquisition-related charges		—			—		nm
Separation-related charges		108			—		nm
Operating (non-GAAP) gross profit	$	8,463		$	8,610		(1.7)	%			$	7,595		$	7,290		4.2	%
Operating (non-GAAP) gross margin		48.0	%		49.0	%	(1.0)	pts.				53.8	%		55.0	%	(1.2)	pts.

* ~~(0.2) percent excluding divested businesses and adjusted for currency.~~

~~nm - not meaningful~~

~~Table of Contents~~

~~Management Discussion – (continued)~~

Yr. to Yr.

Percent

Yr. to Yr.

Change

(Dollars in millions)





Percent/Margin

Adjusted For

For the nine months ended September 30:

2021

2020

Change

Currency

Revenue:









Cloud & Cognitive Software

$
17,227

$
16,540

4.2
%
1.7
%
Gross margin

77.1
%

76.6
%
0.5
pts.


Global Business Services

13,002

11,992

8.4
%
5.5
%
Gross margin

28.6
%

29.5
%
(0.9)
pts.


Global Technology Services

18,866

19,245

(2.0)
%
(4.9)
%
Gross margin

35.3
%

34.4
%
1.0
pts.


Systems

4,251

4,477

(5.1)
%
(7.0)
%
Gross margin

51.3
%

53.7
%
(2.3)
pts.


Global Financing

702

837

(16.2)
%
(18.0)
%
Gross margin

28.4
%

39.0
%
(10.6)
pts.


Other

45

163

(72.1)
%
(72.3)
%
Gross margin

nm

(305.4)
%
nm



Total consolidated revenue

$
54,093

$
53,253

1.6
%*
(1.1)
%
Total consolidated gross profit

$
25,379

$
25,052

1.3
%


Total consolidated gross margin

46.9
%

47.0
%
(0.1)
pts.


Non-operating adjustments:









Amortization of acquired intangible assets

540

556

(2.9)
%


Acquisition-related charges

—

—

nm

Separation-related charges

168

—

nm



Operating (non-GAAP) gross profit

$
26,087

$
25,608

1.9
%


Operating (non-GAAP) gross margin

48.2
%

48.1
%
0.1
pts.

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

~~nm - not meaningful~~

~~Cloud & Cognitive Software~~

Yr. to Yr.

Percent

Yr. to Yr.

Change

(Dollars in millions)





Percent

Adjusted For

For the three months ended September 30:

2021

2020

Change

Currency

Cloud & Cognitive Software external revenue:

$
5,692

$
5,553

2.5
%
1.9
%
Cloud & Data Platforms

$
3,046

$
2,775

9.8
%
9.2
%
Cognitive Applications

1,314

1,317

(0.2)

(1.0)

Transaction Processing Platforms

1,332

1,461

(8.8)

(9.5)

Yr. to Yr.

Percent

Yr. to Yr.

Change

(Dollars in millions)





Percent

Adjusted For

For the nine months ended September 30:

2021

2020

Change

Currency

Cloud & Cognitive Software external revenue:

$
17,227

$
16,540

4.2
%
1.7
%
Cloud & Data Platforms

$
9,032

$
8,108

11.4
%
8.9
%
Cognitive Applications

3,938

3,745

5.1

2.8

Transaction Processing Platforms

4,257

4,687

(9.2)

(11.6)

~~Cloud & Cognitive Software revenue of $5,692 million increased 2.5 percent as reported and 2 percent adjusted for currency in the third quarter of 2021 compared~~Recast to ~~the prior-year period, led by Red Hat, security, automation and Cloud Paks across our software. We had strong growth in Cloud & Data Platforms, partially offset by declines in Transaction~~

~~Table of Contents~~

~~Management Discussion – (continued)~~

Processing Platforms and Cognitive Applications was flat. We have a strong recurring revenue base in software and our renewal rates for subscription and support increased again this quarter. For the first nine months of 2021, Cloud & Cognitive Software revenue of $17,227 million increased 4.2 percent as reported and 2 percent adjusted for currency driven by growth in Cloud & Data Platforms and Cognitive Applications, partially offset by a decrease in Transaction Processing Platforms.

In the third quarter, Cloud & Data Platforms revenue of $3,046 million increased 9.8 percent as reported and 9 percent adjusted for currency compared to the prior-year period, led by continued growth in Red Hat driven by double-digit growth in both Infrastructure and Application Development and emerging technologies. We also had over 40 percent growth in OpenShift recurring revenue as well as growth in automation led by key solutions such as Cloud Pak for Integration and Cloud Pak for Business Automation, and a strong start to our recent Instana and Turbonomic acquisitions. Our Data and AI revenue was down modestly, driven by declines in the on-premises DataOps portfolio and supply chain as compared to a strong third quarter in the prior year.

Cognitive Applications third-quarter revenue of $1,314 million was flat as reported and decreased 1 percent adjusted for currency compared to the prior-year period. We had continued growth in Security revenue in the third quarter, led by threat management software and services as clients respond to the evolving cybersecurity environment. Security remains a key strategic focus area as we help clients adopt a Zero Trust architecture with Cloud Pak for Security and XForce services.

Transaction Processing Platforms revenue of $1,332 million decreased 8.8 percent as reported and 9 percent adjusted for currency in the third quarter compared to the prior-year period. We provide flexibility to our clients in how they purchase this mission-critical software. In the quarter, clients continued their preference for operating expenses over capital expenditures, which continued to put pressure on perpetual licenses, in favor of more consumption-like models. However, our continued strong software renewals in the quarter reflect ~~that clients recognize the long-term value in our offerings.~~

Within Cloud & Cognitive Software, cloud revenue of $2.1 billion grew 21 percent as reported (20 percent adjusted for currency) in the third quarter of 2021 compared to the prior-year period. For the first nine months of 2021, cloud revenue of $6.1 billion grew 28 percent as reported (26 percent adjusted for currency) compared to the first nine months of the prior year. Over the last 12 months, Software cloud revenue of $8.3 billion grew 31 percent as reported and 28 percent adjusted for currency.

Yr. to Yr.

Percent/

(Dollars in millions)





Margin

For the three months ended September 30:

2021

2020

Change

Cloud & Cognitive Software:







External gross profit

$
4,385

$
4,281

2.4
%
External gross profit margin

77.0
%

77.1
%
(0.1)
pts.
Pre-tax income

$
1,675

$
1,834

(8.7)
%
Pre-tax margin

25.9
%

28.5
%
(2.6)
pts.

Yr. to Yr.

Percent/

(Dollars in millions)





Margin

For the nine months ended September 30:

2021

2020

Change

Cloud & Cognitive Software:







External gross profit

$
13,278

$
12,665

4.8
%
External gross profit margin

77.1
%

76.6
%
0.5
pts.
Pre-tax income

$
4,822

$
4,475

7.8
%
Pre-tax margin

24.7
%

23.6
%
1.1
pts.

~~Table of Contents~~

~~Management Discussion – (continued)~~

Cloud & Cognitive Software gross profit margin decreased 0.1 points to 77.0 percent in the third quarter of 2021 compared to the prior-year period. We had margin decline in services which was partially offset by margin expansion in software. For the first nine months of 2021, gross profit margin increased 0.5 points to 77.1 percent, with margin expansion in software and services.

In the third quarter, pre-tax income of $1,675 million decreased 8.7 percent and pre-tax margin decreased 2.6 points to 25.9 percent compared to the prior year. We expanded our pre-tax margin sequentially compared to the second-quarter 2021, while we continued to invest in new innovation and our ecosystem. For the first nine months of 2021, pre-tax income of $4,822 million increased 7.8 percent and pre-tax margin of 24.7 percent increased 1.1 points compared to the prior year, primarily driven by the gross margin expansion and lower workforce rebalancing charges in the current year.

~~Global Business Services~~

Yr. to Yr.

Percent

Yr. to Yr.

Change

(Dollars in millions)





Percent

Adjusted For

For the three months ended September 30:

2021

2020

Change

Currency

Global Business Services external revenue:

$
4,427

$
3,965

11.6
%
11.0
%
Consulting

$
2,292

$
1,966

16.6
%
15.8
%
Application Management

1,847

1,758

5.1

4.5

Global Process Services

287

240

19.5

19.3

Yr. to Yr.

Percent

Yr. to Yr.

Change

(Dollars in millions)





Percent

Adjusted For

For the nine months ended September 30:

2021

2020

Change

Currency

Global Business Services external revenue:

$
13,002

$
11,992

8.4
%
5.5
%
Consulting

$
6,717

$
5,973

12.5
%
9.5
%
Application Management

5,439

5,332

2.0

(0.9)

Global Process Services

846

687

23.1

20.9

Global Business Services revenue of $4,427 million grew 11.6 percent as reported and 11 percent adjusted for currency in the third quarter of 2021 compared to the prior-year period. We had growth across all three business areas and our Consulting business accelerated revenue growth to a double-digit rate. We are helping our clients capture new growth opportunities and increase operational flexibility and productivity with hybrid cloud and AI. Our Red Hat practice continued to drive client adoption of our hybrid cloud platform, with more than 180 new Red Hat engagements in the third quarter. In addition, our teams work alongside our clients to co-create business products and solutions, and, as of September 30, 2021, we have done more than 4,000 IBM Garage engagements. For the first nine months of 2021, GBS revenue of $13,002 million increased 8.4 percent as reported and 6 percent adjusted for currency reflecting strong year-to-year growth in Consulting and Global Process Services (GPS). We continue to expand the opportunities to connect Consulting and Business Process Outsourcing within GPS to transform client workflows using hybrid cloud and AI.

In the third-quarter 2021, Consulting revenue of $2,292 million grew 16.6 percent as reported and 16 percent adjusted for currency. We are leveraging our skills and ecosystem partners to transform business processes and modernize applications based on OpenShift.

Application Management revenue of $1,847 million increased 5.1 percent as reported and 5 percent adjusted for currency in the third quarter of 2021 reflecting the impacts of the pandemic in the prior-year period. Our growth this quarter was driven by management of applications in a multi-cloud environment.

~~Table of Contents~~

~~Management Discussion – (continued)~~

GPS third-quarter revenue of $287 million grew 19.5 percent as reported and 19 percent adjusted for currency compared to the prior-year period. Our offerings in finance, procurement, and talent and transformation grew at double-digit rates.

Within GBS, cloud revenue of $2.0 billion grew 38 percent as reported (37 percent adjusted for currency) in the third quarter of 2021 compared to the prior-year period. For the first nine months of 2021, cloud revenue of $5.6 billion grew 35 percent as reported (32 percent adjusted for currency) compared to the same period in 2020. Over the last 12 months, GBS cloud revenue of $7.3 billion grew 30 percent as reported and 27 percent adjusted for currency.

Yr. to Yr.

Percent/

(Dollars in millions)





Margin

For the three months ended September 30:

2021

2020

Change

Global Business Services:







External gross profit

$
1,321

$
1,306

1.1
%
External gross profit margin

29.8
%

32.9
%
(3.1)
pts.
Pre-tax income

$
587

$
570

3.0
%
Pre-tax margin

13.1
%

14.2
%
(1.1)
pts.

Yr. to Yr.

Percent/

(Dollars in millions)





Margin

For the nine months ended September 30:

2021

2020

Change

Global Business Services:







External gross profit

$
3,724

$
3,538

5.3
%
External gross profit margin

28.6
%

29.5
%
(0.9)
pts.
Pre-tax income

$
1,349

$
1,203

12.1
%
Pre-tax margin

10.2
%

9.9
%
0.3
pts.

GBS third-quarter gross profit margin of 29.8 percent decreased 3.1 points on a year-to-year basis, but improved sequentially compared to the second-quarter 2021. Our gross margin performance reflects our investment in strategic partnerships, new offerings and practices, and integrating and scaling our acquisitions. We are investing to increase our go-to-market resources as well as to scale our practices built around our ecosystem partners and Red Hat.

Pre-tax income of $587 million increased 3.0 percent and pre-tax margin of 13.1 percent decreased 1.1 points in the third quarter of 2021 compared to the prior-year period. The pre-tax income and margin performance reflects our solid growth in revenue and increased gross profit dollars, offset by higher level of investments described above. For the first nine months of 2021, pre-tax income of $1,349 million increased 12.1 percent and pre-tax margin of 10.2 percent increased 0.3 points compared to the prior-year period, driven primarily by revenue growth, lower costs due to prior workforce rebalancing actions and lower workforce rebalancing charges year to year.

~~Global Technology Services~~

Yr. to Yr.

Percent

Yr. to Yr.

Change

(Dollars in millions)

Percent

Adjusted For

For the three months ended September 30:

2021

2020

Change

Currency

Global Technology Services external revenue:

$
6,154

$
6,462

(4.8)
%
(5.4)
%
Infrastructure & Cloud Services

$
4,681

$
4,933

(5.1)
%
(5.6)
%
Technology Support Services

1,473

1,528

(3.7)

(4.6)

segment changes.

Table of Contents

Management Discussion – (continued)


							Yr. to Yr.										Yr. to Yr.
							Percent										Percent
					Yr. to Yr.		Change								Yr. to Yr.		Change
(Dollars in millions)					Percent		Adjusted For								Percent/Margin		Adjusted For
For the nine months ended September 30:	2021		2020		Change		Currency		2022			2021*			Change		Currency
Global Technology Services external revenue:	$	18,866	$	19,245	(2.0)	%	(4.9)	%
Infrastructure & Cloud Services	$	14,370	$	14,663	(2.0)	%	(5.1)	%
Technology Support Services		4,496		4,582	(1.9)		(4.5)
Revenue:
Software									$	17,749		$	16,339		8.6	%	13.7	%
Gross margin										79.0	%		78.7	%	0.3	pts.
Consulting										14,337			13,098		9.5	%	16.9	%
Gross margin										24.8	%		28.3	%	(3.5)	pts.
Infrastructure										10,805			9,774		10.6	%	16.3	%
Gross margin										51.9	%		55.6	%	(3.7)	pts.
Financing										474			601		(21.2)	%	(17.9)	%
Gross margin										35.1	%		31.5	%	3.7	pts.
Other										475			844		(43.8)	%	(40.2)	%
Gross margin										(63.6)	%		(24.4)	%	(39.1)	pts.
Total revenue									$	43,840		$	40,656		7.8	%	13.8	%
Total gross profit									$	23,055		$	21,985		4.9	%
Total gross margin										52.6	%		54.1	%	(1.5)	pts.
Non-operating adjustments:
Amortization of acquired intangible assets										526			537		(2.0)	%
Operating (non-GAAP) gross profit									$	23,582		$	22,522		4.7	%
Operating (non-GAAP) gross margin										53.8	%		55.4	%	(1.6)	pts.

~~Global Technology Services revenue of $6,154 million decreased 4.8 percent as reported and 5 percent adjusted for currency in the third quarter of 2021 compared~~* Recast to ~~the prior-year period. For the first nine months of 2021, GTS revenue of $18,866 million decreased 2.0 percent as reported and 5 percent adjusted for currency as compared to the prior-year period.~~reflect segment changes.

~~In the third-quarter 2021, Infrastructure & Cloud Services revenue of $4,681 million decreased 5.1 percent as reported and 6 percent adjusted for currency compared~~Software


							Yr. to Yr.
							Percent
					Yr. to Yr.		Change
(Dollars in millions)					Percent		Adjusted For
For the three months ended September 30:	2022		2021*		Change		Currency
Software revenue:	$	5,811	$	5,406	7.5	%	14.2	%
Hybrid Platform & Solutions	$	4,172	$	4,074	2.4	%	8.1	%
Red Hat					11.7		18.0
Automation					(2.4)		3.0
Data & AI					(1.0)		4.0
Security					(0.9)		5.8
Transaction Processing		1,640		1,332	23.1		32.8

* Recast to the prior-year period. In the first half of 2021, we had modest improvements in client-based business volumes and project activity which contributed to in-period revenue. However, this quarter, clients paused on new project activity in advance of the separation of Kyndryl in the fourth-quarter 2021.

Technology Support Services (TSS) third-quarter revenue of $1,473 million decreased 3.7 percent as reported and 5 percent adjusted for currency in the third-quarter 2021 compared to the prior-year period, reflecting the Systems hardware product cycles.

Within GTS, cloud revenue of $2.4 billion increased 1 percent as reported and was flat adjusted for currency in the third quarter of 2021 compared to the same period in the prior year. For the first nine months of 2021, cloud revenue of $7.1 billion grew 2 percent as reported, but declined 1 percent adjusted for currency compared to the first nine months of 2020. Over the last 12 months, GTS cloud revenue of $9.6 billion grew 2 percent as reported, but declined 1 percent adjusted for currency.

Yr. to Yr.

Percent/

(Dollars in millions)

Margin

For the three months ended September 30:

2021

2020

Change

Global Technology Services:








External gross profit

$
2,230

$
2,264

(1.5)
%
External gross profit margin

36.2
%

35.0
%
1.2
pts.
Pre-tax income

$
383

$
399

(4.1)
%
Pre-tax margin

5.9
%

5.9
%
0.0
pts.

Yr. to Yr.

Percent/

(Dollars in millions)

Margin

For the nine months ended September 30:

2021

2020

Change

Global Technology Services:








External gross profit

$
6,667

$
6,618

0.7
%
External gross profit margin

35.3
%

34.4
%
1.0
pts.
Pre-tax income

$
903

$
471

91.9
%
Pre-tax margin

4.6
%

2.3
%
2.2
pts.

Global Technology Services gross profit margin increased 1.2 points to 36.2 percent in the third quarter of 2021 as compared to the prior-year period, driven primarily by margin improvement in Infrastructure & Cloud Services which reflects the benefits from the structural actions taken in 2020 to improve the margin and profit profile of the business in advance of the Kyndryl separation in the fourth-quarter 2021.reflect segment changes.

Table of Contents

Management Discussion – (continued)


							Yr. to Yr.
							Percent
					Yr. to Yr.		Change
(Dollars in millions)					Percent		Adjusted For
For the nine months ended September 30:	2022		2021*		Change		Currency
Software revenue:	$	17,749	$	16,339	8.6	%	13.7	%
Hybrid Platform & Solutions	$	12,641	$	12,082	4.6	%	9.0	%
Red Hat					13.7		18.6
Automation					1.4		5.6
Data & AI					0.4		4.3
Security					1.4		6.3
Transaction Processing		5,107		4,257	20.0		26.8

~~Pre-tax income~~* Recast to reflect segment changes.

Software revenue of ~~$383~~$5,811 million ~~decreased 4.1~~increased 7.5 percent ~~and pre-tax margin of 5.9~~as reported (14 percent ~~was flat~~adjusted for currency) in the third quarter of ~~2021~~2022 compared to the prior-year period, driven by revenue growth in both Hybrid Platform & Solutions and Transaction Processing. This includes incremental sales to Kyndryl which contributed approximately 8 points to the revenue growth. This revenue performance reflects our strong and growing recurring revenue base, which is approximately 80 percent of our annual software revenue. Within Software, over the trailing 12 months, hybrid cloud revenue of $9,192 million grew 16 percent as reported (20 percent adjusted for currency) year to year, driven by growth in our hybrid cloud and AI capabilities.

Hybrid Platform & Solutions revenue of $4,172 million increased 2.4 percent as reported (8 percent adjusted for currency) in the third quarter of 2022 compared to the prior-year period, led by continued strong double-digit growth in Red Hat. Incremental sales to Kyndryl contributed approximately 1.5 points to the revenue growth. Red Hat revenue grew 11.7 percent as reported (18 percent adjusted for currency) in the third quarter. As a leader in open-source technologies for enterprises, Red Hat performance in the third quarter continued to be driven by market share gains across RHEL, OpenShift and Ansible. Automation revenue decreased 2.4 percent as reported, but grew 3 percent adjusted for currency, reflecting continued adoption in areas such as AI Ops and Management and Integration, and compared to strong acquisition-related contribution in the prior year. We also brought innovation to our clients this quarter such as new Instana observability capabilities for zSystems in a hybrid cloud environment. Data & AI revenue decreased 1.0 percent as reported, but increased 4 percent adjusted for currency, reflecting growth in areas such as Data Management, Data Fabric and Information Exchange. In addition, our offerings like Envizi and Environmental Intelligence Suite are resonating with clients as they prioritize sustainability efforts. Security revenue decreased 0.9 percent as reported, but grew 6 percent adjusted for currency, reflecting growth in Data Security and Threat Management. Within Data Security, growth was driven by client adoption of Guardium Insights as we continue to deliver new product innovation. Within Threat Management, growth was led by CloudPak for Security, which helps clients prevent and respond to modern threats across disparate security feeds.

Across Hybrid Platform & Solutions, our annual recurring revenue (ARR) was $13 billion, up 9 percent compared to the prior-year period. 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. ARR is calculated at estimated constant currency.

Table of Contents

Management Discussion – (continued)

Transaction Processing revenue of $1,640 million increased 23.1 percent as reported (33 percent adjusted for currency) in the third quarter of 2022 compared to the prior-year period, driven by incremental sales to Kyndryl that contributed approximately 26 points to the revenue growth. The increase in zSystems installed capacity over the last couple of product cycles and continued strong renewal rates are recognition of the importance of this platform in a hybrid cloud environment. As a result, the Transaction Processing annuity base grew this quarter.

For the first nine months of 2022, Software revenue of $17,749 million increased 8.6 percent as reported (14 percent adjusted for currency) compared to the same period in ~~2020, driven primarily by~~2021. Incremental sales to Kyndryl contributed approximately 8 points to the ~~gross profit margin expansion. For~~revenue growth. We had broad-based growth across Hybrid Platform & Solutions for the first nine months of ~~2021, pre-tax income~~2022. Transaction Processing had double-digit growth, driven by incremental sales to Kyndryl that contributed approximately 25 points to the revenue growth.


							Yr. to Yr.
							Percent/
(Dollars in millions)							Margin
For the three months ended September 30:	2022			2021*			Change
Software:
Gross profit	$	4,591		$	4,250		8.0	%
Gross profit margin		79.0	%		78.6	%	0.4	pts.
Pre-tax income	$	1,306		$	990		31.9	%
Pre-tax margin		22.5	%		18.3	%	4.2	pts.

* Recast to reflect segment changes.


							Yr. to Yr.
							Percent/
(Dollars in millions)							Margin
For the nine months ended September 30:	2022			2021*			Change
Software:
Gross profit	$	14,025		$	12,862		9.0	%
Gross profit margin		79.0	%		78.7	%	0.3	pts.
Pre-tax income	$	3,816		$	2,707		41.0	%
Pre-tax margin		21.5	%		16.6	%	4.9	pts.

* Recast to reflect segment changes.

Software gross profit margin increased 0.4 points to 79.0 percent in the third quarter of ~~$903 million increased 91.9 percent and pre-tax margin of 4.6 percent increased 2.2 points~~2022 compared to the prior-year period, driven primarily by a mix between products and services, partially offset by a margin decline in services. For the first nine months of 2022, gross profit margin ~~expansion~~increased 0.3 points to 79.0 percent, driven primarily by the same factors.

In the third quarter, pre-tax income of $1,306 million increased 31.9 percent and ~~lower workforce rebalancing charges~~pre-tax margin of 22.5 percent increased 4.2 points compared to the prior year. We continued to expand our pre-tax margin given the solid revenue growth including the Kyndryl commercial relationship. For the first nine months of 2022, pre-tax income of $3,816 million increased 41.0 percent and pre-tax margin of 21.5 percent increased 4.9 points compared to the prior-year period, driven by the increase in ~~the current year.~~gross profit contribution year to year which reflects our solid revenue growth.

~~Services Backlog and Signings~~

Yr. to Yr.

Percent

Yr. to Yr.

Change

At September 30,

At September 30,

Percent

Adjusted For

(Dollars in billions)

2021

2020

Change

Currency

Total backlog

$
99.8

$
108.0

(7.5)
%
(7.1)
%

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 September 30:	2022		2021*		Change		Currency
Consulting revenue:	$	4,700	$	4,457	5.4	%	15.6	%
Business Transformation	$	2,165	$	2,068	4.7	%	14.3	%
Technology Consulting		943		889	6.1		16.6
Application Operations		1,593		1,501	6.2		16.8

* Recast to reflect segment change.


							Yr. to Yr.
							Percent
					Yr. to Yr.		Change
(Dollars in millions)					Percent		Adjusted For
For the nine months ended September 30:	2022		2021*		Change		Currency
Consulting revenue:	$	14,337	$	13,098	9.5	%	16.9	%
Business Transformation	$	6,646	$	6,070	9.5	%	16.5	%
Technology Consulting		2,826		2,538	11.4		19.3
Application Operations		4,865		4,489	8.4		16.1

* Recast to reflect segment change.

~~The estimated total services backlog at September 30, 2021 was $99.8 billion, a decrease~~Consulting revenue of ~~7.5~~$4,700 million increased 5.4 percent as reported (7(16 percent adjusted for currency) in the third quarter of 2022 compared to the prior-year period, with growth across all business areas. Over the trailing 12 months, our book-to-bill ratio was 1.05, reflecting clients’ trust in our deep industry expertise and co-creation approach throughout their hybrid cloud and digital transformation journeys. Within Consulting, over the trailing 12 months, hybrid cloud revenue of $8,889 million grew 21 percent as reported (28 percent adjusted for currency) year to year, as we help clients design and enable enterprise hybrid cloud strategies. Our Red Hat consulting practice continued to be a meaningful contributor to revenue with strong double-digit growth as we continued to add new engagements. Since acquiring Red Hat just over three years ago, Consulting has led nearly 1,400 Red Had engagements with more than $6.5 billion in aggregate bookings. Our strategic partnerships also contributed to our performance in the third quarter, with continued revenue growth at a double-digit rate from these partnerships.

In the third quarter of 2022, Business Transformation revenue of $2,165 million increased 4.7 percent as reported (14 percent adjusted for currency) on a year-to-year ~~basis. The year-to-year decline was driven primarily by GTS~~basis, as clients ~~paused on new project activity in advance of the Kyndryl separation. GBS backlog grew year~~looked to ~~year~~IBM to help them transform critical workflows at scale. This growth was pervasive, driven by supply chain, finance, data and client experience transformations. Working with our partners such as SAP, Salesforce and Adobe, we help our clients optimize their operations and improve the way they engage with their customers.

Technology Consulting ~~Security~~revenue of $943 million increased 6.1 percent as reported (17 percent adjusted for currency) in the third quarter of 2022 compared to the prior-year period, led by our cloud application development and ~~GPS.~~cloud modernization offerings, including our Red Hat consulting practice.

~~Total services backlog includes Infrastructure & Cloud Services, Security Services, Consulting, Global Process Services,~~

Application ~~Management~~Operations revenue of $1,593 million increased 6.2 percent as reported (17 percent adjusted for currency) compared to the third quarter of 2021. We helped clients optimize their operations and ~~TSS. Total backlog is intended~~reduce cost by taking over the management of clients’ applications in hybrid and multi-cloud environments. We leverage AI to help predict problems before they happen and monitor our clients’ different environments with dashboards, enabling action to be ~~a statement~~taken quickly.

For the first nine months of ~~overall work under contract which is either non-cancellable, or which historically has very low likelihood~~2022, Consulting revenue of ~~termination, given the criticality~~$14,337 million increased 9.5 percent as reported (17 percent adjusted for currency) reflecting strong year-to-year growth as reported and adjusted for currency across all three business areas. Within Business Transformation, year-to-year revenue grew as we brought technology and strategic

Table of ~~certain~~Contents

Management Discussion – (continued)

consulting together to help clients transform critical workflows at scale. In our Technology Consulting business, we led client engagements around cloud modernization and cloud development. Through our Application Operations offerings, we continued to provide cloud platform and application management services to help our clients run their hybrid cloud environments.


							Yr. to Yr.
							Percent/
(Dollars in millions)							Margin
For the three months ended September 30:	2022			2021*			Change
Consulting:
Gross profit	$	1,220		$	1,315		(7.2)	%
Gross profit margin		26.0	%		29.5	%	(3.5)	pts.
Pre-tax income	$	462		$	466		(0.8)	%
Pre-tax margin		9.8	%		10.5	%	(0.6)	pts.

* Recast to reflect segment change.


							Yr. to Yr.
							Percent/
(Dollars in millions)							Margin
For the nine months ended September 30:	2022			2021*			Change
Consulting:
Gross profit	$	3,559		$	3,711		(4.1)	%
Gross profit margin		24.8	%		28.3	%	(3.5)	pts.
Pre-tax income	$	1,154		$	1,013		13.9	%
Pre-tax margin		8.0	%		7.7	%	0.3	pts.

* Recast to reflect segment change.

Consulting gross profit margin of 26.0 percent decreased 3.5 points in the ~~company’s clients. Total backlog does not include as-a-Service arrangements~~third quarter of 2022 compared to the same period in 2021, reflecting the pressure on the margin profile from continued labor costs inflation, however, the Consulting gross profit margin improved 1.8 points compared to the second quarter of 2022. We had two consecutive quarters of priced margin improvement year over year, that ~~allow for termination under contractual commitment terms. Backlog estimates~~will contribute to improved margin performance going forward. Additionally, our utilization rates are ~~subject~~improving as we exit the third quarter, and our acquisitions are scaling toward margin accretion. For the first nine months of 2022, Consulting gross profit margin of 24.8 percent decreased 3.5 points compared to ~~change~~the prior-year period, reflecting the same dynamics described above. We continue to invest in our partner ecosystem, expanding our reach and are ~~affected by several factors, including terminations, changes~~investing in talent across our workforce, developing and adding technical skills in the ~~scope~~areas of ~~contracts, periodic revalidations, adjustments for revenue not materialized~~hybrid cloud and ~~adjustments for currency.~~AI.

~~Services signings~~

Pre-tax income of $462 million decreased 0.8 percent and pre-tax margin of 9.8 percent decreased 0.6 points in the third quarter of 2022 compared to the prior-year period, with almost 3 points of sequential improvement in the pre-tax margin compared to the second quarter of 2022. For the first nine months of 2022, pre-tax income of $1,154 million increased 13.9 percent and pre-tax margin of 8.0 percent increased 0.3 points compared to the prior-year period, as we start to recognize the benefits of priced margin improvements, increased productivity within our workforce, and a more streamlined operating and go-to-market structure.

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 September 30:	2022		2021		Change		Currency
Total Consulting signings	$	4,509	$	5,046	(10.6)	%	(1.9)	%

Table of Contents

Management Discussion – (continued)


							Yr. to Yr.
							Percent
					Yr. to Yr.		Change
(Dollars in millions)					Percent		Adjusted For
For the nine months ended September 30:	2022		2021		Change		Currency
Total Consulting signings	$	14,300	$	13,497	5.9	%	13.3	%

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 & Cloud Services, Security Services, Consulting, Global Process Services and Application Management contracts.~~ Contract extensions and increases in scope are treated as signings only to the extent of the incremental new value. Total ~~services~~ signings can vary over time due to a variety of factors including, but not limited to, the timing of signing a small number of larger contracts, such as in Infrastructure & Cloud Services or Global Process Services. TSS is generally not included in signings as the maintenance contracts tend to be more steady state, where revenues equal renewals. Certain longer-term TSS contracts that have characteristics similar to outsourcing contracts are included in signings.

~~Contract portfolios purchased in~~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 services agreement is signed incidental or coincidental to an acquisition or divestiture.~~prospective basis.

Management believes ~~that~~ the estimated values of ~~services backlog and~~ signings disclosed ~~herein~~ provide ~~insight into~~an indication of our ~~potential future revenue, which is~~forward-looking revenue. Signings are used ~~by management as a tool~~ to monitor the performance of the business and viewed as useful ~~decision-making~~ information for ~~investors.~~management and shareholders. The conversion of signings ~~and backlog~~ into revenue may vary based on the types of services and solutions, contract duration, customer decisions, and ~~as well as~~ other factors, which may include, but are not limited to, the macroeconomic ~~environment or external events.~~environment.

Book-to-bill represents the ratio of IBM Consulting signings to its revenue over the same period. The metric is a useful indicator of the demand of our business over time. This definition should be read in conjunction with the signings definition noted above.

Infrastructure


							Yr. to Yr.
							Percent
					Yr. to Yr.		Change
(Dollars in millions)					Percent		Adjusted For
For the three months ended September 30:	2022		2021*		Change		Currency
Infrastructure revenue:	$	3,352	$	2,921	14.8	%	23.1	%
Hybrid Infrastructure	$	1,931	$	1,453	32.9	%	41.0	%
zSystems					88.0		97.9
Distributed Infrastructure					13.5		20.9
Infrastructure Support		1,421		1,468	(3.2)		5.3

~~Table of Contents~~* Recast to reflect segment change.

~~Management Discussion – (continued)~~


							Yr. to Yr.								Yr. to Yr.
							Percent								Percent
					Yr. to Yr.		Change						Yr. to Yr.		Change
(Dollars in millions)					Percent		Adjusted For						Percent		Adjusted For
For the nine months ended September 30:	2021		2020		Change		Currency		2022		2021*		Change		Currency
Total signings	$	24,330	$	26,663	(8.8)	%	(10.8)	%
Infrastructure revenue:									$	10,805	$	9,774	10.6	%	16.3	%
Hybrid Infrastructure									$	6,392	$	5,294	20.7	%	26.2	%
zSystems													39.6		45.4
Distributed Infrastructure													10.1		15.5
Infrastructure Support										4,413		4,480	(1.5)		4.5

* Recast to reflect segment change.

In the third quarter, the GTS renewal rate with existing clients improved 5 points year to year, however, clients paused signing new project activity in advance of the Kyndryl separation. GBS signings grew compared to the prior-year period, with strength in our practices with ecosystem partners and in application modernization offerings built on Red Hat.

~~Systems~~

Yr. to Yr.

Percent

Yr. to Yr.

Change

(Dollars in millions)

Percent

Adjusted For

For the three months ended September 30:

2021

2020

Change

Currency

Systems external revenue:

$
1,107

$
1,257

(11.9)
%
(12.4)
%
Systems Hardware

$
796

$
919

(13.4)
%
(13.9)
%
IBM Z





(33.0)

(33.5)

Power Systems





(24.4)

(24.8)

Storage Systems





11.4

10.9

Operating Systems Software

312

338

(7.8)

(8.4)

Yr. to Yr.

Percent

Yr. to Yr.

Change

(Dollars in millions)

Percent

Adjusted For

For the nine months ended September 30:

2021

2020

Change

Currency

Systems external revenue:

$
4,251

$
4,477

(5.1)
%
(7.0)
%
Systems Hardware

$
3,294

$
3,404

(3.2)
%
(5.2)
%
IBM Z





0.6

(1.4)

Power Systems





(11.4)

(13.3)

Storage Systems





(3.2)

(5.3)

Operating Systems Software

957

1,074

(10.8)

(12.8)

~~Systems~~Infrastructure revenue of ~~$1,107~~$3,352 million ~~decreased 11.9~~increased 14.8 percent as reported ~~and 12~~(23 percent adjusted for ~~currency~~currency) in the third quarter of ~~2021~~2022 compared to the prior-year period. Systems Hardware revenue of $796 million declined 13.4 percent as reported and 14 percent adjusted for currency, driven by product cycles in IBM Z and Power Systems, partially offset by growth in Storage Systems. Operating Systems Software revenue of $312 million decreased 7.8 percent as reported and 8 percent adjusted for currency, driven primarily by declines in IBM Z and Power Systems operating systems software. For the first nine months of 2021, Systems revenue of $4,251 million decreased 5.1 percent as reported and 7 percent adjusted for currency comparedThis includes incremental sales to ~~the prior-year period. The decline was primarily driven by Power Systems and Storage Systems and a decline in Operating Systems Software.~~

IBM Z revenue decreased 33.0 percent as reported and 33 percent adjusted for currency in the third quarter compared to the prior-year period. While the z15 program continues to outpace the strong z14 program, the magnitudeKyndryl which contributed

6770

Table of Contents

Management Discussion – (continued)

approximately 9 points to the revenue growth. This performance reflects continued strong double-digit growth in Hybrid Infrastructure as reported and adjusted for currency, driven primarily by the z16 product cycle. Within Infrastructure, over the trailing 12 months, hybrid cloud revenue of ~~that overachievement declined slightly~~$3,930 million increased 3 percent as reported (6 percent adjusted for currency) year to year, driven primarily by product cycle dynamics.

Hybrid Infrastructure revenue of $1,931 million increased 32.9 percent as reported (41 percent adjusted for currency) in the third quarter of 2022 compared to the prior-year period. Incremental sales to Kyndryl contributed approximately 11 points to the revenue growth. Within Hybrid Infrastructure, zSystems revenue grew 88.0 percent as reported (98 percent adjusted for currency) on a year-to-year basis, driven by continued adoption of our new z16 program. This latest program combines embedded AI at scale, cloud-native development for hybrid cloud and cyber-resilient security. The z16 is also the industry’s first quantum-safe system, delivering 25 billion encrypted transactions per day for clients. In the third quarter, we ~~near the end of the cycle. This is the ninth quarter of z15 availability,~~introduced our newest LinuxONE server, a highly scalable Linux and Kubernetes-based platform with capabilities to reduce clients’ energy consumption. IBM ~~Z continues to be~~zSystems remains an enduring platform, given market needs for scalability, reliability, security and, more recently, cloud native development. These characteristics, together with our newer, flexible consumption offerings, further demonstrate the value of the IBM Z platform within ourplaying an important role in a hybrid cloud ~~and AI strategy.~~

~~Power Systems~~environment. Distributed Infrastructure revenue ~~decreased 24.4~~grew 13.5 percent as reported (21 percent adjusted for currency). Recent innovation across the portfolio enabled broad-based growth in our Storage and 25Power platforms, including refreshes to our flash storage solutions and the expansion of our Power10 server family.

Infrastructure Support revenue of $1,421 million decreased 3.2 percent as reported, but grew 5 percent adjusted for currency in the third quarter of ~~2021~~2022 compared to the prior-year period. ~~Late in~~This includes incremental sales to Kyndryl which contributed approximately 7 points of revenue growth for the quarter, we started the rollout of our next generation Power 10, starting with the high-end system which has unique hardware innovations including a processor specifically optimized for data intensive workloads such as SAP S/4 HANA. The mid-range and low-end Power 10 systems will be available during 2022.quarter.

Storage Systems revenue increased 11.4 percent as reported and 11 percent adjusted for currency in the third-quarter 2021 compared to the prior-year period driven by demand from hyperscalers for our tape products and growth in entry-level all-flash storage following our product refresh earlier this year.

~~Within Systems, cloud revenue of $0.3 billion decreased 42 percent as reported (43 percent adjusted for currency) in the third quarter of 2021 compared to the same quarter in 2020.~~ For the first nine months of ~~2021, cloud~~2022, Infrastructure revenue of ~~$1.5 billion decreased 13~~$10,805 million increased 10.6 percent as reported ~~(15~~(16 percent adjusted for currency) compared to the ~~same~~ prior-year period. ~~Over~~Incremental sales to Kyndryl contributed approximately 8 points of revenue growth. Infrastructure revenue performance was driven by double-digit growth in Hybrid Infrastructure, with zSystems revenue growth driven by the ~~last 12 months, Systems cloud revenue of $2.6 billion declined 15 percent~~new z16, and growth in Distributed Infrastructure driven by strong performance in high-end disk and flash storage solutions as ~~reported and 17 percent adjusted for currency due to product cycle dynamics.~~well as high-end Power10 systems.

Yr. to Yr.

Percent/

(Dollars in millions)

Margin

For the three months ended September 30:

2021

2020

Change

Systems:







External Systems Hardware gross profit

$
211

$
371

(43.0)
%
External Systems Hardware gross profit margin

26.6
%

40.4
%
(13.8)
pts.
External Operating Systems Software gross profit

$
246

$
273

(9.9)
%
External Operating Systems Software gross profit margin

79.0
%

80.9
%
(1.8)
pts.
External total gross profit

$
458

$
644

(29.0)
%
External total gross profit margin

41.3
%

51.2
%
(9.9)
pts.
Pre-tax income/(loss)

$
(207)

$
(37)

nm

Pre-tax margin

(16.1)
%

(2.5)
%
(13.6)
pts.


							Yr. to Yr.
							Percent/
(Dollars in millions)							Margin
For the three months ended September 30:	2022			2021*			Change
Infrastructure:
Gross profit	$	1,702		$	1,541		10.4	%
Gross profit margin		50.8	%		52.8	%	(2.0)	pts.
Pre-tax income	$	280		$	209		34.1	%
Pre-tax margin		8.3	%		7.1	%	1.2	pts.

~~nm - not meaningful~~* Recast to reflect segment change.

Yr. to Yr.

Percent/

(Dollars in millions)

Margin

For the nine months ended September 30:

2021

2020

Change

Systems:







External Systems Hardware gross profit

$
1,419

$
1,522

(6.8)
%
External Systems Hardware gross profit margin

43.1
%

44.7
%
(1.7)
pts.
External Operating Systems Software gross profit

$
763

$
880

(13.3)
%
External Operating Systems Software gross profit margin

79.7
%

82.0
%
(2.3)
pts.
External total gross profit

$
2,182

$
2,402

(9.2)
%
External total gross profit margin

51.3
%

53.7
%
(2.3)
pts.
Pre-tax income/(loss)

$
(33)

$
(7)

nm

Pre-tax margin

(0.7)
%

(0.1)
%
(0.5)
pts.


							Yr. to Yr.
							Percent/
(Dollars in millions)							Margin
For the nine months ended September 30:	2022			2021*			Change
Infrastructure:
Gross profit	$	5,607		$	5,430		3.3	%
Gross profit margin		51.9	%		55.6	%	(3.7)	pts.
Pre-tax income	$	1,236		$	989		25.0	%
Pre-tax margin		11.4	%		10.1	%	1.3	pts.

~~nm - not meaningful~~* Recast to reflect segment change.

~~Systems~~Infrastructure gross profit margin of 50.8 percent decreased ~~9.9~~2.0 points ~~to 41.3 percent~~ in the ~~third-quarter 2021~~third quarter of 2022 compared to the prior-year period, driven primarily by ~~declines~~profit margin decline in ~~Power Systems and Storage Systems margins and a revenue mix to Storage~~Infrastructure Support, partially offset by margin

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Management Discussion – (continued)

~~Systems.~~expansion in Hybrid Infrastructure driven primarily by a product mix benefit from the revenue growth in zSystems. For the first nine months of ~~2021, Systems~~2022, gross profit margin of 51.9 percent decreased ~~2.3~~3.7 points ~~to 51.3 percent~~ compared to the ~~same~~prior-year period, ~~in 2020,~~ driven primarily by ~~a decline~~profit margin declines in ~~Storage Systems~~Distributed Infrastructure, which reflects increased component costs and supplier premiums, as well as margin declines in Infrastructure Support, driven by portfolio mix. These declines are partially offset by ~~margin expansion~~a product mix benefit from the revenue growth in ~~IBM Z.~~zSystems.

In the third quarter of ~~2021, Systems~~2022, Infrastructure pre-tax ~~loss~~income of $280 million increased ~~$170 million to ($207) million~~34.1 percent and pre-tax margin ~~decreased 13.6~~of 8.3 percent increased 1.2 points compared to ~~(16.1)~~the prior-year period, reflecting product mix benefits from the revenue growth in zSystems. For the first nine months of 2022, Infrastructure pre-tax income of $1,236 million increased 25.0 percent and pre-tax margin of 11.4 percent increased 1.3 points compared to the prior-year period, driven primarily by the IBM Z and Power Systems product cycles, partially offset by lower costs in the current year as a result of prior workforce rebalancing actions. For the first nine months of 2021, Systems pre-tax loss increased $26 million to ($33) million and pre-tax margin decreased 0.5 points to (0.7) percent compared to the prior-year period, driven primarily by the decline in Storage Systems gross profit margin and product cycle dynamics, partially offset by lower costs due to prior workforce rebalancing actions and lower workforce rebalancing charges in the current year.same factor described above.

~~Global~~

Financing

See pages 8891 through 9194 for a discussion of ~~Global~~ Financing’s segment results.

Geographic Revenue

In addition to the revenue presentation by reportable segment, we also measure revenue performance on a geographic basis.


									Yr. to Yr.
							Yr. to Yr.		Percent Change								Yr. to Yr.
							Percent		Excluding Divested								Percent
					Yr. to Yr.		Change		Businesses And						Yr. to Yr.		Change
(Dollars in millions)					Percent		Adjusted For		Adjusted For						Percent		Adjusted For
For the three months ended September 30:	2021		2020		Change		Currency		Currency		2022		2021		Change		Currency
Total Revenue	$	17,618	$	17,560	0.3	%	(0.3)	%	(0.2)	%	$	14,107	$	13,251	6.5	%	14.6	%
Americas	$	8,217	$	8,139	1.0	%	0.4	%	0.4	%	$	7,416	$	6,579	12.7	%	13.4	%
Europe/Middle East/Africa (EMEA)		5,593		5,564	0.5		(1.3)		(1.2)			3,959		3,939	0.5		15.9
Asia Pacific		3,808		3,857	(1.3)		(0.2)		(0.2)			2,732		2,734	(0.1)		15.7


					��				Yr. to Yr.
							Yr. to Yr.		Percent Change								Yr. to Yr.
							Percent		Excluding Divested								Percent
					Yr. to Yr.		Change		Businesses And						Yr. to Yr.		Change
(Dollars in millions)					Percent		Adjusted For		Adjusted For						Percent		Adjusted For
For the nine months ended September 30:	2021		2020		Change		Currency		Currency		2022		2021		Change		Currency
Total Revenue	$	54,093	$	53,253	1.6	%	(1.1)	%	(1.0)	%	$	43,840	$	40,656	7.8	%	13.8	%
Americas	$	25,216	$	24,755	1.9	%	1.2	%	1.3	%	$	22,614	$	20,178	12.1	%	12.4	%
Europe/Middle East/Africa (EMEA)		17,272		16,775	3.0		(3.3)		(3.2)			12,716		12,181	4.4		15.8
Asia Pacific		11,605		11,723	(1.0)		(2.8)		(2.8)			8,509		8,297	2.6		14.0

Total revenue of ~~$17,618~~$14,107 million increased ~~0.3~~6.5 percent as reported ~~and was down modestly excluding divested businesses and~~(15 percent adjusted for ~~currency~~currency) in the third quarter of ~~2021~~2022 compared to the prior-year ~~period.~~period, which includes approximately 5 points of revenue growth from incremental sales to Kyndryl.

Americas revenue of ~~$8,217~~$7,416 million increased ~~1.0~~12.7 percent as reported ~~and was flat~~(13 percent adjusted for ~~currency.~~currency), which includes approximately 4 points of revenue growth from incremental sales to Kyndryl. Within ~~Americas,~~North America, the U.S. ~~was flat compared to the prior year.~~increased 11.5 percent and Canada increased ~~9.6~~3.8 percent as reported ~~and 4~~(7 percent adjusted for ~~currency.~~currency). Latin America increased ~~1.2~~28.0 percent as reported ~~and 1~~(32 percent adjusted for ~~currency,~~currency), with Brazil ~~revenue~~ increasing ~~5.3~~30.3 percent as reported ~~and 3~~(31 percent adjusted for ~~currency.~~currency).

In EMEA, total revenue of ~~$5,593~~$3,959 million increased 0.5 percent as reported ~~but decreased 1~~(16 percent adjusted for ~~currency. Within EMEA, Germany grew 4.0 percent as reported~~currency), which includes approximately 6 points of revenue growth from incremental sales to Kyndryl. France and ~~3 percent adjusted for currency while~~ the UK ~~grew 4.4 percent as reported, but declined 2 percent adjusted for currency. Italy and France decreased 6.7~~increased 4.5 percent and ~~0.5~~3.3 percent, respectively, as reported, and 7increased 21 percent and 120 percent, respectively, ~~adjusted for currency.~~

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Table of Contents

Management Discussion – (continued)

~~Asia Pacific revenue of $3,808 million decreased 1.3 percent as reported and was flat~~ adjusted for currency. ~~Within Asia Pacific, Japan~~Germany and Italy decreased ~~5.0 percent as reported and 1 percent adjusted for currency. China and Australia increased 2.8~~8.1 percent and ~~0.8~~1.3 percent, respectively, as reported, but ~~each declined 2~~increased 7 percent and 15 percent, respectively, adjusted for currency. The suspension and orderly wind-down of our Russian operations in the second quarter impacted the revenue growth rate in EMEA by 1.7 points as reported (2 points adjusted for currency).

Asia Pacific revenue of $2,732 million was flat as reported, but increased 16 percent adjusted for currency, which includes approximately 5 points of revenue growth from incremental sales to Kyndryl. Japan decreased 3.4 percent as reported, but increased 22 percent adjusted for currency. India ~~grew 8.1~~and Australia increased 6.7 percent and 2.6 percent, respectively, as reported, and increased 15 percent and 10 percent, respectively, adjusted for currency. China decreased 15.3 percent as reported ~~and 8~~(12 percent adjusted for ~~currency.~~currency).

For the first nine months of ~~2021,~~2022, total revenue of ~~$54,093~~$43,840 million increased ~~1.6~~7.8 percent as reported ~~but declined 1~~(14 percent ~~excluding divested businesses and~~ adjusted for ~~currency~~currency) compared to the prior-year ~~period.~~period, which includes approximately 5 points of revenue growth from incremental sales to Kyndryl.

Americas revenue of ~~$25,216~~$22,614 million increased ~~1.9~~12.1 percent as reported ~~and 1~~(12 percent adjusted for ~~currency.~~currency), which includes approximately 4 points of revenue growth from incremental sales to Kyndryl. Within ~~Americas,~~North America, the U.S. increased ~~0.8~~10.8 percent ~~compared to the prior year.~~and Canada increased ~~16.9~~5.3 percent as reported ~~and 8~~(8 percent adjusted for ~~currency.~~currency). Latin America ~~decreased 3.5~~increased 29.1 percent as reported ~~and 1~~(30 percent adjusted for ~~currency,~~currency), with Brazil ~~revenue declining 3.5~~increasing 33.6 percent as reported ~~and flat~~(30 percent adjusted for ~~currency.~~currency).

In EMEA, total revenue of ~~$17,272~~$12,716 million increased ~~3.0~~4.4 percent as reported ~~but declined 3~~(16 percent adjusted for ~~currency. Within EMEA, the~~currency), which includes approximately 7 points of revenue growth from incremental sales to Kyndryl. The UK, France and Germany increased ~~8.3~~8.0 percent, ~~as reported and was flat adjusted for currency. France, Germany and Italy increased 4.6 percent, 3.8~~5.3 percent and 2.2 percent, respectively, as reported, ~~but declined 2~~and increased 19 percent, 218 percent and 414 percent, respectively, adjusted for currency.

Italy decreased 1.1 percent as reported, but increased 11 percent adjusted for currency. The suspension and orderly wind-down of our Russian operations in the second quarter impacted the revenue growth rate in EMEA by 1.7 points as reported (2 points adjusted for currency).

Asia Pacific revenue of ~~$11,605~~$8,509 million ~~decreased 1.0~~increased 2.6 percent as reported (14 percent adjusted for currency), which includes approximately 6 points of revenue growth from incremental sales to Kyndryl. Japan was flat as reported and 3increased 18 percent adjusted for currency. ~~Within Asia Pacific, Japan decreased 2.6~~India and Australia increased 20.5 percent and 7.8 percent, respectively, as reported, and 2increased 27 percent and 16 percent, respectively, adjusted for currency. China decreased ~~3.9~~13.1 percent as reported and ~~9 percent adjusted for currency and India decreased 3.2 percent as reported and 4 percent adjusted for currency. Australia grew 3.2 percent as reported, but declined 8~~12 percent adjusted for currency.

~~Expense~~

~~Total Expense and Other (Income)~~

Yr. to Yr.

(Dollars in millions)

Percent

For the three months ended September 30:

2021

2020

Change

Total consolidated expense and other (income)

$
6,852

$
6,603

3.8
%
Non-operating adjustments:







Amortization of acquired intangible assets

$
(290)

$
(279)

4.1
%
Acquisition-related charges

(4)

(1)

154.7

Non-operating retirement-related (costs)/income

(328)

(291)

12.9

Separation-related charges

(169)

—

nm

Operating (non-GAAP) expense and other (income)

$
6,061

$
6,032

0.5
%
Total consolidated expense-to-revenue ratio

38.9
%

37.6
%
1.3
pts.
Operating (non-GAAP) expense-to-revenue ratio

34.4
%

34.4
%
0.0
pts.

~~nm - not meaningful~~

7073

Table of Contents

Management Discussion – (continued)

Yr. to Yr.

(Dollars in millions)

Percent

For the nine months ended September 30:

2021

2020

Change

Total consolidated expense and other (income)

$
21,603

$
21,704

(0.5)
%
Non-operating adjustments:







Amortization of acquired intangible assets

$
(849)

$
(848)

0.1
%
Acquisition-related charges

(37)

(3)

nm

Non-operating retirement-related (costs)/income

(998)

(829)

20.5

Separation-related charges

(344)

—

nm

Operating (non-GAAP) expense and other (income)

$
19,374

$
20,024

(3.2)
%
Total consolidated expense-to-revenue ratio

39.9
%

40.8
%
(0.8)
pts.
Operating (non-GAAP) expense-to-revenue ratio

35.8
%

37.6
%
(1.8)
pts.

Expense

Total Expense and Other (Income)


							Yr. to Yr.
(Dollars in millions)							Percent
For the three months ended September 30:	2022			2021			Change
Total expense and other (income)	$	11,931	*	$	6,293		89.6	%
Non-operating adjustments:
Amortization of acquired intangible assets	$	(253)		$	(285)		(11.5)	%
Acquisition-related charges		(1)			(4)		(76.9)
Non-operating retirement-related (costs)/income		(6,062)	*		(318)		nm
Kyndryl-related impacts		14			—		nm
Operating (non-GAAP) expense and other (income)	$	5,630		$	5,687		(1.0)	%
Total expense-to-revenue ratio		84.6	%		47.5	%	37.1	pts.
Operating (non-GAAP) expense-to-revenue ratio		39.9	%		42.9	%	(3.0)	pts.

* Includes a one-time, non-cash pension settlement charge of $5.9 billion. See note 18, “Retirement-Related Benefits,” for additional information.

nm - not meaningful


							Yr. to Yr.
(Dollars in millions)							Percent
For the nine months ended September 30:	2022			2021			Change
Total expense and other (income)	$	25,212	*	$	20,017		25.9	%
Non-operating adjustments:
Amortization of acquired intangible assets	$	(810)		$	(835)		(2.9)	%
Acquisition-related charges		(9)			(37)		(75.0)
Non-operating retirement-related (costs)/income		(6,455)	*		(967)		nm
Kyndryl-related impacts		(353)			—		nm
Operating (non-GAAP) expense and other (income)	$	17,584		$	18,179		(3.3)	%
Total expense-to-revenue ratio		57.5	%		49.2	%	8.3	pts.
Operating (non-GAAP) expense-to-revenue ratio		40.1	%		44.7	%	(4.6)	pts.

* Includes a one-time, non-cash pension settlement charge of $5.9 billion. See note 18, “Retirement-Related Benefits,” for additional information.

nm - not meaningful

Total expense and other (income) increased ~~3.8~~89.6 percent in the third quarter of ~~2021~~2022 versus the ~~prior year period. Our expense dynamics reflect a~~prior-year period primarily driven by the one-time, non-cash pension settlement charge of $5.9 billion and higher ~~level of~~spending reflecting our continuing focus on our portfolio and investment in ~~innovation, skills~~our offerings, technical talent and ecosystem, partially offset by the effects of currency and benefits from the actions taken to streamline operations and our ecosystem, both organically and through acquisitions, as we execute our hybrid cloud and AI strategy. We are aggressively hiring, scaling our garage footprint, increasing our research spend in areas including quantum, hybrid cloud and AI, and expanding our ecosystem. The year-to-year increase in expense was also driven by separation-related charges in the current-year period and includes higher expense from acquired businesses.go-to-market model. Total operating (non-GAAP) expense and other (income) ~~increased 0.5~~decreased 1.0 percent year to year, driven primarily by the factors described above excluding the ~~separation-related charges.~~pension settlement charge.

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

~~Selling, General and Administrative Expense~~

Yr. to Yr.

(Dollars in millions)

Percent

For the three months ended September 30:

2021

2020

Change

Selling, general and administrative expense:







Selling, general and administrative — other

$
4,087

$
3,864

5.8
%
Advertising and promotional expense

349

361

(3.3)

Workforce rebalancing charges

0

18

nm

Amortization of acquired intangible assets

289

278

4.1

Stock-based compensation

156

129

20.6

Provision for/(benefit from) expected credit loss expense

(21)

(4)

nm

Total consolidated selling, general and administrative expense

$
4,860

$
4,647

4.6
%
Non-operating adjustments:







Amortization of acquired intangible assets

$
(289)

$
(278)

4.1
%
Acquisition-related charges

(4)

(1)

154.7

Separation-related charges

(169)

—

nm

Operating (non-GAAP) selling, general and administrative expense

$
4,398

$
4,367

0.7
%

~~nm - not meaningful~~

~~Table of Contents~~

~~Management Discussion – (continued)~~

Yr. to Yr.

(Dollars in millions)

Percent

For the nine months ended September 30:

2021

2020

Change

Selling, general and administrative expense:







Selling, general and administrative — other

$
12,844

$
12,444

3.2
%
Advertising and promotional expense

1,099

1,152

(4.6)

Workforce rebalancing charges

241

883

(72.7)

Amortization of acquired intangible assets

847

846

0.1

Stock-based compensation

431

401

7.5

Provision for/(benefit from) expected credit loss expense

(94)

122

nm

Total consolidated selling, general and administrative expense

$
15,368

$
15,849

(3.0)
%
Non-operating adjustments:







Amortization of acquired intangible assets

$
(847)

$
(846)

0.1
%
Acquisition-related charges

(37)

(3)

nm

Separation-related charges

(343)

—

nm

Operating (non-GAAP) selling, general and administrative expense

$
14,141

$
15,000

(5.7)
%

~~nm - not meaningful~~

Total selling, general and administrative (SG&A) expense increased 4.6 percent in the third quarter of 2021 versus the prior year reflecting the higher level of investments we are making, both organically and through acquisitions, to execute our hybrid cloud and AI strategy. The year-to-year increase was primarily driven by:

●

~~Kyndryl separation-related charges in the current-year period (4 points); and~~

●

~~Higher spending (1point) including expenses of acquired businesses.~~

~~Operating (non-GAAP) expense increased 0.7 percent year to year and excluded the separation-related charges.~~

~~SG&A expense decreased 3.0 percent in the first nine months of 2021 versus the prior year driven primarily by the following factors:~~

●

~~Lower workforce rebalancing charges (4 points);~~

●

~~A benefit from expected credit loss expense compared to a provision in the prior-year period (1 point); partially offset by~~

●

~~Kyndryl separation-related charges in the current-year period (2 points); and~~

●

~~The effects of currency (1 point).~~

~~Operating (non-GAAP) expense decreased 5.7 percent year to year, primarily driven by the same factors excluding the separation-related charges.~~

Provisions for expected credit loss expense decreased $216 million in the first nine months of 2021 compared to the prior-year period, primarily driven by decreases in both specific and general reserves in the current year compared to increases in the prior-year period. In the prior year, the global pandemic resulted in some deterioration in customer credit quality and/or bankruptcies which had an impact to provisions in the first half of 2020. We have started to see improvement in credit quality and some emergence from bankruptcies in the current year as economies have begun to reopen in many parts of the world. The receivables provision coverage was 2.5 percent at September 30, 2021, an increase of 10 basis points from December 31, 2020, due to the decline in total receivables balance, and a decrease of 10 basis points from September 30, 2020.

7274

Table of Contents

Management Discussion – (continued)

~~Research, Development~~Selling, General and ~~Engineering~~Administrative Expense


					Yr. to Yr.						Yr. to Yr.
(Dollars in millions)					Percent						Percent
For the three months ended September 30:	2021		2020		Change		2022		2021		Change
Research, development and engineering expense	$	1,621	$	1,515	7.0	%
Non-operating adjustment:
Separation-related charges	$	(1)	$	—	nm
Operating (non-GAAP) research, development and engineering expense	$	1,620	$	1,515	6.9	%
Selling, general and administrative expense:
Selling, general and administrative — other							$	3,681	$	3,553	3.6	%
Advertising and promotional expense								297		342	(13.2)
Workforce rebalancing charges								13		0	nm
Amortization of acquired intangible assets								252		285	(11.5)
Stock-based compensation								138		144	(3.7)
Provision for/(benefit from) expected credit loss expense								11		(17)	nm
Total selling, general and administrative expense							$	4,391	$	4,306	2.0	%
Non-operating adjustments:
Amortization of acquired intangible assets							$	(252)	$	(285)	(11.5)	%
Acquisition-related charges								(1)		(4)	(76.9)
Kyndryl-related impacts								0		—	nm
Operating (non-GAAP) selling, general and administrative expense							$	4,138	$	4,018	3.0	%

nm - not meaningful


					Yr. to Yr.						Yr. to Yr.
(Dollars in millions)					Percent						Percent
For the nine months ended September 30:	2021		2020		Change		2022		2021		Change
Research, development and engineering expense	$	4,907	$	4,722	3.9	%
Non-operating adjustment:
Separation-related charges	$	(1)	$	—	nm
Operating (non-GAAP) research, development and engineering expense	$	4,906	$	4,722	3.9	%
Selling, general and administrative expense:
Selling, general and administrative — other							$	11,501	$	11,397	0.9	%
Advertising and promotional expense								1,028		1,079	(4.7)
Workforce rebalancing charges								46		201	(77.3)
Amortization of acquired intangible assets								808		833	(2.9)
Stock-based compensation								427		399	6.9
Provision for/(benefit from) expected credit loss expense								33		(67)	nm
Total selling, general and administrative expense							$	13,843	$	13,842	0.0	%
Non-operating adjustments:
Amortization of acquired intangible assets							$	(808)	$	(833)	(2.9)	%
Acquisition-related charges								(9)		(37)	(75.0)
Kyndryl-related impacts								0		—	nm
Operating (non-GAAP) selling, general and administrative expense							$	13,025	$	12,972	0.4	%

nm - not meaningful

~~Research, development~~Total selling, general and ~~engineering (RD&E)~~administrative (SG&A) expense ~~was 9.2~~increased 2.0 percent and 9.1 percent of revenue in the third quarter and first nine months of 2021, respectively, compared to 8.6 percent and 8.9 percent in the prior-year periods, respectively, reflecting our continuing investment in innovation as we increase spending in areas including quantum, hybrid cloud and AI.

~~RD&E expense~~ in the third quarter of ~~2021 increased 7.0 percent year to year,~~2022 versus the prior-year period driven primarily ~~driven~~ by ~~higher spending (6 points) and~~ the ~~effects of currency (1 point).~~following factors:

~~RD&E expense in the first nine months of 2021 increased 3.9 percent year to year, primarily driven by higher spending (2 points) and the effects of currency (2 points).~~

~~Intellectual Property and Custom Development Income~~

Yr. to Yr.

(Dollars in millions)

Percent

For the three months ended September 30:

2021

2020

Change

Intellectual Property and Custom Development Income:







Licensing of intellectual property including royalty-based fees

$
69

$
60

14.7
%
Custom development income

74

62

18.9

Sales/other transfers of intellectual property

10

11

(10.9)

Total

$
153

$
134

14.5
%

Yr. to Yr.

(Dollars in millions)

Percent

For the nine months ended September 30:

2021

2020

Change

Intellectual Property and Custom Development Income:







Licensing of intellectual property including royalty-based fees

$
205

$
222

(7.7)
%
Custom development income

210

212

(0.8)

Sales/other transfers of intellectual property

20

19

5.0

Total

$
435

$
453

(3.9)
%

●

Higher spending (6 points) reflecting our continuing investment to drive our hybrid cloud and AI strategy, expenses of acquired businesses and higher travel and commission expense, partially offset by benefits from the actions taken to streamline operations and our go-to-market model and lower spending for shared services transferred to Kyndryl; and

●

A provision for expected credit loss expense in the current year compared to a benefit in the prior-year period (1 point); partially offset by

●

The effects of currency (5 points).

7375

Table of Contents

Management Discussion – (continued)

Operating (non-GAAP) expense increased 3.0 percent year to year, primarily driven by the same factors.

SG&A expense was flat in the first nine months of 2022 versus the prior-year period driven primarily by the following factors:

●

Higher spending (4 points) driven primarily by the same factors described above; and

●

A provision for expected credit loss expense in the current year compared to a benefit in the prior-year period (1 point); partially offset by

●

The effects of currency (3 points); and

●

Lower workforce rebalancing charges (1 point).

Operating (non-GAAP) expense increased 0.4 percent year to year, primarily driven by the same factors.

Provisions for expected credit loss expense increased $99 million in the first nine months of 2022 compared to the prior-year period, primarily driven by an increase in specific reserves in the current year compared to decreases in both general and specific reserves in the prior-year period. The receivables provision coverage was 2.3 percent at September 30, 2022, an increase of 20 basis points from December 31, 2021, due to the decline in total receivables balance, and a decrease of 20 basis points from September 30, 2021.

Research, Development and Engineering


					Yr. to Yr.
(Dollars in millions)					Percent
For the three months ended September 30:	2022		2021		Change
Research, development and engineering expense	$	1,611	$	1,606	0.3	%


					Yr. to Yr.
(Dollars in millions)					Percent
For the nine months ended September 30:	2022		2021		Change
Research, development and engineering expense	$	4,963	$	4,863	2.0	%

Research, development and engineering (RD&E) expense in the third quarter of 2022 increased 0.3 percent year to year reflecting our continuing investment to deliver innovation in AI, hybrid cloud and emerging areas such as quantum. Higher spending (3 points) in the current-year period was partially offset by the effects of currency (2 points).

RD&E expense in the first nine months of 2022 increased 2.0 percent year to year, primarily driven by higher spending (4 points) partially offset by the effects of currency (2 points).

Intellectual Property and Custom Development Income


					Yr. to Yr.
(Dollars in millions)					Percent
For the three months ended September 30:	2022		2021		Change
Intellectual property and custom development income:
Licensing of intellectual property including royalty-based fees	$	62	$	75	(17.6)	%
Custom development income		59		68	(12.8)
Sales/other transfers of intellectual property		1		10	(94.5)
Total	$	121	$	153	(20.5)	%

Table of Contents

Management Discussion – (continued)


					Yr. to Yr.
(Dollars in millions)					Percent
For the nine months ended September 30:	2022		2021		Change
Intellectual property and custom development income:
Licensing of intellectual property including royalty-based fees	$	246	$	215	14.5	%
Custom development income		164		197	(16.7)
Sales/other transfers of intellectual property		8		20	(58.0)
Total	$	418	$	431	(3.0)	%

Total intellectual property and custom development income ~~increased 14.5~~decreased 20.5 percent year to year in the third quarter, ~~but decreased 3.9~~and 3.0 percent in the first nine months of ~~2021~~2022 compared to the prior-year period. 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.

Other (Income) and Expense


					Yr. to Yr.							Yr. to Yr.
(Dollars in millions)					Percent							Percent
For the three months ended September 30:	2021		2020		Change		2022			2021		Change
Other (income) and expense:
Foreign currency transaction losses/(gains)	$	(21)	$	109	nm		$	(352)		$	(21)	nm
(Gains)/losses on derivative instruments		7		(101)	nm			189			7	nm
Interest income		(14)		(15)	(10.6)	%		(53)			(14)	287.1	%
Net (gains)/losses from securities and investment assets		3		(6)	nm			(11)			3	nm
Retirement-related costs/(income)		328		291	12.9			6,062	*		318	nm
Other		(69)		(25)	179.3			(80)			(48)	65.1
Total consolidated other (income) and expense	$	234	$	253	(7.3)	%
Total other (income) and expense							$	5,755	*	$	244	nm
Non-operating adjustments:
Amortization of acquired intangible assets	$	(1)	$	(1)	—		$	(1)		$	(1)	—
Non-operating retirement-related (costs)/income		(328)		(291)	12.9	%		(6,062)	*		(318)	nm
Kyndryl-related impacts								14			—	nm
Operating (non-GAAP) other (income) and expense	$	(94)	$	(39)	144.2	%	$	(293)		$	(74)	294.3	%

* Includes a one-time, non-cash pension settlement charge of $5.9 billion.

nm - not meaningful


			��		Yr. to Yr.							Yr. to Yr.
(Dollars in millions)					Percent							Percent
For the nine months ended September 30:	2021		2020		Change		2022			2021		Change
Other (income) and expense:
Foreign currency transaction losses/(gains)	$	(145)	$	45	nm		$	(1,021)		$	(145)	nm
(Gains)/losses on derivative instruments		246		(92)	nm			730			246	196.5	%
Interest income		(39)		(90)	(56.8)	%		(98)			(39)	154.9
Net (gains)/losses from securities and investment assets		(3)		(11)	(74.9)			262			(3)	nm
Retirement-related costs/(income)		998		829	20.5			6,455	*		967	nm
Other		(148)		(67)	120.9			(407)			(135)	200.9
Total consolidated other (income) and expense	$	911	$	614	48.4	%
Total other (income) and expense							$	5,921	*	$	891	nm
Non-operating adjustments:
Amortization of acquired intangible assets	$	(2)	$	(2)	—		$	(2)		$	(2)	—
Non-operating retirement-related (costs)/income		(998)		(829)	20.5	%		(6,455)	*		(967)	nm
Kyndryl-related impacts								(353)			—	nm
Operating (non-GAAP) other (income) and expense	$	(90)	$	(217)	(58.6)	%	$	(889)		$	(77)	nm

* Includes a one-time, non-cash pension settlement charge of $5.9 billion.

nm - not meaningful

Table of Contents

Management Discussion – (continued)

Total ~~consolidated~~ other (income) and expense was ~~$234~~expense of $5,755 million in the third quarter of 2022 compared to $244 million in the prior-year period. The year-to-year change was primarily driven by:

●

Higher non-operating retirement-related costs ($5,744 million) driven by the pension settlement charge. Refer to note 18, “Retirement-Related Benefits,” for additional information; partially offset by

●

Higher net exchange gains (including derivative instruments) in the current year ($145 million); and

●

Higher interest income ($39 million) driven by higher average interest rates in the current year.

Operating (non-GAAP) other (income) and expense was $293 million of income in the third quarter of 2022 andincreased $219 million compared to the prior-year period. The year-to-year change was driven primarily by the higher net exchange gains and higher interest income.

Total other (income) and expense was $5,921 million of expense in the ~~third quarter~~first nine months of ~~2021~~2022 compared to ~~$253~~$891 million in the prior-year period. The year-to-year decrease was primarily driven by:

●

Higher non-operating retirement-related costs ($5,489 million) driven by the pension settlement charge. Refer to note 18, “Retirement-Related Benefits,” for additional information; and

●

Net losses related to Kyndryl retained shares ($267 million); partially offset by

●

Net exchange gains (including foreign exchange derivative instruments) in the current year versus net exchange losses ~~(including derivative instruments)~~ in the prior year ($22477 million). The current-year (gains)/losses on derivative instruments also includes a loss on the cash-settled swap related to the Kyndryl retained shares ($85 million);

●

Higher gains on divestitures ($283 million) primarily driven by the divestiture of our healthcare software assets (included in “Other”); and

●

~~Gains on land/building dispositions and divestitures~~Higher interest income ($4460 million) ~~included~~driven by higher average interest rates in ~~“Other”; partially offset by~~

~~Table of Contents~~

~~Management Discussion – (continued)~~

●

~~Higher non-operating retirement-related costs ($37 million). Refer to “Retirement-Related Plans” for additional information.~~the current year.

Operating (non-GAAP) other (income) and expense was $94 million of income in the third quarter of 2021 and increased $56 million compared to the prior-year period. The year-to-year change was driven primarily by the factors described above, excluding the higher non-operating retirement-related costs.

Total consolidated other (income) and expense was $911 million of expense in the first nine months of 2021 compared to $614 million in the prior year. The year-to-year increase was primarily driven by:

●

~~Higher non-operating retirement-related costs ($170 million). Refer to “Retirement-Related Plans” for additional information;~~

●

~~Net exchange losses (including derivative instruments) in the current year versus net exchange gains (including derivative instruments) in the prior year ($149 million); and~~

●

~~Lower interest income ($51 million) primarily due to lower interest rates in the current-year period.~~

~~Operating (non-GAAP) other (income) and expense was $90~~$889 million of income in the first nine months of ~~2021~~2022 and ~~decreased $127~~increased $812 million compared to the prior-year period. The year-to-year ~~change~~increase was driven primarily by the effects of currency, higher gains on divestitures and ~~lower~~higher interest income described above.

Interest Expense


					Yr. to Yr.						Yr. to Yr.
(Dollars in millions)					Percent						Percent
For the three months ended September 30:	2021		2020		Change		2022		2021		Change
Interest expense	$	291	$	323	(10.0)	%	$	295	$	290	1.7	%


					Yr. to Yr.						Yr. to Yr.
(Dollars in millions)					Percent						Percent
For the nine months ended September 30:	2021		2020		Change		2022		2021		Change
Interest expense	$	852	$	971	(12.3)	%	$	903	$	852	6.0	%

Interest expense ~~decreased $32~~increased $5 million and ~~$119~~$51 million year to year in the third quarter and first nine months of ~~2021,~~2022, respectively. Interest expense is presented in cost of financing in the Consolidated Income Statement if the related external borrowings are to support the ~~Global~~ Financing external business. Overall interest expense (excluding capitalized interest) for the third quarter and first nine months of ~~2021~~2022 was ~~$392~~$394 million and ~~$1,164~~$1,166 million, respectively, ~~a decrease~~an increase of ~~$40~~$2 million and ~~$154~~$3 million, ~~versus the comparable prior-year periods. The decrease for the third quarter was primarily driven by a lower average debt balance, partially offset by higher average interest rates~~respectively, compared to the prior-year ~~period.~~periods. The year-to-year ~~decrease~~dynamics for ~~the first nine months of 2021 was primarily driven by a lower average debt balance in the current-year period.~~

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Management Discussion – (continued)

both the third quarter and first nine months of 2022 were primarily driven by higher average interest rates, offset by a lower average debt balance.

Retirement-Related Plans

The following tables provide the total pre-tax cost for all retirement-related plans. The operating cost amounts are included in the Consolidated Income Statement within the caption (e.g., Cost, SG&A, RD&E) relating to the job function of the plan participants. The non-operating cost amounts are included in other (income) and expense.


					Yr. to Yr.							Yr. to Yr.
(Dollars in millions)					Percent							Percent
For the three months ended September 30:	2021		2020		Change		2022			2021		Change
Retirement-related plans — cost:
Service cost	$	97	$	103	(5.8)	%	$	59		$	70	(15.6)	%
Multi-employer plans		3		7	(62.3)			4			2	76.8
Cost of defined contribution plans		264		259	1.9			225			252	(10.7)
Total operating costs	$	364	$	369	(1.5)	%	$	288		$	324	(11.2)	%
Interest cost	$	411	$	551	(25.4)	%	$	436		$	408	6.9	%
Expected return on plan assets		(737)		(867)	(14.9)			(679)			(726)	(6.5)
Recognized actuarial losses		631		579	8.9			381			613	(37.9)
Amortization of prior service costs/(credits)		3		0	nm			3			3	(11.4)
Curtailments/settlements		13		21	(38.5)			5,913	*		13	nm
Other costs		7		6	19.7			8			7	18.5
Total non-operating costs/(income)	$	328	$	291	12.9	%	$	6,062	*	$	318	nm
Total retirement-related plans — cost	$	692	$	660	4.8	%	$	6,350	*	$	642	nm

* Includes a one-time, non-cash pension settlement charge of $5.9 billion. See note 18, “Retirement-Related Benefits,” for additional information.

nm - not meaningful


					Yr. to Yr.							Yr. to Yr.
(Dollars in millions)					Percent							Percent
For the nine months ended September 30:	2021		2020		Change		2022			2021		Change
Retirement-related plans — cost:
Service cost	$	290	$	300	(3.1)	%	$	186		$	209	(11.0)	%
Multi-employer plans		17		22	(20.5)			11			13	(12.0)
Cost of defined contribution plans		800		791	1.1			697			760	(8.3)
Total operating costs	$	1,107	$	1,112	(0.4)	%	$	894		$	982	(8.9)	%
Interest cost	$	1,237	$	1,637	(24.4)	%	$	1,363		$	1,227	11.1	%
Expected return on plan assets		(2,221)		(2,573)	(13.7)			(2,162)			(2,187)	(1.2)
Recognized actuarial losses		1,907		1,701	12.1			1,283			1,852	(30.7)
Amortization of prior service costs/(credits)		8		1	nm			16			7	131.9
Curtailments/settlements		46		42	9.9			5,931	*		46	nm
Other costs		21		20	6.3			24			21	9.8
Total non-operating costs/(income)	$	998	$	829	20.5	%	$	6,455	*	$	967	nm
Total retirement-related plans — cost	$	2,106	$	1,941	8.5	%	$	7,350	*	$	1,949	277.1	%

* Includes a one-time, non-cash pension settlement charge of $5.9 billion. See note 18, “Retirement-Related Benefits,” for additional information.

nm - not meaningful

Total pre-tax retirement-related plan cost increased by ~~$32~~$5,708 million compared to the third quarter of ~~2020~~2021 primarily due to an increase in curtailments/settlements ($5,900 million) driven by a one-time, non-cash pension settlement charge, lower expected return on plan assets ($~~130~~47 million) and ~~an increase~~higher interest costs ($28 million), partially offset by a decrease in recognized actuarial losses ($52 million), partially offset by lower interest costs ($140 million). Total cost for the first nine months of 2021 increased $165 million versus the first nine months of 2020, primarily driven by lower expected return on plan assets ($352232 million) and ~~an increase in recognized actuarial losses~~lower cost of defined contribution plans ($~~206 million), partially offset by lower interest costs ($400 million).~~

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Management Discussion – (continued)

million). Total cost for the first nine months of 2022 increased $5,401 million compared to the first nine months of 2021, primarily due to an increase in curtailments/settlements ($5,885 million) driven by the pension settlement charge, higher interest costs ($136 million), partially offset by a decrease in recognized actuarial losses ($569 million), and lower cost of defined contribution plans ($63 million).

As described in the “Operating (non-GAAP) Earnings” section, management characterizes certain retirement-related costs as operating and others as non-operating. Utilizing this characterization, operating retirement-related costs in the third quarter of ~~2021~~2022 were ~~$364~~$288 million, a decrease of $6$36 million compared to the third quarter of ~~2020.~~2021. For the first nine months of ~~2021,~~2022, operating retirement-related costs were ~~$1,107~~$894 million, a decrease of $5$88 million compared to the prior-year period. These operating cost decreases were primarily driven by lower cost of defined contribution plans. Non-operating costs of ~~$328~~$6,062 million in the third quarter of ~~2021~~2022 increased ~~$37~~$5,744 million year to year and for the first nine months of ~~2021~~2022 were ~~$998~~$6,455 million, an increase of ~~$170~~$5,488 million compared to the prior-year period. These non-operating cost increases were driven primarily by the ~~same factors as described above.~~$5.9 billion pension settlement charge, higher interest costs and lower expected return on plan assets, partially offset by a decrease in recognized actuarial losses.

Taxes

The continuing operations ~~provision for~~benefit from income taxes for the third quarter of ~~2021~~2022 was ~~$188~~$1,287 million, compared to ~~$128~~a benefit of $224 million in the third quarter of ~~2020.~~2021. The ~~increase~~current-year tax benefit was primarily ~~relates to higher discrete tax benefits in the prior year. The provision for income taxes for the third quarter of 2021 includes discrete tax charges related~~due to the ~~Kyndryl separation, partially offset~~transfer of a portion of the Qualified PPP’s defined benefit pension obligations and related plan assets. The prior-year tax benefit was primarily driven by ~~tax benefits associated with third quarter~~ events that resulted in ~~the expected~~additional anticipated utilization of U.S. foreign tax credits. The operating (non-GAAP) ~~provision for~~ income ~~taxes~~tax provision for the third quarter of ~~2021~~2022 was ~~$115 million, compared to $263 million in the third quarter of 2020. The decrease in the operating (non-GAAP) provision for income taxes was primarily due the tax benefits described above.~~

~~The continuing operations provision for income taxes for the first nine months of 2021 was $365~~$312 million, compared to a benefit from income taxes of ~~$888~~$67 million in the third quarter of 2021. The current-year tax provision was driven by many factors including the impacts of the geographical mix of income, incentives and changes in unrecognized tax benefits and tax laws. The prior-year tax benefit was primarily driven by events that resulted in additional anticipated utilization of U.S. foreign tax credits.

The continuing operations benefit from income taxes for the first nine months of 2022 was $1,070 million, compared to a benefit of $282 million for the first nine months of ~~2020.~~2021. The increase compared to the prior year was primarily driven by the transfer of a portion of the Qualified PPP’s defined benefit pension obligations and related plan assets in the third quarter of 2022. The operating (non-GAAP) provision for income taxes for the first nine months of ~~2021~~2022 was ~~$725~~$969 million, compared to ~~a benefit from income taxes of $329~~$204 million for the first nine months of ~~2020.~~2021. The ~~benefit from~~increase in the operating (non-GAAP) income ~~taxes for the first nine months of 2020 was primarily related~~tax provision compared to the ~~tax impacts of an intra-entity sale of certain of the company’s intellectual property. The operating (non-GAAP) benefit from income taxes~~prior year was primarily driven by the ~~same factor.~~resolution of certain tax audits in the first quarter of 2021 as well as third-quarter events in 2021 that resulted in additional anticipated utilization of U.S. foreign tax credits.

IBM’s full-year tax provision and effective tax rate are impacted by recurring factors including the geographic mix of income before taxes, ~~state~~incentives, changes in unrecognized tax benefits and ~~local taxes, the effects of various global income tax strategies and any~~ discrete tax events, such as the settlement of income tax audits and changes in or new interpretations of tax laws. The GAAP tax provision and effective tax rate could also be affected by adjustments to the previously recorded charges for U.S. tax reform attributable to any changes in law, new regulations and guidance, 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. federal 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 quarter of 2021. In the third quarter of 2018, the IRS commenced its audit of the company’s U.S. federal income tax returns for 2015 and 2016. The company anticipates that this audit will be completed in 2022 or early 2023. In the fourth quarter of ~~2021.~~2021, the IRS commenced its audit of the company’s U.S. federal income tax returns for 2017 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 2015. The company is no longer subject to income tax examination of its U.S. federal tax

Table of Contents

Management Discussion – (continued)

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 penalties have been provided for any adjustments that are expected to result for these years.

The company is involved in a number of income tax-related matters in India ~~challenging~~as a result of tax assessments issued by the India ~~Tax Authorities. As of~~tax authorities. At September 30, ~~2021,~~2022, the company had recorded ~~$735~~$704 million as prepaid income taxes in India. A significant portion of this balance represents cash tax deposits paid over time to protect the company’s right to appeal various income tax assessments made by the India ~~Tax Authorities.~~tax authorities. Although the outcome of tax audits ~~are~~is always uncertain, the company believes that adequate amounts of tax, interest and penalties have been provided for any adjustments that are expected to result for these years.

~~Table of Contents~~

~~Management Discussion – (continued)~~

The amount of unrecognized tax benefits at September 30, ~~2021~~2022 is ~~$8,633~~$8,531 million which can be reduced by ~~$917~~$538 million associated with timing adjustments, U.S. tax credits, potential transfer pricing adjustments, and state income taxes. The net amount of ~~$7,716~~$7,993 million, if recognized, would favorably affect the company’s effective tax rate.

~~Earnings~~Earnings/(Loss) 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:

2021

2020

Change

Earnings per share of common stock from continuing operations:







Assuming dilution

$
1.25

$
1.89

(33.9)
%
Basic

$
1.26

$
1.90

(33.7)
%
Diluted operating (non-GAAP)

$
2.52

$
2.58

(2.3)
%
Weighted-average shares outstanding: (in millions)







Assuming dilution

906.0

897.3

1.0
%
Basic

897.1

891.4

0.6
%

For the three and nine months ended September 30, 2022, the one-time, non-cash, pre-tax pension settlement charge of $5.9 billion ($4.4 billion net of tax) resulted in net losses as reported. Therefore, otherwise dilutive potential shares of common stock have been excluded from the computation of diluted earnings/(loss) per share as the effect would be antidilutive. See note 7, “Earnings Per Share of Common Stock,” for additional information.

Yr. to Yr.

Percent

For the nine months ended September 30:

2021

2020

Change

Earnings per share of common stock from continuing operations:







Assuming dilution

$
3.77

$
4.72

(20.1)
%
Basic

$
3.81

$
4.76

(20.0)
%
Diluted operating (non-GAAP)

$
6.62

$
6.60

0.3
%
Weighted-average shares outstanding: (in millions)







Assuming dilution

904.0

895.8

0.9
%
Basic

895.3

889.6

0.6
%

Operating (non-GAAP) earnings per share for the three and nine months ended September 30, 2022 included all potential dilutive securities.


						Yr. to Yr.
						Percent
For the three months ended September 30:	2022			2021		Change
Earnings/(loss) per share of common stock from continuing operations:
Assuming dilution	$	(3.55)	*	$	1.14	nm
Basic	$	(3.55)	*	$	1.16	nm
Diluted operating (non-GAAP)	$	1.81		$	1.84	(1.6)	%
Weighted-average shares outstanding: (in millions)
Assuming dilution		904.1			906.0	(0.2)	%
Basic		904.1			897.1	0.8	%
Assuming dilution (non-GAAP)		912.8			906.0	0.8	%

* The $5.9 billion one-time, non-cash, pre-tax pension settlement charge resulted in an impact of ($4.86) to diluted earnings/(loss) per share from continuing operations and an impact of ($4.88) to basic earnings/(loss) per share.

nm - not meaningful

Table of Contents

Management Discussion – (continued)


						Yr. to Yr.
						Percent
For the nine months ended September 30:	2022			2021		Change
Earnings/(loss) per share of common stock from continuing operations:
Assuming dilution	$	(1.21)	*	$	2.49	nm
Basic	$	(1.21)	*	$	2.51	nm
Diluted operating (non-GAAP)	$	5.52		$	4.58	20.5	%
Weighted-average shares outstanding: (in millions)
Assuming dilution		901.6			904.0	(0.3)	%
Basic		901.6			895.3	0.7	%
Assuming dilution (non-GAAP)		911.1			904.0	0.8	%

nm - not meaningful

Actual shares outstanding at September 30, ~~2021~~2022 were ~~896.8~~ 904.1 million. The weighted-average number of common shares outstanding assuming dilution during the third quarter and first nine months of ~~2021~~2022 were ~~8.7~~1.9 million ~~(1.0~~(0.2 percent) and ~~8.2~~2.4 million ~~(0.9~~(0.3 percent) shares lower, respectively, than the same periods of 2021, driven by the exclusion of dilutive potential common shares in the current-year computation. The weighted-average number of common shares outstanding assuming dilution used in the non-GAAP diluted earnings per share calculation for the third quarter and first nine months of 2022 were 6.9 million (0.8 percent) and 7.1 million (0.8 percent) shares higher, respectively, than the same periods of ~~2020.~~2021.

Financial Position

Dynamics

AtOur balance sheet at September 30, ~~2021, our balance sheet remained strong~~2022 continues to provide us with flexibility to support the business. We continue to manage the investment portfolio to meet our capital preservation and liquidity objectives and have continued to take actions to enhance our balance sheet strength and liquidity position.

Cash, restricted cash and marketable securities at September 30, ~~2021~~2022 were ~~$8,406~~$9,728 million, ~~a decrease~~an increase of ~~$5,868~~$2,171 million from December 31, 2020, primarily due to debt reduction payments and acquisitions. Financing receivables declined $5,772 million to $12,207 million since the end of 2020 primarily resulting from collections of seasonally higher year-end balances and our strategic actions to re-focus our Global Financing portfolio.2021. Total debt of ~~$54,501~~$50,880 million at September 30, ~~2021~~2022 decreased ~~$7,037~~$824 million from December 31, ~~2020, and $18,538 million since the end of the second quarter 2019 (immediately preceding the Red Hat acquisition).~~2021 driven by currency impacts. We ~~have made good progress in deleveraging~~continue to manage our debt levels while being acquisitive and without sacrificing investments in our business or our solid dividend policy.

Our cash flow is presented on a consolidated basis and includes discontinued operations. Refer to note 3, “Separation of Kyndryl,” for additional information. In the first nine months of ~~2021,~~2022, we generated ~~$10,252~~$6,470 million in ~~net~~ cash from ~~operations,~~operating activities, compared to ~~$12,337~~$10,252 million in the first nine months of 2021, primarily due to financing receivables. There was no cash flow impact from the U.S. pension settlement charge. We invested $1,020 million in acquisitions, generated $1,271 million from divested businesses and returned $4,454 million to shareholders through dividends in the first nine months of 2022. Our cash generation permits us to invest and deploy capital to areas with the most attractive long-term opportunities.

Our pension plans were well funded at the end of 2021, with worldwide qualified plans funded at 107 percent. Overall pension funded status as of the end of September 2022 has increased from year-end 2021, primarily due to higher interest rates and the settlement of approximately $16 billion of the U.S. Qualified PPP’s defined benefit pension obligations. After the settlement and remeasurement, the U.S. Qualified PPP remained in an overfunded position at September 30, 2022. Refer to note 18, “Retirement-Related Benefits,” for additional information. We currently have no change to expected plan contributions in 2022.

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Table of Contents

Management Discussion – (continued)

months of 2020. Our cash from operations in the first nine months of 2021 includes $1.7 billion of cash impacts from the structural actions we initiated in the fourth quarter of 2020 and Kyndryl separation-related charges. We have consistently generated strong cash flow from operations and continue to have access to additional sources of liquidity through the capital markets and our unused credit facilities.

Our pension plans were well funded at the end of 2020, with worldwide qualified plans funded at 102 percent. Overall pension funded status as of the end of September was fairly consistent with year-end 2020, and we currently have no change to expected plan contributions in 2021.

The assets and debt associated with the Global Financing business are a significant part of our financial position. The financial position amounts appearing on pages 5 and 6 are the consolidated amounts including Global Financing. The amounts appearing in the separate “Global Financing” section, beginning on page 88, are supplementary data presented to facilitate an understanding of the Global Financing business.

IBM Working Capital

At September 30,

At December 31,
(Dollars in millions)

2021

2020
Current assets

$
29,967

$
39,165
Current liabilities

35,832

39,869
Working capital

$
(5,865)

$
(705)
Current ratio

0.84:1

0.98:1


	At September 30,		At December 31,
(Dollars in millions)	2022		2021
Current assets	$	28,999	$	29,539
Current liabilities		30,466		33,619
Working capital	$	(1,467)	$	(4,080)
Current ratio		0.95:1		0.88:1

Working capital ~~decreased $5,160~~increased $2,613 million from the year-end ~~2020~~2021 position. The key changes are described below:

Current assets decreased ~~$9,198~~$540 million ~~($8,405~~(an increase of $1,329 million adjusted for currency) due to:

●

A ~~decrease~~decline in receivables of ~~$5,868~~$2,666 million ($~~5,666~~1,593 million adjusted for currency) ~~in cash, restricted cash and marketable securities; and~~

●

~~A decrease in financing receivables of $3,732 million ($3,485 million adjusted for currency) primarily~~mainly due to collections of higher year-end ~~balances and sales of financing receivables;~~balances; partially offset by

●

An increase ~~in prepaid expenses and other current assets~~ of ~~$749~~$2,171 million ($~~820~~2,718 million adjusted for currency) ~~primarily driven by an increase~~ in ~~derivative assets.~~cash, restricted cash and marketable securities.

Current liabilities decreased ~~$4,038~~$3,153 million ($~~2,909~~1,401 million adjusted for currency) as a result of:

●

A decrease in ~~other accrued expenses and liabilities~~deferred income of ~~$2,328~~$1,378 million ($~~1,893~~512 million adjusted for currency) ~~primarily~~reflecting seasonal reductions from higher year-end balances;

●

A decrease in short-term debt of $849 million ($850 million adjusted for currency) due to ~~payments~~maturities of ~~$1,440~~$5,338 million; partially offset by reclassifications of $4,757 million ~~for workforce rebalancing actions~~from long-term debt to reflect upcoming maturities; and ~~a decrease of $518 million in derivative liabilities;~~

●

A decrease in taxes payable of ~~$1,142~~$622 million ($~~1,023~~423 million adjusted for currency) primarily due to indirect tax payments.

Receivables and Allowances

Roll Forward of Total IBM Receivables Allowance for Credit Losses*


(Dollars in millions)
January 1, 2022		Additions / (Releases) **		Write-offs +		Foreign currency and other		September 30, 2022
$	443	$	53	$	(51)	$	(24)	$	421

* This roll forward includes any reserves related to discontinued operations.

**	Additions/(Releases) for allowance for credit losses are recorded in expense.

+ Refer to note A, “Significant Accounting Policies,” in our 2021 Annual Report for additional information regarding allowance for credit loss write-offs.

Excluding receivables classified as held for sale, the total IBM receivables provision coverage was 2.3 percent at September 30, 2022, an increase of 20 basis points compared to December 31, 2021. The increase was primarily driven by the decline in total receivables. The majority of the write-offs during the nine months ended September 30, 2022 related to receivables which had been previously reserved.

Table of Contents

Management Discussion – (continued)

Financing Segment Receivables and Allowances

The following table presents external Financing segment receivables excluding receivables classified as held for sale, and immaterial miscellaneous receivables.


	At September 30,			At December 31,
(Dollars in millions)	2022			2021
Amortized cost *	$	11,234		$	12,859
Specific allowance for credit losses		126			159
Unallocated allowance for credit losses		34			42
Total allowance for credit losses		159			201
Net financing receivables	$	11,075		$	12,658
Allowance for credit losses coverage		1.4	%		1.6	%

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

The percentage of Financing segment receivables reserved decreased from 1.6 percent at December 31, 2021, to 1.4 percent at September 30, 2022, primarily driven by write-offs of previously reserved receivables.

Roll Forward of Financing Segment Receivables Allowance for Credit Losses (included in Total IBM)


(Dollars in millions)
January 1, 2022		Additions / (Releases)*		Write-offs **		Foreign currency and other		September 30, 2022
$	201	$	(13)	$	(23)	$	(5)	$	159

*	Additions/(Releases) for allowance for credit losses are recorded in expense.

**	Refer to note A, “Significant Accounting Policies,” in our 2021 Annual Report for additional information regarding allowance for credit loss write-offs.

Financing’s expected credit loss expense (including reserves for off-balance sheet commitments which are recorded in other liabilities) was a net release of $3 million and $15 million for the three and nine months ended September 30, 2022, respectively, compared to a net release of $18 million and $47 million for the three and nine months ended September 30, 2021, respectively. The declines in net releases in both periods of 2022 were primarily driven by lower unallocated reserve requirements in the prior year in Americas and EMEA due to sales of receivables.

Noncurrent Assets and Liabilities


	At September 30,		At December 31,
(Dollars in millions)	2022		2021
Noncurrent assets	$	96,851	$	102,462
Long-term debt	$	44,942	$	44,917
Noncurrent liabilities (excluding debt)	$	30,294	$	34,469

Noncurrent assets decreased $5,611 million ($1,355 million adjusted for currency) driven by:

●

A decrease in goodwill and net intangible assets of $2,970 million ($916 million adjusted for currency) primarily driven by ~~tax payments~~currency impacts, intangibles amortization and ~~a decline in reserves as a result~~derecognition of goodwill and intangible assets of $648 million related to the ~~resolution~~divestiture of ~~certain tax audit matters;~~our healthcare software assets, partially offset by additions from new acquisitions;

●

A decrease ~~in accounts payable~~ of ~~$659~~$1,025 million ($~~565~~528 million adjusted for currency) ~~reflecting declines from seasonally higher year-end balances;~~in net property, plant and equipment and operating right-of-use assets; and

●

~~A decrease in deferred income of $570 million ($248 million adjusted for currency); partially offset by~~

7984

Table of Contents

Management Discussion – (continued)

●

~~An increase~~A decrease in ~~short-term debt~~long-term financing receivables of ~~$392~~$644 million ($~~403~~265 million adjusted for currency) due to ~~reclassifications~~collections from ~~long-term debt to reflect upcoming maturities and a net increase in commercial paper;~~seasonally higher year-end balances, partially offset by ~~maturities.~~current-year business volumes.

~~Receivables and Allowances~~

~~Roll Forward of Total IBM Receivables Allowance for Credit Losses~~

(Dollars in millions)

January 1, 2021

Additions / (Releases) *

Write-offs **

Other +

September 30, 2021
$
644

$
(85)

$
(45)

$
(5)

$
510

* Additions/(Releases) for Allowance for Credit Losses are recorded in expense.

**Refer to note A, “Significant Accounting Policies,” in our 2020 Annual Report for additional information regarding allowance for credit loss write-offs.

~~+ Primarily represents translation adjustments.~~

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

~~Global Financing Receivables and Allowances~~

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

At September 30,

At December 31,

(Dollars in millions)

2021

2020

Amortized cost *

$
12,426

$
18,264

Specific allowance for credit losses

167

184

Unallocated allowance for credit losses

40

79

Total allowance for credit losses

207

263

Net financing receivables

$
12,219

$
18,001

Allowance for credit losses coverage

1.7
%

1.4
%

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

~~The percentage of Global Financing receivables reserved~~Long-term debt increased ~~from 1.4 percent at December 31, 2020, to 1.7 percent at September 30, 2021, primarily driven by the decline in amortized cost.~~

~~Roll Forward of Global Financing Receivables Allowance for Credit Losses~~

(Dollars in millions)












January 1, 2021

Additions / (Releases)*

Write-offs **

Other +

September 30, 2021
$
263

$
(38)

$
(14)

$
(4)

$
207

* Additions/(Releases) for Allowance for Credit Losses are recorded in expense.

**Refer to note A, “Significant Accounting Policies,” in our 2020 Annual Report for additional information regarding allowance for credit loss write-offs.

~~+ Primarily represents translation adjustments.~~

~~Table of Contents~~

~~Management Discussion – (continued)~~

~~Global Financing’s expected credit loss expense (including impacts from off-balance sheet commitments which are recorded in other liabilities) was a release of $18~~$26 million and $47 million for the three and nine months ended September 30, 2021, respectively, compared to an addition of $5 million and $44 million for the three and nine months ended September 30, 2020, respectively. The decreases in both periods in 2021 were primarily driven by lower unallocated reserves in Americas and EMEA.

~~Noncurrent Assets and Liabilities~~

At September 30,

At December 31,
(Dollars in millions)

2021

2020
Noncurrent assets

$
114,248

$
116,806
Long-term debt

$
46,926

$
54,355
Noncurrent liabilities (excluding debt)

$
39,100

$
41,020

~~Noncurrent assets decreased $2,558 million~~ ($~~815~~2,216 million adjusted for currency) due to:

●

~~A decrease in long-term financing receivables~~Issuances of ~~$2,040 million ($1,848 million adjusted for currency) as a result of reductions from seasonally higher year-end balances and sales of receivables;~~

●

~~A decrease in net property, plant and equipment of $901 million ($674 million adjusted for currency); and~~

●

~~A decrease of $992 million ($579 million adjusted for currency) in total operating right-of-use assets, deferred taxes and investments and sundry assets;~~$7,532 million; partially offset by

●

~~An increase in goodwill and net intangible assets of $990 million ($1,744 million adjusted for currency) due to additions from new acquisitions, partially offset by intangibles amortization; and~~

●

~~An increase in prepaid pension assets of $588 million ($689 million adjusted for currency).~~

~~Long-term debt decreased $7,429 million ($6,528 million adjusted for currency) due to:~~

●

Reclassifications to short-term debt of ~~$5,434~~$4,757 million to reflect upcoming maturities; and

●

~~Early redemption~~A decrease of ~~IBM Credit debt of $1,250 million.~~$2,191 million due to currency impacts.

Noncurrent liabilities (excluding debt) decreased ~~$1,919~~$4,175 million ($~~794~~1,761 million adjusted for currency) due to:

●

A decrease in retirement and ~~nonpension~~ postretirement benefit obligations of ~~$1,483~~$2,675 million ($~~831~~1,392 million adjusted for currency); of which $624 million is due to the amendment and remeasurement impact of the U.S. Nonpension Postretirement Plan;

●

A decrease of $559 million ($294 million adjusted for currency) in deferred income reflecting seasonal reductions from higher year-end balances; and

●

A decrease of $359 million ($184 million adjusted for currency) in long-term operating lease liabilities ~~of $382 million ($277 million adjusted for currency)~~ related primarily to real estate ~~leases; partially offset by~~

●

~~An increase in other liabilities of $282 million ($535 million adjusted for currency) related primarily to income tax reserves related to the separation of Kyndryl.~~leases.

~~Table of Contents~~

~~Management Discussion – (continued)~~

Debt

Our funding requirements are continually monitored and we execute our strategies ~~are executed~~ to manage the overall asset and liability profile. Additionally, we maintain sufficient flexibility to access global funding sources as needed.

At September 30,

At December 31,
(Dollars in millions)

2021

2020
Total company debt

$
54,501

$
61,538
Total Global Financing segment debt

$
15,868

$
21,167
Debt to support external clients

12,677

17,819
Debt to support internal clients

3,191

3,348
Non-Global Financing debt

$
38,633

$
40,371


	At September 30,		At December 31,
(Dollars in millions)	2022		2021
Total company debt	$	50,880	$	51,703
Financing segment debt*	$	11,198	$	13,929
Non-Financing debt	$	39,682	$	37,775

* Financing segment debt includes debt of $1,166 million at September 30, 2022 and $1,345 million at December 31, 2021 to support intercompany financing receivables and other intercompany assets. Refer to Financing’s “Financial Position” on page 92 for additional details.

Total debt of ~~$54,501~~$50,880 million decreased ~~$7,037~~$824 million ~~($6,125~~(increased $1,366 million adjusted for currency) from December 31, ~~2020,~~2021, primarily driven by ~~debt~~ maturities of $5,415 million and ~~early retirements~~currency impacts, partially offset by issuances of ~~$7,301~~$7,871 million. ~~Total debt has decreased $18,538 million since the end of the second quarter 2019 (immediately preceding the Red Hat acquisition).~~

~~Non-Global Financing~~Non-Financing debt of ~~$38,633~~$39,682 million ~~decreased $1,739~~increased $1,907 million ($~~1,151~~3,480 million adjusted for currency) from December 31, ~~2020~~2021 primarily due to ~~scheduled~~new debt ~~maturities in the first nine months of 2021.~~issuances.

~~Global~~ Financing segment debt of ~~$15,868~~$11,198 million decreased ~~$5,298~~$2,730 million ($~~4,974~~2,114 million adjusted for currency) from December 31, ~~2020,~~2021 primarily due to lower funding requirements associated with financing receivables. In the first quarter of 2021, IBM Credit early redeemed all of its outstanding fixed-rate debt in the aggregate amount of $1.75 billion and deregistered with the U.S. Securities and Exchange Commission.assets.

~~Global~~ 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 Global Technology Services, generate long-term, stable revenue streams similar to~~and the Global Financing asset portfolio. Based on their attributes, these Global Technology Services assets are leveraged with the balance of the Global Financing asset base. Global Financing's funding of the Global Technology Services assets supporting the managed infrastructure services unit will wind down with the separation of Kyndryl as Global Financing refocuses its portfolio to support IBM's hybrid cloud platform and AI capabilities.

~~The~~ debt used to fund ~~Global~~ Financing assets is primarily composed of intercompany loans. Total debt changes generally correspond with the level of client and commercial financing receivables, the level of cash and cash equivalents, the change in intercompany and external payables and the change in intercompany investment from IBM. The terms of the intercompany loans are set by

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Management Discussion – (continued)

the company to substantially match the term, currency and interest rate variability underlying the financing receivable and are based on arm’s-length pricing. The ~~Global~~ Financing debt-to-equity ratio remained at 9.0 to 1 at September 30, ~~2021.~~2022.

We measure ~~Global~~ Financing as a stand-alone entity, and accordingly, interest expense relating to debt supporting ~~Global~~ Financing’s external client and internal business is included in the ~~“Global Financing~~“Financing Results of Operations” ~~on pages 88 to 89~~ and in note 4,5, “Segments.” In the Consolidated Income Statement, the external debt-related interest expense supporting ~~Global~~ Financing’s internal financing to ~~the company~~IBM is ~~reclassified from cost of financing to~~classified as interest expense.

Equity

Total equity of $20,147 million increased ~~$1,630~~$1,151 million from December 31, 2020, primarily due to an increase from net income of $3,410 million, an increase in accumulated other comprehensive income of $2,035 million mainly due to retirement-related benefit plans of $1,469 million and cash flow hedge derivatives of $407 million, partially offset by dividends paid of $4,395 million.2021 as a result of:

●

A decrease in accumulated other comprehensive loss of $6,096 million driven by retirement-related benefit plans, primarily due to the pension settlement charge of $4,411 million net of tax; and

●

Common stock issuances of $736 million; partially offset by

●

Dividends paid of $4,454 million; and

●

Net loss of $1,071 million, primarily due to the pension settlement charge.

~~Table of Contents~~

~~Management Discussion – (continued)~~

Cash Flow

Our cash flows from operating, investing and financing activities, as reflected in the Consolidated Statement of Cash Flows on page 7, are summarized in the ~~following table.~~table below and include the cash flows of discontinued operations. These amounts also include the cash flows associated with the ~~Global~~ Financing business.

(Dollars in millions)

For the nine months ended September 30:

2021

2020
Net cash provided by/(used in) continuing operations:




Operating activities

$
10,252

$
12,337
Investing activities

(5,300)

(2,470)
Financing activities

(10,662)

(3,428)
Effect of exchange rate changes on cash, cash equivalents and restricted cash

(159)

(200)
Net change in cash, cash equivalents and restricted cash

$
(5,868)

$
6,239


(Dollars in millions)
For the nine months ended September 30:	2022		2021
Net cash provided by/(used in):
Operating activities	$	6,470	$	10,252
Investing activities		(2,883)		(5,300)
Financing activities		(2,106)		(10,662)
Effect of exchange rate changes on cash, cash equivalents and restricted cash		(463)		(159)
Net change in cash, cash equivalents and restricted cash	$	1,018	$	(5,868)

Net cash provided by operating activities decreased ~~$2,085~~$3,782 million as compared to the first nine months of ~~2020~~2021 driven primarily by:

●

A decrease in cash provided by financing receivables of ~~$1,463~~$4,164 million primarily driven by ~~business volume;~~

●

~~An increase in workforce rebalancing payments~~higher prior-year sales of ~~$802 million; and~~

●

A decrease in payroll tax and value-added tax deferrals of approximately $660 million primarily driven by prior-year tax relief under the U.S. CARES Act and other non-U.S. government assistance programs related to COVID-19; partially offset by

●

~~Performance-related improvements within net income;~~

●

~~A net decrease in cash payments for income taxes of $296 million primarily due to a withholding tax payment on intercompany dividends in the second quarter of 2020; and~~

●

~~A decrease in interest payments on debt of approximately $260 million.~~

~~Net cash used in investing activities increased $2,830 million as compared to the first nine months of 2020 driven by:~~

●

~~An increase in cash used for acquisitions of $2,981 million to enhance our hybrid cloud and AI software capabilities and to add skills in strategic GBS ecosystem partners; and~~

●

~~A decrease in cash provided by divestitures of $483 million;~~receivables; partially offset by

●

A decrease in payments for structural actions and Kyndryl separation-related charges; and

●

An increase in cash ~~used for net~~from sales cycle working capital ~~expenditures~~ of ~~$407~~$578 million.

Net cash used in ~~financing~~investing activities ~~increased $7,234~~decreased $2,417 million driven primarily by:

●

A decrease in ~~net~~cash used in acquisitions of $1,999 million;

●

An increase in cash provided by ~~debt transactions~~divestitures of ~~$7,153 million primarily driven by a higher level of net additions in the prior year; partially offset by a lower level of maturities in the current year.~~$1,245 million; and

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Management Discussion – (continued)

●

A decrease in cash used in net capital expenditures of $539 million; partially offset by

●

An increase in cash used in net marketable securities and other investments of $1,365 million.

Net cash used in financing activities decreased $8,556 million driven primarily by:

●

Total debt was a net source of cash of $2,572 million in the first nine months of 2022 as compared to a net use of cash of $6,086 million in the first nine months of 2021. The year-to-year change of $8,658 million was driven by higher issuances in the current year and higher maturities in the prior year.

Results of Discontinued Operations

Income from discontinued operations, net of tax was $18 million in the third quarter of 2022 compared to $93 million in the prior-year period. For the first nine months of 2022, income from discontinued operations, net of tax was $16 million compared to income of $1,160 million in the prior-year period. As the separation of Kyndryl occurred on November 3, 2021, the year-to-date discontinued operations results as of September 30, 2021 included a full nine months of Kyndryl operations. The income in the third quarter of 2022 primarily 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. The income in the first nine months of 2022 reflects the same drivers as above and also includes a joint venture historically managed by Kyndryl, which did not transfer at separation due to the transfer being subject to regulatory approval. Upon receiving regulatory approval in the first quarter of 2022, the company sold its majority shares in the joint venture to Kyndryl. See note 3, “Separation of Kyndryl,” for additional information.

Looking Forward

As technology remains a fundamental source of competitive advantage, we continue to see solid demand for our hybrid cloud and AI solutions. It is clear that there is a real opportunity to help businesses leverage technology in today’s environment. Clients continue to navigate several challenges and opportunities from inflation to demographic shifts, to supply chain issues to sustainability efforts. We are helping our clients seize new business opportunities, overcome today’s challenges and emerge stronger. We too are building a stronger company that is closely aligned to the needs of our clients. We have continued to focus our portfolio, invest in our offerings, technical talent, and ecosystem and streamline our go-to-market model. We remain confident in our strategy and execution, and feel we are well-positioned to address the needs of our clients.

Hybrid Cloud and AI Progress

~~On November 3, 2021, IBM took an important step in advancing its focus on hybrid~~We believe Hybrid cloud and AI ~~with~~are the ~~separation~~two most transformational enterprise technologies of ~~Kyndryl. The separation of Kyndryl creates two industry-leading companies, which will continue~~our time. Our platform, based on Red Hat, allows our clients to ~~have a strong commercial relationship. Both IBM~~consume software driven by open-source innovation. Our software has been optimized to run on that platform and Kyndryl will have increased clarity and ability to focus on their respective operating and financial models, including capital deployment, investment strategies, and investment grade capital structures. The separation will also enable greater freedom of action to partner and capture new opportunities. The outcome of all of these actions will be increased value for clients and investors. The separation of Kyndryl is just one of many actions we are taking to focus our business on hybrid cloudincludes advanced data and AI, automation and the security capabilities our clients need. Our global team of consultants offer deep business expertise and co-create with clients to ~~improve~~accelerate their digital transformation journeys. And our ~~financial profile.~~

~~IBM is addressing the hybrid cloud and AI opportunity with a platform-centric approach. Effective immediately prior~~infrastructure allows clients to ~~the separation~~take full advantage of Kyndryl, the company made a number of changes to its organizational structure and management system. Our new management structure will reflect four reportable segments: Software, Consulting, Infrastructure and Financing. These segment changes align our operating model to our platform-centric approach, reflect a simpler and more streamlined business and will provide greater transparency into segment trends. These changes will impact our reportable segments beginning in the fourth quarter of 2021 but will not impact our Consolidated Financial Statements.

~~Across every industry, enterprises are using technology to redesign business processes. These digital transformations are enabled by~~ a hybrid cloud environment. ~~Our platform-centric approach is designed to meet clients wherever they~~

Clients are in their journey. The platform we have built is open, secure, and flexible and continues to gain traction in the marketplace. More clients are leveraging our platform capability and our expertise to unlock business value. As of the end of the third quarter, we have more than 3,500 clients usingchoosing our hybrid cloud ~~platform. This not only fuels our Red Hat revenue performance, but also provides a solid base for the multiplier effect~~capabilities to unlock more business value and meet their rapidly changing demands. We see more clients consuming across our portfolio of software, consulting and ~~services. GBS (IBM Consulting post segment change) is helping~~infrastructure capabilities to drive ~~this platform adoption,~~business value. Companies are also eager to deploy AI and ~~had over 180 new Red Hat engagements~~automation capabilities to boost their levels of productivity and we are working to bring these capabilities to clients across all industries.

Our partner ecosystem is a crucial element of our strategy. We continue to expand and extend the work we do with partners to serve our joint clients through strategic collaboration agreements. Revenue from these partnerships grew double digits again in the third quarter. We work alongside our clients to co-create business products and solutions, and have done more than 4,000 Garage engagements as of the third quarter 2021. There is tremendous opportunity for us to help our clients become digital businesses. This is what we have built our platform for and why we have such confidence in our strategy.

To accelerate our strategy, we are taking decisive steps and making the necessary investments to strengthen our portfolio. We continue to leverage our ecosystem to bring joint solutions to market, and to accelerate client transformations. We are investing organically and inorganically to deliver innovation. During the third quarter of 2021, we announced new products in Software and Systems to further differentiate our hybrid cloud and AI capabilities. We are increasing investments in R&D to deliver innovations in our hybrid cloud platform, AI and emerging technologies like quantum. To complement these organic investments, we completed three acquisitions in the third quarter, enhancing our hybrid cloud consulting capabilities. We continue to aggressively hire, bringing in technical talent in Red Hat and highly skilled expertise in consulting. We are scaling resources in our garages to provide a more experiential consulting and sales approach and adding client success managers to help clients get the most value out of their IBM solutions.

With the actions we have taken to simplify our operating model, the fundamentals of our business model remain solid. Our balance sheet and liquidity position remain strong. At September 30, 2021, we had $8.4 billion of cash and cash equivalents, restricted cash and marketable securities. We have made good progress in deleveraging, while being acquisitive and without sacrificing investments in our business or our solid dividend policy. We have reduced our debt by $7.0 billion since the end of 2020 and $18.5 billion from our peak level at June 30, 2019 (immediately preceding the Red Hat acquisition).

The fourth quarter of 2021 is a major milestone as we transition to the future IBM. We continue to take prudent actions to improve our operating model and accelerate our strategy. We are optimizing our portfolio, increasing our focus and agility to better serve clients and we are generating strong free cash flow to enable our investments while

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Table of Contents

Management Discussion – (continued)

~~providing shareholder returns.~~ We ~~are managing~~continue to invest, both organically and inorganically, to deliver innovation for our clients and shape the ~~long-term~~technologies of the future. Most recently, we unveiled the next generation of our LinuxONE server, a Linux and Kubernetes-based platform designed to support thousands of workloads with the footprint of a single system. Quantum is an example of our commitment to shape the future of technology. We remain on track toward our goal of building a 1,000+ qubit system by 2023. Complementing our organic innovation, we acquired Dialexa in October 2022. This brings our total number of acquisitions in 2022 to seven, adding capabilities in areas like hybrid cloud services, security, data observability and sustainability. And as the world takes on the challenge of sustainability and of building a more circular economy, we have been building a portfolio of solutions to help companies make progress on this journey.

We are confident in the ~~direction~~strategy that we are executing and ~~focus~~in the fundamentals of our business. Our balance sheet and liquidity position remain strong. At September 30, 2022 we had $9.7 billion of cash and cash equivalents, restricted cash and marketable securities and we continue to manage our debt levels while being acquisitive and without sacrificing investments in our business or our solid dividend policy. As we enter the fourth quarter, we look forward to closing out our first calendar year of “today’s IBM”. Since the separation of Kyndryl, IBM is a more focused, faster-growing and higher-value company. We expect to continue our progress as a leading hybrid cloud and AI company with a focus on revenue growth and cash generation while maintaining ~~a strong~~our solid and modestly growing dividend policy.

Retirement-Related Plans

Our pension plans are well funded. Contributions for all retirement-related plans are expected to be approximately ~~$2.3~~$2.0 billion in ~~2021, an increase of~~2022, approximately ~~$100 million~~flat compared to ~~2020,~~2021, of which $0.2 billion generally relates to legally required contributions to non-U.S. defined benefit and multi-employer plans. We expect ~~2021~~2022 pre-tax retirement-related plan cost to be approximately ~~$2.9~~$7.8 billion, an increase of approximately ~~$300 million~~$5.2 billion compared to ~~2020.~~2021. The increase 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, ~~2020.~~2021 and for the U.S. Qualified PPP and U.S. Nonpension Postretirement Plan, at August 31, 2022 and July 31, 2022, respectively. Within total retirement-related plan cost, operating retirement-related plan cost is expected to be approximately ~~$1.5~~$1.2 billion, a decrease of approximately ~~flat~~$100 million versus ~~2020.~~2021. Non-operating retirement-related plan cost is expected to be approximately ~~$1.4~~$6.6 billion, an increase of approximately ~~$300 million~~$5.4 billion compared to ~~2020,~~2021, primarily driven by the third-quarter 2022 settlement charge, partially offset by lower recognized actuarial losses and higher income from expected return on assets.

Currency Rate Fluctuations

Throughout 2022, there has been significant strengthening of the U.S. dollar (USD) as compared to most other currencies. Changes in the relative values of non-U.S. currencies to the ~~U.S. dollar (USD)~~USD affect our financial results and financial position. At September 30, ~~2021,~~2022, currency changes resulted in assets and liabilities denominated in local currencies being translated into fewer dollars than at year-end ~~2020.~~2021. We use financial hedging instruments to limit specific currency risks related to ~~financing transactions and other~~ foreign currency-based transactions.

The combination of the rate, breadth and magnitude of 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 profit and cash flows in 2022. 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, we may use some of the advantage from a weakening U.S. dollar to improve our position competitively, and price more aggressively to win the business, essentially passing on a portion of the currency advantage to our customers. Competition will frequently take the same action. Consequently, we believe that some of the currency-based changes in cost impact the prices charged to clients. We also maintain currency hedging programs for cash management purposes which temporarily mitigate, but do not eliminate, the volatility of currency impacts on our financial results.rates over time.

We translate revenue, cost and expense in our non-U.S. operations at current exchange rates in the reported period. References to “adjusted for currency” or “constant currency” reflect adjustments based upon a simple mathematical formula. However, this constant currency methodology that we utilize to disclose this information does not incorporate any operational actions that management could take to mitigate fluctuating currency ~~rates.~~rates, such as updates to pricing and sourcing. Currency movements impacted our year-to-year revenue and earnings per share ~~growth~~results in the first nine months of ~~2021.~~2022. Based on the currency rate movements in the first nine months of ~~2021,~~2022, total revenue increased ~~1.6~~7.8 percent as reported ~~but decreased 1.1~~and 13.8 percent at constant currency versus the first nine months of ~~2020.~~2021. On an ~~income~~income/(loss) from continuing

Table of Contents

Management Discussion – (continued)

operations before income ~~tax~~taxes basis, these translation impacts, mitigated by the net impact of hedging activities, resulted in a theoretical maximum (assuming no pricing or sourcing actions) increase in loss of approximately ~~$200~~$190 million in the first nine months of 2022 on an as-reported basis and a decrease in income of approximately $280 million on an operating (non-GAAP) basis. The same mathematical exercise resulted in an increase in income of approximately $95 million in the first nine months of 2021 on an as-reported basis and an increase of ~~approximately $240~~$130 million on an ~~operating (non-GAAP) basis. The same mathematical exercise resulted in an increase of approximately $270 million in the first nine months of 2020 on both an as-reported basis and~~ operating (non-GAAP) basis. We view these amounts as a theoretical maximum impact to our as-reported financial results. Considering the operational responses mentioned above, movements of exchange rates, and the nature and timing of hedging instruments, it is difficult to predict future currency impacts on any particular ~~period, but we believe it could be substantially less than the theoretical maximum given the competitive pressure in the marketplace.~~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, we manage currency risk in these entities by linking prices and contracts to U.S. dollars.

~~Table of Contents~~

~~Management Discussion – (continued)~~

Liquidity and Capital Resources

In our ~~2020~~2021 Annual Report, on pages 5647 to ~~58,~~49, there is a discussion of our liquidity including two tables that present three years of data. The table presented on page 5647 includes net cash from operating activities, cash and cash equivalents, restricted cash and short-term marketable securities, and the size of our global credit facilities for each of the past three years. For the nine months ended, or at, as applicable, September 30, ~~2021,~~2022, those amounts are ~~$10.3~~$6.5 billion of net cash from operating activities, ~~$8.4~~$9.7 billion of cash and cash equivalents, restricted cash and short-term marketable securities and $10.0 billion in global credit facilities, respectively. While we have no current plans to draw on these credit facilities, they are available as back-up liquidity.

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

The major rating agencies' ratings on our debt securities at September 30, ~~2021~~2022 appear in the following ~~table.~~table and remain unchanged from June 30, 2022.


	STANDARD		MOODY’S
	AND		INVESTORS
IBM RATINGS:	POOR’S	��	SERVICE
Senior long-term debt	A-		A2A3
Commercial paper	A-2		~~Prime-1~~Prime-2

~~In October 2021, Moody's downgraded our long-term debt rating from A2 to A3 and our commercial paper rating from Prime-1 to Prime-2.~~ IBM has ample financial flexibility, supported by our strong liquidity position and cash flows, to operate at a single A credit rating. We issued debt in July 2022 to further improve our liquidity and plan for our 2023 debt maturities. Debt levels have decreased ~~$7.0~~$0.8 billion from December 31, ~~2020~~2021, primarily driven by currency, partially offset by net debt issuances, and ~~$18.5~~$22.2 billion from our peak levels at June 30, 2019 (immediately preceding the Red Hat acquisition) ~~and we will continue to deleverage throughout 2021 utilizing our debt maturities schedule.~~.

We do not have “ratings trigger” provisions in our debt covenants or documentation, which would allow the holders to declare an event of default and seek to accelerate payments thereunder in the event of a change in credit rating. Our debt covenants are well within the required levels. Our contractual agreements governing derivative instruments contain standard market clauses which can trigger the termination of the agreement if our credit rating were to fall below investment grade. At September 30, ~~2021,~~2022, the fair value of those instruments that were in a liability position was ~~$149~~$1,079 million, before any applicable netting, and this position is subject to fluctuations in fair value period to period based on the level of our outstanding instruments and market conditions. We have no other contractual arrangements that, in the event of a change in credit rating, would result in a material adverse effect on our financial position or liquidity.

~~In July 2017,~~Effective December 31, 2021, the ~~UK's~~use of LIBOR was substantially eliminated for purposes of any new financial contract executions. The UK’s Financial Conduct Authority (FCA)~~, which regulates~~ extended the ~~London Interbank Offered Rate (LIBOR), announced that it intends to~~ phase out ~~LIBOR by the end~~ of ~~2021. In March 2021, the FCA announced an extension of the phase out~~LIBOR in the case of U.S. dollar settings for certain tenors until the end of June 2023. ~~Various central bank committees and working groups continue~~Any legacy USD LIBOR based financial contracts are expected to ~~discuss replacement of benchmark~~be addressed using the LIBOR rates published through the ~~process for amending existing LIBOR-based contracts, and the potential economic impacts of different alternatives.~~June 2023 extension period. The Alternative Reference Rates Committee has identified the Secured Overnight Financing Rate (SOFR) as its preferred alternative rate for USD LIBOR. SOFR is a measure of the cost of borrowing cash overnight, collateralized by U.S. Treasury securities, and is based on directly observable U.S. Treasury-backed repurchase transactions. We have evaluated the replacement of the LIBOR benchmark ~~interest rate, including~~within the company’s risk management and internal operational readiness and we are monitoring the FASB standard-setting process to address financial reporting issues that might arise in connection with transition from LIBOR to a new benchmark rate. However, it isactivities did not ~~expected to~~ have a material impact in the consolidated financial results.

Table of Contents

Management Discussion – (continued)

We prepare our Consolidated Statement of Cash Flows in accordance with applicable accounting standards for cash flow presentation on page 7 of this Form 10-Q and highlight causes and events underlying sources and uses of cash in

~~Table of Contents~~

~~Management Discussion – (continued)~~

that format on ~~page 83.~~pages 86 and 87. For the purpose of running its business, 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 shareholder return levels, strategic investments and assess its ability and need to incur and service debt. The entire free cash flow amount is not necessarily available for discretionary expenditures. We define free cash flow as net cash from operating activities less the change in ~~Global~~ Financing receivables and net capital expenditures, including the investment in software. A key objective of the ~~Global~~ Financing business is to generate strong returns on equity, and our ~~Global~~ Financing receivables are the basis for 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.

The following is management’s view of cash flows for the first nine months of ~~2021~~2022 and ~~2020~~2021 prepared in a manner consistent with the description ~~above.~~

~~Net~~above and is presented on a consolidated basis, including cash ~~from operating activities and free~~flows of discontinued operations.


(Dollars in millions)
For the nine months ended September 30:	2022		2021
Net cash from operating activities per GAAP*	$	6,470	$	10,252
Less: change in Financing receivables		1,071		5,235
Net cash from operating activities, excluding Financing receivables	$	5,399	$	5,018
Capital expenditures, net		(1,317)		(1,855)
Free cash flow	$	4,082	$	3,162
Acquisitions		(1,020)		(3,018)
Divestitures		1,271		26
Common stock repurchases for tax withholdings		(329)		(252)
Dividends		(4,454)		(4,395)
Non-Financing debt		4,686		(1,143)
Other (includes Financing net receivables and Financing debt)		(2,066)		(249)
Change in cash, cash equivalents, restricted cash and short-term marketable securities	$	2,171	$	(5,868)

* Includes cash ~~flow in 2021 include significant cash impacts from the workforce rebalancing actions we initiated in the fourth quarter~~flows of ~~2020 and~~discontinued operations. See note 3, “Separation of Kyndryl, ~~separation-related charges.~~” for additional information.

(Dollars in millions)

For the nine months ended September 30:

2021

2020
Net cash from operating activities per GAAP

$
10,252

$
12,337
Less: change in Global Financing receivables

5,235

5,324
Net cash from operating activities, excluding Global Financing receivables

$
5,018

$
7,014
Capital expenditures, net

(1,855)

(2,262)
Free cash flow

$
3,162

$
4,751
Acquisitions

(3,018)

(37)
Divestitures

26

510
Common stock repurchases for tax withholdings

(252)

(225)
Dividends

(4,395)

(4,343)
Non-Global Financing debt

(1,143)

4,977
Other (includes Global Financing net receivables and Global Financing debt)

(249)

1,111
Change in cash, cash equivalents, restricted cash and short-term marketable securities

$
(5,868)

$
6,744

In the first nine months of ~~2021,~~2022, we generated free cash flow of ~~$3.2~~$4.1 billion, ~~a decrease~~an increase of ~~$1.6~~$0.9 billion versus the ~~prior year. The current-year period includes cash impacts from~~prior-year period. Payments for the 2020 structural actions ~~we initiated in the fourth quarter of 2020~~ and Kyndryl separation-related charges ~~in the amount of $1.8 billion.~~are down year to year and we are driving working capital improvements. In the first nine months of ~~2021,~~2022, we ~~also~~ continued to return value to shareholders with ~~$4.4~~$4.5 billion in ~~dividends.~~dividends and invested $1.0 billion in acquisitions, which was more than offset by proceeds from divested businesses.

Events that could temporarily change the historical cash flow dynamics discussed previously and in our ~~2020~~2021 Annual Report include significant changes in operating results, material changes in geographic sources of cash, unexpected adverse impacts from litigation, future pension funding requirements, periods of severe downturn in the capital markets or the timing of tax payments. Whether any litigation has such an adverse impact will depend on a number of variables, which are more completely described in note ~~13,~~14, “Contingencies,” in this Form 10-Q. With respect to pension funding, we expect to make legally mandated pension plan contributions to certain non-U.S. defined benefit plans of approximately $200 million in ~~2021.~~2022. Contributions related to all retirement-related plans are expected to be approximately ~~$2.3~~$2.0 billion in ~~2021.~~2022. Financial market performance could increase the legally mandated minimum contributions in certain non-U.S. countries that require more frequent remeasurement of the funded status. We are not quantifying any further impact from pension funding because it is not possible to predict future movements in the capital markets or changes in pension plan funding regulations.

Table of Contents

Management Discussion – (continued)

In ~~2021,~~2022, we are not legally required to make any contributions to the U.S. defined benefit pension plans.

~~Table of Contents~~

~~Management Discussion – (continued)~~

Our cash flows are sufficient to fund our current operations and obligations, including investing and financing activities such as ~~acquisitions,~~ dividends and debt service. When additional requirements arise, we have several liquidity options available. These options may include the ability to borrow additional funds at reasonable interest rates and utilizing our committed global credit facilities. With our share repurchase program suspended since the close of the Red Hat acquisition, our overall shareholder payout remains at a comfortable level and we remain fully committed to our ~~dividend.~~long-standing dividend policy.

~~Global~~ Financing

~~Global~~ Financing is a reportable segment that is measured as a stand-alone entity. ~~Global~~ Financing facilitates IBM clients’ acquisition of information technology systems, software and services by providing financing solutions in the areas where the company has the expertise, while generating solid returns on equity.

Results of Operations


					Yr. to Yr.
					Percent/						Yr. to Yr.
(Dollars in millions)					Margin						Percent
For the three months ended September 30:	2021		2020		Change		2022		2021*		Change
External revenue	$	220	$	273	(19.2)	%
Internal revenue		153		208	(26.3)
Total revenue	$	373	$	480	(22.3)	%
Revenue							$	174	$	184	(5.7)	%
Pre-tax income	$	206	$	196	5.1	%	$	79	$	132	(40.4)	%

* Recast to reflect 2021 segment changes.


					Yr. to Yr.
					Percent/						Yr. to Yr.
(Dollars in millions)					Margin						Percent
For the nine months ended September 30:	2021		2020		Change		2022		2021*		Change
External revenue	$	702	$	837	(16.2)	%
Internal revenue		581		660	(12.0)
Total revenue	$	1,283	$	1,497	(14.3)	%
Revenue							$	474	$	601	(21.2)	%
Pre-tax income	$	618	$	566	9.1	%	$	265	$	362	(26.8)	%

~~We have refocused our Global~~* Recast to reflect 2021 segment changes.

Our Financing business is focused on IBM’s products and services. For the three months ended September 30, 2022, financing revenue decreased 5.7 percent as reported (1 percent adjusted for currency) compared to the prior year, driven by client financing down $9 million to $172 million. For the nine months ended September 30, 2022, financing revenue decreased 21.2 percent as reported (18 percent adjusted for currency) compared to the prior year, driven by client financing down $123 million to $469 million. The ~~wind down of our OEM commercial~~decreases in client financing ~~operations is complete. In 2020, we began entering into agreements to sell~~revenue in both periods in 2022 were primarily driven by the strategic actions taken in the prior year including selling certain client lease and loan financing receivables to third parties. While these strategic actions ~~continue to~~ impact ~~external~~ revenue and pre-tax income on a year-to-year basis, our repositioning of the ~~Global~~ Financing business has strengthened our liquidity position, improved the quality of our portfolio, and lowered our debt needs.

~~Global~~ Financing ~~total revenue~~pre-tax income decreased ~~22.3~~40.4 percent to $79 million in the third quarter of ~~2021~~2022, compared to the prior year and the pre-tax margin of 45.4 percent decreased 26.4 points year to year. External revenue decreased 19.2 percent (20 percent adjusted for currency), driven by external financing (down 25.2 percent to $151 million). Internal revenue was down 26.3 percent primarily due to a decrease in internal used equipment sales (down 22.1 percent to $126 million) which reflects a decrease in sales to GTS.

~~Global Financing total revenue decreased 14.3 percent in~~For the first nine months of 2021 compared to the same period in 2020. External revenue decreased 16.2 percent (18 percent adjusted for currency), primarily driven by a decline in external financing (down 23.2 percent to $496 million). Internal revenue decreased 12.0 percent primarily driven by a decline in internal financing (down 49.0 percent to $93 million).

~~For both the three and~~ nine months ended September 30, ~~2021,~~2022, Financing pre-tax income decreased 26.8 percent to $265 million compared to the prior year and the pre-tax margin of 55.9 percent decreased 4.3 points year to year. The decreases in ~~external financing~~pre-tax income in both periods in 2022 were ~~due to a lower average asset balance, partially~~primarily driven by the strategic actions ~~and the decreases in internal financing were primarily due to a lower average asset balance.~~described above.

8891

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Management Discussion – (continued)

~~Global Financing pre-tax income increased 5.1~~Financial Position


	At September 30,		At December 31,
(Dollars in millions)	2022		2021
Cash and cash equivalents	$	471	$	1,359
Client financing receivables:
Net investment in sales-type and direct financing leases⁽¹⁾		3,565		3,396
Client loans		7,346		8,818
Total client financing receivables	$	10,911	$	12,215
Commercial financing receivables:
Held for investment		164		444
Held for sale		395		793
Other receivables		46		61
Total external receivables⁽²⁾	$	11,516	$	13,512
Intercompany financing receivables^(3) (4)		671		778
Other assets⁽⁵⁾		1,075		1,231
Total assets	$	13,733	$	16,880

Intercompany payables⁽³⁾	$	488	$	467
Debt⁽⁶⁾		11,198		13,929
Other liabilities		797		937
Total liabilities	$	12,483	$	15,333
Total equity	$	1,249	$	1,547
Total liabilities and equity	$	13,733	$	16,880

(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 $2.0 billion (from $13.5 billion in December 2021 to $11.5 billion in September 2022) and the $1.1 billion change in Financing segment’s receivables disclosed in the free cash flow presentation on page 90 is primarily attributable to currency impacts.

(3)	This entire amount is eliminated for purposes of IBM’s consolidated financial results and therefore does not appear in the Consolidated Balance Sheet.

(4)	These assets, along with all other financing assets in this table, are leveraged at the value in the table using Financing segment debt.

(5)	Includes $0.6 billion of other intercompany assets in September 2022 and $0.7 billion in December 2021.

(6)	Financing segment debt is primarily composed of intercompany loans.

Total external receivables decreased $1,996 million primarily driven by collections of higher year-end balances partially offset by current-year business volumes, with corresponding changes in debt funding.

At September 30, 2022, we continue to apply our rigorous credit policies. Approximately 72 percent of the total external portfolio was with investment-grade clients with no direct exposure to ~~$206 million~~consumers, an increase of 6 points year to year and an increase of 1 point compared to June 30, 2022. This investment grade percentage is based on the credit ratings of the companies in the portfolio and reflects certain mitigating actions taken to reduce the risk to IBM.

We have a long-standing practice of taking mitigation actions, in certain circumstances, to transfer credit risk to third ~~quarter~~parties. These actions may include credit insurance, financial guarantees, nonrecourse borrowings, transfers of ~~2021~~receivables recorded as true sales in accordance with accounting guidance or sales of equipment under operating lease. Sale of receivables arrangements are also utilized in the normal course of business as part of our cash and ~~9.1 percent~~liquidity management.

The company has an existing agreement with a third-party investor to ~~$618 million~~sell IBM short-term commercial financing receivables on a revolving basis. The company has expanded this agreement to other countries and geographies since commencement in the U.S. and Canada in 2020. 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. In the first nine months of 2022, sales of client financing receivables were largely focused on credit mitigation.

Table of Contents

Management Discussion – (continued)

During 2021, ~~compared~~sales of client financing receivables were utilized as part of the company’s cash and liquidity management as well as for credit mitigation.

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


(Dollars in millions)
For the nine months ended September 30:	2022		2021
Client financing receivables:
Lease receivables	$	15	$	781
Loan receivables		2		2,189
Total client financing receivables transferred	$	17	$	2,970
Commercial financing receivables:
Receivables transferred during the period	$	6,091	$	4,465
Receivables uncollected at end of period*	$	816	$	707

*	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 September 30, 2022 and 2021.

For additional information relating to ~~the same periods in 2020. The increase in both periods was primarily driven by improvements in provisions~~financing receivables refer to note 9, “Financing Receivables.” Refer to pages 26 through 30 for additional information related to Financing segment receivables, allowance for credit losses ~~partially offset by a decrease in gross profit which reflects the strategic actions described above.~~and debt.

Return on Equity Calculation


	For Three Months Ended						For Nine Months Ended						For Three Months Ended						For Nine Months Ended
	September 30,						September 30,						September 30,						September 30,
(Dollars in millions)	2021			2020			2021			2020			2022			2021*			2022			2021*
Numerator
Global Financing after-tax income*	$	152		$	150		$	454		$	489
Financing after-tax income**													$	64		$	98		$	217		$	267
Annualized after-tax income (1)	$	610		$	600		$	605		$	651		$	257		$	391		$	289		$	356
Denominator
Average Global Financing equity (2)**	$	1,852		$	2,376		$	2,022		$	2,493
Global Financing return on equity (1)/(2)		32.9	%		25.2	%		30.0	%		26.1	%
Average Financing equity (2)⁺													$	1,306		$	1,842		$	1,378		$	2,013
Financing return on equity (1)/(2)														19.7	%		21.2	%		21.0	%		17.7	%

*	Recast to reflect 2021 segment changes.

** 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.

^È	** Average of the ending equity for ~~Global~~ Financing for the last two quarters and four quarters, for the three months ended September 30 and for the nine months ended September 30, respectively.

Return on equity was 19.7 percent and 21.0 percent for the three and nine months ended September 30, ~~respectively.~~

~~Global Financing return on equity was 32.9~~2022, respectively, compared to 21.2 percent and 17.7 percent for the ~~three months ended September 30, 2021, compared to 25.2 percent for the three months ended September 30, 2020.~~same periods in 2021. The increase was driven by a lower average equity balance. Return on equity was 30.0 percent for the nine months ended September 30, 2021, compared to 26.1 percent for the nine months ended September 30, 2020. The increase waschanges in both periods in 2022 were driven by a lower average equity balance, ~~partially offset by~~and a decrease in net income, which ~~included a discrete tax benefit of $40 million~~reflects the strategic actions taken in the ~~first quarter of 2020.~~

~~Table of Contents~~

~~Management Discussion – (continued)~~

~~Financial Position~~

At September 30,

At December 31,
(Dollars in millions)

2021

2020
Cash and cash equivalents

$
1,298

$
1,862
Client financing receivables:

Net investment in sales-type and direct financing leases ⁽¹⁾

3,280

4,092
Client loans

8,218

11,498
Total client financing receivables

11,498

15,590
Commercial financing receivables

721

2,411
Other receivables

61

91
Total external receivables ⁽²⁾

12,280

18,092
Intercompany financing receivables ^(3) (4)

3,876

3,959
Other assets

1,871

1,162
Total assets

$
19,326

$
25,075

Intercompany payables ⁽³⁾

$
424

$
303
Debt ⁽⁵⁾

15,868

21,167
Other liabilities

1,271

1,254
Total liabilities

17,563

22,723
Total equity

1,763

2,352
Total liabilities and equity

$
19,326

$
25,075

~~(1)~~

~~Includes deferred initial direct costs which are expensed in IBM’s consolidated financial results.~~

~~(2)~~

The difference between the year-to-date decrease in total external receivables of $5.8 billion (from $18.1 billion in 2020 to $12.3 billion in 2021) and the $5.2 billion change in Global Financing receivables disclosed in the free cash flow presentation on page 87 is primarily attributable to currency impacts.

~~(3)~~

~~This entire amount is eliminated for purposes of IBM’s consolidated financial results and therefore does not appear in the Consolidated Balance Sheet.~~

~~(4)~~

~~These assets, along with all other financing assets in this table, are leveraged at the value in the table using Global Financing debt.~~

~~(5)~~

~~Global Financing debt is primarily composed of intercompany loans.~~

~~At September 30, 2021, approximately 66 percent of the total external portfolio was with investment-grade clients with no direct exposure to consumers, an increase of 9 points~~prior year to ~~year and an increase of 2 points compared to June 30, 2021. We continue to apply our rigorous credit policies, particularly in industries and countries disrupted by COVID-19, as it relates to~~reposition the ~~origination of new~~Financing business. ~~This investment grade percentage is based on the credit ratings of the companies in the portfolio and reflects mitigating credit enhancement actions taken by the client to reduce the risk to IBM.~~

We have a long-standing practice of taking mitigation actions, in certain circumstances, to transfer credit risk to third parties, with enhanced focus due to current macroeconomic uncertainty. These actions may include credit insurance, financial guarantees, nonrecourse borrowings, transfers of receivables recorded as true sales in accordance with accounting guidance or sales of equipment under operating lease. Sale of receivables arrangements are also utilized in the normal course of business as part of our cash and liquidity management.

For the nine months ended September 30, 2021, we sold $2,970 million of client financing receivables to third parties, consisting of loan and lease receivables of $2,189 million and $781 million, respectively. More than half of the receivables sold were classified as current assets at the time of sale. For the nine months ended September 30, 2020, we sold $1,610 million of client financing receivables to third parties, consisting of loan and lease receivables of $758 million and $852 million, respectively.

In addition, we sold $4,465 million of commercial financing receivables for the nine months ended September 30, 2021, to a third-party investor. We also classified $400 million and $383 million of IBM commercial financing receivables as held for sale at September 30, 2021 and December 31, 2020, respectively, in short-term financing

~~Table of Contents~~

~~Management Discussion – (continued)~~

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

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

~~Refer to pages 80 through 82 for additional information related to Global Financing receivables, allowance for credit losses and debt.~~

Residual Value

Residual value is a risk unique to the financing business, and management of this risk is dependent upon the ability to accurately project future equipment values at lease inception. ~~Global~~ Financing has insight into product plans and cycles for IBM products. Based upon this product information, ~~Global~~ Financing continually monitors projections of future equipment values and compares them with the residual values reflected in the portfolio.

~~Global~~ Financing optimizes the recovery of residual values by selling assets sourced from end of lease, leasing used equipment to new clients, or extending lease arrangements with current clients.

Table of Contents

Management Discussion – (continued)

The following table presents the recorded amount of unguaranteed residual value for sales-type and direct financing leases, as well as operating leases at September 30, ~~2021~~2022 and December 31, ~~2020.~~2021. In addition, the table presents the run out of when the unguaranteed residual value assigned to equipment on leases at September 30, ~~2021 and December 31, 2020,~~2022 is expected to be returned to the company.

Unguaranteed Residual Value


	At		At		Estimated Run Out of September 30, 2021 Balance								At		At		Estimated Run Out of September 30, 2022 Balance
	December 31,		September 30,								2024 and		December 31,		September 30,								2025 and
(Dollars in millions)	2020		2021		2021		2022		2023		Beyond		2021		2022		2022		2023		2024		Beyond
Sales-type and direct financing leases	$	469	$	342	$	31	$	96	$	126	$	90	$	335	$	323	$	21	$	72	$	62	$	168
Operating leases		48		20		12		4		1		2		13		10		7		2		0		0
Total unguaranteed residual value	$	516	$	362	$	43	$	100	$	126	$	92	$	348	$	333	$	28	$	74	$	62	$	168

9194

Table of Contents

Management Discussion – (continued)

GAAP Reconciliation

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


				Acquisition-			Retirement-			U.S.			Separation-									Acquisition-			Retirement-			U.S.			Kyndryl-
(Dollars in millions except per share amounts)				Related			Related			Tax Reform			Related			Operating						Related			Related			Tax Reform			Related			Operating
For the three months ended September 30, 2021:	GAAP			Adjustments			Adjustments			Impacts			Charges			(non-GAAP)
For the three months ended September 30, 2022:																			GAAP			Adjustments			Adjustments		*	Impacts			Impacts			(non-GAAP)
Gross profit	$	8,171		$	184		$	—		$	—		$	108		$	8,463		$	7,430		$	165		$	—		$	—		$	—		$	7,595
Gross profit margin		46.4	%		1.0	pts.		—	pts.		—	pts.		0.6	pts.		48.0	%		52.7	%		1.2	pts.		—	pts.		—	pts.		—	pts.		53.8	%
S,G&A	$	4,860		$	(293)		$	—		$	—		$	(169)		$	4,398
R,D&E		1,621			—			—			—			(1)			1,620
SG&A																			$	4,391		$	(253)		$	—		$	—		$	0		$	4,138
Other (income) and expense		234			(1)			(328)			—			—			(94)		$	5,755		$	(1)		$	(6,062)		$	—		$	14		$	(293)
Total expense and other (income)		6,852			(294)			(328)			—			(169)			6,061		$	11,931		$	(253)		$	(6,062)		$	—		$	14		$	5,630
Pre-tax income from continuing operations		1,319			478			328			—			277			2,402
Pre-tax income/(loss) from continuing operations																			$	(4,501)		$	418		$	6,062		$	—		$	(14)		$	1,965
Pre-tax margin from continuing operations		7.5	%		2.7	pts.		1.9	pts.		—	pts.		1.6	pts.		13.6	%		(31.9)	%		3.0	pts.		43.0	pts.		—	pts.		(0.1)	pts.		13.9	%
Provision for income taxes*	$	188		$	103		$	57		$	—		$	(233)		$	115
Provision for/(benefit from) income taxes**																			$	(1,287)		$	103		$	1,495		$	—		$	—		$	312
Effective tax rate		14.3	%		1.5	pts.		0.4	pts.		—	pts.		(11.4)	pts.		4.8	%		28.6	%		(0.8)	pts.		(12.1)	pts.		—	pts.		0.2	pts.		15.9	%
Income from continuing operations	$	1,130		$	375		$	271		$	—		$	510		$	2,286
Income margin from continuing operations		6.4	%		2.1	pts.		1.5	pts.		—	pts.		2.9	pts.		13.0	%
Diluted earnings per share from continuing operations	$	1.25		$	0.41		$	0.30		$	—		$	0.56		$	2.52
Income/(loss) from continuing operations																			$	(3,214)		$	315		$	4,566		$	—		$	(14)		$	1,653
Income/(loss) from continuing operations margin																				(22.8)	%		2.2	pts.		32.4	pts.		—	pts.		(0.1)	pts.		11.7	%
Diluted earnings/(loss) per share from continuing operations +																			$	(3.55)		$	0.35		$	5.05		$	—		$	(0.02)		$	1.81

* Retirement-Related Adjustments includes a one-time, non-cash, pre-tax pension settlement charge of $5.9 billion ($4.4 billion after tax). See note 18 “Retirement-Related Benefits,” for additional information.

** 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.

+ Operating (non-GAAP) earnings per share was calculated using 912.8 million shares, which includes 8.8 million dilutive potential shares under our stock-based compensation plans and contingently issuable shares. Due to the GAAP net loss for the three months ended September 30, 2022, these dilutive potential shares were excluded from the GAAP loss per share calculation as the effect would have been antidilutive. The difference in share count resulted in an additional ($0.02) reconciling item.


				Acquisition-			Retirement-			U.S.			Kyndryl-
(Dollars in millions except per share amounts)				Related			Related			Tax Reform			Related			Operating
For the three months ended September 30, 2021:	GAAP			Adjustments			Adjustments			Impacts			Impacts			(non-GAAP)
Gross profit	$	7,106		$	183		$	—		$	—		$	—		$	7,290
Gross profit margin		53.6	%		1.4	pts.		—	pts.		—	pts.		—	pts.		55.0	%
SG&A	$	4,306		$	(288)		$	—		$	—		$	—		$	4,018
Other (income) and expense	$	244		$	(1)		$	(318)		$	—		$	—		$	(74)
Total expense and other (income)	$	6,293		$	(289)		$	(318)		$	—		$	—		$	5,687
Pre-tax income from continuing operations	$	813		$	472		$	318		$	—		$	—		$	1,603
Pre-tax margin from continuing operations		6.1	%		3.6	pts.		2.4	pts.		—	pts.		—	pts.		12.1	%
Provision for/(benefit from) income taxes*	$	(224)		$	102		$	55		$	—		$	—		$	(67)
Effective tax rate		(27.6)	%		14.5	pts.		8.9	pts.		—	pts.		—	pts.		(4.2)	%
Income from continuing operations	$	1,037		$	370		$	262		$	—		$	—		$	1,670
Income from continuing operations margin		7.8	%		2.8	pts.		2.0	pts.		—	pts.		—	pts.		12.6	%
Diluted earnings per share from continuing operations	$	1.14		$	0.41		$	0.29		$	—		$	—		$	1.84

* 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.

Table of Contents

Management Discussion – (continued)


				Acquisition-			Retirement-			U.S.			Kyndryl-
(Dollars in millions except per share amounts)				Related			Related			Tax Reform			Related			Operating
For the nine months ended September 30, 2022:	GAAP			Adjustments			Adjustments		*	Impacts			Impacts			(non-GAAP)
Gross profit	$	23,055		$	526		$	—		$	—		$	—		$	23,582
Gross profit margin		52.6	%		1.2	pts.		—	pts.		—	pts.		—	pts.		53.8	%
SG&A	$	13,843		$	(818)		$	—		$	—		$	0		$	13,025
Other (income) and expense	$	5,921		$	(2)		$	(6,455)		$	—		$	(353)		$	(889)
Total expense and other (income)	$	25,212		$	(820)		$	(6,455)		$	—		$	(353)		$	17,584
Pre-tax income/(loss) from continuing operations	$	(2,156)		$	1,346		$	6,455		$	—		$	353		$	5,998
Pre-tax margin from continuing operations		(4.9)	%		3.1	pts.		14.7	pts.		—	pts.		0.8	pts.		13.7	%
Provision for/(benefit from) income taxes**	$	(1,070)		$	327		$	1,599		$	112		$	—		$	969
Effective tax rate		49.6	%		(5.7)	pts.		(26.7)	pts.		1.9	pts.		(2.9)	pts.		16.1	%
Income/(loss) from continuing operations	$	(1,087)		$	1,019		$	4,856		$	(112)		$	353		$	5,029
Income/(loss) from continuing operations margin		(2.5)	%		2.3	pts.		11.1	pts.		(0.3)	pts.		0.8	pts.		11.5	%
Diluted earnings/(loss) per share from continuing operations +	$	(1.21)		$	1.13		$	5.39		$	(0.12)		$	0.39		$	5.52

**	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.

+ Operating (non-GAAP) earnings per share was calculated using 911.1 million shares, which includes 9.4 million dilutive potential shares under our stock-based compensation plans and contingently issuable shares. Due to the GAAP net loss for the nine months ended September 30, 2022, these dilutive potential shares were excluded from the GAAP loss per share calculation as the effect would have been antidilutive. The difference in share count resulted in an additional ($0.06) reconciling item.


				Acquisition-			Retirement-			U.S.			Separation-									Acquisition-			Retirement-			U.S.			Kyndryl-
(Dollars in millions except per share amounts)				Related			Related			Tax Reform			Related			Operating						Related			Related			Tax Reform			Related			Operating
For the three months ended September 30, 2020:	GAAP			Adjustments			Adjustments			Impacts			Charges			(non-GAAP)
For the nine months ended September 30, 2021:																			GAAP			Adjustments			Adjustments			Impacts			Impacts			(non-GAAP)
Gross profit	$	8,430		$	180		$	—		$	—		$	—		$	8,610		$	21,985		$	537		$	—		$	—		$	—		$	22,522
Gross profit margin		48.0	%		1.0	pts.		—	pts.		—	pts.		—	pts.		49.0	%		54.1	%		1.3	pts.		—	pts.		—	pts.		—	pts.		55.4	%
S,G&A	$	4,647		$	(279)		$	—		$	—		$	—		$	4,367
R,D&E		1,515			—			—			—			—			1,515
SG&A																			$	13,842		$	(870)		$	—		$	—		$	—		$	12,972
Other (income) and expense		253			(1)			(291)			—			—			(39)		$	891			(2)			(967)			—			—			(77)
Total expense and other (income)		6,603			(280)			(291)			—			—			6,032		$	20,017			(872)			(967)			—			—			18,179
Pre-tax income from continuing operations		1,827			460			291			—			—			2,578		$	1,968			1,409			967			—			—			4,343
Pre-tax margin from continuing operations		10.4	%		2.6	pts.		1.7	pts.		—	pts.		—	pts.		14.7	%		4.8	%		3.5	pts.		2.4	pts.		—	pts.		—	pts.		10.7	%
Provision for income taxes*	$	128		$	102		$	54		$	(21)		$	—		$	263
Provision for/(benefit from) income taxes*																			$	(282)		$	340		$	141		$	6		$	—		$	204
Effective tax rate		7.0	%		2.7	pts.		1.3	pts.		(0.8)	pts.		—	pts.		10.2	%		(14.4)	%		12.5	pts.		6.5	pts.		0.1	pts.		—	pts.		4.7	%
Income from continuing operations	$	1,698		$	358		$	237		$	21		$	—		$	2,315		$	2,250		$	1,069		$	825		$	(6)		$	—		$	4,139
Income margin from continuing operations		9.7	%		2.0	pts.		1.4	pts.		0.1	pts.		—	pts.		13.2	%
Income from continuing operations margin																				5.5	%		2.6	pts.		2.0	pts.		0.0	pts.		—	pts.		10.2	%
Diluted earnings per share from continuing operations	$	1.89		$	0.40		$	0.26		$	0.03		$	—		$	2.58		$	2.49		$	1.18		$	0.91		$	(0.01)		$	—		$	4.58

~~Table of Contents~~

~~Management Discussion – (continued)~~

Acquisition-

Retirement-

U.S.

Separation-

(Dollars in millions except per share amounts)

Related

Related

Tax Reform

Related

Operating

For the nine months ended September 30, 2021:

GAAP

Adjustments

Adjustments

Impacts

Charges

(non-GAAP)

Gross profit

$
25,379

$
540

$
—

$
—

$
168

$
26,087

Gross profit margin

46.9
%

1.0
pts.

—
pts.

—
pts.

0.3
pts.

48.2
%
S,G&A

$
15,368

$
(884)

$
—

$
—

$
(343)

$
14,141

R,D&E

4,907

—

—

—

(1)

4,906

Other (income) and expense

911

(2)

(998)

—

—

(90)

Total expense and other (income)

21,603

(886)

(998)

—

(344)

19,374

Pre-tax income from continuing operations

3,776

1,426

998

—

513

6,713

Pre-tax margin from continuing operations

7.0
%

2.6
pts.

1.8
pts.

—
pts.

0.9
pts.

12.4
%
Provision for income taxes*

$
365

$
344

$
185

$
6

$
(174)

$
725

Effective tax rate

9.7
%

3.1
pts.

1.3
pts.

0.1
pts.

(3.3)
pts.

10.8
%
Income from continuing operations

$
3,411

$
1,082

$
813

$
(6)

$
687

$
5,988

Income margin from continuing operations

6.3
%

2.0
pts.

1.5
pts.

0.0
pts.

1.3
pts.

11.1
%
Diluted earnings per share from continuing operations

$
3.77

$
1.20

$
0.90

$
(0.01)

$
0.76

$
6.62

Acquisition-

Retirement-

U.S.

Separation-

(Dollars in millions except per share amounts)

Related

Related

Tax Reform

Related

Operating

For the nine months ended September 30, 2020:

GAAP

Adjustments

Adjustments

Impacts

Charges

(non-GAAP)

Gross profit

$
25,052

$
556

$
—

$
—

$
—

$
25,608

Gross profit margin

47.0
%

1.0
pts.

—
pts.

—
pts.

—
pts.

48.1
%
S,G&A

$
15,849

$
(849)

$
—

$
—

$
—

$
15,000

R,D&E

4,722

—

—

—

—

4,722

Other (income) and expense

614

(2)

(829)

—

—

(217)

Total expense and other (income)

21,704

(851)

(829)

—

—

20,024

Pre-tax income from continuing operations

3,348

1,407

829

—

—

5,584

Pre-tax margin from continuing operations

6.3
%

2.6
pts.

1.6
pts.

—
pts.

—
pts.

10.5
%
Provision for (benefit from) income taxes*

$
(888)

$
312

$
119

$
128

$
—

$
(329)

Effective tax rate

(26.5)
%

12.3
pts.

6.1
pts.

2.3
pts.

—
pts.

(5.9)
%
Income from continuing operations

$
4,237

$
1,095

$
710

$
(128)

$
—

$
5,913

Income margin from continuing operations

8.0
%

2.1
pts.

1.3
pts.

(0.2)
pts.

—
pts.

11.1
%
Diluted earnings per share from continuing operations

$
4.72

$
1.23

$
0.79

$
(0.14)

$
—

$
6.60

9396

Table of Contents

Management Discussion – (continued)

Forward-Looking and Cautionary Statements

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

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.

9497

Table of Contents

Part II — Other Information

Item 1. Legal Proceedings

Refer to note ~~13,~~14, “Contingencies,” 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 quarter of ~~2021.~~2022.


				Total Number	Approximate					Total Number	Approximate
				of Shares	Dollar Value					of Shares	Dollar Value
				Purchased as	of Shares that					Purchased as	of Shares that
	Total Number	Average		Part of Publicly	May Yet Be		Total Number	Average		Part of Publicly	May Yet Be
	of Shares	Price Paid		Announced	Purchased Under		of Shares	Price Paid		Announced	Purchased Under
Period	Purchased	per Share		Program	The Program*		Purchased	per Share		Program	The Program*
July 1, 2021 - July 31, 2021	—	$	—	—	$	2,007,611,768
July 1, 2022 - July 31, 2022							—	$	—	—	$	2,007,611,768

August 1, 2021 - August 31, 2021	—	$	—	—	$	2,007,611,768
August 1, 2022 - August 31, 2022							—	$	—	—	$	2,007,611,768

September 1, 2021 - September 30, 2021	—	$	—	—	$	2,007,611,768
September 1, 2022 - September 30, 2022							—	$	—	—	$	2,007,611,768

Total	—	$	—	—			—	$	—	—

* On October 30, 2018, the Board of Directors authorized $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 September 30, ~~2021~~2022 there was approximately $2.0 billion in authorized funds remaining for purchases under this program.

~~Item 5. Other Information~~

~~Disclosure pursuant to Section 13(r) of the Securities Exchange Act of 1934~~

On March 2, 2021, the U.S. government designated the Russian Federal Security Service (FSB) as a blocked party under Executive Order 13382. On the same day, the U.S. Department of the Treasury’s Office of Foreign Assets Control issued Cyber-related General License 1B “Authorizing Certain Transactions with the Federal Security Service” (GL 1B), which generally authorizes U.S. companies to engage in certain licensing, permitting, certification, notification and related transactions with the FSB to the extent such activities are required for the importation, distribution or use of information technology products in the Russian Federation, though the fact of such activities are now to be disclosed under the Securities Exchange Act of 1934 in companies’ periodic filings.

During the quarter ended September 30, 2021, as permitted under GL 1B, IBM filed notifications with the FSB as required in connection with the importation and distribution of our products in the Russian Federation. No payments were issued or received, and no gross revenue or net profits were generated in connection with these filing activities. IBM and its subsidiaries do not sell products or provide services to the FSB. To the extent permitted by applicable law, IBM and its subsidiaries expect to continue to file notifications with the FSB and may apply for import licenses and permits from the FSB in connection the importation and distribution of our products in the Russian Federation.

9598

Table of Contents

Item 6. Exhibits


Exhibit Number


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

9699

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:	~~November 5, 2021~~October 25, 2022
		By:	/s/ Robert F. Del Bene
			Robert F. Del Bene
			Vice President and Controller

97100

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

~~Item 1. Consolidated Financial Statements (Unaudited)~~:

~~Consolidated Income Statement for the three and nine months ended September 30, 2021 and 2020~~	3

~~Consolidated Statement of Comprehensive Income for the three and nine months ended September 30, 2021 and 2020~~	4

~~Consolidated Balance Sheet at September 30, 2021 and December 31, 2020~~	5

~~Consolidated Statement of Cash Flows for the nine months ended September 30, 2021 and 2020~~	7

~~Consolidated Statement of Equity for the three and nine months ended September 30, 2021 and 2020~~	8

~~Notes to Consolidated Financial Statements~~	10

~~Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition~~	51

~~Item 4. Controls and Procedures~~	94

~~Part II - Other Information~~:

~~Item 1. Legal Proceedings~~	95

~~Item 2. Unregistered Sales of Equity Securities and Use of Proceeds and Issuer Repurchases of Equity Securities~~	95

~~Item 5. Other Information~~	95

~~Item 6. Exhibits~~	96


January 1, 2020		Additions / (Releases)		Write-offs		Other*		December 31, 2020
$	316	$	76	$	(46)	$	5	$	351


	Cloud &			Global			Global
	Cognitive			Business			Technology						Global			Total
(Dollars in millions)	Software			Services			Services			Systems			Financing			Segments
For the three months ended September 30, 2021:
External revenue	$	5,692		$	4,427		$	6,154		$	1,107		$	220		$	17,601
Internal revenue		764			53			317			176			153			1,463
Total revenue	$	6,456		$	4,480		$	6,471		$	1,283		$	373		$	19,064
Pre-tax income/(loss) from continuing operations	$	1,675		$	587		$	383		$	(207)		$	206		$	2,644
Revenue year-to-year change		0.4	%		11.6	%		(4.5)	%		(14.3)	%		(22.3)	%		(0.7)	%
Pre-tax income year-to-year change		(8.7)	%		3.0	%		(4.1)	%		nm			5.1	%		(10.7)	%
Pre-tax income/(loss) margin		25.9	%		13.1	%		5.9	%		(16.1)	%		55.1	%		13.9	%

For the three months ended September 30, 2020:
External revenue	$	5,553		$	3,965		$	6,462		$	1,257		$	273		$	17,510
Internal revenue		875			49			312			240			208			1,683
Total revenue	$	6,428		$	4,014		$	6,774		$	1,497		$	480		$	19,193
Pre-tax income/(loss) from continuing operations	$	1,834		$	570		$	399		$	(37)		$	196		$	2,962
Pre-tax income/(loss) margin		28.5	%		14.2	%		5.9	%		(2.5)	%		40.7	%		15.4	%


(Dollars in millions)
January 1, 2021		Additions / (Releases) *		Write-offs **		Other +		September 30, 2021
$	644	$	(85)	$	(45)	$	(5)	$	510