~~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, ~~2022~~

2023

1-2360

(Commission file number)

INTERNATIONAL BUSINESS MACHINES CORPORATION

(Exact name of registrant as specified in its charter)

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

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

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

914-499-1900

(Registrant’s telephone number)

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

Title of each class

Trading symbol(s)

Name of each exchange
on which registered

Capital stock, par value $.20 per share

IBM

New York Stock Exchange

NYSE Chicago

~~1.250%~~1.125% Notes due ~~2023~~2024

IBM ~~23A~~24A

New York Stock Exchange

~~0.375%~~2.875% Notes due ~~2023~~2025

IBM ~~23B~~25A

New York Stock Exchange

~~1.125%~~0.950% Notes due ~~2024~~2025

IBM ~~24A~~25B

New York Stock Exchange

~~2.875%~~0.875% Notes due 2025

IBM ~~25A~~25C

New York Stock Exchange

~~0.950%~~0.300% Notes due ~~2025~~2026

IBM ~~25B~~26B

New York Stock Exchange

~~0.875%~~1.250% Notes due ~~2025~~2027

IBM ~~25C~~27B

New York Stock Exchange

~~0.300%~~3.375% Notes due ~~2026~~2027

IBM ~~26B~~27F

New York Stock Exchange

~~1.250%~~0.300% Notes due ~~2027~~2028

IBM ~~27B~~28B

New York Stock Exchange

~~0.300%~~1.750% Notes due 2028

IBM ~~28B~~28A

New York Stock Exchange

~~1.750%~~1.500% Notes due ~~2028~~2029

IBM ~~28A~~29

New York Stock Exchange

~~1.500%~~0.875% Notes due ~~2029~~2030

IBM 2930A

New York Stock Exchange

~~0.875%~~1.750% Notes due ~~2030~~2031

IBM 3031

New York Stock Exchange

~~1.750%~~3.625% Notes due 2031

IBM 3131B

New York Stock Exchange

0.650% Notes due 2032

IBM 32A

New York Stock Exchange

1.250% Notes due 2034

IBM 34

New York Stock Exchange

3.750% Notes due 2035

IBM 35

New York Stock Exchange

4.875% Notes due 2038

IBM 38

New York Stock Exchange

1.200% Notes due 2040

IBM 40

New York Stock Exchange

4.000% Notes due 2043

IBM 43

New York Stock Exchange

7.00% Debentures due 2025

IBM 25

New York Stock Exchange

6.22% Debentures due 2027

IBM 27

New York Stock Exchange

6.50% Debentures due 2028

IBM 28

New York Stock Exchange

5.875% Debentures due 2032

IBM 32D

New York Stock Exchange

7.00% Debentures due 2045

IBM 45

New York Stock Exchange

7.125% Debentures due 2096

IBM 96

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section l3 or l5(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ 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).~~ 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 ~~904,126,363~~913,118,581 shares of common stock outstanding at September 30, ~~2022.~~

2023.

~~Table of Contents~~

~~Index~~

9

Table of Contents

Index

	~~Page~~
		Page

Part I - Financial Information:

Item 1. Consolidated Financial Statements (Unaudited):

Consolidated Income Statement for the three and nine months ended September 30, ~~2022~~2023 and ~~2021~~2022		3

Consolidated Statement of Comprehensive Income for the three and nine months ended September 30, ~~2022~~2023 and ~~2021~~2022		4

Consolidated Balance Sheet at September 30, ~~2022~~2023 and December 31, ~~2021~~2022		5

Consolidated Statement of Cash Flows for the nine months ended September 30, ~~2022~~2023 and ~~2021~~2022		7

Consolidated Statement of Equity for the three and nine months ended September 30, ~~2022~~2023 and ~~2021~~2022		8

Notes to Consolidated Financial Statements		10

Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition		54 48

Item 4. Controls and Procedures		97 83

Part II - Other Information:

Item 1. Legal Proceedings		98 84

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds and Issuer Repurchases of Equity Securities		98 84

Item 5. Other Information		84

Item 6. Exhibits		99 85

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


	Three Months Ended September 30,					Nine Months Ended September 30,
(Dollars in millions except per share amounts)	2023		2022			2023		2022
Revenue:
Services	$	7,541	$	7,365		$	22,618	$	22,708
Sales	7,025		6,565			21,296		20,652
Financing	186		176			566		479
Total revenue	14,752		14,107			44,479		43,840
Cost:
Services	5,217		5,168			15,821		15,915
Sales	1,419		1,389			4,329		4,555
Financing	94		120			297		314
Total cost	6,729		6,677			20,446		20,784
Gross profit	8,023		7,430			24,033		23,055
Expense and other (income):
Selling, general and administrative	4,458		4,391			14,212		13,843
Research, development and engineering	1,685		1,611			5,027		4,963
Intellectual property and custom development income	(190)		(121)			(618)		(418)
Other (income) and expense	(215)		5,755			(721)		5,921
Interest expense	412		295			1,202		903
Total expense and other (income)	6,150		11,931			19,102		25,212
Income/(loss) from continuing operations before income taxes	1,873		(4,501)			4,931		(2,156)
Provision for/(benefit from) income taxes	159		(1,287)			702		(1,070)
Income/(loss) from continuing operations	$	1,714	$	(3,214)		$	4,229	$	(1,087)
Income/(loss) from discontinued operations, net of tax	(10)		18			(15)		16
Net income/(loss)	$	1,704	$	(3,196)	*	$	4,214	$	(1,071)	*

Earnings/(loss) per share of common stock:
Assuming dilution:
Continuing operations	$	1.86	$	(3.55)		$	4.59	$	(1.21)
Discontinued operations	(0.01)		0.02			(0.02)		0.02
Total	$	1.84	$	(3.54)		$	4.58	$	(1.19)
Basic:
Continuing operations	$	1.88	$	(3.55)		$	4.65	$	(1.21)
Discontinued operations	(0.01)		0.02			(0.02)		0.02
Total	$	1.87	$	(3.54)		$	4.63	$	(1.19)

Weighted-average number of common shares outstanding: (millions)
Assuming dilution	923.7		904.1			920.3		901.6
Basic	912.8		904.1			910.1		901.6

*	~~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 STATEMENT OF COMPREHENSIVE INCOME

(UNAUDITED)

Three Months Ended September 30,

Nine Months Ended September 30,
(Dollars in millions)

2022

2021*

2022

2021*
Net income/(loss)

$
(3,196)

$
1,130

$
(1,071)

$
3,410
Other comprehensive income/(loss), before tax:








Foreign currency translation adjustments

143

(114)

799

463
Net changes related to available-for-sale securities:








Unrealized gains/(losses) arising during the period

0

0

(1)

0
Reclassification of (gains)/losses to net income

—

—

—

—
Total net changes related to available-for-sale securities

0

0

(1)

0
Unrealized gains/(losses) on cash flow hedges:








Unrealized gains/(losses) arising during the period

189

109

449

262
Reclassification of (gains)/losses to net income

(12)

32

4

282
Total unrealized gains/(losses) on cash flow hedges

178

141

453

545
Retirement-related benefit plans:








Prior service costs/(credits)

412

0

408

0
Net (losses)/gains arising during the period

53

1

63

23
Curtailments and settlements

5,913

13

5,931

46
Amortization of prior service (credits)/costs

3

3

16

8
Amortization of net (gains)/losses

388

638

1,305

1,929
Total retirement-related benefit plans

6,768

656

7,722

2,006
Other comprehensive income/(loss), before tax

7,089

683

8,973

3,014
Income tax (expense)/benefit related to items of other comprehensive income

(2,058)

(333)

(2,877)

(978)
Other comprehensive income/(loss), net of tax

5,030

350

6,096

2,035
Total comprehensive income

$
1,834

$
1,480

$
5,025

$
5,446


	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in millions)	2023		2022		2023		2022
Net income/(loss)	$	1,704	$	(3,196)	$	4,214	$	(1,071)
Other comprehensive income/(loss), before tax:
Foreign currency translation adjustments	151		143		180		799
Net changes related to available-for-sale securities:
Unrealized gains/(losses) arising during the period	0		0		(1)		(1)
Reclassification of (gains)/losses to net income	—		—		—		—
Total net changes related to available-for-sale securities	0		0		(1)		(1)
Unrealized gains/(losses) on cash flow hedges:
Unrealized gains/(losses) arising during the period	131		189		279		449
Reclassification of (gains)/losses to net income	202		(12)		51		4
Total unrealized gains/(losses) on cash flow hedges	333		178		330		453
Retirement-related benefit plans:
Prior service costs/(credits)	—		412		—		408
Net (losses)/gains arising during the period	102		53		104		63
Curtailments and settlements	2		5,913		7		5,931
Amortization of prior service (credits)/costs	(2)		3		(6)		16
Amortization of net (gains)/losses	128		388		389		1,305
Total retirement-related benefit plans	230		6,768		494		7,722
Other comprehensive income/(loss), before tax	714		7,089		1,003		8,973
Income tax (expense)/benefit related to items of other comprehensive income	(313)		(2,058)		(361)		(2,877)
Other comprehensive income/(loss), net of tax	402		5,030		642		6,096
Total comprehensive income	$	2,105	$	1,834	$	4,857	$	5,025

* 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)

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


(Dollars in millions)	At September 30, 2023		At December 31, 2022
Assets:
Current assets:
Cash and cash equivalents	$	7,257	$	7,886
Restricted cash	19		103
Marketable securities	3,721		852
Notes and accounts receivable — trade (net of allowances of $198 in 2023 and $233 in 2022)	5,330		6,541
Short-term financing receivables:
Held for investment (net of allowances of $133 in 2023 and $145 in 2022)	5,032		6,851
Held for sale	593		939
Other accounts receivable (net of allowances of $106 in 2023 and $89 in 2022)	842		817
Inventory, at lower of average cost or net realizable value:
Finished goods	159		158
Work in process and raw materials	1,239		1,394
Total inventory	1,399		1,552
Deferred costs	931		967
Prepaid expenses and other current assets	2,582		2,611
Total current assets	27,705		29,118
Property, plant and equipment	18,217		18,695
Less: Accumulated depreciation	12,848		13,361
Property, plant and equipment — net	5,369		5,334
Operating right-of-use assets — net	3,112		2,878
Long-term financing receivables (net of allowances of $26 in 2023 and $28 in 2022)	4,789		5,806
Prepaid pension assets	8,901		8,236
Deferred costs	822		866
Deferred taxes	6,168		6,256
Goodwill	59,596		55,949
Intangible assets — net	11,278		11,184
Investments and sundry assets	1,582		1,617
Total assets	$	129,321	$	127,243

(Amounts may not add due to rounding.)

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

Table of Contents

INTERNATIONAL BUSINESS MACHINES CORPORATION

AND SUBSIDIARY COMPANIES

CONSOLIDATED BALANCE SHEET – (CONTINUED)

(UNAUDITED)

LIABILITIES AND EQUITY

At September 30,

At December 31,
(Dollars in millions except per share amounts)

2022

2021
Liabilities:

Current liabilities:




Taxes

$
1,667

$
2,289
Short-term debt

5,937

6,787
Accounts payable

3,806

3,955
Compensation and benefits

3,369

3,204
Deferred income

11,139

12,518
Operating lease liabilities

844

974
Other accrued expenses and liabilities

3,702

3,892
Total current liabilities

30,466

33,619
Long-term debt

44,942

44,917
Retirement and nonpension postretirement benefit obligations

11,760

14,435
Deferred income

3,018

3,577
Operating lease liabilities

2,103

2,462
Other liabilities

13,413

13,996
Total liabilities

105,703

113,005
Equity:

IBM stockholders’ equity:

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

58,117

57,319
Shares authorized: 4,687,500,000

Shares issued: 2022 - 2,255,410,248

2021 - 2,248,577,848

Retained earnings

148,611

154,209
Treasury stock - at cost

(169,514)

(169,392)
Shares: 2022 - 1,351,283,886

2021 - 1,350,509,249

Accumulated other comprehensive income/(loss)

(17,138)

(23,234)
Total IBM stockholders’ equity

20,076

18,901
Noncontrolling interests

71

95
Total equity

20,147

18,996
Total liabilities and equity

$
125,850

$
132,001


(Dollars in millions except per share amounts)	At September 30, 2023		At December 31, 2022
Liabilities:
Current liabilities:
Taxes	$	1,559	$	2,196
Short-term debt	6,414		4,760
Accounts payable	3,342		4,051
Compensation and benefits	3,257		3,481
Deferred income	11,917		12,032
Operating lease liabilities	807		874
Other accrued expenses and liabilities	3,309		4,111
Total current liabilities	30,606		31,505
Long-term debt	48,828		46,189
Retirement and nonpension postretirement benefit obligations	9,090		9,596
Deferred income	3,085		3,499
Operating lease liabilities	2,476		2,190
Other liabilities	12,081		12,243
Total liabilities	106,165		105,222
Equity:
IBM stockholders’ equity:
Common stock, par value $0.20 per share, and additional paid-in capital	59,313		58,343
Shares authorized: 4,687,500,000
Shares issued: 2023 - 2,265,198,427
2022 - 2,257,116,920
Retained earnings	149,506		149,825
Treasury stock - at cost	(169,640)		(169,484)
Shares: 2023 - 1,352,079,846
2022 - 1,351,024,943
Accumulated other comprehensive income/(loss)	(16,098)		(16,740)
Total IBM stockholders’ equity	23,081		21,944
Noncontrolling interests	75		77
Total equity	23,156		22,021
Total liabilities and equity	$	129,321	$	127,243

(Amounts may not add due to rounding.)

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

Table of Contents

INTERNATIONAL BUSINESS MACHINES CORPORATION

AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)


	Nine Months Ended September 30,
(Dollars in millions)	2023		2022*
Cash flows from operating activities:
Net income/(loss)	$	4,214	$	(1,071)
Adjustments to reconcile net income/(loss) to cash provided by operating activities:
Pension settlement charge	—		5,894
Depreciation	1,568		1,837
Amortization of intangibles	1,676		1,828
Stock-based compensation	843		739
Net (gain)/loss on asset sales and other	(89)		(60)
Changes in operating assets and liabilities, net of acquisitions/divestitures	1,257		(2,695)		**
Net cash provided by operating activities	9,468		6,470

Cash flows from investing activities:
Payments for property, plant and equipment	(945)		(937)
Proceeds from disposition of property, plant and equipment	137		98
Investment in software	(417)		(479)
Acquisition of businesses, net of cash acquired	(4,945)		(1,020)
Divestitures of businesses, net of cash transferred	(4)		1,271
Purchases of marketable securities and other investments	(10,374)		(4,474)
Proceeds from disposition of marketable securities and other investments	6,642		2,655
Net cash provided by/(used in) investing activities	(9,906)		(2,883)

Cash flows from financing activities:
Proceeds from new debt	9,586		7,797
Payments to settle debt	(4,973)		(5,446)
Short-term borrowings/(repayments) less than 90 days — net	6		221
Common stock repurchases for tax withholdings	(338)		(329)
Financing — other	86		106
Cash dividends paid	(4,522)		(4,454)
Net cash provided by/(used in) financing activities	(154)		(2,106)

Effect of exchange rate changes on cash, cash equivalents and restricted cash	(120)		(463)
Net change in cash, cash equivalents and restricted cash	(713)		1,018

Cash, cash equivalents and restricted cash at January 1	7,988		6,957
Cash, cash equivalents and restricted cash at September 30	$	7,275	$	7,975

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~~ Includes immaterial cash flows ~~are presented on an IBM consolidated basis.~~from discontinued operations.

** Refer to note ~~3, “Separation~~1, "Basis of ~~Kyndryl,”~~Presentation," for additional ~~information related to cash flows from Kyndryl discontinued operations.~~

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 STATEMENT OF EQUITY

(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 - 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)







5,030

5,030



5,030
Total comprehensive income/(loss)









$
1,834



$
1,834
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
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 - 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
Other comprehensive income/(loss)







350

350



350
Total comprehensive income/(loss)









$
1,480



$
1,480
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











4

4
Equity - September 30, 2021

$
57,189

$
161,747

$
(169,406)

$
(27,302)

$
22,228

$
129

$
22,357


(Dollars in millions except per share amounts)	Common Stock and Additional Paid-in Capital		Retained Earnings		Treasury Stock		Accumulated Other Comprehensive Income/(Loss)		Total IBM Stockholders' Equity		Non- Controlling Interests		Total Equity
Equity - July 1, 2023	$	58,963	$	149,318	$	(169,581)	$	(16,499)	$	22,201	$	70	$	22,271
Net income plus other comprehensive income/(loss):
Net income			1,704						1,704				1,704
Other comprehensive income/(loss)							402		402				402
Total comprehensive income									$	2,105			$	2,105
Cash dividends paid — common stock ($1.66 per share)			(1,515)						(1,515)				(1,515)
Common stock issued under employee plans (2,501,236 shares)	350								350				350
Purchases (688,254 shares) and sales (299,359 shares) of treasury stock under employee plans — net			(1)		(60)				(60)				(60)
Changes in noncontrolling interests											5		5
Equity – September 30, 2023	$	59,313	$	149,506	$	(169,640)	$	(16,098)	$	23,081	$	75	$	23,156


(Dollars in millions except per share amounts)	Common Stock and Additional Paid-in Capital		Retained Earnings		Treasury Stock		Accumulated Other Comprehensive Income/(Loss)		Total IBM Stockholders' Equity		Non- Controlling Interests		Total Equity
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)							5,030		5,030				5,030
Total comprehensive income									$	1,834			$	1,834
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
Equity - September 30, 2022	$	58,117	$	148,611	$	(169,514)	$	(17,138)	$	20,076	$	71	$	20,147

(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, 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, 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


(Dollars in millions except per share amounts)	Common Stock and Additional Paid-in Capital		Retained Earnings		Treasury Stock		Accumulated Other Comprehensive Income/(Loss)		Total IBM Stockholders' Equity		Non- Controlling Interests		Total Equity
Equity - January 1, 2023	$	58,343	$	149,825	$	(169,484)	$	(16,740)	$	21,944	$	77	$	22,021
Net income plus other comprehensive income/(loss):
Net income			4,214						4,214				4,214
Other comprehensive income/(loss)							642		642				642
Total comprehensive income									$	4,857			$	4,857
Cash dividends paid — common stock ($4.97 per share)			(4,522)						(4,522)				(4,522)
Common stock issued under employee plans (8,081,507 shares)	970								970				970
Purchases (2,498,567 shares) and sales (1,443,664 shares) of treasury stock under employee plans — net			(11)		(156)				(167)				(167)

Changes in noncontrolling interests											(2)		(2)
Equity - September 30, 2023	$	59,313	$	149,506	$	(169,640)	$	(16,098)	$	23,081	$	75	$	23,156


(Dollars in millions except per share amounts)	Common Stock and Additional Paid-in Capital		Retained Earnings		Treasury Stock		Accumulated Other Comprehensive Income/(Loss)		Total IBM Stockholders' Equity		Non- Controlling Interests		Total 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									$	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

(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 ofof Presentation:

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

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

On November 3, 2021, the company completed the separation of its managed infrastructure services unit into a new public company with the distribution of 80.1 percent of the outstanding common stock of Kyndryl Holdings, Inc. (Kyndryl) to IBM stockholders on a pro rata basis. 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 accounts for the retained Kyndryl common stock as a fair value equity investment included within prepaid expenses and 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, 2022, the 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 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 Software segment and Other–divested businesses category. 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. These changes impacted the company’s reportable segments but did not impact the Consolidated Financial Statements. Refer to note 5, “Segments,” for additional information on the 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 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 funding contribution was required from the company. As a result of 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 2022, primarily related to the accelerated recognition of accumulated actuarial losses of the Qualified PPP. The $1.5 billion tax effect associated with the settlement charge is reflected as an adjustment to reconcile net income/(loss) to cash from operating activities within changes in operating assets and liabilities, net of acquisitions/divestitures in the Consolidated Statement of Cash Flows for the nine months ended September 30, 2022. Refer to note 18, “Retirement-Related Benefits,” for additional information.

In the fourth quarter of 2022, the company completed its annual assessment of the useful lives of its property, plant and equipment. Due to advances in technology, the company determined it should increase the estimated useful lives of its server and network equipment from five to six years for new assets and from three to four years for used assets. This change in accounting estimate was effective beginning January 1, 2023. Based on the carrying amount of server and network equipment included in property, plant and equipment-net in the company's Consolidated Balance Sheet as of December 31, 2022, the effect of this change in estimate was an increase in income from continuing operations before income taxes of $44 million, or $0.04 per basic and diluted share for the three months ended September 30, 2023, and $175 million, or $0.16 and $0.15 per basic and diluted share, respectively, for the nine months ended September 30, 2023.

For the three and nine months ended September 30, 2023, the company reported a provision for income taxes of $159 million and $702 million, respectively, and its effective tax rate was 8.5 percent and 14.2 percent, respectively. The rates are driven by many factors including the impacts of changes to the U.S. Foreign Tax Credit regulations, geographical mix of income, incentives and changes in unrecognized tax benefits. For the three and nine months ended September 30, 2022, the company reported a benefit from income taxes of $1,287 million and $1,070 million, respectively. The tax benefits were primarily due to the transfer of a portion of the

~~Table of Contents~~

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

Qualified ~~PPP’s~~PPP's defined benefit pension obligations and related plan assets, as described above. For the three and nine months ended September 30, 2021, the company reported a benefit from income taxes of $224 million and $282 million, respectively. The tax benefits were primarily driven by the 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.

Noncontrolling interest amounts of ~~$3.7 million and $5.5~~$4 million, net of tax, for both the three months ended September 30, ~~2022~~2023 and ~~2021,~~2022, respectively, and ~~$14.2~~$13 million and ~~$14.5~~$14 million, net of tax, for the nine months ended September 30, ~~2022~~2023 and ~~2021,~~2022, respectively, are included as a reduction within other (income) and expense in the Consolidated Income Statement.

The company has supplier finance programs with third-party financial institutions where the company agrees to pay the financial institutions the stated amounts of invoices from participating suppliers on the originally invoiced maturity date, which have an average term of 90 to 120 days, consistent with the company's standard payment terms. The financial institutions offer earlier payment of the invoices at the sole discretion of the supplier for a discounted amount. The company does not provide secured legal assets or other forms of guarantees under the arrangements. The company is not a party to the arrangements between its suppliers and the financial institutions. These obligations are recognized as accounts

Table of Contents

Notes to Consolidated Financial Statements — (continued)

payable in the Consolidated Balance Sheet. The obligations outstanding under these programs at September 30, 2023 and December 31, 2022 were $99 million and $60 million, respectively.

Interim results are not necessarily indicative of financial results for a full year. The information included in this Form 10-Q should be read in conjunction with the company’s ~~2021~~2022 Annual Report.

Within the financial statements and tables presented, certain columns and rows may not add due to the use of rounded numbers for disclosure purposes. Percentages presented are calculated from the underlying whole-dollar amounts. Certain prior-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 iswas effective January 1, 2023 with certain annual disclosures required beginning in 2024 and early adoption iswas permitted. The company ~~will adopt~~adopted the guidance as of the effective date.

Effect on Financial Statements or Other Significant Matters–~~As the~~The guidance ~~is a change to disclosures only, the company does~~did not ~~expect it to~~ have a material impact in the consolidated financial results. ~~The company’s use~~Refer to note 1, "Basis 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~~Presentation," 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.~~

~~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.~~

additional information.

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

~~Table of Contents~~

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

a continuation of an existing loan. The guidance also requires presenting ~~current period~~current-period gross write-offs by year of origination for financing receivables and net investment in 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 guidance is not expected to have a material impact in the consolidated financial results.~~

~~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 was effective January 1, ~~2022~~2023 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.~~

~~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~~Refer to note 9, "Financing Receivables," for ~~Income Taxes~~additional information.

~~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.~~

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~~3.

~~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.

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)

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


	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in millions)	2023		2022		2023		2022
Hybrid Platform & Solutions	$	4,506	$	4,172	$	13,350	$	12,641
Transaction Processing	1,759		1,640		5,444		5,107
Total Software	$	6,265	$	5,811	$	18,794	$	17,749
Business Transformation	2,291		2,165		6,869		6,646
Application Operations	1,710		1,593		5,204		4,865
Technology Consulting	961		943		2,865		2,826
Total Consulting	$	4,963	$	4,700	$	14,938	$	14,337
Hybrid Infrastructure	1,943		1,931		5,912		6,392
Infrastructure Support	1,329		1,421		4,076		4,413
Total Infrastructure	$	3,272	$	3,352	$	9,988	$	10,805
Financing*	186		174		566		474
Other	67		70		192		475
Total revenue	$	14,752	$	14,107	$	44,479	$	43,840

*	~~Recast to reflect segment changes.~~

** Contains lease and ~~loan/working capital~~loan 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,
(Dollars in millions)

2022

2021

2022

2021
Americas

$
7,416

$
6,579

$
22,614

$
20,178
Europe/Middle East/Africa

3,959

3,939

12,716

12,181
Asia Pacific

2,732

2,734

8,509

8,297
Total

$
14,107

$
13,251

$
43,840

$
40,656

Three Months Ended September 30, Nine Months Ended September 30,
(Dollars in millions) 2023 2022 2023 2022
Americas $ 7,686 $ 7,416 $ 22,810 $ 22,614
Europe/Middle East/Africa 4,223 3,959 13,156 12,716
Asia Pacific 2,843 2,732 8,513 8,509
Total $ 14,752 $ 14,107 $ 44,479 $ 43,840

Remaining Performance Obligations

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

At September 30, ~~2022,~~2023, the aggregate amount of the transaction price allocated to RPO related to customer contracts that are unsatisfied or partially unsatisfied was ~~$53~~$55 billion. Approximately 7371 percent of the amount is expected to be recognized as revenue in the subsequent two years, approximately 2526 percent in the subsequent three to five years and the balance thereafter.

Table of Contents
Notes to Consolidated Financial Statements — (continued)

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

For the three ~~and nine~~ months ended September 30, ~~2022,~~2023 the revenue ~~was reduced by $36 million and $60~~ ~~million, respectively,~~recognized for performance obligations satisfied (or partially satisfied) in previous periods was immaterial. For the nine months ended September 30, 2023, revenue was reduced by $16 million mainly due to changes in estimates on contracts with cost-to-cost measures of progress.

Reconciliation of Contract Balances

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


(Dollars in millions)	At September 30, 2023		At December 31, 2022
Notes and accounts receivable — trade (net of allowances of $198 in 2023 and $233 in 2022)	$	5,330	$	6,541
Contract assets*	$	454	$	464
Deferred income (current)	$	11,917	$	12,032
Deferred income (noncurrent)	$	3,085	$	3,499

At September 30,

At December 31,
(Dollars in millions)

2022

2021
Notes and accounts receivable — trade (net of allowances of $214 in 2022 and $218 in 2021)

$
5,526

$
6,754
Contract assets*

$
522

$
471
Deferred income (current)

$
11,139

$
12,518
Deferred income (noncurrent)

$
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, ~~2022~~2023 that was included within the deferred income balance at June 30, ~~2022~~2023 and December 31, ~~2021~~2022 was $4.3 billion and ~~$8.8~~$9.0 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–trade allowance for expected credit losses for the nine months ended September 30, ~~2022~~2023 and the year ended December 31, ~~2021.~~

(Dollars in millions)












January 1, 2022

Additions / (Releases)

Write-offs

Foreign currency and other

September 30, 2022
$
218

$
43

$
(28)

$
(19)

$
214

January 1, 2021

Additions / (Releases)

Write-offs

Foreign currency and other

December 31, 2021
$
260

$
(15)

$
(28)

$
1

$
218

2022.


(Dollars in millions)
January 1, 2023		Additions / (Releases)		Write-offs		Foreign currency and other		September 30, 2023
$	233	$	28	$	(67)	$	4	$	198


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

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

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, 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.~~company. Performance measurement is based on pre-tax income from continuing operations. These results are used by the chief operating decision maker, both in evaluating the performance of, and in allocating resources to, each of the segments.

Table of Contents

Notes to Consolidated Financial Statements — (continued)

SEGMENT INFORMATION

Total

(Dollars in millions)

Software

Consulting

Infrastructure

Financing

Segments

For the three months ended 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
%

(Dollars in millions) Software Consulting Infrastructure Financing Total
Segments
For the three months ended September 30, 2023:
Revenue $ 6,265 $ 4,963 $ 3,272 $ 186 $ 14,685
Pre-tax income from continuing operations $ 1,486 $ 509 $ 387 $ 91 $ 2,473
Revenue year-to-year change 7.8 % 5.6 % (2.4) % 6.9 % 4.6 %
Pre-tax income year-to-year change 13.7 % 10.0 % 38.3 % 16.0 % 16.2 %
Pre-tax income margin 23.7 % 10.2 % 11.8 % 49.2 % 16.8 %
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
Pre-tax income margin 22.5 % 9.8 % 8.3 % 45.4 % 15.2 %

Reconciliations to IBM as Reported:

(Dollars in millions)






For the three months ended September 30:

2022

2021*

Revenue:





Total reportable segments

$
14,037

$
12,969

Other‒divested businesses

3

189

Other revenue

68

93

Total consolidated revenue

$
14,107

$
13,251

Pre-tax income/(loss) from continuing operations:





Total reportable segments

$
2,128

$
1,797

Amortization of acquired intangible assets

(417)

(469)

Acquisition-related (charges)/income

(1)

(4)

Non-operating retirement-related (costs)/income

(6,062)
**

(318)

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


(Dollars in millions)
For the three months ended September 30:	2023		2022
Revenue:
Total reportable segments	$	14,685	$	14,037
Other‒divested businesses	0		3
Other revenue	66		68
Total revenue from continuing operations	$	14,752	$	14,107

Pre-tax income from continuing operations:
Total reportable segments	$	2,473	$	2,128
Amortization of acquired intangible assets	(414)		(417)
Acquisition-related (charges)/income	(25)		(1)
Non-operating retirement-related (costs)/income	12		(6,062)		*
Kyndryl-related impacts	—		14		**
Workforce rebalancing charges+	(34)		—
Other‒divested businesses	8		0
Unallocated corporate amounts and other	(148)		(163)		++
Total pre-tax income/(loss) from continuing operations	$	1,873	$	(4,501)

*	~~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.

**Net impacts from Kyndryl retained shares and related swap. Refer to note ~~8, “Financial Assets~~5, "Acquisitions & ~~Liabilities,”~~Divestitures," and note 16, "Derivative Financial Instruments," for additional information.

+Beginning in the first quarter of 2023, the company updated its measure of segment pre-tax income, consistent with its management system, to no longer allocate workforce rebalancing charges to its segments. Workforce rebalancing charges in the third quarter of 2022 of $13 million were included in the segments.

++Recast to conform to 2023 presentation.

Table of Contents

Notes to Consolidated Financial Statements — (continued)

SEGMENT INFORMATION

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
%

(Dollars in millions) Software Consulting Infrastructure Financing Total
Segments
For the nine months ended September 30, 2023:
Revenue $ 18,794 $ 14,938 $ 9,988 $ 566 $ 44,287
Pre-tax income from continuing operations $ 4,154 $ 1,336 $ 1,236 $ 256 $ 6,983
Revenue year-to-year change 5.9 % 4.2 % (7.6) % 19.5 % 2.1 %
Pre-tax income year-to-year change 8.9 % 15.8 % 0.0 % (3.2) % 7.9 %
Pre-tax income margin 22.1 % 8.9 % 12.4 % 45.3 % 15.8 %
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
Pre-tax income margin 21.5 % 8.0 % 11.4 % 55.9 % 14.9 %

Reconciliations to IBM as Reported:

(Dollars in millions)






For the nine months ended September 30:

2022

2021*

Revenue:





Total reportable segments

$
43,365

$
39,812

Other‒divested businesses

319

583

Other revenue

156

261

Total consolidated revenue

$
43,840

$
40,656

Pre-tax income/(loss) from continuing operations:





Total reportable segments

$
6,470

$
5,071

Amortization of acquired intangible assets

(1,337)

(1,371)

Acquisition-related charges

(9)

(37)

Non-operating retirement-related (costs)/income

(6,455)
**

(967)

Kyndryl-related impacts+

(353)

—

Eliminations of internal transactions

(15)

(3)

Other‒divested businesses

108
++

(106)

Unallocated corporate amounts

(565)

(619)

Total pre-tax income/(loss) from continuing operations

$
(2,156)

$
1,968


(Dollars in millions)
For the nine months ended September 30:	2023		2022
Revenue:
Total reportable segments	$	44,287	$	43,365
Other‒divested businesses	(1)		319
Other revenue	193		156
Total consolidated revenue	$	44,479	$	43,840

Pre-tax income from continuing operations:
Total reportable segments	$	6,983	$	6,470
Amortization of acquired intangible assets	(1,194)		(1,337)
Acquisition-related charges	(35)		(9)
Non-operating retirement-related (costs)/income	16		(6,455)		*
Kyndryl-related impacts	—		(353)		**
Workforce rebalancing charges+	(410)		—
Other‒divested businesses	4		108
Unallocated corporate amounts	(432)		(581)		++
Total pre-tax income/(loss) from continuing operations	$	4,931	$	(2,156)

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

**Net impacts from ~~the sale of the company’s healthcare software assets.~~Kyndryl retained shares and related swaps. Refer to note ~~6, “Acquisitions~~5, "Acquisitions & ~~Divestitures.”~~

Divestitures," and note 16, "Derivative Financial Instruments," for additional information.

+Beginning in the first quarter of 2023, the company updated its measure of segment pre-tax income, consistent with its management system, to no longer allocate workforce rebalancing charges to its segments. Workforce rebalancing charges in the first nine months of 2022 of $22 million were included in the segments.

++Recast to conform to 2023 presentation.

Table of Contents

Notes to Consolidated Financial Statements — (continued)

6. 5. Acquisitions & Divestitures:

Acquisitions

Purchase price consideration for all acquisitions was paid primarily in cash. All acquisitions, ~~except as~~unless 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, ~~2022,~~2023, the company completed ~~six~~seven acquisitions at an aggregate cost of ~~$1,102~~$5,033 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~~
Acquisition			Segment	Description of Acquired Business
First Quarter

~~Envizi~~ StepZen, Inc.			Software	~~Data and analytics software provider for environmental performance management~~ Developer of GraphQL to help build application programming interfaces (APIs)

~~Sentaca~~ Asset Strategy Library (ASL) Portfolio of Uptake Technologies			~~Consulting~~ Software	~~Telco consulting~~Library of industrial asset management data

NS1			Software	Leading provider of network automation SaaS solutions

Second Quarter

Ahana Cloud, Inc.			Software	Expert in open-source-based solutions for data analytics

Polar Security			Software	Innovator in technology that helps companies discover, continuously monitor and secure cloud and SaaS application data

Agyla SAS			Consulting	Leading provider of cloud platform engineering services ~~and solutions provider~~in France specializing in ~~automation, cloud migration,~~Cloud, DevOps and ~~future networks for telecommunication providers~~ Security

~~Neudesic~~ Third Quarter			~~Consulting~~	~~Application development and cloud computing services company~~
~~Second Quarter~~ Apptio, Inc.			Software	Leading provider of financial and operational IT management and optimization software which enables enterprise leaders to deliver enhanced business value across technology investments

~~Randori~~	~~Software~~	~~Leading attack surface management (ASM) and cybersecurity provider~~

~~Databand.ai~~	~~Software~~	~~Proactive data observability platform that isolates data errors and issues to alert relevant stakeholders~~

~~Third Quarter~~

~~Omnio~~	~~Software~~	~~Developer of software connectors used in the collection of raw data for various Industrial Internet of Things (IoT) applications~~

At September 30, ~~2022,~~2023, the remaining cash to be remitted by the company related to certain ~~first half 2022~~2023 acquisitions was ~~$90~~$38 million, most of which is expected to be paid byin the ~~second quarter~~first half of 2024. The unremitted cash associated with these acquisitions is primarily a non-cash financing activity for purposes of the company's Consolidated Statement of Cash Flows as of September 30, 2023.

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, ~~2022.~~

2023.


(Dollars in millions)	Amortization Life (in years)	Apptio, Inc.		Other Acquisitions
Current assets		$	150	$	46
Property, plant and equipment/noncurrent assets		35		7
Intangible assets:
Goodwill	N/A	3,552		301
Client relationships	6-10	740		37
Completed technology	5-7	530		66
Trademarks	2-5	35		2
Total assets acquired		$	5,042	$	458
Current liabilities		255		26
Noncurrent liabilities		177		10
Total liabilities assumed		$	432	$	36
Total purchase price		$	4,610	$	423

~~Table of Contents~~

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

Amortization

Total
(Dollars in millions)

Life (in years)

Acquisitions
Current assets

$
63
Property, plant and equipment/noncurrent assets

3
Intangible assets:

Goodwill

N/A

857
Client relationships

7

151
Completed technology

4-7

90
Trademarks

2-3

7
Total assets acquired

$
1,171
Current liabilities

48
Noncurrent liabilities

22
Total liabilities assumed

$
69
Total purchase price

$
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.

Apptio, Inc. — Goodwill of $3,180 million and $372 million was assigned to the Software and Consulting segments, respectively. It is expected that one percent of the goodwill will be deductible for tax purposes. The overall weighted-average useful life of the identified amortizable intangible assets acquired was 8.6 years.

Other Acquisitions — Goodwill of $266 million, $23 million and $12 million was assigned to the Software, Consulting and Infrastructure segments, respectively. It is expected that none of the goodwill will be deductible for tax purposes. The overall weighted-average useful life of the identified amortizable intangible assets acquired was 6.7 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’~~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.

Transactions Closed — In October ~~3, 2022,~~2023, the company acquired ~~Dialexa,~~Manta Software, Inc. (Manta), a ~~privately held digital product engineering services firm. Dialexa~~world-class data lineage platform to complement its capabilities within watsonx.ai, watsonx.data and watsonx.governance. Manta will be integrated into the ~~Consulting~~Software segment. At the date of issuance of the financial statements, the initial purchase accounting for ~~Dialexa~~Manta was not complete.

Divestitures

~~Healthcare Software Assets~~

Separation of Kyndryl — ~~In January 2022,~~On November 3, 2021, the company completed the separation of its managed infrastructure services unit into a new public company with the distribution of 80.1 percent of the outstanding common stock of Kyndryl Holdings, Inc. (Kyndryl) to IBM ~~and Francisco Partners (Francisco) signed~~stockholders on 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 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.pro rata basis. The company ~~expects to close~~retained 19.9 percent of the ~~remaining countries by~~shares of Kyndryl common stock immediately following the ~~first quarter of 2023.~~

~~On June 30,~~separation. During 2022, the company ~~received~~fully disposed of its retained interest in Kyndryl common stock pursuant to exchange agreements with a ~~cash payment~~third-party financial institution, which were completed within twelve months of ~~$1,065 million.~~separation. As of ~~September 30,~~November 2, 2022, ~~a total pre-tax gain of $259 million has been recognized~~the company no longer held an ownership interest in other (income) and expense in the Consolidated Income Statement. Any pre-tax gains related to the subsequent wave closings are not expected to be material. The total gain on sale may change in the future due to changes in transaction estimates; however, such changes are not expected to be material.

Kyndryl.

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Notes to Consolidated Financial Statements — (continued)

~~Other Divestitures — In~~Loss from discontinued operations, net of tax for the three and nine months ended September 30, 2023 of $10 million and $15 million, respectively, reflects the net impact of changes in separation-related estimates and the settlement of assets and liabilities in accordance with the separation and distribution agreement. Income from discontinued operations, net of tax for the three and nine months ended September 30, 2022 of $18 million and $16 million, respectively, reflects the same drivers as above and also reflects a gain on sale of a joint venture historically managed by Kyndryl, which was sold to Kyndryl in the first quarter of 2022 upon receiving regulatory approval.

Other — The company completed two divestitures in the ~~Infrastructure segment completed one divestiture.~~second quarter of 2023. The financial terms related to ~~this transaction~~these transactions were not material.

Transactions Signed — In August 2023, IBM and Zephyr Buyer, L.P., a wholly-owned subsidiary of Francisco Partners (collectively, Francisco), entered into a definitive agreement under which Francisco would acquire The Weather Company assets from IBM for $1,100 million inclusive of $250 million of contingent consideration, of which $200 million is contingent on Francisco’s attainment of certain investment return metrics. The assets, reported within the company’s Software segment, include The Weather Company's digital consumer-facing offerings, The Weather Channel mobile and cloud-based digital properties including Weather.com, Weather Underground and Storm Radar, as well as its enterprise offerings for broadcast, media, aviation, advertising technology and data solutions for other emerging industries. The transaction is expected to close in the first quarter of 2024, subject to customary regulatory clearances and closing conditions. Upon the initial closing, the company expects to receive cash proceeds of approximately $750 million and will provide seller financing to Francisco in the form of a $100 million loan with a term of 7 years. The company expects to recognize a pre-tax gain on the sale, of which the final amount is not yet determinable.

At September 30, 2023, the business met the criteria for held for sale classification. Held for sale assets of approximately $531 million, which consist primarily of goodwill, prepaid and other current assets, intangible assets-net and plant, property and equipment-net of approximately $450 million, $50 million, $20 million and $11 million, respectively, and held for sale liabilities of $17 million consisting primarily of deferred income, were included in the company’s Consolidated Balance Sheet at September 30, 2023.

6. Other (Income) and Expense:

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


	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in millions)	2023		2022		2023		2022
Other (income) and expense:
Foreign currency transaction losses/(gains) (1)	$	(260)	$	(352)	$	(338)	$	(1,021)
(Gains)/losses on derivative instruments (2)	316		189		315		730
Interest income	(156)		(53)		(527)		(98)
Net (gains)/losses from securities and investment assets (3)	(5)		(11)		3		262
Retirement-related costs/(income) (4)	(12)		6,062		(16)		6,455
Other (5)	(97)		(80)		(158)		(407)
Total other (income) and expense	$	(215)	$	5,755	$	(721)	$	5,921

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

(2)Prior year includes a gain of $3 million and a loss of $85 million recognized in the three and nine months ended September 30, 2022, respectively, on the cash-settled swap related to the Kyndryl retained shares. Refer to note 16, "Derivative Financial Instruments," for additional information.

(3)Prior year includes a gain of $11 million and a loss of $267 million recognized in the three and nine months ended September 30, 2022, respectively, on Kyndryl retained shares. Refer to note 5, "Acquisitions & Divestitures," for additional information.

(4)Prior year includes a one-time, non-cash pension settlement charge of $5.9 billion. Refer to note 18, "Retirement-Related Benefits," for additional information.

(5)Other primarily consists of (gains)/losses from divestitures and dispositions of land/buildings. The nine months ended September 30, 2022 includes a pre-tax gain of $259 million related to the divestiture of IBM's healthcare software assets in the second quarter 2022.

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Notes to Consolidated Financial Statements — (continued)

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

The following tables provide the computation of basic and diluted ~~earnings/(loss)~~earnings per share of common stock for the three and nine months ended September 30, ~~2022~~2023 and ~~2021.~~

(Dollars in millions except per share amounts)

For the three months ended September 30:

2022

2021
Number of shares on which basic earnings per share is calculated:




Weighted-average shares outstanding during period

904,076,831

897,097,073
Add — Incremental shares under stock-based compensation plans

—

6,946,467
Add — Incremental shares associated with contingently issuable shares

—

1,909,573
Number of shares on which diluted earnings per share is calculated

904,076,831

905,953,114

Income/(loss) from continuing operations

$
(3,214)

$
1,037
Income/(loss) from discontinued operations, net of tax

18

93
Net income/(loss) on which basic earnings per share is calculated

$
(3,196)

$
1,130

Income/(loss) from continuing operations

$
(3,214)

$
1,037
Net income applicable to contingently issuable shares

—

—
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

$
(3.55)

$
1.14
Discontinued operations

0.02

0.10
Total

$
(3.54)

$
1.25
Basic




Continuing operations

$
(3.55)

$
1.16
Discontinued operations

0.02

0.10
Total

$
(3.54)

$
1.26

2022.


(Dollars in millions except per share amounts)
For the three months ended September 30:	2023		2022
Number of shares on which basic earnings per share is calculated:
Weighted-average shares outstanding during period	912,790,387		904,076,831
Add — Incremental shares under stock-based compensation plans	8,531,982		—
Add — Incremental shares associated with contingently issuable shares	2,350,932		—
Number of shares on which diluted earnings per share is calculated	923,673,300		904,076,831

Income/(loss) from continuing operations	$	1,714	$	(3,214)
Income/(loss) from discontinued operations, net of tax	(10)		18
Net income/(loss) on which basic earnings per share is calculated	$	1,704	$	(3,196)

Income/(loss) from continuing operations	$	1,714	$	(3,214)
Net income applicable to contingently issuable shares	—		—
Income/(loss) from continuing operations on which diluted earnings per share is calculated	$	1,714	$	(3,214)
Income/(loss) from discontinued operations, net of tax, on which diluted earnings per share is calculated	(10)		18
Net income/(loss) on which diluted earnings per share is calculated	$	1,704	$	(3,196)

Earnings/(loss) per share of common stock:
Assuming dilution
Continuing operations	$	1.86	$	(3.55)
Discontinued operations	(0.01)		0.02
Total	$	1.84	$	(3.54)
Basic
Continuing operations	$	1.88	$	(3.55)
Discontinued operations	(0.01)		0.02
Total	$	1.87	$	(3.54)

Stock options to purchase ~~840,544~~536,391 shares and ~~750,990~~840,544 shares were outstanding as of September 30, ~~2022~~2023 and ~~2021,~~2022, respectively, but were not included in the computation of diluted ~~earnings/(loss)~~earnings per share because the exercise price of the options during the respective period was greater than the average market price of the common shares, and therefore, the effect would have been antidilutive.

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 for the three months ended September 30, 2022, as the effect would have been antidilutive.

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Notes to Consolidated Financial Statements — (continued)

(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

(Dollars in millions except per share amounts)
For the nine months ended September 30: 2023 2022
Number of shares on which basic earnings per share is calculated:
Weighted-average shares outstanding during period 910,057,739 901,621,217
Add — Incremental shares under stock-based compensation plans 8,241,752 —
Add — Incremental shares associated with contingently issuable shares 2,024,201 —
Number of shares on which diluted earnings per share is calculated 920,323,692 901,621,217
Income/(loss) from continuing operations $ 4,229 $ (1,087)
Income/(loss) from discontinued operations, net of tax (15) 16
Net income/(loss) on which basic earnings per share is calculated $ 4,214 $ (1,071)
Income/(loss) from continuing operations $ 4,229 $ (1,087)
Net income applicable to contingently issuable shares — —
Income/(loss) from continuing operations on which diluted earnings per share is calculated $ 4,229 $ (1,087)
Income/(loss) from discontinued operations, net of tax, on which diluted earnings per share is calculated (15) 16
Net income/(loss) on which diluted earnings per share is calculated $ 4,214 $ (1,071)
Earnings/(loss) per share of common stock:
Assuming dilution
Continuing operations $ 4.59 $ (1.21)
Discontinued operations (0.02) 0.02
Total $ 4.58 $ (1.19)
Basic
Continuing operations $ 4.65 $ (1.21)
Discontinued operations (0.02) 0.02
Total $ 4.63 $ (1.19)

Stock options to purchase ~~930,788~~2,346,268 shares and ~~879,289~~930,788 shares (average of first, second and third quarter share amounts) were outstanding as of September 30, ~~2022~~2023 and ~~2021,~~2022, respectively, but were not included in the computation of diluted ~~earnings/(loss)~~earnings per share because the exercise price of the options during the respective period was greater than the average market price of the common shares, and therefore, the effect would have been antidilutive.

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 for the nine months ended September 30, 2022, as the effect would have been antidilutive.

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Notes to Consolidated Financial Statements — (continued)

8. Financial Assets & ~~Liabilities~~:

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;~~

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

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

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

Level 3–Unobservable inputs for the asset or liability.

●

~~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.~~

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.

•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~~protect principal by investing in very liquid ~~and~~investment securities with highly rated ~~investment grade securities.~~

counterparties.

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

2023.

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, 2023 and 2022, ~~and 2021,~~ respectively.

Table of Contents

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, ~~2022~~2023 and December 31, ~~2021.~~

Fair Value

Hierarchy

At September 30, 2022

At December 31, 2021
(Dollars in millions)

Level

Assets (8)

Liabilities (9)

Assets (8)

Liabilities (9)
Cash equivalents: (1)

Time deposits and certificates of deposit (2)

2

$
4,195

$
N/A

$
1,903

$
N/A
Money market funds

1

732

N/A

263

N/A
U.S. government securities (2)

2

—

N/A

599

N/A
Total cash equivalents

$
4,927

$
N/A

$
2,766

$
N/A
Equity investments (3)

1

—

N/A

0

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

1

339

12

—
Foreign exchange contracts

2

998

531

359

117
Derivatives not designated as hedging instruments:

Foreign exchange contracts

2

13

31

21

42
Equity contracts (7)

1,2

—

178

6

4
Total

$
7,908

$
1,263

$
4,608

$
162
2022.


	Fair Value Hierarchy Level	At September 30, 2023				At December 31, 2022
(Dollars in millions)		Assets (5)		Liabilities (6)		Assets (5)		Liabilities (6)
Cash equivalents: (1)
Time deposits and certificates of deposit (2)	2	$	3,765	N/A		$	3,712	N/A
Money market funds	1	212		N/A		306		N/A
Total cash equivalents		$	3,977	N/A		$	4,018	N/A
Equity investments	1	2		N/A		—		N/A
Debt securities-current (2)(3)	2	3,721		N/A		852		N/A
Debt securities-noncurrent (2)(4)	2,3	33		N/A		31		N/A
Derivatives designated as hedging instruments:
Interest rate contracts	2	0		579		3		336
Foreign exchange contracts	2	420		185		184		674
Derivatives not designated as hedging instruments:
Foreign exchange contracts	2	12		45		42		16
Equity contracts	2	0		55		49		8
Total		$	8,164	$	864	$	5,179	$	1,034

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

~~(2)~~

(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)Term deposits and U.S. treasury bills that are reported within marketable securities in the Consolidated Balance Sheet. The September 30, 2023 balance includes partial proceeds from the first quarter 2023 debt issuances. See note 12, "Borrowings," for additional information.

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

(5)

~~(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.~~

~~(6)~~

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

~~(7)~~

~~Level 1 includes immaterial amounts related to equity futures contracts.~~

~~(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, 2022 were $1,008 million and $4 million, respectively, and at December 31, 2021 were $358 million and $40 million, respectively.

~~(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, 2022 were $475 million and $603 million, respectively, and at December 31, 2021 were $60 million and $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, and investments and sundry assets in the Consolidated Balance ~~Sheet. For the nine months ended~~Sheet at 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 $112023 were $431 million and ~~a realized loss~~$1 million, respectively, and at December 31, 2022 were $271 million and $7 million, respectively.

(6)The gross balances of ~~$174 million related to the Kyndryl shares under the August 2022 Exchange for the three~~derivative liabilities contained within other accrued expenses and ~~nine months ended September 30, 2022, respectively. Gains~~liabilities, and ~~losses for both the May and August exchanges as noted above were recorded in~~ other ~~(income) and expense~~liabilities in the Consolidated ~~Income Statement.~~

Balance Sheet at September 30, 2023 were $171 million and $693 million, respectively, and at December 31, 2022 were $546 million and $488 million, respectively.

N/A – not applicable

Financial Assets and Liabilities Not Measured at Fair Value

Short-Term Receivables and Payables

~~Notes and other accounts receivable~~

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

~~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, ~~2022~~2023 and December 31, ~~2021,~~2022, the difference between the carrying amount and estimated fair value for loans and long-term receivables was immaterial. If measured at fair value in the financial statements, these financial instruments would be classified as Level 3 in the fair value hierarchy.

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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 ~~$44,942~~$48,828 million and ~~$44,917~~$46,189 million, and the estimated fair value was ~~$40,944~~$44,264 million and ~~$49,465~~$42,514 million at September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively. If measured at fair value in the financial statements, long-term debt (including the current portion) would be classified as Level 2 in the fair value hierarchy.

9. Financing Receivables:

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

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


	Client Financing Receivables
	Client Loan and Installment Payment Receivables		Investment in Sales-Type and Direct Financing
					Commercial Financing Receivables
(Dollars in millions)					Held for		Held for
At September 30, 2023	(Loans)		Leases		Investment		Sale*		Total
Financing receivables, gross	$	6,398	$	3,628	$	313	$	593	$	10,932
Unearned income	(406)		(355)		—		—		(761)
Unguaranteed residual value	—		403		—		—		403
Amortized cost	$	5,992	$	3,676	$	313	$	593	$	10,573
Allowance for credit losses	(95)		(59)		(5)		—		(159)
Total financing receivables, net	$	5,897	$	3,617	$	308	$	593	$	10,414
Current portion	$	3,337	$	1,387	$	308	$	593	$	5,625
Noncurrent portion	$	2,560	$	2,230	$	—	$	—	$	4,789


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

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 September 30, 2022:

(Loans)

Leases

Investment

Sale*

Total
Financing receivables, gross

$
7,777

$
3,566

$
169

$
395

$
11,907
Unearned income

(330)

(285)

—

—

(615)
Unguaranteed residual value

—

323

—

—

323
Amortized cost

$
7,447

$
3,604

$
169

$
395

$
11,616
Allowance for credit losses

(101)

(53)

(5)

—

(159)
Total financing receivables, net

$
7,346

$
3,551

$
164

$
395

$
11,456
Current portion

$
4,750

$
1,366

$
164

$
395

$
6,676
Noncurrent portion

$
2,596

$
2,185

$
—

$
—

$
4,781

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

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. These actions may include credit insurance, financial guarantees, nonrecourse secured borrowings, transfers of receivables recorded as true sales in accordance with accounting guidance or sales of equipment under operating lease. Sale of receivables arrangements are also utilized in the normal course of business as part of the company’s cash and liquidity management.

Financing receivables pledged as collateral for ~~nonrecourse~~secured borrowings were ~~$386~~$294 million and ~~$408~~$349 million at September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively. These borrowings are included in note 12, “Borrowings.”

Transfer of Financial Assets

The company has an existing agreement with a third-party investor to 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~~There were no material client financing receivables ~~were largely focused on credit mitigation. During 2021, sales of client financing receivables were utilized as part of~~transferred for the ~~company’s cash~~nine months ended September 30, 2023 and ~~liquidity management as well as for credit mitigation.~~

2022.

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


(Dollars in millions)
For the nine months ended September 30:	2023		2022




Commercial financing receivables:
Receivables transferred during the period	$	6,453	$	6,091
Receivables uncollected at end of period*	$	836	$	816

*	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.

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, 2023 and 2022.

The transfer of these receivables qualified as true sales and therefore reduced financing receivables. The cash proceeds from the sales are included in cash flows from operating ~~activities and the impacts to the Consolidated Income~~

~~Table of Contents~~

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

~~Statement, including fees and net gain or loss associated with the transfers of these receivables for~~activities. For the nine months ended September 30, 2023 and 2022, the net loss, including fees, associated with the transfer of commercial financial receivables was $69 million and ~~2021 were not material.~~

$38 million, respectively, and is included in other (income) and expense in the Consolidated Income Statement.

Financing Receivables by Portfolio Segment

The following tables present the amortized cost basis for client financing receivables at September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, further segmented by three classes: Americas, Europe/Middle East/Africa (EMEA) and Asia Pacific. The commercial financing receivables portfolio segment is excluded from the tables in the sections below as the receivables are short term in nature and the current estimated risk of loss and resulting impact to the company’s financial results are not material.


(Dollars in millions)
At September 30, 2023:	Americas		EMEA		Asia Pacific		Total
Amortized cost	$	5,841	$	2,636	$	1,190	$	9,668
Allowance for credit losses:
Beginning balance at January 1, 2023	$	88	$	60	$	20	$	168
Write-offs	$	(9)	$	0	$	0	$	(9)
Recoveries	0		0		3		3
Additions/(releases)	6		(14)		(4)		(11)
Other*	6		(1)		(1)		3
Ending balance at September 30, 2023	$	92	$	44	$	18	$	154

(Dollars in millions)












At September 30, 2022:

Americas

EMEA

Asia Pacific

Total
Amortized cost

$
6,900

$
2,731

$
1,420

$
11,051
Allowance for credit losses:







Beginning balance at January 1, 2022

$
111

$
61

$
23

$
195
Write-offs

$
(20)

$
(1)

$
(2)

$
(23)
Recoveries

1

0

4

5
Additions/(releases)

(6)

(3)

(5)

(13)
Other*

1

(8)

(2)

(10)
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.

Table of Contents

Notes to Consolidated Financial Statements — (continued)


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

*Primarily represents translation adjustments.

When determining the allowances, financing receivables are evaluated either on an individual or a collective basis. For the company’s policy on determining allowances for credit losses, refer to note A, “Significant Accounting Policies,” in the company’s ~~2021~~2022 Annual Report. ~~Any changes to economic models that occurred after the balance sheet date will be reflected in future periods.~~

~~Table of Contents~~

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

Past Due Financing Receivables

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

Amortized

Billed

Amortized

Total

Amortized

Cost

Invoices

Cost
(Dollars in millions)

Amortized

Cost

> 90 Days and

> 90 Days and

Not
At September 30, 2022:

Cost

> 90 Days*

Accruing*

Accruing

Accruing**
Americas

$
6,900

$
266

$
197

$
22

$
70
EMEA

2,731

81

1

0

81
Asia Pacific

1,420

23

6

1

17
Total client financing receivables

$
11,051

$
369

$
204

$
23

$
168

Amortized

Billed

Amortized

Total

Amortized

Cost

Invoices

Cost
(Dollars in millions)

Amortized

Cost

> 90 Days and

> 90 Days and

Not
At December 31, 2021:

Cost

> 90 Days*

Accruing*

Accruing

Accruing**
Americas

$
6,573

$
188

$
100

$
6

$
90
EMEA

3,793

99

7

2

95
Asia Pacific

2,031

25

5

2

20
Total client financing receivables

$
12,397

$
312

$
112

$
10

$
205


(Dollars in millions)	Total Amortized Cost		Amortized Cost > 90 Days*		Amortized Cost > 90 Days and Accruing*		Billed Invoices > 90 Days and Accruing		Amortized Cost Not Accruing**
At September 30, 2023:
Americas	$	5,841	$	101	$	33	$	7	$	70
EMEA	2,636		34		4		1		30
Asia Pacific	1,190		17		1		1		15
Total client financing receivables	$	9,668	$	152	$	37	$	9	$	115


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

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

**	Of the amortized cost not accruing, there was a related allowance of $120 million and $153 million at September 30, 2022 and December 31, 2021, respectively. Financing income recognized on these receivables was immaterial for the three and nine months ended September 30, 2022, respectively.

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

**Of the amortized cost not accruing, there was a related allowance of $112 million and $122 million at September 30, 2023 and December 31, 2022, respectively. Financing income recognized on these receivables was immaterial for the three and nine months ended September 30, 2023, 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.

Table of Contents

Notes to Consolidated Financial Statements — (continued)

The following tables present the amortized cost basis for client financing receivables by credit quality indicator at September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively. Receivables with a credit quality indicator ranging from Aaa to Baa3 are considered investment grade. All others are considered non-investment grade. The credit quality indicators reflect mitigating credit enhancement actions taken by customers which reduce the risk to IBM.

(Dollars in millions)

Americas

EMEA

Asia Pacific
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

1,401

387

487

198

210

77
2020

660

265

268

168

213

53
2019

310

119

167

110

133

24
2018

147

40

45

37

87

25
2017 and prior

40

47

15

54

25

18
Total

$
5,031

$
1,869

$
1,698

$
1,033

$
1,140

$
280

Gross write-offs by vintage year at September 30, 2023 were not material.


(Dollars in millions)	Americas				EMEA				Asia Pacific
At September 30, 2023:	Aaa – Baa3		Ba1 – C		Aaa – Baa3		Ba1 – C		Aaa – Baa3		Ba1 – C
Vintage year:
2023	$	1,242	$	718	$	385	$	384	$	281	$	59
2022	1,962		307		737		395		381		45
2021	780		160		290		94		120		43
2020	283		120		120		73		105		26
2019	124		33		66		45		52		10
2018 and prior	58		54		16		32		46		21
Total	$	4,449	$	1,393	$	1,613	$	1,023	$	986	$	204


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

~~Table of Contents~~

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

(Dollars in millions)

Americas

EMEA

Asia Pacific
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

1,013

392

506

342

381

86
2019

544

236

287

291

297

51
2018

338

117

189

85

211

64
2017

108

50

15

52

74

17
2016 and prior

20

53

21

46

38

20
Total

$
4,579

$
1,994

$
2,198

$
1,595

$
1,567

$
464

Modifications and Troubled Debt Restructurings

The company did not have any significant modifications due to financial difficulty during the nine months ended September 30, 2023. The company did not have any significant troubled debt restructurings during the ~~nine months ended September 30, 2022 or for the~~ year ended December 31, ~~2021.~~

2022.

10. Leases:

Accounting for Leases as a Lessor

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


	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in millions)	2023		2022		2023		2022
Lease income — sales-type and direct financing leases:
Sales-type lease selling price	$	190	$	99	$	528	$	888
Less: Carrying value of underlying assets*	(42)		(57)		(133)		(195)
Gross profit	$	148	$	43	$	395	$	693
Interest income on lease receivables	58		54		176		144
Total sales-type and direct financing lease income	$	206	$	97	$	571	$	838
Lease income — operating leases	20		29		71		86
Variable lease income	12		19		47		75
Total lease income	$	238	$	145	$	689	$	998

Three Months Ended September 30,

Nine Months Ended September 30,
(Dollars in millions)

2022

2021

2022

2021
Lease income — sales-type and direct financing leases:








Sales-type lease selling price

$
99

$
119

$
888

$
870
Less: Carrying value of underlying assets*

(57)

(48)

(195)

(205)
Gross profit

$
43

$
70

$
693

$
664
Interest income on lease receivables

54

44

144

142
Total sales-type and direct financing lease income

$
97

$
114

$
838

$
806
Lease income — operating leases

29

38

86

136
Variable lease income

19

18

75

97
Total lease income

$
145

$
169

$
998

$
1,038

* Excludes unguaranteed residual value.

Table of Contents

Notes to Consolidated Financial Statements — (continued)

11. Intangible Assets Including Goodwill:

Intangible Assets

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


	At September 30, 2023
(Dollars in millions)	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount*
Intangible asset class:
Capitalized software	$	1,606	$	(734)	$	872
Client relationships	8,946		(3,253)		5,693
Completed technology	5,630		(2,321)		3,309
Patents/trademarks	1,805		(404)		1,401
Other**	17		(15)		2
Total	$	18,004	$	(6,726)	$	11,278


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

At September 30, 2022


Gross Carrying

Accumulated

Net Carrying
(Dollars in millions)

Amount

Amortization

Amount*
Intangible asset class:

Capitalized software

$
1,697

$
(720)

$
977
Client relationships

8,051

(2,763)

5,288
Completed technology

5,490

(2,242)

3,248
Patents/trademarks

2,093

(645)

1,448
Other**

32

(27)

5
Total

$
17,364

$
(6,397)

$
10,967

At December 31, 2021


Gross Carrying

Accumulated

Net Carrying
(Dollars in millions)

Amount

Amortization

Amount*
Intangible asset class:

Capitalized software

$
1,696

$
(751)

$
945
Client relationships

9,021

(2,889)

6,132
Completed technology

6,074

(2,259)

3,815
Patents/trademarks

2,196

(586)

1,610
Other**

44

(35)

9
Total

$
19,031

$
(6,520)

$
12,511

* Amounts as of September 30, ~~2022~~2023 and December 31, ~~2021 included~~2022 include a decrease in net intangible asset balances of ~~$389~~$41 million and ~~$221~~$198 million, respectively, due to foreign currency translation.

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

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

The net carrying amount of intangible assets ~~decreased $1,544~~increased $94 million during the first nine months of ~~2022,~~2023, primarily due to ~~intangible asset amortization and the impacts of currency, partially offset by~~ additions of acquired intangibles of $1,406 million, primarily related to the acquisition of Apptio, Inc. in the current quarter and capitalized ~~software.~~software, partially offset by intangible asset amortization. The aggregate intangible asset amortization expense was $572 million and $1,676 million for the third quarter and first nine months of 2023, respectively, compared to $577 million and $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. In the first nine months of ~~2022,~~2023, the company retired ~~$647~~$1,327 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, ~~2022:~~

Capitalized

Acquired



(Dollars in millions)

Software

Intangibles

Total
Remainder of 2022

$
157

$
405

$
562
2023

472

1,469

1,941
2024

286

1,452

1,737
2025

63

1,434

1,497
2026

—

1,417

1,417
Thereafter

—

3,813

3,813

2023:


(Dollars in millions)	Capitalized Software		Acquired Intangibles		Total
Remainder of 2023	$	156	$	430	$	585
2024	448		1,703		2,151
2025	213		1,684		1,897
2026	55		1,661		1,716
2027	—		1,642		1,642
Thereafter	—		3,285		3,285

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, ~~2022~~2023 and for the year ended December 31, ~~2021~~2022 were as follows:


(Dollars in millions)	Balance		Goodwill Additions		Purchase Price Adjustments				Foreign Currency Translation and Other Adjustments*		Balance
Segment	1/1/2023						Divestitures				9/30/2023
Software	$	43,657	$	3,447	$	(7)	$	—	$	(173)	$	46,923
Consulting	7,928		395		6		—		(26)		8,302
Infrastructure	4,363		12		—		—		(5)		4,370
Other	—		—		—		—		—		—
Total	$	55,949	$	3,854	$	(1)	$	—	$	(205)	$	59,596

Foreign



Currency

Purchase

Translation

(Dollars in millions)

Balance

Goodwill

Price

and Other

Balance
Segment

1/1/2022

Additions

Adjustments

Divestitures

Adjustments*

9/30/2022
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

$
55,643

$
903

$
(160)

$
(485)

$
(1,683)

$
54,218


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

*	~~Primarily driven by foreign currency translation.~~

**	~~The company derecognized $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.

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

*	~~Primarily driven by foreign currency translation.~~

**	~~Recast to conform to current year presentation.~~

There were no goodwill impairment losses recorded during the first nine months of ~~2022~~2023 or full-year ~~2021~~2022 and the company has no accumulated impairment losses. Purchase price adjustments recorded in the first nine months of ~~2022~~2023 and full-year ~~2021~~2022 were related to acquisitions that were still subject to the measurement period that ends at the earlier of 12 months from the acquisition date or when information becomes available. Net purchase price adjustments recorded in the first nine months of 2023 were not material. Net purchase price adjustments recorded in 2022 primarily ~~relate~~related to deferred tax assets and liabilities associated with the Turbonomic acquisition.

~~12.~~ ~~Borrowings:~~

~~Short-Term Debt~~

At September 30,

At December 31,
(Dollars in millions)

2022

2021
Short-term loans

$
196

$
22
Long-term debt — current maturities

5,741

6,764
Total

$
5,937

$
6,787

Included within short-term debt in the company’s Consolidated Balance Sheet at September 30, 2022 is $184 million of secured borrowings recorded at fair value from the short-term credit facility and the May 2022 Exchange as described in note 8, “Financial Assets & Liabilities.”

~~Table of Contents~~12.

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

Borrowings:

Short-Term Debt


(Dollars in millions)	At September 30, 2023		At December 31, 2022
Short-term loans	$	13	$	8
Long-term debt — current maturities	6,400		4,751
Total	$	6,414	$	4,760

The weighted-average interest rate for short-term loans ~~excluding the aforementioned secured borrowings~~ was ~~8.2~~1.8 percent and ~~6.7~~7.6 percent at September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively.

Table of Contents
Notes to Consolidated Financial Statements — (continued)

Long-Term Debt

Pre-Swap Borrowing


		Balance		Balance
(Dollars in millions)	Maturities	9/30/2023		12/31/2022
U.S. dollar debt (weighted-average interest rate at September 30, 2023):*
2.4%	2023	$	2	$	1,529
3.3%	2024	5,004		5,009
5.1%	2025	1,602		1,603
3.5%	2026	5,201		4,351
3.1%	2027	3,620		3,620
5.0%	2028	1,313		313
3.5%	2029	3,250		3,250
2.0%	2030	1,350		1,350
4.4%	2032	1,850		1,850
4.8%	2033	750		—
8.0%	2038	83		83
4.5%	2039	2,745		2,745
2.9%	2040	650		650
4.0%	2042	1,107		1,107
7.0%	2045	27		27
4.7%	2046	650		650
4.3%	2049	3,000		3,000
3.0%	2050	750		750
4.2%	2052	1,400		1,400
5.1%	2053	650		—
7.1%	2096	316		316
		$	35,321	$	33,605
Other currencies (weighted-average interest rate at September 30, 2023, in parentheses):*
Euro (1.8%)	2024–2043	$	18,512	$	17,087
Pound sterling (4.9%)	2038	915		—
Japanese yen (0.5%)	2024–2028	1,182		694
Other (15.1%)	2023–2026	310		361
		$	56,240	$	51,747
Finance lease obligations (4.3%)	2023–2030	303		239
		$	56,542	$	51,986
Less: net unamortized discount		846		835
Less: net unamortized debt issuance costs		157		138
Add: fair value adjustment**		(311)		(73)
		$	55,228	$	50,940
Less: current maturities		6,400		4,751
Total		$	48,828	$	46,189

Balance

Balance
(Dollars in millions)

Maturities

9/30/2022

12/31/2021
U.S. dollar debt (weighted-average interest rate at September 30, 2022):*






2.9%

2022

$
900

$
5,673
3.4%

2023

1,536

1,573
3.3%

2024

5,011

5,016
5.1%

2025

1,604

608
3.3%

2026

4,352

4,356
3.1%

2027

3,621

2,221
6.5%

2028

313

313
3.5%

2029

3,250

3,250
2.0%

2030

1,350

1,350
4.4%

2032

1,850

600
8.0%

2038

83

83
4.5%

2039

2,745

2,745
2.9%

2040

650

650
4.0%

2042

1,107

1,107
7.0%

2045

27

27
4.7%

2046

650

650
4.3%

2049

3,000

3,000
3.0%

2050

750

750
4.2%

2052

1,400

—
7.1%

2096

316

316

$
34,516

$
34,290
Other currencies (weighted-average interest rate at September 30, 2022, in parentheses):*






Euro (1.1%)

2023–2040

$
15,671

$
15,903
Pound sterling

2022

—

406
Japanese yen (0.3%)

2022–2026

1,005

1,263
Other (16.0%)

2022–2026

397

378

$
51,590

$
52,240
Finance lease obligations (2.8%)

2022–2030

159

99

$
51,749

$
52,339
Less: net unamortized discount



841

839
Less: net unamortized debt issuance costs



140

130
Add: fair value adjustment**



(84)

311

$
50,684

$
51,681
Less: current maturities



5,741

6,764
Total



$
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.

Table of Contents

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 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 ~~2022,~~2023, the company issued ~~$2.3~~$0.7 billion of Japanese yen floating-rate syndicated bank loans with a maturity of 5 years; $4.6 billion of Euro fixed-rate notes in tranches with maturities ranging from 84 to 1220 years and coupons ranging from ~~0.875~~3.375 percent to ~~1.25 percent, and $1.8~~4 percent; $0.9 billion of ~~U.S. dollar~~Pound sterling fixed-rate notes with ~~maturities ranging from 5 to 30~~a maturity of 15 years and ~~coupons ranging from 2.20 to 3.43 percent.~~a coupon of 4.875 percent;

~~On July 20, 2022, the company issued~~and $3.25 billion of U.S. dollar fixed-rate notes in tranches with maturities ranging from 3 to 30 years and coupons ranging from ~~4.00~~4.5 to ~~4.90~~5.1 percent.

Pre-swap annual contractual obligations of long-term debt outstanding at September 30, ~~2022,~~2023, were as follows:

(Dollars in millions)

Total
Remainder of 2022

$
1,334
2023

4,490
2024

6,246
2025

4,586
2026

4,657
Thereafter

30,436
Total

$
51,749

(Dollars in millions) Total
Remainder of 2023 $ 75
2024 6,368
2025 4,912
2026 5,570
2027 5,772
Thereafter 33,845
Total $ 56,542

Interest on Debt

(Dollars in millions)






For the nine months ended September 30:

2022

2021
Cost of financing

$
264

$
312
Interest expense

903

852
Interest capitalized

4

3
Total interest paid and accrued

$
1,170

$
1,167

(Dollars in millions)
For the nine months ended September 30: 2023 2022
Cost of financing $ 255 $ 264
Interest expense 1,202 903
Interest capitalized 7 4
Total interest paid and accrued $ 1,464 $ 1,170

Lines of Credit

The company has a $2.5 billion Three-Year Credit Agreement and a $7.5 billion Five-Year Credit Agreement (the Credit Agreements) with maturity dates of June 20, ~~2025~~2026 and June 22, ~~2027,~~2028, respectively. The Credit Agreements permit the company and its subsidiary borrowers to borrow up to $10 billion on a revolving basis. At September 30, ~~2022,~~2023, there were no borrowings by the company, or its subsidiaries, under these credit facilities.

~~Table of Contents~~13.

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

Commitments:

~~13.~~ ~~Commitments:~~

The company’s extended lines of credit to third-party entities include unused amounts of $1.5 billion and ~~$1.7~~$1.6 billion at September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively. A portion of these amounts was available to the company’s business partners to support their working capital needs. In addition, the company has committed to provide future financing to its clients in connection with client purchase agreements for ~~$2.3~~$1.5 billion and ~~$3.2~~$2.1 billion at September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively. The reduction in the future financing commitments is primarily due to lower services financing in the current year. 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

Table of Contents

Notes to Consolidated Financial Statements — (continued)

Policies,” in the company’s ~~2021~~2022 Annual Report for additional information. The allowance for these commitments is recorded in other liabilities in the Consolidated Balance Sheet and was not material at September 30, ~~2022.~~

2023.

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

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

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

In addition, the company guarantees certain loans and financial commitments. The maximum potential future payment under these financial guarantees and the fair value of these guarantees recognized in the Consolidated Balance Sheet at September 30, ~~2022~~2023 and December 31, ~~2021~~2022 was not material.

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

Standard Warranty Liability

(Dollars in millions)

2022

2021
Balance at January 1

$
77

$
83
Current period accruals

58

50
Accrual adjustments to reflect actual experience

(1)

(2)
Charges incurred

(62)

(66)
Balance at September 30

$
72

$
66


(Dollars in millions)	2023		2022
Balance at January 1	$	79	$	77
Current-period accruals	53		58
Accrual adjustments to reflect actual experience	(14)		(1)
Charges incurred	(64)		(62)
Balance at September 30	$	54	$	72

~~Table of Contents~~

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

Extended Warranty Liability

(Dollars in millions)

2022

2021
Balance at January 1

$
350

$
425
Revenue deferred for new extended warranty contracts

103

71
Amortization of deferred revenue

(148)

(154)
Other*

(21)

(9)
Balance at September 30

$
284

$
334
Current portion

$
139

$
171
Noncurrent portion

$
145

$
163


(Dollars in millions)	2023		2022
Balance at January 1	$	272	$	350
Revenue deferred for new extended warranty contracts	55		103
Amortization of deferred revenue	(122)		(148)
Other*	(4)		(21)
Balance at September 30	$	201	$	284
Current portion	$	119	$	139
Noncurrent portion	$	82	$	145

*Other primarily consists of foreign currency translation adjustments.

Table of Contents
Notes to Consolidated Financial Statements — (continued)

14.Contingencies:

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

The company records a provision with respect to a claim, suit, investigation or proceeding when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Any recorded liabilities, including any changes to such liabilities for the quarter ended September 30, ~~2022~~2023 were not material to the Consolidated Financial Statements.

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

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

~~Table of Contents~~

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

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

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

Table of Contents

Notes to Consolidated Financial Statements — (continued)

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

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 damages, plus interest and litigation costs. In April 2022, the Court of Appeal 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 billion. On September 14, 2021, the court ruled on GF’s motion to dismiss. On April 7, 2022, the Appellate Division unanimously reversed the lower court’s dismissal of IBM’s fraud claim. IBM’s claims for breaches of contract, promissory estoppel, and fraud are proceeding.

On April 5, 2022, a putative securities law class action was commenced in the United States District Court for the Southern District of New York alleging that during the period from April 4, 2017 through October 20, 2021, certain strategic imperatives revenues were misclassified. The company, two current IBM senior executives, and two former IBM senior executives are named as defendants. On June 23, 2022, the court entered an order appointing Iron Workers Local 580 Joint Funds as lead plaintiff. On September 21, 2022, the plaintiff voluntarily dismissed the case, without prejudice. On 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

~~Table of Contents~~

~~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.~~appeal. IBM does not believe it has any material exposure relating to this litigation. No material liability or related indemnification asset has been recorded by IBM.

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)

15. Equity Activity:

Reclassifications and Taxes Related to Items of Other Comprehensive Income

(Dollars in millions)

Before Tax

Tax (Expense)/

Net of Tax
For the three months ended September 30, 2022:

Amount

Benefit

Amount
Other comprehensive income/(loss):






Foreign currency translation adjustments

$
143

$
(301)

$
(158)
Net changes related to available-for-sale securities:






Unrealized gains/(losses) arising during the period

$
0

$
0

$
0
Reclassification of (gains)/losses to other (income) and expense

—

—

—
Total net changes related to available-for-sale securities

$
0

$
0

$
0
Unrealized gains/(losses) on cash flow hedges:






Unrealized gains/(losses) arising during the period

$
189

$
(49)

$
140
Reclassification of (gains)/losses to:






Cost of services

(4)

1

(3)
Cost of sales

(35)

10

(25)
Cost of financing

7

(2)

5
SG&A expense

(8)

2

(6)
Other (income) and expense

6

(2)

5
Interest expense

22

(5)

16
Total unrealized gains/(losses) on cash flow hedges

$
178

$
(45)

$
133
Retirement-related benefit plans*:






Prior service costs/(credits)

$
412

$
(104)

$
309
Net (losses)/gains arising during the period

53

(13)

39
Curtailments and settlements

5,913

(1,487)

4,426
Amortization of prior service (credits)/costs

3

(1)

2
Amortization of net (gains)/losses

388

(108)

279
Total retirement-related benefit plans

$
6,768

$
(1,712)

$
5,056
Other comprehensive income/(loss)

$
7,089

$
(2,058)

$
5,030


(Dollars in millions)	Before Tax Amount		Tax (Expense)/ Benefit		Net of Tax Amount
For the three months ended September 30, 2023:
Other comprehensive income/(loss):
Foreign currency translation adjustments	$	151	$	(164)	$	(13)
Net changes related to available-for-sale securities:
Unrealized gains/(losses) arising during the period	$	0	$	0	$	0
Reclassification of (gains)/losses to other (income) and expense	—		—		—
Total net changes related to available-for-sale securities	$	0	$	0	$	0
Unrealized gains/(losses) on cash flow hedges:
Unrealized gains/(losses) arising during the period	$	131	$	(35)	$	95
Reclassification of (gains)/losses to:
Cost of services	2		0		1
Cost of sales	5		(1)		4
Cost of financing	3		(1)		2
SG&A expense	4		(1)		3
Other (income) and expense	175		(44)		131
Interest expense	14		(4)		11
Total unrealized gains/(losses) on cash flow hedges	$	333	$	(85)	$	248
Retirement-related benefit plans:*
Prior service costs/(credits)	$	—	$	—	$	—
Net (losses)/gains arising during the period	102		(26)		77
Curtailments and settlements	2		(1)		1
Amortization of prior service (credits)/costs	(2)		1		(2)
Amortization of net (gains)/losses	128		(37)		91
Total retirement-related benefit plans	$	230	$	(63)	$	167
Other comprehensive income/(loss)	$	714	$	(313)	$	402

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

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

Table of Contents

Notes to Consolidated Financial Statements — (continued)

Reclassifications and Taxes Related to Items of Other Comprehensive Income

(Dollars in millions)

Before Tax

Tax (Expense)/

Net of Tax
For the three months ended September 30, 2021:

Amount

Benefit

Amount
Other comprehensive income/(loss):






Foreign currency translation adjustments

$
(114)

$
(120)

$
(234)
Net changes related to available-for-sale securities:






Unrealized gains/(losses) arising during the period

$
0

$
0

$
0
Reclassification of (gains)/losses to other (income) and expense

—

—

—
Total net changes related to available-for-sale securities

$
0

$
0

$
0
Unrealized gains/(losses) on cash flow hedges:






Unrealized gains/(losses) arising during the period

$
109

$
(28)

$
82
Reclassification of (gains)/losses to:

Cost of services

(12)

3

(9)
Cost of sales

(1)

1

(1)
Cost of financing

6

(1)

4
SG&A expense

1

0

1
Other (income) and expense

22

(6)

17
Interest expense

16

(4)

12
Total unrealized gains/(losses) on cash flow hedges

$
141

$
(35)

$
106
Retirement-related benefit plans*:






Prior service costs/(credits)

$
0

$
0

$
0
Net (losses)/gains arising during the period

1

0

1
Curtailments and settlements

13

(4)

9
Amortization of prior service (credits)/costs

3

0

3
Amortization of net (gains)/losses

638

(174)

464
Total retirement-related benefit plans

$
656

$
(178)

$
478
Other comprehensive income/(loss)

$
683

$
(333)

$
350


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

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

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

Table of Contents

Notes to Consolidated Financial Statements — (continued)

Reclassifications and Taxes Related to Items of Other Comprehensive Income

(Dollars in millions)

Before Tax

Tax (Expense)/

Net of Tax
For the nine months ended September 30, 2022:

Amount

Benefit

Amount
Other comprehensive income/(loss):






Foreign currency translation adjustments

$
799

$
(784)

$
14
Net changes related to available-for-sale securities:






Unrealized gains/(losses) arising during the period

$
(1)

$
0

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

—

—

—
Total net changes related to available-for-sale securities

$
(1)

$
0

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






Unrealized gains/(losses) arising during the period

$
449

$
(118)

$
332
Reclassification of (gains)/losses to:






Cost of services

(32)

8

(24)
Cost of sales

(71)

20

(50)
Cost of financing

19

(5)

14
SG&A expense

(28)

8

(20)
Other (income) and expense

51

(13)

38
Interest expense

64

(16)

48
Total unrealized gains/(losses) on cash flow hedges

$
453

$
(116)

$
338
Retirement-related benefit plans*:






Prior service costs/(credits)

$
408

$
(99)

$
309
Net (losses)/gains arising during the period

63

(20)

43
Curtailments and settlements

5,931

(1,491)

4,440
Amortization of prior service (credits)/costs

16

(4)

12
Amortization of net (gains)/losses

1,305

(364)

941
Total retirement-related benefit plans

$
7,722

$
(1,978)

$
5,745
Other comprehensive income/(loss)

$
8,973

$
(2,877)

$
6,096


(Dollars in millions)	Before Tax Amount		Tax (Expense)/ Benefit		Net of Tax Amount
For the nine months ended September 30, 2023:
Other comprehensive income/(loss):
Foreign currency translation adjustments	$	180	$	(142)	$	39
Net changes related to available-for-sale securities:
Unrealized gains/(losses) arising during the period	$	(1)	$	0	$	(1)
Reclassification of (gains)/losses to other (income) and expense	—		—		—
Total net changes related to available-for-sale securities	$	(1)	$	0	$	(1)
Unrealized gains/(losses) on cash flow hedges:
Unrealized gains/(losses) arising during the period	$	279	$	(77)	$	203
Reclassification of (gains)/losses to:
Cost of services	6		(1)		5
Cost of sales	(12)		4		(8)
Cost of financing	12		(3)		9
SG&A expense	(7)		2		(4)
Other (income) and expense	(6)		1		(4)
Interest expense	57		(14)		43
Total unrealized gains/(losses) on cash flow hedges	$	330	$	(87)	$	243
Retirement-related benefit plans:*
Prior service costs/(credits)	$	—	$	1	$	1
Net (losses)/gains arising during the period	104		(19)		85
Curtailments and settlements	7		(2)		5
Amortization of prior service (credits)/costs	(6)		2		(5)
Amortization of net (gains)/losses	389		(113)		276
Total retirement-related benefit plans	$	494	$	(132)	$	361
Other comprehensive income/(loss)	$	1,003	$	(361)	$	642

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

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

Table of Contents

Notes to Consolidated Financial Statements — (continued)

Reclassifications and Taxes Related to Items of Other Comprehensive Income

(Dollars in millions)

Before Tax

Tax (Expense)/

Net of Tax
For the nine months ended September 30, 2021:

Amount

Benefit

Amount
Other comprehensive income/(loss):






Foreign currency translation adjustments

$
463

$
(304)

$
160
Net changes related to available-for-sale securities:




Unrealized gains/(losses) arising during the period

$
0

$
0

$
0
Reclassification of (gains)/losses to other (income) and expense

—

—

—
Total net changes related to available-for-sale securities

$
0

$
0

$
0
Unrealized gains/(losses) on cash flow hedges:






Unrealized gains/(losses) arising during the period

$
262

$
(66)

$
196
Reclassification of (gains)/losses to:

Cost of services

(33)

8

(25)
Cost of sales

30

(8)

23
Cost of financing

17

(4)

13
SG&A expense

32

(8)

24
Other (income) and expense

187

(47)

140
Interest expense

48

(12)

36
Total unrealized gains/(losses) on cash flow hedges

$
545

$
(138)

$
407
Retirement-related benefit plans*:






Prior service costs/(credits)

$
0

$
0

$
0
Net (losses)/gains arising during the period

23

4

27
Curtailments and settlements

46

(14)

32
Amortization of prior service (credits)/costs

8

0

8
Amortization of net (gains)/losses

1,929

(526)

1,403
Total retirement-related benefit plans

$
2,006

$
(537)

$
1,469
Other comprehensive income/(loss)

$
3,014

$
(978)

$
2,035


(Dollars in millions)	Before Tax Amount		Tax (Expense)/ Benefit		Net of Tax Amount
For the nine months ended September 30, 2022:
Other comprehensive income/(loss):
Foreign currency translation adjustments	$	799	$	(784)	$	14
Net changes related to available-for-sale securities:
Unrealized gains/(losses) arising during the period	$	(1)	$	0	$	(1)
Reclassification of (gains)/losses to other (income) and expense	—		—		—
Total net changes related to available-for-sale securities	$	(1)	$	0	$	(1)
Unrealized gains/(losses) on cash flow hedges:
Unrealized gains/(losses) arising during the period	$	449	$	(118)	$	332
Reclassification of (gains)/losses to:
Cost of services	(32)		8		(24)
Cost of sales	(71)		20		(50)
Cost of financing	19		(5)		14
SG&A expense	(28)		8		(20)
Other (income) and expense	51		(13)		38
Interest expense	64		(16)		48
Total unrealized gains/(losses) on cash flow hedges	$	453	$	(116)	$	338
Retirement-related benefit plans:*
Prior service costs/(credits)	$	408	$	(99)	$	309
Net (losses)/gains arising during the period	63		(20)		43
Curtailments and settlements	5,931		(1,491)		4,440
Amortization of prior service (credits)/costs	16		(4)		12
Amortization of net (gains)/losses	1,305		(364)		941
Total retirement-related benefit plans	$	7,722	$	(1,978)	$	5,745
Other comprehensive income/(loss)	$	8,973	$	(2,877)	$	6,096

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

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

Table of Contents
Notes to Consolidated Financial Statements — (continued)

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


(Dollars in millions)	Net Unrealized Gains/(Losses) on Cash Flow Hedges		Foreign Currency Translation Adjustments*		Net Change Retirement- Related Benefit Plans		Net Unrealized Gains/(Losses) on Available- For-Sale Securities		Accumulated Other Comprehensive Income/ (Loss)
January 1, 2023	$	(135)	$	(3,591)	$	(13,013)	$	(1)	$	(16,740)
Other comprehensive income before reclassifications	203		39		86		(1)		326
Amount reclassified from accumulated other comprehensive income	40		—		276		—		316
Total change for the period	$	243	$	39	$	361	$	(1)	$	642
September 30, 2023	$	109	$	(3,552)	$	(12,652)	$	(2)	$	(16,098)

Net Change

Net Unrealized



Net Unrealized

Foreign

Retirement-

Gains/(Losses)

Accumulated

Gains/(Losses)

Currency

Related

on Available-

Other

on Cash Flow

Translation

Benefit

For-Sale

Comprehensive
(Dollars in millions)

Hedges

Adjustments*

Plans

Securities

Income/(Loss)
January 1, 2022

$
(18)

$
(3,362)

$
(19,854)

$
(1)

$
(23,234)
Other comprehensive income before reclassifications

332

14

352

(1)

697
Amount reclassified from accumulated other comprehensive income

6

—

5,393
**

—

5,399
Total change for the period

$
338

$
14

$
5,745

$
(1)

$
6,096
September 30, 2022

$
320

$
(3,347)

$
(14,110)

$
(1)

$
(17,138)


(Dollars in millions)	Net Unrealized Gains/(Losses) on Cash Flow Hedges		Foreign Currency Translation Adjustments*		Net Change Retirement- Related Benefit Plans			Net Unrealized Gains/(Losses) on Available- For-Sale Securities		Accumulated Other Comprehensive Income/ (Loss)
January 1, 2022	$	(18)	$	(3,362)	$	(19,854)		$	(1)	$	(23,234)
Other comprehensive income before reclassifications	332		14		352			(1)		697
Amount reclassified from accumulated other comprehensive income	6		—		5,393		**	—		5,399
Total change for the period	$	338	$	14	$	5,745		$	(1)	$	6,096
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.~~

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.

~~Table of Contents~~*

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

Net Change

Net Unrealized



Net Unrealized

Foreign

Retirement-

Gains/(Losses)

Accumulated

Gains/(Losses)

Currency

Related

on Available-

Other

on Cash Flow

Translation

Benefit

For-Sale

Comprehensive
(Dollars in millions)

Hedges

Adjustments*

Plans

Securities

Income/(Loss)
January 1, 2021

$
(456)

$
(4,665)

$
(24,216)

$
0

$
(29,337)
Other comprehensive income before reclassifications

196

160

26

0

382
Amount reclassified from accumulated other comprehensive income

211

—

1,442

—

1,654
Total change for the period

$
407

$
160

$
1,469

$
0

$
2,035
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.

** 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.

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. At September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, the amount recognized in other accounts receivables for the right to reclaim cash collateral was ~~$191~~$112 million and $2$140 million, respectively. At September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, the amount recognized in accounts payable for the obligation to return cash collateral was ~~$222~~$3 million and ~~$38~~$8 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. At September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, the amount rehypothecated was ~~$158~~$3 million and $2$8 million respectively. Additionally, if derivative exposures covered by a qualifying master netting agreement had been netted in the Consolidated Balance Sheet at

Table of Contents

Notes to Consolidated Financial Statements — (continued)

September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, the total derivative asset and liability positions each would have been reduced by ~~$311~~$281 million and ~~$60~~$220 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.~~shares. The notional value of the swap iswas $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 an unrealized loss of $85 million, respectively, was recorded in other (income) and expense in the Consolidated Income Statement. The company settled the swap on November 2, 2022.

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, ~~2022~~2023 and December 31, ~~2021,~~2022, the total notional amount of the company’s interest-rate swaps was ~~$6.2~~$6.7 billion and ~~$0.4~~$6.5 billion, respectively. The weighted-average remaining maturity of these instruments at September 30, ~~2022~~2023 and December 31, ~~2021~~2022 was approximately ~~6.0~~5.7 years and ~~1.2~~6.0 years, respectively. These interest-rate contracts were accounted for as fair value hedges. The company did not have any cash flow hedges relating to this program outstanding at September 30, ~~2022~~2023 and December 31, ~~2021.~~

2022.

Forecasted Debt Issuance

The company is exposed to interest rate volatility on future debt issuances. To manage this risk, the company may use instruments such as forward starting interest-rate swaps to lock in the rate on the interest payments related to the forecasted debt issuances. There were no instruments outstanding at September 30, ~~2022~~2023 and December 31, ~~2021.~~

2022.

In connection with cash flow hedges of forecasted interest payments related to the company's borrowings, the company recorded net losses (before taxes) of ~~$144~~$126 million and ~~$157~~$139 million at September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively, in AOCI. The company estimates that ~~$18~~$16 million of the deferred net losses (before taxes) on derivatives in AOCI at September 30, ~~2022~~2023 will be reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying interest payments.

Foreign Exchange Risk

Long-Term Investments in Foreign Subsidiaries (Net Investment)

A large portion of the company’s foreign currency denominated debt portfolio is designated as a hedge of net investment in foreign subsidiaries to reduce the volatility in stockholders’ equity caused by changes in foreign currency exchange rates in the functional currency of major foreign subsidiaries with respect to the U.S. dollar. At September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, the carrying value of debt designated as hedging instruments was ~~$12.8~~$15.2 billion and ~~$14.1~~$13.4 billion, respectively. The company also uses cross-currency swaps and foreign exchange forward contracts (forward contracts) for this risk management purpose. At September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, the total notional amount of derivative instruments designated as net investment hedges was ~~$5.4~~$5.3 billion and ~~$6.8~~$4.7 billion, respectively. At ~~both~~ September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, the weighted-average remaining maturity of these instruments was approximately 0.2 years and 0.1 ~~year.~~

years, respectively.

Table of Contents
Notes to Consolidated Financial Statements — (continued)

Anticipated Royalties and Cost Transactions

The company’s operations generate significant nonfunctional currency, third-party vendor payments and intercompany payments for royalties and goods and services among the company’s non-U.S. subsidiaries and with the company. In anticipation of these foreign currency cash flows and in view of the volatility of the currency markets, the company selectively employs foreign exchange forward contracts to manage its currency risk. These forward contracts are accounted for as cash flow hedges. At September 30, ~~2022,~~2023, the maximum remaining length of time over which the company hedged its exposure is approximately two years. At September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, the total notional amount of forward contracts designated as cash flow hedges of forecasted royalty and cost transactions was

~~Table of Contents~~

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

~~$8.2~~ $9.0 billion and ~~$7.2~~$8.1 billion, respectively. At both September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, the weighted-average remaining maturity of these instruments was approximately 0.6 years.

At September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, in connection with cash flow hedges of anticipated royalties and cost transactions, the company recorded net gains (before taxes) of ~~$693~~$317 million and ~~$315~~$66 million, respectively, in AOCI. The company estimates that ~~$631~~$257 million of deferred net gains (before taxes) on derivatives in AOCI at September 30, ~~2022~~2023 will be reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying anticipated transactions.

Foreign Currency Denominated Borrowings

The company is exposed to exchange rate volatility on foreign currency denominated debt. To manage this risk, the company ~~employs~~may employ forward contracts or cross-currency swaps to convert ~~fixed-rate~~the principal, or principal and interest payments of foreign currency denominated debt to ~~fixed-rate~~ debt denominated in the functional currency of the borrowing entity. These ~~swaps~~derivatives are accounted for as cash flow hedges. For forward contracts, the company excludes the initial forward points from the assessment of hedge effectiveness and recognizes it in other (income) and expense in the Consolidated Income Statement on a straight-line basis over the life of the hedging instrument. Changes in the fair value of the amounts excluded from the assessment of hedge effectiveness are recognized in OCI.

In August 2023, the company terminated all of its outstanding cross-currency swaps designated as cash flow hedges of the principal and interest associated with foreign currency denominated debt and executed forward contracts designated as cash flow hedges of the principal associated with foreign currency denominated debt. At September 30, ~~2022,~~2023, the maximum length of time remaining over which the company hedged its exposure iswas approximately ~~five~~seven years. At September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, the total notional amount of ~~cross-currency swaps~~derivative instruments designated as cash flow hedges of ~~foreign currency~~foreign-currency denominated debt was ~~$3.0~~$5.2 billion and ~~$2.0~~$3.1 billion, respectively.

At September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, in connection with ~~cash flow hedges of foreign currency denominated borrowings,~~cross-currency swaps, the company recorded net losses (before taxes) of ~~$112~~$74 million and ~~$174~~$101 million, respectively, in ~~AOCI. The company estimates that $17~~AOCI, of which $23 million of deferred net ~~gains~~losses (before taxes) ~~on derivatives in AOCI at September 30, 2022 will~~is estimated to be reclassified to net income within the next 12 ~~months, providing an offsetting economic impact against~~months.

At September 30, 2023, in connection with forward contracts, the ~~underlying exposure.~~

company has recorded net gains (before taxes) of $40 million in AOCI. Approximately $72 million of losses (before taxes) related to the initial forward points excluded from the assessment of hedge effectiveness is expected to be amortized to other (income) and expenses within the next 12 months. There was no activity associated with forward contracts recorded in AOCI at December 31, 2022.

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, ~~2022~~2023 and December 31, ~~2021,~~2022, the total notional amount of derivative instruments in economic hedges of foreign currency exposure was ~~$4.3~~$6.2 billion and ~~$6.8~~$5.9 billion, respectively.

Table of Contents
Notes to Consolidated Financial Statements — (continued)

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, ~~2022~~2023 and December 31, ~~2021,~~2022, the total notional amount of derivative instruments in economic hedges of these compensation obligations was $1.2 billion and ~~$1.4~~$1.1 billion, respectively.

~~Table of Contents~~

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

Cumulative Basis Adjustments for Fair Value Hedges

At September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, the following amounts were recorded in the Consolidated Balance Sheet related to cumulative basis adjustments for fair value hedges:

September 30,

December 31,

(Dollars in millions)

2022

2021

Short-term debt:





Carrying amount of the hedged item

$
(425)

$
(227)

Cumulative hedging adjustments included in the carrying amount — assets/(liabilities)*

$
0

$
(2)

Long-term debt:





Carrying amount of the hedged item

$
(5,631)

$
(508)

Cumulative hedging adjustments included in the carrying amount — assets/(liabilities)*

$
84

$
(309)


(Dollars in millions)	September 30, 2023		December 31, 2022
Short-term debt:
Carrying amount of the hedged item	$	(2)	$	(199)
Cumulative hedging adjustments included in the carrying amount — assets/(liabilities)*	$	(2)	$	1
Long-term debt:
Carrying amount of the hedged item	$	(6,376)	$	(6,216)
Cumulative hedging adjustments included in the carrying amount — assets/(liabilities)*	$	312	$	72

*Includes ($~~263)~~212) million and ($~~302)~~250) million of hedging adjustments on discontinued hedging relationships at September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively.

The Effect of Derivative Instruments in the Consolidated Income Statement

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

Gains/(Losses) of

(Dollars in millions)

Total

Total Hedge Activity

For the three months ended September 30:

2022

2021

2022

2021

Cost of services

$
5,168

$
4,650

$
4

$
12

Cost of sales

$
1,389

$
1,363
*
$
35

$
1

Cost of financing

$
120

$
132
*
$
1

$
(1)

SG&A expense

$
4,391

$
4,306

$
(69)

$
(14)

Other (income) and expense

$
5,755

$
244

$
(189)

$
(7)

Interest expense

$
295

$
290

$
4

$
(2)

* Reclassified to conform to current year presentation.


(Dollars in millions)	Total				Gains/(Losses) of Total Hedge Activity
For the three months ended September 30:	2023		2022		2023		2022
Cost of services	$	5,217	$	5,168	$	(2)	$	4
Cost of sales	$	1,419	$	1,389	$	(5)	$	35
Cost of financing	$	94	$	120	$	(3)	$	1
SG&A expense	$	4,458	$	4,391	$	(58)	$	(69)
Other (income) and expense	$	(215)	$	5,755	$	(316)	$	(189)
Interest expense	$	412	$	295	$	(15)	$	4

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

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

(Dollars in millions)

Consolidated

Reclassified

Amounts Excluded from

For the three 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

$
(1)

$
(1)

$
—

$
—

Interest expense

(3)

(3)

—

—

Foreign exchange contracts

189

109

Cost of services

4

12

—

—

Cost of sales

35

1

—

—

Cost of financing

(6)

(5)

—

—

SG&A expense

8

(1)

—

—

Other (income) and expense

(6)

(22)

—

—

Interest expense

(18)

(13)

—

—

Instruments in net investment hedges (4):













Foreign exchange contracts

1,198

477

Cost of financing

—

—

5

1

Interest expense

—

—

14

3

Total

$
1,387

$
587



$
12

$
(32)

$
19

$
5


	Gain (Loss) Recognized in Consolidated Income Statement
(Dollars in millions)	Consolidated Income Statement Line Item	Recognized on Derivatives				Attributable to Risk Being Hedged (2)
For the three months ended September 30:		2023		2022		2023		2022
Derivative instruments in fair value hedges (1):
Interest rate contracts	Cost of financing	$	(33)	$	(64)	$	28	$	68
	Interest expense	(166)		(191)		139		203
Derivative instruments not designated as hedging instruments:
Foreign exchange contracts	Other (income) and expense	(141)		(186)		N/A		N/A
Equity contracts	SG&A expense	(54)		(76)		N/A		N/A
	Other (income) and expense	—		3		N/A		N/A
Total		$	(394)	$	(514)	$	167	$	271


	Gain (Loss) Recognized in Consolidated Income Statement and Other Comprehensive Income
	Recognized in OCI				Consolidated Income Statement Line Item	Reclassified from AOCI				Amounts Excluded from Effectiveness Testing (3)
(Dollars in millions)
For the three months ended September 30:	2023		2022			2023		2022		2023		2022
Derivative instruments in cash flow hedges:
Interest rate contracts	$	—	$	—	Cost of financing	$	(1)	$	(1)	$	—	$	—
					Interest expense	(4)		(3)		—		—
Foreign exchange contracts					Cost of services	(2)		4		—		—
Amount included in the assessment of effectiveness	101		189		Cost of sales	(5)		35		—		—
Amount excluded from the assessment of effectiveness	29		—		Cost of financing	(2)		(6)		—		—
					SG&A expense	(4)		8		—		—
					Other (income) and expense	(164)		(6)		(11)		—
					Interest expense	(11)		(18)		—		—
Instruments in net investment hedges (4):
Foreign exchange contracts	652		1,198		Cost of financing	—		—		5		5
					Interest expense	—		—		26		14
Total	$	782	$	1,387		$	(192)	$	12	$	21	$	19

~~(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.~~

(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 for net investment hedges in net income each period. For cash flow hedges of foreign currency denominated debt, the amounts excluded from effectiveness testing are amortized to net income over the life of the hedging instrument.

(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


(Dollars in millions)	Total				Gains/(Losses) of Total Hedge Activity
For the nine months ended September 30:	2023		2022		2023		2022
Cost of services	$	15,821	$	15,915	$	(6)	$	32
Cost of sales	$	4,329	$	4,555	$	12	$	71
Cost of financing	$	297	$	314	$	(10)	$	0
SG&A expense	$	14,212	$	13,843	$	44	$	(291)
Other (income) and expense	$	(721)	$	5,921	$	(315)	$	(730)
Interest expense	$	1,202	$	903	$	(46)	$	1


	Gain (Loss) Recognized in Consolidated Income Statement
(Dollars in millions)	Consolidated Income Statement Line Item	Recognized on Derivatives				Attributable to Risk Being Hedged (2)
For the nine months ended September 30:		2023		2022		2023		2022
Derivative instruments in fair value hedges (1):
Interest rate contracts	Cost of financing	$	(55)	$	(76)	$	42	$	89
	Interest expense	(261)		(261)		196		305
Derivative instruments not designated as hedging instruments:
Foreign exchange contracts	Other (income) and expense	(321)		(595)		N/A		N/A
Equity contracts	SG&A expense	37		(319)		N/A		N/A
	Other (income) and expense	—		(85)		N/A		N/A
Total		$	(600)	$	(1,336)	$	238	$	395


	Gain (Loss) Recognized in Consolidated Income Statement and Other Comprehensive Income
	Recognized in OCI				Consolidated Income Statement Line Item	Reclassified from AOCI				Amounts Excluded from Effectiveness Testing (3)
(Dollars in millions)
For the nine months ended September 30:	2023		2022			2023		2022		2023		2022
Derivative instruments in cash flow hedges:
Interest rate contracts	$	—	$	—	Cost of financing	$	(2)	$	(3)	$	—	$	—
					Interest expense	(11)		(10)		—		—
Foreign exchange contracts					Cost of services	(6)		32		—		—
Amount included in the assessment of effectiveness	250		449		Cost of sales	12		71		—		—
Amount excluded from the assessment of effectiveness	29		—		Cost of financing	(10)		(16)		—		—
					SG&A expense	7		28		—		—
					Other (income) and expense	16		(51)		(11)		—
					Interest expense	(46)		(54)		—		—
Instruments in net investment hedges (4):
Foreign exchange contracts	564		3,118		Cost of financing	—		—		16		6
					Interest expense	—		—		75		22
Total	$	843	$	3,567		$	(40)	$	(4)	$	81	$	28

~~(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)~~

~~(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.~~

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

N/A - not applicable

Table of Contents

Notes to Consolidated Financial Statements — (continued)

For the three and nine months ended September 30, ~~2022~~2023 and ~~2021,~~2022, there were no material gains or losses excluded from the assessment of hedge effectiveness (for fair value or cash flow hedges), or associated with an underlying exposure that did not or was not expected to occur (for cash flow hedges); nor are there any anticipated in the normal course of business.

~~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.


	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in millions)	2023		2022		2023		2022
Cost	$	48	$	40	$	141	$	124
Selling, general and administrative	148		138		465		427
Research, development and engineering	91		73		237		188
Pre-tax stock-based compensation cost	$	286	$	251	$	843	$	739
Income tax benefits	(74)		(51)		(216)		(191)
Total net stock-based compensation cost	$	213	$	200	$	627	$	548

Pre-tax stock-based compensation cost for the three months ended September 30, ~~2022~~2023 increased ~~$10~~$35 million compared to the corresponding period in the prior year ~~including~~due to increases in ~~ESPP~~restricted stock units ($1526 million) ~~as a result of the change described above and~~, performance share units ($54 million)~~, partially offset by decreases in~~ and stock options ($104 million) ~~primarily due to~~. The increases are driven by stock-based compensation awards granted by the ~~conversion~~company as part of ~~stock options of acquired entities in the prior year.~~

its annual cycles for executives and other employees.

Pre-tax stock-based compensation cost for the nine months ended September 30, ~~2022~~2023 increased ~~$74~~$104 million compared to the corresponding period in the prior year ~~including~~due to increases in restricted stock units ($3244 million), ~~ESPP~~stock options ($3025 million), Employees Stock Purchase Plan (ESPP) ($20 million) and performance share units ($1615 million). The increases are driven by stock-based compensation awards granted by the ~~change in~~company as part of its annual cycles for executives and other employees and the ESPP ~~described above and a change in the timing of the company’s executive grant cycle in~~being considered compensatory effective April 1, 2022.

Total unrecognized compensation cost related to non-vested awards at September 30, ~~2022~~2023 was ~~$1.6~~$1.7 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.


						Yr. to Yr.
(Dollars in millions)						Percent
For the three months ended September 30:	2023		2022			Change
Retirement-related plans — cost:
Defined benefit and contribution pension plans — cost	$	250	$	6,319	*	(96.0)	%
Nonpension postretirement plans — cost	33		31			5.3
Total	$	283	$	6,350		(95.5)	%

*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.

Table of Contents

Notes to Consolidated Financial Statements — (continued)


						Yr. to Yr.

														Yr. to Yr.
(Dollars in millions)						Percent		(Dollars in millions)						Percent
For the three months ended September 30:	2022			2021		Change
For the nine months ended September 30:								For the nine months ended September 30:	2023		2022			Change
Retirement-related plans — cost:								Retirement-related plans — cost:
Defined benefit and contribution pension plans — cost	$	6,319	*	$	598	nm		Defined benefit and contribution pension plans — cost	$	791	$	7,252	*	(89.1)	%
Nonpension postretirement plans — cost		31			44	(30.2)	%	Nonpension postretirement plans — cost	98		97			0.4
Total	$	6,350		$	642	nm		Total	$	888	$	7,350		(87.9)	%

*	~~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.

*	~~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


(Dollars in millions)	U.S. Plans					Non-U.S. Plans
For the three months ended September 30:	2023		2022			2023		2022
Service cost	$	—	$	—		$	44	$	57
Interest cost*	272		282			293		124
Expected return on plan assets*	(382)		(432)			(363)		(246)
Amortization of prior service costs/(credits)*	—		2			5		3
Recognized actuarial losses*	27		132			99		247
Curtailments and settlements*	—		5,894		**	2		19
Multi-employer plans	—		—			4		4
Other costs/(credits)*	—		—			3		8
Total net periodic pension (income)/cost of defined benefit plans	$	(82)	$	5,877		$	88	$	216
Cost of defined contribution plans	150		134			95		91
Total defined benefit and contribution pension plans cost recognized in the Consolidated Income Statement	$	68	$	6,012		$	182	$	307

*	~~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)~~


(Dollars in millions)	U.S. Plans					Non-U.S. Plans
For the nine months ended September 30:	2023		2022			2023		2022
Service cost	$	—	$	—		$	133	$	180
Interest cost*	817		885			873		394
Expected return on plan assets*	(1,146)		(1,382)			(1,081)		(778)
Amortization of prior service costs/(credits)*	0		6			15		10
Recognized actuarial losses*	82		490			302		784
Curtailments and settlements*	—		5,894		**	7		38
Multi-employer plans	—		—			10		11
Other costs/(credits)*	—		—			21		24
Total net periodic pension (income)/cost of defined benefit plans	$	(247)	$	5,893		$	281	$	663
Cost of defined contribution plans	473		416			283		280
Total defined benefit and contribution pension plans cost recognized in the Consolidated Income Statement	$	226	$	6,309		$	565	$	943

(Dollars in millions)

U.S. Plans

Non-U.S. Plans
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

*	~~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.~~

~~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

* 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.

(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

Table of Contents

Notes to Consolidated Financial Statements — (continued)

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:	2023		2022		2023		2022
Service cost	$	1	$	1	$	1	$	1
Interest cost*	29		21		10		8
Expected return on plan assets*	—		—		(1)		0
Amortization of prior service costs/(credits)*	(7)		(2)		0		0
Recognized actuarial losses*	—		1		0		1
Curtailments and settlements*	—		—		—		—
Total nonpension postretirement plans cost recognized in the Consolidated Income Statement	$	23	$	21	$	10	$	10


(Dollars in millions)	U.S. Plan				Non-U.S. Plans
For the nine months ended September 30:	2023		2022		2023		2022
Service cost	$	3	$	4	$	2	$	2
Interest cost*	88		58		29		26
Expected return on plan assets*	—		—		(2)		(2)
Amortization of prior service costs/(credits)*	(22)		(1)		0		0
Recognized actuarial losses*	—		6		(1)		3
Curtailments and settlements*	—		—		—		—
Total nonpension postretirement plans cost recognized in the Consolidated Income Statement	$	69	$	67	$	28	$	30

*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)~~

IBM U.S. Pension ~~and Nonpension Postretirement~~ Plan ~~Changes~~

~~Over the past several years, the company has taken actions to reduce the risk profile of its worldwide retirement-related plans, while at the same time increasing the funded status of the plans.~~ Change

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~~de-risked 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~~is 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,~~

Plan Contributions

The company does not anticipate any significant changes to the ~~company was required to remeasure~~expected plan contributions in 2023 from 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 reflectedamounts disclosed in the ~~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 the changes in benefit obligations and plan assets of the company’s retirement related benefit plans affected by the interim remeasurements described above for the nine months ended September 30, 2022.

Annual Report.

Table of Contents

Notes to Consolidated Financial Statements — (continued)

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.~~

~~Plan Contributions~~

The table below includes contributions to the following plans:


(Dollars in millions)	Plan Contributions
For the nine months ended September 30:	2023		2022
U.S. nonpension postretirement benefit plans	$	188	$	272
Non-U.S. DB and multi-employer plans*	45		85
Total plan contributions	$	233	$	357

(Dollars in millions)

Plan Contributions
For the nine months ended September 30:

2022
2021
U.S. and non-U.S. nonpension postretirement benefit plans

$
272

$
263
Non-U.S. DB and multi-employer plans*

85

43
Total plan contributions

$
357

$
306

* Amounts reported net of refunds.

During the nine months ended September 30, ~~2022~~2023 and ~~2021,~~2022, the company contributed ~~$247~~$188 million and ~~$307~~$247 million of U.S. Treasury Securities, respectively, to the ~~non-U.S. DB plans and~~U.S. nonpension postretirement benefit ~~plans.~~plan. Additionally, during the nine months ended September 30, ~~2022~~2023 and ~~2021,~~2022, the company contributed $537 million and $366 million ~~and $311 million in~~of 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.~~

~~Table of Contents~~

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

19. Subsequent Events:

On October ~~25, 2022,~~30, 2023, the company announced that the Board of Directors approved a quarterly dividend of ~~$1.65~~$1.66 per common share. The dividend is payable December ~~10, 2022~~9, 2023 to shareholders of record on November 10, ~~2022.~~

2023.

Table of Contents

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

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

~~Snapshot~~

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

Yr. to Yr.

Percent/

(Dollars and shares in millions except per share amounts)

Margin

For the three months ended September 30:

2022*

2021

Change

Revenue

$
14,107

$
13,251

6.5
%**
Gross profit margin

52.7
%

53.6
%
(1.0)
pts.
Total expense and other (income)

$
11,931

$
6,293

89.6
%
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

904.1

906.0

(0.2)
%

2023

Snapshot

* Includes a one-time, non-cash, pre-tax pension settlement charge of $5.9 billion ($4.4 billion net of tax) resulting in an impact of ($4.86) to diluted earnings/(loss) per share from continuing operations and an impact of ($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 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 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. The company accounts for the retained Kyndryl common stock as a fair value investment included within prepaid expenses and 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, 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 separation of Kyndryl as a discontinued operation were met when the separation was completed. Accordingly, the historical results of Kyndryl 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.

~~Table of Contents~~

~~Management Discussion – (continued)~~

separation of Kyndryl, the company made a number of changes to its organizational structure and management system. These changes impacted the company’s reportable segments but did not impact the Consolidated Financial Statements. Refer to note 5, “Segments,” for additional information on the 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 2022, primarily related to the accelerated recognition of accumulated actuarial losses of the Qualified PPP. ~~The company was also required to remeasure the benefit obligation and plan assets of the Qualified PPP.~~ Refer to note 18, “Retirement-Related Benefits,” for additional information.

~~To provide~~

In the fourth quarter of 2022, we completed our annual assessment of the useful ~~decision-making information~~lives of our property, plant and equipment. Due to advances in technology, we determined we should increase the estimated useful lives of our server and network equipment from five to six years for ~~management~~new assets and ~~shareholders,~~from three to four years for used assets. This change in accounting estimate was effective beginning January 1, 2023. Based on the ~~company defines~~carrying amount of server and ~~measures hybrid cloud revenue~~network equipment included in property, plant and equipment-net in our Consolidated Balance Sheet as ~~end-to-end cloud capabilities within hybrid cloud environments, which includes technology (software~~of December 31, 2022, the effect of this change in estimate was an increase in income from continuing operations before income taxes of $44 million, or $0.04 per basic and ~~hardware), services~~diluted share for the three months ended September 30, 2023, and ~~solutions~~$175 million, or $0.16 and $0.15 per basic and diluted share, respectively, for the nine months ended September 30, 2023.

In 2023, we executed workforce rebalancing actions to ~~enable clients~~address remaining stranded costs from portfolio actions over the last couple of years resulting in a charge to ~~implement cloud solutions across public, private~~pre-tax income from continuing operations of $34 million and ~~multi-clouds. The definition~~$410 million for the three and nine months ended September 30, 2023. In addition, beginning in the first quarter of ~~hybrid cloud revenue is~~2023, we updated our measure of segment pre-tax income to no longer allocate workforce rebalancing actions to our segments, consistent with our management system. Workforce rebalancing charges in the ~~prior methodology for cloud revenue historically presented. This spans across IBM’s Consulting, Software~~third quarter and ~~Infrastructure~~first nine months of 2022 of $13 million and $22 million, respectively, were included in the 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~~current period presentation. This is annotated where applicable.

~~Currency:~~Currency

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

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, certain impacts from the Kyndryl

Table of Contents

Management Discussion – (continued)

separation and their related tax impacts. Due to the unique, non-recurring nature of the enactment of the U.S. Tax Cuts and Jobs Act (U.S. tax reform), management characterizes the one-time provisional charge recorded in the fourth quarter of 2017 and adjustments to that charge as non-operating. Adjustments primarily include true-ups, accounting elections and any changes to regulations, laws, audit adjustments ~~etc.~~ that affect the recorded one-time charge. Management ~~also~~ characterizes direct and incremental charges incurred related to the Kyndryl separation as ~~non-~~

~~Table of Contents~~

~~Management Discussion – (continued)~~

~~operating~~non-operating given their unique and non-recurring nature. ~~These~~In 2022, these charges primarily ~~relate~~related to any net gains or losses on the Kyndryl common stock and the related cash-settled swap with a third-party financial institution, which ~~are~~were recorded in other (income) and expense in the Consolidated Income Statement. ~~The Kyndryl shares were retained by~~As of November 2, 2022, the company ~~immediately following the separation, with the intent to dispose of such shares within twelve months after the distribution.~~no longer held an ownership interest in Kyndryl. For acquisitions, operating (non-GAAP) earnings exclude the amortization of purchased intangible assets and acquisition-related charges such as in-process research and development, transaction costs, applicable retention, restructuring and related expenses, 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. 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 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. 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.

Financial Results Summary — Three Months Ended September 30


(Dollars and shares in millions except per share amounts)							Yr. to Yr. Percent/ Margin Change
For the three months ended September 30:	2023			2022*
Revenue	$	14,752		$	14,107		4.6	%**
Gross profit margin	54.4		%	52.7		%	1.7	pts.
Total expense and other (income)	$	6,150		$	11,931		(48.5)	%
Income/(loss) from continuing operations before income taxes	$	1,873		$	(4,501)		nm
Provision for/(benefit from) income taxes from continuing operations	$	159		$	(1,287)		nm
Income/(loss) from continuing operations	$	1,714		$	(3,214)		nm
Income/(loss) from continuing operations margin	11.6		%	(22.8)		%	34.4	pts.
Income/(loss) from discontinued operations, net of tax	$	(10)		$	18		nm
Net income/(loss)	$	1,704		$	(3,196)		nm
Earnings/(loss) per share from continuing operations - assuming dilution	$	1.86		$	(3.55)		nm
Consolidated earnings/(loss) per share - assuming dilution	$	1.84		$	(3.54)		nm
Weighted-average shares outstanding - assuming dilution	923.7			904.1			2.2	%

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

**3.5% percent adjusted for currency.

nm - not meaningful

Table of Contents

Management Discussion – (continued)

The following table provides the company’s operating (non-GAAP) earnings for the third quarter of ~~2022~~2023 and ~~2021.~~

Yr. to Yr.

(Dollars in millions except per share amounts)

Percent

For the three months ended September 30:

2022

2021

Change

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

$
315

$
370

(15.0)
%
Non-operating retirement-related costs/(income)

4,566
*

262

nm

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)
%
2022.


(Dollars in millions except per share amounts)						Yr. to Yr. Percent Change
For the three months ended September 30:	2023		2022
Net income/(loss) as reported	$	1,704	$	(3,196)	*	nm
Income/(loss) from discontinued operations, net of tax	(10)		18			nm
Income/(loss) from continuing operations	$	1,714	$	(3,214)	*	nm
Non-operating adjustments (net of tax):
Acquisition-related charges	$	340	$	315		8.0	%
Non-operating retirement-related costs/(income)	1		4,566		*	(100.0)
U.S. tax reform impacts	(24)		—			nm
Kyndryl-related impacts	—		(14)			(100.0)
Operating (non-GAAP) earnings**	$	2,031	$	1,653		22.8	%
Diluted operating (non-GAAP) earnings per share**	$	2.20	$	1.81		21.5	%

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

**Refer to page 9581 for a more detailed reconciliation of net ~~loss~~income to operating ~~earnings and operating earnings per share.~~

earnings.

nm - not meaningful

~~Table of Contents~~

~~Management Discussion – (continued)~~

Macroeconomic Environment:

~~Throughout 2022, we have seen escalating labor~~

Our business profile positions us well in challenging macroeconomic times. Our diversification across geographies, industries, clients and ~~component costs~~business mix and ~~a strengthening of~~our recurring revenue base provides some stability in revenue, profit and cash generation. In the ~~U.S. dollar. Consulting, which makes up well over half of IBM’s workforce, is most impacted by the labor cost inflation. While those dynamics~~current environment, clients and partners continue to ~~put pressure on our margin profile, we~~view technology as a source of competitive advantage. Businesses and governments around the world are ~~seeing progress in~~looking for opportunities to address demographic shifts, make their supply chains more resilient and improve sustainability. More recently, geopolitical events and 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"higher for longer" interest rate environment are ~~incurring due~~adding to the ~~inflationary environment~~growing uncertainty. In response, clients are leveraging technologies like hybrid cloud and AI that boost productivity and competitiveness.

In the first nine months of 2023, movements in global currencies continued 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~~impact our reported year-to-year revenue and ~~gross profit dollars.~~pre-tax profit. We execute hedging programs which defer, but do not eliminate, the impact of currency. The ~~gains~~(gains)/losses 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 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~~ We saw progress from the actions we have taken to mitigate the impacts of ~~Ukraine. The safety~~escalating labor and ~~security of our employees~~component costs and ~~their families~~a strong U.S. dollar. Consulting gross profit and pre-tax margin increased in the ~~impacted regions has been our primary focus. The sanctions placed~~third quarter of 2023 on ~~numerous Russian entities, specific Russian-controlled entities, as well as Belarus~~a year-to-year basis, reflecting the pricing and ~~other measures that~~productivity actions we have ~~been and~~taken. We expect these actions to 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~~contribute 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 certain immaterial asset and restructuring charges in the second quarter of 2022. These charges, together with the year-to-year lost business due to the wind-down, impacted our pre-tax income by approximately $180 millionmargin improvement for the ~~nine months ended September 30, 2022. The long-term impacts~~remainder of 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. 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 improving or worsening over time. The pandemic has 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 spending environment continues to be strong, and we remain focused on providing the technology and consulting services that our clients need to accelerate their digital organizations and emerge from the pandemic even stronger.

2023.

~~Table of Contents~~

~~Management Discussion – (continued)~~

Financial Performance Summary — Three Months Ended September 30:

In the third quarter of ~~2022,~~2023, we reported ~~$14.1~~$14.8 billion in revenue, ~~a loss~~income from continuing operations of ~~$3.2~~$1.7 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. Ourand 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.~~$2.0 billion. Diluted ~~loss~~earnings per share from continuing operations was ~~$3.55~~$1.86 as reported ~~including an impact of $4.86 from the pension settlement charge,~~ and ~~diluted earnings per share was $1.81~~$2.20 on an operating (non-GAAP) basis. ~~On a consolidated basis, we~~We generated ~~$1.9~~$3.1 billion in cash from operations and ~~$0.8~~$1.7 billion in free cash ~~flow. We~~flow, and delivered shareholder returns of $1.5 billion in ~~dividends~~dividends. Our third-quarter performance reflects solid revenue growth, profit margin expansion and strong cash generation. Our cash generation has enabled us to be acquisitive and increase our ~~balance sheet continues to provide us with the flexibility to support~~investment in R&D, strengthening our ~~business needs. These results reflect our continued focus on the execution of our strategy and the solid demand for our~~future hybrid cloud and AI ~~solutions.~~

capabilities, while continuing to support shareholder returns through dividends.

Total revenue grew ~~6.5~~4.6 percent as reported and 153.5 percent adjusted for currency compared to the prior-year ~~period. This includes incremental sales to Kyndryl which contributed approximately 5 points to the revenue growth.~~period led by our growth areas of Software and Consulting. Software delivered revenue growth of ~~7.5~~7.8 percent as reported and ~~14 percent adjusted for currency, including approximately 8 points of growth from incremental sales to Kyndryl. Within Software, Hybrid Platform & Solutions increased 2.4 percent as reported and 8~~6 percent adjusted for 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.~~both Hybrid Platform & Solutions and Transaction Processing, ~~grew 23.1~~as clients leverage their data for insights and automate IT in a hybrid cloud environment. Hybrid Platform & Solutions revenue was up 8.0 percent as reported and ~~33 percent adjusted for currency, including approximately 26 points of growth from incremental Kyndryl sales. Consulting revenue increased 5.4 percent as reported and 16~~7 percent adjusted for currency, with growth across Red Hat, Automation and Data & AI. Transaction Processing grew 7.3 percent as reported and 5 percent adjusted for currency, reflecting the success of the last two zSystems cycles which drives demand for this mission-critical software. Consulting revenue increased 5.6 percent as reported and 5 percent adjusted for currency, with revenue growth across all ~~three~~lines of business ~~lines.~~as clients continue to

Table of Contents

Management Discussion – (continued)

prioritize transformation projects that enable cost savings and productivity. Infrastructure revenue ~~increased 14.8~~decreased 2.4 percent year to year as reported and 233 percent adjusted for currency, with declines in Distributed Infrastructure and Infrastructure Support reflecting ~~strong double-digit~~product cycle dynamics; partially offset by growth in 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 $5.2 billion in the third quarter of 2022 grew 11 percent as reported and 19 percent adjusted for currency. Over the trailing 12 months, total hybrid cloud revenue was $22.2 billion, up 15 percent as reported (20 percent adjusted for currency) year to year.

zSystems.

From a geographic perspective, Americas revenue ~~grew 12.7~~increased 3.6 percent ~~year to year~~ as reported ~~(13~~(4 percent adjusted for currency). Europe/Middle East/Africa (EMEA) increased ~~0.5~~6.7 percent ~~(16~~as reported and was flat adjusted for currency. Asia Pacific increased 4.1 percent (7 percent adjusted for currency). ~~Asia Pacific was flat year to year but grew 16 percent adjusted for currency.~~

Gross margin of ~~52.7~~54.4 percent ~~decreased 1.0~~increased 1.7 points year to year ~~however, gross profit dollars grew 4.6 percent compared to the prior-year period~~with continued margin expansion across all reportable segments driven by ~~strong~~ revenue ~~performance in our high-value businesses. Overall gross margin was impacted by the investments we are making to drive our hybrid cloud~~growth, improving portfolio mix 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 expense.~~actions. Operating (non-GAAP) gross margin of ~~53.8~~55.5 percent ~~decreased 1.2~~increased 1.6 points compared to the prior-year period ~~for similar reasons.~~

due to the same dynamics.

Total expense and other (income) ~~increased 89.6~~decreased 48.5 percent in the third quarter of ~~2022~~2023 versus the prior-year period primarily driven by the pension settlement charge of $5.9 billion in the prior year, and ~~higher spending reflecting~~benefits from productivity and transformation of our ~~continuing focus on our portfolio and investment in our offerings, technical talent and ecosystem,~~business processes; partially offset by the effects of currency and ~~benefits from the actions taken~~higher net spending to ~~streamline operations~~drive our hybrid cloud and ~~our go-to-market model.~~AI strategy. Total operating (non-GAAP) expense and other (income) ~~decreased 1.0~~increased 4.5 percent year to year, driven primarily by the ~~factors described above, excluding~~effects of currency and higher net spending to drive our strategy; partially offset by benefits from productivity and transformation initiatives.

Pre-tax income from continuing operations was $1.9 billion in the third quarter of 2023 compared with pre-tax loss of $4.5 billion in the prior year and pre-tax margin was 12.7 percent, an increase of 44.6 points versus the third quarter of 2022. The year-to-year improvements were primarily driven by the $5.9 billion pension settlement charge in the prior year, the combination of our revenue and gross margin performance and the benefits from productivity actions. The continuing operations provision for income taxes for the third quarter of 2023 was $0.2 billion, compared to a benefit of $1.3 billion in the third quarter of 2022. The prior-year tax benefit was primarily due to the pension settlement charge.

~~Pre-tax loss~~ Net income from continuing operations was ~~$4.5~~$1.7 billion compared to a net loss of $3.2 billion in 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

~~Table of Contents~~

~~Management Discussion – (continued)~~

tax benefit was primarily driven by events that resulted in additional anticipated utilization of U.S. foreign tax credits. Net loss from continuing operations was $3.2 billion compared with net income of $1.0 billion in the prior-year period and the net ~~income/(loss)~~income from continuing operations margin ~~of (22.8)~~was 11.6 percent, ~~was down 30.6~~up 34.4 points year to year.

Operating (non-GAAP) pre-tax income from continuing operations of ~~$2.0~~$2.3 billion increased ~~22.6~~17.0 percent compared to the prior-year period and the operating (non-GAAP) pre-tax margin from continuing operations increased ~~1.8~~1.7 points to ~~13.9~~15.6 percent. ~~These profit dynamics reflect~~The combination of our ~~portfolio shift toward higher value, led by software. Our~~revenue and gross margin performance and productivity actions resulted in strong operating (non-GAAP) pre-tax ~~profit includes~~income growth in the ~~contribution from incremental sales to Kyndryl and the negative impacts of currency primarily due to the strengthening of the U.S. dollar.~~current period. The operating (non-GAAP) income tax provision was $0.3 billion for the third quarter of 2022 was $312 million, compared to a benefit from income taxes of $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, incentives2023 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.~~2022. Operating (non-GAAP) net income from continuing operations of ~~$1.7~~$2.0 billion ~~decreased 1.0~~increased 22.8 percent and the operating (non-GAAP) net income margin from continuing operations of ~~11.7~~13.8 percent was ~~down 0.9~~up 2.0 points year to year.

Diluted ~~loss~~earnings per share from continuing operations was ~~$3.55~~$1.86 in the third quarter of ~~2022, including~~2023 compared to diluted loss per share of $3.55 in the prior-year period, which included an impact of $4.86 from the pension settlement ~~charge, compared to diluted earnings per share of $1.14 in the prior-year period.~~charge. Operating (non-GAAP) diluted earnings per share of ~~$1.81 decreased 1.6~~$2.20 increased 21.5 percent versus the prior-year period.

~~Consolidated diluted loss per share~~

Cash provided by operating activities was $3.1 billion in the third quarter of ~~2022 was $3.54 compared to diluted earnings per share~~2023, an increase of ~~$1.25 in the prior-year period. This includes the impact from the pension settlement charge and a year-to-year reduction of $0.08 from discontinued operations due to the separation of Kyndryl.~~

Our cash flows from operating, investing and financing activities, as reflected in the Consolidated Statement of Cash Flows, include the cash flows of discontinued operations. On a consolidated basis, in the third quarter of 2022, we generated $1.9 billion in cash flow provided by operating activities, a decrease of $0.8$1.2 billion compared to the third quarter of ~~2021, primarily driven by a decrease in cash provided by financing receivables.~~2022. Net cash used in investing activities was $2.0 billion, a decline of ~~$1.7~~$0.3 billion ~~increased $1.1~~and financing activities were a net use of cash of $3.1 billion in the third quarter of 2023 compared to ~~the prior-year period, primarily driven by an increase in cash used in net marketable 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 prior-year period primarily~~ due to higher ~~net issuances of~~ debt maturities in the current year.

Table of Contents

Management Discussion – (continued)

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

Yr. to Yr.

Percent/

(Dollars and shares in millions except per share amounts)

Margin

For the nine months ended September 30:

2022*

2021

Change

Revenue

$
43,840

$
40,656

7.8
%**
Gross profit margin

52.6
%

54.1
%
(1.5)
pts.
Total expense and other (income)

$
25,212

$
20,017

25.9
%
Income/(loss) from continuing operations before income taxes

$
(2,156)

$
1,968

nm

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

$
(1,070)

$
(282)

nm

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

901.6

904.0

(0.3)
%

At 9/30/2022

At 12/31/2021

Assets

$
125,850

$
132,001

(4.7)
%
Liabilities

$
105,703

$
113,005

(6.5)
%
Equity

$
20,147

$
18,996

6.1
%


(Dollars and shares in millions except per share amounts)							Yr. to Yr. Percent/ Margin Change
For the nine months ended September 30:	2023			2022*
Revenue	$	44,479		$	43,840		1.5	%**
Gross profit margin	54.0		%	52.6		%	1.4	pts.
Total expense and other (income)	$	19,102		$	25,212		(24.2)	%
Income/(loss) from continuing operations before income taxes	$	4,931		$	(2,156)		nm
Provision for/(benefit from) income taxes from continuing operations	$	702		$	(1,070)		nm
Income/(loss) from continuing operations	$	4,229		$	(1,087)		nm
Income/(loss) from continuing operations margin	9.5		%	(2.5)		%	12.0	pts.
Income/(loss) from discontinued operations, net of tax	$	(15)		$	16		nm
Net income/(loss)	$	4,214		$	(1,071)		nm
Earnings/(loss) per share from continuing operations - assuming dilution	$	4.59		$	(1.21)		nm
Consolidated earnings/(loss) per share - assuming dilution	$	4.58		$	(1.19)		nm
Weighted-average shares outstanding - assuming dilution	920.3			901.6			2.1	%

	At 9/30/2023			At 12/31/2022
Assets	$	129,321		$	127,243		1.6	%
Liabilities	$	106,165		$	105,222		0.9	%
Equity	$	23,156		$	22,021		5.2	%

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

** ~~13.8~~2.7% percent adjusted for currency.

nm - not meaningful

The following table provides the company’s operating (non-GAAP) earnings for the first nine months of ~~2022~~2023 and ~~2021.~~

Yr. to Yr.

(Dollars in millions except per share amounts)





Percent

For the nine months ended September 30:

2022

2021

Change

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

$
1,019

$
1,069

(4.7)
%
Non-operating retirement-related costs/(income)

4,856
*

825

nm

U.S. tax reform impacts

(112)

(6)

nm

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
%
2022.


(Dollars in millions except per share amounts)						Yr. to Yr. Percent Change
For the nine months ended September 30:	2023		2022
Net income/(loss) as reported	$	4,214	$	(1,071)	*	nm
Income/(loss) from discontinued operations, net of tax	(15)		16			nm
Income/(loss) from continuing operations	$	4,229	$	(1,087)	*	nm
Non-operating adjustments (net of tax):
Acquisition-related charges	$	953	$	1,019		(6.5)	%
Non-operating retirement-related costs/(income)	11		4,856		*	(99.8)
U.S. tax reform impacts	91		(112)			nm
Kyndryl-related impacts	—		353			(100.0)
Operating (non-GAAP) earnings **	$	5,283	$	5,029		5.0	%
Diluted operating (non-GAAP) earnings per share **	$	5.74	$	5.52		4.0	%

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

**Refer to page 9682 for a more detailed reconciliation of net ~~loss~~income to operating ~~earnings and operating earnings per share.~~earnings.

nm - not meaningful

Table of Contents

Management Discussion – (continued)

Financial Performance Summary —Nine Months Ended September 30:

In the first nine months of ~~2022,~~2023, we reported ~~$43.8~~$44.5 billion in revenue, ~~a loss~~income from continuing operations of ~~$1.1~~$4.2 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.~~$5.3 billion. Diluted ~~loss~~earnings per share from continuing operations was ~~$1.21~~$4.59 as reported ~~including an impact of $4.86 from the pension settlement charge,~~ and ~~diluted earnings per share was $5.52~~$5.74 on an operating (non-GAAP) basis. ~~On a consolidated basis, we~~We generated ~~$6.5~~$9.5 billion in cash from operations and ~~$4.1~~$5.1 billion in free cash ~~flow. We~~flow, and delivered shareholder returns of $4.5 billion in dividends.

Our year-to-date performance reflects the continued momentum in our growth areas of Software and Consulting, and a solid recurring revenue base driven by our high-value software.

Total revenue grew ~~7.8~~1.5 percent as reported and 143 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~~5.9 percent as reported and 146 percent adjusted for 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~~4.2 percent as reported and 176 percent adjusted for currency, with growth across all ~~three business areas.~~lines of business. Infrastructure revenue decreased 7.6 percent as reported and 6 percent adjusted for currency, reflecting product cycle dynamics which impacted both Hybrid Infrastructure and Infrastructure Support.

From a geographic perspective, Americas revenue increased ~~10.6~~0.9 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 12.1 percent year to year as reported (12~~(1 percent adjusted for currency). EMEA increased ~~4.4~~3.5 percent ~~(16~~(3 percent adjusted for currency). Asia Pacific was flat but grew ~~2.6 percent (14~~6 percent adjusted for ~~currency).~~

currency.

Gross margin of ~~52.6~~54.0 percent ~~decreased 1.5~~increased 1.4 points year to year ~~however,~~with continued gross profit ~~dollars grew 4.9 percent compared to the prior-year period. Overall gross margin was impacted~~expansion across all reportable segments driven by ~~the investments we are making to drive~~ our ~~hybrid cloud~~improving portfolio mix 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 expense.~~actions. Operating (non-GAAP) gross margin of ~~53.8~~55.1 percent ~~decreased 1.6~~increased 1.3 points ~~versus~~compared to the ~~prior year for similar reasons.~~

prior-year period due to the same dynamics.

Total expense and other (income) ~~increased 25.9~~decreased 24.2 percent in the first nine months of ~~2022~~2023 versus the prior-year period primarily driven by the pension settlement charge of $5.9 billion in the prior year, higher interest income, prior-year impacts ~~of $0.4 billion~~ related to the Kyndryl retained shares and swap, and benefits from productivity and transformation of our business processes. This was partially offset by higher workforce rebalancing charges, higher interest expense, lower gains from divestitures, higher spending ~~reflecting continuing investment in~~to drive our hybrid cloud and AI strategy ~~partially offset by~~and the effects of ~~currency, a gain from the divestiture of our healthcare software assets, lower workforce rebalancing charges and benefits from the actions taken to streamline operations and our go-to-market model.~~currency. Total operating (non-GAAP) expense and other (income) ~~decreased 3.3~~increased 4.3 percent year to year, driven primarily by ~~the factors described above excluding the pension settlement charge~~higher workforce rebalancing charges, higher interest expense, lower gains from divestitures and ~~the impacts related~~higher net spending to ~~the Kyndryl retained shares.~~

drive our strategy; partially offset by higher interest income and benefits from productivity and transformation initiatives.

Pre-tax ~~loss~~income from continuing operations was ~~$2.2~~$4.9 billion in the first nine months of ~~2022~~2023 compared with pre-tax ~~income~~loss of ~~$2.0~~$2.2 billion in the prior-year period ~~with the year-to-year decline driven by the $5.9 billion pension settlement charge. Pre-tax~~and pre-tax margin was ~~down 9.8 points year to year to (4.9)~~11.1 percent, ~~reflecting the impact~~an increase of ~~the charge. The continuing operations benefit from income taxes~~16.0 points. Performance in the first nine months of ~~2022~~2023 benefited from the expense dynamics described above, improvements in portfolio mix and ongoing productivity actions. The continuing operations provision for income taxes for the first nine months of 2023 was ~~$1.1~~$0.7 billion, compared to a benefit of ~~$0.3~~$1.1 billion infor the first nine months of ~~2021.~~2022. The ~~increase compared to the prior year~~prior-year tax benefit was primarily due to the pension settlement charge in the ~~third quarter of~~third-quarter 2022. Net ~~loss~~income from continuing operations was ~~$1.1~~$4.2 billion compared with a net ~~income~~loss of ~~$2.3~~$1.1 billion in the prior-year period and the net ~~income/(loss)~~income from continuing operations margin ~~of (2.5)~~was 9.5 percent, ~~was down 8.0~~up 12.0 points year to year.

Operating (non-GAAP) pre-tax income from continuing operations of ~~$6.0~~$6.1 billion increased ~~38.1~~2.4 percent compared to the prior-year period and the operating (non-GAAP) pre-tax margin from continuing operations increased ~~3.0~~0.1 points to ~~13.7~~13.8 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) provision for income taxes ~~was $969 million in the first~~

~~Table of Contents~~

~~Management Discussion – (continued)~~

~~nine months of 2022, compared to $204 million in~~for the first nine months of ~~2021. The increase~~2023 was $0.9 billion, compared to ~~the prior year was primarily driven by the resolution of certain tax audits in~~$1.0 billion for the first ~~quarter~~nine months of ~~2021 as well as third-quarter 2021 events that resulted in additional anticipated utilization of U.S. foreign tax credits.~~2022. Operating (non-GAAP) income from continuing operations of ~~$5.0~~$5.3 billion increased ~~21.5~~5.0 percent and the operating (non-GAAP) income margin from continuing operations of ~~11.5~~11.9 percent ~~was up 1.3~~increased 0.4 points year to year.

Diluted ~~loss~~earnings per share from continuing operations was ~~$1.21~~$4.59 in the first nine months of ~~2022, including~~2023 compared to diluted loss per share of $1.21 in the prior-year period, which included an impact of $4.86 from the pension settlement ~~charge, compared to diluted earnings per share of $2.49 in the prior-year period.~~charge. Operating (non-GAAP) diluted earnings per share of ~~$5.52~~$5.74 increased ~~20.5~~4.0 percent versus the prior-year period.

~~Consolidated diluted loss per share in the first nine months~~Table of ~~2022 was $1.19 compared to diluted earnings per share of $3.77 in~~Contents

Management Discussion – (continued)

At September 30, 2023, the ~~prior-year period. This includes the impact from the pension settlement charge and a year-to-year reduction of $1.26 from discontinued operations due to the separation of Kyndryl.~~

~~Our~~ balance sheet ~~at September 30, 2022 continues to provide us~~remained strong with the flexibility to support and invest in the business. Cash and cash equivalents, restricted cash and marketable securities at September 30, ~~2022 were $9.7~~2023 of $11.0 billion ~~an increase of~~increased $2.2 billion from December 31, ~~2021. Total~~2022 and debt of ~~$50.9~~$55.2 billion at September 30, ~~2022 decreased $0.8 billion driven by currency impacts, partially offset by net debt issuances.~~

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

2023 increased $4.3 billion.

Total assets ~~decreased $6.2~~increased $2.1 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 $7.3 billion~~ ($~~0.9~~2.9 billion adjusted for currency) from December 31, ~~2021~~2022 primarily 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 deferred income of $1.9 billion ($0.8 billion adjusted for currency) reflecting seasonal reductions from higher year-end balances;~~

●

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.~~

~~Table of Contents~~

~~Management Discussion – (continued)~~

by an increase in goodwill mainly related to the Apptio acquisition and an increase in cash and cash equivalents and marketable securities; partially offset by a decrease in receivables. Total liabilities increased $0.9 billion ($1.9 billion adjusted for currency) from December 31, 2022 primarily driven by an increase in debt; partially offset by decreases in accounts payable, taxes and derivative liabilities. Total equity of ~~$20.1~~$23.2 billion increased ~~$1.2~~$1.1 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.~~

~~Our cash flows from operating, investing~~2022 primarily driven by year-to-date net income and ~~financing activities, as reflected in the Consolidated Statement of~~ common stock issuances; partially offset by dividends paid.

Cash ~~Flows, include the cash flows of discontinued operations. On a consolidated basis, cash~~ provided by operating activities was ~~$6.5~~$9.5 billion in the first nine months of ~~2022, a decrease~~2023, an increase of ~~$3.8 billion compared to the first nine months of 2021, primarily due to a decrease in cash provided by financing receivables driven by higher prior-year sales of receivables.~~$3.0 billion. Net cash used in investing activities of ~~$2.9~~$9.9 billion ~~decreased $2.4~~increased $7.0 billion compared to the prior-year period. ~~Financing~~Net cash used in financing activities ~~were a net use~~ of ~~cash of $2.1~~$0.2 billion ~~in the first nine months of 2022~~decreased $2.0 billion compared to ~~$10.7 billion in~~ the ~~first nine months of 2021.~~

prior-year period.

~~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 tables present each reportable segment’s revenue and gross margin results, followed by an analysis of the third quarter and first nine months of ~~2022~~2023 versus the third quarter and first nine months of ~~2021~~2022 reportable segments results. ~~Prior-year results have been recast to conform with the changes as described in the “Organization of Information” section.~~

Yr. to Yr.

Percent

Yr. to Yr.

Change

(Dollars in millions)





Percent/Margin

Adjusted For

For the three months ended September 30:

2022

2021*

Change

Currency

Revenue:









Software

$
5,811

$
5,406

7.5
%
14.2
%
Gross margin

79.0
%

78.6
%
0.4
pts.


Consulting

4,700

4,457

5.4
%
15.6
%
Gross margin

26.0
%

29.5
%
(3.5)
pts.


Infrastructure

3,352

2,921

14.8
%
23.1
%
Gross margin

50.8
%

52.8
%
(2.0)
pts.


Financing

174

184

(5.7)
%
(0.6)
%
Gross margin

32.8
%

28.7
%
4.1
pts.


Other

70

282

(75.1)
%
(70.5)
%
Gross margin

(197.7)
%

(18.5)
%
(179.2)
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

165

183

(10.1)
%


Operating (non-GAAP) gross profit

$
7,595

$
7,290

4.2
%


Operating (non-GAAP) gross margin

53.8
%

55.0
%
(1.2)
pts.

* Recast to reflect segment changes.


(Dollars in millions)							Yr. to Yr. Percent/Margin Change		Yr. to Yr. Percent Change Adjusted For Currency
For the three months ended September 30:	2023			2022
Revenue:
Software	$	6,265		$	5,811		7.8	%	6.3	%
Gross margin	79.5		%	79.0		%	0.5	pts.
Consulting	4,963			4,700			5.6	%	5.0	%
Gross margin	27.4		%	26.0		%	1.5	pts.
Infrastructure	3,272			3,352			(2.4)	%	(3.2)	%
Gross margin	53.5		%	50.8		%	2.8	pts.
Financing	186			174			6.9	%	5.1	%
Gross margin	49.7		%	32.8		%	16.9	pts.
Other	67			70			(5.1)	%	(14.1)	%
Gross margin	(243.4)		%	(197.7)		%	(45.6)	pts.
Total revenue	$	14,752		$	14,107		4.6	%	3.5	%
Total gross profit	$	8,023		$	7,430		8.0	%
Total gross margin	54.4		%	52.7		%	1.7	pts.
Non-operating adjustments:
Amortization of acquired intangible assets	162			165			(1.9)	%
Operating (non-GAAP) gross profit	$	8,185		$	7,595		7.8	%
Operating (non-GAAP) gross margin	55.5		%	53.8		%	1.6	pts.

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:

2022

2021*

Change

Currency

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.

* Recast to reflect segment changes.

~~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 reflect segment changes.


(Dollars in millions)							Yr. to Yr. Percent/Margin Change		Yr. to Yr. Percent Change Adjusted For Currency
For the nine months ended September 30:	2023			2022
Revenue:
Software	$	18,794		$	17,749		5.9	%	6.5	%
Gross margin	79.4		%	79.0		%	0.4	pts.
Consulting	14,938			14,337			4.2	%	6.4	%
Gross margin	26.2		%	24.8		%	1.4	pts.
Infrastructure	9,988			10,805			(7.6)	%	(6.4)	%
Gross margin	53.8		%	51.9		%	1.9	pts.
Financing	566			474			19.5	%	20.3	%
Gross margin	47.5		%	35.1		%	12.4	pts.
Other*	192			475			(59.5)	%	(60.5)	%
Gross margin	(233.5)		%	(63.6)		%	(169.9)	pts.
Total revenue	$	44,479		$	43,840		1.5	%	2.7	%
Total gross profit	$	24,033		$	23,055		4.2	%
Total gross margin	54.0		%	52.6		%	1.4	pts.
Non-operating adjustments:
Amortization of acquired intangible assets	460			526			(12.6)	%
Operating (non-GAAP) gross profit	$	24,492		$	23,582		3.9	%
Operating (non-GAAP) gross margin	55.1		%	53.8		%	1.3	pts.

* The year-to-year decline relates to the divestiture of our healthcare software assets in the second quarter of 2022.

Software


(Dollars in millions)					Yr. to Yr. Percent Change		Yr. to Yr. Percent Change Adjusted For Currency
For the three months ended September 30:	2023		2022
Software revenue:	$	6,265	$	5,811	7.8	%	6.3	%
Hybrid Platform & Solutions	$	4,506	$	4,172	8.0	%	6.7	%
Red Hat					9.4		7.6
Automation					14.0		12.8
Data & AI					6.4		5.5
Security					(1.9)		(3.3)
Transaction Processing	1,759		1,640		7.3		5.3

Table of Contents

Management Discussion – (continued)


							Yr. to Yr.
							Percent
					Yr. to Yr.		Change

(Dollars in millions)					Percent		Adjusted For		(Dollars in millions)					Yr. to Yr. Percent Change		Yr. to Yr. Percent Change Adjusted For Currency
For the nine months ended September 30:	2022		2021*		Change		Currency		For the nine months ended September 30:	2023		2022				Yr. to Yr. Percent Change Adjusted For Currency
Software revenue:	$	17,749	$	16,339	8.6	%	13.7	%	Software revenue:	$	18,794	$	17,749	Yr. to Yr. Percent Change	5.9	%	6.5	%
Hybrid Platform & Solutions	$	12,641	$	12,082	4.6	%	9.0	%	Hybrid Platform & Solutions	$	13,350	$	12,641	5.6	%	6.2	%
Red Hat					13.7		18.6		Red Hat					9.5		9.7
Automation					1.4		5.6		Automation					4.6		5.4
Data & AI					0.4		4.3		Data & AI					5.9		6.6
Security					1.4		6.3		Security					(1.6)		(0.8)
Transaction Processing		5,107		4,257	20.0		26.8		Transaction Processing	5,444		5,107		6.6		7.2

* Recast to reflect segment changes.

Software revenue of ~~$5,811~~$6,265 million increased ~~7.5~~7.8 percent as reported ~~(14~~(6 percent adjusted for currency) in the third quarter of ~~2022~~2023 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 continued growth in 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.~~

well as transactional revenue growth.

Hybrid Platform & Solutions revenue of ~~$4,172~~$4,506 million increased ~~2.4~~8.0 percent as reported (8(7 percent adjusted for currency) in the third quarter of ~~2022~~2023 compared to the prior-year period, ~~led~~driven by ~~continued strong double-digit~~ growth in Red ~~Hat. Incremental sales to Kyndryl contributed approximately 1.5 points to the revenue growth.~~Hat, Automation and Data & AI. Red Hat revenue ~~grew 11.7~~increased 9.4 percent as reported ~~(18~~(8 percent adjusted for currency). OpenShift and Ansible each contributed double-digit revenue growth in the third quarter of 2023 compared to the prior-year period and continued to gain market share. Automation revenue increased 14.0 percent as reported (13 percent adjusted for currency), with growth across all business areas. We had strength in AIOps and Management driven by good performance in Instana, Turbonomic and our most recent acquisition, Apptio as clients focus on optimizing their business outcomes and boost productivity. IT and business automation are top client priorities and we have been investing to capture this opportunity. Data & AI revenue increased 6.4 percent as reported (6 percent adjusted for currency), including growth in Data Fabric and Customer Care as enterprise clients prepare for and adopt generative AI solutions, leveraging watsonx. We also grew revenue in Asset & Supply Chain Management as we help enterprises run sustainable operations. Security revenue decreased 1.9 percent as reported (3 percent adjusted for currency) in the third ~~quarter. As a leader~~quarter of 2023. While we had declines 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, reflectingmanaged security services, we had 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 insecurity software, driven by Data Security and ~~Threat~~Identity & Access 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.~~$14.0 billion. ARR is a key performance metric management uses to assess the health and growth trajectory of our Hybrid Platform & Solutions business within the Software segment. ARR is calculated by estimating the current quarter’s recurring, committed value for certain types of active contracts as of the period-end date and then multiplying that value by four. This value is based on each arrangement’s contract value and start date, mitigating fluctuations during the contract term, and includes the following consumption models: (1) software subscription agreements, including committed term licenses, (2) as-a-service arrangements such as SaaS and PaaS, (3) maintenance and support contracts, and (4) security managed services contracts. ARR should be viewed independently of revenue as this performance metric and its inputs may not represent the amount of revenue recognized in the period and therefore is not intended to represent current period revenue or revenue that will be recognized in future periods. ARR is calculated at estimated constant currency.

~~Table of Contents~~

~~Management Discussion – (continued)~~

Transaction Processing revenue of ~~$1,640~~$1,759 million increased ~~23.1~~7.3 percent as reported ~~(33~~(5 percent adjusted for currency) in the third quarter of ~~2022~~2023 compared to the prior-year period, ~~driven by incremental sales to Kyndryl that contributed approximately 26 points to~~reflecting the ~~revenue growth. The increase in zSystems installed capacity over~~success of the last ~~couple of product~~two zSystems cycles ~~and continued strong renewal rates are recognition of the importance of~~which is driving demand for this ~~platform in a hybrid cloud environment. As a result, the Transaction Processing annuity base grew this quarter.~~

mission-critical software.

For the first nine months of ~~2022,~~2023, Software revenue of ~~$17,749~~$18,794 million increased ~~8.6~~5.9 percent as reported ~~(14~~(6 percent adjusted for currency) compared to the same period in ~~2021. Incremental sales to Kyndryl contributed approximately 8 points to the revenue growth. We had broad-based~~2022, driven by solid growth ~~across~~in Hybrid Platform & Solutions, led by Red Hat, Automation and Data & AI, and Transaction Processing. This growth reflects clients' increased adoption of our hybrid cloud and AI solutions. In addition, our zSystems platform continues to drive client demand for our Transaction Processing software and, together with price increases, contributed to year-to-year growth in both recurring and transactional revenue in Transaction Processing.

Table of Contents

Management Discussion – (continued)


(Dollars in millions)							Yr. to Yr. Percent/ Margin Change
For the three months ended September 30:	2023			2022
Software:
Gross profit	$	4,981		$	4,591		8.5	%
Gross profit margin	79.5		%	79.0		%	0.5	pts.
Pre-tax income	$	1,486		$	1,306		13.7	%
Pre-tax margin	23.7		%	22.5		%	1.2	pts.


(Dollars in millions)							Yr. to Yr. Percent/ Margin Change
For the nine months ended September 30:	2023			2022
Software:
Gross profit	$	14,924		$	14,025		6.4	%
Gross profit margin	79.4		%	79.0		%	0.4	pts.
Pre-tax income	$	4,154		$	3,816		8.9	%
Pre-tax margin	22.1		%	21.5		%	0.6	pts.

Software gross profit margin increased 0.5 points to 79.5 percent in the third quarter of 2023 compared to the prior-year period, primarily due to revenue growth and portfolio mix. For the first nine months of ~~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~~2023, gross profit margin increased 0.4 points to 79.0 percent in the third quarter of 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 increased 0.3 points to 79.079.4 percent, driven primarily by the same ~~factors.~~

factors described for the third quarter.

In the third quarter, pre-tax income of ~~$1,306~~$1,486 million increased ~~31.9~~13.7 percent and pre-tax margin of ~~22.5~~23.7 percent increased ~~4.2~~1.2 points compared to the prior year. ~~We continued to expand our~~The pre-tax margin ~~given the solid~~expansion reflects operating leverage from revenue growth ~~including the Kyndryl commercial relationship.~~and product mix, partially offset by more than 2 points of impact from currency. For the first nine months of ~~2022,~~2023, pre-tax income of ~~$3,816~~$4,154 million increased ~~41.0~~8.9 percent and pre-tax margin of ~~21.5~~22.1 percent increased ~~4.9~~0.6 points compared to the prior-year period, ~~driven by the increase in gross profit contribution year to year~~ which ~~reflects our solid revenue growth.~~

included more than 1 point of impact from currency.

Consulting


(Dollars in millions)					Yr. to Yr. Percent Change		Yr. to Yr. Percent Change Adjusted For Currency
For the three months ended September 30:	2023		2022
Consulting revenue:	$	4,963	$	4,700	5.6	%	5.0	%
Business Transformation	$	2,291	$	2,165	5.9	%	5.1	%
Technology Consulting	961		943		2.0		1.4
Application Operations	1,710		1,593		7.4		6.9

~~Table of Contents~~

~~Management Discussion – (continued)~~

(Dollars in millions) Yr. to Yr.
Percent
Change Yr. to Yr.
Percent
Change
Adjusted For
Currency
For the nine months ended September 30: 2023 2022
Consulting revenue: $ 14,938 $ 14,337 4.2 % 6.4 %
Business Transformation $ 6,869 $ 6,646 3.4 % 5.4 %
Technology Consulting 2,865 2,826 1.4 3.6
Application Operations 5,204 4,865 7.0 9.3

~~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.

Consulting revenue of ~~$4,700~~$4,963 million increased ~~5.4~~5.6 percent as reported ~~(16~~(5 percent adjusted for currency) in the third quarter of ~~2022~~2023 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~~three lines of business. Our focused hybrid cloud and ~~digital transformation journeys. Within Consulting, over the trailing 12 months, hybrid cloud revenue~~AI strategy has become even more of ~~$8,889 million grew 21 percent as reported (28 percent adjusted for currency) year to year,~~a differentiator as we help clients ~~design~~understand how AI can be used to automate

Table of Contents

Management Discussion – (continued)

tasks, make better decisions with speed and ~~enable enterprise hybrid cloud strategies. Our~~improve customer experiences. We continued to advance our strategic partnerships, which account for approximately 40 percent of Consulting revenue and continued to grow revenue and signings in the third quarter at a double-digit rate on a year-to-year basis. Additionally, our Red Hat consulting practice, which helps clients optimize how they build, deploy and manage applications for a hybrid cloud environment has continued to begrow at 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 performancerate in the third quarter of 2023 on a year-to-year basis, with ~~continued revenue growth at a double-digit rate from these partnerships.~~

more than $1 billion in signings this quarter.

In the third quarter of ~~2022,~~2023, Business Transformation revenue of ~~$2,165~~$2,291 million increased ~~4.7~~5.9 percent as reported ~~(14~~(5 percent adjusted for currency) ~~on a year-to-year basis, as clients looked~~compared to ~~IBM to help them transform critical workflows at scale. This growth was pervasive,~~the prior-year period, driven by data and technology transformations including AI and analytics-focused projects. Finance and 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~~transformations also contributed to revenue growth in the ~~way they engage with their customers.~~

quarter.

Technology Consulting revenue of ~~$943~~$961 million increased ~~6.1~~2.0 percent as reported ~~(17~~(1 percent adjusted for currency) in the third quarter of ~~2022~~2023 compared to the prior-year ~~period, led by our cloud~~period. Growth in cloud-based application development and ~~cloud~~ modernization ~~offerings, including our Red Hat consulting practice.~~

work was partially offset by declines in on-premise application-focused projects.

Application Operations revenue of ~~$1,593~~$1,710 million increased ~~6.2~~7.4 percent as reported ~~(17~~(7 percent adjusted for currency) compared to the third quarter of ~~2021. We helped~~2022, driven by cloud application management and platform engineering services. In platform engineering services, we help clients ~~optimize their operations~~design an application environment that runs securely and 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 taken quickly.

smoothly at scale.

For the first nine months of ~~2022,~~2023, Consulting revenue of ~~$14,337~~$14,938 million increased ~~9.5~~4.2 percent as reported ~~(17~~(6 percent adjusted for currency) reflecting ~~strong~~ year-to-year growth ~~as reported and adjusted for currency~~ across all three ~~business areas. Within~~lines of business. Business Transformation ~~year-to-year~~ revenue grew ~~as we brought~~year to year led by growth in data and technology and ~~strategic~~

~~Table of Contents~~

~~Management Discussion – (continued)~~

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

platforms.


(Dollars in millions)	2023			2022			Yr. to Yr. Percent/ Margin Change
For the three months ended September 30:
Consulting:
Gross profit	$	1,361		$	1,220		11.6	%
Gross profit margin	27.4		%	26.0		%	1.5	pts.
Pre-tax income	$	509		$	462		10.0	%
Pre-tax margin	10.2		%	9.8		%	0.4	pts.

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.


(Dollars in millions)							Yr. to Yr. Percent/ Margin Change
For the nine months ended September 30:	2023			2022
Consulting:
Gross profit	$	3,914		$	3,559		10.0	%
Gross profit margin	26.2		%	24.8		%	1.4	pts.
Pre-tax income	$	1,336		$	1,154		15.8	%
Pre-tax margin	8.9		%	8.0		%	0.9	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.

In the third quarter of 2023, Consulting gross profit margin of ~~26.0~~27.4 percent ~~decreased 3.5~~increased 1.5 points on a year-to-year basis. Pre-tax income of $509 million increased 10.0 percent and pre-tax margin of 10.2 percent increased 0.4 points in ~~the third quarter of 2022~~third-quarter 2023 compared to the ~~same period in 2021, reflecting the pressure on the margin profile from continued labor costs inflation, however, the Consulting~~prior-year period. Our 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 will contribute to improved~~expansion and pre-tax margin performance ~~going forward. Additionally, our utilization rates~~reflect benefits from the pricing and productivity actions we have taken during the past year, which are ~~improving as we exit the third quarter,~~partially offset by increased labor costs and ~~our acquisitions are scaling toward~~approximately 1 point of pre-tax margin ~~accretion.~~ impact from currency.

For the first nine months of ~~2022,~~2023, Consulting gross profit margin of ~~24.8~~26.2 percent ~~decreased 3.5~~increased 1.4 points compared to the prior-year period, reflecting the same dynamics described above. We continue to invest in our partner ecosystem, expanding our reach and are investing in talent across our workforce, developing and adding technical skills in the areas of hybrid cloud and AI.

period. Pre-tax income of ~~$462~~$1,336 million ~~decreased 0.8~~increased 15.8 percent and pre-tax margin of ~~9.8~~8.9 percent ~~decreased 0.6~~ increased 0.9

Table of Contents

Management Discussion – (continued)

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~~2023 compared to the prior-year ~~period, as we start to recognize~~period. The nine-month margin performance was driven by the ~~benefits of priced margin improvements, increased~~pricing, productivity ~~within our workforce,~~ and ~~a more streamlined operating and go-to-market structure.~~

labor cost factors described above for the third quarter.

Consulting Signings and Book-to-Bill


(Dollars in millions)					Yr. to Yr. Percent Change		Yr. to Yr. Percent Change Adjusted For Currency
For the three months ended September 30:	2023		2022
Total Consulting signings	$	5,834	$	4,509	29.4	%	32.1	%


(Dollars in millions)					Yr. to Yr. Percent Change		Yr. to Yr. Percent Change Adjusted For Currency
For the nine months ended September 30:	2023		2022
Total Consulting signings	$	16,693	$	14,300	16.7	%	20.4	%

In the third quarter of 2023, Consulting signings grew 29 percent as reported and 32 percent adjusted for currency and our book-to-bill ratio was over 1.15 over the last twelve months. Clients continue to prioritize transformation projects that enable cost savings and productivity, and our strong signings growth demonstrates that we are well positioned to meet these client needs in today's complex environment.

~~Table~~Book-to-bill represents the ratio of ~~Contents~~

~~Management Discussion – (continued)~~

IBM Consulting signings to its revenue over the same period. The metric is a useful indicator of the demand of our business over time. Signings are management’s initial estimate of the value of a client’s commitment under a services 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.

Contract extensions and increases in scope are treated as signings only to the extent of the incremental new value. Total 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. Signings associated with an acquisition will be recognized on a prospective basis.

Management believes the estimated values of signings disclosed provide an indication of our forward-looking revenue. Signings are used to monitor the performance of the business and viewed as useful information for management and shareholders. The conversion of signings into revenue may vary based on the types of services and solutions, contract duration, customer decisions, and other factors, which may include, but are not limited to, the macroeconomic environment.

~~Book-to-bill represents the ratio~~

Infrastructure


(Dollars in millions)					Yr. to Yr. Percent Change		Yr. to Yr. Percent Change Adjusted For Currency
For the three months ended September 30:	2023		2022
Infrastructure revenue:	$	3,272	$	3,352	(2.4)	%	(3.2)	%
Hybrid Infrastructure	$	1,943	$	1,931	0.6	%	(0.3)	%
zSystems					9.3		8.8
Distributed Infrastructure					(4.5)		(5.6)
Infrastructure Support	1,329		1,421		(6.5)		(7.2)

Table 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~~Contents

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

Management Discussion – (continued)

* Recast to reflect segment change.


(Dollars in millions)					Yr. to Yr. Percent Change		Yr. to Yr. Percent Change Adjusted For Currency
For the nine months ended September 30:	2023		2022
Infrastructure revenue:	$	9,988	$	10,805	(7.6)	%	(6.4)	%
Hybrid Infrastructure	$	5,912	$	6,392	(7.5)	%	(6.8)	%
zSystems					(11.4)		(10.7)
Distributed Infrastructure					(4.7)		(4.0)
Infrastructure Support	4,076		4,413		(7.6)		(5.8)

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

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.

Infrastructure revenue of ~~$3,352~~$3,272 million ~~increased 14.8~~decreased 2.4 percent as reported ~~(23~~(3 percent adjusted for currency) in the third quarter of ~~2022~~2023 compared to the prior-year period, reflecting product cycle dynamics which impacted both Hybrid Infrastructure and Infrastructure Support.

Hybrid Infrastructure revenue of $1,943 million increased 0.6 percent as reported, but was flat adjusted for currency in the third quarter of 2023 compared to the prior-year period. ~~This includes incremental sales to Kyndryl which contributed~~

~~Table of Contents~~

~~Management Discussion – (continued)~~

~~approximately 9 points to the revenue growth. This performance reflects continued strong double-digit growth in~~Within Hybrid Infrastructure, zSystems revenue increased 9.3 percent as reported ~~and~~(9 percent adjusted for ~~currency, driven primarily by~~currency) in the third quarter which is typically a seasonally lower revenue quarter. After six quarters of availability, revenue for z16 ~~product cycle. Within Infrastructure, over~~continues to exceed the ~~trailing 12 months,~~prior cycles, reflecting clients' growing enterprise workload requirements and the economic value at scale of the platform. Clients also continue to value the security, resiliency and hybrid cloud capabilities of the zSystems platform. Distributed Infrastructure revenue ~~of $3,930 million increased 3~~decreased 4.5 percent as reported (6 percent adjusted for currency) ~~year to year,~~, driven primarily by ~~product cycle dynamics.~~

~~Hybrid~~ declines in Storage Systems partially offset by growth in Power Systems. This performance compares to strong revenue growth in the prior year as we introduced innovation across Storage Systems and Power10.

Infrastructure Support revenue of ~~$1,931~~$1,329 million ~~increased 32.9~~decreased 6.5 percent as reported ~~(41~~(7 percent adjusted for currency) in the third quarter of ~~2022~~2023 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) onperiod, driven primarily by 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 introduced our newest LinuxONE server, a highly scalable Linux and Kubernetes-based platform with capabilities to reduce clients’ energy consumption.decline in IBM zSystems remains an enduring platform, playing an important role in a hybrid cloud environment. Distributed Infrastructure revenue grew 13.5 percent as reported (21 percent adjusted for currency). Recent innovation across the portfolio enabled broad-based growth in our Storage and Power 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 2022 compared to the prior-year period. This includes incremental sales to Kyndryl which contributed approximately 7 points of revenue growth for the quarter.

logo product support.

For the first nine months of ~~2022,~~2023, Infrastructure revenue of ~~$10,805~~$9,988 million ~~increased 10.6~~decreased 7.6 percent as reported ~~(16~~(6 percent adjusted for currency) compared to the prior-year ~~period. Incremental sales to Kyndryl contributed approximately 8 points of revenue growth. Infrastructure revenue performance was~~period, driven by ~~double-digit growth~~declines in Hybrid Infrastructure ~~with zSystems~~and Infrastructure Support. Within Hybrid Infrastructure, the revenue ~~growth~~decline was primarily driven by zSystems due to the ~~new~~strong launch of the z16 ~~and growth~~program in ~~Distributed~~second-quarter 2022. The revenue decline in Infrastructure ~~driven by strong performance in high-end disk and flash storage solutions as well as high-end Power10 systems.~~

Support for the first nine months of 2023 reflects product cycle dynamics.


(Dollars in millions)							Yr. to Yr. Percent/ Margin Change
For the three months ended September 30:	2023			2022
Infrastructure:
Gross profit	$	1,752		$	1,702		2.9	%
Gross profit margin	53.5		%	50.8		%	2.8	pts.
Pre-tax income	$	387		$	280		38.3	%
Pre-tax margin	11.8		%	8.3		%	3.5	pts.


(Dollars in millions)							Yr. to Yr. Percent/ Margin Change
For the nine months ended September 30:	2023			2022
Infrastructure:
Gross profit	$	5,375		$	5,607		(4.1)	%
Gross profit margin	53.8		%	51.9		%	1.9	pts.
Pre-tax income	$	1,236		$	1,236		0.0	%
Pre-tax margin	12.4		%	11.4		%	0.9	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.

* Recast to reflect segment change.

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.

Table of Contents

Management Discussion – (continued)

* Recast to reflect segment change.

Infrastructure gross profit margin of ~~50.8~~53.5 percent ~~decreased 2.0~~increased 2.8 points in the third quarter of ~~2022~~2023 compared to the prior-year ~~period,~~period. This increase was driven ~~primarily~~ by ~~profit~~margin expansion in Hybrid Infrastructure reflecting the solid revenue performance and margin improvement in zSystems, partially offset by margin decline in Infrastructure Support ~~partially offset by margin~~

~~Table of Contents~~

~~Management Discussion – (continued)~~

~~expansion in Hybrid Infrastructure driven primarily by a~~due to product ~~mix benefit from the revenue growth in zSystems.~~cycle dynamics. For the first nine months of ~~2022,~~2023, gross profit margin of ~~51.9~~53.8 percent ~~decreased 3.7~~increased 1.9 points compared to the prior-year period, driven primarily by ~~profit~~ margin ~~declines~~expansion in 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 a ~~product mix benefit from the revenue growth~~margin decline in ~~zSystems.~~

Infrastructure Support.

In the third quarter of ~~2022,~~2023, Infrastructure pre-tax income of ~~$280~~$387 million increased ~~34.1~~38.3 percent and pre-tax margin of ~~8.3~~11.8 percent increased ~~1.2~~3.5 points compared to the prior-year ~~period, reflecting~~period. This performance reflects an increase in gross profit contribution from Hybrid Infrastructure, primarily from zSystems, partially offset by a decline in profit contribution from Infrastructure Support due to product ~~mix benefits~~cycle dynamics. The increase in pre-tax margin also reflects a benefit from the ~~revenue growth~~changes in ~~zSystems.~~ the useful life of servers and network equipment, an increase in IP and custom development income and continued productivity actions. Pre-tax margin in the third quarter included more than 1 point of impact from currency.

For the first nine months of ~~2022,~~2023, Infrastructure pre-tax income of $1,236 million ~~increased 25.0 percent~~was flat and pre-tax margin of ~~11.4~~12.4 percent increased ~~1.3~~0.9 points compared to the prior-year ~~period,~~period. This performance reflects an increase in gross profit contribution from Hybrid Infrastructure, driven primarily by margin expansion in Distributed Infrastructure, partially offset by a decline in profit contribution from Infrastructure Support due to product cycle dynamics. The increase in pre-tax margin also reflects the ~~same factor described above.~~

change in useful life, increase in IP and custom development income and productivity actions. Pre-tax margin for the first nine months of 2023 included more than 1 point of impact from currency.

Financing

~~Financing~~

See pages 9178 through 9480 for a discussion of 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.

Percent

Yr. to Yr.

Change

(Dollars in millions)

Percent

Adjusted For

For the three months ended September 30:

2022

2021

Change

Currency

Total Revenue

$
14,107

$
13,251

6.5
%
14.6
%
Americas

$
7,416

$
6,579

12.7
%
13.4
%
Europe/Middle East/Africa (EMEA)

3,959

3,939

0.5

15.9

Asia Pacific

2,732

2,734

(0.1)

15.7

(Dollars in millions) Yr. to Yr.
Percent
Change Yr. to Yr.
Percent
Change
Adjusted For
Currency
For the three months ended September 30: 2023 2022
Total Revenue $ 14,752 $ 14,107 4.6 % 3.5 %
Americas $ 7,686 $ 7,416 3.6 % 3.9 %
Europe/Middle East/Africa (EMEA) 4,223 3,959 6.7 0.0
Asia Pacific 2,843 2,732 4.1 7.4


(Dollars in millions)					Yr. to Yr. Percent Change		Yr. to Yr. Percent Change Adjusted For Currency
For the nine months ended September 30:	2023		2022
Total Revenue	$	44,479	$	43,840	1.5	%	2.7	%
Americas	$	22,810	$	22,614	0.9	%	1.5	%
Europe/Middle East/Africa (EMEA)	13,156		12,716		3.5		2.7
Asia Pacific	8,513		8,509		0.0		5.9

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 Revenue

$
43,840

$
40,656

7.8
%
13.8
%
Americas

$
22,614

$
20,178

12.1
%
12.4
%
Europe/Middle East/Africa (EMEA)

12,716

12,181

4.4

15.8

Asia Pacific

8,509

8,297

2.6

14.0

Total revenue of ~~$14,107~~$14,752 million increased ~~6.5~~4.6 percent as reported ~~(15~~and 3.5 percent adjusted for ~~currency)~~currency in the third quarter of ~~2022~~2023 compared to the prior-year ~~period, which includes approximately 5 points of revenue growth from incremental sales to Kyndryl.~~

period.

Americas revenue of ~~$7,416~~$7,686 million increased ~~12.7~~3.6 percent as reported ~~(13~~and 4 percent adjusted for ~~currency), which includes approximately 4 points of revenue growth from incremental sales to Kyndryl. Within North America, the~~currency. The U.S. increased ~~11.5 percent and~~1.9 percent. Canada increased ~~3.8~~6.6 percent as reported (7and 9 percent adjusted for ~~currency).~~currency. Latin America increased ~~28.0~~15.6 percent as reported ~~(32~~and 16 percent adjusted for ~~currency),~~currency, with Brazil increasing ~~30.3~~32.3 percent as reported ~~(31~~and 27 percent adjusted for ~~currency).~~

currency.

Table of Contents

Management Discussion – (continued)

In EMEA, total revenue of ~~$3,959~~$4,223 million increased ~~0.5~~6.7 percent as reported ~~(16~~and was flat adjusted for currency. France increased 11.4 percent as reported and 4 percent adjusted for ~~currency), which includes approximately 6 points of revenue growth from incremental sales to Kyndryl. France~~currency. Germany increased 7.1 percent as reported and was flat adjusted for currency. Italy and the UK increased ~~4.5~~4.8 percent and 3.3 percent, respectively, as reported, ~~and increased 21~~but decreased 2 percent and ~~20 percent, respectively,~~

~~Table of Contents~~

~~Management Discussion – (continued)~~

~~adjusted for currency. Germany and Italy decreased 8.1 percent and 1.3 percent, respectively, as reported, but increased 7 percent and 15~~4 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~~$2,843 million ~~was flat~~increased 4.1 percent as reported ~~but increased 16~~and 7 percent adjusted for ~~currency, which includes approximately 5 points of revenue growth from incremental sales to Kyndryl.~~currency. Japan ~~decreased 3.4~~increased 6.0 percent as reported ~~but increased 22~~and 11 percent adjusted for currency. India and Australia increased ~~6.7~~17.2 percent and ~~2.6~~15.8 percent, respectively, as reported, and each increased 1521 percent ~~and 10 percent, respectively,~~ adjusted for currency. China decreased ~~15.3~~21.1 percent as reported ~~(12~~and 18 percent adjusted for ~~currency).~~

currency.

For the first nine months of ~~2022,~~2023, total revenue of ~~$43,840~~$44,479 million increased ~~7.8~~1.5 percent as reported ~~(14~~and 3 percent adjusted for ~~currency)~~currency compared to the prior-year ~~period, which includes approximately 5 points of revenue growth from incremental sales to Kyndryl.~~

period.

Americas revenue of ~~$22,614~~$22,810 million increased ~~12.1~~0.9 percent as reported ~~(12~~and 1 percent adjusted for ~~currency), which includes approximately 4 points of revenue growth from incremental sales~~currency. The U.S. decreased 0.3 percent compared to ~~Kyndryl. Within North America,~~ the ~~U.S. increased 10.8 percent and~~prior-year period. Canada ~~increased 5.3~~decreased 2.1 percent as reported, (8but increased 2 percent adjusted for ~~currency).~~currency. Latin America increased ~~29.1~~16.1 percent as reported ~~(30~~and 18 percent adjusted for ~~currency),~~currency, with Brazil increasing ~~33.6~~20.1 percent as reported ~~(30~~and 18 percent adjusted for ~~currency).~~

currency.

In EMEA, total revenue of ~~$12,716~~$13,156 million increased 3.5 percent as reported and 3 percent adjusted for currency. Italy and France increased 4.4 percent ~~as reported (16 percent adjusted for currency), which includes approximately 7 points of revenue growth from incremental sales to Kyndryl. The UK, France~~ and ~~Germany increased 8.0 percent, 5.3 percent and 2.2~~4.2 percent, respectively, as reported, and each increased 193 percent 18adjusted for currency. The UK and Germany decreased 2.4 percent and 143.8 percent, respectively, as reported, and 1 percent and 5 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 ~~$8,509~~$8,513 million ~~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 increased 186 percent adjusted for currency. Japan increased 1.9 percent as reported and 10 percent adjusted for currency. India ~~and Australia~~ increased ~~20.5~~9.9 percent ~~and 7.8 percent, respectively,~~ as reported and ~~increased 27~~17 percent ~~and 16~~adjusted for currency. Australia decreased 5.1 percent ~~respectively,~~as reported, but was flat adjusted for currency. China decreased ~~13.1~~21.5 percent as reported and 1218 percent adjusted for currency.

~~Table of Contents~~

~~Management Discussion – (continued)~~

Expense

~~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.


(Dollars in millions)							Yr. to Yr. Percent Change
For the three months ended September 30:	2023			2022
Total expense and other (income)	$	6,150		$	11,931	*	(48.5)	%
Non-operating adjustments:
Amortization of acquired intangible assets	$	(252)		$	(253)		(0.2)	%
Acquisition-related charges	(25)			(1)			nm
Non-operating retirement-related (costs)/income	12			(6,062)		*	nm
Kyndryl-related impacts	—			14			(100.0)
Operating (non-GAAP) expense and other (income)	$	5,885		$	5,630		4.5	%
Total expense-to-revenue ratio	41.7		%	84.6		%	(42.9)	pts.
Operating (non-GAAP) expense-to-revenue ratio	39.9		%	39.9		%	0.0	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.

Table of Contents

Management Discussion – (continued)


(Dollars in millions)							Yr. to Yr. Percent Change
For the nine months ended September 30:	2023			2022
Total expense and other (income)	$	19,102		$	25,212	*	(24.2)	%
Non-operating adjustments:
Amortization of acquired intangible assets	$	(735)		$	(810)		(9.3)	%
Acquisition-related charges	(35)			(9)			272.3
Non-operating retirement-related (costs)/income	16			(6,455)		*	nm
Kyndryl-related impacts	—			(353)			(100.0)
Operating (non-GAAP) expense and other (income)	$	18,348		$	17,584		4.3	%
Total expense-to-revenue ratio	42.9		%	57.5		%	(14.6)	pts.
Operating (non-GAAP) expense-to-revenue ratio	41.3		%	40.1		%	1.1	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 89.6 percent in the third quarter of 2022 versus the prior-year period primarily driven by the one-time, non-cash pension settlement charge of $5.9 billion and higher spending reflecting our continuing focus on our portfolio and investment in our offerings, technical talent and ecosystem, partially offset by the effects of currency and benefits from the actions taken to streamline operations and our go-to-market model. Total operating (non-GAAP) expense and other (income) decreased 1.0 percent year to year, driven primarily by the factors described above excluding the pension settlement charge.

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

~~Table of Contents~~

~~Management Discussion – (continued)~~

Selling, General and Administrative Expense

Yr. to Yr.

(Dollars in millions)

Percent

For the three months ended September 30:

2022

2021

Change

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
%


(Dollars in millions)					Yr. to Yr. Percent Change
For the three months ended September 30:	2023		2022
Selling, general and administrative expense:
Selling, general and administrative — other	$	3,730	$	3,681	1.3	%
Advertising and promotional expense	303		297		2.1
Workforce rebalancing charges	34		13		165.2
Amortization of acquired intangible assets	252		252		0.0
Stock-based compensation	148		138		7.0
Provision for/(benefit from) expected credit loss expense	(9)		11		nm
Total selling, general and administrative expense	$	4,458	$	4,391	1.5	%
Non-operating adjustments:
Amortization of acquired intangible assets	$	(252)	$	(252)	0.0	%
Acquisition-related charges	(25)		(1)		nm
Kyndryl-related impacts	—		0		nm
Operating (non-GAAP) selling, general and administrative expense	$	4,181	$	4,138	1.0	%

nm - not meaningful

Yr. to Yr.

(Dollars in millions)

Percent

For the nine months ended September 30:

2022

2021

Change

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
%

Table of Contents

Management Discussion – (continued)


(Dollars in millions)					Yr. to Yr. Percent Change
For the nine months ended September 30:	2023		2022
Selling, general and administrative expense:
Selling, general and administrative — other	$	11,607	$	11,501	0.9	%
Advertising and promotional expense	989		1,028		(3.8)
Workforce rebalancing charges	410		46		nm
Amortization of acquired intangible assets	734		808		(9.2)
Stock-based compensation	465		427		8.9
Provision for/(benefit from) expected credit loss expense	7		33		(80.0)
Total selling, general and administrative expense	$	14,212	$	13,843	2.7	%
Non-operating adjustments:
Amortization of acquired intangible assets	$	(734)	$	(808)	(9.2)	%
Acquisition-related charges	(34)		(9)		262.2
Kyndryl-related impacts	—		0		nm
Operating (non-GAAP) selling, general and administrative expense	$	13,444	$	13,025	3.2	%

nm - not meaningful

Total selling, general and administrative (SG&A) expense increased ~~2.0~~1.5 percent in the third quarter of ~~2022~~2023 versus the prior-year period driven primarily by the following factors:

●

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).~~

•Higher net spending (1 point) reflecting our continued investment to drive our hybrid cloud and AI strategy, expenses of acquired businesses and higher commissions expense, partially offset by benefits from productivity actions; and

•The effects of currency (1 point).

~~Table of Contents~~

~~Management Discussion – (continued)~~

Operating (non-GAAP) expense increased ~~3.0~~1.0 percent year to year, driven primarily ~~driven~~ by the same factors.

SG&A expense ~~was flat~~increased 2.7 percent in the first nine months of ~~2022~~2023 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).~~

•Higher workforce rebalancing charges (3 points) to address remaining stranded cost from portfolio actions; and

•Higher net spending (1 point) driven by the same factors above; partially offset by

•The effects of currency (1 point).

Operating (non-GAAP) expense increased ~~0.4~~3.2 percent year to year, driven primarily ~~driven~~ by the same factors.

Provisions for expected credit loss expense ~~increased $99 million~~ in the first nine months of ~~2022~~2023 decreased $26 million compared to the prior-year period, driven primarily ~~driven~~ by ~~an increase in~~lower specific ~~reserves~~reserve requirements in the current ~~year compared to decreases in both general and specific reserves in the prior-year period.~~year. The receivables provision coverage was ~~2.3~~2.8 percent at September 30, ~~2022,~~2023, excluding receivables classified as held for sale, an increase of 2040 basis points ~~from~~compared to December 31, ~~2021, due to~~2022. The increase in coverage was primarily driven by the ~~decline~~overall decrease in total ~~receivables balance, and a decrease~~receivables.

Table of ~~20 basis points from September 30, 2021.~~

Contents

Management Discussion – (continued)

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
%


(Dollars in millions)					Yr. to Yr. Percent Change
For the three months ended September 30:	2023		2022
Research, development and engineering expense	$	1,685	$	1,611	4.6	%


(Dollars in millions)					Yr. to Yr. Percent Change
For the nine months ended September 30:	2023		2022
Research, development and engineering expense	$	5,027	$	4,963	1.3	%

Research, development and engineering (RD&E) expense in the third quarter of ~~2022~~2023 increased ~~0.3~~4.6 percent year to year ~~reflecting~~primarily driven by higher spending (5 points) which includes expenses of acquired businesses and our ~~continuing~~continued 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~~2023 increased ~~2.0~~1.3 percent year to year primarily driven by higher spending (4(3 points); partially offset by ~~the~~ effects of currency ~~(2 points)~~(1 point).

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)
%


(Dollars in millions)					Yr. to Yr. Percent Change
For the three months ended September 30:	2023		2022
Intellectual property and custom development income:
Licensing of intellectual property including royalty-based fees	$	76	$	62	22.6	%
Custom development income	114		59		92.8
Sales/other transfers of intellectual property	—		1		(100.0)
Total	$	190	$	121	56.3	%


(Dollars in millions)					Yr. to Yr. Percent Change
For the nine months ended September 30:	2023		2022
Intellectual property and custom development income:
Licensing of intellectual property including royalty-based fees	$	264	$	246	7.3	%
Custom development income	349		164		112.7
Sales/other transfers of intellectual property	5		8		(37.0)
Total	$	618	$	418	47.8	%

~~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 ~~decreased 20.5~~increased 56.3 percent year to year in the third quarter, and ~~3.0~~47.8 percent in the first nine months of ~~2022~~2023 compared to the prior-year period. The increase was primarily driven by a three-year joint development and licensing agreement signed in the fourth quarter of 2022 with a Japanese consortium to leverage our intellectual property and expertise on advanced semiconductors.

The timing and amount of licensing, sales or other transfers of IP may vary significantly from period to period depending upon the timing of licensing agreements, economic conditions, industry consolidation and the timing of new patents and know-how development.

Table of Contents

Management Discussion – (continued)

Other (Income) and Expense

Yr. to Yr.

(Dollars in millions)

Percent

For the three months ended September 30:

2022

2021

Change

Other (income) and expense:







Foreign currency transaction losses/(gains)

$
(352)

$
(21)

nm

(Gains)/losses on derivative instruments

189

7

nm

Interest income

(53)

(14)

287.1
%
Net (gains)/losses from securities and investment assets

(11)

3

nm

Retirement-related costs/(income)

6,062
*

318

nm

Other

(80)

(48)

65.1

Total other (income) and expense

$
5,755
*
$
244

nm

Non-operating adjustments:







Amortization of acquired intangible assets

$
(1)

$
(1)

—

Non-operating retirement-related (costs)/income

(6,062)
*

(318)

nm

Kyndryl-related impacts

14

—

nm

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

$
(293)

$
(74)

294.3
%


(Dollars in millions)						Yr. to Yr. Percent Change
For the three months ended September 30:	2023		2022
Other (income) and expense:
Foreign currency transaction losses/(gains)	$	(260)	$	(352)		(26.2)	%
(Gains)/losses on derivative instruments	316		189			67.1
Interest income	(156)		(53)			195.9
Net (gains)/losses from securities and investment assets	(5)		(11)			(50.3)
Retirement-related costs/(income)	(12)		6,062		*	nm
Other	(97)		(80)			21.6
Total other (income) and expense	$	(215)	$	5,755	*	nm
Non-operating adjustments:
Amortization of acquired intangible assets	$	—	$	(1)		(100.0)	%
Non-operating retirement-related (costs)/income	12		(6,062)		*	nm
Kyndryl-related impacts	—		14			(100.0)
Operating (non-GAAP) other (income) and expense	$	(203)	$	(293)		(30.8)	%


(Dollars in millions)						Yr. to Yr. Percent Change
For the nine months ended September 30:	2023		2022
Other (income) and expense:
Foreign currency transaction losses/(gains)	$	(338)	$	(1,021)		(66.9)	%
(Gains)/losses on derivative instruments	315		730			(56.8)
Interest income	(527)		(98)			nm
Net (gains)/losses from securities and investment assets	3		262			(98.9)
Retirement-related costs/(income)	(16)		6,455		*	nm
Other	(158)		(407)			(61.1)
Total other (income) and expense	$	(721)	$	5,921	*	nm
Non-operating adjustments:
Amortization of acquired intangible assets	$	(1)	$	(2)		(55.6)	%
Acquisition-related charges	(1)		—			nm
Non-operating retirement-related (costs)/income	16		(6,455)		*	nm
Kyndryl-related impacts	—		(353)			(100.0)
Operating (non-GAAP) other (income) and expense	$	(707)	$	(889)		(20.5)	%

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

nm - not meaningful

Yr. to Yr.

(Dollars in millions)

Percent

For the nine months ended September 30:

2022

2021

Change

Other (income) and expense:







Foreign currency transaction losses/(gains)

$
(1,021)

$
(145)

nm

(Gains)/losses on derivative instruments

730

246

196.5
%
Interest income

(98)

(39)

154.9

Net (gains)/losses from securities and investment assets

262

(3)

nm

Retirement-related costs/(income)

6,455
*

967

nm

Other

(407)

(135)

200.9

Total other (income) and expense

$
5,921
*
$
891

nm

Non-operating adjustments:







Amortization of acquired intangible assets

$
(2)

$
(2)

—

Non-operating retirement-related (costs)/income

(6,455)
*

(967)

nm

Kyndryl-related impacts

(353)

—

nm

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

$
(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 other (income) and expense was ~~expense~~income of ~~$5,755~~$215 million in the third quarter of ~~2022~~2023 compared to ~~$244~~expense of $5,755 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.~~

•Lower non-operating retirement-related cost ($6,074 million) primarily due to a one-time, non-cash pension settlement charge in the prior year. Refer to note 18, “Retirement-Related Benefits,” for additional information; and

•Higher interest income ($104 million) driven by higher average interest rates and a higher average cash balance in the current year; partially offset by

•Net exchange losses (including derivative instruments) in the current year versus net exchange gains in the prior year ($219 million).

Operating (non-GAAP) other (income) and expense was ~~$293~~income of $203 million ~~of income~~ in the third quarter of ~~2022~~2023 and~~increased $219~~ decreased $90 million compared to the prior-year period. The year-to-year change was primarily driven ~~primarily~~ by the ~~higher net exchange gains and higher interest income.~~

factors described above, excluding the lower non-operating retirement-related costs.

Total other (income) and expense was ~~$5,921~~income of $721 million ~~of expense~~ in the first nine months of ~~2022~~2023 compared to ~~$891~~expense of $5,921 million in the prior-year period. The year-to-year ~~decrease~~change 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 in the prior year ($477 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~~

●

~~Higher interest income ($60 million) driven by higher average interest rates in the current year.~~

•Lower non-operating retirement-related cost ($6,471 million) primarily driven by the pension settlement charge in 2022. Refer to note 18, “Retirement-Related Benefits,” for additional information; and

•Higher interest income ($429 million) driven by higher average interest rates and a higher average cash balance in the current year; and

•Losses on Kyndryl retained shares ($267 million) in the prior year; partially offset by

•Lower net exchange gains (including derivative instruments) in the current year ($268 million). The prior-year (gains)/losses on derivative instruments also includes a loss on the cash-settled swap related to the Kyndryl retained shares ($85 million); and

•Lower gains on divestitures ($264 million) primarily driven by the divestiture of our healthcare software assets in the second quarter 2022 (included in “Other”).

Operating (non-GAAP) other (income) and expense was ~~$889~~income of $707 million ~~of income~~ in the first nine months of ~~2022~~2023 and ~~increased $812~~decreased $183 million compared to the prior-year period. The year-to-year ~~increase~~change was primarily driven ~~primarily~~ by the ~~effects of currency, higher gains on divestitures~~factors described above, excluding the lower non-operating retirement-related costs and ~~higher interest income described above.~~

the prior year Kyndryl retained shares and swap.

Interest Expense

Yr. to Yr.

(Dollars in millions)

Percent

For the three months ended September 30:

2022

2021

Change

Interest expense

$
295

$
290

1.7
%

Yr. to Yr.

(Dollars in millions)

Percent

For the nine months ended September 30:

2022

2021

Change

Interest expense

$
903

$
852

6.0
%


(Dollars in millions)					Yr. to Yr. Percent Change
For the three months ended September 30:	2023		2022
Interest expense	$	412	$	295	39.5	%


(Dollars in millions)					Yr. to Yr. Percent Change
For the nine months ended September 30:	2023		2022
Interest expense	$	1,202	$	903	33.2	%

Interest expense increased $5$117 million and ~~$51~~$299 million year to year in the third quarter and first nine months of ~~2022,~~2023, respectively. Interest expense is presented in cost of financing in the Consolidated Income Statement if the related external borrowings are to support the Financing external business. Overall interest expense (excluding capitalized interest) for the third quarter and first nine months of ~~2022~~2023 was ~~$394~~$494 million and ~~$1,166~~$1,457 million, respectively, an increase of $2$100 million and $3$291 million, respectively, compared to the prior-year periods. The year-to-year dynamics for

~~Table of Contents~~

~~Management Discussion – (continued)~~

both the third quarter and first nine months of ~~2022~~2023 were primarily driven by higher average interest rates ~~offset by~~and a ~~lower~~higher average debt ~~balance.~~

balance in the current year.

Table of Contents

Management Discussion – (continued)

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.

(Dollars in millions)

Percent

For the three months ended September 30:

2022

2021

Change

Retirement-related plans — cost:







Service cost

$
59

$
70

(15.6)
%
Multi-employer plans

4

2

76.8

Cost of defined contribution plans

225

252

(10.7)

Total operating costs

$
288

$
324

(11.2)
%
Interest cost

$
436

$
408

6.9
%
Expected return on plan assets

(679)

(726)

(6.5)

Recognized actuarial losses

381

613

(37.9)

Amortization of prior service costs/(credits)

3

3

(11.4)

Curtailments/settlements

5,913
*

13

nm

Other costs

8

7

18.5

Total non-operating costs/(income)

$
6,062
*
$
318

nm

Total retirement-related plans — cost

$
6,350
*
$
642

nm


(Dollars in millions)						Yr. to Yr. Percent Change
For the three months ended September 30:	2023		2022
Retirement-related plans — cost:
Service cost	$	46	$	59		(21.8)	%
Multi-employer plans	4		4			(1.0)
Cost of defined contribution plans	245		225			8.8
Total operating costs	$	295	$	288		2.4	%
Interest cost	$	604	$	436		38.6	%
Expected return on plan assets	(745)		(679)			9.8
Recognized actuarial losses	126		381			(66.8)
Amortization of prior service costs/(credits)	(2)		3			nm
Curtailments/settlements	2		5,913		*	(100.0)
Other costs	3		8			(66.6)
Total non-operating costs/(income)	$	(12)	$	6,062	*	nm
Total retirement-related plans — cost	$	283	$	6,350	*	(95.5)	%


(Dollars in millions)						Yr. to Yr. Percent Change
For the nine months ended September 30:	2023		2022
Retirement-related plans — cost:
Service cost	$	138	$	186		(25.9)	%
Multi-employer plans	10		11			(7.7)
Cost of defined contribution plans	756		697			8.5
Total operating costs	$	905	$	894		1.2	%
Interest cost	$	1,807	$	1,363		32.6	%
Expected return on plan assets	(2,229)		(2,162)			3.1
Recognized actuarial losses	384		1,283			(70.1)
Amortization of prior service costs/(credits)	(6)		16			nm
Curtailments/settlements	7		5,931		*	(99.9)
Other costs	22		24			(8.7)
Total non-operating costs/(income)	$	(16)	$	6,455	*	nm
Total retirement-related plans — cost	$	888	$	7,350	*	(87.9)	%

* 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

Retirement-related plans — cost:







Service cost

$
186

$
209

(11.0)
%
Multi-employer plans

11

13

(12.0)

Cost of defined contribution plans

697

760

(8.3)

Total operating costs

$
894

$
982

(8.9)
%
Interest cost

$
1,363

$
1,227

11.1
%
Expected return on plan assets

(2,162)

(2,187)

(1.2)

Recognized actuarial losses

1,283

1,852

(30.7)

Amortization of prior service costs/(credits)

16

7

131.9

Curtailments/settlements

5,931
*

46

nm

Other costs

24

21

9.8

Total non-operating costs/(income)

$
6,455
*
$
967

nm

Total retirement-related plans — cost

$
7,350
*
$
1,949

277.1
%

* Includes a one-time, non-cash pension settlement charge

Table of ~~$5.9 billion. See note 18, “Retirement-Related Benefits,” for additional information.~~

~~nm - not meaningful~~

Contents

Management Discussion – (continued)

Total pre-tax retirement-related plan cost ~~increased~~decreased by ~~$5,708~~$6,067 million compared to the third quarter of ~~2021~~2022 primarily ~~due to an increase~~driven by a decrease in curtailments/settlements ($~~5,900~~5,911 million) ~~driven by~~due to a one-time, non-cash pension settlement charge ~~lower expected return on plan assets ($47 million)~~in the prior year, and ~~higher interest costs ($28 million), partially offset by~~ a decrease in recognized actuarial losses ($~~232~~254 million) ~~and lower cost of defined contribution plans~~, partially offset by higher interest costs ($27

~~Table of Contents~~

~~Management Discussion – (continued)~~

168 million). Total cost for the first nine months of ~~2022 increased $5,401~~2023 decreased $6,461 million compared to the first nine months of ~~2021,~~2022, primarily ~~due to an increase~~driven by a decrease in curtailments/settlements ($~~5,885~~5,925 million) ~~driven by~~due to the pension settlement charge ~~higher interest costs ($136 million), partially offset by~~in the prior year, and a decrease in recognized actuarial losses ($~~569~~899 million), ~~and lower cost of defined contribution plans~~partially offset by higher interest costs ($63444 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 ~~2022~~2023 were ~~$288~~$295 million, ~~a decrease~~an increase of ~~$36~~$7 million compared to the third quarter of ~~2021.~~2022, primarily driven by higher cost of defined contribution plans ($20 million), partially offset by lower service cost ($13 million). For the first nine months of ~~2022,~~2023, operating retirement-related costs were ~~$894~~$905 million, ~~a decrease~~an increase of ~~$88~~$10 million compared to the prior-year ~~period. These operating cost decreases were~~period, primarily driven by ~~lower~~higher cost of defined contribution ~~plans.~~plans ($59 million), partially offset by lower service cost ($48 million). Non-operating ~~costs~~costs/(income) was $12 million of ~~$6,062 million~~income in the third quarter of ~~2022 increased $5,744~~2023 compared to cost of $6,062 million ~~year to year~~in third quarter of 2022 and for the first nine months of ~~2022 were~~2023 was $16 million of income compared to cost of $6,455 million ~~an increase of $5,488 million compared to~~in the prior-year period. ~~These non-operating cost increases~~The year-to-year changes were primarily driven ~~primarily~~ by the ~~$5.9 billion~~ pension settlement charge ~~higher interest costs~~in the prior year, and ~~lower expected return on plan assets, partially offset by~~ a decrease in recognized actuarial ~~losses.~~

losses, partially offset by higher interest costs.

The year-to-year decrease in recognized actuarial losses was primarily driven by the December 2022 remeasurement of our retirement and postretirement plans which resulted in a significant reduction to our pension plan benefit obligations and an improvement in our overall funded status primarily due to higher discount rates. In addition, we transferred $16 billion of our U.S. Qualified PPP obligations and related plan assets to Insurers in the third-quarter of 2022 as described in note 18, "Retirement-Related Benefits," which resulted in the accelerated recognition of actuarial losses in the prior year.

Taxes

The continuing operations ~~benefit from~~provision for income taxes for the third quarter of ~~2022~~2023 was ~~$1,287~~$159 million, compared to a benefit of ~~$224~~$1,287 million in the third quarter of ~~2021.~~2022. The ~~current-year~~prior-year tax benefit was primarily due to the transfer of a portion of the Qualified ~~PPP’s~~PPP's defined benefit pension obligations and related plan assets. ~~The prior-year tax benefit was primarily driven by events that resulted in additional anticipated utilization of U.S. foreign tax credits.~~ The operating (non-GAAP) income tax provision for the third quarter of ~~2022~~2023 was ~~$312~~$268 million, compared to ~~a benefit from income taxes of $67~~$312 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.

2022.

The continuing operations ~~benefit from~~provision for income taxes for the first nine months of ~~2022~~2023 was ~~$1,070~~$702 million, compared to a benefit of ~~$282~~$1,070 million for the first nine months of ~~2021.~~2022. The ~~increase compared to the prior year~~prior-year tax benefit was primarily ~~driven by~~due to the ~~transfer of a portion of the Qualified PPP’s~~ defined benefit pension ~~obligations and related plan assets in the third quarter of 2022.~~transfer. The operating (non-GAAP) provision for income taxes for the first nine months of ~~2022~~2023 was ~~$969~~$861 million, compared to ~~$204~~$969 million for the first nine months of 2021. The increase in the operating (non-GAAP) income tax provision compared to the prior year was primarily driven by the 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.

2022.

IBM’s ~~full-year~~ tax provision and effective tax rate are impacted by recurring factors including the ~~geographic~~geographical mix of income before taxes, incentives, changes in unrecognized tax benefits and 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~~and issued a ~~specific focus on~~final Revenue Agent's Report (RAR) proposing adjustments related to certain cross-border transactions that occurred in ~~2013,~~2013. These adjustments, if sustained, would have resulted in additional taxable income of approximately $4.5 billion. The company filed its IRS Appeals protest in the first quarter of 2021, and in October of 2023 the IRS issued a ~~final Revenue Agent’s Report (RAR).~~revised RAR. The ~~IRS’ proposed~~ adjustments ~~relative to these cross-border transactions,~~in the revised RAR, if sustained, would result in additional taxable income of approximately ~~$4.5~~$4.2 billion. The company continues to strongly ~~disagrees~~disagree with the IRS ~~on these specific matters~~position and ~~filed its~~will pursue resolution at IRS Appeals ~~protest in the first quarter of 2021.~~and then court, if necessary. 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, 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.~~2016. 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~~they relate to the amount and/or timing of income, deductions, and tax credits.

Table of Contents

Management Discussion – (continued)

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 ~~as a result of~~challenging tax assessments issued by the India ~~tax authorities. At~~Tax Authorities. As of September 30, ~~2022,~~2023, the company had recorded ~~$704~~$589 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 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 amount of unrecognized tax benefits at September 30, ~~2022~~2023 is ~~$8,531~~$8,720 million which can be reduced by ~~$538~~$550 million associated with timing adjustments, ~~U.S. tax credits,~~ potential transfer pricing adjustments, and state income taxes. The net amount of ~~$7,993~~$8,170 million, if recognized, would favorably affect the company’s effective tax rate.

~~Earnings/(Loss)~~

Earnings Per Share

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

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~~were 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.

~~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
%


For the three months ended September 30:	2023		2022			Yr. to Yr. Percent Change
Earnings per share of common stock from continuing operations:
Assuming dilution	$	1.86	$	(3.55)	*	nm
Basic	$	1.88	$	(3.55)	*	nm
Diluted operating (non-GAAP)	$	2.20	$	1.81		21.5	%
Weighted-average shares outstanding: (in millions)
Assuming dilution	923.7		904.1			2.2	%
Basic	912.8		904.1			1.0	%
Assuming dilution (non-GAAP)	923.7		912.8			1.2	%


For the nine months ended September 30:	2023		2022			Yr. to Yr. Percent Change
Earnings per share of common stock from continuing operations:
Assuming dilution	$	4.59	$	(1.21)	*	nm
Basic	$	4.65	$	(1.21)	*	nm
Diluted operating (non-GAAP)	$	5.74	$	5.52		4.0	%
Weighted-average shares outstanding: (in millions)
Assuming dilution	920.3		901.6			2.1	%
Basic	910.1		901.6			0.9	%
Assuming dilution (non-GAAP)	920.3		911.1			1.0	%

* 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 for the three and nine months ended September 30, 2022 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
%

* 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~~ ($4.90) to basic earnings/(loss) per ~~share.~~

share for the three and nine months ended September 30, 2022, respectively.

nm - not meaningful

Table of Contents

Management Discussion – (continued)

Actual shares outstanding at September 30, ~~2022~~2023 were ~~904.1~~913.1 million. The weighted-average number of common shares outstanding assuming dilution during the third quarter and first nine months of ~~2022~~2023 were ~~1.9~~19.6 million ~~(0.2~~shares (2.2 percent) and ~~2.4~~18.7 million ~~(0.3~~shares (2.1 percent) ~~shares lower,~~higher, respectively, than the same periods of ~~2021, driven by~~2022. The year-to-year increase was primarily due to the exclusion of dilutive potential common shares in the ~~current-year computation.~~prior-year computation and common stock issued under employee plans. 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~~2023 were ~~6.9~~10.8 million ~~(0.8~~(1.2 percent) and ~~7.1~~9.3 million ~~(0.8~~(1.0 percent) shares higher, respectively, than the same periods of ~~2021.~~

2022, primarily driven by common stock issued under employee plans.

Financial Position

Dynamics

Our balance sheet at September 30, ~~2022~~2023 continues to provide us with flexibility to support and invest in the business.

Cash and cash equivalents, restricted cash and marketable securities at September 30, ~~2022~~2023 were ~~$9,728~~$10,996 million, an increase of ~~$2,171~~$2,156 million compared to December 31, 2022, and a decrease of $5,333 million compared to June 30, 2023 primarily due to the acquisition of Apptio. Total debt of $55,242 million at September 30, 2023 increased $4,293 million from December 31, ~~2021. Total~~2022 primarily due to debt issuances. We were opportunistic in accessing the debt market and issued $9,463 million of ~~$50,880 million at September 30, 2022 decreased $824 million from December 31, 2021 driven by currency impacts.~~debt in the first quarter of 2023 to prudently plan for our debt maturity obligations in 2023 and 2024 as well as capital allocation priorities. We continue to manage our debt levels while being acquisitive and without sacrificing investments in our business or our ~~solid~~secure and modestly growing 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 ~~2022,~~2023, we generated ~~$6,470~~$9,468 million in cash from operating activities, an increase of $2,997 million compared to ~~$10,252 million in~~ the first nine months of ~~2021, primarily due to financing receivables. There was no~~2022. Our free cash flow ~~impact from~~for the ~~U.S. pension settlement charge.~~nine months ended September 30, 2023 was $5,123 million, an increase of $1,040 million versus the prior-year period. See pages 76 through 77 for additional information on free cash flow. Our strong cash generation has enabled us to be acquisitive and increase our investment in R&D, strengthening our future AI and hybrid cloud capabilities, while supporting continued shareholder returns through dividends. We ~~invested $1,020 million in~~completed seven acquisitions ~~generated $1,271 million from divested businesses~~ and returned ~~$4,454~~$4,522 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.~~

2023.

Our pension plans were well funded at the end of ~~2021,~~2022, with worldwide qualified plans funded at ~~107~~114 percent. Overall pension funded status as of the end of September ~~2022 has increased from~~2023 was fairly consistent with year-end ~~2021, primarily due~~2022. We expect contributions for all retirement-related plans to ~~higher interest rates and the settlement~~be approximately $1.9 billion in 2023, a decrease of approximately ~~$16~~$0.1 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,~~compared to 2022. ~~Refer to note 18, “Retirement-Related Benefits,” for additional information. We currently have no change to expected plan contributions in 2022.~~

~~Table of Contents~~

~~Management Discussion – (continued)~~

IBM Working Capital

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


(Dollars in millions)	At September 30, 2023		At December 31, 2022
Current assets	$	27,705	$	29,118
Current liabilities	30,606		31,505
Working capital	$	(2,900)	$	(2,387)
Current ratio	0.91:1		0.92:1

Working capital ~~increased $2,613~~decreased $513 million from the year-end ~~2021~~2022 position. ~~The key changes are described below:~~

Current assets decreased ~~$540~~$1,413 million ~~(an increase of $1,329~~($1,041 million adjusted for currency) ~~due to:~~

●

~~A decline in receivables of $2,666 million ($1,593 million adjusted for currency) mainly due to collections of higher year-end balances; partially offset by~~

●

~~An increase of $2,171 million ($2,718 million adjusted for currency) in cash, restricted cash and marketable securities.~~

primarily in receivables mainly from collections of seasonally higher year-end balances; partially offset by an increase in cash and cash equivalents and marketable securities. Current liabilities decreased ~~$3,153~~$899 million ($~~1,401~~522 million adjusted for currency) ~~as a result of:~~

●

~~A decrease in deferred income of $1,378 million ($512 million adjusted for currency) reflecting seasonal reductions from higher year-end balances;~~

●

A decrease in short-term debt of $849 million ($850 million adjusted for currency) due to maturities of $5,338 million; partially offset by reclassifications of $4,757 million from long-term debt to reflect upcoming maturities; and

●

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

primarily in accounts payable, taxes payable and derivative liabilities; partially offset by an increase in short-term debt driven by reclassifications from long-term debt net of maturities.

Table of Contents

Management Discussion – (continued)

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
Losses


(Dollars in millions)
January 1, 2023		Additions / (Releases) *		Write-offs **		Foreign currency and other+		September 30, 2023
$	495	$	7	$	(77)	$	38	$	464

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

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

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

**Refer to note A, “Significant Accounting Policies,” in our ~~2021~~2022 Annual Report for additional information regarding allowance for credit loss write-offs.

+Other includes additions/(releases) related to discontinued operations.

Excluding receivables classified as held for sale, the total IBM receivables provision coverage was ~~2.3~~2.8 percent at September 30, ~~2022,~~2023, an increase of 2040 basis points compared to December 31, ~~2021.~~2022. The increase in coverage was primarily driven by the ~~decline~~overall decrease in total receivables. The majority of the write-offs during the nine months ended September 30, ~~2022~~2023 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
%


(Dollars in millions)	At September 30, 2023			At December 31, 2022
Amortized cost *	$	9,991		$	12,843
Specific allowance for credit losses	117			127
Unallocated allowance for credit losses	43			46
Total allowance for credit losses	159			173
Net financing receivables	$	9,831		$	12,670
Allowance for credit losses coverage	1.6		%	1.3		%

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

The percentage of Financing segment receivables reserved ~~decreased~~increased from ~~1.6~~1.3 percent at December 31, ~~2021,~~2022 to ~~1.4~~1.6 percent at September 30, ~~2022,~~2023, primarily driven by ~~write-offs of previously reserved receivables.~~

the decline in amortized cost.

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


(Dollars in millions)
January 1, 2023		Additions / (Releases)*		Write-offs **		Foreign currency and other		September 30, 2023
$	173	$	(11)	$	(9)	$	7	$	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.~~

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

**Refer to note A, “Significant Accounting Policies,” in our 2022 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~~$7 million for the three ~~and nine~~ months ended September 30, ~~2022, respectively,~~2023, compared to a net release of ~~$18 million and $47~~$3 million for the three ~~and~~months ended September 30, 2022. The year-to-year decrease in expected credit loss expense was due to lower specific reserve requirements in the current year.

Expected credit loss expense was a net release of $12 million for the nine months ended September 30, ~~2021, respectively.~~2023, compared to a net release of $15 million for the nine months ended September 30, 2022. The ~~declines in~~lower year-to-year net ~~releases in both periods of 2022 were primarily driven by~~release was due to lower unallocated reserve ~~requirements in the prior year in Americas and EMEA due to sales~~releases.

Table of ~~receivables.~~

Contents

Management Discussion – (continued)

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~~


(Dollars in millions)	At September 30, 2023		At December 31, 2022
Noncurrent assets	$	101,616	$	98,125
Long-term debt	$	48,828	$	46,189
Noncurrent liabilities (excluding debt)	$	26,731	$	27,528

The increase in noncurrent assets ~~decreased $5,611~~of $3,491 million ($~~1,355~~3,912 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 currency impacts, intangibles amortization and derecognition of goodwill and intangible assets of $648 million related to the divestiture of our healthcare software assets, partially offset by additions from new acquisitions;

●

~~A decrease of $1,025 million ($528 million adjusted for currency) in net property, plant and equipment and operating right-of-use assets; and~~

was primarily due to goodwill and intangible assets mainly related to the Apptio acquisition; partially offset by a decrease in long-term financing receivables as a result of declines from seasonally higher year-end balances.

~~Table of Contents~~

~~Management Discussion – (continued)~~

●

A decrease in long-term financing receivables of $644 million ($265 million adjusted for currency) due to collections from seasonally higher year-end balances, partially offset by current-year business volumes.

Long-term debt increased ~~$26~~$2,639 million ($~~2,216~~2,940 million adjusted for currency) ~~due to:~~

●

~~Issuances of $7,532 million; partially offset by~~

●

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

●

~~A decrease of $2,191 million due to currency impacts.~~

primarily driven by debt issuances; partially offset by reclassifications to short-term debt to reflect upcoming maturities.

Noncurrent liabilities (excluding debt) decreased ~~$4,175~~$797 million ($~~1,761~~525 million adjusted for currency) ~~due to:~~

●

A decrease in retirement and postretirement benefit obligations of $2,675 million ($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 related primarily to real estate leases.~~

primarily driven by a decrease in retirement and postretirement benefit obligations and deferred income.

Debt

Our funding requirements are continually monitored ~~and~~as we execute our strategies 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)

2022

2021
Total company debt

$
50,880

$
51,703
Financing segment debt*

$
11,198

$
13,929
Non-Financing debt

$
39,682

$
37,775


(Dollars in millions)	At September 30, 2023		At December 31, 2022
Total debt	$	55,242	$	50,949
Financing segment debt*	$	9,860	$	12,872
Non-Financing debt	$	45,381	$	38,077

* ~~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 9279 for additional details.

Total debt of ~~$50,880~~$55,242 million ~~decreased $824~~increased $4,293 million ~~(increased $1,366~~($4,585 million adjusted for currency) from December 31, ~~2021,~~2022, primarily driven by ~~maturities~~proceeds from issuances of ~~$5,415 million and currency impacts,~~$9,586 million; partially offset by ~~issuances~~maturities of ~~$7,871~~$4,973 million.

Non-Financing debt of ~~$39,682~~$45,381 million increased ~~$1,907~~$7,304 million ($~~3,480~~7,536 million adjusted for currency) from December 31, ~~2021~~2022, primarily ~~due~~driven by our first quarter debt issuances to ~~new~~plan for debt ~~issuances.~~

maturity obligations in 2023 and 2024 as well as capital allocation priorities.

Financing segment debt of ~~$11,198~~$9,860 million decreased ~~$2,730~~$3,011 million ($~~2,114~~2,952 million adjusted for currency) from December 31, ~~2021~~2022, primarily due to lower funding requirements associated with financing ~~assets.~~

receivables.

Financing provides financing solutions predominantly for IBM’s external client assets, and the debt used to fund 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

~~Table of Contents~~

~~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.~~receivable. The Financing debt-to-equity ratio remained at 9.0 to 1 at September 30, ~~2022.~~

2023.

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

Equity

Total equity ~~of $20,147 million~~ increased ~~$1,151~~$1,135 million from December 31, ~~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.~~

2022, primarily driven by an increase from net income of $4,214 million and common stock of $970 million; partially offset by dividends paid of $4,522 million.

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 table ~~below and include the cash flows of discontinued operations.~~below. These amounts also include the cash flows associated with the Financing business.

(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)


(Dollars in millions)
For the nine months ended September 30:	2023		2022
Net cash provided by/(used in):
Operating activities	$	9,468	$	6,470
Investing activities	(9,906)		(2,883)
Financing activities	(154)		(2,106)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	(120)		(463)
Net change in cash, cash equivalents and restricted cash	$	(713)	$	1,018

Net cash provided by operating activities ~~decreased $3,782~~increased $2,997 million as compared to the first nine months of ~~2021 driven primarily by:~~

●

~~A decrease in cash provided by financing receivables of $4,164 million primarily driven by higher prior-year sales of receivables; partially offset by~~

●

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

●

~~An increase in cash from sales cycle working capital of $578 million.~~

2022. This was due to an increase in cash provided by financing receivables, performance-related improvements within net income and sales cycle working capital efficiencies; partially offset by an increase in performance-based compensation payments in 2023, given our strong results in 2022.

Net cash used in investing activities ~~decreased $2,417~~increased $7,023 million mainly driven ~~primarily by:~~

●

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

●

~~An increase in cash provided by divestitures of $1,245 million; and~~

by the Apptio acquisition, higher net purchases of marketable securities and other investments and a decrease in cash provided by divestitures.

~~Table of Contents~~

~~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~~$1,951 million mainly due to an increase in net cash provided by debt of $2,048 million primarily driven ~~primarily by:~~

●

by a higher level of net additions in the current year.

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~~

Loss from discontinued operations, net of tax was ~~$18~~$10 million in the third quarter of ~~2022~~2023 compared to ~~$93~~income of $18 million in the prior-year period. For the first nine months of ~~2022, income~~2023, loss from discontinued operations, net of tax was ~~$16~~$15 million compared to income of ~~$1,160~~$16 million in the prior-year period. ~~As the separation of Kyndryl occurred on November 3, 2021, the year-to-date discontinued operations~~The results ~~as of September 30, 2021 included a full nine months of Kyndryl operations. The income in the third quarter of 2022 primarily reflects~~for all periods reflect the net impact of changes in separation-related estimates and the settlement of assets and liabilities in accordance with the separation and distribution agreement. The ~~income in the first nine months~~prior-year results also reflect a gain on sale 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~~was sold to ~~the transfer being subject to regulatory approval. Upon receiving regulatory approval~~Kyndryl in the first quarter of 2022 ~~the company sold its majority shares in the joint venture~~upon receiving regulatory approval.

Looking Forward

Technology continues to ~~Kyndryl. See note 3, “Separation of Kyndryl,” for additional information.~~

~~Looking Forward~~

~~As technology remains~~serve as a fundamental source of competitive ~~advantage, we continue~~advantage. Clients are looking to ~~see solid~~leverage technology to offer better services, scale more quickly and fuel growth without increasing their footprint. This has been driving demand for technologies that boost productivity and competitiveness, such as hybrid cloud and AI.

To advance 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~~

We believe Hybrid cloud and AI are the two most transformational enterprise technologies of our time. Our platform, based on Red Hat, allows our clients to consume software driven by open-source innovation. Our software has been optimized to run on that platform and includes 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 accelerate their digital transformation journeys. And our infrastructure allows clients to take full advantage of a hybrid cloud environment.

Clients are choosing our hybrid cloud capabilities to unlock more business value and meet their rapidly changing demands. We see more clients consuming across our portfolio of software, consulting and infrastructure capabilities to drive business value. Companies are also eager to deploy AI and 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.

~~Table of Contents~~

~~Management Discussion – (continued)~~

We continue to invest, both organically and inorganically, to deliver new innovation ~~for~~to our clients and to shape the technologies of the future. ~~Most recently,~~In third quarter 2023, we ~~unveiled~~launched watsonx, our enterprise-ready generative AI and data platform, and we are building additional capabilities to help clients and partners capitalize on the ~~next generation~~AI opportunity. We have over 20,000 data and AI consultants, including a center of excellence to help clients navigate the AI landscape and to provide valuable and real-time feedback to our ~~LinuxONE server,~~product teams. We delivered Granite, a ~~Linux~~multi-billion parameter foundation model on watsonx.ai which excels in both language and ~~Kubernetes-based~~code. We also introduced the watsonx Code Assistant, including the watsonx Code Assistant for Z to help clients accelerate the modernization of mainframe code and applications. And before the end of 2023, we plan to launch watsonx.governance to provide governance tools businesses need to mitigate risks and ensure compliance through the AI lifecycle. We also brought to market new innovations to our industry-leading hybrid cloud platform, ~~designed~~Red Hat OpenShift, and are making good progress in quantum computing that puts us on a path toward building practical quantum computers that can solve hard problems in areas such as risk, finance and materials. To complement our innovations, we closed seven acquisitions in the first nine months of 2023, including the acquisition of Apptio, a leader in financial and operational IT management and optimization software.

Table of Contents

Management Discussion – (continued)

We are driving productivity initiatives which range from simplifying our application environment to ~~support thousands~~digitally transforming our business processes by applying AI at scale. We are ahead of ~~workloads with~~pace to achieve our target of $2.0 billion in savings from these productivity initiatives by the ~~footprint~~end of ~~a single system. Quantum is an example of our commitment~~2024. This will enable reinvestment in the business, increase financial flexibility and contribute to ~~shape the future of technology.~~ both gross and pre-tax margin expansion.

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~~our strategy ~~that we are executing~~ and in the fundamentals of our business. Our balance sheet and liquidity position remain ~~strong.~~strong with financial flexibility to support our business into the future. At September 30, ~~2022~~2023, we had ~~$9.7~~$11.0 billion of cash and cash equivalents, restricted cash and marketable ~~securities~~securities. We issued $9.5 billion of debt in the first quarter of 2023 to prudently plan for our debt maturity obligations in 2023 and ~~we continue~~2024 as well as capital allocation priorities. We continued to manage our debt levels while being acquisitive and without sacrificing investments in our business or our ~~solid~~secure and modestly growing 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,~~

Today’s IBM is a ~~more focused, faster-growing~~higher-growth, higher-value business with solid cash generation – a business well positioned for the future. We are executing a strategy that closely resonates with our clients’ needs, and ~~higher-value company.~~this is propelling our business forward. We expect to continue our progress as a leading hybrid cloud and AI company with a focus on revenue growth and cash ~~generation while maintaining our solid and modestly growing dividend policy.~~

generation.

Retirement-Related Plans

Our pension plans are well funded. Contributions for all retirement-related plans are expected to be approximately ~~$2.0~~$1.9 billion in ~~2022,~~2023, a decrease of approximately ~~flat~~$0.1 billion compared to ~~2021,~~2022, of which ~~$0.2~~$0.1 billion generally relates to legally required contributions to non-U.S. defined benefit and multi-employer plans. We expect ~~2022~~2023 pre-tax retirement-related plan cost to be approximately ~~$7.8~~$1.2 billion, ~~an increase~~a decrease of approximately ~~$5.2~~$6.5 billion compared to ~~2021.~~2022. The ~~increase~~decrease is primarily driven by a $5.9 billion settlement charge in the third quarter of 2022 resulting from the transfer of a portion of the U.S. Qualified PPP to insurance companies. This estimate reflects current pension plan assumptions at December 31, ~~2021 and for the U.S. Qualified PPP and U.S. Nonpension Postretirement Plan, at August 31, 2022 and July 31, 2022, respectively.~~2022. Within total retirement-related plan cost, operating retirement-related plan cost is expected to be approximately $1.2 billion, ~~a decrease of~~ approximately ~~$100 million~~flat versus ~~2021.~~2022. Non-operating retirement-related plan cost is expected to be ~~approximately $6.6 billion, an increase of approximately $5.4 billion~~immaterial compared to ~~2021,~~$6.5 billion in 2022, primarily driven by the third-quarter 2022 settlement charge ~~partially offset by~~and lower recognized actuarial losses, ~~and~~partially offset by higher ~~income from expected return on assets.~~

interest cost.

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 USD affect our financial results and financial position. At September 30, ~~2022,~~2023, currency changes resulted in assets and liabilities denominated in local currencies being translated into fewer dollars than at year-end ~~2021.~~2022. We use financial hedging instruments to limit specific currency risks related to foreign currency-based transactions.

~~The combination of the rate, breadth and magnitude of movements~~

Movements in currency, and the fact that we do not hedge 100 percent of our currency exposures, will result in a currency impact to our revenues, profit and cash flows ~~in 2022.~~throughout 2023. We execute a hedging program which defers, versus eliminates, the volatility of currency impacts on our financial results. During periods of sustained movements in currency, the marketplace and competition adjust to the changing rates 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, such as updates to pricing and sourcing. Currency movements impacted our year-to-year revenue and earnings per share results in the first nine months of 2022.~~rates. Based on the currency rate movements in the ~~first nine months~~third quarter of ~~2022, total~~2023, revenue from continuing operations increased ~~7.8~~4.6 percent as reported and ~~13.8~~3.5 percent at constant currency versus the third quarter of 2022. In the first nine months of ~~2021. On an income/(loss)~~2023, revenue from continuing

~~Table~~ operations increased 1.5 percent as reported and 2.7 percent at constant currency, compared to the same period in 2022. Currency translation and hedging impacted year-to-year pre-tax income growth and operating (non-GAAP) pre-tax income growth by approximately $200 million in the third quarter of ~~Contents~~

~~Management Discussion – (continued)~~

operations before income 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 of2023, and approximately ~~$190~~$500 million in the first nine months of ~~2022 on an as-reported basis~~2023. From a segment perspective, in the third quarter of 2023, currency translation and hedging impacted our Software pre-tax income margin year-to-year growth by more than two points, Infrastructure by more than a ~~decrease in income of~~point and Consulting by approximately ~~$280 million on an operating (non-GAAP) basis. The same mathematical exercise resulted in an increase in income of approximately $95 million in~~a point. In the first nine months of ~~2021 on an as-reported basis~~2023, currency translation and ~~an increase of $130 million on an operating (non-GAAP) basis.~~hedging impacted our Software and Infrastructure pre-tax income margin year-to-year growth by more than a point each. We view these amounts as a theoretical maximum impact to our as-reported financial results. Hedging and certain underlying foreign currency transaction gains and losses are allocated to our segment results. Considering the operational responses mentioned above,

Table of Contents

Management Discussion – (continued)

movements of exchange rates, and the nature and timing of hedging instruments, it is difficult to predict future currency impacts on any particular 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.

Liquidity and Capital Resources

In our ~~2021~~2022 Annual Report, on pages 4733 to ~~49,~~35, there is a discussion of our liquidity including two tables that present three years of data. The table presented on page 4733 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, ~~2022,~~2023, those amounts are ~~$6.5~~$9.5 billion of net cash from operating activities, ~~$9.7~~$11.0 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.

The major rating agencies' ratings on our debt securities at September 30, ~~2022~~2023 appear in the following table and remain unchanged from June 30, ~~2022.~~

2023.

IBM RATINGS:

STANDARD

AND
POOR’S

MOODY’S

INVESTORS
SERVICE

~~AND~~

~~INVESTORS~~

~~IBM RATINGS:~~

~~POOR’S~~

~~SERVICE~~

Senior long-term debt

A-

Commercial paper

A-2

Prime-2

IBM has ample financial flexibility, supported by our strong liquidity position and cash flows, to operate at a single A credit rating. WeIn the first quarter of 2023, we issued $9.5 billion of debt ~~in July 2022~~primarily to ~~further improve our liquidity and~~ plan for our debt maturity obligations in 2023 ~~debt maturities.~~and 2024 as well as capital allocation priorities. Debt levels have ~~decreased $0.8~~increased $4.3 billion from December 31, ~~2021, primarily~~2022, driven by ~~currency,~~debt issuances; partially offset by ~~net debt issuances, and $22.2 billion from our peak levels at June 30, 2019 (immediately preceding the Red Hat acquisition).~~

maturities.

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, ~~2022,~~2023, the fair value of those instruments that were in a liability position was ~~$1,079~~$864 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.

Effective December 31, ~~2021,~~2022, the use of LIBOR was substantially eliminated for purposes of any new financial contract executions. The UK’s Financial Conduct Authority (FCA) extended the phase out of LIBOR in the case of U.S. dollar settings for certain tenors until the end of June 2023. Any legacy USD LIBOR based financial contracts ~~are expected to be~~were addressed using the LIBOR rates published through the June 2023 extension period. The replacement of the LIBOR benchmark within the company’s risk management activities did not have a material impact in the consolidated financial results.

~~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 that format on ~~pages 86 and 87.~~page 74. 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 Financing receivables and net capital expenditures, including the investment in software. A key objective of the Financing business is to generate strong returns on equity, and our Financing receivables are the basis for that growth. Accordingly,

Table of Contents

Management Discussion – (continued)

management considers 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 Financing receivables.

The following is management’s view of cash flows for the first nine months of ~~2022~~2023 and ~~2021~~2022 prepared in a manner consistent with the description ~~above and is presented on a consolidated basis, including~~above.


(Dollars in millions)
For the nine months ended September 30:	2023		2022*
Net cash from operating activities per GAAP	$	9,468	$	6,470
Less: change in Financing receivables	3,119		1,071
Net cash from operating activities, excluding Financing receivables	$	6,349	$	5,399
Capital expenditures, net	(1,226)		(1,317)
Free cash flow	$	5,123	$	4,082
Acquisitions	(4,945)		(1,020)
Divestitures	(4)		1,271

Dividends	(4,522)		(4,454)
Non-Financing debt	7,572		4,686
Other (includes Financing net receivables and Financing debt)	(1,068)		(2,395)		**
Change in cash, cash equivalents, restricted cash and short-term marketable securities	$	2,156	$	2,171

*Includes immaterial cash flows offrom 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)

**Recast to conform to current-year presentation.

* Includes cash flows of discontinued operations. See note 3, “Separation of Kyndryl,” for additional information.

In the first nine months of ~~2022,~~2023, we generated $5.1 billion in free cash flow, ~~of $4.1 billion,~~ an increase of ~~$0.9~~$1.0 billion versus the prior-year period. ~~Payments for the 2020 structural actions~~The increase was driven primarily by performance-related improvements within net income and ~~Kyndryl separation-related charges are down year to year and we are driving~~sales cycle working capital ~~improvements.~~efficiencies; partially offset by higher performance-based compensation payments in 2023 given our strong results in 2022. In the first nine months of ~~2022,~~2023, net cash used in acquisitions was $4.9 billion and we continued to return value to shareholders with $4.5 billion in ~~dividends and invested $1.0 billion in acquisitions, which was more than offset by proceeds from divested businesses.~~

dividends.

Events that could temporarily change the historical cash flow dynamics discussed previously and in our ~~2021~~2022 Annual Report include significant changes in operating results, material changes in geographic sources of cash, unexpected adverse impacts from litigation, future pension funding requirements, 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 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~~$100 million in ~~2022.~~2023. Contributions related to all retirement-related plans are expected to be approximately ~~$2.0~~$1.9 billion in ~~2022.~~2023. Financial market performance could increase the legally mandated minimum contributions in certain non-U.S. countries that require more frequent remeasurement of the funded status. 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 ~~2022,~~2023, we are not legally required to make any contributions to the U.S. defined benefit pension plans.

Our cash flows are sufficient to fund our current operations and obligations, including investing and financing activities such as 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 ~~long-standing~~secure and modestly growing dividend policy.

Table of Contents

~~Financing~~

Management Discussion – (continued)

Financing

Financing is a reportable segment that is measured as a stand-alone entity. Financing facilitates IBM clients’ acquisition of IBM information technology systems, software and services by providing financing solutions in the areas where the company has the expertise, while generating solid returns on equity.

Results of Operations

Yr. to Yr.

(Dollars in millions)

Percent

For the three months ended September 30:

2022

2021*

Change

Revenue

$
174

$
184

(5.7)
%
Pre-tax income

$
79

$
132

(40.4)
%


(Dollars in millions)					Yr. to Yr. Percent Change
For the three months ended September 30:	2023		2022
Revenue	$	186	$	174	6.9	%
Pre-tax income	$	91	$	79	16.0	%


(Dollars in millions)					Yr. to Yr. Percent Change
For the nine months ended September 30:	2023		2022
Revenue	$	566	$	474	19.5	%
Pre-tax income	$	256	$	265	(3.2)	%

* Recast to reflect 2021 segment changes.

Yr. to Yr.

(Dollars in millions)

Percent

For the nine months ended September 30:

2022

2021*

Change

Revenue

$
474

$
601

(21.2)
%
Pre-tax income

$
265

$
362

(26.8)
%

* 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,~~2023, financing revenue ~~decreased 5.7~~increased 6.9 percent as reported (1(5 percent adjusted for currency) compared to the prior year, driven by client financing ~~down $9~~revenue up $11 million to ~~$172~~$183 million. For the nine months ended September 30, ~~2022,~~2023, financing revenue ~~decreased 21.2~~increased 19.5 percent as reported ~~(18~~(20 percent adjusted for currency) compared to the prior year, driven by client financing ~~down $123~~up $88 million to ~~$469~~$557 million. The ~~decreases~~increase in client financing revenue in both periods in ~~2022 were~~2023 was primarily driven by ~~the strategic actions taken~~an increase in ~~the prior year including selling certain~~ client ~~lease and loan~~ financing receivables to third parties. While these strategic actions impact revenue and pre-tax income on a year-to-year basis, our repositioning of the Financing business has strengthened our liquidity position, improved the quality of our portfolio, and lowered our debt needs.

asset yields.

Financing pre-tax income ~~decreased 40.4~~increased 16.0 percent to ~~$79~~$91 million in the third quarter of ~~2022,~~2023, compared to the ~~prior year~~prior-year period and the pre-tax margin of ~~45.4~~49.2 percent ~~decreased 26.4~~increased 3.9 points year to year. The increase in pre-tax income for the third quarter was primarily driven by a decrease in SG&A expenses and lower specific reserve requirements in the current year. For the nine months ended September 30, ~~2022,~~2023, Financing pre-tax income decreased ~~26.8~~3.2 percent to ~~$265~~$256 million compared to the prior year and the pre-tax margin of ~~55.9~~45.3 percent decreased ~~4.3~~10.6 points year to ~~year. The decreases in pre-tax income in both periods in 2022 were~~year, primarily driven by ~~the strategic actions described above.~~

year-to-year foreign currency impacts.

Table of Contents

Management Discussion – (continued)

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


(Dollars in millions)	At September 30, 2023		At December 31, 2022
Cash and cash equivalents	$	558	$	699
Client financing receivables:
Net investment in sales-type and direct financing leases (1)	3,627		4,047
Client loans	5,897		8,329
Total client financing receivables	$	9,524	$	12,376
Commercial financing receivables:
Held for investment	308		293
Held for sale	593		939
Other receivables	42		66
Total external receivables (2)	$	10,466	$	13,674
Intercompany assets (3)	722		988		(4)
Other assets	295		395		(4)
Total assets	$	12,042	$	15,757

Intercompany payables (3)	$	444	$	637
Debt (5)	9,860		12,872
Other liabilities	642		814
Total liabilities	$	10,946	$	14,323
Total equity	$	1,096	$	1,433
Total liabilities and equity	$	12,042	$	15,757

~~(1)~~	~~Includes deferred initial direct costs which are expensed in IBM’s consolidated financial results.~~

~~(2)~~

The difference between the decrease in total external receivables of $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.~~

(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 $3.2 billion (from $13.7 billion in December 2022 to $10.5 billion in September 2023) and the $3.1 billion change in Financing segment’s receivables disclosed in the free cash flow presentation on page 77 is primarily attributable to currency impacts.

(3)This entire amount is eliminated for purposes of IBM’s consolidated financial results and therefore does not appear in the Consolidated Balance Sheet.

(4)Prior period amounts have been recast to conform to 2023 presentation.

(5)Financing segment debt is primarily composed of intercompany loans.

Total external receivables decreased ~~$1,996~~$3,208 million primarily due to collections of higher year-end balances. Intercompany assets decreased $267 million primarily driven by ~~collections~~intercompany financing receivables at December 31, 2022 that settled in the first half of ~~higher year-end balances partially offset by current-year business volumes, with~~2023. These declines had corresponding ~~changes~~reductions in debt funding.

~~At September 30, 2022, we~~

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 consumers ~~an increase of 6 points year to year~~at September 30, 2023, flat year-to-year and ~~an increase~~a decrease of 1 point as compared to June 30, ~~2022.~~2023. 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 parties. These actions may include credit insurance, financial guarantees, nonrecourse secured borrowings, transfers of receivables recorded as true sales in accordance with accounting guidance or sales of equipment under operating lease. Sale of receivables arrangements are also utilized in the normal course of business as part of our cash and liquidity management.

The company has an existing agreement with a third-party investor to 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, 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 financing receivables refer to note 9, “Financing Receivables.” Refer to pages 2672 through 3073 for additional information related to Financing segment receivables, allowance for credit losses and debt.

Table of Contents
Management Discussion – (continued)

Return on Equity Calculation

For Three Months Ended

For Nine Months Ended

September 30,

September 30,

(Dollars in millions)

2022

2021*

2022

2021*

Numerator





Financing after-tax income**

$
64

$
98

$
217

$
267

Annualized after-tax income (1)

$
257

$
391

$
289

$
356

Denominator

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
%


	For Three Months Ended September 30,						For Nine Months Ended September 30,
(Dollars in millions)	2023			2022			2023			2022
Numerator:
Financing after-tax income*	$	79		$	64		$	214		$	217
Annualized after-tax income (1)	$	315		$	257		$	285		$	289
Denominator:
Average Financing equity (2)**	$	1,134		$	1,306		$	1,217		$	1,378
Financing return on equity (1)/(2)	27.8		%	19.7		%	23.4		%	21.0		%

*	~~Recast to reflect 2021 segment changes.~~

** Calculated based upon an estimated tax rate principally based on 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 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.~~

Average of the ending equity for Financing for the last two quarters and three quarters, for the three months ended September 30 and for the nine months ended September 30, respectively.

Return on equity was ~~19.7~~27.8 percent and ~~21.0~~23.4 percent for the three and nine months ended September 30, ~~2022,~~2023, respectively, compared to ~~21.2~~19.7 percent and ~~17.7~~21.0 percent for the same periods in ~~2021.~~2022. The ~~changes~~change in ~~both periods~~the three months ended September 30, 2023 was driven by an increase in ~~2022 were~~net income and a lower average equity balance. The change in the nine months ended September 30, 2023 was driven by a lower average equity ~~balance,~~balance.

Residual Value

The estimated residual value represents the estimated fair value of the equipment under lease at the end of the lease. The company estimates the future fair value of leased equipment by using historical models, analyzing the current market for new and ~~a decrease in net income, which reflects the strategic actions taken in the prior year to reposition the Financing business.~~

~~Residual Value~~

~~Residual value is a risk unique to the financing business,~~used equipment and ~~management of this risk is dependent upon the ability to accurately project future equipment values at lease inception. Financing has insight into~~obtaining forward-looking product information such as marketing plans and cycles for IBM products. Based upon this product information, Financing continually monitors projections of future equipment values and compares them with the residual values reflected in the portfolio.

~~Financing~~technology innovations.

The company 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.~~

or selling leased equipment to existing clients and periodically reassesses the realizable value of its lease residual values.

~~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, ~~2022~~2023 and December 31, ~~2021.~~2022. In addition, the table presents the run out of when the unguaranteed residual value assigned to equipment on leases at September 30, ~~2022~~2023 is expected to be returned to the company.

The unguaranteed residual value for operating leases at September 30, 2023 and December 31, 2022 was not material.

Unguaranteed Residual Value

At

At

Estimated Run Out of September 30, 2022 Balance

December 31,

September 30,

2025 and
(Dollars in millions)

2021

2022

2022

2023

2024

Beyond
Sales-type and direct financing leases

$
335

$
323

$
21

$
72

$
62

$
168
Operating leases

13

10

7

2

0

0
Total unguaranteed residual value

$
348

$
333

$
28

$
74

$
62

$
168


	At December 31, 2022		At September 30, 2023		Estimated Run Out of September 30, 2023 Balance
(Dollars in millions)					2023		2024		2025		2026 and Beyond
Sales-type and direct financing leases	$	422	$	403	$	21	$	58	$	135	$	188

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.

Kyndryl-

(Dollars in millions except per share amounts)

Related

Related

Tax Reform

Related

Operating

For the three months ended September 30, 2022:

GAAP

Adjustments

Adjustments
*
Impacts

Impacts

(non-GAAP)

Gross profit

$
7,430

$
165

$
—

$
—

$
—

$
7,595

Gross profit margin

52.7
%

1.2
pts.

—
pts.

—
pts.

—
pts.

53.8
%
SG&A

$
4,391

$
(253)

$
—

$
—

$
0

$
4,138

Other (income) and expense

$
5,755

$
(1)

$
(6,062)

$
—

$
14

$
(293)

Total expense and other (income)

$
11,931

$
(253)

$
(6,062)

$
—

$
14

$
5,630

Pre-tax income/(loss) from continuing operations

$
(4,501)

$
418

$
6,062

$
—

$
(14)

$
1,965

Pre-tax margin from continuing operations

(31.9)
%

3.0
pts.

43.0
pts.

—
pts.

(0.1)
pts.

13.9
%
Provision for/(benefit from) income taxes**

$
(1,287)

$
103

$
1,495

$
—

$
—

$
312

Effective tax rate

28.6
%

(0.8)
pts.

(12.1)
pts.

—
pts.

0.2
pts.

15.9
%
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


(Dollars in millions except per share amounts)	GAAP			Acquisition- Related Adjustments			Retirement- Related Adjustments			U.S. Tax Reform Impacts			Kyndryl- Related Impacts			Operating (non-GAAP)
For the three months ended September 30, 2023:
Gross profit	$	8,023		$	162		$	—		$	—		$	—		$	8,185
Gross profit margin	54.4		%	1.1		pts.	—		pts.	—		pts.	—		pts.	55.5		%
SG&A	$	4,458		$	(277)		$	—		$	—		$	—		$	4,181
Other (income) and expense	$	(215)		$	—		$	12		$	—		$	—		$	(203)
Total expense and other (income)	$	6,150		$	(277)		$	12		$	—		$	—		$	5,885
Pre-tax income from continuing operations	$	1,873		$	438		$	(12)		$	—		$	—		$	2,299
Pre-tax margin from continuing operations	12.7		%	3.0		pts.	(0.1)		pts.	—		pts.	—		pts.	15.6		%
Provision for income taxes**	$	159		$	99		$	(14)		$	24		$	—		$	268
Effective tax rate	8.5		%	2.7		pts.	(0.5)		pts.	1.0		pts.	—		pts.	11.7		%
Income from continuing operations	$	1,714		$	340		$	1		$	(24)		$	—		$	2,031
Income margin from continuing operations	11.6		%	2.3		pts.	$	0.0	pts.	(0.2)		pts.	—		pts.	13.8		%
Diluted earnings per share from continuing operations	$	1.86		$	0.37		$	0.00		$	(0.03)		$	—		$	2.20


(Dollars in millions except per share amounts)	GAAP			Acquisition- Related Adjustments			Retirement- Related Adjustments*			U.S. Tax Reform Impacts			Kyndryl- Related Impacts			Operating (non-GAAP)
For the three months ended September 30, 2022:
Gross profit	$	7,430		$	165		$	—		$	—		$	—		$	7,595
Gross profit margin	52.7		%	1.2		pts.	—		pts.	—		pts.	—		pts.	53.8		%
SG&A	$	4,391		$	(253)		$	—		$	—		$	0		$	4,138
Other (income) and expense	$	5,755		$	(1)		$	(6,062)		$	—		$	14		$	(293)
Total expense and other (income)	$	11,931		$	(253)		$	(6,062)		$	—		$	14		$	5,630
Pre-tax income/(loss) from continuing operations	$	(4,501)		$	418		$	6,062		$	—		$	(14)		$	1,965
Pre-tax margin from continuing operations	(31.9)		%	3.0		pts.	43.0		pts.	—		pts.	(0.1)		pts.	13.9		%
Provision for/(benefit from) income taxes**	$	(1,287)		$	103		$	1,495		$	—		$	—		$	312
Effective tax rate	28.6		%	(0.8)		pts.	(12.1)		pts.	—		pts.	0.2		pts.	15.9		%
Income/(loss) from continuing operations	$	(3,214)		$	315		$	4,566		$	—		$	(14)		$	1,653
Income/(loss) margin from continuing operations	(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 in 2022 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 in 2022 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

Table of Contents

Management Discussion – (continued)


(Dollars in millions except per share amounts)	GAAP			Acquisition- Related Adjustments			Retirement- Related Adjustments			U.S. Tax Reform Impacts			Kyndryl- Related Impacts			Operating (non-GAAP)
For the nine months ended September 30, 2023:
Gross profit	$	24,033		$	460		$	—		$	—		$	—		$	24,492
Gross profit margin	54.0		%	1.0		pts.	—		pts.	—		pts.	—		pts.	55.1		%
SG&A	$	14,212		$	(768)		$	—		$	—		$	—		$	13,444
Other (income) and expense	$	(721)		$	(2)		$	16		$	—		$	—		$	(707)
Total expense and other (income)	$	19,102		$	(770)		$	16		$	—		$	—		$	18,348
Pre-tax income from continuing operations	$	4,931		$	1,229		$	(16)		$	—		$	—		$	6,144
Pre-tax margin from continuing operations	11.1		%	2.8		pts.	0.0		pts.	—		pts.	—		pts.	13.8		%
Provision for income taxes**	$	702		$	277		$	(27)		$	(91)		$	—		$	861
Effective tax rate	14.2		%	1.7		pts.	(0.4)		pts.	(1.5)		pts.	—		pts.	14.0		%
Income from continuing operations	$	4,229		$	953		$	11		$	91		$	—		$	5,283
Income margin from continuing operations	9.5		%	2.1		pts.	0.0		pts.	0.2		pts.	—		pts.	11.9		%
Diluted earnings per share from continuing operations	$	4.59		$	1.04		$	0.01		$	0.10		$	—		$	5.74


(Dollars in millions except per share amounts)	GAAP			Acquisition- Related Adjustments			Retirement- Related Adjustments*			U.S. Tax Reform Impacts			Kyndryl- Related Impacts			Operating (non-GAAP)
For the nine months ended September 30, 2022:
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) margin from continuing operations	(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

~~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

* 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 in 2022 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.

Kyndryl-

(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

Impacts

(non-GAAP)

Gross profit

$
21,985

$
537

$
—

$
—

$
—

$
22,522

Gross profit margin

54.1
%

1.3
pts.

—
pts.

—
pts.

—
pts.

55.4
%
SG&A

$
13,842

$
(870)

$
—

$
—

$
—

$
12,972

Other (income) and expense

$
891

(2)

(967)

—

—

(77)

Total expense and other (income)

$
20,017

(872)

(967)

—

—

18,179

Pre-tax income from continuing operations

$
1,968

1,409

967

—

—

4,343

Pre-tax margin from continuing operations

4.8
%

3.5
pts.

2.4
pts.

—
pts.

—
pts.

10.7
%
Provision for/(benefit from) income taxes*

$
(282)

$
340

$
141

$
6

$
—

$
204

Effective tax rate

(14.4)
%

12.5
pts.

6.5
pts.

0.1
pts.

—
pts.

4.7
%
Income from continuing operations

$
2,250

$
1,069

$
825

$
(6)

$
—

$
4,139

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

$
2.49

$
1.18

$
0.91

$
(0.01)

$
—

$
4.58

* 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)

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 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 related to climate change and environmental ~~matters,~~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 Holdings, Inc. 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.

Table of Contents

Part II — Other Information

Item 1. Legal Proceedings

Refer to note 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 ~~2022.~~

Total Number

Approximate

of Shares

Dollar Value

Purchased as

of Shares that

Total Number

Average

Part of Publicly

May Yet Be

of Shares

Price Paid

Announced

Purchased Under
Period

Purchased

per Share

Program

The Program*
July 1, 2022 - July 31, 2022

—

$
—

—

$
2,007,611,768

August 1, 2022 - August 31, 2022

—

$
—

—

$
2,007,611,768

September 1, 2022 - September 30, 2022

—

$
—

—

$
2,007,611,768

Total

—

$
—

—


2023.


Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Program	Approximate Dollar Value of Shares that May Yet Be Purchased Under The Program*
July 1, 2023 - July 31, 2023	—	$	—	—	$	2,007,611,768

August 1, 2023 - August 31, 2023	—	$	—	—	$	2,007,611,768

September 1, 2023 - September 30, 2023	—	$	—	—	$	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~~closing in 2019.

Item 5. Other Information

Amendment to By-Laws

On July 31, 2023, the company announced that Michael Miebach had been elected to the IBM Board of Directors, effective October 30, ~~2022 there~~2023. As a result, Article III, Section 2 of the company’s By-Laws was ~~approximately $2.0 billion in authorized funds remaining for purchases under~~amended to increase the number of directors to thirteen, effective October 30, 2023. The full text of IBM’s By-Laws, as amended effective October 30, 2023, is included as Exhibit 3.2 to this ~~program.~~

report.

Table of Contents

Item 6. Exhibits


~~Exhibit Number~~

Exhibit Number
~~31.1~~
3.2	The By-Laws of IBM, as amended through October 30, 2023.

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

Table of Contents

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

International Business Machines Corporation

(Registrant)

Date:

October ~~25, 2022~~

31, 2023

By:

/s/ ~~Robert F. Del Bene~~

Nicolás A. Fehring

~~Robert F. Del Bene~~

Nicolás A. Fehring

Vice President and Controller

~~100~~


	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


	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


	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 - 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)								5,030		5,030				5,030
Total comprehensive income/(loss)									$	1,834			$	1,834
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
Equity – September 30, 2022	$	58,117	$	148,611	$	(169,514)	$	(17,138)	$	20,076	$	71	$	20,147


(Dollars in millions)
January 1, 2022		Additions / (Releases)		Write-offs		Foreign currency and other		September 30, 2022
$	218	$	43	$	(28)	$	(19)	$	214


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


													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	%


	Amortization	Total
(Dollars in millions)	Life (in years)	Acquisitions
Current assets		$	63
Property, plant and equipment/noncurrent assets			3
Intangible assets:
Goodwill	N/A		857
Client relationships	7		151
Completed technology	4-7		90
Trademarks	2-3		7
Total assets acquired		$	1,171
Current liabilities			48
Noncurrent liabilities			22
Total liabilities assumed		$	69
Total purchase price		$	1,102


	Fair Value
	Hierarchy	At September 30, 2022				At December 31, 2021
(Dollars in millions)	Level	Assets (8)		Liabilities (9)		Assets (8)		Liabilities (9)
Cash equivalents: (1)
Time deposits and certificates of deposit (2)	2	$	4,195	$	N/A	$	1,903	$	N/A
Money market funds	1		732		N/A		263		N/A
U.S. government securities (2)	2		—		N/A		599		N/A
Total cash equivalents		$	4,927	$	N/A	$	2,766	$	N/A
Equity investments (3)	1		—		N/A		0		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		1		339		12		—
Foreign exchange contracts	2		998		531		359		117
Derivatives not designated as hedging instruments:
Foreign exchange contracts	2		13		31		21		42
Equity contracts (7)	1,2		—		178		6		4
Total		$	7,908	$	1,263	$	4,608	$	162


	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 September 30, 2022:	(Loans)		Leases		Investment		Sale*		Total
Financing receivables, gross	$	7,777	$	3,566	$	169	$	395	$	11,907
Unearned income		(330)		(285)		—		—		(615)
Unguaranteed residual value		—		323		—		—		323
Amortized cost	$	7,447	$	3,604	$	169	$	395	$	11,616
Allowance for credit losses		(101)		(53)		(5)		—		(159)
Total financing receivables, net	$	7,346	$	3,551	$	164	$	395	$	11,456
Current portion	$	4,750	$	1,366	$	164	$	395	$	6,676
Noncurrent portion	$	2,596	$	2,185	$	—	$	—	$	4,781


(Dollars in millions)
At September 30, 2022:	Americas		EMEA		Asia Pacific		Total
Amortized cost	$	6,900	$	2,731	$	1,420	$	11,051
Allowance for credit losses:
Beginning balance at January 1, 2022	$	111	$	61	$	23	$	195
Write-offs	$	(20)	$	(1)	$	(2)	$	(23)
Recoveries		1		0		4		5
Additions/(releases)		(6)		(3)		(5)		(13)
Other*		1		(8)		(2)		(10)
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


					Amortized		Billed		Amortized
	Total		Amortized		Cost		Invoices		Cost
(Dollars in millions)	Amortized		Cost		> 90 Days and		> 90 Days and		Not
At September 30, 2022:	Cost		> 90 Days*		Accruing*		Accruing		Accruing**
Americas	$	6,900	$	266	$	197	$	22	$	70
EMEA		2,731		81		1		0		81
Asia Pacific		1,420		23		6		1		17
Total client financing receivables	$	11,051	$	369	$	204	$	23	$	168


	At September 30, 2022
	Gross Carrying		Accumulated		Net Carrying
(Dollars in millions)	Amount		Amortization		Amount*
Intangible asset class:
Capitalized software	$	1,697	$	(720)	$	977
Client relationships		8,051		(2,763)		5,288
Completed technology		5,490		(2,242)		3,248
Patents/trademarks		2,093		(645)		1,448
Other**		32		(27)		5
Total	$	17,364	$	(6,397)	$	10,967


	Capitalized		Acquired
(Dollars in millions)	Software		Intangibles		Total
Remainder of 2022	$	157	$	405	$	562
2023		472		1,469		1,941
2024		286		1,452		1,737
2025		63		1,434		1,497
2026		—		1,417		1,417
Thereafter		—		3,813		3,813


									Foreign
									Currency
					Purchase				Translation
(Dollars in millions)	Balance		Goodwill		Price				and Other		Balance
Segment	1/1/2022		Additions		Adjustments		Divestitures		Adjustments*		9/30/2022
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	$	55,643	$	903	$	(160)	$	(485)	$	(1,683)	$	54,218


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


					Net Change			Net Unrealized
	Net Unrealized		Foreign		Retirement-			Gains/(Losses)		Accumulated
	Gains/(Losses)		Currency		Related			on Available-		Other
	on Cash Flow		Translation		Benefit			For-Sale		Comprehensive
(Dollars in millions)	Hedges		Adjustments*		Plans			Securities		Income/(Loss)
January 1, 2022	$	(18)	$	(3,362)	$	(19,854)		$	(1)	$	(23,234)
Other comprehensive income before reclassifications		332		14		352			(1)		697
Amount reclassified from accumulated other comprehensive income		6		—		5,393	**		—		5,399
Total change for the period	$	338	$	14	$	5,745		$	(1)	$	6,096
September 30, 2022	$	320	$	(3,347)	$	(14,110)		$	(1)	$	(17,138)


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


						Gains/(Losses) of
(Dollars in millions)	Total					Total Hedge Activity
For the three months ended September 30:	2022		2021			2022		2021
Cost of services	$	5,168	$	4,650		$	4	$	12
Cost of sales	$	1,389	$	1,363	*	$	35	$	1
Cost of financing	$	120	$	132	*	$	1	$	(1)
SG&A expense	$	4,391	$	4,306		$	(69)	$	(14)
Other (income) and expense	$	5,755	$	244		$	(189)	$	(7)
Interest expense	$	295	$	290		$	4	$	(2)


	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


(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


(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


				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


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


							Yr. to Yr.
							Percent/
(Dollars and shares in millions except per share amounts)							Margin
For the three months ended September 30:	2022*			2021			Change
Revenue	$	14,107		$	13,251		6.5	%**
Gross profit margin		52.7	%		53.6	%	(1.0)	pts.
Total expense and other (income)	$	11,931		$	6,293		89.6	%
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		904.1			906.0		(0.2)	%


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


	For Three Months Ended						For Nine Months Ended
	September 30,						September 30,
(Dollars in millions)	2022			2021*			2022			2021*
Numerator
Financing after-tax income**	$	64		$	98		$	217		$	267
Annualized after-tax income (1)	$	257		$	391		$	289		$	356
Denominator
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	%


	At		At		Estimated Run Out of September 30, 2022 Balance
	December 31,		September 30,								2025 and
(Dollars in millions)	2021		2022		2022		2023		2024		Beyond
Sales-type and direct financing leases	$	335	$	323	$	21	$	72	$	62	$	168
Operating leases		13		10		7		2		0		0
Total unguaranteed residual value	$	348	$	333	$	28	$	74	$	62	$	168


				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, 2022:	GAAP			Adjustments			Adjustments		*	Impacts			Impacts			(non-GAAP)
Gross profit	$	7,430		$	165		$	—		$	—		$	—		$	7,595
Gross profit margin		52.7	%		1.2	pts.		—	pts.		—	pts.		—	pts.		53.8	%
SG&A	$	4,391		$	(253)		$	—		$	—		$	0		$	4,138
Other (income) and expense	$	5,755		$	(1)		$	(6,062)		$	—		$	14		$	(293)
Total expense and other (income)	$	11,931		$	(253)		$	(6,062)		$	—		$	14		$	5,630
Pre-tax income/(loss) from continuing operations	$	(4,501)		$	418		$	6,062		$	—		$	(14)		$	1,965
Pre-tax margin from continuing operations		(31.9)	%		3.0	pts.		43.0	pts.		—	pts.		(0.1)	pts.		13.9	%
Provision for/(benefit from) income taxes**	$	(1,287)		$	103		$	1,495		$	—		$	—		$	312
Effective tax rate		28.6	%		(0.8)	pts.		(12.1)	pts.		—	pts.		0.2	pts.		15.9	%
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


				Total Number	Approximate
				of Shares	Dollar Value
				Purchased as	of Shares that
	Total Number	Average		Part of Publicly	May Yet Be
	of Shares	Price Paid		Announced	Purchased Under
Period	Purchased	per Share		Program	The Program*
July 1, 2022 - July 31, 2022	—	$	—	—	$	2,007,611,768

August 1, 2022 - August 31, 2022	—	$	—	—	$	2,007,611,768

September 1, 2022 - September 30, 2022	—	$	—	—	$	2,007,611,768

Total	—	$	—	—