EXHIBIT 99.2
Non-GAAP Financial Information
Operating and Pro Forma Operating (non-GAAP) net income
In an effort to provide better transparency into the operational results of the business, management has provided operating (non-GAAP) net income from continuing operations and pro forma operating (non-GAAP) net income from continuing operations, non-GAAP measures that exclude the effects of certain acquisition-related charges, intangible asset amortization, expense resulting from basis differences on equity method investments, retirement-related costs and certain Kyndryl separation-related charges and their related tax impacts. Due to the unique, non-recurring nature of the enactment of the U.S. Tax Cuts and Jobs Act (U.S. tax reform), management characterizes the one-time provisional charge recorded in the fourth quarter of 2017 and adjustments to that charge as non-operating. Adjustments include true-ups, accounting elections and any changes to regulations, laws, audit adjustments, etc. that affect the recorded one-time charge. Management also characterizes direct and incremental charges incurred to accomplish the Kyndryl separation as non-operating given their unique and non-recurring nature. 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. All other spending for Kyndryl is included in both net income from continuing operations and in operating (non-GAAP) net income. For acquisitions, operating and pro forma operating (non-GAAP) net income 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 net income from continuing operations and in both operating and pro forma operating (non-GAAP) net income. For retirement-related costs, management characterizes certain items as operating and others as non-operating, consistent with GAAP. The company includes defined benefit plan and nonpension postretirement benefit plan service costs, multi-employer plan costs and the cost of defined contribution plans in operating net income. 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 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.
The pro forma operating (non-GAAP) net income also includes management adjustments as described in Exhibit 99.3 to this Form 8-K. Management adjustments include certain general corporate overhead costs associated with labor and benefits for shared resources transferred to Kyndryl that the company does not intend to backfill. Management believes the resource transfers and costs which were used as the basis for the management adjustments are reasonable and representative of the labor-based cost reductions the company will realize after the separation of Kyndryl.
Overall, management believes that supplementally providing investors with a view of operating and pro forma operating (non-GAAP) net income 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.
The below table reconciles the non-GAAP financial information contained in the investor relations article which was posted to IBM’s Investor Relations website on November 4, 2021 and is included as Exhibit 99.1 in this Form 8-K.
