Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2023

Snapshot

Organization of Information:

In the fourth quarter of 2022, we completed our annual assessment of the useful lives of our property, plant and equipment. Due to advances in technology, we determined we should increase the estimated useful lives of our server and network equipment from five to six years for new assets and from three to four years for used assets. This change in accounting estimate was effective beginning January 1, 2023. Based on the carrying amount of server and network equipment included in property, plant and equipment-net in our Consolidated Balance Sheet as of December 31, 2022, the effect of this change in estimate was an increase in income from continuing operations before income taxes of $57 million or $0.05 per basic and diluted share for the three months ended June 30, 2023, and $131 million, or $0.12 and $0.11 per basic and diluted share, respectively, for the six months ended June 30, 2023.

In the first half of 2023, we initiated workforce rebalancing actions to address remaining stranded costs from portfolio actions over the last couple of years resulting in a charge to pre-tax income from continuing operations of $117 million and $376 million for the three and six months ended June 30, 2023. In addition, beginning in the first quarter of 2023, we updated our measure of segment pre-tax income to no longer allocate workforce rebalancing actions to our segments, consistent with our management system. Workforce rebalancing charges in the second quarter and first half of 2022 of $3 million and $9 million, respectively, were included in the segments.

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

Currency:

The references to “adjusted for currency” or “at constant currency” in the Management Discussion do not include operational impacts that could result from fluctuations in foreign currency rates. When we refer to growth rates at constant currency or adjust such growth rates for currency, it is done so that certain financial results can be viewed without the impact of fluctuations in foreign currency exchange rates, thereby facilitating period-to-period comparisons 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 separation and their related tax impacts. Due to the unique, non-recurring nature of the enactment of the U.S. Tax Cuts and Jobs Act (U.S. tax reform), management characterizes the one-time provisional charge recorded in the fourth quarter of 2017 and adjustments to that charge as non-operating. Adjustments primarily include true-ups, accounting elections and any changes to regulations, laws, audit adjustments that affect the recorded one-time charge. Management characterizes direct and incremental charges incurred related to the Kyndryl separation as non-operating given their unique and non-recurring nature. These charges primarily relate to any net gains or losses on the Kyndryl common stock and the related cash-settled swap with a third-party financial institution, which were recorded in other (income) and expense in the Consolidated Income Statement. As of November 2, 2022, the company no longer held an 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

Management Discussion – (continued)

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 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 June 30

(Dollars and shares in millions except per share amounts)																		Yr. to Yr. Percent/ Margin Change
For the three months ended June 30:						2023						2022
Revenue						$	15,475					$	15,535					(0.4)			%*
Gross profit margin						54.9			%			53.4			%			1.6			pts.
Total expense and other (income)						$	6,501					$	6,568					(1.0)			%
Income from continuing operations before income taxes						$	2,000					$	1,722					16.2			%
Provision for income taxes from continuing operations						$	419					$	257					63.4			%
Income from continuing operations						$	1,581					$	1,465					7.9			%
Income from continuing operations margin						10.2			%			9.4			%			0.8			pts.
Income/(loss) from discontinued operations, net of tax						$	2					$	(73)					nm
Net income						$	1,583					$	1,392					13.7			%
Earnings per share from continuing operations - assuming dilution						$	1.72					$	1.61					6.8			%
Consolidated earnings per share - assuming dilution						$	1.72					$	1.53					12.4			%
Weighted-average shares outstanding - assuming dilution						919.5						910.7						1.0			%

*0.4% percent adjusted for currency.

nm - not meaningful

Management Discussion – (continued)

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

(Dollars in millions except per share amounts)																		Yr. to Yr. Percent Change
For the three months ended June 30:						2023						2022
Net income as reported						$	1,583					$	1,392					13.7			%
Income/(loss) from discontinued operations, net of tax						2						(73)						nm
Income from continuing operations						$	1,581					$	1,465					7.9			%
Non-operating adjustments (net of tax):
Acquisition-related charges						$	308					$	345					(10.8)			%
Non-operating retirement-related costs/(income)						5						146						(96.9)
U.S. tax reform impacts						110						4						nm
Kyndryl-related impacts						—						145						(100)
Operating (non-GAAP) earnings*						$	2,003					$	2,105					(4.8)			%
Diluted operating (non-GAAP) earnings per share*						$	2.18					$	2.31					(5.6)			%

*Refer to page 81 for a more detailed reconciliation of net income to operating earnings.

nm - not meaningful

Macroeconomic Environment:

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

In the first half of 2023, we saw progress from the actions we have taken to mitigate the impacts of escalating labor and component costs and a strong U.S. dollar. Consulting gross profit and pre-tax margin increased in the second quarter of 2023 reflecting the pricing and productivity actions we have taken. We expect these actions to continue to contribute to margin improvement throughout 2023. In the current environment, clients and partners continue to view technology as a source of competitive advantage, and are prioritizing larger digital transformation projects that focus on cost savings and increased productivity. In Consulting, while demand for our offerings that support these priorities remains solid, we continue to experience some delays for other projects considered to be more discretionary, especially in the U.S. The strength of the U.S. dollar has continued to impact our reported year-to-year revenue and pre-tax profit. We execute hedging programs which defer but do not eliminate the impact of currency. The (gains)/losses from these hedging programs are reflected primarily in other income and expense. See “Currency Rate Fluctuations,” for additional information.

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

Financial Performance Summary — Three Months Ended June 30:

In the second quarter of 2023, we reported $15.5 billion in revenue, income from continuing operations of $1.6 billion and operating (non-GAAP) earnings of $2.0 billion. Diluted earnings per share from continuing operations was $1.72 as reported and $2.18 on an operating (non-GAAP) basis. We generated $2.6 billion in cash from operations and $2.1 billion in free cash flow, and delivered shareholder returns of $1.5 billion in dividends. Our second-quarter results reflect the continued execution of our hybrid cloud and AI strategy. We had continued strength in our growth areas of Software and Consulting, and solid cash generation. We continued to invest in innovation while transforming our business processes and driving productivity.

Total revenue decreased 0.4 percent as reported and was up modestly adjusted for currency compared to the prior-year period. Software delivered revenue growth of 7.2 percent as reported and 8 percent adjusted for currency, as clients

Management Discussion – (continued)

leverage our hybrid cloud and AI platform capabilities. Hybrid Platform & Solutions revenue was up 6.3 percent as reported and 7 percent adjusted for currency, led by growth in Red Hat, Data & AI and Automation. Transaction Processing grew 9.4 percent as reported and 10 percent adjusted for currency, as this software remains core to supporting clients' mission-critical workloads. Consulting revenue increased 4.3 percent as reported and 6 percent adjusted for currency, with growth across all lines of business, and reflecting the continued demand for technology-driven transformation as clients prioritize projects that drive cost savings and increase productivity. Infrastructure revenue decreased 14.6 percent year to year as reported and 14 percent adjusted for currency, reflecting product cycle dynamics which impacted both Hybrid Infrastructure and Infrastructure Support.

From a geographic perspective, Americas revenue decreased 1.2 percent year to year as reported and was flat adjusted for currency, including the impact from declines in Infrastructure and the divestiture of our healthcare software assets in the second quarter of 2022. Europe/Middle East/Africa (EMEA) increased 1.7 percent and was flat adjusted for currency. Asia Pacific decreased 1.4 percent, but grew 3 percent adjusted for currency.

Gross margin of 54.9 percent increased 1.6 points year to year with continued margin expansion across all reportable segments driven by our improving portfolio mix and productivity actions. Operating (non-GAAP) gross margin of 55.9 percent increased 1.4 points compared to the prior-year period due to the same dynamics.

Total expense and other (income) decreased 1.0 percent in the second quarter of 2023 versus the prior-year period primarily driven by lower non-operating retirement-related costs, higher interest income, prior-year impacts related to the Kyndryl retained shares and swap, and benefits from productivity and transformation of our business processes. This was partially offset by lower gains from divestitures, higher interest expense, higher workforce rebalancing charges, the effects of currency and higher net spending to drive our hybrid cloud and AI strategy. Total operating (non-GAAP) expense and other (income) increased 5.1 percent year to year, primarily driven by lower gains from divestitures, higher interest expense, the effects of currency, higher workforce rebalancing charges and higher net spending to drive our strategy; partially offset by higher interest income and benefits from productivity and transformation initiatives.

Pre-tax income from continuing operations of $2.0 billion increased 16.2 percent and pre-tax margin was 12.9 percent, an increase of 1.8 points versus the second quarter of 2022. Performance this quarter benefited from the expense dynamics described above, and improvements in business mix and ongoing productivity initiatives. In the second quarter of 2022, we recorded a pre-tax gain of approximately $230 million from the sale of our healthcare software assets which impacted the pre-tax income from continuing operations year-to-year performance by approximately 17 points and the pre-tax margin by 1.4 points. In addition, in the second-quarter 2023 workforce rebalancing charges of $117 million impacted the pre-tax income from continuing operations year-to-year performance by approximately 5 points and the pre-tax margin by 0.6 points. The continuing operations provision for income taxes in the second quarter of 2023 was $419 million compared to $257 million in the second quarter of 2022. The increase was primarily driven by the impact of foreign tax credit regulations. Net income from continuing operations of $1.6 billion increased 7.9 percent and the net income from continuing operations margin was 10.2 percent, up 0.8 points year to year. The gains from the healthcare software assets divestiture impacted net income from continuing operations year-to-year performance by approximately 15 points and net income margin by 1.2 points.

Operating (non-GAAP) pre-tax income from continuing operations of $2.4 billion decreased 4.8 percent compared to the prior-year period and the operating (non-GAAP) pre-tax margin from continuing operations decreased 0.7 points to 15.5 percent. The year-to-year gains from the healthcare software assets divestiture impacted these results by approximately 9 points and 1.4 points, respectively. The higher workforce rebalancing charges in the second quarter 2023 impacted these results by approximately 4 points and 0.6 points, respectively. The operating (non-GAAP) income tax provision for the second quarter of 2023 was $393 million, compared to $413 million in the second quarter of 2022. Operating (non-GAAP) net income from continuing operations of $2.0 billion decreased 4.8 percent and the operating (non-GAAP) net income margin from continuing operations of 12.9 percent was down 0.6 points year to year. The gains from the healthcare software assets divestiture impacted these results by approximately 9 points and 1.2 points, respectively.

Diluted earnings per share from continuing operations of $1.72 in the second quarter of 2023 increased 6.8 percent and operating (non-GAAP) diluted earnings per share of $2.18 decreased 5.6 percent versus the prior-year period. The gains from the divestiture of our healthcare software assets resulted in an impact of 15 points and 9 points to diluted earnings per share from continuing operations and diluted operating (non-GAAP) earnings per share, respectively.

Management Discussion – (continued)

Cash provided by operating activities was $2.6 billion in the second quarter of 2023, an increase of $1.3 billion compared to the second quarter of 2022. Net cash provided by investing activities was immaterial, a decline of $0.2 billion and net cash used in financing activities of $2.7 billion decreased $1.5 billion compared to the second quarter of 2022.

Financial Results Summary —Six Months Ended June 30:

(Dollars and shares in millions except per share amounts)																		Yr. to Yr. Percent/ Margin Change
For the six months ended June 30:						2023						2022
Revenue						$	29,727					$	29,732					0.0			%*
Gross profit margin						53.9			%			52.6			%			1.3			pts.
Total expense and other (income)						$	12,952					$	13,280					(2.5)			%
Income from continuing operations before income taxes						$	3,058					$	2,345					30.4			%
Provision for income taxes from continuing operations						$	543					$	218					149.7			%
Income from continuing operations						$	2,515					$	2,127					18.2			%
Income from continuing operations margin						8.5			%			7.2			%			1.3			pts.
Loss from discontinued operations, net of tax						$	(4)					$	(2)					128.1			%
Net income						$	2,511					$	2,125					18.1			%
Earnings per share from continuing operations - assuming dilution						$	2.74					$	2.34					17.1			%
Consolidated earnings per share - assuming dilution						$	2.73					$	2.34					16.7			%
Weighted-average shares outstanding - assuming dilution						918.6						910.0						1.0			%
						At 6/30/2023						At 12/31/2022
Assets						$	132,213					$	127,243					3.9			%
Liabilities						$	109,942					$	105,222					4.5			%
Equity						$	22,271					$	22,021					1.1			%

*2.3% percent adjusted for currency.

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

(Dollars in millions except per share amounts)																		Yr. to Yr. Percent Change
For the six months ended June 30:						2023						2022
Net income as reported						$	2,511					$	2,125					18.1			%
Loss from discontinued operations, net of tax						(4)						(2)						128.1
Income from continuing operations						$	2,515					$	2,127					18.2			%
Non-operating adjustments (net of tax):
Acquisition-related charges						$	613					$	704					(13.0)			%
Non-operating retirement-related costs/(income)						10						290						(96.7)
U.S. tax reform impacts						115						(112)						nm
Kyndryl-related impacts						—						367						(100.0)
Operating (non-GAAP) earnings						$	3,252					$	3,376					(3.7)			%
Diluted operating (non-GAAP) earnings per share						$	3.54					$	3.71					(4.6)			%

nm - not meaningful

Management Discussion – (continued)

Financial Performance Summary —Six Months Ended June 30:

In the first six months of 2023, we reported $29.7 billion in revenue, income from continuing operations of $2.5 billion and operating (non-GAAP) earnings of $3.3 billion. Diluted earnings per share from continuing operations was $2.74 as reported and $3.54 on an operating (non-GAAP) basis. We generated $6.4 billion in cash from operations and $3.4 billion in free cash flow, and delivered shareholder returns of $3.0 billion in dividends. Our first-half performance reflects the momentum in our growth areas of Software and Consulting, and a solid recurring revenue base driven by our high-value software.

Total revenue was flat as reported and grew 2 percent adjusted for currency compared to the prior-year period. Software delivered revenue growth of 5.0 percent as reported and 7 percent adjusted for currency, with growth in both Hybrid Platform & Solutions and Transaction Processing. Consulting revenue increased 3.5 percent as reported and 7 percent adjusted for currency, with growth across all lines of business. Infrastructure revenue decreased 9.9 percent as reported and 8 percent adjusted for currency, reflecting product cycle dynamics which impacted both Hybrid Infrastructure and Infrastructure Support.

From a geographic perspective, Americas revenue decreased 0.5 percent year to year as reported and was flat adjusted for currency. EMEA increased 2.0 percent (4 percent adjusted for currency). Asia Pacific decreased 1.9 percent but grew 5 percent adjusted for currency.

Gross margin of 53.9 percent increased 1.3 points year to year with continued gross profit expansion across all reportable segments driven by our improving portfolio mix and productivity initiatives. Operating (non-GAAP) gross margin of 54.9 percent increased 1.1 points compared to the prior-year period due to the same dynamics.

Total expense and other (income) decreased 2.5 percent in the first six months of 2023 versus the prior-year period primarily driven by lower non-operating retirement-related costs, prior-year impacts related to the Kyndryl retained shares and swap, higher interest income and benefits from productivity and transformation of our business processes. This was partially offset by higher workforce rebalancing charges, lower gains from divestitures, higher interest expense and higher net spending to drive our hybrid cloud and AI strategy. Total operating (non-GAAP) expense and other (income) increased 4.3 percent year to year, driven primarily by higher workforce rebalancing charges, lower gains from divestitures, higher interest expense and higher net spending to drive our strategy; partially offset by higher interest income and benefits from productivity and transformation initiatives.

Pre-tax income from continuing operations of $3.1 billion increased 30.4 percent and pre-tax margin was 10.3 percent, an increase of 2.4 points versus the first half of 2022. Performance in the first six months of 2023 benefited from the expense dynamics described above, improvements in business mix and ongoing productivity initiatives. The continuing operations provision for income taxes in the first six months of 2023 was $543 million, compared to $218 million in the first six months of 2022. The increase was primarily driven by the impact of foreign tax credit regulations. Net income from continuing operations of $2.5 billion increased 18.2 percent and the net income from continuing operations margin was 8.5 percent, up 1.3 points year to year.

Operating (non-GAAP) pre-tax income from continuing operations of $3.8 billion declined 4.7 percent compared to the prior-year period and the operating (non-GAAP) pre-tax margin from continuing operations decreased 0.6 points to 12.9 percent. The operating (non-GAAP) provision for income taxes was $593 million in the first six months of 2023, compared to $657 million in the first six months of 2022. Operating (non-GAAP) income from continuing operations of $3.3 billion decreased 3.7 percent and the operating (non-GAAP) income margin from continuing operations of 10.9 percent decreased 0.4 points year to year.

Diluted earnings per share from continuing operations of $2.74 in the first six months of 2023 increased 17.1 percent and operating (non-GAAP) diluted earnings per share of $3.54 decreased 4.6 percent versus the prior-year period.

At June 30, 2023, the balance sheet remained strong with the flexibility to support and invest in the business. Cash and cash equivalents, restricted cash and marketable securities at June 30, 2023 of $16.3 billion increased $7.5 billion from December 31, 2022 and debt of $57.5 billion at June 30, 2023 increased $6.5 billion.

Total assets increased $5.0 billion ($4.5 billion adjusted for currency) from December 31, 2022 primarily driven by an increase in cash and cash equivalents and marketable securities; partially offset by a decrease in receivables. Total liabilities increased $4.7 billion ($4.3 billion adjusted for currency) from December 31, 2022 primarily driven by the

Management Discussion – (continued)

increase in debt and an increase in deferred income; partially offset by decreases in tax liabilities. Total equity of $22.3 billion increased $0.3 billion from December 31, 2022 primarily driven by first-half 2023 net income and common stock issuances; partially offset by dividends paid.

Cash provided by operating activities was $6.4 billion in the first six months of 2023, an increase of $1.8 billion. Net cash used in investing activities of $8.0 billion increased $6.8 billion compared to the prior-year period. Cash from financing activities was a net source of cash of $3.0 billion in the first six months of 2023, compared to a net use of cash of $2.8 billion in the prior period.

Second Quarter and First Six Months in Review

Results of Continuing Operations

Segment Details

The following tables present each reportable segment’s revenue and gross margin results, followed by an analysis of the second quarter and first six months of 2023 versus the second quarter and first six months of 2022 reportable segments results.

(Dollars in millions)																		Yr. to Yr. Percent/Margin Change						Yr. to Yr. Percent Change Adjusted For Currency
For the three months ended June 30:						2023						2022
Revenue:
Software						$	6,608					$	6,166					7.2			%			7.5			%
Gross margin						79.3			%			79.2			%			0.1			pts.
Consulting						5,013						4,809						4.3			%			5.9			%
Gross margin						25.9			%			24.2			%			1.8			pts.
Infrastructure						3,618						4,235						(14.6)			%			(13.8)			%
Gross margin						55.8			%			53.8			%			2.0			pts.
Financing						185						146						26.2			%			27.1			%
Gross margin						49.2			%			35.3			%			13.9			pts.
Other						51						180						(71.9)			%			(72.9)			%
Gross margin						(295.7)			%			(49.3)			%			(246.5)			pts.
Total revenue						$	15,475					$	15,535					(0.4)			%			0.4			%
Total gross profit						$	8,501					$	8,290					2.5			%
Total gross margin						54.9			%			53.4			%			1.6			pts.
Non-operating adjustments:
Amortization of acquired intangible assets						150						180						(17.1)			%
Operating (non-GAAP) gross profit						$	8,650					$	8,470					2.1			%
Operating (non-GAAP) gross margin						55.9			%			54.5			%			1.4			pts.

Management Discussion – (continued)

(Dollars in millions)																		Yr. to Yr. Percent/Margin Change						Yr. to Yr. Percent Change Adjusted For Currency
For the six months ended June 30:						2023						2022
Revenue:
Software						$	12,529					$	11,938					5.0			%			6.6			%
Gross margin						79.4			%			79.0			%			0.3			pts.
Consulting						9,975						9,637						3.5			%			7.0			%
Gross margin						25.6			%			24.3			%			1.3			pts.
Infrastructure						6,716						7,453						(9.9)			%			(7.8)			%
Gross margin						53.9			%			52.4			%			1.6			pts.
Financing						380						300						26.8			%			29.1			%
Gross margin						46.5			%			36.5			%			10.0			pts.
Other						126						404						(68.9)			%			(68.6)			%
Gross margin						(228.2)			%			(40.2)			%			(188.0)			pts.
Total revenue						$	29,727					$	29,732					0.0			%			2.3			%
Total gross profit						$	16,010					$	15,625					2.5			%
Total gross margin						53.9			%			52.6			%			1.3			pts.
Non-operating adjustments:
Amortization of acquired intangible assets						298						361						(17.5)			%
Operating (non-GAAP) gross profit						$	16,308					$	15,986					2.0			%
Operating (non-GAAP) gross margin						54.9			%			53.8			%			1.1			pts.

Software

(Dollars in millions)																		Yr. to Yr. Percent Change						Yr. to Yr. Percent Change Adjusted For Currency
For the three months ended June 30:						2023						2022
Software revenue:						$	6,608					$	6,166					7.2			%			7.5			%
Hybrid Platform & Solutions						$	4,665					$	4,390					6.3			%			6.6			%
Red Hat																		10.7						10.8
Automation																		1.2						1.6
Data & AI																		10.0						10.6
Security																		(1.5)						(1.0)
Transaction Processing						1,943						1,776						9.4						9.7

(Dollars in millions)																		Yr. to Yr. Percent Change						Yr. to Yr. Percent Change Adjusted For Currency
For the six months ended June 30:						2023						2022
Software revenue:						$	12,529					$	11,938					5.0			%			6.6			%
Hybrid Platform & Solutions						$	8,844					$	8,470					4.4			%			5.9			%
Red Hat																		9.5						10.8
Automation																		0.2						1.8
Data & AI																		5.7						7.2
Security																		(1.4)						0.4
Transaction Processing						3,685						3,468						6.3						8.1

Management Discussion – (continued)

Software revenue of $6,608 million increased 7.2 percent as reported (8 percent adjusted for currency) in the second quarter of 2023 compared to the prior-year period, driven by revenue growth in both Hybrid Platform & Solutions and Transaction Processing as clients leverage our hybrid cloud and AI platform capabilities. This revenue performance reflects continued growth across our recurring revenue base, which is approximately 80 percent of our annual software revenue, as well as transactional revenue.

Hybrid Platform & Solutions revenue of $4,665 million increased 6.3 percent as reported (7 percent adjusted for currency) in the second quarter of 2023 compared to the prior-year period, led by growth in Red Hat, Data & AI, and Automation. Red Hat revenue increased 10.7 percent as reported (11 percent adjusted for currency). OpenShift, our leading hybrid cloud platform, grew more than 30 percent year to year in the second-quarter 2023 and had $1.1 billion in annual recurring revenue. Ansible also had double-digit revenue growth in the second quarter of 2023 compared to 2022 and gained market share. Automation revenue increased 1.2 percent as reported (2 percent adjusted for currency), reflecting growth across Integration, Application Servers and Business Automation, as clients drive enhanced business value through productivity and performance optimization. Data & AI revenue increased 10.0 percent as reported (11 percent adjusted for currency) with broad-based growth in areas such as Data Management and Business Analytics given enterprise needs for data visualization, organization, analysis, and insights as the underpinnings for AI workloads. Security revenue decreased 1.5 percent as reported (1 percent adjusted for currency) driven by declines in security services, partially offset by growth in security software led by Data Security with Guardium Insights.

Across Hybrid Platform & Solutions, our annual recurring revenue (ARR) was $13.6 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.

Transaction Processing revenue of $1,943 million increased 9.4 percent as reported (10 percent adjusted for currency) in the second quarter of 2023 compared to the prior-year period. The increase in zSystems installed capacity over the last couple of product cycles, strong renewal rates and higher price increases contributed to growth in recurring and transactional revenue.

For the first six months of 2023, Software revenue of $12,529 million increased 5.0 percent as reported (7 percent adjusted for currency) compared to the same period in 2022, driven by solid growth in Hybrid Platform & Solutions, led by Red Hat and Data & AI, and in Transaction Processing.

(Dollars in millions)																		Yr. to Yr. Percent/ Margin Change
For the three months ended June 30:						2023						2022
Software:
Gross profit						$	5,239					$	4,884					7.3			%
Gross profit margin						79.3			%			79.2			%			0.1			pts.
Pre-tax income						$	1,504					$	1,375					9.4			%
Pre-tax margin						22.8			%			22.3			%			0.5			pts.

Management Discussion – (continued)

(Dollars in millions)																		Yr. to Yr. Percent/ Margin Change
For the six months ended June 30:						2023						2022
Software:
Gross profit						$	9,944					$	9,434					5.4			%
Gross profit margin						79.4			%			79.0			%			0.3			pts.
Pre-tax income						$	2,668					$	2,509					6.3			%
Pre-tax margin						21.3			%			21.0			%			0.3			pts.

Software gross profit margin increased 0.1 points to 79.3 percent in the second quarter of 2023 compared to the prior-year period, driven primarily by portfolio mix, partially offset by a margin decline in software products. For the first six months of 2023, gross profit margin increased 0.3 points to 79.4 percent, driven primarily by portfolio mix.

In the second quarter, pre-tax income of $1,504 million increased 9.4 percent and pre-tax margin of 22.8 percent increased 0.5 points compared to the prior year. The margin expansion reflects operating leverage from higher revenue and product mix while absorbing more than a point of impact from currency. For the first six months of 2023, pre-tax income of $2,668 million increased 6.3 percent and pre-tax margin of 21.3 percent increased 0.3 points compared to the prior-year period, which included approximately a 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 June 30:						2023						2022
Consulting revenue:						$	5,013					$	4,809					4.3			%			5.9			%
Business Transformation						$	2,295					$	2,227					3.0			%			4.5			%
Technology Consulting						961						928						3.5						5.1
Application Operations						1,758						1,653						6.3						8.1

(Dollars in millions)																		Yr. to Yr. Percent Change						Yr. to Yr. Percent Change Adjusted For Currency
For the six months ended June 30:						2023						2022
Consulting revenue:						$	9,975					$	9,637					3.5			%			7.0			%
Business Transformation						$	4,578					$	4,482					2.1			%			5.5			%
Technology Consulting						1,904						1,884						1.1						4.6
Application Operations						3,494						3,272						6.8						10.5

Consulting revenue of $5,013 million increased 4.3 percent as reported (6 percent adjusted for currency) in the second quarter of 2023 compared to the prior-year period. Revenue grew in all lines of business in Consulting, driven by broad-based growth across our service offerings. This growth reflects sustained demand for larger transformations that delivered meaningful returns on investment, while some clients, predominantly in the U.S., continued to delay projects considered to be more discretionary. Our Red Hat consulting practice had double-digit growth in signings and revenue, and our strategic partnerships grew signings and revenue in the second quarter at a double-digit rate on a year-to-year basis.

In the second quarter of 2023, Business Transformation revenue of $2,295 million increased 3.0 percent as reported (5 percent adjusted for currency) compared to the prior-year period, driven by data and technology transformations including AI and analytics focused projects. Digital transformations continue to be underpinned by clients' embracing a hybrid cloud strategy.

Management Discussion – (continued)

Technology Consulting revenue of $961 million increased 3.5 percent as reported (5 percent adjusted for currency) in the second quarter of 2023 compared to the prior-year period, led by our cloud application development and cloud modernization offerings.

Application Operations revenue of $1,758 million increased 6.3 percent as reported (8 percent adjusted for currency) compared to the second quarter of 2022, driven by growth in cloud application management services as we helped clients optimize their operations and reduce cost by managing clients’ applications in hybrid and multi-cloud environments.

For the first six months of 2023, Consulting revenue of $9,975 million increased 3.5 percent as reported (7 percent adjusted for currency) reflecting year-to-year growth across all three lines of business. Business Transformation revenue grew year to year led by growth in data and technology and customer experience transformation projects. In our Technology Consulting business, we led client engagements around cloud application development and modernization. Through our Application Operations offerings, we continued to provide application and cloud platform services required to operationalize and run cloud platforms.

(Dollars in millions)						2023						2022						Yr. to Yr. Percent/ Margin Change
For the three months ended June 30:
Consulting:
Gross profit						$	1,300					$	1,163					11.8			%
Gross profit margin						25.9			%			24.2			%			1.8			pts.
Pre-tax income						$	446					$	343					30.1			%
Pre-tax margin						8.9			%			7.1			%			1.8			pts.

(Dollars in millions)																		Yr. to Yr. Percent/ Margin Change
For the six months ended June 30:						2023						2022
Consulting:
Gross profit						$	2,553					$	2,339					9.1			%
Gross profit margin						25.6			%			24.3			%			1.3			pts.
Pre-tax income						$	828					$	691					19.8			%
Pre-tax margin						8.3			%			7.2			%			1.1			pts.

In the second quarter of 2023, Consulting gross profit margin of 25.9 percent increased 1.8 points on a year-to-year basis. Pre-tax income of $446 million increased 30.1 percent and pre-tax margin of 8.9 percent increased 1.8 points in second-quarter 2023 compared to the same prior-year period. Our gross profit margin expansion and pre-tax margin performance are a reflection of the pricing and productivity actions we have taken during the past year, which are more than offsetting the increased labor costs and investments.

For the first six months of 2023, Consulting gross profit margin of 25.6 percent increased 1.3 points compared to the prior-year period. Pre-tax income of $828 million increased 19.8 percent and pre-tax margin of 8.3 percent increased 1.1 points in the first six months of 2023 compared to the prior-year period. The six-month margin performance was driven by the same factors as described above for the second quarter.

Management Discussion – (continued)

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 June 30:						2023						2022
Total Consulting signings						$	5,667					$	4,654					21.8			%			24.5			%

(Dollars in millions)																		Yr. to Yr. Percent Change						Yr. to Yr. Percent Change Adjusted For Currency
For the six months ended June 30:						2023						2022
Total Consulting signings						$	10,860					$	9,791					10.9			%			15.1			%

In the second quarter of 2023, Consulting signings grew 22 percent as reported and 24 percent adjusted for currency, with solid growth in both large and small engagements, and our book-to-bill ratio was 1.1 over the last twelve months. We addressed continued demand for technology-driven transformation as clients prioritize projects that drive cost savings and increase productivity.

Book-to-bill represents the ratio of IBM Consulting signings to its revenue over the same period. The metric is a useful indicator of the demand of our business over time. 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.

Management Discussion – (continued)

Infrastructure

(Dollars in millions)																		Yr. to Yr. Percent Change						Yr. to Yr. Percent Change Adjusted For Currency
For the three months ended June 30:						2023						2022
Infrastructure revenue:						$	3,618					$	4,235					(14.6)			%			(13.8)			%
Hybrid Infrastructure						$	2,260					$	2,760					(18.1)			%			(17.8)			%
zSystems																		(30.1)						(30.0)
Distributed Infrastructure																		(6.5)						(5.9)
Infrastructure Support						1,358						1,474						(7.9)						(6.3)

(Dollars in millions)																		Yr. to Yr. Percent Change						Yr. to Yr. Percent Change Adjusted For Currency
For the six months ended June 30:						2023						2022
Infrastructure revenue:						$	6,716					$	7,453					(9.9)			%			(7.8)			%
Hybrid Infrastructure						$	3,969					$	4,461					(11.0)			%			(9.6)			%
zSystems																		(19.0)						(17.8)
Distributed Infrastructure																		(4.9)						(3.2)
Infrastructure Support						2,747						2,993						(8.2)						(5.1)

Infrastructure revenue of $3,618 million decreased 14.6 percent as reported (14 percent adjusted for currency) in the second quarter of 2023 compared to the prior-year period, reflecting product cycle dynamics which impacted both Hybrid Infrastructure and Infrastructure Support.

Hybrid Infrastructure revenue of $2,260 million decreased 18.1 percent as reported (18 percent adjusted for currency) in the second quarter of 2023 compared to the prior-year period. Within Hybrid Infrastructure, zSystems revenue decreased 30.1 percent as reported (30 percent adjusted for currency), driven by strong revenue performance in the prior year as the z16 launched in a seasonally strong quarter. Through the first five quarters of availability, z16 program revenue exceeded the prior cycles, as it brings the power of embedded AI at scale, cyber-resilient security and cloud-native development for hybrid cloud to our clients. Distributed Infrastructure revenue decreased 6.5 percent as reported (6 percent adjusted for currency), driven by strong revenue growth in the prior year led by Storage and Power10 high-end systems.

Infrastructure Support revenue of $1,358 million decreased 7.9 percent as reported (6 percent adjusted for currency) in the second quarter of 2023 compared to the prior-year period, reflecting product cycle dynamics.

For the first six months of 2023, Infrastructure revenue of $6,716 million decreased 9.9 percent as reported (8 percent adjusted for currency) compared to the prior-year period, driven by declines in Hybrid Infrastructure and Infrastructure Support. Within Hybrid Infrastructure, the revenue decline was primarily driven by zSystems. The revenue decline in Infrastructure Support for the first six months of 2023 reflects product cycle dynamics.

(Dollars in millions)																		Yr. to Yr. Percent/ Margin Change
For the three months ended June 30:						2023						2022
Infrastructure:
Gross profit						$	2,021					$	2,280					(11.4)			%
Gross profit margin						55.8			%			53.8			%			2.0			pts.
Pre-tax income						$	633					$	757					(16.4)			%
Pre-tax margin						17.5			%			17.9			%			(0.4)			pts.

Management Discussion – (continued)

(Dollars in millions)																		Yr. to Yr. Percent/ Margin Change
For the six months ended June 30:						2023						2022
Infrastructure:
Gross profit						$	3,623					$	3,905					(7.2)			%
Gross profit margin						53.9			%			52.4			%			1.6			pts.
Pre-tax income						$	849					$	956					(11.2)			%
Pre-tax margin						12.6			%			12.8			%			(0.2)			pts.

Infrastructure gross profit margin of 55.8 percent increased 2.0 points in the second quarter of 2023 compared to the prior-year period, driven by margin expansion in Hybrid Infrastructure, partially offset by a margin decline in Infrastructure Support reflecting product cycle dynamics. For the first six months of 2023, gross profit margin of 53.9 percent increased 1.6 points compared to the prior-year period, driven by the same factors as described above for the second quarter.

In the second quarter of 2023, Infrastructure pre-tax income of $633 million decreased 16.4 percent and pre-tax margin of 17.5 percent decreased 0.4 points compared to the prior-year period. This performance reflects declines in gross profit contributions from Hybrid Infrastructure and Infrastructure Support primarily driven by product cycle dynamics. The declines are partially offset by a year-to-year increase in IP and custom development income and the benefit of the changes in the useful life of servers and network equipment effective January 1, 2023. The decline in pre-tax margin in the second quarter also included approximately a point of impact from currency. For the first six months of 2023, Infrastructure pre-tax income of $849 million decreased 11.2 percent and pre-tax margin of 12.6 percent decreased 0.2 points compared to the prior-year period, driven primarily by the same factors described above for the second quarter.

Financing

See pages 78 through 80 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.

(Dollars in millions)																		Yr. to Yr. Percent Change						Yr. to Yr. Percent Change Adjusted For Currency
For the three months ended June 30:						2023						2022
Total Revenue						$	15,475					$	15,535					(0.4)			%			0.4			%
Americas						$	8,046					$	8,142					(1.2)			%			(0.5)			%
Europe/Middle East/Africa (EMEA)						4,602						4,526						1.7						0.3
Asia Pacific						2,827						2,868						(1.4)						3.2

(Dollars in millions)																		Yr. to Yr. Percent Change						Yr. to Yr. Percent Change Adjusted For Currency
For the six months ended June 30:						2023						2022
Total Revenue						$	29,727					$	29,732					0.0			%			2.3			%
Americas						$	15,124					$	15,198					(0.5)			%			0.3			%
Europe/Middle East/Africa (EMEA)						8,933						8,757						2.0						4.0
Asia Pacific						5,670						5,778						(1.9)						5.2

Management Discussion – (continued)

Total revenue of $15,475 million decreased 0.4 percent as reported and was up modestly adjusted for currency in the second quarter of 2023 compared to the prior-year period.

Americas revenue of $8,046 million decreased 1.2 percent as reported and was flat adjusted for currency. The U.S. decreased 2.2 percent compared to the prior year. Canada decreased 13.6 percent as reported and 9 percent adjusted for currency. Latin America increased 23.2 percent as reported and 26 percent adjusted for currency, with Brazil increasing 15.4 percent as reported and 16 percent adjusted for currency.

In EMEA, total revenue of $4,602 million increased 1.7 percent as reported and was flat adjusted for currency. Italy and the UK increased 5.8 percent and 1.3 percent, respectively, as reported, and 4 percent and 1 percent, respectively, adjusted for currency. France was flat as reported and decreased 3 percent adjusted for currency. Germany decreased 11.3 percent as reported and 13 percent adjusted for currency.

Asia Pacific revenue of $2,827 million decreased 1.4 percent as reported, but increased 3 percent adjusted for currency. Japan increased 2.6 percent as reported and 9 percent adjusted for currency. India increased 4.3 percent as reported and 11 percent adjusted for currency. China and Australia decreased 19.0 percent and 13.0 percent, respectively, as reported, and 15 percent and 7 percent, respectively, adjusted for currency.

For the first six months of 2023, total revenue of $29,727 million was flat as reported and increased 2.3 percent adjusted for currency compared to the prior-year period.

Americas revenue of $15,124 million decreased 0.5 percent as reported and was flat adjusted for currency. The U.S. decreased 1.4 percent compared to the prior-year period. Canada decreased 6.2 percent as reported and 1 percent adjusted for currency. Latin America increased 16.3 percent as reported and 19 percent adjusted for currency, with Brazil increasing 14.7 percent as reported and 15 percent adjusted for currency.

In EMEA, total revenue of $8,933 million increased 2.0 percent as reported and 4 percent adjusted for currency. Italy and France increased 4.2 percent and 1.3 percent, respectively, as reported, and 5 percent and 2 percent, respectively, adjusted for currency. The UK decreased 5.0 percent as reported and was flat adjusted for currency. Germany decreased 8.5 percent as reported and 8 percent adjusted for currency.

Asia Pacific revenue of $5,670 million decreased 1.9 percent as reported, but grew 5 percent adjusted for currency. Japan was flat as reported and increased 10 percent adjusted for currency. India increased 6.3 percent as reported and 15 percent adjusted for currency. China and Australia decreased 21.7 percent and 14.5 percent, respectively, as reported, and 18 percent and 9 percent, respectively, adjusted for currency.

Management Discussion – (continued)

Expense

Total Expense and Other (Income)

(Dollars in millions)																		Yr. to Yr. Percent Change
For the three months ended June 30:						2023						2022
Total expense and other (income)						$	6,501					$	6,568					(1.0)			%
Non-operating adjustments:
Amortization of acquired intangible assets						$	(239)					$	(278)					(14.0)			%
Acquisition-related charges						(7)						(2)						nm
Non-operating retirement-related (costs)/income						(1)						(192)						(99.4)
Kyndryl-related impacts						—						(145)						(100.0)
Operating (non-GAAP) expense and other (income)						$	6,254					$	5,952					5.1			%
Total expense-to-revenue ratio						42.0			%			42.3			%			(0.3)			pts.
Operating (non-GAAP) expense-to-revenue ratio						40.4			%			38.3			%			2.1			pts.

(Dollars in millions)																		Yr. to Yr. Percent Change
For the six months ended June 30:						2023						2022
Total expense and other (income)						$	12,952					$	13,280					(2.5)			%
Non-operating adjustments:
Amortization of acquired intangible assets						$	(483)					$	(558)					(13.4)			%
Acquisition-related charges						(10)						(9)						17.6
Non-operating retirement-related (costs)/income						4						(394)						nm
Kyndryl-related impacts						—						(367)						(100.0)
Operating (non-GAAP) expense and other (income)						$	12,463					$	11,953					4.3			%
Total expense-to-revenue ratio						43.6			%			44.7			%			(1.1)			pts.
Operating (non-GAAP) expense-to-revenue ratio						41.9			%			40.2			%			1.7			pts.

nm - not meaningful

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

Management Discussion – (continued)

Selling, General and Administrative Expense

(Dollars in millions)																		Yr. to Yr. Percent Change
For the three months ended June 30:						2023						2022
Selling, general and administrative expense:
Selling, general and administrative — other						$	3,991					$	3,996					(0.1)			%
Advertising and promotional expense						372						395						(5.8)
Workforce rebalancing charges						117						28						nm
Amortization of acquired intangible assets						239						277						(13.9)
Stock-based compensation						168						153						10.3
Provision for/(benefit from) expected credit loss expense						14						6						129.1
Total selling, general and administrative expense						$	4,900					$	4,855					0.9			%
Non-operating adjustments:
Amortization of acquired intangible assets						$	(239)					$	(277)					(13.9)			%
Acquisition-related charges						(7)						(2)						nm
Kyndryl-related impacts						—						0						nm
Operating (non-GAAP) selling, general and administrative expense						$	4,655					$	4,576					1.7			%

(Dollars in millions)																		Yr. to Yr. Percent Change
For the six months ended June 30:						2023						2022
Selling, general and administrative expense:
Selling, general and administrative — other						$	7,877					$	7,820					0.7			%
Advertising and promotional expense						687						732						(6.1)
Workforce rebalancing charges						376						33						nm
Amortization of acquired intangible assets						482						557						(13.4)
Stock-based compensation						317						289						9.9
Provision for/(benefit from) expected credit loss expense						16						22						(29.5)
Total selling, general and administrative expense						$	9,754					$	9,452					3.2			%
Non-operating adjustments:
Amortization of acquired intangible assets						$	(482)					$	(557)					(13.4)			%
Acquisition-related charges						(9)						(9)						6.4
Kyndryl-related impacts						—						0						nm
Operating (non-GAAP) selling, general and administrative expense						$	9,263					$	8,887					4.2			%

nm - not meaningful

Total selling, general and administrative (SG&A) expense increased 0.9 percent in the second quarter of 2023 versus the prior-year period driven primarily by the following factors:

• Higher workforce rebalancing charges (2 points) to address remaining stranded cost from portfolio actions; partially offset by

• Benefits from productivity actions, partially offset by higher spending to drive our hybrid cloud and AI strategy.

Operating (non-GAAP) expense increased 1.7 percent year to year, driven primarily by the same factors.

Management Discussion – (continued)

SG&A expense increased 3.2 percent in the first six months of 2023 versus the prior-year period driven primarily by the following factors:

• Higher workforce rebalancing charges (4 points); and

• Higher net spending driven by the same factors above; partially offset by

• The effects of currency (1 point).

Operating (non-GAAP) expense increased 4.2 percent year to year, driven primarily by the same factors.

Provisions for expected credit loss expense in the first six months of 2023 decreased $6 million compared to the prior-year period, driven primarily by lower specific reserve requirements in the current year. The receivables provision coverage was 2.8 percent at June 30, 2023, excluding receivables classified as held for sale, an increase of 40 basis points from December 31, 2022, primarily due to seasonality declines in the total receivables balance, and an increase in coverage of 60 basis points from June 30, 2022.

Research, Development and Engineering

(Dollars in millions)																		Yr. to Yr. Percent Change
For the three months ended June 30:						2023						2022
Research, development and engineering expense						$	1,687					$	1,673					0.8			%

(Dollars in millions)																		Yr. to Yr. Percent Change
For the six months ended June 30:						2023						2022
Research, development and engineering expense						$	3,342					$	3,352					(0.3)			%

Research, development and engineering (RD&E) expense in the second quarter of 2023 increased 0.8 percent year to year primarily due to higher spending in the current-year period (2 points); partially offset by the effects of currency (1 point). RD&E expense in the first six months of 2023 was approximately flat compared to 2022 driven primarily by the effects of currency (1 point); partially offset by higher spending (1 point). We continue to invest to deliver innovation in AI, hybrid cloud and emerging areas such as quantum.

Intellectual Property and Custom Development Income

(Dollars in millions)																		Yr. to Yr. Percent Change
For the three months ended June 30:						2023						2022
Intellectual property and custom development income:
Licensing of intellectual property including royalty-based fees						$	127					$	113					12.5			%
Custom development income						119						57						111.2
Sales/other transfers of intellectual property						2						6						(73.4)
Total						$	248					$	176					41.3			%

(Dollars in millions)																		Yr. to Yr. Percent Change
For the six months ended June 30:						2023						2022
Intellectual property and custom development income:
Licensing of intellectual property including royalty-based fees						$	188					$	184					2.2			%
Custom development income						235						105						124.0
Sales/other transfers of intellectual property						5						8						(32.5)
Total						$	428					$	297					44.3			%

Management Discussion – (continued)

Total intellectual property and custom development income increased 41.3 percent year to year in the second quarter, and 44.3 percent in the first six months of 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.

Other (Income) and Expense

(Dollars in millions)																		Yr. to Yr. Percent Change
For the three months ended June 30:						2023						2022
Other (income) and expense:
Foreign currency transaction losses/(gains)						$	(166)					$	(494)					(66.4)			%
(Gains)/losses on derivative instruments						141						439						(67.8)
Interest income						(201)						(28)						nm
Net (gains)/losses from securities and investment assets						3						54						(94.1)
Retirement-related costs/(income)						1						192						(99.4)
Other						(39)						(243)						(84.0)
Total other (income) and expense						$	(261)					$	(81)					223.6			%
Non-operating adjustments:
Amortization of acquired intangible assets						$	0					$	(1)					(66.7)			%
Non-operating retirement-related (costs)/income						(1)						(192)						(99.4)
Kyndryl-related impacts						—						(145)						(100.0)
Operating (non-GAAP) other (income) and expense						$	(262)					$	(418)					(37.2)			%

(Dollars in millions)																		Yr. to Yr. Percent Change
For the six months ended June 30:						2023						2022
Other (income) and expense:
Foreign currency transaction losses/(gains)						$	(78)					$	(670)					(88.3)			%
(Gains)/losses on derivative instruments						(1)						541						nm
Interest income						(371)						(46)						nm
Net (gains)/losses from securities and investment assets						8						273						(96.9)
Retirement-related costs/(income)						(4)						394						nm
Other						(61)						(327)						(81.4)
Total other (income) and expense						$	(506)					$	166					nm
Non-operating adjustments:
Amortization of acquired intangible assets						$	(1)					$	(1)					(33.3)			%
Acquisition-related charges						(1)						—						nm
Non-operating retirement-related (costs)/income						4						(394)						nm
Kyndryl-related impacts						—						(367)						(100.0)
Operating (non-GAAP) other (income) and expense						$	(504)					$	(596)					(15.5)			%

nm - not meaningful

Management Discussion – (continued)

Total other (income) and expense was income of $261 million in the second quarter of 2023 compared to $81 million in the prior-year period. The year-to-year change was primarily driven by:

• Lower non-operating retirement-related cost ($191 million). Refer to “Retirement-Related Plans” for additional information; and

• Higher interest income ($173 million) driven by higher average interest rates and a higher average cash balance in the current year; and

• Kyndryl-related impacts in the prior period ($145 million), including unrealized losses on Kyndryl retained shares ($56 million) and related cash-settled swap ($88 million); partially offset by

• Lower gains on divestitures ($222 million) primarily driven by the divestiture of our healthcare software assets in the second quarter 2022 (included in “Other”); and

• The effects of currency.

Operating (non-GAAP) other (income) and expense was income of $262 million in the second quarter of 2023 and decreased $155 million compared to the prior-year period. The year-to-year change was primarily driven by the factors described above, excluding the lower non-operating retirement-related costs and benefits related to the prior year Kyndryl retained shares and swap.

Total other (income) and expense was income of $506 million in the first six months of 2023 compared to expense of $166 million in the prior-year period. The year-to-year change was primarily driven by:

• Lower non-operating retirement-related cost ($398 million). Refer to “Retirement-Related Plans” for additional information; and

• Kyndryl-related impacts in the prior period ($367 million), including unrealized losses on Kyndryl retained shares ($278 million) and related cash-settled swap ($88 million); and

• Higher interest income ($325 million) driven by higher average interest rates and a higher average cash balance in the current year; partially offset by

• Lower gains on divestitures ($240 million) primarily driven by the divestiture of our healthcare software assets in the second quarter 2022 (included in “Other”); and

• The effects of currency.

Operating (non-GAAP) other (income) and expense was income of $504 million in the first six months of 2023 and decreased $92 million compared to the prior-year period. The year-to-year change was primarily driven by the factors described above, excluding the lower non-operating retirement-related costs and benefits related to the prior year Kyndryl retained shares and swap.

Interest Expense

(Dollars in millions)																		Yr. to Yr. Percent Change
For the three months ended June 30:						2023						2022
Interest expense						$	423					$	297					42.5			%

(Dollars in millions)																		Yr. to Yr. Percent Change
For the six months ended June 30:						2023						2022
Interest expense						$	790					$	607					30.1			%

Management Discussion – (continued)

Interest expense increased $126 million and $183 million year to year in the second quarter and first six months of 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 second quarter and first six months of 2023 was $505 million and $963 million, respectively, an increase of $126 million and $191 million, respectively, compared to the prior-year periods. The year-to-year dynamics for both the second quarter and first six months of 2023 were primarily driven by higher average interest rates and a higher average debt balance in the current year.

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.

(Dollars in millions)																		Yr. to Yr. Percent Change
For the three months ended June 30:						2023						2022
Retirement-related plans — cost:
Service cost						$	46					$	61					(25.9)			%
Multi-employer plans						3						3						(17.6)
Cost of defined contribution plans						242						233						4.1
Total operating costs						$	291					$	298					(2.3)			%
Interest cost						$	604					$	460					31.3			%
Expected return on plan assets						(745)						(734)						1.5
Recognized actuarial losses						128						442						(71.0)
Amortization of prior service costs/(credits)						(2)						6						nm
Curtailments/settlements						6						11						(47.0)
Other costs						10						6						67.7
Total non-operating costs/(income)						$	1					$	192					(99.4)			%
Total retirement-related plans — cost						$	292					$	489					(40.4)			%

(Dollars in millions)																		Yr. to Yr. Percent Change
For the six months ended June 30:						2023						2022
Retirement-related plans — cost:
Service cost						$	92					$	127					(27.8)			%
Multi-employer plans						6						7						(11.5)
Cost of defined contribution plans						511						472						8.4
Total operating costs						$	610					$	606					0.6			%
Interest cost						$	1,203					$	927					29.7			%
Expected return on plan assets						(1,484)						(1,483)						0.0
Recognized actuarial losses						257						902						(71.5)
Amortization of prior service costs/(credits)						(4)						13						nm
Curtailments/settlements						5						19						(74.0)
Other costs						19						15						22.6
Total non-operating costs/(income)						$	(4)					$	394					nm
Total retirement-related plans — cost						$	606					$	1,000					(39.4)			%

nm - not meaningful

Management Discussion – (continued)

Total pre-tax retirement-related plan cost decreased by $198 million compared to the second quarter of 2022 primarily driven by a decrease in recognized actuarial losses ($314 million), partially offset by higher interest costs ($144 million). Total cost for the first six months of 2023 decreased $394 million compared to the first six months of 2022, primarily driven by a decrease in recognized actuarial losses ($645 million), partially offset by higher interest costs ($276 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 second quarter of 2023 were $291 million, a decrease of $7 million compared to the second quarter of 2022, primarily driven by lower service cost ($16 million), partially offset by higher cost of defined contribution plans ($10 million). For the first six months of 2023, operating retirement-related costs were $610 million, an increase of $3 million compared to the prior-year period, primarily driven by higher cost of defined contribution plans ($40 million), partially offset by lower service cost ($35 million). Non-operating costs/(income) of $1 million in the second quarter of 2023 decreased $191 million year to year and for the first six months of 2023 was $4 million of income compared to cost of $394 million in the prior-year period. The year-to-year changes were primarily driven by a decrease in recognized actuarial 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 third-party insurers in 2022 to further reduce the risk profile of our plans. The transfer resulted in a pre-tax pension settlement charge of $5.9 billion in the third quarter of 2022 primarily related to the accelerated recognition of actuarial losses.

Taxes

The continuing operations provision for income taxes for the second quarter of 2023 was $419 million, compared to $257 million in the second quarter of 2022. The operating (non-GAAP) income tax provision for the second quarter of 2023 was $393 million, compared to $413 million in the second quarter of 2022.

The continuing operations provision for income taxes for the first six months of 2023 was $543 million, compared to $218 million for the first six months of 2022. The operating (non-GAAP) provision for income taxes for the first six months of 2023 was $593 million, compared to $657 million for the first six months of 2022.

The increase in the continuing operations provision for income taxes for the second quarter and first six months of 2023 compared to prior year was primarily driven by the impact of foreign tax credit regulations.

IBM’s tax provision and effective tax rate are impacted by recurring factors including the 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. income tax returns for 2013 and 2014, which had a specific focus on certain cross-border transactions that occurred in 2013, and issued a final Revenue Agent’s Report (RAR). The IRS’ proposed adjustments relative to these cross-border transactions, if sustained, would result in additional taxable income of approximately $4.5 billion. The company strongly disagrees with the IRS on these specific matters and filed its IRS Appeals protest in the first quarter of 2021. In the third quarter of 2018, the IRS commenced its audit of the company’s U.S. tax returns for 2015 and 2016. The company anticipates that this audit will be completed in 2023. In the fourth quarter of 2021, the IRS commenced its audit of the company’s U.S. tax returns for 2017 and 2018. With respect to major U.S. state and foreign taxing jurisdictions, the company is generally no longer subject to tax examinations for years prior to 2015. The company is no longer subject to income tax examination of its U.S. federal tax 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 they relate to the amount and/or timing of income, deductions, and tax credits. Although the outcome of tax audits is always uncertain, the company believes that adequate amounts of tax, interest and penalties have been provided for any adjustments that are expected to result for these years.

Management Discussion – (continued)

The company is involved in a number of income tax-related matters in India challenging tax assessments issued by the India Tax Authorities. As of June 30, 2023, the company had recorded $639 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. Although the outcome of tax audits are 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 June 30, 2023 is $8,796 million which can be reduced by $548 million associated with timing adjustments, potential transfer pricing adjustments, and state income taxes. The net amount of $8,248 million, if recognized, would favorably affect the company’s effective tax rate.

Earnings Per Share

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

For the three months ended June 30:						2023						2022						Yr. to Yr. Percent Change
Earnings per share of common stock from continuing operations:
Assuming dilution						$	1.72					$	1.61					6.8			%
Basic						$	1.74					$	1.62					7.4			%
Diluted operating (non-GAAP)						$	2.18					$	2.31					(5.6)			%
Weighted-average shares outstanding: (in millions)
Assuming dilution						919.5						910.7						1.0			%
Basic						909.9						901.5						0.9			%

For the six months ended June 30:						2023						2022						Yr. to Yr. Percent Change
Earnings per share of common stock from continuing operations:
Assuming dilution						$	2.74					$	2.34					17.1			%
Basic						$	2.77					$	2.36					17.4			%
Diluted operating (non-GAAP)						$	3.54					$	3.71					(4.6)			%
Weighted-average shares outstanding: (in millions)
Assuming dilution						918.6						910.0						1.0			%
Basic						908.7						900.4						0.9			%

Actual shares outstanding at June 30, 2023 were 911.0 million. The weighted-average number of common shares outstanding assuming dilution during the second quarter and first six months of 2023 were 8.7 million shares (1.0 percent) higher than the same periods of 2022.

Financial Position

Dynamics

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

Cash and cash equivalents, restricted cash and marketable securities at June 30, 2023 were $16,329 million, an increase of $7,489 million compared to December 31, 2022. Total debt of $57,476 million at June 30, 2023 increased $6,527 million from December 31, 2022 primarily due to new debt issuances. We were opportunistic in accessing the debt market and issued $9,463 million of debt in the first quarter of 2023 to prudently plan for our debt maturity obligations in

Management Discussion – (continued)

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 secure and modestly growing dividend policy.

In the first six months of 2023, we generated $6,412 million in cash from operating activities, an increase of $1,843 million compared to the first six months of 2022. Our free cash flow for the six months ended June 30, 2023 was $3,441 million, an increase of $110 million versus the prior year. See pages 76 through 77 for additional information on free cash flow. Our solid cash generation supports investment and deployment of capital to areas with the most attractive long-term opportunities. We completed six acquisitions and returned $3,007 million to shareholders through dividends in the first half of 2023.

Our pension plans were well funded at the end of 2022, with worldwide qualified plans funded at 114 percent. Overall pension funded status as of the end of June 2023 was fairly consistent with year-end 2022, and we currently have no change to expected plan contributions in 2023.

IBM Working Capital

(Dollars in millions)						At June 30, 2023						At December 31, 2022
Current assets						$	34,458					$	29,118
Current liabilities						32,513						31,505
Working capital						$	1,945					$	(2,387)
Current ratio						1.06:1						0.92:1

Working capital increased $4,332 million from the year-end 2022 position. Current assets increased $5,340 million ($5,279 million adjusted for currency) primarily in cash and cash equivalents and marketable securities mainly driven by new debt issuances; partially offset by a decrease in receivables mainly from collections of seasonally higher year-end balances. Current liabilities increased $1,008 million ($948 million adjusted for currency) primarily in short-term debt driven by reclassifications from long-term debt net of maturities; partially offset by a decrease in taxes payable and accounts payable.

Receivables and Allowances

Roll Forward of Total IBM Receivables Allowance for Credit Losses

(Dollars in millions)
January 1, 2023						**Additions / (Releases) ***						**Write-offs ****						Foreign currency and other+						June 30, 2023
$	495					$	14					$	(51)					$	38					$	496

*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.

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

Excluding receivables classified as held for sale, the total IBM receivables provision coverage was 2.8 percent at June 30, 2023, an increase of 40 basis points compared to December 31, 2022. The increase in coverage was primarily driven by the overall decrease in total receivables. The majority of the write-offs during the six months ended June 30, 2023 related to receivables which had been previously reserved.

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.

(Dollars in millions)						At June 30, 2023						At December 31, 2022
Amortized cost *						$	10,969					$	12,843
Specific allowance for credit losses						126						127
Unallocated allowance for credit losses						45						46
Total allowance for credit losses						171						173
Net financing receivables						$	10,798					$	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 increased from 1.3 percent at December 31, 2022 to 1.6 percent at June 30, 2023, primarily driven by the decline in amortized cost and higher unallocated reserve requirements.

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

(Dollars in millions)
January 1, 2023						Additions / (Releases)*						**Write-offs ****						Foreign currency and other						June 30, 2023
$	173					$	(6)					$	(4)					$	7					$	171

*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 addition of $10 million for the three months ended June 30, 2023, compared to a net release of $2 million for the three months ended June 30, 2022. The year-to-year increase in expected credit loss expense was due to higher unallocated reserve requirements in the current year and higher specific reserve releases in the prior year.

Expected credit loss expense was a net release of $5 million for the six months ended June 30, 2023, compared to a net release of $12 million for the six months ended June 30, 2022. The lower year-to-year net release was due to lower specific and unallocated reserve releases in the current year.

Noncurrent Assets and Liabilities

(Dollars in millions)						At June 30, 2023						At December 31, 2022
Noncurrent assets						$	97,755					$	98,125
Long-term debt						$	50,691					$	46,189
Noncurrent liabilities (excluding debt)						$	26,738					$	27,528

The decrease in noncurrent assets of $369 million ($765 million adjusted for currency) was primarily due to intangibles amortization, a decrease in long-term financing receivables as a result of declines from seasonally higher year-end balances; partially offset by an increase in prepaid pension assets and goodwill.

Long-term debt increased $4,502 million ($4,305 million adjusted for currency) primarily driven by new debt issuances; partially offset by reclassifications to short-term debt to reflect upcoming maturities.

Noncurrent liabilities (excluding debt) decreased $789 million ($917 million adjusted for currency) primarily driven by deferred taxes, deferred income, and retirement and postretirement benefit obligations.

Management Discussion – (continued)

Debt

Our funding requirements are continually monitored 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.

(Dollars in millions)						At June 30, 2023						At December 31, 2022
Total debt						$	57,476					$	50,949
Financing segment debt*						$	10,551					$	12,872
Non-Financing debt						$	46,925					$	38,077

*Refer to Financing’s “Financial Position” on page 79 for additional details.

Total debt of $57,476 million increased $6,527 million ($6,312 million adjusted for currency) from December 31, 2022, primarily driven by proceeds from issuances of $9,482 million; partially offset by maturities of $3,155 million.

Non-Financing debt of $46,925 million increased $8,848 million ($8,656 million adjusted for currency) from December 31, 2022, primarily driven by our first quarter debt issuances to plan for debt maturity obligations in 2023 and 2024 as well as capital allocation priorities.

Financing segment debt of $10,551 million decreased $2,321 million ($2,344 million adjusted for currency) from December 31, 2022, primarily due to lower funding requirements associated with financing 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 the company to substantially match the term, currency and interest rate variability underlying the financing receivable. The Financing debt-to-equity ratio remained at 9.0 to 1 at June 30, 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 4, “Segments.”

Equity

Total equity increased $250 million from December 31, 2022, primarily driven by an increase from net income of $2,511 million and common stock of $619 million; partially offset by dividends paid of $3,007 million.

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. These amounts also include the cash flows associated with the Financing business.

(Dollars in millions)
For the six months ended June 30:						2023						2022
Net cash provided by/(used in):
Operating activities						$	6,412					$	4,569
Investing activities						(7,953)						(1,186)
Financing activities						2,978						(2,819)
Effect of exchange rate changes on cash, cash equivalents and restricted cash						(1)						(267)
Net change in cash, cash equivalents and restricted cash						$	1,436					$	297

Management Discussion – (continued)

Net cash provided by operating activities increased $1,843 million as compared to the first six months of 2022. This was due to an increase in cash provided by financing receivables and improvements in sales cycle working capital; partially offset by an increase in performance-based compensation payments given our strong results in 2022.

Net cash used in investing activities increased $6,767 million mainly driven by net purchases of marketable securities and other investments and a decrease in cash provided by divestitures; partially offset by a decrease in cash used in acquisitions.

Financing activities were a net source of cash of $2,978 million in the first six months of 2023 compared to a net use of cash of $2,819 million in the first six months of 2022. The year-to-year change of $5,797 million is mainly due to an increase in net cash provided by debt transactions of $5,736 million primarily driven by a higher level of net additions in the current year.

Results of Discontinued Operations

Income from discontinued operations, net of tax was $2 million in the second quarter of 2023 compared to a loss of $73 million in the prior-year period. For the first six months of 2023, loss from discontinued operations, net of tax was $4 million compared to $2 million in the prior-year period. The results 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 prior-year results also reflect 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.

Looking Forward

Clients and partners continue to view technology as a source of competitive advantage. Clients turn to us to speed up their transformation journeys, modernize applications and optimize their business workflows. At the same time, they continue to prioritize projects that focus on productivity and deliver quick time to value. To seize this opportunity, we are bringing new innovations to market, expanding strategic partnerships and making investments in targeted growth markets, while unlocking value through our productivity initiatives. We continue to build a stronger, more focused company that is closely aligned to the needs of our clients.

Hybrid Cloud and AI Strategy

We have made progress in our strategy around hybrid cloud and AI, the two key drivers of business innovation.

Hybrid cloud is the most widespread form of IT architecture. Red Hat OpenShift, our leading container platform based on open-source innovations, plays a crucial role in making this possible, along with IBM Software and Infrastructure. Our consultants use their technical and business knowledge to speed up clients’ digital transformation journeys and help drive adoption of our technology platforms, and our broad ecosystem of partners amplifies our reach and ability to meet client demand. Artificial Intelligence (AI) is a transformative technology that has the potential to unlock tremendous business value. Our focus is on enterprise AI, designed to address these opportunities and solve business problems. We are infusing AI into our software products and building products that address specific enterprise use cases such as digital labor, customer service and code generation. We recently announced watsonx, our enterprise-ready AI and data platform to help clients and partners capitalize on the AI opportunity. Watsonx delivers the value of foundation models to enterprises, enabling them to be more productive and will be the core technology platform for our AI capabilities. We have over 20,000 data and AI consultants and we recently launched our new Center of Excellence for Generative AI, staffed with over 1,000 consultants with specialized generative AI expertise. These investments we are making in products and skills will help us seize the AI opportunity.

To further advance our hybrid cloud and AI strategy, we continue to invest, both organically and inorganically, to deliver new innovation to our clients and to shape the technologies of the future. Watsonx is just one of many new technology innovations in 2023. Others include OpenShift AI, Hybrid Cloud Mesh, as well as sustainability tools to help clients advance their sustainability agendas. We continue to make advances in quantum computing that put 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 six acquisitions in the first half of 2023, and in July 2023, we announced the intent to acquire Apptio, a leader in financial and operational IT management and optimization software.

Management Discussion – (continued)

We are making progress on our productivity initiatives. Through our hybrid cloud and AI strategy, we are digitally transforming IBM as client zero, modernizing our IT infrastructure, optimizing the operating model, simplifying and automating our workflows and deploying AI across the enterprise. These productivity benefits free up spend for reinvestment and contribute to margin expansion.

Through first half 2023 our Consulting business continued to see sustained demand for larger transformation projects that deliver meaningful return on investment. At the same time, other projects considered to be more discretionary are being delayed, predominantly in the U.S. Our signings in the second quarter of 2023 were solid, and we addressed continued demand for technology-driven transformations as clients prioritize projects that drive cost savings and increase productivity.

We remain confident in our strategy and in the fundamentals of our business. Our balance sheet and liquidity position remain strong. At June 30, 2023 we had $16.3 billion of cash and cash equivalents, restricted cash and marketable securities. We issued $9.5 billion of debt in the first quarter of 2023 to prudently plan for our debt maturity obligations in 2023 and 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 secure and modestly growing dividend policy.

“Today’s IBM” is a higher-growth, higher-value business with strong cash generation. We expect to continue our progress as a leading hybrid cloud and AI company with a focus on revenue growth and cash generation.

Retirement-Related Plans

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

Currency Rate Fluctuations

Changes in the relative values of non-U.S. currencies to the USD affect our financial results and financial position. At June 30, 2023, currency changes resulted in assets and liabilities denominated in local currencies being translated into more dollars than at year-end 2022. We use financial hedging instruments to limit specific currency risks related to foreign currency-based transactions.

Movements in currency, and the fact that we do not hedge 100 percent of our currency exposures, will result in a currency impact to our revenues, profit and cash flows throughout 2023. We execute a hedging program which defers, versus eliminates, the volatility of currency impacts on our financial results. During periods of sustained movements in currency, the marketplace and competition adjust to the changing rates 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. Based on the currency rate movements in the second quarter of 2023, revenue from continuing operations decreased 0.4 percent as reported but increased 0.4 percent at constant currency versus the second quarter of 2022. In the first six months of 2023, revenue from continuing operations was flat as reported and increased 2.3 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 $150 million in the second quarter of 2023, and approximately $300 million in the first six months of 2023. From a segment perspective, currency translation and hedging impacted our Software pre-tax income margin year-to-year growth by over a point, and Infrastructure by about a point in the second quarter of 2023. In the first six months of 2023, currency translation and hedging impacted our Software pre-tax income margin year-to-year growth by

Management Discussion – (continued)

about a point, and Infrastructure by over a point. 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, 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 2022 Annual Report, on pages 33 to 35, there is a discussion of our liquidity including two tables that present three years of data. The table presented on page 33 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 six months ended, or at, as applicable, June 30, 2023, those amounts are $6.4 billion of net cash from operating activities, $16.3 billion of cash and cash equivalents, restricted cash and short-term marketable securities and $10.0 billion in global credit facilities, respectively. While we have no current plans to draw on these credit facilities, they are available as back-up liquidity. On June 15, 2023, the company amended its existing $2.5 billion Three-Year Credit Agreement and $7.5 billion Five-Year Credit Agreement (the Credit Agreements) to extend the maturity dates to June 20, 2026 and June 22, 2028, respectively. Refer to note 12, “Borrowings,” for additional details on these credit facilities.

The major rating agencies' ratings on our debt securities at June 30, 2023 appear in the following table and remain unchanged from March 31, 2023.

IBM RATINGS:						STANDARD AND POOR’S						MOODY’S INVESTORS SERVICE
Senior long-term debt						A-						A3
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. Debt levels have increased $6.5 billion from December 31, 2022, primarily driven by debt issuances. In the first quarter of 2023, we issued $9.5 billion of debt primarily to plan for our debt maturity obligations in 2023 and 2024 as well as capital allocation priorities.

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 June 30, 2023, the fair value of those instruments that were in a liability position was $824 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, 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 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.

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 73 and 74. For the purpose of running its business, IBM manages, monitors and analyzes cash flows in a different manner.

Management Discussion – (continued)

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, 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 six months of 2023 and 2022 prepared in a manner consistent with the description above.

(Dollars in millions)
For the six months ended June 30:						2023						2022*
Net cash from operating activities per GAAP						$	6,412					$	4,569
Less: change in Financing receivables						2,028						367
Net cash from operating activities, excluding Financing receivables						$	4,385					$	4,202
Capital expenditures, net						(944)						(871)
Free cash flow						$	3,441					$	3,331
Acquisitions						(356)						(958)
Divestitures						6						1,268
Dividends						(3,007)						(2,963)
Non-Financing debt						8,514						1,740
Other (includes Financing net receivables and Financing debt)						(1,109)						(2,197)			**
Change in cash, cash equivalents, restricted cash and short-term marketable securities						$	7,489					$	221

*Includes immaterial cash flows from discontinued operations.

**Recast to conform to current-year presentation.

In the first six months of 2023, we generated $3.4 billion in free cash flow, an increase of $0.1 billion versus the prior-year period. The increase was driven by working capital efficiencies, cash from our profit performance and lower payments for structural actions; partially offset by higher performance-based compensation payments given our strong results in 2022 and higher cash taxes. In the first six months of 2023, we also continued to return value to shareholders with $3.0 billion in dividends.

Events that could temporarily change the historical cash flow dynamics discussed previously and in our 2022 Annual Report include significant changes in operating results, material changes in geographic sources of cash, unexpected adverse impacts from litigation, future pension funding requirements, 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 million in 2023. Contributions related to all retirement-related plans are expected to be approximately $2.0 billion in 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. In 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 secure and modestly growing dividend policy.

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

(Dollars in millions)																		Yr. to Yr. Percent Change
For the three months ended June 30:						2023						2022
Revenue						$	185					$	146					26.2			%
Pre-tax income						$	64					$	102					(36.8)			%

(Dollars in millions)																		Yr. to Yr. Percent Change
For the six months ended June 30:						2023						2022
Revenue						$	380					$	300					26.8			%
Pre-tax income						$	165					$	186					(11.3)			%

For the three months ended June 30, 2023, financing revenue increased 26.2 percent as reported (27 percent adjusted for currency) compared to the prior year, driven by client financing revenue up $36 million to $181 million. For the six months ended June 30, 2023, financing revenue increased 26.8 percent as reported (29 percent adjusted for currency) compared to the prior year, driven by client financing up $77 million to $374 million. The increase in client financing revenue in both periods in 2023 was primarily driven by an increase in client financing asset yields.

Financing pre-tax income decreased 36.8 percent to $64 million in the second quarter of 2023, compared to the prior year and the pre-tax margin of 34.9 percent decreased 34.8 points year to year. The decrease in pre-tax income for the second quarter was driven by an increase in expense, primarily due to year-to-year foreign currency impacts and higher unallocated reserve requirements in the current year. For the six months ended June 30, 2023, Financing pre-tax income decreased 11.3 percent to $165 million compared to the prior year and the pre-tax margin of 43.3 percent decreased 18.6 points year to year, primarily driven by year-to-year foreign currency impacts.

Management Discussion – (continued)

Financial Position

(Dollars in millions)						At June 30, 2023						At December 31, 2022
Cash and cash equivalents						$	662					$	699
Client financing receivables:
Net investment in sales-type and direct financing leases (1)						3,831						4,047
Client loans						6,722						8,329
Total client financing receivables						$	10,553					$	12,376
Commercial financing receivables:
Held for investment						245						293
Held for sale						865						939
Other receivables						42						66
Total external receivables (2)						$	11,705					$	13,674
Intercompany assets (3)						453						988			(4)
Other assets						346						395			(4)
Total assets						$	13,166					$	15,757
Intercompany payables (3)						$	427					$	637
Debt (5)						10,551						12,872
Other liabilities						1,016						814
Total liabilities						$	11,994					$	14,323
Total equity						$	1,172					$	1,433
Total liabilities and equity						$	13,166					$	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 (from $13.7 billion in December 2022 to $11.7 billion in June 2023) and the 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 $1,970 million primarily due to collections of higher year-end balances. Intercompany assets decreased $535 million primarily driven by intercompany financing receivables at December 31, 2022 that settled in the first half of 2023. These declines had corresponding reductions in debt funding.

We continue to apply our rigorous credit policies. Approximately 73 percent of the total external portfolio was with investment-grade clients with no direct exposure to consumers at both June 30, 2023 and December 31, 2022; a year-to-year increase of 2 points as compared to June 30, 2022. This investment grade percentage is based on the credit ratings of the companies in the portfolio and reflects certain mitigating actions taken to reduce the risk to IBM.

We have a long-standing practice of taking mitigation actions, in certain circumstances, to transfer credit risk to third 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. For additional information relating to financing receivables refer to note 9, “Financing Receivables.” Refer to pages 72 through 73 for additional information related to Financing segment receivables, allowance for credit losses and debt.

Management Discussion – (continued)

Return on Equity Calculation

						For Three Months Ended June 30,												For Six Months Ended June 30,
(Dollars in millions)						2023						2022						2023						2022
Numerator:
Financing after-tax income*						$	53					$	84					$	135					$	153
Annualized after-tax income (1)						$	211					$	336					$	270					$	305
Denominator:
Average Financing equity (2)**						$	1,170					$	1,358					$	1,258					$	1,421
Financing return on equity (1)/(2)						18.1			%			24.8			%			21.5			%			21.5			%

*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.

**Average of the ending equity for Financing for the last two quarters and three quarters, for the three months ended June 30 and for the six months ended June 30, respectively.

Return on equity was 18.1 percent and 21.5 percent for the three and six months ended June 30, 2023, respectively, compared to 24.8 percent and 21.5 percent for the same periods in 2022. The changes in the three months ended June 30, 2023 were driven by a decrease in net income, partially offset by a lower average equity balance.

Residual Value

The estimated residual value represents the estimated fair value of the equipment under lease at the end of the lease. The company estimates the future fair value of leased equipment by using historical models, analyzing the current market for new and used equipment and obtaining forward-looking product information such as marketing plans and technology innovations.

The company optimizes the recovery of residual values by extending lease arrangements with, or selling leased equipment to existing clients and periodically reassesses the realizable value of its lease residual values.

The following table presents the recorded amount of unguaranteed residual value for sales-type and direct financing leases at June 30, 2023 and December 31, 2022. In addition, the table presents the run out of when the unguaranteed residual value assigned to equipment on leases at June 30, 2023 is expected to be returned to the company. The unguaranteed residual value for operating leases at June 30, 2023 and December 31, 2022 was not material.

Unguaranteed Residual Value

						At December 31, 2022						At June 30, 2023						Estimated Run Out of June 30, 2023 Balance
(Dollars in millions)												2023						2024						2025						2026 and Beyond
Sales-type and direct financing leases						$	422					$	404					$	28					$	60					$	137					$	180

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.

(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 June 30, 2023:
Gross profit						$	8,501					$	150					$	—					$	—					$	—					$	8,650
Gross profit margin						54.9			%			1.0			pts.			—			pts.			—			pts.			—			pts.			55.9			%
SG&A						$	4,900					$	(245)					$	—					$	—					$	—					$	4,655
Other (income) and expense						$	(261)					$	0					$	(1)					$	—					$	—					$	(262)
Total expense and other (income)						$	6,501					$	(246)					$	(1)					$	—					$	—					$	6,254
Pre-tax income from continuing operations						$	2,000					$	395					$	1					$	—					$	—					$	2,396
Pre-tax margin from continuing operations						12.9			%			2.6			pts.			0.0			pts.			—			pts.			—			pts.			15.5			%
Provision for income taxes*						$	419					$	87					$	(3)					$	(110)					$	—					$	393
Effective tax rate						21.0			%			0.2			pts.			(0.2)			pts.			(4.6)			pts.			—			pts.			16.4			%
Income from continuing operations						$	1,581					$	308					$	5					$	110					$	—					$	2,003
Income margin from continuing operations						10.2			%			2.0			pts.			$	0.0		pts.			0.7			pts.			—			pts.			12.9			%
Diluted earnings per share from continuing operations						$	1.72					$	0.34					$	0.00					$	0.12					$	—					$	2.18

(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 June 30, 2022:
Gross profit						$	8,290					$	180					$	—					$	—					$	—					$	8,470
Gross profit margin						53.4			%			1.2			pts.			—			pts.			—			pts.			—			pts.			54.5			%
SG&A						$	4,855					$	(279)					$	—					$	—					$	0					$	4,576
Other (income) and expense						$	(81)					$	(1)					$	(192)					$	—					$	(145)					$	(418)
Total expense and other (income)						$	6,568					$	(280)					$	(192)					$	—					$	(145)					$	5,952
Pre-tax income from continuing operations						$	1,722					$	460					$	192					$	—					$	145					$	2,518
Pre-tax margin from continuing operations						11.1			%			3.0			pts.			1.2			pts.			—			pts.			0.9			pts.			16.2			%
Provision for income taxes*						$	257					$	115					$	46					$	(4)					$	—					$	413
Effective tax rate						14.9			%			1.8			pts.			0.7			pts.			(0.2)			pts.			(0.9)			pts.			16.4			%
Income from continuing operations						$	1,465					$	345					$	146					$	4					$	145					$	2,105
Income margin from continuing operations						9.4			%			2.2			pts.			0.9			pts.			0.0			pts.			0.9			pts.			13.5			%
Diluted earnings per share from continuing operations						$	1.61					$	0.38					$	0.16					$	0.00					$	0.16					$	2.31

*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.

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 six months ended June 30, 2023:
Gross profit						$	16,010					$	298					$	—					$	—					$	—					$	16,308
Gross profit margin						53.9			%			1.0			pts.			—			pts.			—			pts.			—			pts.			54.9			%
SG&A						$	9,754					$	(491)					$	—					$	—					$	—					$	9,263
Other (income) and expense						$	(506)					$	(2)					$	4					$	—					$	—					$	(504)
Total expense and other (income)						$	12,952					$	(493)					$	4					$	—					$	—					$	12,463
Pre-tax income from continuing operations						$	3,058					$	791					$	(4)					$	—					$	—					$	3,845
Pre-tax margin from continuing operations						10.3			%			2.7			pts.			0.0			pts.			—			pts.			—			pts.			12.9			%
Provision for income taxes*						$	543					$	178					$	(14)					$	(115)					$	—					$	593
Effective tax rate						17.8			%			1.0			pts.			(0.3)			pts.			(3.0)			pts.			—			pts.			15.4			%
Income from continuing operations						$	2,515					$	613					$	10					$	115					$	—					$	3,252
Income margin from continuing operations						8.5			%			2.1			pts.			0.0			pts.			0.4			pts.			—			pts.			10.9			%
Diluted earnings per share from continuing operations						$	2.74					$	0.67					$	0.01					$	0.13					$	—					$	3.54

(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 six months ended June 30, 2022:
Gross profit						$	15,625					$	361					$	—					$	—					$	—					$	15,986
Gross profit margin						52.6			%			1.2			pts.			—			pts.			—			pts.			—			pts.			53.8			%
SG&A						$	9,452					$	(565)					$	—					$	—					$	0					$	8,887
Other (income) and expense						$	166					$	(1)					$	(394)					$	—					$	(367)					$	(596)
Total expense and other (income)						$	13,280					$	(566)					$	(394)					$	—					$	(367)					$	11,953
Pre-tax income from continuing operations						$	2,345					$	928					$	394					$	—					$	367					$	4,033
Pre-tax margin from continuing operations						7.9			%			3.1			pts.			1.3			pts.			—			pts.			1.2			pts.			13.6			%
Provision for income taxes*						$	218					$	224					$	104					$	112					$	—					$	657
Effective tax rate						9.3			%			3.4			pts.			1.7			pts.			2.8			pts.			(0.8)			pts.			16.3			%
Income from continuing operations						$	2,127					$	704					$	290					$	(112)					$	367					$	3,376
Income margin from continuing operations						7.2			%			2.4			pts.			1.0			pts.			(0.4)			pts.			1.2			pts.			11.4			%
Diluted earnings per share from continuing operations						$	2.34					$	0.77					$	0.32					$	(0.12)					$	0.40					$	3.71

*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.

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, 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.