Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2023

Snapshot

Organization of Information:

In September 2022, the IBM Qualified Personal Pension Plan (Qualified PPP) purchased two separate nonparticipating single premium group annuity contracts from The Prudential Insurance Company of America and Metropolitan Life Insurance Company (collectively, the Insurers) and irrevocably transferred to the Insurers approximately $16 billion of the Qualified PPP’s defined benefit pension obligations and related plan assets, thereby reducing our pension obligations and assets by the same amount. The group annuity contracts were purchased using assets of the Qualified PPP and no additional funding contribution was required from the company. As a result of this transaction we recognized a one-time, non-cash, pre-tax pension settlement charge of $5.9 billion ($4.4 billion net of tax) in the third quarter of 2022, primarily related to the accelerated recognition of accumulated actuarial losses of the Qualified PPP. Refer to note 18, “Retirement-Related Benefits,” for additional 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 $44 million, or $0.04 per basic and diluted share for the three months ended September 30, 2023, and $175 million, or $0.16 and $0.15 per basic and diluted share, respectively, for the nine months ended September 30, 2023.

In 2023, we executed 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 $34 million and $410 million for the three and nine months ended September 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 third quarter and first nine months of 2022 of $13 million and $22 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

Management Discussion – (continued)

separation and their related tax impacts. Due to the unique, non-recurring nature of the enactment of the U.S. Tax Cuts and Jobs Act (U.S. tax reform), management characterizes the one-time provisional charge recorded in the fourth quarter of 2017 and adjustments to that charge as non-operating. Adjustments primarily include true-ups, accounting elections and any changes to regulations, laws, audit adjustments 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. In 2022, these charges primarily related to any net gains or losses on the Kyndryl common stock and the related cash-settled swap with a third-party financial institution, which 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 related expenses, tax charges related to acquisition integration and pre-closing charges, such as financing costs. These charges are excluded as they may be inconsistent in amount and timing from period to period and are significantly impacted by the size, type and frequency of the company’s acquisitions. All other spending for acquired companies is included in both earnings from continuing operations and in operating (non-GAAP) earnings. For retirement-related costs, management characterizes certain items as operating and others as non-operating, consistent with GAAP. We include defined benefit plan and nonpension postretirement benefit plan service costs, multi-employer plan costs and the cost of defined contribution plans in operating earnings. Non-operating retirement-related costs include defined benefit plan and nonpension postretirement benefit plan amortization of prior service costs, interest cost, expected return on plan assets, amortized actuarial gains/losses, the impacts of any plan curtailments/settlements including a one-time, non-cash, pre-tax settlement charge of $5.9 billion ($4.4 billion net of tax) in the third quarter of 2022 and pension insolvency costs and other costs. Non-operating retirement-related costs are primarily related to changes in pension plan assets and liabilities which are tied to financial market performance, and the company considers these costs to be outside of the operational performance of the business.

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

Financial Results Summary — Three Months Ended September 30


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

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

**3.5% percent adjusted for currency.

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Management Discussion – (continued)

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


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

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

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

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Macroeconomic Environment:

Our business profile positions us well in challenging macroeconomic 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 current environment, clients and partners continue to view technology as a source of competitive advantage. Businesses and governments around the world are looking for opportunities to address demographic shifts, make their supply chains more resilient and improve sustainability. More recently, geopolitical events and the "higher for longer" interest rate environment are adding to the growing uncertainty. In response, clients are leveraging technologies like hybrid cloud and AI that boost productivity and competitiveness.

In the first nine months of 2023, movements in global currencies continued to 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. 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 third quarter of 2023 on a year-to-year basis, reflecting the pricing and productivity actions we have taken. We expect these actions to continue to contribute to margin improvement for the remainder of 2023.

Financial Performance Summary — Three Months Ended September 30:

In the third quarter of 2023, we reported $14.8 billion in revenue, income from continuing operations of $1.7 billion and operating (non-GAAP) earnings of $2.0 billion. Diluted earnings per share from continuing operations was $1.86 as reported and $2.20 on an operating (non-GAAP) basis. We generated $3.1 billion in cash from operations and $1.7 billion in free cash flow, and delivered shareholder returns of $1.5 billion in dividends. Our third-quarter performance reflects solid revenue growth, profit margin expansion and strong cash generation. Our cash generation has enabled us to be acquisitive and increase our investment in R&D, strengthening our future hybrid cloud and AI capabilities, while continuing to support shareholder returns through dividends.

Total revenue grew 4.6 percent as reported and 3.5 percent adjusted for currency compared to the prior-year period led by our growth areas of Software and Consulting. Software delivered revenue growth of 7.8 percent as reported and 6 percent adjusted for currency, with growth in both Hybrid Platform & Solutions and Transaction Processing, as clients leverage their data for insights and automate IT in a hybrid cloud environment. Hybrid Platform & Solutions revenue was up 8.0 percent as reported and 7 percent adjusted for currency, with growth across Red Hat, Automation and Data & AI. Transaction Processing grew 7.3 percent as reported and 5 percent adjusted for currency, reflecting the success of the last two zSystems cycles which drives demand for this mission-critical software. Consulting revenue increased 5.6 percent as reported and 5 percent adjusted for currency, with revenue growth across all lines of business as clients continue to

Management Discussion – (continued)

prioritize transformation projects that enable cost savings and productivity. Infrastructure revenue decreased 2.4 percent year to year as reported and 3 percent adjusted for currency, with declines in Distributed Infrastructure and Infrastructure Support reflecting product cycle dynamics; partially offset by growth in zSystems.

From a geographic perspective, Americas revenue increased 3.6 percent as reported (4 percent adjusted for currency). Europe/Middle East/Africa (EMEA) increased 6.7 percent as reported and was flat adjusted for currency. Asia Pacific increased 4.1 percent (7 percent adjusted for currency).

Gross margin of 54.4 percent increased 1.7 points year to year with continued margin expansion across all reportable segments driven by revenue growth, improving portfolio mix and productivity actions. Operating (non-GAAP) gross margin of 55.5 percent increased 1.6 points compared to the prior-year period due to the same dynamics.

Total expense and other (income) decreased 48.5 percent in the third quarter of 2023 versus the prior-year period primarily driven by the pension settlement charge of $5.9 billion in the prior year, and benefits from productivity and transformation of our business processes; partially offset by 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 4.5 percent year to year, driven primarily by the effects of currency and higher net spending to drive our strategy; partially offset by benefits from productivity and transformation initiatives.

Pre-tax income from continuing operations was $1.9 billion in the third quarter of 2023 compared with pre-tax loss of $4.5 billion in the prior year and pre-tax margin was 12.7 percent, an increase of 44.6 points versus the third quarter of 2022. The year-to-year improvements were primarily driven by the $5.9 billion pension settlement charge in the prior year, the combination of our revenue and gross margin performance and the benefits from productivity actions. The continuing operations provision for income taxes for the third quarter of 2023 was $0.2 billion, compared to a benefit of $1.3 billion in the third quarter of 2022. The prior-year tax benefit was primarily due to the pension settlement charge. Net income from continuing operations was $1.7 billion compared to a net loss of $3.2 billion in the third quarter of 2022 and the net income from continuing operations margin was 11.6 percent, up 34.4 points year to year.

Operating (non-GAAP) pre-tax income from continuing operations of $2.3 billion increased 17.0 percent compared to the prior-year period and the operating (non-GAAP) pre-tax margin from continuing operations increased 1.7 points to 15.6 percent. The combination of our revenue and gross margin performance and productivity actions resulted in strong operating (non-GAAP) pre-tax income growth in the current period. The operating (non-GAAP) income tax provision was $0.3 billion for the third quarter of 2023 and 2022. Operating (non-GAAP) net income from continuing operations of $2.0 billion increased 22.8 percent and the operating (non-GAAP) net income margin from continuing operations of 13.8 percent was up 2.0 points year to year.

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

Cash provided by operating activities was $3.1 billion in the third quarter of 2023, an increase of $1.2 billion compared to the third quarter of 2022. Net cash used in investing activities was $2.0 billion, a decline of $0.3 billion and financing activities were a net use of cash of $3.1 billion in the third quarter of 2023 compared to a net source of cash of $0.7 billion in third quarter of 2022, due to higher debt maturities in the current year.

Management Discussion – (continued)

Financial Results Summary — Nine Months Ended September 30:


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

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

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

**2.7% percent adjusted for currency.

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


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

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

**Refer to page 82 for a more detailed reconciliation of net income to operating earnings.

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Management Discussion – (continued)

Financial Performance Summary —Nine Months Ended September 30:

In the first nine months of 2023, we reported $44.5 billion in revenue, income from continuing operations of $4.2 billion and operating (non-GAAP) earnings of $5.3 billion. Diluted earnings per share from continuing operations was $4.59 as reported and $5.74 on an operating (non-GAAP) basis. We generated $9.5 billion in cash from operations and $5.1 billion in free cash flow, and delivered shareholder returns of $4.5 billion in dividends. Our year-to-date performance reflects the continued momentum in our growth areas of Software and Consulting, and a solid recurring revenue base driven by our high-value software.

Total revenue grew 1.5 percent as reported and 3 percent adjusted for currency compared to the prior-year period. Software delivered revenue growth of 5.9 percent as reported and 6 percent adjusted for currency, with growth in both Hybrid Platform & Solutions and Transaction Processing. Consulting revenue increased 4.2 percent as reported and 6 percent adjusted for currency, with growth across all lines of business. Infrastructure revenue decreased 7.6 percent as reported and 6 percent adjusted for currency, reflecting product cycle dynamics which impacted both Hybrid Infrastructure and Infrastructure Support.

From a geographic perspective, Americas revenue increased 0.9 percent year to year as reported (1 percent adjusted for currency). EMEA increased 3.5 percent (3 percent adjusted for currency). Asia Pacific was flat but grew 6 percent adjusted for currency.

Gross margin of 54.0 percent increased 1.4 points year to year with continued gross profit expansion across all reportable segments driven by our improving portfolio mix and productivity actions. Operating (non-GAAP) gross margin of 55.1 percent increased 1.3 points compared to the prior-year period due to the same dynamics.

Total expense and other (income) decreased 24.2 percent in the first nine months of 2023 versus the prior-year period primarily driven by the pension settlement charge of $5.9 billion in the prior year, higher interest income, prior-year impacts related to the Kyndryl retained shares and swap, and benefits from productivity and transformation of our business processes. This was partially offset by higher workforce rebalancing charges, higher interest expense, lower gains from divestitures, higher spending to drive our hybrid cloud and AI strategy and the effects of currency. Total operating (non-GAAP) expense and other (income) increased 4.3 percent year to year, driven primarily by higher workforce rebalancing charges, higher interest expense, lower gains from divestitures 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 was $4.9 billion in the first nine months of 2023 compared with pre-tax loss of $2.2 billion in the prior-year period and pre-tax margin was 11.1 percent, an increase of 16.0 points. Performance in the first nine months of 2023 benefited from the expense dynamics described above, improvements in portfolio mix and ongoing productivity actions. The continuing operations provision for income taxes for the first nine months of 2023 was $0.7 billion, compared to a benefit of $1.1 billion for the first nine months of 2022. The prior-year tax benefit was primarily due to the pension settlement charge in the third-quarter 2022. Net income from continuing operations was $4.2 billion compared with a net loss of $1.1 billion in the prior-year period and the net income from continuing operations margin was 9.5 percent, up 12.0 points year to year.

Operating (non-GAAP) pre-tax income from continuing operations of $6.1 billion increased 2.4 percent compared to the prior-year period and the operating (non-GAAP) pre-tax margin from continuing operations increased 0.1 points to 13.8 percent. The operating (non-GAAP) provision for income taxes for the first nine months of 2023 was $0.9 billion, compared to $1.0 billion for the first nine months of 2022. Operating (non-GAAP) income from continuing operations of $5.3 billion increased 5.0 percent and the operating (non-GAAP) income margin from continuing operations of 11.9 percent increased 0.4 points year to year.

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

Management Discussion – (continued)

At September 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 September 30, 2023 of $11.0 billion increased $2.2 billion from December 31, 2022 and debt of $55.2 billion at September 30, 2023 increased $4.3 billion.

Total assets increased $2.1 billion ($2.9 billion adjusted for currency) from December 31, 2022 primarily driven by an increase in goodwill mainly related to the Apptio acquisition and an increase in cash and cash equivalents and marketable securities; partially offset by a decrease in receivables. Total liabilities increased $0.9 billion ($1.9 billion adjusted for currency) from December 31, 2022 primarily driven by an increase in debt; partially offset by decreases in accounts payable, taxes and derivative liabilities. Total equity of $23.2 billion increased $1.1 billion from December 31, 2022 primarily driven by year-to-date net income and common stock issuances; partially offset by dividends paid.

Cash provided by operating activities was $9.5 billion in the first nine months of 2023, an increase of $3.0 billion. Net cash used in investing activities of $9.9 billion increased $7.0 billion compared to the prior-year period. Net cash used in financing activities of $0.2 billion decreased $2.0 billion compared to the prior-year period.

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

Management Discussion – (continued)


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

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

Software


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

Management Discussion – (continued)


(Dollars in millions)					Yr. to Yr. Percent Change		Yr. to Yr. Percent Change Adjusted For Currency
For the nine months ended September 30:	2023		2022
Software revenue:	$	18,794	$	17,749	5.9	%	6.5	%
Hybrid Platform & Solutions	$	13,350	$	12,641	5.6	%	6.2	%
Red Hat					9.5		9.7
Automation					4.6		5.4
Data & AI					5.9		6.6
Security					(1.6)		(0.8)
Transaction Processing	5,444		5,107		6.6		7.2

Software revenue of $6,265 million increased 7.8 percent as reported (6 percent adjusted for currency) in the third quarter of 2023 compared to the prior-year period, driven by revenue growth in both Hybrid Platform & Solutions and Transaction Processing. This revenue performance reflects continued growth in our recurring revenue base, which is approximately 80 percent of annual software revenue, as well as transactional revenue growth.

Hybrid Platform & Solutions revenue of $4,506 million increased 8.0 percent as reported (7 percent adjusted for currency) in the third quarter of 2023 compared to the prior-year period, driven by growth in Red Hat, Automation and Data & AI. Red Hat revenue increased 9.4 percent as reported (8 percent adjusted for currency). OpenShift and Ansible each contributed double-digit revenue growth in the third quarter of 2023 compared to the prior-year period and continued to gain market share. Automation revenue increased 14.0 percent as reported (13 percent adjusted for currency), with growth across all business areas. We had strength in AIOps and Management driven by good performance in Instana, Turbonomic and our most recent acquisition, Apptio as clients focus on optimizing their business outcomes and boost productivity. IT and business automation are top client priorities and we have been investing to capture this opportunity. Data & AI revenue increased 6.4 percent as reported (6 percent adjusted for currency), including growth in Data Fabric and Customer Care as enterprise clients prepare for and adopt generative AI solutions, leveraging watsonx. We also grew revenue in Asset & Supply Chain Management as we help enterprises run sustainable operations. Security revenue decreased 1.9 percent as reported (3 percent adjusted for currency) in the third quarter of 2023. While we had declines in managed security services, we had growth in security software, driven by Data Security and Identity & Access Management.

Across Hybrid Platform & Solutions, our annual recurring revenue (ARR) was $14.0 billion. ARR is a key performance metric management uses to assess the health and growth trajectory of our Hybrid Platform & Solutions business within the Software segment. ARR is calculated by estimating the current quarter’s recurring, committed value for certain types of active contracts as of the period-end date and then multiplying that value by four. This value is based on each arrangement’s contract value and start date, mitigating fluctuations during the contract term, and includes the following consumption models: (1) software subscription agreements, including committed term licenses, (2) as-a-service arrangements such as SaaS and PaaS, (3) maintenance and support contracts, and (4) security managed services contracts. ARR should be viewed independently of revenue as this performance metric and its inputs may not represent the amount of revenue recognized in the period and therefore is not intended to represent current period revenue or revenue that will be recognized in future periods. ARR is calculated at estimated constant currency.

Transaction Processing revenue of $1,759 million increased 7.3 percent as reported (5 percent adjusted for currency) in the third quarter of 2023 compared to the prior-year period, reflecting the success of the last two zSystems cycles which is driving demand for this mission-critical software.

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

Management Discussion – (continued)


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


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

Software gross profit margin increased 0.5 points to 79.5 percent in the third quarter of 2023 compared to the prior-year period, primarily due to revenue growth and portfolio mix. For the first nine months of 2023, gross profit margin increased 0.4 points to 79.4 percent, driven primarily by the same factors described for the third quarter.

In the third quarter, pre-tax income of $1,486 million increased 13.7 percent and pre-tax margin of 23.7 percent increased 1.2 points compared to the prior year. The pre-tax margin expansion reflects operating leverage from revenue growth and product mix, partially offset by more than 2 points of impact from currency. For the first nine months of 2023, pre-tax income of $4,154 million increased 8.9 percent and pre-tax margin of 22.1 percent increased 0.6 points compared to the prior-year period, which included more than 1 point of impact from currency.

Consulting


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


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

Consulting revenue of $4,963 million increased 5.6 percent as reported (5 percent adjusted for currency) in the third quarter of 2023 compared to the prior-year period, with growth across all three lines of business. Our focused hybrid cloud and AI strategy has become even more of a differentiator as we help clients understand how AI can be used to automate

Management Discussion – (continued)

tasks, make better decisions with speed and improve customer experiences. We continued to advance our strategic partnerships, which account for approximately 40 percent of Consulting revenue and continued to grow revenue and signings in the third quarter at a double-digit rate on a year-to-year basis. Additionally, our Red Hat consulting practice, which helps clients optimize how they build, deploy and manage applications for a hybrid cloud environment has continued to grow at a double-digit rate in the third quarter of 2023 on a year-to-year basis, with more than $1 billion in signings this quarter.

In the third quarter of 2023, Business Transformation revenue of $2,291 million increased 5.9 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. Finance and supply chain transformations also contributed to revenue growth in the quarter.

Technology Consulting revenue of $961 million increased 2.0 percent as reported (1 percent adjusted for currency) in the third quarter of 2023 compared to the prior-year period. Growth in cloud-based application development and modernization work was partially offset by declines in on-premise application-focused projects.

Application Operations revenue of $1,710 million increased 7.4 percent as reported (7 percent adjusted for currency) compared to the third quarter of 2022, driven by cloud application management and platform engineering services. In platform engineering services, we help clients design an application environment that runs securely and smoothly at scale.

For the first nine months of 2023, Consulting revenue of $14,938 million increased 4.2 percent as reported (6 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 had growth in client engagements focused on cloud application development and modernization. Through our Application Operations offerings, we continued to provide cloud application management and platform services to clients to help run their cloud platforms.


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


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

In the third quarter of 2023, Consulting gross profit margin of 27.4 percent increased 1.5 points on a year-to-year basis. Pre-tax income of $509 million increased 10.0 percent and pre-tax margin of 10.2 percent increased 0.4 points in third-quarter 2023 compared to the prior-year period. Our gross profit margin expansion and pre-tax margin performance reflect benefits from the pricing and productivity actions we have taken during the past year, which are partially offset by increased labor costs and approximately 1 point of pre-tax margin impact from currency.

For the first nine months of 2023, Consulting gross profit margin of 26.2 percent increased 1.4 points compared to the prior-year period. Pre-tax income of $1,336 million increased 15.8 percent and pre-tax margin of 8.9 percent increased 0.9

Management Discussion – (continued)

points in the first nine months of 2023 compared to the prior-year period. The nine-month margin performance was driven by the pricing, productivity and labor cost factors described above for the third quarter.

Consulting Signings and Book-to-Bill


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


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

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

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.

Infrastructure


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

Management Discussion – (continued)


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

Infrastructure revenue of $3,272 million decreased 2.4 percent as reported (3 percent adjusted for currency) in the third 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 $1,943 million increased 0.6 percent as reported, but was flat adjusted for currency in the third quarter of 2023 compared to the prior-year period. Within Hybrid Infrastructure, zSystems revenue increased 9.3 percent as reported (9 percent adjusted for currency) in the third quarter which is typically a seasonally lower revenue quarter. After six quarters of availability, revenue for z16 continues to exceed the prior cycles, reflecting clients' growing enterprise workload requirements and the economic value at scale of the platform. Clients also continue to value the security, resiliency and hybrid cloud capabilities of the zSystems platform. Distributed Infrastructure revenue decreased 4.5 percent as reported (6 percent adjusted for currency), driven primarily by declines in Storage Systems partially offset by growth in Power Systems. This performance compares to strong revenue growth in the prior year as we introduced innovation across Storage Systems and Power10.

Infrastructure Support revenue of $1,329 million decreased 6.5 percent as reported (7 percent adjusted for currency) in the third quarter of 2023 compared to the prior-year period, driven primarily by a decline in IBM logo product support.

For the first nine months of 2023, Infrastructure revenue of $9,988 million decreased 7.6 percent as reported (6 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 due to the strong launch of the z16 program in second-quarter 2022. The revenue decline in Infrastructure Support for the first nine months of 2023 reflects product cycle dynamics.


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


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

Management Discussion – (continued)

Infrastructure gross profit margin of 53.5 percent increased 2.8 points in the third quarter of 2023 compared to the prior-year period. This increase was driven by margin expansion in Hybrid Infrastructure reflecting the solid revenue performance and margin improvement in zSystems, partially offset by margin decline in Infrastructure Support due to product cycle dynamics. For the first nine months of 2023, gross profit margin of 53.8 percent increased 1.9 points compared to the prior-year period, driven primarily by margin expansion in Distributed Infrastructure, partially offset by a margin decline in Infrastructure Support.

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

For the first nine months of 2023, Infrastructure pre-tax income of $1,236 million was flat and pre-tax margin of 12.4 percent increased 0.9 points compared to the prior-year period. This performance reflects an increase in gross profit contribution from Hybrid Infrastructure, driven primarily by margin expansion in Distributed Infrastructure, partially offset by a decline in profit contribution from Infrastructure Support due to product cycle dynamics. The increase in pre-tax margin also reflects the change in useful life, increase in IP and custom development income and productivity actions. Pre-tax margin for the first nine months of 2023 included more than 1 point of impact from currency.

Financing

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 September 30:	2023		2022
Total Revenue	$	14,752	$	14,107	4.6	%	3.5	%
Americas	$	7,686	$	7,416	3.6	%	3.9	%
Europe/Middle East/Africa (EMEA)	4,223		3,959		6.7		0.0
Asia Pacific	2,843		2,732		4.1		7.4


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

Total revenue of $14,752 million increased 4.6 percent as reported and 3.5 percent adjusted for currency in the third quarter of 2023 compared to the prior-year period.

Americas revenue of $7,686 million increased 3.6 percent as reported and 4 percent adjusted for currency. The U.S. increased 1.9 percent. Canada increased 6.6 percent as reported and 9 percent adjusted for currency. Latin America increased 15.6 percent as reported and 16 percent adjusted for currency, with Brazil increasing 32.3 percent as reported and 27 percent adjusted for currency.

Management Discussion – (continued)

In EMEA, total revenue of $4,223 million increased 6.7 percent as reported and was flat adjusted for currency. France increased 11.4 percent as reported and 4 percent adjusted for currency. Germany increased 7.1 percent as reported and was flat adjusted for currency. Italy and the UK increased 4.8 percent and 3.3 percent, respectively, as reported, but decreased 2 percent and 4 percent, respectively, adjusted for currency.

Asia Pacific revenue of $2,843 million increased 4.1 percent as reported and 7 percent adjusted for currency. Japan increased 6.0 percent as reported and 11 percent adjusted for currency. India and Australia increased 17.2 percent and 15.8 percent, respectively, as reported, and each increased 21 percent adjusted for currency. China decreased 21.1 percent as reported and 18 percent adjusted for currency.

For the first nine months of 2023, total revenue of $44,479 million increased 1.5 percent as reported and 3 percent adjusted for currency compared to the prior-year period.

Americas revenue of $22,810 million increased 0.9 percent as reported and 1 percent adjusted for currency. The U.S. decreased 0.3 percent compared to the prior-year period. Canada decreased 2.1 percent as reported, but increased 2 percent adjusted for currency. Latin America increased 16.1 percent as reported and 18 percent adjusted for currency, with Brazil increasing 20.1 percent as reported and 18 percent adjusted for currency.

In EMEA, total revenue of $13,156 million increased 3.5 percent as reported and 3 percent adjusted for currency. Italy and France increased 4.4 percent and 4.2 percent, respectively, as reported, and each increased 3 percent adjusted for currency. The UK and Germany decreased 2.4 percent and 3.8 percent, respectively, as reported, and 1 percent and 5 percent, respectively, adjusted for currency.

Asia Pacific revenue of $8,513 million was flat as reported and increased 6 percent adjusted for currency. Japan increased 1.9 percent as reported and 10 percent adjusted for currency. India increased 9.9 percent as reported and 17 percent adjusted for currency. Australia decreased 5.1 percent as reported, but was flat adjusted for currency. China decreased 21.5 percent as reported and 18 percent adjusted for currency.

Expense

Total Expense and Other (Income)


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

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

nm - not meaningful

Management Discussion – (continued)


(Dollars in millions)							Yr. to Yr. Percent Change
For the nine months ended September 30:	2023			2022
Total expense and other (income)	$	19,102		$	25,212	*	(24.2)	%
Non-operating adjustments:
Amortization of acquired intangible assets	$	(735)		$	(810)		(9.3)	%
Acquisition-related charges	(35)			(9)			272.3
Non-operating retirement-related (costs)/income	16			(6,455)		*	nm
Kyndryl-related impacts	—			(353)			(100.0)
Operating (non-GAAP) expense and other (income)	$	18,348		$	17,584		4.3	%
Total expense-to-revenue ratio	42.9		%	57.5		%	(14.6)	pts.
Operating (non-GAAP) expense-to-revenue ratio	41.3		%	40.1		%	1.1	pts.

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

nm - not meaningful

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

Selling, General and Administrative Expense


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

nm - not meaningful

Management Discussion – (continued)


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

nm - not meaningful

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

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

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

SG&A expense increased 2.7 percent in the first nine months of 2023 versus the prior-year period driven primarily by the following factors:

Higher workforce rebalancing charges (3 points) to address remaining stranded cost from portfolio actions; and
Higher net spending (1 point) driven by the same factors above; partially offset by
The effects of currency (1 point).

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

Provisions for expected credit loss expense in the first nine months of 2023 decreased $26 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 September 30, 2023, excluding receivables classified as held for sale, 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.

Management Discussion – (continued)

Research, Development and Engineering


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


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

Research, development and engineering (RD&E) expense in the third quarter of 2023 increased 4.6 percent year to year primarily driven by higher spending (5 points) which includes expenses of acquired businesses and our continued investment to deliver innovation in AI, hybrid cloud and quantum. RD&E expense in the first nine months of 2023 increased 1.3 percent year to year primarily driven by higher spending (3 points); partially offset by effects of currency (1 point).

Intellectual Property and Custom Development Income


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


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

Total intellectual property and custom development income increased 56.3 percent year to year in the third quarter, and 47.8 percent in the first nine 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.

Management Discussion – (continued)

Other (Income) and Expense


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


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

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

nm - not meaningful

Management Discussion – (continued)

Total other (income) and expense was income of $215 million in the third quarter of 2023 compared to expense of $5,755 million in the prior-year period. The year-to-year change was primarily driven by:

Lower non-operating retirement-related cost ($6,074 million) primarily due to a one-time, non-cash pension settlement charge in the prior year. Refer to note 18, “Retirement-Related Benefits,” for additional information; and
Higher interest income ($104 million) driven by higher average interest rates and a higher average cash balance in the current year; partially offset by
Net exchange losses (including derivative instruments) in the current year versus net exchange gains in the prior year ($219 million).

Operating (non-GAAP) other (income) and expense was income of $203 million in the third quarter of 2023 and decreased $90 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.

Total other (income) and expense was income of $721 million in the first nine months of 2023 compared to expense of $5,921 million in the prior-year period. The year-to-year change was primarily driven by:

Lower non-operating retirement-related cost ($6,471 million) primarily driven by the pension settlement charge in 2022. Refer to note 18, “Retirement-Related Benefits,” for additional information; and
Higher interest income ($429 million) driven by higher average interest rates and a higher average cash balance in the current year; and
Losses on Kyndryl retained shares ($267 million) in the prior year; partially offset by
Lower net exchange gains (including derivative instruments) in the current year ($268 million). The prior-year (gains)/losses on derivative instruments also includes a loss on the cash-settled swap related to the Kyndryl retained shares ($85 million); and
Lower gains on divestitures ($264 million) primarily driven by the divestiture of our healthcare software assets in the second quarter 2022 (included in “Other”).

Operating (non-GAAP) other (income) and expense was income of $707 million in the first nine months of 2023 and decreased $183 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 the prior year Kyndryl retained shares and swap.

Interest Expense


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


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

Interest expense increased $117 million and $299 million year to year in the third quarter and first nine 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 third quarter and first nine months of 2023 was $494 million and $1,457 million, respectively, an increase of $100 million and $291 million, respectively, compared to the prior-year periods. The year-to-year dynamics for both the third quarter and first nine months of 2023 were primarily driven by higher average interest rates and a higher average debt balance in the current year.

Management Discussion – (continued)

Retirement-Related Plans

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


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


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

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

nm - not meaningful

Management Discussion – (continued)

Total pre-tax retirement-related plan cost decreased by $6,067 million compared to the third quarter of 2022 primarily driven by a decrease in curtailments/settlements ($5,911 million) due to a one-time, non-cash pension settlement charge in the prior year, and a decrease in recognized actuarial losses ($254 million), partially offset by higher interest costs ($168 million). Total cost for the first nine months of 2023 decreased $6,461 million compared to the first nine months of 2022, primarily driven by a decrease in curtailments/settlements ($5,925 million) due to the pension settlement charge in the prior year, and a decrease in recognized actuarial losses ($899 million), partially offset by higher interest costs ($444 million).

As described in the “Operating (non-GAAP) Earnings” section, management characterizes certain retirement-related costs as operating and others as non-operating. Utilizing this characterization, operating retirement-related costs in the third quarter of 2023 were $295 million, an increase of $7 million compared to the third quarter of 2022, primarily driven by higher cost of defined contribution plans ($20 million), partially offset by lower service cost ($13 million). For the first nine months of 2023, operating retirement-related costs were $905 million, an increase of $10 million compared to the prior-year period, primarily driven by higher cost of defined contribution plans ($59 million), partially offset by lower service cost ($48 million). Non-operating costs/(income) was $12 million of income in the third quarter of 2023 compared to cost of $6,062 million in third quarter of 2022 and for the first nine months of 2023 was $16 million of income compared to cost of $6,455 million in the prior-year period. The year-to-year changes were primarily driven by the pension settlement charge in the prior year, and 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 Insurers in the third-quarter of 2022 as described in note 18, "Retirement-Related Benefits," which resulted in the accelerated recognition of actuarial losses in the prior year.

Taxes

The continuing operations provision for income taxes for the third quarter of 2023 was $159 million, compared to a benefit of $1,287 million in the third quarter of 2022. The prior-year tax benefit was primarily due to the transfer of a portion of the Qualified PPP's defined benefit pension obligations and related plan assets. The operating (non-GAAP) income tax provision for the third quarter of 2023 was $268 million, compared to $312 million in the third quarter of 2022.

The continuing operations provision for income taxes for the first nine months of 2023 was $702 million, compared to a benefit of $1,070 million for the first nine months of 2022. The prior-year tax benefit was primarily due to the defined benefit pension transfer. The operating (non-GAAP) provision for income taxes for the first nine months of 2023 was $861 million, compared to $969 million for the first nine months of 2022.

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 and issued a final Revenue Agent's Report (RAR) proposing adjustments related to certain cross-border transactions that occurred in 2013. These adjustments, if sustained, would have resulted in additional taxable income of approximately $4.5 billion. The company filed its IRS Appeals protest in the first quarter of 2021, and in October of 2023 the IRS issued a revised RAR. The adjustments in the revised RAR, if sustained, would result in additional taxable income of approximately $4.2 billion. The company continues to strongly disagree with the IRS position and will pursue resolution at IRS Appeals and then court, if necessary. 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 2016. 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.

Management Discussion – (continued)

Although the outcome of tax audits is always uncertain, the company believes that adequate amounts of tax, interest and penalties have been provided for any adjustments that are expected to result for these years.

The company is involved in a number of income tax-related matters in India challenging tax assessments issued by the India Tax Authorities. As of September 30, 2023, the company had recorded $589 million as prepaid income taxes in India. A significant portion of this balance represents cash tax deposits paid over time to protect the company’s right to appeal various income tax assessments made by the India Tax Authorities. Although the outcome of tax audits is always uncertain, the company believes that adequate amounts of tax, interest and penalties have been provided for any adjustments that are expected to result for these years.

The amount of unrecognized tax benefits at September 30, 2023 is $8,720 million which can be reduced by $550 million associated with timing adjustments, potential transfer pricing adjustments, and state income taxes. The net amount of $8,170 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 and nine months ended September 30, 2022, the one-time, non-cash, pre-tax pension settlement charge of $5.9 billion ($4.4 billion net of tax) resulted in net losses as reported. Therefore, otherwise dilutive potential shares of common stock were excluded from the computation of diluted earnings/(loss) per share as the effect would be antidilutive. See note 7, “Earnings Per Share of Common Stock,” for additional information.


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


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

The $5.9 billion one-time, non-cash, pre-tax pension settlement charge resulted in an impact of ($4.86) to diluted earnings/(loss) per share from continuing operations for the three and nine months ended September 30, 2022 and an impact of ($4.88) and ($4.90) to basic earnings/(loss) per share for the three and nine months ended September 30, 2022, respectively.

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Management Discussion – (continued)

Actual shares outstanding at September 30, 2023 were 913.1 million. The weighted-average number of common shares outstanding assuming dilution during the third quarter and first nine months of 2023 were 19.6 million shares (2.2 percent) and 18.7 million shares (2.1 percent) higher, respectively, than the same periods of 2022. The year-to-year increase was primarily due to the exclusion of dilutive potential common shares in the prior-year computation and common stock issued under employee plans. The weighted-average number of common shares outstanding assuming dilution used in the non-GAAP diluted earnings per share calculation for the third quarter and first nine months of 2023 were 10.8 million (1.2 percent) and 9.3 million (1.0 percent) shares higher, respectively, than the same periods of 2022, primarily driven by common stock issued under employee plans.

Financial Position

Dynamics

Our balance sheet at September 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 September 30, 2023 were $10,996 million, an increase of $2,156 million compared to December 31, 2022, and a decrease of $5,333 million compared to June 30, 2023 primarily due to the acquisition of Apptio. Total debt of $55,242 million at September 30, 2023 increased $4,293 million from December 31, 2022 primarily due to 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 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 nine months of 2023, we generated $9,468 million in cash from operating activities, an increase of $2,997 million compared to the first nine months of 2022. Our free cash flow for the nine months ended September 30, 2023 was $5,123 million, an increase of $1,040 million versus the prior-year period. See pages 76 through 77 for additional information on free cash flow. Our strong cash generation has enabled us to be acquisitive and increase our investment in R&D, strengthening our future AI and hybrid cloud capabilities, while supporting continued shareholder returns through dividends. We completed seven acquisitions and returned $4,522 million to shareholders through dividends in the first nine months 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 September 2023 was fairly consistent with year-end 2022. We expect contributions for all retirement-related plans to be approximately $1.9 billion in 2023, a decrease of approximately $0.1 billion compared to 2022.

IBM Working Capital


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

Working capital decreased $513 million from the year-end 2022 position. Current assets decreased $1,413 million ($1,041 million adjusted for currency) primarily in receivables mainly from collections of seasonally higher year-end balances; partially offset by an increase in cash and cash equivalents and marketable securities. Current liabilities decreased $899 million ($522 million adjusted for currency) primarily in accounts payable, taxes payable and derivative liabilities; partially offset by an increase in short-term debt driven by reclassifications from long-term debt net of maturities.

Management Discussion – (continued)

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+		September 30, 2023
$	495	$	7	$	(77)	$	38	$	464

*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 September 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 nine months ended September 30, 2023 related to receivables which had been previously reserved.

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

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

The percentage of Financing segment receivables reserved increased from 1.3 percent at December 31, 2022 to 1.6 percent at September 30, 2023, primarily driven by the decline in amortized cost.

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		September 30, 2023
$	173	$	(11)	$	(9)	$	7	$	159

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

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

Financing’s expected credit loss expense (including reserves for off-balance sheet commitments which are recorded in other liabilities) was a net release of $7 million for the three months ended September 30, 2023, compared to a net release of $3 million for the three months ended September 30, 2022. The year-to-year decrease in expected credit loss expense was due to lower specific reserve requirements in the current year.

Expected credit loss expense was a net release of $12 million for the nine months ended September 30, 2023, compared to a net release of $15 million for the nine months ended September 30, 2022. The lower year-to-year net release was due to lower unallocated reserve releases.

Management Discussion – (continued)

Noncurrent Assets and Liabilities


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

The increase in noncurrent assets of $3,491 million ($3,912 million adjusted for currency) was primarily due to goodwill and intangible assets mainly related to the Apptio acquisition; partially offset by a decrease in long-term financing receivables as a result of declines from seasonally higher year-end balances.

Long-term debt increased $2,639 million ($2,940 million adjusted for currency) primarily driven by debt issuances; partially offset by reclassifications to short-term debt to reflect upcoming maturities.

Noncurrent liabilities (excluding debt) decreased $797 million ($525 million adjusted for currency) primarily driven by a decrease in retirement and postretirement benefit obligations and deferred income.

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

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

Total debt of $55,242 million increased $4,293 million ($4,585 million adjusted for currency) from December 31, 2022, primarily driven by proceeds from issuances of $9,586 million; partially offset by maturities of $4,973 million.

Non-Financing debt of $45,381 million increased $7,304 million ($7,536 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 $9,860 million decreased $3,011 million ($2,952 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 September 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 $1,135 million from December 31, 2022, primarily driven by an increase from net income of $4,214 million and common stock of $970 million; partially offset by dividends paid of $4,522 million.

Management Discussion – (continued)

Cash Flow

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


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

Net cash provided by operating activities increased $2,997 million as compared to the first nine months of 2022. This was due to an increase in cash provided by financing receivables, performance-related improvements within net income and sales cycle working capital efficiencies; partially offset by an increase in performance-based compensation payments in 2023, given our strong results in 2022.

Net cash used in investing activities increased $7,023 million mainly driven by the Apptio acquisition, higher net purchases of marketable securities and other investments and a decrease in cash provided by divestitures.

Net cash used in financing activities decreased $1,951 million mainly due to an increase in net cash provided by debt of $2,048 million primarily driven by a higher level of net additions in the current year.

Results of Discontinued Operations

Loss from discontinued operations, net of tax was $10 million in the third quarter of 2023 compared to income of $18 million in the prior-year period. For the first nine months of 2023, loss from discontinued operations, net of tax was $15 million compared to income of $16 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

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

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

Management Discussion – (continued)

We are driving productivity initiatives which range from simplifying our application environment to digitally transforming our business processes by applying AI at scale. We are ahead of pace to achieve our target of $2.0 billion in savings from these productivity initiatives by the end of 2024. This will enable reinvestment in the business, increase financial flexibility and contribute to both gross and pre-tax margin expansion.

We remain confident in our strategy and in the fundamentals of our business. Our balance sheet and liquidity position remain strong with financial flexibility to support our business into the future. At September 30, 2023, we had $11.0 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 solid cash generation – a business well positioned for the future. We are executing a strategy that closely resonates with our clients’ needs, and this is propelling our business forward. We expect to continue our progress as a leading hybrid cloud and AI company with a focus on revenue growth and cash generation.

Retirement-Related Plans

Our pension plans are well funded. Contributions for all retirement-related plans are expected to be approximately $1.9 billion in 2023, a decrease of approximately $0.1 billion compared to 2022, of which $0.1 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 immaterial compared to $6.5 billion in 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 September 30, 2023, currency changes resulted in assets and liabilities denominated in local currencies being translated into fewer 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 third quarter of 2023, revenue from continuing operations increased 4.6 percent as reported and 3.5 percent at constant currency versus the third quarter of 2022. In the first nine months of 2023, revenue from continuing operations increased 1.5 percent as reported and 2.7 percent at constant currency, compared to the same period in 2022. Currency translation and hedging impacted year-to-year pre-tax income growth and operating (non-GAAP) pre-tax income growth by approximately $200 million in the third quarter of 2023, and approximately $500 million in the first nine months of 2023. From a segment perspective, in the third quarter of 2023, currency translation and hedging impacted our Software pre-tax income margin year-to-year growth by more than two points, Infrastructure by more than a point and Consulting by approximately a point. In the first nine months of 2023, currency translation and hedging impacted our Software and Infrastructure pre-tax income margin year-to-year growth by more than a point each. We view these amounts as a theoretical maximum impact to our as-reported financial results. Hedging and certain underlying foreign currency transaction gains and losses are allocated to our segment results. Considering the operational responses mentioned above,

Management Discussion – (continued)

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

For non-U.S. subsidiaries and branches that operate in U.S. dollars or whose economic environment is highly inflationary, translation adjustments are reflected in results of operations. Generally, we manage currency risk in these entities by linking prices and contracts to U.S. dollars.

Liquidity and Capital Resources

In our 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 nine months ended, or at, as applicable, September 30, 2023, those amounts are $9.5 billion of net cash from operating activities, $11.0 billion of cash and cash equivalents, restricted cash and short-term marketable securities and $10.0 billion in global credit facilities, respectively. While we have no current plans to draw on these credit facilities, they are available as back-up liquidity.

The major rating agencies' ratings on our debt securities at September 30, 2023 appear in the following table and remain unchanged from June 30, 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. 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. Debt levels have increased $4.3 billion from December 31, 2022, driven by debt issuances; partially offset by maturities.

We do not have “ratings trigger” provisions in our debt covenants or documentation, which would allow the holders to declare an event of default and seek to accelerate payments thereunder in the event of a change in credit rating. Our debt covenants are well within the required levels. Our contractual agreements governing derivative instruments contain standard market clauses which can trigger the termination of the agreement if our credit rating were to fall below investment grade. At September 30, 2023, the fair value of those instruments that were in a liability position was $864 million, before any applicable netting, and this position is subject to fluctuations in fair value period to period based on the level of our outstanding instruments and market conditions. We have no other contractual arrangements that, in the event of a change in credit rating, would result in a material adverse effect on our financial position or liquidity.

Effective December 31, 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 page 74. For the purpose of running its business, IBM manages, monitors and analyzes cash flows in a different manner.

Management uses free cash flow as a measure to evaluate its operating results, plan shareholder return levels, strategic investments and assess its ability and need to incur and service debt. The entire free cash flow amount is not necessarily available for discretionary expenditures. We define free cash flow as net cash from operating activities less the change in Financing receivables and net capital expenditures, including the investment in software. A key objective of the Financing business is to generate strong returns on equity, and our Financing receivables are the basis for that growth. Accordingly,

Management Discussion – (continued)

management considers Financing receivables as a profit-generating investment, not as working capital that should be minimized for efficiency. Therefore, management includes presentations of both free cash flow and net cash from operating activities that exclude the effect of Financing receivables.

The following is management’s view of cash flows for the first nine months of 2023 and 2022 prepared in a manner consistent with the description above.


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

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

*Includes immaterial cash flows from discontinued operations.

**Recast to conform to current-year presentation.

In the first nine months of 2023, we generated $5.1 billion in free cash flow, an increase of $1.0 billion versus the prior-year period. The increase was driven primarily by performance-related improvements within net income and sales cycle working capital efficiencies; partially offset by higher performance-based compensation payments in 2023 given our strong results in 2022. In the first nine months of 2023, net cash used in acquisitions was $4.9 billion and we continued to return value to shareholders with $4.5 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 $100 million in 2023. Contributions related to all retirement-related plans are expected to be approximately $1.9 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 September 30:	2023		2022
Revenue	$	186	$	174	6.9	%
Pre-tax income	$	91	$	79	16.0	%


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

For the three months ended September 30, 2023, financing revenue increased 6.9 percent as reported (5 percent adjusted for currency) compared to the prior year, driven by client financing revenue up $11 million to $183 million. For the nine months ended September 30, 2023, financing revenue increased 19.5 percent as reported (20 percent adjusted for currency) compared to the prior year, driven by client financing up $88 million to $557 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 increased 16.0 percent to $91 million in the third quarter of 2023, compared to the prior-year period and the pre-tax margin of 49.2 percent increased 3.9 points year to year. The increase in pre-tax income for the third quarter was primarily driven by a decrease in SG&A expenses and lower specific reserve requirements in the current year. For the nine months ended September 30, 2023, Financing pre-tax income decreased 3.2 percent to $256 million compared to the prior year and the pre-tax margin of 45.3 percent decreased 10.6 points year to year, primarily driven by year-to-year foreign currency impacts.

Management Discussion – (continued)

Financial Position


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

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

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

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

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

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

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

Total external receivables decreased $3,208 million primarily due to collections of higher year-end balances. Intercompany assets decreased $267 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 72 percent of the total external portfolio was with investment-grade clients with no direct exposure to consumers at September 30, 2023, flat year-to-year and a decrease of 1 point as compared to June 30, 2023. This investment grade percentage is based on the credit ratings of the companies in the portfolio and reflects certain mitigating actions taken to reduce the risk to IBM.

We have a long-standing practice of taking mitigation actions, in certain circumstances, to transfer credit risk to third parties. These actions may include credit insurance, financial guarantees, nonrecourse secured borrowings, transfers of receivables recorded as true sales in accordance with accounting guidance or sales of equipment under operating lease. Sale of receivables arrangements are also utilized in the normal course of business as part of our cash and liquidity management. 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 September 30,						For Nine Months Ended September 30,
(Dollars in millions)	2023			2022			2023			2022
Numerator:
Financing after-tax income*	$	79		$	64		$	214		$	217
Annualized after-tax income (1)	$	315		$	257		$	285		$	289
Denominator:
Average Financing equity (2)**	$	1,134		$	1,306		$	1,217		$	1,378
Financing return on equity (1)/(2)	27.8		%	19.7		%	23.4		%	21.0		%

*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 September 30 and for the nine months ended September 30, respectively.

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

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 September 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 September 30, 2023 is expected to be returned to the company. The unguaranteed residual value for operating leases at September 30, 2023 and December 31, 2022 was not material.

Unguaranteed Residual Value


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

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 September 30, 2023:
Gross profit	$	8,023		$	162		$	—		$	—		$	—		$	8,185
Gross profit margin	54.4		%	1.1		pts.	—		pts.	—		pts.	—		pts.	55.5		%
SG&A	$	4,458		$	(277)		$	—		$	—		$	—		$	4,181
Other (income) and expense	$	(215)		$	—		$	12		$	—		$	—		$	(203)
Total expense and other (income)	$	6,150		$	(277)		$	12		$	—		$	—		$	5,885
Pre-tax income from continuing operations	$	1,873		$	438		$	(12)		$	—		$	—		$	2,299
Pre-tax margin from continuing operations	12.7		%	3.0		pts.	(0.1)		pts.	—		pts.	—		pts.	15.6		%
Provision for income taxes**	$	159		$	99		$	(14)		$	24		$	—		$	268
Effective tax rate	8.5		%	2.7		pts.	(0.5)		pts.	1.0		pts.	—		pts.	11.7		%
Income from continuing operations	$	1,714		$	340		$	1		$	(24)		$	—		$	2,031
Income margin from continuing operations	11.6		%	2.3		pts.	$	0.0	pts.	(0.2)		pts.	—		pts.	13.8		%
Diluted earnings per share from continuing operations	$	1.86		$	0.37		$	0.00		$	(0.03)		$	—		$	2.20


(Dollars in millions except per share amounts)	GAAP			Acquisition- Related Adjustments			Retirement- Related Adjustments*			U.S. Tax Reform Impacts			Kyndryl- Related Impacts			Operating (non-GAAP)
For the three months ended September 30, 2022:
Gross profit	$	7,430		$	165		$	—		$	—		$	—		$	7,595
Gross profit margin	52.7		%	1.2		pts.	—		pts.	—		pts.	—		pts.	53.8		%
SG&A	$	4,391		$	(253)		$	—		$	—		$	0		$	4,138
Other (income) and expense	$	5,755		$	(1)		$	(6,062)		$	—		$	14		$	(293)
Total expense and other (income)	$	11,931		$	(253)		$	(6,062)		$	—		$	14		$	5,630
Pre-tax income/(loss) from continuing operations	$	(4,501)		$	418		$	6,062		$	—		$	(14)		$	1,965
Pre-tax margin from continuing operations	(31.9)		%	3.0		pts.	43.0		pts.	—		pts.	(0.1)		pts.	13.9		%
Provision for/(benefit from) income taxes**	$	(1,287)		$	103		$	1,495		$	—		$	—		$	312
Effective tax rate	28.6		%	(0.8)		pts.	(12.1)		pts.	—		pts.	0.2		pts.	15.9		%
Income/(loss) from continuing operations	$	(3,214)		$	315		$	4,566		$	—		$	(14)		$	1,653
Income/(loss) margin from continuing operations	(22.8)		%	2.2		pts.	32.4		pts.	—		pts.	(0.1)		pts.	11.7		%
Diluted earnings/(loss) per share from continuing operations +	$	(3.55)		$	0.35		$	5.05		—			$	(0.02)		$	1.81

*Retirement-Related Adjustments in 2022 includes a one-time, non-cash, pre-tax pension settlement charge of $5.9 billion ($4.4 billion after tax). See note 18 “Retirement-Related Benefits,” for additional information.

**The tax impact on operating (non-GAAP) pre-tax income from continuing operations is calculated under the same accounting principles applied to the GAAP pre-tax income which employs an annual effective tax rate method to the results.

+Operating (non-GAAP) earnings per share in 2022 was calculated using 912.8 million shares, which includes 8.8 million dilutive potential shares under our stock-based compensation plans and contingently issuable shares. Due to the GAAP net loss for the three months ended September 30, 2022, these dilutive potential shares were excluded from the GAAP loss per share calculation as the effect would have been antidilutive. The difference in share count resulted in an additional ($0.02) reconciling item.

Management Discussion – (continued)


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


(Dollars in millions except per share amounts)	GAAP			Acquisition- Related Adjustments			Retirement- Related Adjustments*			U.S. Tax Reform Impacts			Kyndryl- Related Impacts			Operating (non-GAAP)
For the nine months ended September 30, 2022:
Gross profit	$	23,055		$	526		$	—		$	—		$	—		$	23,582
Gross profit margin	52.6		%	1.2		pts.	—		pts.	—		pts.	—		pts.	53.8		%
SG&A	$	13,843		$	(818)		$	—		$	—		$	0		$	13,025
Other (income) and expense	$	5,921		$	(2)		$	(6,455)		$	—		$	(353)		$	(889)
Total expense and other (income)	$	25,212		$	(820)		$	(6,455)		$	—		$	(353)		$	17,584
Pre-tax income/(loss) from continuing operations	$	(2,156)		$	1,346		$	6,455		$	—		$	353		$	5,998
Pre-tax margin from continuing operations	(4.9)		%	3.1		pts.	14.7		pts.	—		pts.	0.8		pts.	13.7		%
Provision for/(benefit from) income taxes**	$	(1,070)		$	327		$	1,599		$	112		$	—		$	969
Effective tax rate	49.6		%	(5.7)		pts.	(26.7)		pts.	1.9		pts.	(2.9)		pts.	16.1		%
Income/(loss) from continuing operations	$	(1,087)		$	1,019		$	4,856		$	(112)		$	353		$	5,029
Income/(loss) margin from continuing operations	(2.5)		%	2.3		pts.	11.1		pts.	(0.3)		pts.	0.8		pts.	11.5		%
Diluted earnings/(loss) per share from continuing operations +	$	(1.21)		$	1.13		$	5.39		$	(0.12)		$	0.39		$	5.52

+Operating (non-GAAP) earnings per share in 2022 was calculated using 911.1 million shares, which includes 9.4 million dilutive potential shares under our stock-based compensation plans and contingently issuable shares. Due to the GAAP net loss for the nine months ended September 30, 2022, these dilutive potential shares were excluded from the GAAP loss per share calculation as the effect would have been antidilutive. The difference in share count resulted in an additional ($0.06) reconciling item.

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.

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