filings.toolsItem 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 MONTHS ENDED MARCH 31, 2024
Snapshot
Organization of Information:
In the first quarter of 2024, we made changes to our organizational structure and management system to better align our portfolio to the market, increase transparency and improve segment comparability to peers. These changes did not impact our Consolidated Financial Statements, but did impact our reportable segments. The segments are reported on a comparable basis for all periods. In addition, due to the removal of certain components of segment profitability we also updated the title of our segment performance metric from pre-tax income from continuing operations to segment profit. Refer to note 4, "Segments," for additional information on our reportable 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 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 or audit adjustments that affect the recorded one-time charge. 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 our acquisitions. Given its unique and temporary nature, management has also characterized as non-operating expense, the mark-to-market impact on the foreign exchange call option contracts to economically hedge the foreign currency exposure related to the purchase price of our announced acquisition of StreamSets and webMethods from Software AG. The mark-to-market impact is recorded in other (income) and expense in the Consolidated Income Statement and reflects the fair value changes in the derivative contracts. All other spending for acquired companies is included in both earnings from continuing operations and in operating (non-GAAP) earnings. For retirement-related costs, management characterizes certain items as operating and others as non-operating, consistent with GAAP. We include defined benefit plan and nonpension postretirement benefit plan service costs, multi-employer plan costs and the cost of defined contribution plans in operating earnings. Non-operating retirement-related costs include defined benefit plan and nonpension postretirement benefit plan amortization of prior service costs, interest cost, expected return on plan assets, amortized actuarial gains/losses, the impacts of any plan curtailments/settlements and pension insolvency costs and other costs. Non-operating retirement-related costs are primarily
Management Discussion – (continued)
related to changes in pension plan assets and liabilities which are tied to financial market performance, and we consider 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 our pension plans; improves visibility to management decisions and their impacts on operational performance; enables better comparison to peer companies; and allows us 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 March 31
| (Dollars and shares in millions except per share amounts) | Yr. to Yr. Percent/ Margin Change | |||||||||||||||||||
| For the three months ended March 31: | 2024 | 2023 | ||||||||||||||||||
| Revenue (1) | $ | 14,462 | $ | 14,252 | 1.5 | % | ||||||||||||||
| Gross profit margin | 53.5 | % | 52.7 | % | 0.8 | pts. | ||||||||||||||
| Total expense and other (income) | $ | 6,669 | $ | 6,451 | 3.4 | % | ||||||||||||||
| Income from continuing operations before income taxes | $ | 1,074 | $ | 1,058 | 1.4 | % | ||||||||||||||
| Provision for/(benefit from) income taxes from continuing operations (2) | $ | (502) | $ | 124 | nm | |||||||||||||||
| Income from continuing operations | $ | 1,575 | $ | 934 | 68.6 | % | ||||||||||||||
| Income from continuing operations margin | 10.9 | % | 6.6 | % | 4.3 | pts. | ||||||||||||||
| Income/(loss) from discontinued operations, net of tax | $ | 30 | $ | (7) | nm | |||||||||||||||
| Net income | $ | 1,605 | $ | 927 | 73.0 | % | ||||||||||||||
| Earnings per share from continuing operations - assuming dilution | $ | 1.69 | $ | 1.02 | 65.7 | % | ||||||||||||||
| Consolidated earnings per share - assuming dilution | $ | 1.72 | $ | 1.01 | 70.3 | % | ||||||||||||||
| Weighted-average shares outstanding - assuming dilution | 933.4 | 917.8 | 1.7 | % | ||||||||||||||||
| At 3/31/2024 | At 12/31/2023 | |||||||||||||||||||
| Assets | $ | 137,169 | $ | 135,241 | 1.4 | % | ||||||||||||||
| Liabilities | $ | 113,836 | $ | 112,628 | 1.1 | % | ||||||||||||||
| Equity | $ | 23,333 | $ | 22,613 | 3.2 | % |
(1)Year-to-year revenue growth of 2.5 percent adjusted for currency.
(2)2024 benefit from income taxes due to the resolution of certain tax audit matters.
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Management Discussion – (continued)
The following table provides the company’s operating (non-GAAP) earnings for the first quarter of 2024 and 2023.
| (Dollars in millions except per share amounts) | Yr. to Yr. Percent Change | |||||||||||||||||||
| For the three months ended March 31: | 2024 | 2023 | ||||||||||||||||||
| Net income as reported | $ | 1,605 | $ | 927 | 73.0 | % | ||||||||||||||
| Income/(loss) from discontinued operations, net of tax | 30 | (7) | nm | |||||||||||||||||
| Income from continuing operations | $ | 1,575 | $ | 934 | 68.6 | % | ||||||||||||||
| Non-operating adjustments (net of tax): | ||||||||||||||||||||
| Acquisition-related charges | $ | 346 | $ | 305 | 13.5 | % | ||||||||||||||
| Non-operating retirement-related costs/(income) | 91 | 5 | nm | |||||||||||||||||
| U.S. tax reform impacts | (448) | 5 | nm | |||||||||||||||||
| Operating (non-GAAP) earnings (1) | $ | 1,564 | $ | 1,249 | 25.2 | % | ||||||||||||||
| Diluted operating (non-GAAP) earnings per share (1) | $ | 1.68 | $ | 1.36 | 23.5 | % |
(1)Refer to page 64 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 are turning to technology to improve productivity and customer experience. Businesses and governments around the world are looking for opportunities to deploy AI at scale, offer better services, unlock productivity and seize new market opportunities. More recently, geopolitical events and the interest rate environment are adding to the uncertainty. In response, clients are leveraging technologies like hybrid cloud and AI that boost productivity and competitiveness.
In the first three months of 2024, movements in global currencies continued to impact our reported year-to-year revenue and 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. Refer to “Currency Rate Fluctuations,” for additional information.
Financial Performance Summary — Three Months Ended March 31:
In the first quarter of 2024, we reported $14.5 billion in revenue, income from continuing operations of $1.6 billion and operating (non-GAAP) earnings of $1.6 billion. Diluted earnings per share from continuing operations was $1.69 as reported and $1.68 on an operating (non-GAAP) basis. We generated $4.2 billion in cash from operations and $1.9 billion in free cash flow, and delivered shareholder returns of $1.5 billion in dividends. Our first-quarter performance reflects solid revenue performance, gross margin expansion and cash generation, demonstrating the quality of our portfolio, our hybrid cloud and AI strategy, and the strength of our diversified business model. We continued to focus on the fundamentals of our business which, combined with our strong cash generation, position us to invest both organically and through strategic acquisitions while continuing to return value to shareholders through dividends.
Total revenue grew 1.5 percent as reported and 3 percent adjusted for currency compared to the prior-year period, led by Software. Software delivered revenue growth of 5.5 percent as reported and 5.9 percent adjusted for currency, with growth in both Hybrid Platform & Solutions and Transaction Processing, and continued strength in our high-value, recurring revenue base. Hybrid Platform & Solutions revenue was up 6.5 percent as reported and 6.7 percent adjusted for currency, with growth across Red Hat, Automation and Data & AI. Transaction Processing, with its strong base of recurring revenue, grew 3.4 percent as reported and 3.9 percent adjusted for currency, as clients continue to value this portfolio of mission-critical software. Consulting revenue decreased 0.2 percent as reported but grew 1.7 percent adjusted for currency, reflecting organic growth as clients continue to prioritize large data and technology transformation projects focused on driving productivity with AI and analytics. Infrastructure revenue decreased 0.7 percent year to year as reported but grew 0.2 percent adjusted for currency, with growth in Hybrid Infrastructure reflecting strong demand across our hardware portfolio, offset by a decline in Infrastructure Support reflecting product cycle dynamics.
Management Discussion – (continued)
From a geographic perspective, Americas revenue increased 3.1 percent as reported (3.2 percent adjusted for currency). Europe/Middle East/Africa (EMEA) decreased 0.4 percent as reported and 2.1 percent adjusted for currency. Asia Pacific increased 0.3 percent as reported (7.9 percent adjusted for currency).
Gross margin of 53.5 percent increased 0.8 points year to year with continued margin expansion driven by revenue growth, portfolio mix and ongoing productivity actions. Operating (non-GAAP) gross margin of 54.7 percent increased 1.0 points compared to the prior-year period due to the same dynamics.
Total expense and other (income) increased 3.4 percent in the first quarter of 2024 versus the prior-year period primarily driven by higher workforce rebalancing charges, the effects of currency, higher non-operating retirement-related cost and higher spending reflecting our continued focus on talent and portfolio innovation to drive our strategy; partially offset by higher gains on divestitures primarily driven by the divestiture of The Weather Company assets and the benefits from productivity actions. Total operating (non-GAAP) expense and other (income) increased 0.7 percent year to year, driven primarily by the factors described above, excluding the higher non-operating retirement-related costs.
Pre-tax income from continuing operations was $1.1 billion and pre-tax margin was 7.4 percent in the first quarter of 2024, both approximately flat compared to the prior-year period. Our gross margin expansion and the benefits from productivity actions enabled continued investments to drive innovation. Our first-quarter 2024 pre-tax income includes a gain from the sale of The Weather Company assets of $241 million and workforce rebalancing charges of approximately $375 million. The year-to-year workforce rebalancing charges and divestiture dynamics were a net benefit to our pre-tax income from continuing operations year-to-year performance of approximately 8.2 points and pre-tax margin of approximately 0.8 points. The continuing operations benefit from income taxes for the first quarter of 2024 was $502 million, compared to a provision for income taxes of $124 million in the first quarter of 2023. The current-year benefit is primarily driven by the resolution of certain tax audit matters. Net income from continuing operations of $1.6 billion increased 68.6 percent and the net income from continuing operations margin was 10.9 percent, up 4.3 points year to year.
Operating (non-GAAP) pre-tax income from continuing operations of $1.7 billion increased 14.4 percent compared to the prior-year period and the operating (non-GAAP) pre-tax margin from continuing operations increased 1.3 points to 11.5 percent primarily driven by the combination of our revenue growth and gross margin performance and the benefits from productivity actions. The year-to-year workforce rebalancing charges and divestiture dynamics were a net benefit to our operating (non-GAAP) pre-tax income from continuing operations year-to-year performance of approximately 8.2 points and operating (non-GAAP) pre-tax margin of approximately 0.8 points. The operating (non-GAAP) income tax provision for the first quarter of 2024 was $94 million, compared to $200 million in the first quarter of 2023. The operating (non-GAAP) income tax provision year-to-year change was primarily driven by the same factor described above. Operating (non-GAAP) net income from continuing operations of $1.6 billion increased 25.2 percent and the operating (non-GAAP) net income margin from continuing operations of 10.8 percent was up 2.0 points year to year.
Diluted earnings per share from continuing operations of $1.69 in the first quarter of 2024 increased 65.7 percent and operating (non-GAAP) diluted earnings per share of $1.68 increased 23.5 percent versus the first quarter of 2023.
At March 31, 2024, the balance sheet remained strong with financial flexibility to support and invest in the business. Cash and cash equivalents, restricted cash and marketable securities at March 31, 2024 of $19.3 billion increased $5.8 billion from December 31, 2023 and debt of $59.5 billion at March 31, 2024 increased $3.0 billion.
Total assets increased $1.9 billion ($3.2 billion adjusted for currency) from December 31, 2023 primarily driven by increases in cash and cash equivalents and marketable securities; partially offset by a decrease in receivables. Total liabilities increased $1.2 billion ($2.5 billion adjusted for currency) from December 31, 2023 primarily driven by an increase in debt and deferred income; partially offset by decreases in tax liabilities and accounts payable. Total equity of $23.3 billion increased $0.7 billion from December 31, 2023 primarily driven by first-quarter 2024 net income and common stock issuances; partially offset by dividends paid.
Cash provided by operating activities was $4.2 billion in the first quarter of 2023, an increase of $0.4 billion compared to the first quarter of 2023 and free cash flow was $1.9 billion, an increase of $0.6 billion versus the prior-year period. Refer to page 60 for additional information on free cash flow. Net cash used in investing activities of $4.2 billion, decreased $3.7 billion and net cash provided by financing activities of $1.9 billion decreased $3.8 billion compared to the prior-year period.
Management Discussion – (continued)
First Quarter in Review
Results of Continuing Operations
Segment Details
As discussed in the "Organization of Information" section, we made changes to our organizational structure and management system in the first quarter of 2024. With these changes, we revised our reportable segments and updated the title of our segment performance metric from pre-tax income from continuing operations to segment profit.
The following table presents each reportable segment’s revenue and gross margin results, followed by an analysis of the first quarter of 2024 versus the first quarter of 2023 reportable segments results. Prior-year results have been recast to conform with the changes as described in note 4, "Segments."
| (Dollars in millions) | Yr. to Yr. Percent/Margin Change | Yr. to Yr. Percent Change Adjusted For Currency | ||||||||||||||||||||||||
| For the three months ended March 31: | 2024 | 2023 (1) | ||||||||||||||||||||||||
| Revenue: | ||||||||||||||||||||||||||
| Software | $ | 5,899 | $ | 5,591 | 5.5 | % | 5.9 | % | ||||||||||||||||||
| Gross margin | 82.4 | % | 82.6 | % | (0.2) | pts. | ||||||||||||||||||||
| Consulting | 5,186 | 5,197 | (0.2) | % | 1.7 | % | ||||||||||||||||||||
| Gross margin | 25.3 | % | 25.5 | % | (0.2) | pts. | ||||||||||||||||||||
| Infrastructure | 3,076 | 3,098 | (0.7) | % | 0.2 | % | ||||||||||||||||||||
| Gross margin | 54.2 | % | 51.8 | % | 2.3 | pts. | ||||||||||||||||||||
| Financing | 193 | 196 | (1.6) | % | (1.5) | % | ||||||||||||||||||||
| Gross margin | 48.5 | % | 43.9 | % | 4.6 | pts. | ||||||||||||||||||||
| Other | 108 | 169 | (36.1) | % | (36.6) | % | ||||||||||||||||||||
| Gross margin | (176.7) | % | (74.9) | % | (101.9) | pts. | ||||||||||||||||||||
| Total revenue | $ | 14,462 | $ | 14,252 | 1.5 | % | 2.5 | % | ||||||||||||||||||
| Total gross profit | $ | 7,742 | $ | 7,509 | 3.1 | % | ||||||||||||||||||||
| Total gross margin | 53.5 | % | 52.7 | % | 0.8 | pts. | ||||||||||||||||||||
| Non-operating adjustments: | ||||||||||||||||||||||||||
| Amortization of acquired intangible assets | 170 | 148 | 14.9 | % | ||||||||||||||||||||||
| Operating (non-GAAP) gross profit | $ | 7,913 | $ | 7,658 | 3.3 | % | ||||||||||||||||||||
| Operating (non-GAAP) gross margin | 54.7 | % | 53.7 | % | 1.0 | pts. |
(1)Recast to reflect segment changes.
Management Discussion – (continued)
Software
| (Dollars in millions) | Yr. to Yr. Percent Change | Yr. to Yr. Percent Change Adjusted For Currency | ||||||||||||||||||||||||
| For the three months ended March 31: | 2024 | 2023 (1) | ||||||||||||||||||||||||
| Software revenue: | $ | 5,899 | $ | 5,591 | 5.5 | % | 5.9 | % | ||||||||||||||||||
| Hybrid Platform & Solutions | $ | 4,098 | $ | 3,850 | 6.5 | % | 6.7 | % | ||||||||||||||||||
| Red Hat | 8.7 | 9.1 | ||||||||||||||||||||||||
| Automation | 13.1 | 13.4 | ||||||||||||||||||||||||
| Data & AI | 0.6 | 0.8 | ||||||||||||||||||||||||
| Security | (2.8) | (2.8) | ||||||||||||||||||||||||
| Transaction Processing | 1,800 | 1,742 | 3.4 | 3.9 |
(1)Recast to reflect segment changes.
Software revenue of $5,899 million increased 5.5 percent as reported (5.9 percent adjusted for currency) in the first quarter of 2024 compared to the prior-year period, driven by revenue growth in both Hybrid Platform & Solutions and Transaction Processing. This revenue performance continues to reflect growth in our high-value, recurring revenue base.
Hybrid Platform & Solutions revenue of $4,098 million increased 6.5 percent as reported (6.7 percent adjusted for currency) in the first quarter of 2024 compared to the prior-year period, driven by growth in Red Hat, Automation and Data & AI. Red Hat revenue increased 8.7 percent as reported (9.1 percent adjusted for currency), reflecting solid performance across the three key solutions – RHEL, OpenShift and Ansible. OpenShift and Ansible each contributed double-digit revenue growth in the first quarter of 2024 compared to the prior-year period. Automation revenue increased 13.1 percent as reported (13.4 percent adjusted for currency), reflecting the contribution from Apptio, acquired in the third-quarter 2023, and the strength of our IT Automation portfolio, which together unlock the full benefits of a FinOps solution for technology investments across hybrid cloud environments. Data & AI revenue increased 0.6 percent as reported (0.8 percent adjusted for currency) reflecting strong growth in Data Fabric, driven by client demand for our watsonx platform, and Asset & Supply Chain Management. Security revenue decreased 2.8 percent as reported and adjusted for currency in the first quarter of 2024 compared to the prior-year period. While we had revenue declines in Data Security and Threat Management, we delivered revenue growth in Identity and Access Management.
Across Hybrid Platform & Solutions, our annual recurring revenue (ARR) was $13.9 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. The metric was updated in the first quarter of 2024 to reflect the organizational changes described in note 4, “Segments,” and to simplify the calculation. ARR is calculated by using the current quarter’s recurring revenue and then multiplying that value by four. This value includes the following consumption models: (1) software subscription agreements, including committed term licenses, (2) as-a-service arrangements such as SaaS and PaaS, and (3) maintenance and support contracts. ARR should be viewed independently of revenue as this performance metric and its inputs may not represent revenue that will be recognized in future periods.
Transaction Processing revenue of $1,800 million increased 3.4 percent as reported (3.9 percent adjusted for currency) in the first quarter of 2024 compared to the prior-year period, on its strong base of recurring revenue. Clients continue to value this portfolio of mission-critical software which supports growing workloads on our hardware platforms. In addition, we had revenue growth in generative AI application modernization capabilities such as watsonx Code Assistant for Z.
Management Discussion – (continued)
| (Dollars in millions) | Yr. to Yr. Percent/ Margin Change | |||||||||||||||||||
| For the three months ended March 31: | 2024 | 2023 (1) | ||||||||||||||||||
| Software: | ||||||||||||||||||||
| Gross profit | $ | 4,860 | $ | 4,618 | 5.2 | % | ||||||||||||||
| Gross profit margin | 82.4 | % | 82.6 | % | (0.2) | pts. | ||||||||||||||
| Segment profit | $ | 1,500 | $ | 1,379 | 8.8 | % | ||||||||||||||
| Segment profit margin | 25.4 | % | 24.7 | % | 0.8 | pts. |
(1)Recast to reflect segment changes.
Software gross profit margin decreased 0.2 points to 82.4 percent in the first quarter of 2024 compared to the prior-year period. In the first quarter, segment profit of $1,500 million increased 8.8 percent and segment profit margin of 25.4 percent increased 0.8 points compared to the prior-year period. The segment profit margin expansion reflects our operating leverage from revenue growth in the quarter and continued productivity actions, partially offset by key investments in innovation and approximately 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 March 31: | 2024 | 2023 (1) | ||||||||||||||||||||||||
| Consulting revenue: | $ | 5,186 | $ | 5,197 | (0.2) | % | 1.7 | % | ||||||||||||||||||
| Business Transformation | $ | 2,317 | $ | 2,283 | 1.5 | % | 3.3 | % | ||||||||||||||||||
| Technology Consulting | 931 | 925 | 0.6 | 3.1 | ||||||||||||||||||||||
| Application Operations | 1,938 | 1,989 | (2.6) | (0.7) |
(1)Recast to reflect segment changes.
Consulting revenue of $5,186 million decreased 0.2 percent as reported, but increased 1.7 percent adjusted for currency in the first quarter of 2024 compared to the prior-year period. Clients continue to prioritize large data and technology transformation projects focused on driving productivity with AI and analytics, which is also reflected in our year-to-year growth in Consulting signings this quarter. At the same time, we saw both a lengthening of backlog duration driven by large scale digital transformations and a reduced level of revenue realization in the quarter as clients tightened discretionary spending. Our strategic partnerships continued to account for approximately 40 percent of our Consulting revenue with both AWS and Azure practices reflecting double-digit growth year-to-year in the quarter. We also continue to expand our business focused on generative AI with more clients migrating from experimenting to deploying AI at scale. Additionally, our Red Hat consulting practice grew revenue year to year at a double-digit rate in the first quarter of 2024.
In the first quarter of 2024, Business Transformation revenue of $2,317 million increased 1.5 percent as reported (3.3 percent adjusted for currency) compared to the prior-year period, led by supply chain and finance transformations. In addition, customer experience transformation offerings contributed to revenue growth in the quarter.
Technology Consulting revenue of $931 million increased 0.6 percent as reported (3.1 percent adjusted for currency) in the first quarter of 2024 compared to the prior-year period. Cloud modernization projects grew at a double-digit rate. In addition, strategic partnerships and Red Hat engagements each delivered double-digit revenue growth year to year.
Application Operations revenue of $1,938 million decreased 2.6 percent as reported (0.7 percent adjusted for currency) compared to the prior-year period, reflecting a decline in on-premise custom application management projects, partially offset by growth in cloud-based application management offerings.
Management Discussion – (continued)
| (Dollars in millions) | Yr. to Yr. Percent/ Margin Change | |||||||||||||||||||
| For the three months ended March 31: | 2024 | 2023 (1) | ||||||||||||||||||
| Consulting: | ||||||||||||||||||||
| Gross profit | $ | 1,314 | $ | 1,325 | (0.9) | % | ||||||||||||||
| Gross profit margin | 25.3 | % | 25.5 | % | (0.2) | pts. | ||||||||||||||
| Segment profit | $ | 424 | $ | 427 | (0.6) | % | ||||||||||||||
| Segment profit margin | 8.2 | % | 8.2 | % | 0.0 | pts. |
(1)Recast to reflect segment changes.
In the first quarter of 2024, Consulting gross profit margin of 25.3 percent decreased 0.2 points on a year-to-year basis. Segment profit of $424 million decreased 0.6 percent and the segment profit margin of 8.2 percent was flat year to year in first-quarter 2024 compared to the prior-year period. The segment profit margin includes an impact of approximately 1 point from currency, offset by improvements from our pricing and productivity actions.
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 March 31: | 2024 | 2023 (1) | ||||||||||||||||||||||||
| Total Consulting signings | $ | 5,511 | $ | 5,382 | 2.4 | % | 4.3 | % |
(1)Recast to reflect segment changes.
In the first quarter of 2024, Consulting signings grew 2.4 percent as reported and 4.3 percent adjusted for currency. We had solid demand for our offerings as clients prioritize larger transformation projects. Our book-to-bill ratio for the trailing twelve-months remains over 1.15. Book-to-bill represents the ratio of IBM Consulting signings to its revenue over the same period. The metric is a useful indicator of the demand of our business over time.
Signings are management’s initial estimate of the value of a client’s commitment under a services contract within IBM Consulting. There are no third-party standards or requirements governing the calculation of signings. The calculation used by management involves estimates and judgments to gauge the extent of a client’s commitment, including the type and duration of the agreement, and the presence of termination charges or wind-down costs.
Contract extensions and increases in scope are treated as signings only to the extent of the incremental new value. Total signings can vary over time due to a variety of factors including, but not limited to, the timing of signing a small number of larger contracts. Signings associated with an acquisition will be recognized on a prospective basis.
Management believes the estimated values of signings disclosed provide an indication of our forward-looking revenue. Signings are used to monitor the performance of the business and viewed as useful information for management and shareholders. The conversion of signings into revenue may vary based on the types of services and solutions, contract duration, customer decisions, and other factors, which may include, but are not limited to, the macroeconomic environment.
Management Discussion – (continued)
Infrastructure
| (Dollars in millions) | Yr. to Yr. Percent Change | Yr. to Yr. Percent Change Adjusted For Currency | ||||||||||||||||||||||||
| For the three months ended March 31: | 2024 | 2023 | ||||||||||||||||||||||||
| Infrastructure revenue: | $ | 3,076 | $ | 3,098 | (0.7) | % | 0.2 | % | ||||||||||||||||||
| Hybrid Infrastructure | $ | 1,803 | $ | 1,709 | 5.5 | % | 6.3 | % | ||||||||||||||||||
| IBM Z | 4.1 | 4.7 | ||||||||||||||||||||||||
| Distributed Infrastructure | 6.3 | 7.1 | ||||||||||||||||||||||||
| Infrastructure Support | 1,273 | 1,389 | (8.3) | (7.3) |
Infrastructure revenue of $3,076 million decreased 0.7 percent as reported, but increased 0.2 percent adjusted for currency in the first quarter of 2024 compared to the prior-year period, with a decline in Infrastructure Support and growth in Hybrid Infrastructure.
Hybrid Infrastructure revenue of $1,803 million increased 5.5 percent as reported (6.3 percent adjusted for currency) in the first quarter of 2024 compared to the prior-year period. Within Hybrid Infrastructure, revenue growth was broad based with strong demand for our hardware offerings across IBM Z, Power and Storage. IBM Z revenue increased 4.1 percent as reported (4.7 percent adjusted for currency). This was the eighth quarter of z16 product availability. Our z16 program continues to resonate with clients and surpass the total revenue performance of the z15 program. IBM Z is uniquely positioned for AI with the first processor designed with on-chip acceleration for real-time AI inferencing. IBM Z remains an enduring platform, not only driving hardware adoption but also related software, storage and services. Distributed Infrastructure revenue increased 6.3 percent as reported (7.1 percent adjusted for currency), driven primarily by double-digit growth in Storage and Power systems. The revenue performance in Storage was driven by demand for high-end storage tied to the z16 cycle. In addition, clients are interested in our Storage offerings for data-curation, model-building, and fine-tuning in support of generative AI. Within Power, revenue performance was driven by demand for data intensive workloads.
Infrastructure Support revenue of $1,273 million decreased 8.3 percent as reported (7.3 percent adjusted for currency) in the first quarter of 2024 compared to the prior-year period, driven by volume decline in support of non-IBM equipment and IBM product cycle dynamics.
| (Dollars in millions) | Yr. to Yr. Percent/ Margin Change | |||||||||||||||||||
| For the three months ended March 31: | 2024 | 2023 (1) | ||||||||||||||||||
| Infrastructure: | ||||||||||||||||||||
| Gross profit | $ | 1,666 | $ | 1,606 | 3.7 | % | ||||||||||||||
| Gross profit margin | 54.2 | % | 51.8 | % | 2.3 | pts. | ||||||||||||||
| Segment profit | $ | 311 | $ | 307 | 1.4 | % | ||||||||||||||
| Segment profit margin | 10.1 | % | 9.9 | % | 0.2 | pts. |
(1)Recast to reflect segment changes.
Infrastructure gross profit margin of 54.2 percent increased 2.3 points in the first quarter of 2024 compared to the prior-year period, with margin expansion in Hybrid Infrastructure and Infrastructure Support. The increase in margin within Hybrid Infrastructure was across both IBM Z and Distributed Infrastructure, as a result of productivity initiatives including streamlining our supply chain. In the first quarter of 2024, Infrastructure segment profit of $311 million increased 1.4 percent and the segment profit margin of 10.1 percent increased 0.2 points compared to the prior-year period. The segment profit and margin reflects benefits from higher IP and custom development income and productivity actions, partially offset by portfolio mix and approximately 1 point of impact from currency.
Management Discussion – (continued)
Financing
Refer to pages 61 through 63 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 March 31: | 2024 | 2023 | ||||||||||||||||||||||||
| Total Revenue | $ | 14,462 | $ | 14,252 | 1.5 | % | 2.5 | % | ||||||||||||||||||
| Americas | $ | 7,296 | $ | 7,078 | 3.1 | % | 3.2 | % | ||||||||||||||||||
| Europe/Middle East/Africa (EMEA) | 4,313 | 4,331 | (0.4) | (2.1) | ||||||||||||||||||||||
| Asia Pacific | 2,853 | 2,843 | 0.3 | 7.9 |
Americas revenue of $7,296 million increased 3.1 percent as reported and 3.2 percent adjusted for currency. The U.S. increased 3.4 percent. Canada decreased 6.4 percent as reported and 6.7 percent adjusted for currency. Latin America increased 12.8 percent as reported and 13.8 percent adjusted for currency, with Brazil increasing 11.6 percent as reported and 8.2 percent adjusted for currency.
In EMEA, total revenue of $4,313 million decreased 0.4 percent as reported and 2.1 percent adjusted for currency, driven primarily by Infrastructure, reflecting product cycle dynamics. The UK increased 4.1 percent as reported and was flat adjusted for currency. Germany, France and Italy increased 4.1 percent, 3.3 percent and 1.5 percent, respectively, as reported, and 3.0 percent, 2.2 percent and 0.4 percent, respectively, adjusted for currency.
Asia Pacific revenue of $2,853 million increased 0.3 percent as reported and 7.9 percent adjusted for currency. Japan increased 3.2 percent as reported and 15.8 percent adjusted for currency. India increased 5.7 percent as reported and 6.6 percent adjusted for currency. Australia and China decreased 8.5 percent and 5.7 percent, respectively, as reported, and 4.9 percent and 2.4 percent, respectively, adjusted for currency.
Expense
Total Expense and Other (Income)
| (Dollars in millions) | Yr. to Yr. Percent Change | |||||||||||||||||||
| For the three months ended March 31: | 2024 | 2023 | ||||||||||||||||||
| Total expense and other (income) | $ | 6,669 | $ | 6,451 | 3.4 | % | ||||||||||||||
| Non-operating adjustments: | ||||||||||||||||||||
| Amortization of acquired intangible assets | $ | (257) | $ | (244) | 5.5 | % | ||||||||||||||
| Acquisition-related charges | (60) | (3) | nm | |||||||||||||||||
| Non-operating retirement-related (costs)/income | (96) | 5 | nm | |||||||||||||||||
| Operating (non-GAAP) expense and other (income) | $ | 6,255 | $ | 6,209 | 0.7 | % | ||||||||||||||
| Total expense-to-revenue ratio | 46.1 | % | 45.3 | % | 0.8 | pts. | ||||||||||||||
| Operating (non-GAAP) expense-to-revenue ratio | 43.3 | % | 43.6 | % | (0.3) | pts. |
nm - not meaningful
For additional information regarding total expense and other (income) for both expense presentations, refer to the following analyses by category.
Management Discussion – (continued)
Selling, General and Administrative Expense
| (Dollars in millions) | Yr. to Yr. Percent Change | |||||||||||||||||||
| For the three months ended March 31: | 2024 | 2023 | ||||||||||||||||||
| Selling, general and administrative expense: | ||||||||||||||||||||
| Selling, general and administrative — other | $ | 3,915 | $ | 3,886 | 0.7 | % | ||||||||||||||
| Advertising and promotional expense | $ | 279 | $ | 314 | (11.3) | |||||||||||||||
| Workforce rebalancing charges | 375 | 259 | 45.1 | |||||||||||||||||
| Amortization of acquired intangible assets | 257 | 243 | 5.8 | |||||||||||||||||
| Stock-based compensation | 171 | 149 | 14.8 | |||||||||||||||||
| Provision for/(benefit from) expected credit loss expense | (23) | 2 | nm | |||||||||||||||||
| Total selling, general and administrative expense | $ | 4,974 | $ | 4,853 | 2.5 | % | ||||||||||||||
| Non-operating adjustments: | ||||||||||||||||||||
| Amortization of acquired intangible assets | $ | (257) | $ | (243) | 5.8 | % | ||||||||||||||
| Acquisition-related charges | (10) | (3) | nm | |||||||||||||||||
| Operating (non-GAAP) selling, general and administrative expense | $ | 4,706 | $ | 4,607 | 2.1 | % |
nm - not meaningful
Total selling, general and administrative (SG&A) expense increased 2.5 percent in the first quarter of 2024 versus the prior-year period driven primarily by the following factors:
-
Higher workforce rebalancing charges (2 points); and
-
Higher net spending reflecting our continued investment to drive our hybrid cloud and AI strategy, partially offset by benefits from productivity actions.
Operating (non-GAAP) expense increased 2.1 percent year to year, primarily driven by the same factors.
Benefit from expected credit loss expense was $23 million in the first quarter of 2024 compared to a provision of $2 million in the first quarter of 2023. The year-to-year change was primarily driven by lower specific reserve requirements in the current year. Refer to "Receivables and Allowances" section on page 55 for additional information.
Research, Development and Engineering
| (Dollars in millions) | Yr. to Yr. Percent Change | |||||||||||||||||||
| For the three months ended March 31: | 2024 | 2023 | ||||||||||||||||||
| Research, development and engineering expense | $ | 1,796 | $ | 1,655 | 8.5 | % |
Research, development and engineering (RD&E) expense in the first quarter of 2024 increased 8.5 percent year to year primarily driven by investments to drive innovation in AI, hybrid cloud and quantum.
Management Discussion – (continued)
Intellectual Property and Custom Development Income
| (Dollars in millions) | Yr. to Yr. Percent Change | |||||||||||||||||||
| For the three months ended March 31: | 2024 | 2023 | ||||||||||||||||||
| Intellectual property and custom development income: | ||||||||||||||||||||
| Licensing of intellectual property including royalty-based fees | $ | 72 | $ | 61 | 18.7 | % | ||||||||||||||
| Custom development income | 144 | 115 | 24.9 | |||||||||||||||||
| Sales/other transfers of intellectual property | — | 4 | (100.0) | |||||||||||||||||
| Total | $ | 216 | $ | 180 | 20.3 | % |
Total intellectual property and custom development income in the first quarter of 2024 increased 20.3 percent year to year. The increase was primarily driven by joint development and licensing agreements with a Japanese consortium to leverage our intellectual property and expertise on advanced semiconductors.
The timing and amount of licensing, sales or other transfers of IP may vary significantly from period to period depending upon the timing of licensing agreements, economic conditions, industry consolidation and the timing of new patents and know-how development.
Other (Income) and Expense
| (Dollars in millions) | Yr. to Yr. Percent Change | |||||||||||||||||||
| For the three months ended March 31: | 2024 | 2023 | ||||||||||||||||||
| Other (income) and expense: | ||||||||||||||||||||
| Foreign currency transaction losses/(gains) | $ | (205) | $ | 88 | nm | |||||||||||||||
| (Gains)/losses on derivative instruments (1) | 287 | (142) | nm | |||||||||||||||||
| Interest income | (210) | (170) | 24.1 | |||||||||||||||||
| Net (gains)/losses from securities and investment assets | (10) | 5 | nm | |||||||||||||||||
| Retirement-related costs/(income) | 96 | (5) | nm | |||||||||||||||||
| Other | (274) | (22) | nm | |||||||||||||||||
| Total other (income) and expense | $ | (317) | $ | (245) | 29.4 | % | ||||||||||||||
| Non-operating adjustments: | ||||||||||||||||||||
| Amortization of acquired intangible assets | $ | — | $ | (1) | (100.0) | % | ||||||||||||||
| Acquisition-related charges (1) | (50) | (1) | nm | |||||||||||||||||
| Non-operating retirement-related (costs)/income | (96) | 5 | nm | |||||||||||||||||
| Operating (non-GAAP) other (income) and expense | $ | (463) | $ | (242) | 91.7 | % | ||||||||||||||
(1)2024 includes a loss of $50 million on foreign exchange call option contracts related to the company’s planned acquisition of StreamSets and webMethods from Software AG. Refer to note 16, “Derivative Financial Instruments,” for additional information.
nm - not meaningful
Total other (income) and expense was income of $317 million in the first quarter of 2024 and increased $72 million compared to the prior-year period. The year-to-year change was primarily driven by:
-
Higher gains on divestitures ($230 million) primarily driven by the divestiture of The Weather Company assets (included in “Other” in the table above). Refer to note 5, "Acquisitions & Divestitures," for additional information; and
-
Higher interest income ($41 million) primarily driven by 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 ($136 million); and
Management Discussion – (continued)
- Higher non-operating retirement-related cost of $101 million primarily driven by an increase in recognized actuarial losses of the Qualified PPP due to the change in amortization period as described in note 18, "Retirement-Related Benefits," partially offset by lower interest costs.
Operating (non-GAAP) other (income) and expense was income of $463 million in the first quarter of 2024 and increased $221 million compared to the prior-year period. The year-to-year change was primarily driven by the factors described above, excluding the higher non-operating retirement-related costs.
Interest Expense
| (Dollars in millions) | Yr. to Yr. Percent Change | |||||||||||||||||||
| For the three months ended March 31: | 2024 | 2023 | ||||||||||||||||||
| Interest expense | $ | 432 | $ | 367 | 17.5 | % |
Interest expense of $432 million in the first quarter of 2024 increased $64 million compared to the prior-year period. 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 first quarter of 2024 was $517 million, an increase of $60 million year to year primarily driven by higher average interest rates and a higher average debt balance in the current year.
Retirement-Related Plans
The following table provides 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 March 31: | 2024 | 2023 | ||||||||||||||||||
| Retirement-related plans — cost: | ||||||||||||||||||||
| Service cost | $ | 143 | $ | 46 | 209.7 | % | ||||||||||||||
| Multi-employer plans | 4 | 4 | 1.2 | |||||||||||||||||
| Cost of defined contribution plans | 111 | 269 | (58.8) | |||||||||||||||||
| Total operating costs | $ | 257 | $ | 319 | (19.2) | % | ||||||||||||||
| Interest cost | $ | 558 | $ | 599 | (6.8) | % | ||||||||||||||
| Expected return on plan assets | (730) | (739) | (1.2) | |||||||||||||||||
| Recognized actuarial losses | 259 | 129 | 100.1 | |||||||||||||||||
| Amortization of prior service costs/(credits) | (2) | (2) | nm | |||||||||||||||||
| Curtailments/settlements | 2 | (1) | nm | |||||||||||||||||
| Other costs | 8 | 9 | (3.3) | |||||||||||||||||
| Total non-operating costs/(income) | $ | 96 | $ | (5) | nm | |||||||||||||||
| Total retirement-related plans — cost | $ | 353 | $ | 314 | 12.7 | % |
nm - not meaningful
Total pre-tax retirement-related plan cost increased by $40 million compared to the first quarter of 2023, primarily driven by an increase in recognized actuarial losses ($129 million) and higher service cost ($97 million), partially offset by lower cost of defined contribution plans ($158 million) and lower interest costs ($41 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 first quarter of 2024 were $257 million, a decrease of $61 million compared to the first quarter of 2023. The decrease was primarily driven by lower cost of defined contribution plans ($158 million), partially offset by higher service cost ($97 million) due to the U.S. retirement plan changes. Including the related employee salary increase effective January 1, 2024, the net impact to our first-quarter 2024 operating costs from the U.S. retirement plan changes was immaterial. Refer to note
Management Discussion – (continued)
18,"Retirement Related Benefits," for additional information. Non-operating costs/(income) was $96 million of cost in the first quarter of 2024 compared to income of $5 million in the prior-year period. The year-to-year change was primarily driven by an increase in recognized actuarial losses, due to the change in amortization period of the Qualified PPP as described in note 18, "Retirement-Related Benefits," partially offset by lower interest costs.
Taxes
The continuing operations benefit from income taxes for the first quarter of 2024 was $502 million, compared to a provision for income taxes of $124 million in the first quarter of 2023. The current-year benefit is primarily driven by the resolution of certain tax audit matters. The operating (non-GAAP) income tax provision for the first quarter of 2024 was $94 million, compared to $200 million in the first quarter of 2023. The operating (non-GAAP) income tax provision year-to-year change was primarily driven by the same factor described above.
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. The company filed its IRS Appeals protest in the first quarter of 2021, and in October of 2023, the IRS issued a revised RAR. These adjustments, if sustained, would increase the company’s income subject to tax by approximately $4.2 billion, with tax calculated at the relevant federal income tax rate. The company continues to strongly disagree with the IRS position and will pursue resolution at IRS Appeals and then court, if necessary. In the first quarter of 2024, the IRS concluded its examination of the company's U.S. income tax returns for 2015 and 2016 and issued a final RAR proposing adjustments related to certain cross-border transactions that occurred in 2015. The proposed adjustments, if sustained, would increase the company’s income subject to tax by approximately $1.2 billion, with tax calculated at the relevant federal income tax rate. The company strongly disagrees with the IRS position and will pursue resolution at IRS Appeals and then court, if necessary. In the fourth quarter of 2021, the IRS commenced its audit of the company’s U.S. tax returns for 2017 and 2018. The company anticipates that this audit will be completed in 2024. 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 it relates to the amount and/or timing of income, deductions, and tax credits. Although the outcome of tax audits is always uncertain, the company believes that adequate amounts of tax, interest and penalties have been provided for any adjustments that are expected to result for these years.
The company is involved in a number of income tax-related matters in India challenging tax assessments issued by the India Tax Authorities. As of March 31, 2024, the company had recorded $572 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 March 31, 2024 is $8,365 million which can be reduced by $567 million associated with timing adjustments, potential transfer pricing adjustments, and state income taxes. The net amount of $7,798 million, if recognized, would favorably affect the company’s effective tax rate.
Management Discussion – (continued)
Financial Position
Dynamics
Our balance sheet at March 31, 2024 continues to provide us with flexibility to support and invest in the business.
Cash and cash equivalents, restricted cash and marketable securities at March 31, 2024 were $19,278 million, an increase of $5,815 million compared to December 31, 2023. Total debt of $59,504 million at March 31, 2024 increased $2,957 million from December 31, 2023 primarily due to net debt issuances. We issued $5,486 million of debt in the first quarter of 2024 to increase our financial liquidity and plan for our future debt maturities. We continue to manage our debt levels while being acquisitive and without sacrificing investments in our business.
In the first three months of 2024, we generated $4,168 million in cash from operating activities, an increase of $394 million compared to the first three months of 2023. Our free cash flow at March 31, 2024 was $1,910 million, an increase of $570 million versus the prior year. Refer to pages 59 through 60 for additional information on free cash flow. Our strong cash generation positions us to invest both organically and through strategic acquisitions. At the same time, we continue to return value to shareholders through dividends. We returned $1,522 million to shareholders through dividends and completed three acquisitions in the first quarter of 2024. Our cash generation supports investment and deployment of capital to areas with the most attractive long-term opportunities.
Our pension plans were well funded at the end of 2023, with worldwide qualified plans funded at 111 percent. Overall pension funded status as of the end of March 2024 was fairly consistent with year-end 2023. We expect contributions for all retirement-related plans to be approximately $1.5 billion in 2024, a decrease of approximately $0.3 billion compared to 2023.
IBM Working Capital
| (Dollars in millions) | At March 31, 2024 | At December 31, 2023 | ||||||||||||
| Current assets | $ | 36,663 | $ | 32,908 | ||||||||||
| Current liabilities | 32,397 | 34,122 | ||||||||||||
| Working capital | $ | 4,266 | $ | (1,214) | ||||||||||
| Current ratio | 1.13:1 | 0.96:1 |
Working capital increased $5,480 million from the year-end 2023 position. Current assets increased $3,755 million ($4,226 million adjusted for currency) primarily in cash and cash equivalents and marketable securities; partially offset by a decrease in receivables mainly from collections of seasonally higher year-end balances. Current liabilities decreased $1,725 million ($1,299 million adjusted for currency) due to declines in short-term debt mainly due to maturities, taxes payable, and accounts payable, partially offset by an increase in deferred income mainly driven by annual customer billings.
Receivables and Allowances
Roll Forward of Total IBM Receivables Allowance for Credit Losses
| (Dollars in millions) | ||||||||||||||||||||||||||
| January 1, 2024 | Additions / (Releases) (1) | Write-offs (2)(3) | Foreign currency and other (3) | March 31, 2024 | ||||||||||||||||||||||
| $457 | $(20) | $(89) | $(14) | $335 |
(1)Additions/(Releases) for allowance for credit losses are recorded in expense.
(2)Refer to note A, “Significant Accounting Policies,” in our 2023 Annual Report for additional information regarding allowance for credit loss write-offs.
(3)Includes activity related to discontinued operations.
Excluding receivables classified as held for sale, the total IBM receivables provision coverage was 2.0 percent at March 31, 2024, a decrease of 30 basis points compared to December 31, 2023. The decrease in coverage is due to declines
Management Discussion – (continued)
in reserves primarily driven by write-offs; partially offset by the overall decrease in total receivables. The write-offs during the three months ended March 31, 2024 primarily related to receivables from discontinued operations which had been previously reserved. Refer to Financing's "Financial Position" on page 61 for additional details regarding the Financing segment receivables and allowances.
Noncurrent Assets and Liabilities
| (Dollars in millions) | At March 31, 2024 | At December 31, 2023 | ||||||||||||
| Noncurrent assets | $ | 100,506 | $ | 102,333 | ||||||||||
| Long-term debt | $ | 54,033 | $ | 50,121 | ||||||||||
| Noncurrent liabilities (excluding debt) | $ | 27,405 | $ | 28,385 |
The decrease in noncurrent assets of $1,827 million ($1,000 million adjusted for currency) is primarily due to a decrease in long-term financing receivables as a result of declines from seasonally higher year-end balances and a decrease in goodwill driven by the sale of The Weather Company assets in the first quarter of 2024.
Long-term debt increased $3,912 million ($4,331 million adjusted for currency) primarily from new debt issuances; partially offset by reclassifications to short-term debt to reflect upcoming maturities.
Noncurrent liabilities (excluding debt) decreased $980 million ($557 million adjusted for currency) primarily driven by a decrease in income tax reserves from the resolution of certain tax audit matters and a decrease in retirement and nonpension postretirement benefit obligations.
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 March 31, 2024 | At December 31, 2023 | ||||||||||||
| Total debt | $ | 59,504 | $ | 56,547 | ||||||||||
| Financing segment debt (1) | $ | 9,921 | $ | 11,879 | ||||||||||
| Non-Financing debt | $ | 49,583 | $ | 44,668 |
(1)Refer to Financing’s “Financial Position” on page 61 for additional details.
Total debt of $59,504 million increased $2,957 million ($3,380 million adjusted for currency) from December 31, 2023, primarily driven by proceeds from issuances of $5,486 million; partially offset by maturities of $2,106 million.
Non-Financing debt of $49,583 million increased $4,915 million ($5,242 million adjusted for currency) from December 31, 2023, primarily driven by our first quarter debt issuances to increase our financial liquidity and plan for our future debt maturities.
Financing segment debt of $9,921 million decreased $1,958 million ($1,862 million adjusted for currency) from December 31, 2023, 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 March 31, 2024.
Management Discussion – (continued)
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.” In the Consolidated Income Statement, the external debt-related interest expense supporting Financing’s internal financing to the company is classified as interest expense.
Equity
Total equity increased $720 million from December 31, 2023, primarily driven by an increase from net income of $1,605 million and common stock of $502 million; partially offset by dividends paid of $1,522 million.
Cash Flow
Our cash flows from operating, investing and financing activities, as reflected in the Consolidated Statement of Cash Flows on page 7, are summarized in the table below. These amounts also include the cash flows associated with the Financing business.
| (Dollars in millions) | ||||||||||||||
| For the three months ended March 31: | 2024 | 2023 | ||||||||||||
| Net cash provided by/(used in): | ||||||||||||||
| Operating activities | $ | 4,168 | $ | 3,774 | ||||||||||
| Investing activities | (4,210) | (7,960) | ||||||||||||
| Financing activities | 1,877 | 5,708 | ||||||||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | (159) | 24 | ||||||||||||
| Net change in cash, cash equivalents and restricted cash | $ | 1,676 | $ | 1,547 |
Net cash provided by operating activities increased $394 million as compared to the first three months of 2023. The increase was primarily driven by performance-related improvements within net income and timing of balance sheet dynamics including performance-based compensation payments and sales cycle working capital. Changes in operating assets and liabilities, net of acquisitions/divestitures in the Consolidated Statement of Cash Flows also includes the reduction of tax reserves which is reflected as a non-cash adjustment to reconcile net income/(loss) to cash from operating activities.
Net cash used in investing activities decreased $3,750 million mainly driven by lower purchases of marketable securities and other investments; partially offset by an increase in cash provided by divestitures.
Net cash provided by financing activities decreased $3,831 million mainly due to a decrease in net cash provided by debt of $3,923 million primarily driven by a lower level of net issuances in the current year.
Looking Forward
Technology has proven to be a fundamental source of competitive advantage. Continued demand for technology will serve as a major driving force behind global economic and business growth as businesses look to scale, offer better services, drive efficiencies and seize new market opportunities. AI-driven productivity in particular continues to be a top priority for businesses for both cost reductions and new revenue opportunities.
Enterprise AI continues to gain traction. In 2024, we anticipate more clients moving from experimenting to deploying AI at scale to unlock productivity. We believe our comprehensive AI strategy is well positioned to help clients scale AI. We developed our watsonx platform for clients to build their AI solutions, spanning from foundation model training to data preparation and governance. We have leveraged watsonx to build AI assistants throughout our software portfolio, our consultants are helping clients navigate the AI landscape and are also leveraging AI technologies in the delivery of those services, and our Infrastructure segment is playing a larger role as clients leverage their hardware investments in their AI strategies. For example, as AI becomes widely adopted, IBM Z is uniquely advantaged. Our full-stack focus, from on-chip AI processing to AI accelerator cards, to watsonx platform support, allows models to be built and trained on any platform, and easily deployed on IBM Z. Our Storage offerings are benefiting from generative AI where industry-leading performance and scalability is utilized for data-curation, model-building, and fine-tuning.
Management Discussion – (continued)
We are committed to an open innovation ecosystem around AI, to help our clients maximize flexibility and leverage skills and we believe IBM with Red Hat can be a key driver of open-source AI. We have recently released a family of state-of-the-art open-source code models from our Granite series, and Red Hat and IBM launched InstructLab to evolve and improve AI models. Our partner ecosystem remains essential to both AI and hybrid cloud growth and we continue to progress strategy partnerships with industry leaders.
We continue to invest in emerging technologies, bringing new innovations to market. In early April 2024, we installed a Quantum System One at Rensselaer Polytechnic Institute, the first IBM quantum system on a college campus anywhere in the world. This installation will advance research in critical areas such as energy, storage, materials science and financial modeling. As we remain focused on portfolio optimization, we closed the sale of The Weather Company assets in January. To complement our portfolio, we completed three acquisitions in the first quarter of 2024, and we expect to close the announced acquisition of StreamSets and webMethods from Software AG by mid-year.
On April 24, 2024, we announced our intent to acquire all of the outstanding shares of HashiCorp. The combination of IBM’s and HashiCorp’s combined portfolios will help clients manage growing application and infrastructure complexity and create a comprehensive end-to-end hybrid cloud platform designed for the AI era. Under the terms of the definitive agreement, HashiCorp shareholders will receive $35 per share in cash, representing a total enterprise value of approximately $6.4 billion. The transaction is expected to close by the end of 2024, subject to approval by HashiCorp shareholders, regulatory approvals and other customary closing conditions. Upon closing, HashiCorp will be integrated into the Software segment.
We had a positive start to 2024. We continue to invest organically and inorganically, bring new products and innovation to market, expand our ecosystem and drive productivity across our business. Our first quarter performance is another proof point of this progress. We are a more focused business that has delivered sustained revenue and cash flow growth – a business well positioned for the future.
Retirement-Related Plans
Our pension plans are well funded. Contributions for all retirement-related plans are expected to be approximately $1.5 billion in 2024, of which $0.2 billion generally relates to legally required contributions to non-U.S. defined benefit and multi-employer plans. The expected decrease of $0.3 billion in total contributions for 2024 is primarily driven by ongoing dynamics of our retirement-related plans, including the change in U.S. retirement-related benefits in first-quarter 2024, described in note 18, "Retirement-Related Benefits". We expect 2024 pre-tax retirement-related plan cost to be approximately $1.5 billion, an increase of approximately $0.3 billion compared to 2023. Within total retirement-related plan cost, operating retirement-related plan cost is expected to be approximately $1.1 billion, a decrease of approximately $0.1 billion compared to 2023. Non-operating retirement-related plan cost is expected to be approximately $0.4 billion, an increase of approximately $0.5 billion compared to 2023, primarily driven by higher recognized actuarial losses, partially offset by lower 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 March 31, 2024, currency changes resulted in assets and liabilities denominated in local currencies being translated into fewer dollars than at year-end 2023. 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 2024. 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 first quarter of 2024, revenue from continuing operations increased 1.5 percent as reported and 3 percent at constant currency compared to the prior year. In the first quarter of 2024, currency translation and hedging negatively
Management Discussion – (continued)
impacted year-to-year pre-tax income growth and operating (non-GAAP) pre-tax income growth by approximately $200 million and $150 million, respectively. From a segment perspective, in the first quarter of 2024, currency translation and hedging negatively impacted our Software, Consulting and Infrastructure segment profit margin year-to-year growth by approximately one 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, 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 2023 Annual Report, on pages 30 to 32, there is a discussion of our liquidity including two tables that present three years of data. The table presented on page 30 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 three months ended, or at, as applicable, March 31, 2024, those amounts are $4.2 billion of net cash from operating activities, $19.3 billion of cash and cash equivalents, restricted cash and short-term marketable securities and $10.0 billion in global credit facilities, respectively. While we have no current plans to draw on these credit facilities, they are available as back-up liquidity.
The major rating agencies' ratings on our debt securities at March 31, 2024 appear in the following table and remain unchanged from December 31, 2023.
| IBM Ratings: | Standard and Poor's | Moody’s Investors Service | Fitch Ratings | |||||||||||||||||
| Senior long-term debt | A- | A3 | A- | |||||||||||||||||
| Commercial paper | A-2 | Prime-2 | F1 |
We have ample financial flexibility, supported by our strong liquidity position and cash flows, to operate at a single A credit rating. Debt levels have increased $3.0 billion from December 31, 2023, driven by debt issuances; partially offset by maturities. In the first quarter of 2024, we issued $5.5 billion of debt to increase our financial liquidity and plan for our future debt maturities. Refer to note 12, “Borrowings,” for additional information.
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 March 31, 2024, the fair value of those instruments that were in a liability position was $564 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.
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 57. 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 considers Financing receivables as a profit-generating investment, not as working capital that should be
Management Discussion – (continued)
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 three months of 2024 and 2023 prepared in a manner consistent with the description above.
| (Dollars in millions) | ||||||||||||||
| For the three months ended March 31: | 2024 | 2023 | ||||||||||||
| Net cash from operating activities per GAAP | $ | 4,168 | $ | 3,774 | ||||||||||
| Less: change in Financing receivables | 1,897 | 1,977 | ||||||||||||
| Net cash from operating activities, excluding Financing receivables | $ | 2,271 | $ | 1,797 | ||||||||||
| Capital expenditures, net | (361) | (457) | ||||||||||||
| Free cash flow | $ | 1,910 | $ | 1,340 | ||||||||||
| Acquisitions | (82) | (22) | ||||||||||||
| Divestitures | 703 | — | ||||||||||||
| Dividends | (1,522) | (1,497) | ||||||||||||
| Non-Financing debt | 5,244 | 9,692 | ||||||||||||
| Other (includes Financing net receivables and Financing debt) | (437) | (762) | ||||||||||||
| Change in cash, cash equivalents, restricted cash and short-term marketable securities | $ | 5,815 | $ | 8,752 |
In the first three months of 2024, we generated $1.9 billion in free cash flow, an increase of $0.6 billion versus the prior-year period. The increase was primarily driven by performance-related improvements within net income and approximately $400 million from timing of balance sheet dynamics including performance-based compensation payments, sales cycle working capital and capital expenditures. In the first quarter of 2024, we continued to return value to shareholders with $1.5 billion in dividends.
Events that could temporarily change the historical cash flow dynamics discussed previously and in our 2023 Annual Report include significant changes in operating results, material changes in geographic sources of cash, unexpected adverse impacts from litigation, future pension funding requirements, periods of severe downturn in the capital markets or the timing of tax payments. Whether any litigation has such an adverse impact will depend on a number of variables, which are more completely described in note 14, “Contingencies,” in this Form 10-Q. With respect to pension funding, we expect to make legally mandated pension plan contributions to certain non-U.S. defined benefit plans of approximately $200 million in 2024. Contributions related to all retirement-related plans are expected to be approximately $1.5 billion in 2024. Refer to "Retirement-Related Plans" for additional information. 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 2024, 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. Our overall shareholder payout remains at a comfortable level and we remain fully committed to our long-standing dividend policy.
Management Discussion – (continued)
Financing
Financing is a reportable segment that facilitates IBM clients’ acquisition of hardware, software and services by providing financing solutions, while generating solid returns on equity.
Results of Operations
| (Dollars in millions) | Yr. to Yr. Percent Change | |||||||||||||||||||
| For the three months ended March 31: | 2024 | 2023 | ||||||||||||||||||
| Revenue | $ | 193 | $ | 196 | (1.6) | % | ||||||||||||||
| Segment profit (1) | $ | 92 | $ | 100 | (8.4) | % |
(1)Prior-year amounts recast to reflect segment changes.
For the three months ended March 31, 2024, financing revenue decreased 1.6 percent as reported (1.5 percent adjusted for currency) compared to the prior-year period, primarily driven by client financing revenue due to a decrease in assets.
Financing segment profit decreased 8.4 percent to $92 million compared to the prior-year period and the segment profit margin of 47.7 percent decreased 3.5 points year to year. The decrease in segment profit was primarily driven by settlements on non-accrual assets in the prior year.
Financial Position
| (Dollars in millions) | At March 31, 2024 | At December 31, 2023 | ||||||||||||
| Cash and cash equivalents | $ | 410 | $ | 555 | ||||||||||
| Client financing receivables: | ||||||||||||||
| Net investment in sales-type and direct financing leases (1) | 3,922 | 4,237 | ||||||||||||
| Client loans | 5,455 | 6,486 | ||||||||||||
| Total client financing receivables | $ | 9,377 | $ | 10,723 | ||||||||||
| Commercial financing receivables: | ||||||||||||||
| Held for investment | 435 | 1,155 | ||||||||||||
| Held for sale | 644 | 692 | ||||||||||||
| Other receivables | 27 | 26 | ||||||||||||
| Total external receivables (2) | $ | 10,483 | $ | 12,596 | ||||||||||
| Intercompany assets (3) | 786 | 963 | ||||||||||||
| Other assets | 256 | 294 | ||||||||||||
| Total assets | $ | 11,935 | $ | 14,409 | ||||||||||
| Intercompany payables (3)(4) | $ | 384 | $ | 423 | ||||||||||
| Debt (5) | 9,921 | 11,879 | ||||||||||||
| Other liabilities | 528 | 783 | ||||||||||||
| Total liabilities (4) | $ | 10,833 | $ | 13,085 | ||||||||||
| Total equity (4) | $ | 1,102 | $ | 1,324 | ||||||||||
| Total liabilities and equity | $ | 11,935 | $ | 14,409 |
(1)Includes deferred initial direct costs which are expensed in IBM’s consolidated financial results.
(2)The difference between the decrease in total external receivables of $2.1 billion (from $12.6 billion in December 2023 to $10.5 billion in March 2024) and the $1.9 billion change in Financing segment’s receivables disclosed in the free cash flow presentation on page 60 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-year amounts recast to reflect segment changes.
(5)Financing segment debt is primarily composed of intercompany loans.
Management Discussion – (continued)
Financing Segment Receivables and Allowances
The following table presents external Financing segment receivables excluding receivables classified as held for sale, and immaterial miscellaneous receivables.
| (Dollars in millions) | At March 31, 2024 | At December 31, 2023 | ||||||||||||
| Amortized cost (1) | $ | 9,957 | $ | 12,034 | ||||||||||
| Specific allowance for credit losses | 110 | 111 | ||||||||||||
| Unallocated allowance for credit losses | 34 | 45 | ||||||||||||
| Total allowance for credit losses | 145 | 156 | ||||||||||||
| Net financing receivables | $ | 9,813 | $ | 11,878 | ||||||||||
| Allowance for credit losses coverage | 1.5 | % | 1.3 | % |
(1)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, 2023 to 1.5 percent at March 31, 2024, primarily driven by the decline in amortized cost.
We continue to apply our rigorous credit policies. Approximately 73 percent of the total external portfolio was with investment grade clients, essentially flat compared to December 31, 2023. This investment grade percentage is based on the credit ratings of the companies in the portfolio and reflects certain mitigation actions taken to reduce the risk to IBM.
For additional information relating to the company's credit quality and mitigation actions, including sales of receivables, refer to note 9, “Financing Receivables.”
Return on Equity Calculation
| (Dollars in millions) | ||||||||||||||||||||||||||
| For the three months ended March 31: | 2024 | 2023 (1) | ||||||||||||||||||||||||
| Numerator: | ||||||||||||||||||||||||||
| Financing after-tax segment profit (2) | $ | 75 | $ | 82 | ||||||||||||||||||||||
| Annualized after-tax segment profit (A) | $ | 300 | $ | 329 | ||||||||||||||||||||||
| Denominator: | ||||||||||||||||||||||||||
| Average Financing equity (B) (3) | $ | 1,213 | $ | 1,302 | ||||||||||||||||||||||
| Financing return on equity (A)/(B) | 24.7 | % | 25.3 | % |
(1)Prior-year amounts recast to reflect segment changes.
(2)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.
(3)Average of the ending equity for Financing for the last two quarters.
Return on equity was 24.7 percent compared to 25.3 percent for the three months ended March 31, 2024, and 2023, respectively. The decrease was driven by a decrease in net income partially offset by a lower average equity balance.
Management Discussion – (continued)
Residual Value
The following table presents the recorded amount of unguaranteed residual value for sales-type and direct financing leases at March 31, 2024 and December 31, 2023. In addition, the table presents the run out of when the unguaranteed residual value assigned to equipment on leases at March 31, 2024 is expected to be returned to the company. The unguaranteed residual value for operating leases at March 31, 2024 and December 31, 2023 was not material. For additional information related to the company's residual value, refer to note A, "Significant Accounting Policies," in the company's 2023 Annual Report.
Unguaranteed Residual Value
| At December 31, 2023 | At March 31, 2024 | Estimated Run Out of March 31, 2024 Balance | ||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2024 | 2025 | 2026 | 2027 and Beyond | ||||||||||||||||||||||||||||||||||
| Sales-type and direct financing leases | $ | 458 | $ | 424 | $ | 33 | $ | 137 | $ | 124 | $ | 130 |
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 (1) | Operating (non-GAAP) | |||||||||||||||||||||||||||
| For the three months ended March 31, 2024: | ||||||||||||||||||||||||||||||||
| Gross profit | $ | 7,742 | $ | 170 | $ | — | $ | — | $ | 7,913 | ||||||||||||||||||||||
| Gross profit margin | 53.5 | % | 1.2 | pts. | — | pts. | — | pts. | 54.7 | % | ||||||||||||||||||||||
| SG&A | $ | 4,974 | $ | (268) | $ | — | $ | — | $ | 4,706 | ||||||||||||||||||||||
| Other (income) and expense (2) | $ | (317) | $ | (50) | $ | (96) | $ | — | $ | (463) | ||||||||||||||||||||||
| Total expense and other (income) | $ | 6,669 | $ | (318) | $ | (96) | $ | — | $ | 6,255 | ||||||||||||||||||||||
| Pre-tax income from continuing operations | $ | 1,074 | $ | 488 | $ | 96 | $ | — | $ | 1,658 | ||||||||||||||||||||||
| Pre-tax margin from continuing operations | 7.4 | % | 3.4 | pts. | 0.7 | pts. | — | pts. | 11.5 | % | ||||||||||||||||||||||
| Provision for/(benefit from) income taxes (3) | $ | (502) | $ | 142 | $ | 5 | $ | 448 | $ | 94 | ||||||||||||||||||||||
| Effective tax rate | (46.7) | % | 22.3 | pts. | 3.0 | pts. | 27.0 | pts. | 5.6 | % | ||||||||||||||||||||||
| Income from continuing operations | $ | 1,575 | $ | 346 | $ | 91 | $ | (448) | $ | 1,564 | ||||||||||||||||||||||
| Income margin from continuing operations | 10.9 | % | 2.4 | pts. | 0.6 | pts. | (3.1) | pts. | 10.8 | % | ||||||||||||||||||||||
| Diluted earnings per share from continuing operations | $ | 1.69 | $ | 0.37 | $ | 0.10 | $ | (0.48) | $ | 1.68 |
| (Dollars in millions except per share amounts) | GAAP | Acquisition- Related Adjustments | Retirement- Related Adjustments | U.S. Tax Reform Impacts | Operating (non-GAAP) | |||||||||||||||||||||||||||
| For the three months ended March 31, 2023: | ||||||||||||||||||||||||||||||||
| Gross profit | $ | 7,509 | $ | 148 | $ | — | $ | — | $ | 7,658 | ||||||||||||||||||||||
| Gross profit margin | 52.7 | % | 1.0 | pts. | — | pts. | — | pts. | 53.7 | % | ||||||||||||||||||||||
| SG&A | $ | 4,853 | $ | (246) | $ | — | $ | — | $ | 4,607 | ||||||||||||||||||||||
| Other (income) and expense | $ | (245) | $ | (2) | $ | 5 | $ | — | $ | (242) | ||||||||||||||||||||||
| Total expense and other (income) | $ | 6,451 | $ | (247) | $ | 5 | $ | — | $ | 6,209 | ||||||||||||||||||||||
| Pre-tax income from continuing operations | $ | 1,058 | $ | 396 | $ | (5) | $ | — | $ | 1,449 | ||||||||||||||||||||||
| Pre-tax margin from continuing operations | 7.4 | % | 2.8 | pts. | 0.0 | pts. | — | pts. | 10.2 | % | ||||||||||||||||||||||
| Provision for income taxes (3) | $ | 124 | $ | 91 | $ | (10) | $ | (5) | $ | 200 | ||||||||||||||||||||||
| Effective tax rate | 11.7 | % | 3.1 | pts. | (0.7) | pts. | (0.3) | pts. | 13.8 | % | ||||||||||||||||||||||
| Income from continuing operations | $ | 934 | $ | 305 | $ | 5 | $ | 5 | $ | 1,249 | ||||||||||||||||||||||
| Income margin from continuing operations | 6.6 | % | 2.1 | pts. | 0.0 | pts. | 0.0 | pts. | 8.8 | % | ||||||||||||||||||||||
| Diluted earnings per share from continuing operations | $ | 1.02 | $ | 0.33 | $ | 0.01 | $ | 0.01 | $ | 1.36 |
(1)2024 includes a benefit from income taxes due to the resolution of certain tax audit matters.
(2)Acquisition-Related Adjustments in 2024 includes a loss of $50 million on foreign exchange call option contracts related to the company’s planned acquisition of StreamSets and webMethods from Software AG. Refer to note 16, “Derivative Financial Instruments,” for additional information.
(3)The tax impact on operating (non-GAAP) pre-tax income from continuing operations is calculated under the same accounting principles applied to the GAAP pre-tax income which employs an annual effective tax rate method to the results.
Management Discussion – (continued)
Forward-Looking and Cautionary Statements
Except for the historical information and discussions contained herein, statements contained in this Form 10-Q may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on the company’s current assumptions regarding future business and financial performance. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, including, but not limited to, the following: a downturn in economic environment and client spending budgets; a failure of the company’s innovation initiatives; damage to the company’s reputation; risks from investing in growth opportunities; failure of the company’s intellectual property portfolio to prevent competitive offerings and the failure of the company to obtain necessary licenses; the company’s ability to successfully manage acquisitions, alliances and dispositions, including integration challenges, failure to achieve objectives, the assumption of liabilities and higher debt levels; fluctuations in financial results; impact of local legal, economic, political, health and other conditions; the company’s failure to meet growth and productivity objectives; ineffective internal controls; the company’s use of accounting estimates; impairment of the company’s goodwill or amortizable intangible assets; the company’s ability to attract and retain key employees and its reliance on critical skills; impacts of relationships with critical suppliers; product quality issues; impacts of business with government clients; reliance on third party distribution channels and ecosystems; cybersecurity and data privacy considerations; adverse effects related to climate change and environmental matters; tax matters; legal proceedings and investigatory risks; the company’s pension plans; currency fluctuations and customer financing risks; impact of changes in market liquidity conditions and customer credit risk on receivables; potential failure of the separation of Kyndryl Holdings, Inc. to qualify for tax-free treatment; risk factors related to IBM securities; and other risks, uncertainties and factors discussed in the company’s Form 10-Qs, Form 10-K and in the company’s other filings with the U.S. Securities and Exchange Commission or in materials incorporated therein by reference. Any forward-looking statement in this Form 10-Q speaks only as of the date on which it is made. Except as required by law, the company assumes no obligation to update or revise any forward-looking statements.
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