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, 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.

In September 2024, the IBM Qualified Personal Pension Plan (Qualified PPP) purchased a nonparticipating single premium group annuity contract from The Prudential Insurance Company of America (the Insurer) and irrevocably transferred to the Insurer approximately $6 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 contract was 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-operating, non-cash, pre-tax pension settlement charge of $2.7 billion ($2.0 billion net of tax) in the third quarter of 2024, primarily related to the accelerated recognition of accumulated actuarial losses of the Qualified PPP. As the charge was non-operating and non-cash, it did not impact our operating (non-GAAP) earnings or cash flow results. Refer to note 18, “Retirement-Related Benefits,” for additional information.

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

Management Discussion – (continued)

foreign exchange derivative contracts entered into prior to the acquisition of StreamSets and webMethods from SoftwareAG to economically hedge the foreign currency exposure related to the purchase price of this acquisition. These derivative contracts expired by June 28, 2024. This impact was recorded in other (income) and expense in the Consolidated Income Statement and reflects the realized loss from the changes in fair value of these 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 including the impact of a one-time, non-cash, pre-tax settlement charge of $2.7 billion ($2.0 billion net of tax) resulting from the transfer to the Insurer of a portion of the Qualified PPP’s defined benefit pension obligations and related plan assets in the third quarter of 2024 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 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 September 30


(Dollars and shares in millions except per share amounts)							Yr.-to-Yr. Percent/ Margin Change
For the three months ended September 30:	2024			2023
Revenue (1)	$	14,968		$	14,752		1.5	%
Gross profit margin	56.3		%	54.4		%	1.9	pts.
Total expense and other (income)	$	9,222		$	6,150		50.0	%
Income/(loss) from continuing operations before income taxes	$	(802)		$	1,873		nm
Provision for/(benefit from) income taxes from continuing operations	$	(485)		$	159		nm
Income/(loss) from continuing operations	$	(317)		$	1,714		nm
Income/(loss) from continuing operations margin	(2.1)		%	11.6		%	(13.7)	pts.
Income from discontinued operations, net of tax	$	(13)		$	(10)		29.4	%
Net income/(loss) (2)	$	(330)		$	1,704		nm
Earnings/(loss) per share from continuing operations - assuming dilution (2)	$	(0.34)		$	1.86		nm
Consolidated earnings/(loss) per share - assuming dilution (2)	$	(0.36)		$	1.84		nm
Weighted-average shares outstanding - assuming dilution	923.6			923.7			0.0	%

(1)Year-to-year revenue growth of 1.6 percent adjusted for currency.

(2)Includes a one-time, non-cash, pre-tax pension settlement charge of $2.7 billion ($2.0 billion net of tax) resulting in an impact of $2.18 to both diluted earnings/(loss) per share from continuing operations and consolidated diluted earnings/(loss) per share. Refer to note 18, "Retirement-Related Benefits," for additional information.

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Management Discussion – (continued)

The following table provides the company’s operating (non-GAAP) earnings for the third quarter of 2024 and 2023.


(Dollars in millions except per share amounts)					Yr.-to-Yr. Percent Change
For the three months ended September 30:	2024		2023
Net income/(loss) as reported (1)	$	(330)	$	1,704	nm
Income from discontinued operations, net of tax	(13)		(10)		29.4	%
Income/(loss) from continuing operations (1)	$	(317)	$	1,714	nm
Non-operating adjustments (net of tax):
Acquisition-related charges	$	373	$	340	9.9	%
Non-operating retirement-related costs/(income) (1)	2,097		1		nm
U.S. tax reform impacts	2		(24)		nm
Operating (non-GAAP) earnings (2)	$	2,155	$	2,031	6.1	%
Diluted operating (non-GAAP) earnings per share (2)	$	2.30	$	2.20	4.5	%

(1)Includes the impact of a one-time, non-cash pension settlement charge of $2.0 billion net of tax.

(2)Refer to page 85 for a more detailed reconciliation of net income to operating earnings.

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Macroeconomic Environment:

Our business portfolio positions us well to capture market opportunities 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. Clients and partners continue to leverage technology to allow businesses to scale, drive efficiencies, fuel growth and gain competitive advantage. The economic uncertainty caused by temporary factors including geopolitical issues, upcoming elections, and the changing landscape of interest rates and inflation is leading clients to manage their discretionary spending, which has impacted certain areas of our Consulting business. The consulting market remains dynamic, with significant opportunity as clients and partners prepare for AI.

In the first nine 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 September 30:

In the third quarter of 2024, we reported $15.0 billion in revenue and a net loss from continuing operations of $0.3 billion, which includes the impact of a one-time, non cash, pre-tax pension settlement charge of $2.7 billion ($2.0 billion net of tax). The pension settlement charge was the result of the transfer to the Insurer of a portion of the Qualified PPP’s defined benefit pension obligations and related plan assets, an action we took to further reduce the risk profile of our worldwide retirement-related plans. Our operating (non-GAAP) earnings for the three months ended September 30, 2024 were $2.2 billion. Diluted loss per share from continuing operations was $0.34 as reported, including an impact of $2.18 from the pension settlement charge, and diluted earnings per share was $2.30 on an operating (non-GAAP) basis. We generated $2.9 billion in cash from operations and $2.1 billion in free cash flow, and delivered shareholder returns of $1.5 billion in dividends. Our third-quarter performance reflects accelerated Software revenue growth, expanded gross profit margin, and strong cash generation, demonstrating the continued success of 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 cash generation, position us to continue investing in innovation and expertise across the portfolio while continuing to return value to shareholders through dividends.

Total revenue grew 1.5 percent as reported and 2 percent adjusted for currency compared to the prior-year period, led by Software. Software delivered revenue growth of 9.7 percent as reported and 9.6 percent adjusted for currency, driven by both Hybrid Platform & Solutions and Transaction Processing, and reflecting the repositioning of our software portfolio around Hybrid Cloud, Automation, Data and Transaction Processing. Hybrid Platform & Solutions revenue was up 9.8 percent as reported and 9.7 percent adjusted for currency, led by growth in Red Hat, Automation and Data & AI. Transaction Processing grew 9.4 percent as reported and adjusted for currency, reflecting growing capacity, solid renewal

Management Discussion – (continued)

rates, and continued customer interest in our AI solutions. Consulting revenue decreased 0.5 percent as reported but was flat adjusted for currency, as it continued to be impacted by a dynamic market environment as clients reprioritize spending given macroeconomic uncertainty. Infrastructure revenue decreased 7.0 percent year to year as reported and 6.7 percent adjusted for currency, reflecting product cycle dynamics.

From a geographic perspective, Americas revenue decreased 3.0 percent as reported (2.4 percent adjusted for currency). Europe/Middle East/Africa (EMEA) increased 8.5 percent as reported (6.8 percent adjusted for currency). Asia Pacific increased 3.1 percent as reported (4.5 percent adjusted for currency).

Gross margin of 56.3 percent increased 1.9 points year to year with continued margin expansion driven by revenue growth, portfolio mix and ongoing productivity actions. Operating (non-GAAP) gross margin of 57.5 percent increased 2.1 points compared to the prior-year period due to the same dynamics.

Total expense and other (income) increased 50.0 percent in the third quarter of 2024 versus the prior-year period primarily driven by the pension settlement charge of $2.7 billion described above, higher workforce rebalancing charges and higher spending reflecting our continued investment in portfolio innovation to drive our strategy. This was partially offset by a gain from the sale of certain QRadar SaaS assets and the benefits from productivity and the actions we have taken to transform our operations. Total operating (non-GAAP) expense and other (income) increased 4.1 percent year to year, driven primarily by the factors described above, excluding the pension settlement charge.

Pre-tax loss from continuing operations was $0.8 billion in the third quarter of 2024 compared with pre-tax income of $1.9 billion in the prior-year period, and pre-tax margin was down 18.1 points year to year to (5.4) percent. The continuing operations benefit from income taxes in the third quarter of 2024 was $0.5 billion, compared to a provision for income taxes of $0.2 billion in the third quarter of 2023. Net loss from continuing operations was $0.3 billion compared with net income of $1.7 billion in the prior-year period and the net income/(loss) from continuing operations margin of (2.1) percent was down 13.7 points year to year. This year-to-year performance was primarily driven by the transfer to the Insurer of a portion of the Qualified PPP’s defined benefit pension obligations and related plan assets which resulted in a pension settlement charge of $2.7 billion ($2.0 billion net of tax) in the third quarter of 2024 as described above.

Operating (non-GAAP) pre-tax income from continuing operations of $2.5 billion increased 8.2 percent compared to the third quarter of 2023 and the operating (non-GAAP) pre-tax margin from continuing operations increased 1.0 point to 16.6 percent primarily driven by our revenue growth and gross margin performance and the benefits from productivity and the actions taken to transform our operations, partially offset by our continued investments to drive innovation. The operating (non-GAAP) provision for income taxes was $0.3 billion in both the third quarter of 2024 and the third quarter of 2023. Operating (non-GAAP) net income from continuing operations of $2.2 billion increased 6.1 percent and the operating (non-GAAP) net income margin from continuing operations of 14.4 percent was up 0.6 points year to year.

Diluted loss per share from continuing operations was $0.34 in the third quarter of 2024, including an impact of $2.18 from the pension settlement charge, compared to diluted earnings per share of $1.86 in the prior-year period. Operating (non-GAAP) diluted earnings per share of $2.30 increased 4.5 percent compared to the third quarter of 2023. Operating (non-GAAP) earnings per share was calculated using 938.4 million shares, which includes 14.9 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, 2024, these dilutive potential shares were excluded from the GAAP loss per share calculation as the effect would have been antidilutive. Refer to note 7, “Earnings Per Share of Common Stock,” for additional information.

Cash provided by operating activities was $2.9 billion in the third quarter of 2024, a decrease of $0.2 billion compared to the third quarter of 2023 and free cash flow was $2.1 billion, an increase of $0.4 billion versus the prior-year period. Net cash used in investing activities of $1.6 billion decreased $0.4 billion and net cash used in financing activities of $2.8 billion decreased $0.4 billion compared to the third quarter of 2023.

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:	2024			2023
Revenue (1)	$	45,199		$	44,479		1.6	%
Gross profit margin	55.6		%	54.0		%	1.5	pts.
Total expense and other (income)	$	22,621		$	19,102		18.4	%
Income from continuing operations before income taxes	$	2,491		$	4,931		(49.5)	%
Provision for/(benefit from) income taxes from continuing operations	$	(597)		$	702		nm
Income from continuing operations	$	3,088		$	4,229		(27.0)	%
Income from continuing operations margin	6.8		%	9.5		%	(2.7)	pts.
Income/(loss) from discontinued operations, net of tax	$	21		$	(15)		nm
Net income (2)	$	3,109		$	4,214		(26.2)	%
Earnings per share from continuing operations - assuming dilution (2)	$	3.30		$	4.59		(28.1)	%
Consolidated earnings per share - assuming dilution (2)	$	3.32		$	4.58		(27.5)	%
Weighted-average shares outstanding - assuming dilution	935.4			920.3			1.6	%

	At 9/30/2024			At 12/31/2023
Assets	$	134,339		$	135,241		(0.7)	%
Liabilities	$	109,809		$	112,628		(2.5)	%
Equity	$	24,530		$	22,613		8.5	%

(1)Year-to-year revenue growth of 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 2024 and 2023.


(Dollars in millions except per share amounts)					Yr.-to-Yr. Percent Change
For the nine months ended September 30:	2024		2023
Net income as reported (1)	$	3,109	$	4,214	(26.2)	%
Income/(loss) from discontinued operations, net of tax	21		(15)		nm
Income from continuing operations (1)	$	3,088	$	4,229	(27.0)	%
Non-operating adjustments (net of tax):
Acquisition-related charges	$	1,081	$	953	13.4	%
Non-operating retirement-related costs/(income) (1)	2,259		11		nm
U.S. tax reform impacts	(434)		91		nm

Operating (non-GAAP) earnings (2)	$	5,994	$	5,283	13.4	%
Diluted operating (non-GAAP) earnings per share (2)	$	6.41	$	5.74	11.7	%

(1)Includes the impact of a one-time, non-cash pension settlement charge of $2.0 billion net of tax.

(2)Refer to page 86 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 2024, we reported $45.2 billion in revenue, net income from continuing operations of $3.1 billion, including the impact of a one-time, non cash, pre-tax pension settlement charge of $2.7 billion ($2.0 billion net of tax), and operating (non-GAAP) earnings of $6.0 billion. Diluted earnings per share from continuing operations was $3.30 as reported, including an impact of $2.18 from the pension settlement charge, and diluted earnings per share was $6.41 on an operating (non-GAAP) basis. We generated $9.1 billion in cash from operations and $6.6 billion in free cash flow, and delivered shareholder returns of $4.6 billion in dividends. Our year-to-date performance reflects our deep focus on the business fundamentals with continued revenue growth, gross profit margin expansion and strong cash generation, and a balance sheet with financial flexibility to support our business.

Total revenue grew 1.6 percent as reported and 3 percent adjusted for currency compared to the prior-year period. Software delivered revenue growth of 7.5 percent as reported and 8.0 percent adjusted for currency, with solid growth in Hybrid Platform & Solutions and Transaction Processing. Consulting revenue decreased 0.5 percent as reported but grew 1.1 percent adjusted for currency, led by strength in our Business Transformation offerings with revenue growth year to year driven by transformation projects for data, finance and supply chain. Infrastructure revenue decreased 2.3 percent as reported and 1.2 percent adjusted for currency, driven by declines in Infrastructure Support, partially offset by growth in Hybrid Infrastructure.

From a geographic perspective, Americas revenue decreased 0.4 percent year to year as reported (flat adjusted for currency). EMEA increased 3.5 percent (2.6 percent adjusted for currency). Asia Pacific increased 4.0 percent (9.8 percent adjusted for currency).

Gross margin of 55.6 percent increased 1.5 points year to year with gross profit margin expansion across all reportable segments driven by our improving portfolio mix and productivity actions. Operating (non-GAAP) gross margin of 56.7 percent increased 1.7 points compared to the prior-year period due to the same dynamics.

Total expense and other (income) increased increased 18.4 percent in the first nine months of 2024 versus the prior-year period primarily driven by the pension settlement charge of $2.7 billion described above, higher workforce rebalancing charges and higher spending reflecting our continued investment in portfolio innovation to drive our strategy. This was partially offset by a gain from the sale of certain QRadar SaaS assets, the gain on the divestiture of The Weather Company assets in the first quarter and the benefits from productivity and the actions taken to transform our operations. Total operating (non-GAAP) expense and other (income) increased 2.0 percent year to year, driven primarily by the factors described above, excluding the pension settlement charge.

Pre-tax income from continuing operations of $2.5 billion decreased 49.5 percent and pre-tax margin was 5.5 percent, a decrease of 5.6 points as compared to the first nine months of 2023. Performance in the first nine months of 2024 reflects the impact from the pension settlement charge described above partially offset by our gross margin expansion and the benefits from productivity and the actions taken to transform our operations which enabled investments to drive innovation. The continuing operations benefit from income taxes for the first nine months of 2024 was $0.6 billion, compared to a provision for income taxes of $0.7 billion for the first nine months of 2023. The current-year tax benefit was primarily driven by the resolution of certain tax audit matters in the first quarter and the pension settlement charge in the third quarter. Net income from continuing operations of $3.1 billion decreased 27.0 percent and the net income from continuing operations margin was 6.8 percent, down 2.7 points year to year.

Operating (non-GAAP) pre-tax income from continuing operations of $6.9 billion increased 12.9 percent compared to the prior-year period and the operating (non-GAAP) pre-tax margin from continuing operations increased 1.5 points to 15.3 percent. The operating (non-GAAP) provision for income taxes was $0.9 billion in both the first nine months of 2024 and the first nine months of 2023. Operating (non-GAAP) income from continuing operations of $6.0 billion increased 13.4 percent and the operating (non-GAAP) income margin from continuing operations of 13.3 percent increased 1.4 points year to year.

Diluted earnings per share from continuing operations was $3.30 for the nine months ended 2024 and included an impact of $2.18 from the pension settlement charge and decreased 28.1 percent compared to the prior-year period. Operating (non-GAAP) diluted earnings per share of $6.41 increased 11.7 percent compared to the prior-year period.

Management Discussion – (continued)

At September 30, 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 September 30, 2024 of $13.7 billion increased $0.3 billion from December 31, 2023 and debt of $56.6 billion at September 30, 2024 was flat from prior-year end.

Total assets decreased $0.9 billion ($0.7 billion adjusted for currency) from December 31, 2023 primarily driven by a decrease in receivables, partially offset by an increase in goodwill and intangible assets mainly related to the StreamSets and webMethods acquisition. Total liabilities decreased $2.8 billion ($2.9 billion adjusted for currency) from December 31, 2023 primarily driven by decreases in tax liabilities and accounts payable. Total equity of $24.5 billion increased $1.9 billion from December 31, 2023 primarily driven by the year-to-date net income, including the impact of the pension settlement charge, a decrease in accumulated other comprehensive loss mainly driven by retirement-related benefit plans due to the pension settlement charge of $2.0 billion net of tax, and common stock issuances; partially offset by dividends paid.

Cash provided by operating activities was $9.1 billion in the first nine months of 2024, a decrease of $0.4 billion compared to the first nine months of 2023 and free cash flow was $6.6 billion, an increase of $1.5 billion versus the prior-year period. Refer to page 81 for additional information on free cash flow. Net cash used in investing activities of $3.6 billion decreased $6.3 billion compared to the prior-year period. Financing activities were a net use of cash of $5.4 billion in the first nine months of 2024 compared to $0.2 billion in the prior-year period.

Management Discussion – (continued)

Third 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 tables present each reportable segment’s revenue and gross margin results, followed by an analysis of the third quarter and first nine months of 2024 versus the third quarter and first nine months of 2023 reportable segments results. Prior-year results have been recast to reflect the January 2024 segment 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 September 30:	2024			2023 (1)
Revenue:
Software	$	6,524		$	5,947		9.7	%	9.6	%
Gross margin	83.2		%	82.3		%	0.9	pts.
Consulting	5,152			5,178			(0.5)	%	(0.2)	%
Gross margin	28.4		%	27.6		%	0.9	pts.
Infrastructure	3,042			3,272			(7.0)	%	(6.7)	%
Gross margin	55.0		%	53.7		%	1.2	pts.
Financing	181			186			(2.5)	%	(1.3)	%
Gross margin	47.2		%	49.7		%	(2.5)	pts.
Other	68			170			(60.0)	%	(60.2)	%
Gross margin	(342.6)		%	(88.3)		%	(254.4)	pts.
Total revenue	$	14,968		$	14,752		1.5	%	1.6	%
Total gross profit	$	8,420		$	8,023		5.0	%
Total gross margin	56.3		%	54.4		%	1.9	pts.
Non-operating adjustments:
Amortization of acquired intangible assets	192			162			18.6	%
Operating (non-GAAP) gross profit	$	8,612		$	8,185		5.2	%
Operating (non-GAAP) gross margin	57.5		%	55.5		%	2.1	pts.

(1)Recast to reflect January 2024 segment changes.

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:	2024			2023 (1)
Revenue:
Software	$	19,162		$	17,832		7.5	%	8.0	%
Gross margin	83.1		%	82.3		%	0.8	pts.
Consulting	15,517			15,601			(0.5)	%	1.1	%
Gross margin	26.7		%	26.3		%	0.4	pts.
Infrastructure	9,764			9,988			(2.3)	%	(1.2)	%
Gross margin	55.3		%	54.0		%	1.3	pts.
Financing	543			566			(4.1)	%	(3.1)	%
Gross margin	48.2		%	47.5		%	0.7	pts.
Other	214			491			(56.4)	%	(56.5)	%
Gross margin	(286.7)		%	(83.8)		%	(202.9)	pts.
Total revenue	$	45,199		$	44,479		1.6	%	2.7	%
Total gross profit	$	25,112		$	24,033		4.5	%
Total gross margin	55.6		%	54.0		%	1.5	pts.
Non-operating adjustments:
Amortization of acquired intangible assets	533			460			15.9	%
Operating (non-GAAP) gross profit	$	25,645		$	24,492		4.7	%
Operating (non-GAAP) gross margin	56.7		%	55.1		%	1.7	pts.

(1)Recast to reflect January 2024 segment changes.

Software


(Dollars in millions)					Yr.-to-Yr. Percent Change		Yr.-to-Yr. Percent Change Adjusted For Currency
For the three months ended September 30:	2024		2023 (1)
Software revenue:	$	6,524	$	5,947	9.7	%	9.6	%
Hybrid Platform & Solutions	$	4,600	$	4,187	9.8	%	9.7	%
Red Hat					13.7		13.8
Automation					13.2		12.9
Data & AI					5.3		5.1
Security					(1.2)		(1.0)
Transaction Processing	1,925		1,759		9.4		9.4

(1)Recast to reflect January 2024 segment changes.

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:	2024		2023 (1)
Software revenue:	$	19,162	$	17,832	7.5	%	8.0	%
Hybrid Platform & Solutions	$	13,272	$	12,388	7.1	%	7.6	%
Red Hat					9.8		10.4
Automation					13.7		14.1
Data & AI					0.8		1.1
Security					(0.5)		(0.1)
Transaction Processing	5,889		5,444		8.2		8.9

(1)Recast to reflect January 2024 segment changes.

Software revenue of $6,524 million increased 9.7 percent as reported (9.6 percent adjusted for currency) in the third quarter of 2024 compared to the prior-year period, reflecting accelerated revenue growth in total Software and in Hybrid Platform & Solutions as compared to the quarterly year-to-year growth rates in the first-half 2024. This performance reflects the repositioning of Software around our key growth platforms, including Hybrid Cloud, Automation, Data and Transaction Processing, where we deliver a differentiated value proposition to our clients to help address their most pressing needs. We delivered strong growth in our recurring revenue base and have momentum from innovation across our Software portfolio. Red Hat revenue growth accelerated in the third quarter and contributed approximately 3.5 points of growth to total Software. The combination of innovation and recurring revenue also contributed approximately 3.5 points to total Software revenue growth. In addition, our focused acquisition strategy contributed approximately 3 points to our total Software revenue growth.

Hybrid Platform & Solutions revenue of $4,600 million increased 9.8 percent as reported (9.7 percent adjusted for currency) in the third quarter of 2024 compared to the prior-year period, driven primarily by strong growth in Red Hat, Automation and Data & AI. Red Hat revenue increased 13.7 percent as reported (13.8 percent adjusted for currency) in the third quarter of 2024. We gained market share across each of our key solutions, as OpenShift and Ansible each continued to grow year-to-year revenue greater than 20 percent in the third quarter, and RHEL had double-digit, year-to-year growth in the quarter. This revenue growth within Red Hat reflects the demand for our hybrid cloud solutions as clients continue to prioritize application modernization on OpenShift containers and Ansible automation to optimize their IT spend and reduce operational complexity. We had strong acceleration in Red Hat's subscription business this quarter compared to the second-quarter 2024 and the consumption-based services business returned to growth in the third quarter compared to the prior-year period. Automation revenue increased 13.2 percent as reported (12.9 percent adjusted for currency) in the third quarter of 2024 compared to the prior-year period driven by our Software-as-a-Service subscription offerings such as AI Ops and Management, which includes the revenue contribution from Apptio. The Apptio acquisition closed in August last year and continues to build strong synergies with our automation capabilities and broader software portfolio, driving continued growth in signings and annual recurring revenue. Data & AI revenue increased 5.3 percent as reported (5.1 percent adjusted for currency) driven by continued growth in watsonx including our AI Assistant for Customer Care.

Across Hybrid Platform & Solutions, our annual recurring revenue (ARR) was $14.9 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 $1,925 million increased 9.4 percent as reported and adjusted for currency in the third quarter of 2024 compared to the prior-year period, reflecting the growing client demand for workload capacity, solid renewal rates, and continued customer interest in our new generative AI product, watsonx Code Assistant for Z.

Management Discussion – (continued)

For the first nine months of 2024, Software revenue of $19,162 million increased 7.5 percent as reported (8.0 percent adjusted for currency) compared to the same period in 2023, driven by solid growth in Hybrid Platform & Solutions, led by Automation and Red Hat, and Transaction Processing. This performance reflects the continued demand for the high-value capabilities within our Hybrid Platform & Solutions offerings and the value of our mission-critical software portfolio within Transaction Processing which supports growing workloads on our hardware platforms. This revenue performance also reflects the investments we have been making in Software, both organically and in acquisitions.


(Dollars in millions)							Yr.-to-Yr. Percent/ Margin Change
For the three months ended September 30:	2024			2023 (1)
Software:
Gross profit	$	5,431		$	4,896		10.9	%
Gross profit margin	83.2		%	82.3		%	0.9	pts.
Segment profit	$	1,969		$	1,722		14.4	%
Segment profit margin	30.2		%	29.0		%	1.2	pts.


(Dollars in millions)							Yr.-to-Yr. Percent/ Margin Change
For the nine months ended September 30:	2024			2023 (1)
Software:
Gross profit	$	15,925		$	14,681		8.5	%
Gross profit margin	83.1		%	82.3		%	0.8	pts.
Segment profit	$	5,582		$	4,850		15.1	%
Segment profit margin	29.1		%	27.2		%	1.9	pts.

(1)Recast to reflect January 2024 segment changes.

Software gross profit margin increased 0.9 points to 83.2 percent in the third quarter of 2024 compared to the prior-year period. Segment profit of $1,969 million increased 14.4 percent and segment profit margin of 30.2 percent increased 1.2 points compared to the prior-year period. The segment profit growth reflects our operating leverage driven by our revenue performance and portfolio mix and the benefits of our continued productivity actions, partially offset by key investments in software innovation.

For the first nine months of 2024, gross profit margin increased 0.8 points to 83.1 percent, compared to the first nine months of 2023. Segment profit of $5,582 million increased 15.1 percent and segment profit margin of 29.1 percent increased 1.9 points compared to the prior-year period. The segment profit growth for the first nine months of 2024 was driven by the same factors described for the third quarter.

Management Discussion – (continued)

Consulting


(Dollars in millions)					Yr.-to-Yr. Percent Change		Yr.-to-Yr. Percent Change Adjusted For Currency
For the three months ended September 30:	2024		2023 (1)
Consulting revenue:	$	5,152	$	5,178	(0.5)	%	(0.2)	%
Business Transformation	$	2,327	$	2,291	1.6	%	1.7	%
Technology Consulting	905		943		(4.0)		(3.6)
Application Operations	1,921		1,944		(1.2)		(0.8)


(Dollars in millions)					Yr.-to-Yr. Percent Change		Yr.-to-Yr. Percent Change Adjusted For Currency
For the nine months ended September 30:	2024		2023 (1)
Consulting revenue:	$	15,517	$	15,601	(0.5)	%	1.1	%
Business Transformation	$	7,004	$	6,869	2.0	%	3.5	%
Technology Consulting	2,752		2,808		(2.0)		0.0
Application Operations	5,761		5,924		(2.8)		(1.1)

(1)Recast to reflect January 2024 segment changes.

Consulting revenue of $5,152 million decreased 0.5 percent as reported (0.2 percent adjusted for currency) in the third quarter of 2024 compared to the prior-year period, reflecting a challenging macroeconomic environment which is impacting client buying behavior. At the same time, clients are reprioritizing their IT budgets to prepare for generative AI. We continued to build a solid generative AI business as we partner with our clients to design and scale AI solutions and develop new ways of working. This early momentum in engaging with clients as they architect their AI strategies is establishing IBM Consulting as a strategic partner of choice. In the third quarter, our Red Hat consulting practice, which helps clients optimize how they build, deploy, and manage applications for a hybrid cloud environment continued to grow revenue at a double-digit rate on a year-to-year basis in the third quarter, with the highest level of single-quarter signings since the acquisition of Red Hat. In addition, Consulting revenue generated through our strategic partnerships continued to contribute strong revenue growth.

In the third quarter of 2024, Business Transformation revenue of $2,327 million increased 1.6 percent as reported (1.7 percent adjusted for currency) compared to the prior-year period driven by strength in transformation projects for data, finance and supply chain.

Technology Consulting revenue of $905 million decreased 4.0 percent as reported (3.6 percent adjusted for currency) in the third quarter of 2024 compared to the prior-year period, driven by a decline in our application development offerings, partially offset by solid growth in our cloud-based application services across modernization development and management services.

Application Operations revenue of $1,921 million decreased 1.2 percent as reported (0.8 percent adjusted for currency) compared to the prior-year period, reflecting a reprioritization of spending by clients for on-premise customized services.

For the first nine months of 2024, Consulting revenue of $15,517 million decreased 0.5 percent as reported, but grew 1.1 percent adjusted for currency, led by strength in our Business Transformation offerings with revenue growth year to year driven by transformation projects for data, finance and supply chain. We had double-digit revenue growth in both our Red Hat and strategic partner driven practices in the first nine months of 2024 compared to the prior-year period. Throughout 2024, the uncertainty of the macroeconomic environment has delayed client spending on smaller, discretionary projects, however, we had solid demand for larger digital transformation projects.

Management Discussion – (continued)


(Dollars in millions)							Yr.-to-Yr. Percent/ Margin Change
For the three months ended September 30:	2024			2023 (1)
Consulting:
Gross profit	$	1,464		$	1,427		2.6	%
Gross profit margin	28.4		%	27.6		%	0.9	pts.
Segment profit	$	559		$	566		(1.2)	%
Segment profit margin	10.9		%	10.9		%	(0.1)	pts.


(Dollars in millions)							Yr.-to-Yr. Percent/ Margin Change
For the nine months ended September 30:	2024			2023 (1)
Consulting:
Gross profit	$	4,141		$	4,105		0.9	%
Gross profit margin	26.7		%	26.3		%	0.4	pts.
Segment profit	$	1,447		$	1,476		(1.9)	%
Segment profit margin	9.3		%	9.5		%	(0.1)	pts.

(1)Recast to reflect January 2024 segment changes.

In the third quarter of 2024, Consulting gross profit margin of 28.4 percent increased 0.9 points on a year-to-year basis. Segment profit of $559 million decreased 1.2 percent and segment profit margin of 10.9 percent decreased 0.1 points year to year. The gross profit margin expansion reflects the savings from productivity actions we have taken. Our segment profit margin improved 2.0 points compared to the second-quarter 2024 reflecting the benefits from our productivity actions, but was essentially flat year to year.

For the first nine months of 2024, Consulting gross profit margin of 26.7 percent increased 0.4 points compared to the prior-year period. Segment profit of $1,447 million decreased 1.9 percent and segment profit margin of 9.3 percent decreased 0.1 points in the first nine months of 2024 compared to the prior-year period. The nine-month margin performance was driven primarily by the same factors as 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:	2024		2023 (1)
Total Consulting signings	$	5,448	$	5,964	(8.7)	%	(9.3)	%


(Dollars in millions)					Yr.-to-Yr. Percent Change		Yr.-to-Yr. Percent Change Adjusted For Currency
For the nine months ended September 30:	2024		2023 (1)
Total Consulting signings	$	16,637	$	17,293	(3.8)	%	(2.7)	%

(1)Recast to reflect January 2024 segment changes.

In the third quarter of 2024, Consulting signings decreased 8.7 percent as reported and 9.3 percent adjusted for currency. Clients are reprioritizing their IT budgets to prepare for investments in generative AI, while the challenging macroeconomic environment is impacting client spending, particularly on more discretionary projects. We continued to have solid demand for large digital transformations that contributed to the $5.4 billion in signings in the quarter. Our book-to-bill ratio for the trailing twelve-months was 1.14. 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.

Management Discussion – (continued)

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:	2024		2023
Infrastructure revenue:	$	3,042	$	3,272	(7.0)	%	(6.7)	%
Hybrid Infrastructure	$	1,765	$	1,943	(9.1)	%	(9.2)	%
IBM Z					(18.7)		(18.6)
Distributed Infrastructure					(2.8)		(3.0)
Infrastructure Support	1,277		1,329		(3.9)		(3.1)


(Dollars in millions)					Yr.-to-Yr. Percent Change		Yr.-to-Yr. Percent Change Adjusted For Currency
For the nine months ended September 30:	2024		2023
Infrastructure revenue:	$	9,764	$	9,988	(2.3)	%	(1.2)	%
Hybrid Infrastructure	$	5,928	$	5,912	0.3	%	1.1	%
IBM Z					(2.7)		(1.8)
Distributed Infrastructure					2.2		3.0
Infrastructure Support	3,835		4,076		(5.9)		(4.5)

Infrastructure revenue of $3,042 million decreased 7.0 percent as reported and 6.7 percent adjusted for currency in the third quarter of 2024 compared to the prior-year period, reflecting the impact of product cycle dynamics in both Hybrid Infrastructure and Infrastructure Support.

Hybrid Infrastructure revenue of $1,765 million decreased 9.1 percent as reported and 9.2 percent adjusted for currency in the third quarter of 2024 compared to the prior-year period. Within Hybrid Infrastructure, IBM Z decreased 18.7 percent as reported (18.6 percent adjusted for currency) reflecting the z16 program cycle dynamics. Ten quarters into the program, z16 continued to exceed the total revenue generated by each prior cycle and resulted in a greater than 30 percent increase in program-to-date installed MIPs. Our clients continue to face increased demands for workloads given rapid business expansion, complex regulatory environments, and increased cybersecurity threats and attacks. IBM Z remains uniquely positioned to address these demands with the technologies that our latest program offers, which includes embedded AI at scale, quantum-safe security, and cloud-native development for hybrid cloud. Distributed Infrastructure revenue decreased 2.8 percent as reported and 3.0 percent adjusted for currency, driven primarily by declines in Cloud platform revenue, as well as a decrease in Power systems revenue reflecting product cycle dynamics, partially offset by solid growth in our Storage business as we continued to take market share in storage technology.

Management Discussion – (continued)

Infrastructure Support revenue of $1,277 million decreased 3.9 percent as reported (3.1 percent adjusted for currency) in the third quarter of 2024 compared to the prior-year period, driven by product cycle dynamics and volume decline in support of non-IBM equipment.

For the first nine months of 2024, Infrastructure revenue of $9,764 million decreased 2.3 percent as reported (1.2 percent adjusted for currency) compared to the prior-year period, driven by declines in Infrastructure Support partially offset by growth in Hybrid Infrastructure. Within Hybrid Infrastructure, Distributed Infrastructure revenue increased in the first nine months of 2024 driven primarily by growth in Storage and Power systems, partially offset by a revenue decline in IBM Z reflecting the program cycle. Infrastructure Support revenue declined in the first nine months of 2024 driven by volume declines 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 September 30:	2024			2023 (1)
Infrastructure:
Gross profit	$	1,672		$	1,758		(4.9)	%
Gross profit margin	55.0		%	53.7		%	1.2	pts.
Segment profit	$	422		$	490		(13.8)	%
Segment profit margin	13.9		%	15.0		%	(1.1)	pts.


(Dollars in millions)							Yr.-to-Yr. Percent/ Margin Change
For the nine months ended September 30:	2024			2023 (1)
Infrastructure:
Gross profit	$	5,398		$	5,389		0.2	%
Gross profit margin	55.3		%	54.0		%	1.3	pts.
Segment profit	$	1,387		$	1,529		(9.3)	%
Segment profit margin	14.2		%	15.3		%	(1.1)	pts.

(1)Recast to reflect January 2024 segment changes.

Infrastructure gross profit margin of 55.0 percent increased 1.2 points in the third quarter of 2024 compared to the prior-year period, with margin expansion in Infrastructure Support and Hybrid Infrastructure. The increase in margin within Infrastructure Support was driven by product mix. The increase in margin within Hybrid Infrastructure was driven primarily by margin expansion in both IBM Z and Distributed Infrastructure, partially offset by portfolio mix. In the third quarter of 2024, Infrastructure segment profit of $422 million decreased 13.8 percent and segment profit margin of 13.9 percent decreased 1.1 points compared to the prior-year period. The year-to-year decrease in segment profit and margin reflects the revenue decline due to product cycle dynamics in IBM Z and Distributed Infrastructure and continued investments in innovation for our next generation of products. This performance was partially offset by higher IP and custom development income year to year and savings from productivity actions.

For the first nine months of 2024, gross profit margin of 55.3 percent increased 1.3 points compared to the prior-year period, driven by margin expansion in Hybrid Infrastructure and Infrastructure Support. Within Hybrid Infrastructure, we had margin improvement across our hardware platforms. The gross profit margin improvement in Infrastructure Support reflects the benefits from productivity and cost management. Infrastructure segment profit of $1,387 million decreased 9.3 percent and segment profit margin of 14.2 percent decreased 1.1 points in the first nine months of 2024 compared to the prior-year period. This performance reflects the same factors described for the third quarter, and also included approximately a half of a point of impact from currency.

Financing

Refer to pages 82 through 84 for a discussion of Financing’s segment results.

Management Discussion – (continued)

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:	2024		2023
Total Revenue	$	14,968	$	14,752	1.5	%	1.6	%
Americas	$	7,453	$	7,686	(3.0)	%	(2.4)	%
Europe/Middle East/Africa (EMEA)	4,584		4,223		8.5		6.8
Asia Pacific	2,932		2,843		3.1		4.5


(Dollars in millions)					Yr.-to-Yr. Percent Change		Yr.-to-Yr. Percent Change Adjusted For Currency
For the nine months ended September 30:	2024		2023
Total Revenue	$	45,199	$	44,479	1.6	%	2.7	%
Americas	$	22,727	$	22,810	(0.4)	%	0.0	%
Europe/Middle East/Africa (EMEA)	13,619		13,156		3.5		2.6
Asia Pacific	8,853		8,513		4.0		9.8

Geographic revenue performance for the three months ended September 30, 2024:

Americas revenue of $7,453 million decreased 3.0 percent as reported and 2.4 percent adjusted for currency in the third quarter of 2024 compared to the prior-year period. The U.S. decreased 3.5 percent. Canada decreased 7.5 percent as reported and 6.1 percent adjusted for currency. Latin America increased 8.3 percent as reported and 13.5 percent adjusted for currency, with Brazil increasing 11.5 percent as reported and 18.9 percent adjusted for currency.

In EMEA, total revenue of $4,584 million increased 8.5 percent as reported and 6.8 percent adjusted for currency. Germany, France and the UK increased 19.6 percent, 5.2 percent and 4.7 percent, respectively, as reported, and 18.1 percent, 4.1 percent and 1.9 percent, respectively, adjusted for currency. Italy decreased 1.6 percent as reported and 2.8 percent adjusted for currency.

Asia Pacific revenue of $2,932 million increased 3.1 percent as reported and 4.5 percent adjusted for currency. Japan increased 11.4 percent as reported and 14.7 percent adjusted for currency. India was flat as reported and increased 1.2 percent adjusted for currency. Australia and China decreased 16.8 percent and 9.6 percent, respectively, as reported, and 18.9 percent and 10.5 percent, respectively, adjusted for currency.

Geographic revenue performance for the nine months ended September 30, 2024:

Americas revenue of $22,727 million decreased 0.4 percent as reported, but was flat adjusted for currency. The U.S. increased 0.8 percent compared to the prior-year period. Canada decreased 6.7 percent as reported and 5.8 percent adjusted for currency. Latin America decreased 1.7 percent as reported, but grew 0.8 percent adjusted for currency, with a decline in Brazil of 2.1 percent as reported, but growth of 0.6 percent adjusted for currency.

In EMEA, total revenue of $13,619 million increased 3.5 percent as reported and 2.6 percent adjusted for currency. Germany, the UK and Italy increased 9.1 percent, 2.8 percent and 1.7 percent, respectively, as reported, and 8.6 percent, 0.3 percent and 1.3 percent, respectively, adjusted for currency. France decreased 0.9 percent as reported and 1.2 percent adjusted for currency.

Asia Pacific revenue of $8,853 million increased 4.0 percent as reported and 9.8 percent adjusted for currency. Japan increased 8.5 percent as reported and 18.9 percent adjusted for currency. India increased 5.6 percent as reported and 6.9 percent adjusted for currency. China and Australia decreased 6.5 percent and 4.5 percent, respectively, as reported, and 5.0 percent and 3.8 percent, respectively, adjusted for currency.

Management Discussion – (continued)

Expense

Total Expense and Other (Income)


(Dollars in millions)							Yr.-to-Yr. Percent Change
For the three months ended September 30:	2024			2023
Total expense and other (income)	$	9,222		$	6,150		50.0	%
Non-operating adjustments:
Amortization of acquired intangible assets	$	(290)		$	(252)		15.0	%
Acquisition-related charges	(10)			(25)			(0.6)
Non-operating retirement-related (costs)/income (1)	(2,797)			12			nm
Operating (non-GAAP) expense and other (income)	$	6,125		$	5,885		4.1	%
Total expense-to-revenue ratio	61.6		%	41.7		%	19.9	pts.
Operating (non-GAAP) expense-to-revenue ratio	40.9		%	39.9		%	1.0	pts.


(Dollars in millions)							Yr.-to-Yr. Percent Change
For the nine months ended September 30:	2024			2023
Total expense and other (income)	$	22,621		$	19,102		18.4	%
Non-operating adjustments:
Amortization of acquired intangible assets	$	(815)		$	(735)		11.0	%
Acquisition-related charges	(106)			(35)			2.1
Non-operating retirement-related (costs)/income (1)	(2,991)			16			nm
Operating (non-GAAP) expense and other (income)	$	18,709		$	18,348		2.0	%
Total expense-to-revenue ratio	50.0		%	42.9		%	7.1	pts.
Operating (non-GAAP) expense-to-revenue ratio	41.4		%	41.3		%	0.1	pts.

(1)Includes the impact of a one-time, non-cash, pre-tax pension settlement charge of $2.7 billion. Refer to note 18, "Retirement-Related Benefits," for additional information.

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 September 30:	2024		2023
Selling, general and administrative expense:
Selling, general and administrative — other	$	3,865	$	3,730	3.6	%
Advertising and promotional expense	279		303		(7.8)
Workforce rebalancing charges	306		34		nm
Amortization of acquired intangible assets	290		252		15.0
Stock-based compensation	167		148		13.2
Provision for/(benefit from) expected credit loss expense	4		(9)		nm
Total selling, general and administrative expense	$	4,911	$	4,458	10.2	%
Non-operating adjustments:
Amortization of acquired intangible assets	$	(290)	$	(252)	15.0	%
Acquisition-related charges	(10)		(25)		(58.5)
Operating (non-GAAP) selling, general and administrative expense	$	4,611	$	4,181	10.3	%


(Dollars in millions)					Yr.-to-Yr. Percent Change
For the nine months ended September 30:	2024		2023
Selling, general and administrative expense:
Selling, general and administrative — other	$	11,901	$	11,607	2.5	%
Advertising and promotional expense	912		989		(7.9)
Workforce rebalancing charges	701		410		71.3
Amortization of acquired intangible assets	815		734		11.1
Stock-based compensation	511		465		9.8
Provision for/(benefit from) expected credit loss expense	(17)		7		nm
Total selling, general and administrative expense	$	14,823	$	14,212	4.3	%
Non-operating adjustments:
Amortization of acquired intangible assets	$	(815)	$	(734)	11.1	%
Acquisition-related charges	(39)		(34)		14.4
Operating (non-GAAP) selling, general and administrative expense	$	13,969	$	13,444	3.9	%

nm - not meaningful

Total selling, general and administrative (SG&A) expense increased 10.2 percent in the third quarter of 2024 versus the prior-year period driven primarily by the following factors:

Higher workforce rebalancing charges (6 points) to address stranded costs and accelerate our productivity initiatives; and
Higher spending, including expenses of acquired businesses, as a result of our continued investment to drive our hybrid cloud and AI strategy; partially offset by benefits from productivity and the actions taken to transform our operations (4 points).

Operating (non-GAAP) SG&A expense increased 10.3 percent year to year primarily driven by the same factors above.

Management Discussion – (continued)

Total SG&A expense increased 4.3 percent in the first nine months of 2024 versus the prior-year period driven primarily by the following factors:

Higher spending, including expenses from acquired businesses, as a result of our continued investment to drive our hybrid cloud and AI strategy; partially offset by benefits from productivity and the actions taken to transform our operations (3 points); and
Higher workforce rebalancing charges (2 points) to address stranded costs and accelerate our productivity initiatives; partially offset by
The effects of currency (1 point).

Operating (non-GAAP) SG&A expense increased 3.9 percent year to year primarily driven by the same factors above.

Expected credit loss expense was a benefit of $17 million in the first nine months of 2024 compared to a provision of $7 million in the prior-year period. The year-to-year change was primarily driven by lower reserve requirements in the current year. Refer to "Receivables and Allowances" section on page 75 for additional information.

Research, Development and Engineering


(Dollars in millions)					Yr.-to-Yr. Percent Change
For the three months ended September 30:	2024		2023
Research, development and engineering expense	$	1,876	$	1,685	11.3	%


(Dollars in millions)					Yr.-to-Yr. Percent Change
For the nine months ended September 30:	2024		2023
Research, development and engineering expense	$	5,512	$	5,027	9.7	%

Research, development and engineering (RD&E) expense increased 11.3 percent and 9.7 percent year to year in the third quarter and first nine months of 2024, respectively. The year-to-year increase in RD&E expense was primarily driven by investments to drive innovation in AI, hybrid cloud and quantum, as well as in Infrastructure ahead of our next IBM Z cycle in 2025.

Intellectual Property and Custom Development Income


(Dollars in millions)					Yr.-to-Yr. Percent Change
For the three months ended September 30:	2024		2023
Intellectual property and custom development income:
Intellectual property income (1) (2)	$	62	$	76	(17.9)	%
Custom development income	176		114		53.9

Total	$	238	$	190	25.3	%

(1)Includes licensing, royalty-based fees and sales.

(2)Prior period has been reclassified to conform to the change in 2024 presentation.

Management Discussion – (continued)


(Dollars in millions)					Yr.-to-Yr. Percent Change
For the nine months ended September 30:	2024		2023
Intellectual property and custom development income:
Intellectual property income (1) (2)	$	211	$	269	(21.5)	%
Custom development income	484		349		38.8

Total	$	696	$	618	12.6	%

(1)Includes licensing, royalty-based fees and sales.

(2)Prior period has been reclassified to conform to the change in 2024 presentation.

Total intellectual property and custom development income increased 25.3 percent year to year in the third quarter, and increased 12.6 percent in the first nine months of 2024 compared to the prior-year period. The increase in the third quarter and first nine months of 2024 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 and sales 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 September 30:	2024		2023
Other (income) and expense:
(Gains)/losses on foreign currency transactions	$	470	$	(260)	nm
(Gains)/losses on derivative instruments	(428)		316		nm
Interest income	(170)		(156)		8.6	%
Net (gains)/losses from securities and investment assets	(4)		(5)		(33.9)
Retirement-related costs/(income)	2,797		(12)		nm
Other (1)	(422)		(97)		nm
Total other (income) and expense	$	2,244	$	(215)	nm
Non-operating adjustments:


Non-operating retirement-related (costs)/income	(2,797)		12		nm
Operating (non-GAAP) other (income) and expense	$	(553)	$	(203)	172.3	%

(1)2024 amount includes a pre-tax gain of $351 million from the sale of certain QRadar SaaS assets. Refer to note 5, "Acquisitions & Divestitures," for additional information.

nm - not meaningful

Management Discussion – (continued)


(Dollars in millions)					Yr.-to-Yr. Percent Change
For the nine months ended September 30:	2024		2023
Other (income) and expense:
(Gains)/losses on foreign currency transactions	$	126	$	(338)	nm
(Gains)/losses on derivative instruments (1)	(1)		315		nm
Interest income	(597)		(527)		13.2	%
Net (gains)/losses from securities and investment assets	(14)		3		nm
Retirement-related costs/(income)	2,991		(16)		nm
Other (2)	(810)		(158)		nm
Total other (income) and expense	$	1,694	$	(721)	nm
Non-operating adjustments:
Amortization of acquired intangible assets	$	—	$	(1)	(100.0)	%
Acquisition-related charges (1)	(68)		(1)		nm
Non-operating retirement-related (costs)/income	(2,991)		16		nm
Operating (non-GAAP) other (income) and expense	$	(1,364)	$	(707)	93.1	%

(1)2024 includes the realized loss of $68 million recognized on foreign exchange derivative contracts entered into by the company prior to the acquisition of StreamSets and webMethods from Software AG. Refer to note 16, “Derivative Financial Instruments,” for additional information.

(2)2024 amount includes a pre-tax gain of $351 million from the sale of certain QRadar SaaS assets and a pre-tax gain of $241 million from the divestiture of The Weather Company assets. Refer to note 5, "Acquisitions & Divestitures," for additional information.

nm - not meaningful

Total other (income) and expense was $2,244 million of expense in the third quarter of 2024 compared to income of $215 million in the prior-year period. The year-to-year change was primarily driven by:

Non-operating retirement-related cost of $2,797 million in the current-year period versus $12 million of income in the prior-year period primarily driven by the impact of a one-time, non-cash pension settlement charge of $2,725 million in the third quarter of 2024 and an increase in recognized actuarial losses due to the change in amortization period effective January 1, 2024 as described in note 18, "Retirement-Related Benefits,"; partially offset by
A gain of $351 million from the sale of certain QRadar SaaS assets in the third-quarter 2024. Refer to note 5, "Acquisitions & Divestitures," for additional information.

Operating (non-GAAP) other (income) and expense was income of $553 million in the third quarter of 2024 and increased $350 million compared to the prior-year period. The year-to-year change was primarily driven by the gain recognized from the sale of certain QRadar SaaS assets in the current year.

Total other (income) and expense was $1,694 million of expense in the first nine months of 2024 compared to income of $721 million in the prior-year period. The year-to-year change was primarily driven by:

Non-operating retirement-related cost of $2,991 million compared to $16 million of income in the prior-year period primarily driven by the factors described in the third quarter above; and
Net exchange losses (including derivative instruments) of $124 million in the current-year period versus net exchange gains of $23 million in the prior-year period; partially offset by
A gain of $351 million from the sale of certain QRadar SaaS assets in the third-quarter 2024. Refer to note 5, "Acquisitions & Divestitures," for additional information; and
Higher gains on divestitures ($203 million) primarily driven by the divestiture of The Weather Company assets. Refer to note 5, "Acquisitions & Divestitures," for additional information; and
Higher gains on sales of intangibles ($81 million) included in “Other”; and

Management Discussion – (continued)

Higher interest income ($70 million) primarily driven by a higher average cash balance in the current year.

Operating (non-GAAP) other (income) and expense was income of $1,364 million in the first nine months of 2024 and increased $658 million compared to the prior-year period. The year-to-year change was primarily driven by the gain recognized from the sale of certain QRadar SaaS assets in the third-quarter 2024, higher gains on divestitures and sales of intangibles and higher interest income.

Interest Expense


(Dollars in millions)					Yr.-to-Yr. Percent Change
For the three months ended September 30:	2024		2023
Interest expense	$	429	$	412	4.2	%


(Dollars in millions)					Yr.-to-Yr. Percent Change
For the nine months ended September 30:	2024		2023
Interest expense	$	1,288	$	1202	7.2	%

Interest expense increased $17 million and $86 million year to year in the third quarter and first nine months of 2024, 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 2024 was $516 million and $1,542 million, respectively, an increase of $22 million and $85 million, respectively, compared to the prior-year periods. The year-to-year dynamics for both the third quarter and first nine months of 2024 were primarily driven by higher average interest rates and a higher average debt balance in the current year.

Retirement-Related Plans

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


(Dollars in millions)					Yr.-to-Yr. Percent Change
For the three months ended September 30:	2024		2023
Retirement-related plans — cost:
Service cost	$	143	$	46	209.2	%
Multi-employer plans	3		4		(19.0)
Cost of defined contribution plans	111		245		(54.7)
Total operating costs	$	257	$	295	(13.0)	%
Interest cost	$	535	$	604	(11.5)	%
Expected return on plan assets	(708)		(745)		(5.0)
Recognized actuarial losses	244		126		93.2
Amortization of prior service costs/(credits)	(2)		(2)		(18.4)
Curtailments/settlements (1)	2,727		2		nm
Other costs	0		3		(89.9)
Total non-operating costs/(income) (1)	$	2,797	$	(12)	nm
Total retirement-related plans — cost (1)	$	3,053	$	283	nm

(1)2024 includes the impact of a one-time, non-cash, pre-tax pension settlement charge of $2.7 billion. Refer to 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:	2024		2023
Retirement-related plans — cost:
Service cost	$	426	$	138	209.2	%
Multi-employer plans	10		10		(6.5)
Cost of defined contribution plans	330		756		(56.3)
Total operating costs	$	767	$	905	(15.3)	%
Interest cost	$	1,648	$	1,807	(8.8)	%
Expected return on plan assets	(2,163)		(2,229)		(3.0)
Recognized actuarial losses	759		384		97.7
Amortization of prior service costs/(credits)	(5)		(6)		(17.8)
Curtailments/settlements (1)	2,731		7		nm
Other costs	20		22		(4.9)
Total non-operating costs/(income) (1)	$	2,991	$	(16)	nm
Total retirement-related plans — cost (1)	$	3,757	$	888	nm

(1)2024 includes the impact of a one-time, non-cash, pre-tax pension settlement charge of $2.7 billion. Refer to note 18, "Retirement-Related Benefits," for additional information.

nm - not meaningful

Total pre-tax retirement-related plan cost increased by $2,771 million compared to the third quarter of 2023, primarily driven by an increase in curtailments/settlements driven by the impact of a one-time, non-cash pension settlement charge ($2,725 million), an increase in recognized actuarial losses ($118 million) and higher service cost ($97 million), partially offset by lower cost of defined contribution plans ($134 million) and lower interest costs ($69 million). Total cost for the first nine months of 2024 increased by $2,869 million compared to the first nine months of 2023, primarily driven by the impact of a one-time, non-cash pension settlement charge ($2,725 million), increase in recognized actuarial losses ($375 million) and higher service cost ($289 million), partially offset by lower cost of defined contribution plans ($426 million) and lower interest costs ($159 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 2024 were $257 million, a decrease of $38 million compared to the third quarter of 2023. The decrease was primarily driven by lower cost of defined contribution plans ($134 million), partially offset by higher service cost ($97 million) due to the U.S. retirement plan changes effective January 1, 2024. For the first nine months of 2024, operating retirement-related costs were $767 million, a decrease of $138 million compared to the prior-year period, primarily driven by lower cost of defined contribution plans ($426 million), partially offset by higher service cost ($289 million) due to U.S. retirement plan changes effective January 1, 2024. Including the related employee salary increase effective January 1, 2024, the net impact to our operating costs from the U.S. retirement plan changes was immaterial for the three and nine months ended September 30, 2024. Refer to note 18, "Retirement-Related Benefits," for additional information. Non-operating costs/(income) was $2,797 million of cost in the third quarter of 2024 compared to $12 million of income in the prior-year period and for the first nine months of 2024 non-operating costs/(income) was $2,991 million of cost compared to $16 million of income in the prior-year period. The year-to-year changes were primarily driven by an increase in curtailments/settlements including the impact of a one-time, non-cash pension settlement charge resulting from the transfer to the Insurer of a portion of the Qualified PPP in the current quarter and an increase in recognized actuarial losses due to the change in amortization period of the Qualified PPP effective January 1, 2024 as described in note 18, "Retirement-Related Benefits," partially offset by lower interest costs.

Taxes

The continuing operations benefit from income taxes in the third quarter of 2024 was $485 million, compared to a provision for income taxes of $159 million in the third quarter of 2023. The current-year tax benefit was primarily driven by the transfer to the Insurer of a portion of the Qualified PPP’s defined benefit pension obligations and related plan assets.

Management Discussion – (continued)

The operating (non-GAAP) provision for income taxes in the third quarter of 2024 was $332 million, compared to $268 million in the third quarter of 2023.

The continuing operations benefit from income taxes in the first nine months of 2024 was $597 million, compared to a provision for income taxes of $702 million in the first nine months of 2023. The current-year tax benefit was primarily driven by the resolution of certain tax audit matters in the first quarter and the transfer to the Insurer of a portion of the Qualified PPP’s defined benefit pension obligations and related plan assets in the third quarter. The operating (non-GAAP) provision for income taxes in the first nine months of 2024 was $942 million, compared to $861 million in the first nine months of 2023.

IBM’s tax provision and effective tax rate are impacted by recurring factors including the geographical mix of income before taxes, incentives, specific transactions, 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 filed its IRS Appeals protest in the second quarter of 2024. 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 September 30, 2024, 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, 2024 is $8,615 million which can be reduced by $613 million associated with timing adjustments, potential transfer pricing adjustments, and state income taxes. The net amount of $8,002 million, if recognized, would favorably affect the company’s effective tax rate.

Financial Position

Dynamics

Our balance sheet at September 30, 2024 continues to provide us with financial flexibility to support and invest in the business.

Cash and cash equivalents, restricted cash and marketable securities at September 30, 2024 were $13,719 million, an increase of $257 million compared to December 31, 2023. Total debt of $56,579 million at September 30, 2024 was flat compared to December 31, 2023. We continue to manage our debt levels while being acquisitive and without sacrificing investments in our business.

Management Discussion – (continued)

In the first nine months of 2024, we generated $9,115 million in cash from operating activities, a decrease of $353 million compared to the first nine months of 2023 due to a decrease in cash provided by financing receivables; partially offset by performance-related improvements within net income. Our free cash flow for the nine months ended September 30, 2024 was $6,586 million, an increase of $1,463 million versus the prior year. Refer to pages 80 through 81 for additional information on free cash flow. Our cash generation enables us to continue investing in innovation and expertise across the portfolio, while returning value to shareholders through dividends. We invested $2,748 million in acquisitions and we returned $4,601 million to shareholders through dividends in the first nine months of 2024.

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 September 2024 was fairly consistent with year-end 2023, as the transfer to the Insurer of approximately $6 billion of the Qualified PPP’s defined benefit pension obligations and related plan assets, reduced the company’s pension obligations and assets by the same amount. After the settlement and remeasurement, the Qualified PPP remained in an overfunded position at September 30, 2024. Refer to note 18, "Retirement-Related Benefits," for additional information.

IBM Working Capital


(Dollars in millions)	At September 30, 2024		At December 31, 2023
Current assets	$	30,543	$	32,908
Current liabilities	28,853		34,122
Working capital	$	1,690	$	(1,214)
Current ratio	1.06:1		0.96:1

Working capital increased $2,904 million from the year-end 2023 position. Current assets decreased $2,365 million ($2,257 million adjusted for currency) primarily in receivables mainly from collections of seasonally higher year-end balances. Current liabilities decreased $5,269 million ($5,228 million adjusted for currency) due to declines in short-term debt mainly due to maturities, accounts payable, and taxes payable.

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)	September 30, 2024
$457	$(14)	$(137)	$(8)	$298

(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 1.7 percent at September 30, 2024, a decrease of 50 basis points compared to December 31, 2023. The decrease in coverage is due to declines in reserves primarily driven by write-offs; partially offset by the overall decrease in total receivables. The majority of the write-offs during the year were related to receivables which had been previously reserved and were considered uncollectible as the related customer is no longer in operation, and/or there was no reasonable expectation of repossession or additional collections primarily due to their aging. In addition, it includes about $60 million of previously reserved receivables from discontinued operations that were written off in the current year. Refer to Financing's "Financial Position" on page 83 for additional details regarding the Financing segment receivables and allowances.

Management Discussion – (continued)

Noncurrent Assets and Liabilities


(Dollars in millions)	At September 30, 2024		At December 31, 2023
Noncurrent assets	$	103,796	$	102,333
Long-term debt	$	52,980	$	50,121
Noncurrent liabilities (excluding debt)	$	27,976	$	28,385

The increase in noncurrent assets of $1,463 million ($1,516 million adjusted for currency) was primarily due to an increase in goodwill and intangible assets from the StreamSets and webMethods 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 $2,859 million ($2,738 million adjusted for currency) primarily driven by our first-quarter 2023 debt issuances; partially offset by reclassifications to short-term debt to reflect upcoming maturities.

Noncurrent liabilities (excluding debt) decreased $409 million ($419 million adjusted for currency) primarily driven by 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 September 30, 2024		At December 31, 2023
Total debt	$	56,579	$	56,547
Financing segment debt (1)	$	10,355	$	11,879
Non-Financing debt	$	46,224	$	44,668

(1)Refer to Financing’s “Financial Position” on page 83 for additional details.

Total debt of $56,579 million increased $32 million (decreased $74 million adjusted for currency) from December 31, 2023, primarily driven by maturities of $6,491 million; partially offset by proceeds from issuances of $5,705 million and currency impacts.

Non-Financing debt of $46,224 million increased $1,557 million ($1,395 million adjusted for currency) from December 31, 2023, primarily due to the first-quarter debt issuances; partially offset by maturities.

Financing segment debt of $10,355 million decreased $1,525 million ($1,469 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 comprised 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, 2024.

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 $1,917 million from December 31, 2023, primarily driven by an increase from net income of $3,109 million which includes the impact of a one-time, non-cash pension settlement charge of $2,039 million net of tax, a

Management Discussion – (continued)

decrease in accumulated other comprehensive loss of $2,343 million driven by retirement-related benefit plans primarily due to the pension settlement charge, and common stock issuances of $1,370 million; partially offset by dividends paid of $4,601 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 nine months ended September 30:	2024		2023
Net cash provided by/(used in):
Operating activities	$	9,115	$	9,468
Investing activities	(3,558)		(9,906)
Financing activities	(5,403)		(154)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	(29)		(120)
Net change in cash, cash equivalents and restricted cash	$	125	$	(713)

Net cash provided by operating activities decreased $353 million as compared to the first nine months of 2023. This was due to a decrease in cash provided by financing receivables; partially offset by performance-related improvements within net income. Changes in operating assets and liabilities, net of acquisitions/divestitures in the Consolidated Statement of Cash Flows also includes the tax effect related to the pension settlement charge in the third quarter of 2024, which represents a non-cash adjustment to reconcile net income/(loss) to cash from operating activities.

Net cash used in investing activities decreased $6,348 million primarily driven by lower net purchases of marketable securities and other investments, a decrease in cash used in acquisitions mainly driven by the Apptio acquisition in the previous year, partially offset by the StreamSets and webMethods acquisition in the current quarter, an increase in cash provided by divestitures from the sale of The Weather Company assets in the first quarter of 2024 and an increase in cash from disposition of property, plant and equipment/other mainly driven by proceeds from the sale of certain QRadar SaaS assets in the current quarter.

Net cash used in Financing activities increased by $5,249 million primarily driven by a higher level of net debt issuances in the prior-year period.

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. The AI portfolio we have built is designed to give clients a comprehensive set of tools and we believe we are well positioned to help clients scale AI. We have infused AI across the business, from the tools clients use to manage and optimize their hybrid cloud environments, to the tools to deploy AI within their enterprise, to Infrastructure and Consulting, there is AI innovation within all of our segments. For example, in Software, our broad suite of automation products such as Apptio and watsonx Orchestrate are leveraging AI. Red Hat is bringing AI to the platform with innovation such as OpenShift AI and RHEL AI. In Transaction Processing we are experiencing continued customer interest in our new generative AI product, watsonx Code Assistant for Z. In Infrastructure, IBM Z is equipped with real time AI inferencing capabilities. We continue to see Infrastructure play a larger role as clients bring AI to their data. In Consulting, our experts are helping clients design and execute AI strategies and are also leveraging AI technologies in the delivery of those services.

We are committed to an open innovation ecosystem around AI, to help our clients maximize flexibility and leverage skills, and IBM with Red Hat can be a key driver of open-source AI. Earlier this year, we open-sourced IBM’s Granite family of large language models and we see parallels to how Linux became dominant in the enterprise server space as a

Management Discussion – (continued)

result of the speed and innovation offered by open source. Red Hat and IBM also 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 strategic partnerships with industry leaders. In August, we completed the previously announced sale of certain IBM QRadar SaaS assets, which is part of a partnership to deliver AI-powered security solutions using watsonx with Palo Alto. The sale of these assets resulted in a benefit to cash from operating activities, cash from investing activities and to free cash flow in the third quarter. However, for full-year 2024 we expect only a nominal benefit to cash flows due to payments for structural actions we have taken and foregone profit from the QRadar business.

We continue to invest in emerging technologies, bringing new innovations to market. In early October 2024, we opened Europe’s first IBM Quantum Data Center. This is the second IBM quantum data center deployed globally which will greatly advance our goal of expanding access to the world’s most performant quantum computers. As we remain focused on portfolio optimization, we closed the divestiture of The Weather Company assets in January. To complement our portfolio, we completed eight acquisitions in the first nine months of 2024, including the acquisition of the StreamSets and webMethods assets from Software AG in July. This acquisition brings together leading capabilities in integration, API management and data ingestion.

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 on record immediately prior to the effective time on the closing date will receive $35 per share in cash, representing a total enterprise value of approximately $6.4 billion. On July 15, 2024, HashiCorp stockholders voted to approve the merger with IBM. The transaction is expected to close by the end of 2024, subject to regulatory approvals and other customary closing conditions. Upon closing, HashiCorp will be integrated into the Software segment.

In the first nine months of 2024, we continued to invest organically and inorganically, bring new products and innovation to market, expand our ecosystem and drive productivity across our business. Our performance over the first nine months of 2024 is a proof point of this progress. We have made solid progress in transitioning our portfolio to a higher growth, more focused business that has delivered sustained revenue growth and strong cash generation – a business well positioned for the future.

Retirement-Related Plans

In the fourth quarter of 2024, IBM Canada Ltd. (“IBMC”) purchased two separate nonparticipating single premium group annuity contracts from RBC Life Insurance Company ("RBC Insurance") and Brookfield Annuity Company ("Brookfield") (collectively the "Insurers") that will transfer to the Insurers approximately $1.2 billion of the IBMC IBM Retirement Plan’s (the “Plan”) defined benefit pension obligations for approximately 6,000 Plan participants and beneficiaries whose last province of employment was in British Columbia, Ontario or Quebec and who were receiving a payment under the Plan on July 1, 2024 (the “Transferred Participants”). The purchase of the group annuity contracts was completed October 29, 2024 and was funded directly by assets of the Plan and required no cash contribution from IBM.

Under the group annuity contracts, each insurer has made an irrevocable commitment, and will be solely responsible to pay the pension benefits of each Transferred Participant that are due on and after May 1, 2025 as follows: RBC Insurance will be responsible for 25 percent of the pension benefit and Brookfield will be responsible for 75 percent of the pension benefit. RBC Insurance will be the lead administrator. The transaction will result in no changes to the amount of benefits payable to the Transferred Participants.

As a result of the transaction, the company expects to recognize a one-time, non-cash, pre-tax, non-operating pension settlement charge of approximately $0.4 billion in the fourth quarter of 2024. The actual charge will depend on finalization of the actuarial and other assumptions. This charge will not impact the company’s fourth-quarter or full-year 2024 operating (non-GAAP) profit or free cash flow.

Our pension plans are well funded. Contributions for all retirement-related plans are expected to be approximately $1.4 billion in 2024, of which $0.1 billion generally relates to legally required contributions to non-U.S. defined benefit and multi-employer plans. The expected decrease of $0.4 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 effective January 1, 2024 described in note 18, "Retirement-Related Benefits." We expect 2024 pre-tax retirement-related plan cost to be

Management Discussion – (continued)

approximately $4.6 billion, an increase of approximately $3.4 billion compared to 2023, primarily driven by an increase in curtailments/settlements including the impact of a one-time, non-cash pension settlement charge in the third quarter of 2024 and the expected settlement charge associated with the transfer of a portion of IBM Canada's defined benefit pension obligations as described above, which was completed on October 29, 2024. Within total retirement-related plan cost, operating retirement-related plan cost is expected to be approximately $1.0 billion, a decrease of approximately $0.2 billion compared to 2023. Non-operating retirement-related plan cost is expected to be approximately $3.6 billion, an increase of approximately $3.6 billion compared to 2023, due to the pension charges described above and an increase in recognized actuarial losses, partially offset by lower interest costs.

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, 2024, currency changes resulted in assets and liabilities denominated in most 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 third quarter of 2024, revenue from continuing operations increased 1.5 percent as reported and 2 percent at constant currency compared to the prior year. In the first nine months of 2024, revenue from continuing operations increased 1.6 percent as reported and 3 percent at constant currency, compared to the same period in 2023. In the third quarter of 2024, the impact from currency translation and hedging to year-to-year pre-tax income growth and operating (non-GAAP) pre-tax income growth was immaterial. In the first nine months of 2024, currency translation and hedging negatively impacted year-to-year pre-tax income growth and operating (non-GAAP) pre-tax income growth by approximately $200 million. From a segment perspective, in the third quarter of 2024, the impact from currency translation and hedging to our segments profit margin year-to-year growth was immaterial. In the first nine months of 2024, currency translation and hedging impacted our Infrastructure segment profit margin year-to-year growth by about half a point. We view these amounts as a theoretical maximum impact to our as-reported financial results. Hedging and certain underlying foreign currency transaction gains and losses are allocated to our segment results. Considering the operational responses mentioned above, movements of exchange rates, and the nature and timing of hedging instruments, it is difficult to predict future currency impacts on any particular period.

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

Management Discussion – (continued)

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 nine months ended, or at, as applicable, September 30, 2024, those amounts are $9.1 billion of net cash from operating activities, $13.7 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, 2024 appear in the following table and remain unchanged from June 30, 2024.


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 financial flexibility, supported by our strong liquidity position and cash flows, to operate at a single A credit rating. At September 30, 2024, our debt level was flat from December 31, 2023 driven by maturities; partially offset by proceeds from issuances and currency impacts.

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, 2024, the fair value of those instruments that were in a liability position was $500 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 77. 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 and other asset sales (e.g., certain QRadar SaaS assets). A key objective of the Financing business is to generate strong returns on equity, and our Financing receivables are the basis for that growth. Accordingly, management considers Financing receivables as a profit-generating investment, not as working capital that should be minimized for efficiency. Therefore, management includes presentations of both free cash flow and net cash from operating activities that exclude the effect of Financing receivables.

Management Discussion – (continued)

The following is management’s view of cash flows for the first nine months of 2024 and 2023 prepared in a manner consistent with the description above.


(Dollars in millions)
For the nine months ended September 30:	2024		2023
Net cash from operating activities per GAAP	$	9,115	$	9,468
Less: change in Financing receivables	1,824		3,119
Net cash from operating activities, excluding Financing receivables	$	7,292	$	6,349
Capital expenditures, net	(705)		(1,226)
Free cash flow	$	6,586	$	5,123
Acquisitions	(2,748)		(4,945)
Divestitures	705		(4)

Dividends	(4,601)		(4,522)
Non-Financing debt	693		7,572
Other (includes Financing net receivables and Financing debt)	(379)		(1,068)
Change in cash, cash equivalents, restricted cash and short-term marketable securities	$	257	$	2,156

In the first nine months of 2024, we generated $6.6 billion in free cash flow, an increase of $1.5 billion versus the prior-year period. The increase was primarily driven by performance-related improvements within net income and lower net capital expenditures driven by the cash proceeds from the sale of certain QRadar SaaS assets in the current quarter. Proceeds of $0.4 billion from the sale were included within capital expenditures, net and the remaining $0.1 billion were included within net cash from operating activities in the table above. Refer to note 5, “Acquisitions & Divestitures,” for additional information.

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 $100 million in 2024. Contributions related to all retirement-related plans are expected to be approximately $1.4 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 September 30:	2024		2023
Revenue	$	181	$	186	(2.5)	%
Segment profit (1)	$	86	$	91	(5.9)	%


(Dollars in millions)					Yr.-to-Yr. Percent Change
For the nine months ended September 30:	2024		2023
Revenue	$	543	$	566	(4.1)	%
Segment profit (1)	$	254	$	256	(0.5)	%

(1)Prior-year amounts recast to reflect January 2024 segment changes.

For the three months ended September 30, 2024, financing revenue decreased 2.5 percent as reported (1.3 percent adjusted for currency) compared to the prior-year period. For the nine months ended September 30, 2024, financing revenue decreased 4.1 percent as reported (3.1 percent adjusted for currency) compared to the prior-year period. These declines were primarily driven by a reduction in used equipment sales.

Financing segment profit decreased 5.9 percent to $86 million and 0.5 percent to $254 million in the third quarter and first nine months of 2024, respectively, compared to the prior-year period. The decreases in segment profit for both periods were primarily due to a reduction in used equipment sales. Financing segment profit margin decreased 1.7 points to 47.5 percent and increased 1.7 points to 46.9 percent in the third quarter and first nine months of 2024, respectively, compared to the prior-year period.

Management Discussion – (continued)

Financial Position


(Dollars in millions)	At September 30, 2024		At December 31, 2023
Cash and cash equivalents	$	403	$	555
Client financing receivables:
Net investment in sales-type and direct financing leases (1)	3,792		4,237
Client loans	5,731		6,486
Total client financing receivables	$	9,523	$	10,723
Commercial financing receivables:
Held for investment	670		1,155
Held for sale	509		692
Other receivables	15		26
Total external receivables (2)	$	10,716	$	12,596
Intercompany assets (3)	740		963
Other assets	211		294
Total assets	$	12,070	$	14,409

Debt (4)	$	10,355	$	11,879
Other liabilities (5) (6)	565		1,205
Total liabilities (5)	$	10,920	$	13,085
Total equity (5)	$	1,151	$	1,324
Total liabilities and equity	$	12,070	$	14,409

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

(2)The change in total external receivables of $1.9 billion and the $1.8 billion change in Financing segment’s receivables disclosed in the free cash flow presentation on page 81 is primarily attributable to currency impacts.

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

(4)Financing segment debt is primarily comprised of intercompany loans.

(5)Prior-year amounts recast to reflect January 2024 segment change. Other liabilities have been reclassified to conform to the change in 2024 presentation.

(6)Includes intercompany payables of $0.4 billion at December 31, 2023. There were no intercompany payables outstanding at September 30, 2024. These intercompany payables were eliminated for purposes of IBM’s consolidated financial results.

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, 2024			At December 31, 2023
Amortized cost (1)	$	10,324		$	12,034
Specific allowance for credit losses	104			111
Unallocated allowance for credit losses	27			45
Total allowance for credit losses	131			156
Net financing receivables	$	10,193		$	11,878
Allowance for credit losses coverage	1.3		%	1.3		%

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

Management Discussion – (continued)

The percentage of Financing segment receivables reserved was 1.3 percent at both September 30, 2024 and December 31, 2023.

We continue to apply our rigorous credit policies. Approximately 75 percent of the total external portfolio was with investment grade clients, an increase of 3 points as 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




	For Three Months Ended September 30,						For Nine Months Ended September 30,
(Dollars in millions)	2024			2023 (1)			2024			2023 (1)
Numerator:
Financing after-tax segment profit (2)	$	70		$	79		$	207		$	214
Annualized after-tax segment profit (A)	$	280		$	315		$	276		$	285
Denominator:
Average Financing equity (B) (3)	$	1,191		$	1,137		$	1,202		$	1,219
Financing return on equity (A)/(B)	23.5		%	27.7		%	23.0		%	23.4		%

(1)Prior-year amounts recast to reflect January 2024 segment changes.

(2)Calculated based upon an estimated tax rate, which is a function of IBM’s provision for income taxes determined on a consolidated basis.

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

Return on equity was 23.5 percent compared to 27.7 percent for the three months ended September 30, 2024, and 2023, respectively. The decrease was driven by a decrease in net income. Return on equity was 23.0 percent compared to 23.4 percent for the nine months ended September 30, 2024, and 2023, respectively. The decrease was primarily driven by a decrease in net income partially offset by a lower average equity balance.

Residual Value

The following table presents the recorded amount of unguaranteed residual value for sales-type and direct financing leases at September 30, 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 September 30, 2024 is expected to be returned to the company. The unguaranteed residual value for operating leases at September 30, 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 September 30, 2024		Estimated Run Out of September 30, 2024 Balance
(Dollars in millions)			2024		2025		2026		2027 and Beyond
Sales-type and direct financing leases	$	458	$	457	$	13	$	133	$	119	$	191

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 (1)			U.S. Tax Reform Impacts			Operating (non-GAAP)
For the three months ended September 30, 2024:
Gross profit	$	8,420		$	192		$	—		$	—		$	8,612
Gross profit margin	56.3		%	1.3		pts.	—		pts.	—		pts.	57.5		%
SG&A	$	4,911		$	(300)		$	—		$	—		$	4,611
Other (income) and expense	$	2,244		$	—		$	(2,797)		$	—		$	(553)
Total expense and other (income)	$	9,222		$	(300)		$	(2,797)		$	—		$	6,125
Pre-tax income/(loss) from continuing operations	$	(802)		$	492		$	2,797		$	—		$	2,487
Pre-tax margin from continuing operations	(5.4)		%	3.3		pts.	18.7		pts.	—		pts.	16.6		%
Provision for/(benefit from) income taxes (2)	$	(485)		$	119		$	700		$	(2)		$	332
Effective tax rate	60.4		%	(7.2)		pts.	(39.8)		pts.	(0.1)		pts.	13.4		%
Income/(loss) from continuing operations	$	(317)		$	373		$	2,097		$	2		$	2,155
Income/(loss) margin from continuing operations	(2.1)		%	2.5		pts.	14.0		pts.	0.0		pts.	14.4		%
Diluted earnings/(loss) per share from continuing operations (3)	$	(0.34)		$	0.40		$	2.27		$	0.00		$	2.30


(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 September 30, 2023:
Gross profit	$	8,023		$	162		$	—		$	—		$	8,185
Gross profit margin	54.4		%	1.1		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.	15.6		%
Provision for income taxes (2)	$	159		$	99		$	(14)		$	24		$	268
Effective tax rate	8.5		%	2.7		pts.	(0.5)		pts.	1.0		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.	13.8		%
Diluted earnings per share from continuing operations	$	1.86		$	0.37		$	0.00		$	(0.03)		$	2.20

(1)2024 includes the impact of a one-time, non-cash, pre-tax pension settlement charge of $2.7 billion ($2.0 billion net of tax). Refer to note 18, "Retirement-Related Benefits," for additional information.

(2)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.

(3)Operating (non-GAAP) earnings per share was calculated using 938.4 million shares, which includes 14.9 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, 2024, 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 (0.04) reconciling item.

Management Discussion – (continued)


(Dollars in millions except per share amounts)	GAAP			Acquisition- Related Adjustments			Retirement- Related Adjustments (1)			U.S. Tax Reform Impacts (2)			Operating (non-GAAP)
For the nine months ended September 30, 2024:
Gross profit	$	25,112		$	533		$	—		$	—		$	25,645
Gross profit margin	55.6		%	1.2		pts.	—		pts.	—		pts.	56.7		%
SG&A	$	14,823		$	(854)		$	—		$	—		$	13,969
Other (income) and expense (3)	$	1,694		$	(68)		$	(2,991)		$	—		$	(1,364)
Total expense and other (income)	$	22,621		$	(922)		$	(2,991)		$	—		$	18,709
Pre-tax income from continuing operations	$	2,491		$	1,454		$	2,991		$	—		$	6,936
Pre-tax margin from continuing operations	5.5		%	3.2		pts.	6.6		pts.	—		pts.	15.3		%
Provision for/(benefit from) income taxes (4)	$	(597)		$	374		$	731		$	434		$	942
Effective tax rate	(24.0)		%	10.4		pts.	20.9		pts.	6.3		pts.	13.6		%
Income from continuing operations	$	3,088		$	1,081		$	2,259		$	(434)		$	5,994
Income margin from continuing operations	6.8		%	2.4		pts.	5.0		pts.	(1.0)		pts.	13.3		%
Diluted earnings per share from continuing operations	$	3.30		$	1.16		$	2.42		$	(0.46)		$	6.41


(Dollars in millions except per share amounts)	GAAP			Acquisition- Related Adjustments			Retirement- Related Adjustments			U.S. Tax Reform 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.	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.	13.8		%
Provision for income taxes (4)	$	702		$	277		$	(27)		$	(91)		$	861
Effective tax rate	14.2		%	1.7		pts.	(0.4)		pts.	(1.5)		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.	11.9		%
Diluted earnings per share from continuing operations	$	4.59		$	1.04		$	0.01		$	0.10		$	5.74

(2)2024 includes a benefit from income taxes due to the resolution of certain tax audit matters in the first quarter.

(3)Acquisition-Related Adjustments in 2024 includes a realized loss of $68 million on foreign exchange derivative contracts entered into by the company prior to the acquisition of StreamSets and webMethods from Software AG. Refer to note 16, “Derivative Financial Instruments,” for additional information.

(4)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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