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, 2026

Snapshot

Organization of Information:

The Management Discussion is designed to provide readers with an overview of the business and a narrative on our financial results and certain factors that may affect our future prospects from the perspective of management.

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 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” on page 70 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 and 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 (TCJA or U.S. tax reform), management characterizes the one-time provisional charge recorded in the fourth quarter of 2017, and adjustments to that charge, as non-operating. Adjustments include the tax effect of true-ups, audit adjustments, accounting elections and new regulations, or laws (e.g., H.R. 1 in July of 2025) that impact the TCJA provisions which resulted in the one-time provisional charge. For acquisitions, operating (non-GAAP) earnings exclude the amortization of acquired 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. All other spending for acquired companies is included in both earnings from continuing operations and in operating (non-GAAP) earnings. For retirement-related costs, management characterizes certain items as operating and others as non-operating, consistent with GAAP. We include defined benefit plan and nonpension postretirement benefit plan service costs, multi-employer plan costs and the cost of defined contribution plans in operating earnings. Non-operating retirement-related costs include defined benefit plan and nonpension postretirement benefit plan amortization of prior service costs, interest cost, expected return on plan assets, amortized actuarial gains/losses, the impacts of any plan curtailments/settlements and pension insolvency costs and other costs. Non-operating retirement-related costs are primarily related to changes in pension plan assets and liabilities which are tied to financial market performance, and 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.

Management Discussion – (continued)

Financial Results Summary — Three Months Ended September 30:


($ and shares in millions, except per share amounts)							Yr.-to-Yr. Percent/ Margin Change
For the three months ended September 30:	2026			2025
Revenue (1)	$	17,103		$	16,331		4.7	%
Gross profit margin	56.8		%	57.3		%	(0.5)	pts.
Total expense and other (income)	$	7,217		$	6,931		4.1	%
Income from continuing operations before income taxes	$	2,497		$	2,430		2.8	%
Provision for/(benefit from) income taxes from continuing operations	$	298		$	686		(56.6)	%
Income from continuing operations	$	2,199		$	1,744		26.1	%
Income from continuing operations margin	12.9		%	10.7		%	2.2	pts.
Income/(loss) from discontinued operations, net of tax	$	(10)		$	0		nm
Net income	$	2,190		$	1,744		25.6	%
Earnings per share from continuing operations - assuming dilution	$	2.31		$	1.84		25.5	%
Consolidated earnings per share - assuming dilution	$	2.30		$	1.84		25.0	%
Weighted-average shares outstanding - assuming dilution	953.5			948.9			0.5	%

(1)Year-to-year revenue growth of 6 percent adjusted for currency.

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The following table provides the company’s operating (non-GAAP) earnings for the third quarter of 2026 and 2025.


($ in millions, except per share amounts)					Yr.-to-Yr. Percent Change
For the three months ended September 30:	2026		2025
Net income as reported	$	2,190	$	1,744	25.6	%
Income/(loss) from discontinued operations, net of tax	(10)		0		nm
Income from continuing operations	$	2,199	$	1,744	26.1	%
Non-operating adjustments (net of tax):
Acquisition-related charges	542		454		19.3
Non-operating retirement-related costs/(income)	71		10		nm
U.S. tax reform impacts	—		309		(100)
Operating (non-GAAP) earnings (1)	$	2,812	$	2,517	11.7	%
Diluted operating (non-GAAP) earnings per share (1)	$	2.95	$	2.65	11.3	%

(1)Refer to the quarter-to-date "GAAP Reconciliation" on page 65 for additional information.

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Financial Performance Summary — Three Months Ended September 30:

In the third quarter of 2026, we reported $17.1 billion in revenue, income from continuing operations of $2.2 billion, and operating (non-GAAP) earnings of $2.8 billion. Diluted earnings per share from continuing operations was $2.31 as reported and $2.95 on an operating (non-GAAP) basis. We generated $4.0 billion in cash from operations and $3.0 billion in free cash flow, and returned $1.6 billion to shareholders in dividends. Our third-quarter performance demonstrates the strength of our portfolio, disciplined execution against our priorities and the continued value clients place on our mission-critical platforms. We believe our strategic investments over the past several years continue to strengthen IBM's position as a software-led Hybrid Cloud and AI platform company and advance our quantum capabilities, a strategic area of differentiation and long-term opportunity.

Total revenue grew 4.7 percent as reported and 5.6 percent adjusted for currency compared to the prior-year period. Software delivered revenue growth of 8.2 percent as reported (8.7 percent adjusted for currency). Consulting revenue was

Management Discussion – (continued)

flat as reported and increased 1.8 percent adjusted for currency. Infrastructure revenue increased 4.2 percent as reported (4.9 percent adjusted for currency).

From a geographic perspective, Americas revenue increased 5.3 percent as reported (5.1 percent adjusted for currency). Europe/Middle East/Africa (EMEA) increased 3.3 percent as reported (4.3 percent adjusted for currency). Asia Pacific increased 5.6 percent as reported (9.6 percent adjusted for currency).

Gross margin of 56.8 percent decreased 0.5 points year to year and operating (non-GAAP) gross margin of 58.5 percent decreased 0.2 points compared to the prior-year period.

Total expense and other (income) increased 4.1 percent in the third quarter of 2026 compared to the third quarter of 2025, driven by our investments in portfolio innovation, and higher non-operating retirement-related costs, partially offset by savings from productivity actions and the effects of currency. Total operating (non-GAAP) expense and other (income) increased 2.3 percent year to year, driven primarily by the same factors as described above, excluding higher non-operating retirement-related costs.

Pre-tax income from continuing operations of $2.5 billion increased 2.8 percent compared to the prior-year period and pre-tax margin declined 0.3 points year to year to 14.6 percent. The continuing operations provision for income taxes was $0.3 billion in the third quarter of 2026, compared to $0.7 billion in the third quarter of 2025, which included a one-time, non-cash income tax charge resulting from the enactment of H.R. 1. Net income from continuing operations of $2.2 billion increased 26.1 percent and net income from continuing operations margin of 12.9 percent increased 2.2 points year to year.

Operating (non-GAAP) pre-tax income from continuing operations of $3.3 billion increased 8.7 percent compared to the third quarter of 2025 and the operating (non-GAAP) pre-tax margin from continuing operations increased 0.7 points to 19.3 percent. The operating (non-GAAP) provision for income taxes was $0.5 billion in both the third quarter of 2026 and the third quarter of 2025. Operating (non-GAAP) income from continuing operations of $2.8 billion increased 11.7 percent and the operating (non-GAAP) income margin from continuing operations of 16.4 percent increased 1.0 point year to year.

Diluted earnings per share from continuing operations of $2.31 increased 25.5 percent and operating (non-GAAP) diluted earnings per share of $2.95 increased 11.3 percent compared to the third quarter of 2025.

Cash provided by operating activities was $4.0 billion in the third quarter of 2026, an increase of $0.9 billion compared to the third quarter of 2025, which includes an increase in cash provided by financing receivables of $0.2 billion. Free cash flow was $3.0 billion, an increase of $0.7 billion versus the prior-year period. Net cash used in investing activities increased $2.1 billion to $2.6 billion compared with the prior-year period. Net cash provided by financing activities was $0.6 billion in the third quarter of 2026, compared to net cash used in financing activities of $3.0 billion in the third quarter of 2025.

Management Discussion – (continued)

Financial Results Summary — Nine Months Ended September 30:


($ and shares in millions, except per share amounts)							Yr.-to-Yr. Percent/ Margin Change
For the nine months ended September 30:	2026			2025
Revenue (1)	$	50,182		$	47,849		4.9	%
Gross profit margin	56.9		%	57.2		%	(0.3)	pts.
Total expense and other (income)	$	22,208		$	21,184		4.8	%
Income from continuing operations before income taxes	$	6,363		$	6,185		2.9	%
Provision for/(benefit from) income taxes from continuing operations	$	782		$	1,193		(34.4)	%
Income from continuing operations	$	5,581		$	4,992		11.8	%
Income from continuing operations margin	11.1		%	10.4		%	0.7	pts.
Income/(loss) from discontinued operations, net of tax	$	(10)		$	1		nm
Net income	$	5,571		$	4,993		11.6	%
Earnings per share from continuing operations - assuming dilution	$	5.86		$	5.27		11.2	%
Consolidated earnings per share - assuming dilution	$	5.85		$	5.27		11.0	%
Weighted-average shares outstanding - assuming dilution	953.0			947.4			0.6	%

	At 9/30/2026			At 12/31/2025
Assets	$	155,011		$	151,880		2.1	%
Liabilities	$	118,805		$	119,139		(0.3)	%
Equity	$	36,206		$	32,740		10.6	%

(1)Year-to-year revenue growth of 4 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 2026 and 2025.


($ in millions, except per share amounts)					Yr.-to-Yr. Percent Change
For the nine months ended September 30:	2026		2025
Net income as reported	$	5,571	$	4,993	11.6	%
Income/(loss) from discontinued operations, net of tax	(10)		1		nm
Income from continuing operations	$	5,581	$	4,992	11.8	%
Non-operating adjustments (net of tax):
Acquisition-related charges	1,598		1,326		20.5
Non-operating retirement-related costs/(income)	240		61		295.0
U.S. tax reform impacts	6		307		(98.1)

Operating (non-GAAP) earnings (1)	$	7,425	$	6,686	11.1	%
Diluted operating (non-GAAP) earnings per share (1)	$	7.79	$	7.06	10.3	%

(1)Refer to the year-to-date "GAAP Reconciliation" on page 66 for additional information.

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Financial Performance Summary — Nine Months Ended September 30:

In the first nine months of 2026, we reported $50.2 billion in revenue, net income from continuing operations of $5.6 billion, and operating (non-GAAP) earnings of $7.4 billion. Diluted earnings per share from continuing operations was $5.86 as reported and $7.79 on an operating (non-GAAP) basis. We generated $11.8 billion in cash from operations and $7.8 billion in free cash flow, and delivered shareholder returns of $4.8 billion in dividends. Our year-to-date performance reflects the benefits of our productivity initiatives and continued operational discipline. We continue to

Management Discussion – (continued)

maintain a strong liquidity position and a solid investment grade balance sheet, which enable us to invest in our business and return value to shareholders through dividends.

Total revenue grew 4.9 percent as reported and 4.2 percent adjusted for currency compared to the prior-year period. Software grew 8.1 percent as reported (7.0 percent adjusted for currency). Consulting revenue increased 1.5 percent as reported (1.2 percent adjusted for currency). Infrastructure revenue increased 2.7 percent as reported (1.9 percent adjusted for currency).

From a geographic perspective, Americas revenue increased 4.4 percent year to year as reported (3.8 percent adjusted for currency). EMEA increased 7.1 percent (3.9 percent adjusted for currency). Asia Pacific increased 2.3 percent (5.6 percent adjusted for currency).

Gross margin of 56.9 percent decreased 0.3 points and operating (non-GAAP) gross margin of 58.6 percent was essentially flat compared to the prior-year period.

Total expense and other (income) increased 4.8 percent in the first nine months of 2026 versus the prior-year period primarily driven by our investments in portfolio innovation, and higher non-operating retirement-related costs, partially offset by savings from productivity actions and the effects of currency. Total operating (non-GAAP) expense and other (income) increased 3.0 percent year to year, driven primarily by the same factors as described above, excluding the higher non-operating retirement-related costs.

Pre-tax income from continuing operations of $6.4 billion increased 2.9 percent and pre-tax margin was 12.7 percent, a decline of 0.2 points as compared to the first nine months of 2025. The continuing operations provision for income taxes was $0.8 billion in the first nine months of 2026, compared to $1.2 billion in the first nine months of 2025. Net income from continuing operations of $5.6 billion increased 11.8 percent and the net income from continuing operations margin was 11.1 percent, which increased 0.7 points year to year.

Operating (non-GAAP) pre-tax income from continuing operations of $8.7 billion increased 9.4 percent compared to the prior-year period and the operating (non-GAAP) pre-tax margin from continuing operations increased 0.7 points to 17.4 percent. The operating (non-GAAP) provision for income taxes in both the first nine months of 2026 and the first nine months of 2025 was $1.3 billion. Operating (non-GAAP) income from continuing operations of $7.4 billion increased 11.1 percent and the operating (non-GAAP) income margin from continuing operations of 14.8 percent increased 0.8 points year to year.

Diluted earnings per share from continuing operations of $5.86 in the first nine months of 2026 increased 11.2 percent and operating (non-GAAP) diluted earnings per share of $7.79 increased 10.4 percent compared to the first nine months of 2025.

At September 30, 2026, 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, 2026 of $11.1 billion decreased $3.4 billion from December 31, 2025 and debt of $63.8 billion at September 30, 2026 increased $2.6 billion. The company continues to make investments in innovation both organically and through acquisitions, including the Confluent acquisition in the first quarter of 2026.

Total assets increased $3.1 billion ($4.3 billion adjusted for currency) from December 31, 2025. Total liabilities decreased $0.3 billion ($0.9 billion adjusted for currency) from December 31, 2025. Total equity of $36.2 billion increased $3.5 billion from December 31, 2025.

Cash provided by operating activities was $11.8 billion in the first nine months of 2026, an increase of $2.6 billion compared to the first nine months of 2025, which includes an increase in cash provided by financing receivables of $1.9 billion. Free cash flow of $7.8 billion increased $0.6 billion versus the prior-year period. Refer to page 72 for additional information on free cash flow. Net cash used in investing activities of $13.5 billion, which includes our investment in the acquisition of Confluent, increased $1.8 billion compared to the prior-year period. Net cash used in financing activities of $2.4 billion increased $2.0 billion compared to the first nine months of 2025.

Management Discussion – (continued)

Third Quarter in Review

Results of Continuing Operations

Segment Details

The following tables present each reportable segment’s revenue and gross margin results, followed by an analysis of the third quarter and the first nine months of 2026 versus the third quarter and first nine months of 2025 reportable segments results.


($ in millions)							Yr.-to-Yr. Percent/Margin Change		Yr.-to-Yr. Percent Change Adjusted For Currency
For the three months ended September 30:	2026			2025
Revenue:
Software	$	7,804		$	7,209		8.2	%	8.7	%
Gross margin	82.5		%	83.1		%	(0.6)	pts.
Consulting	5,335			5,324			0.2	%	1.8	%
Gross margin	27.4		%	29.3		%	(1.9)	pts.
Infrastructure	3,707			3,559			4.2	%	4.9	%
Gross margin	56.7		%	57.2		%	(0.4)	pts.
Financing	192			200			(3.9)	%	(3.3)	%
Gross margin	40.7		%	45.6		%	(4.9)	pts.
Other (1)	66			38			72.1	%	75.6	%
Gross margin	nm			nm			nm
Total revenue	$	17,103		$	16,331		4.7 %		5.6	%
Total gross profit	$	9,714		$	9,360		3.8	%
Total gross margin	56.8		%	57.3		%	(0.5)	pts.
Non-operating adjustments:
Amortization of acquired intangible assets	289			231			25.5 %
Operating (non-GAAP) gross profit	$	10,004		$	9,591		4.3	%
Operating (non-GAAP) gross margin	58.5		%	58.7		%	(0.2)	pts.

(1)Includes reductions in revenue for estimated residual value less related unearned income on sales-type leases, which reflects the z17 launch in June 2025. Refer to note A, "Significant Accounting Policies," in the company's 2025 Annual Report for additional information.

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Management Discussion – (continued)


($ in millions)							Yr.-to-Yr. Percent/Margin Change		Yr.-to-Yr. Percent Change Adjusted For Currency
For the nine months ended September 30:	2026			2025
Revenue:
Software	$	22,617		$	20,932		8.1	%	7.0	%
Gross margin	82.6		%	83.5		%	(0.9)	pts.
Consulting	15,934			15,706			1.5	%	1.2	%
Gross margin	27.9		%	28.0		%	(0.1)	pts.
Infrastructure	10,868			10,586			2.7	%	1.9	%
Gross margin	57.4		%	57.7		%	(0.3)	pts.
Financing	598			557			7.3	%	5.7	%
Gross margin	42.2		%	45.7		%	(3.5)	pts.
Other (1)	165			68			143.7	%	128.5	%
Gross margin	nm			nm			nm
Total revenue	$	50,182		$	47,849		4.9	%	4.2	%
Total gross profit	$	28,571		$	27,369		4.4	%
Total gross margin	56.9		%	57.2		%	(0.3)	pts.
Non-operating adjustments:
Amortization of acquired intangible assets	813			656			23.9	%
Operating (non-GAAP) gross profit	$	29,384		$	28,025		4.8	%
Operating (non-GAAP) gross margin	58.6		%	58.6		%	0.0	pts.

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Software


($ in millions)					Yr.-to-Yr. Percent Change		Yr.-to-Yr. Percent Change Adjusted For Currency
For the three months ended September 30:	2026		2025
Software revenue:	$	7,804	$	7,209	8.2	%	8.7	%
Hybrid Cloud	$	2,086	$	1,886	10.6	%	11.1	%
Automation	1,870		1,934		(3.3)		(2.9)
Data	1,738		1,459		19.1		19.6
Transaction Processing	2,111		1,930		9.3		9.9


($ in millions)					Yr.-to-Yr. Percent Change		Yr.-to-Yr. Percent Change Adjusted For Currency
For the nine months ended September 30:	2026		2025
Software revenue:	$	22,617	$	20,932	8.1	%	7.0	%
Hybrid Cloud	$	5,988	$	5,369	11.5	%	10.7	%
Automation	5,562		5,401		3.0		2.0
Data	4,994		4,194		19.1		18.1
Transaction Processing	6,073		5,967		1.8		0.6

Management Discussion – (continued)

For the third quarter of 2026, Software revenue of $7,804 million increased 8.2 percent as reported (8.7 percent adjusted for currency) compared to the prior-year period led by the combination of strong new business performance, including Confluent, and pipeline closure rates as we completed a significant portion of large deals that failed to close within the expected timelines from the second quarter. Our high-value recurring revenue base, which is approximately 80 percent of Software revenue, continues to deliver solid growth reflecting demand for our offerings. The remaining 20 percent of Software revenue is transactional in nature, which grew in the current period. This performance reinforces our confidence in the strength of the software portfolio.

Revenue performance by line of business in the third quarter compared to the prior-year period was as follows:

Hybrid Cloud (Red Hat) revenue increased 10.6 percent as reported (11.1 percent adjusted for currency) with accelerated bookings growth. OpenShift annual recurring revenue continues to grow and is approximately $2.4 billion. Automation revenue decreased 3.3 percent as reported (2.9 percent adjusted for currency) reflecting a strong prior-year performance, partially offset by growth from HashiCorp. Data revenue increased 19.1 percent as reported (19.6 percent adjusted for currency) driven by the strong performance from Confluent. Transaction Processing revenue increased 9.3 percent as reported (9.9 percent adjusted for currency) driven by demand for this mission-critical software and strong execution against our pipeline, including certain large deals that failed to close from the second quarter.

Across Software, our annual recurring revenue (ARR) was solid at $24.9 billion, and increased approximately $2 billion as reported year to year. This increase reflects the acquisition of Confluent and growth across other areas of our recurring revenue base. ARR is a key performance metric management uses to assess the health and growth trajectory of our Software segment, and 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 software revenue as this performance metric and its inputs may not represent revenue that will be recognized in future periods.

Revenue performance in the first nine months of 2026 compared to the prior-year period was as follows:

Software revenue of $22,617 million increased 8.1 percent as reported (7.0 percent adjusted for currency) with growth in all lines of business. Hybrid Cloud and Data both grew at double-digit rates, and Automation and Transaction Processing both grew at low-single digit rates. The revenue performance in Software for the first nine months of 2026 reflects contributions from Hybrid Cloud and recent acquisitions, including Confluent and HashiCorp, as well as the investments we have made in organic software innovation.


($ in millions)							Yr.-to-Yr. Percent/ Margin Change
For the three months ended September 30:	2026			2025
Software:
Gross profit	$	6,436		$	5,989		7.5	%
Gross profit margin	82.5		%	83.1		%	(0.6)	pts.
Segment profit	$	2,734		$	2,374		15.2	%
Segment profit margin	35.0		%	32.9		%	2.1	pts.


($ in millions)							Yr.-to-Yr. Percent/ Margin Change
For the nine months ended September 30:	2026			2025
Software:
Gross profit	$	18,683		$	17,480		6.9	%
Gross profit margin	82.6		%	83.5		%	(0.9)	pts.
Segment profit	$	7,335		$	6,517		12.5	%
Segment profit margin	32.4		%	31.1		%	1.3	pts.

Management Discussion – (continued)

For the third quarter of 2026, Software gross profit margin decreased 0.6 points to 82.5 percent, on a year-to-year basis. Segment profit of $2,734 million increased 15.2 percent and segment profit margin of 35.0 percent increased 2.1 points compared to the prior-year period.

For the first nine months of 2026, Software gross profit margin decreased 0.9 points to 82.6 percent on a year-to-year basis. Segment profit of $7,335 million increased 12.5 percent and segment profit margin of 32.4 percent increased 1.3 points compared to the prior-year period.

Software gross profit margin decline for the third quarter and the first nine months of 2026 compared to the prior-year periods was primarily driven by investments in innovation, and product mix. Segment profit and margin performance for both periods reflect the benefits of our ongoing productivity actions and currency, partially offset by investments in innovation.

Consulting


($ in millions)					Yr.-to-Yr. Percent Change		Yr.-to-Yr. Percent Change Adjusted For Currency
For the three months ended September 30:	2026		2025
Consulting revenue:	$	5,335	$	5,324	0.2	%	1.8	%
Strategy and Technology	$	2,965	$	2,905	2.1	%	3.6	%
Intelligent Operations	2,370		2,419		(2.0)		(0.4)


($ in millions)					Yr.-to-Yr. Percent Change		Yr.-to-Yr. Percent Change Adjusted For Currency
For the nine months ended September 30:	2026		2025
Consulting revenue:	$	15,934	$	15,706	1.5	%	1.2	%
Strategy and Technology	$	8,794	$	8,607	2.2	%	2.0	%
Intelligent Operations	7,140		7,100		0.6		0.4

For the third quarter of 2026, Consulting revenue of $5,335 million was essentially flat as reported (increased 1.8 percent adjusted for currency) on a year-to-year basis. Strategy and Technology revenue increased 2.1 percent as reported (3.6 percent adjusted for currency) and Intelligent Operations revenue decreased 2.0 percent as reported (0.4 percent adjusted for currency) compared to the prior-year period. Across Consulting, we continue to see growth driven by demand for application modernization, data and AI transformation, and cybersecurity services as clients deploy AI securely and at scale.

For the first nine months of 2026, Consulting revenue of $15,934 million increased 1.5 percent as reported (1.2 percent adjusted for currency) on a year-to-year basis. Strategy and Technology revenue increased 2.2 percent as reported (2.0 percent adjusted for currency) and Intelligent Operations revenue increased 0.6 percent as reported (0.4 percent adjusted for currency) compared to the prior-year period. Our integrated model, combining deep domain expertise, technology and reusable assets, positions us to help clients capture business value from AI while accelerating time to value.


($ in millions)							Yr.-to-Yr. Percent/ Margin Change
For the three months ended September 30:	2026			2025
Consulting:
Gross profit	$	1,462		$	1,558		(6.2)	%
Gross profit margin	27.4		%	29.3		%	(1.9)	pts.
Segment profit	$	653		$	686		(4.8)	%
Segment profit margin	12.2		%	12.9		%	(0.6)	pts.

Management Discussion – (continued)


($ in millions)							Yr.-to-Yr. Percent/ Margin Change
For the nine months ended September 30:	2026			2025
Consulting:
Gross profit	$	4,450		$	4,400		1.1	%
Gross profit margin	27.9		%	28.0		%	(0.1)	pts.
Segment profit	$	1,858		$	1,807		2.8	%
Segment profit margin	11.7		%	11.5		%	0.2	pts.

For the third quarter of 2026, Consulting gross profit margin of 27.4 percent decreased 1.9 points on a year-to-year basis. Segment profit of $653 million decreased 4.8 percent and segment profit margin of 12.2 percent decreased 0.6 points compared to the prior-year period. This performance primarily reflects investments we have made in the business, including our digital assets to capture the growing AI opportunity, partially offset by the benefits of our ongoing productivity actions.

For the first nine months of 2026, Consulting gross profit margin of 27.9 percent was essentially flat on a year-to-year basis. Segment profit of $1,858 million increased 2.8 percent and segment profit margin of 11.7 percent was essentially flat compared to the prior-year period. Segment profit performance primarily reflects the benefits of our ongoing productivity actions, partially offset by investments in the business.

Consulting Signings, Book-to-Bill and Backlog


($ in millions)					Yr.-to-Yr. Percent Change		Yr.-to-Yr. Percent Change Adjusted For Currency
For the three months ended September 30:	2026		2025
Total Consulting signings	$	5,030	$	5,223	(3.7)	%	(2.0)	%


($ in millions)					Yr.-to-Yr. Percent Change		Yr.-to-Yr. Percent Change Adjusted For Currency
For the nine months ended September 30:	2026		2025
Total Consulting signings	$	15,418	$	14,950	3.1	%	3.2	%

For the three and nine months ended September 30, 2026 compared to the prior-year periods, Consulting signings decreased 3.7 percent as reported (2.0 percent adjusted for currency), but increased 3.1 percent as reported (3.2 percent adjusted for currency), respectively. Although signings declined in the third quarter on a year-to-year basis, there was client investment in cybersecurity and data transformation initiatives. Our book-to-bill ratio for the trailing twelve-months was approximately 1.04. 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. At September 30, 2026, backlog was $30.2 billion.

Signings are management’s initial estimate of the value of a client’s commitment under a services contract within IBM Consulting. There are no third-party standards or requirements governing the calculation of signings. The calculation used by management involves estimates and judgments to gauge the extent of a client’s commitment, including the type and duration of the agreement, and the presence of termination charges or wind-down costs.

Contract extensions and increases in scope are treated as signings only to the extent of the incremental new value. Total signings can vary over time due to a variety of factors including, but not limited to, the timing of signing a small number of larger contracts. Signings associated with an acquisition will be recognized on a prospective basis.

Management believes the estimated values of signings disclosed provide an indication of our forward-looking revenue. Signings are used to monitor the performance of the business and viewed as useful information for management and shareholders. The conversion of signings into revenue may vary based on the types of services and solutions, contract duration, customer decisions, and other factors, which may include, but are not limited to, the macroeconomic environment.

Management Discussion – (continued)

Infrastructure


($ in millions)					Yr.-to-Yr. Percent Change		Yr.-to-Yr. Percent Change Adjusted For Currency
For the three months ended September 30:	2026		2025
Infrastructure revenue:	$	3,707	$	3,559	4.2	%	4.9	%
Hybrid Infrastructure	$	2,452	$	2,263	8.3	%	9.0	%
IBM Z					(19.6)		(19.3)
Distributed Infrastructure					31.3		32.3
Infrastructure Support	1,255		1,296		(3.1)		(2.4)


($ in millions)					Yr.-to-Yr. Percent Change		Yr.-to-Yr. Percent Change Adjusted For Currency
For the nine months ended September 30:	2026		2025
Infrastructure revenue:	$	10,868	$	10,586	2.7	%	1.9	%
Hybrid Infrastructure	$	7,130	$	6,775	5.2	%	4.7	%
IBM Z					(19.6)		(19.8)
Distributed Infrastructure					28.7		28.0
Infrastructure Support	3,738		3,811		(1.9)		(3.0)

For the third quarter of 2026 as compared to the prior-year period, Infrastructure revenue of $3,707 million increased 4.2 percent as reported (4.9 percent adjusted for currency) with an increase in Hybrid Infrastructure of 8.3 percent as reported (9.0 percent adjusted for currency), partially offset by a decline in Infrastructure Support of 3.1 percent as reported (2.4 percent adjusted for currency). Within Hybrid Infrastructure, IBM Z decreased 19.6 percent as reported (19.3 percent adjusted for currency) reflecting product cycle dynamics, and Distributed Infrastructure revenue increased 31.3 percent as reported (32.3 percent adjusted for currency) with continued strong performance in both Storage and Power. The growth in Storage and Power reflects the importance of differentiated infrastructure as clients modernize their environments, address data growth, and support AI at scale.

For the first nine months of 2026 as compared to the prior-year period, Infrastructure revenue of $10,868 million increased 2.7 percent as reported (1.9 percent adjusted for currency) reflecting growth in Distributed Infrastructure, led by double-digit growth in both Power and Storage. IBM Z and Infrastructure Support revenue performance reflects product cycle dynamics from the z17 launch in the second quarter of 2025. The z17 remains our strongest program on record reflecting the security, reliability, scalability and compelling economics of the platform.


($ in millions)							Yr.-to-Yr. Percent/ Margin Change
For the three months ended September 30:	2026			2025
Infrastructure:
Gross profit	$	2,103		$	2,034		3.4	%
Gross profit margin	56.7		%	57.2		%	(0.4)	pts.
Segment profit	$	715		$	644		10.9	%
Segment profit margin	19.3		%	18.1		%	1.2	pts.

Management Discussion – (continued)


($ in millions)							Yr.-to-Yr. Percent/ Margin Change
For the nine months ended September 30:	2026			2025
Infrastructure:
Gross profit	$	6,234		$	6,105		2.1	%
Gross profit margin	57.4		%	57.7		%	(0.3)	pts.
Segment profit	$	2,074		$	1,857		11.7	%
Segment profit margin	19.1		%	17.5		%	1.5	pts.

For the third quarter of 2026, Infrastructure gross profit margin of 56.7 percent decreased 0.4 points on a year-to-year basis. Infrastructure segment profit of $715 million increased 10.9 percent and segment profit margin of 19.3 percent increased 1.2 points compared to the prior-year period.

For the first nine months of 2026, gross profit margin of 57.4 percent decreased 0.3 points on a year-to-year basis. Infrastructure segment profit of $2,074 million increased 11.7 percent and segment profit margin of 19.1 percent increased 1.5 points compared to the prior-year period.

The Infrastructure gross profit margin declines for the third quarter and first nine months of 2026 compared to prior-year period reflect product mix, partially offset by improvement in Distributed Infrastructure margins. Segment profit and margin performance was driven by our ongoing productivity actions, partially offset by product mix and investment in innovation.

Financing

Refer to pages 73 through 74 for a discussion of Financing’s segment results.

Geographic Revenue

In addition to the revenue presentation by reportable segment, we also measure revenue performance on a geographic basis.


($ in millions)					Yr.-to-Yr. Percent Change		Yr.-to-Yr. Percent Change Adjusted For Currency
For the three months ended September 30:	2026		2025
Total Revenue	$	17,103	$	16,331	4.7	%	5.6	%
Americas	$	8,576	$	8,143	5.3	%	5.1	%
Europe/Middle East/Africa (EMEA)	5,426		5,251		3.3		4.3
Asia Pacific	3,101		2,936		5.6		9.6


($ in millions)					Yr.-to-Yr. Percent Change		Yr.-to-Yr. Percent Change Adjusted For Currency
For the nine months ended September 30:	2026		2025
Total Revenue	$	50,182	$	47,849	4.9	%	4.2	%
Americas	$	24,854	$	23,811	4.4	%	3.8	%
Europe/Middle East/Africa (EMEA)	16,302		15,216		7.1		3.9
Asia Pacific	9,027		8,822		2.3		5.6

Management Discussion – (continued)

Geographic revenue performance for the three months ended September 30, 2026 compared to the prior-year period:

Americas revenue of $8,576 million increased 5.3 percent as reported and 5.1 percent adjusted for currency. The U.S. increased 6.6 percent as reported. Canada decreased 3.7 percent as reported and 2.3 percent adjusted for currency. Latin America decreased 1.2 percent as reported and 4.3 percent adjusted for currency, with Brazil decreasing 15.7 percent as reported and 19.0 percent adjusted for currency.

EMEA revenue of $5,426 million increased 3.3 percent as reported and 4.3 percent adjusted for currency. Italy, Germany and the U.K. increased 22.7 percent, 7.8 percent and 1.1 percent, respectively, as reported and 24.7 percent, 9.5 percent and 1.4 percent, respectively, adjusted for currency. France decreased 13.9 percent as reported and 12.5 percent adjusted for currency. The Middle East and Africa region increased 14.3 percent as reported and 12.8 percent adjusted for currency.

Asia Pacific revenue of $3,101 million increased 5.6 percent as reported and 9.6 percent adjusted for currency. Australia and India increased 32.4 percent and 4.2 percent, respectively, as reported and 22.7 percent and 13.8 percent, respectively, adjusted for currency. Japan decreased 3.3 percent as reported, but increased 4.2 percent adjusted for currency.

Geographic revenue performance for the nine months ended September 30, 2026 compared to the prior-year period:

Americas revenue of $24,854 million increased 4.4 percent as reported and 3.8 percent adjusted for currency. The U.S. increased 3.7 percent as reported. Canada decreased 4.4 percent as reported and 5.3 percent adjusted for currency. Latin America increased 14.1 percent as reported and 9.6 percent adjusted for currency, with Brazil increasing 18.2 percent as reported and 12.4 percent adjusted for currency.

EMEA revenue of $16,302 million increased 7.1 percent as reported and 3.9 percent adjusted for currency. The U.K., Italy and Germany increased 10.2 percent, 9.5 percent and 5.8 percent, respectively, as reported and 8.1 percent, 6.0 percent and 2.2 percent, respectively, adjusted for currency. France decreased 0.7 percent as reported and 4.3 percent adjusted for currency. The Middle East and Africa region increased 17.8 percent as reported and 15.8 percent adjusted for currency and represents less than 3 percent of IBM total revenue.

Asia Pacific revenue of $9,027 million increased 2.3 percent as reported and 5.6 percent adjusted for currency. Australia and India increased 18.4 percent and 7.4 percent, respectively, as reported and 8.2 percent and 16.7 percent, respectively, adjusted for currency. Japan decreased 5.7 percent as reported, but increased 1.0 percent adjusted for currency.

Expense

Total Expense and Other (Income)


($ in millions)							Yr.-to-Yr. Percent Change
For the three months ended September 30:	2026			2025
Total expense and other (income)	$	7,217		$	6,931		4.1	%
Non-operating adjustments:
Amortization of acquired intangible assets	$	(381)		$	(330)		15.4	%
Acquisition-related charges	(37)			(29)			26.3
Non-operating retirement-related (costs)/income	(91)			(13)			nm
Operating (non-GAAP) expense and other (income)	$	6,708		$	6,559		2.3	%
Total expense-to-revenue ratio	42.2		%	42.4		%	(0.2)	pts.
Operating (non-GAAP) expense-to-revenue ratio	39.2		%	40.2		%	(0.9)	pts.

nm - not meaningful

Management Discussion – (continued)


($ in millions)							Yr.-to-Yr. Percent Change
For the nine months ended September 30:	2026			2025
Total expense and other (income)	$	22,208		$	21,184		4.8	%
Non-operating adjustments:
Amortization of acquired intangible assets	$	(1,092)		$	(948)		15.2	%
Acquisition-related charges	(163)			(118)			39.0
Non-operating retirement-related (costs)/income	(283)			(61)			nm
Operating (non-GAAP) expense and other (income)	$	20,669		$	20,058		3.0	%
Total expense-to-revenue ratio	44.3		%	44.3		%	0.0	pts.
Operating (non-GAAP) expense-to-revenue ratio	41.2		%	41.9		%	(0.7)	pts.

nm - not meaningful

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

Selling, General and Administrative Expense


($ in millions)					Yr.-to-Yr. Percent Change
For the three months ended September 30:	2026		2025
Selling, general and administrative expense:
Selling, general and administrative — other	$	3,704	$	3,873	(4.3)	%
Advertising and promotional expense	234		270		(13.4)
Workforce rebalancing charges	15		43		(65.4)
Amortization of acquired intangible assets	381		330		15.4
Stock-based compensation (1)	278		233		19.6
Provision for/(benefit from) expected credit loss expense	8		(1)		nm
Total selling, general and administrative expense	$	4,620	$	4,748	(2.7)	%
Non-operating adjustments:
Amortization of acquired intangible assets	$	(381)	$	(330)	15.4	%
Acquisition-related charges (1)	(47)		(24)		95.9
Operating (non-GAAP) selling, general and administrative expense	$	4,193	$	4,394	(4.6)	%

(1)2026 includes $73 million for awards in connection with acquisitions (including a non-operating adjustment in acquisition related charges of $22 million). 2025 includes $29 million for awards in connection with acquisitions (including a non-operating adjustment in acquisition-related charges of $14 million).

nm - not meaningful

Management Discussion – (continued)


($ in millions)					Yr.-to-Yr. Percent Change
For the nine months ended September 30:	2026		2025
Selling, general and administrative expense:
Selling, general and administrative — other	$	11,524	$	11,757	(2.0)	%
Advertising and promotional expense	847		858		(1.3)
Workforce rebalancing charges	439		377		16.4
Amortization of acquired intangible assets	1,092		948		15.2
Stock-based compensation (1)	776		694		11.8
Provision for/(benefit from) expected credit loss expense	14		27		(50.2)
Total selling, general and administrative expense	$	14,691	$	14,661	0.2	%
Non-operating adjustments:
Amortization of acquired intangible assets	$	(1,092)	$	(948)	15.2	%
Acquisition-related charges (1)	(164)		(107)		54.2
Operating (non-GAAP) selling, general and administrative expense	$	13,435	$	13,606	(1.3)	%

(1)2026 includes $143 million for awards in connection with acquisitions (including a non-operating adjustment in acquisition related charges of $28 million). 2025 includes $74 million for awards in connection with acquisitions (including a non-operating adjustment in acquisition-related charges of $31 million).

Total selling, general and administrative (SG&A) expense decreased 2.7 percent in the third quarter of 2026 versus the prior-year period driven primarily by the following factors:

Lower spending reflecting the benefits from productivity and the actions taken to transform our operations (8 points); partially offset by
Higher operating expenses from acquired businesses, as a result of our continued investment to drive our hybrid cloud and AI strategy (4 points); and
Higher amortization of acquired intangible assets and acquisition-related charges (2 points).

Operating (non-GAAP) SG&A expense decreased 4.6 percent year to year primarily driven by the same factors above, excluding the higher amortization of acquired intangible assets and acquisition-related charges.

Total SG&A expense increased 0.2 percent in the first nine months of 2026 versus the prior-year period driven primarily by the following factors:

Higher operating expenses from acquired businesses, as a result of our continued investment to drive our hybrid cloud and AI strategy (3 points);
Higher amortization of acquired intangible assets and acquisition-related charges (1 point);
The effects of currency (1 points); partially offset by
Lower spending reflecting the benefits from productivity and the actions taken to transform our operations (5 points).

Operating (non-GAAP) SG&A expense decreased 1.3 percent year to year primarily driven by lower spending reflecting the benefits from productivity initiatives and actions taken to transform our operations, partially offset by higher operating expenses from acquired businesses and the effects of currency.

Expected credit loss expense was a provision of $14 million in the first nine months of 2026 compared to $27 million in the prior-year period. The year-to-year change was primarily driven by a higher release of general reserves partially offset by higher specific reserves in the current year. Refer to "Receivables and Allowances" section on page 67 for additional information.

Management Discussion – (continued)

Research and Development


($ in millions)					Yr.-to-Yr. Percent Change
For the three months ended September 30:	2026		2025
Research and development expense	$	2,378	$	2,082	14.2	%


($ in millions)					Yr.-to-Yr. Percent Change
For the nine months ended September 30:	2026		2025
Research and development expense	$	6,863	$	6,129	12.0	%

Research and development (R&D) expense increased 14.2 percent and 12.0 percent in the third quarter and the first nine months of 2026, respectively, driven by continued organic and inorganic investments to drive innovation in AI, hybrid cloud and quantum.

Intellectual Property and Custom Development Income


($ in millions)					Yr.-to-Yr. Percent Change
For the three months ended September 30:	2026		2025
Intellectual property and custom development income:
Intellectual property income (1)	$	50	$	39	28.8	%
Custom development income	114		180		(36.9)

Total	$	164	$	219	(25.3)	%


($ in millions)					Yr.-to-Yr. Percent Change
For the nine months ended September 30:	2026		2025
Intellectual property and custom development income:
Intellectual property income (1)	$	151	$	145	4.6	%
Custom development income	350		542		(35.5)

Total	$	501	$	687	(27.0)	%

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

Total intellectual property and custom development income decreased 25.3 percent and 27.0 percent year to year in the third quarter and first nine months of 2026, respectively. 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.

Management Discussion – (continued)

Other (Income) and Expense


($ in millions)					Yr.-to-Yr. Percent Change
For the three months ended September 30:	2026		2025
Other (income) and expense:
(Gains)/losses on foreign currency transactions	$	(52)	$	(84)	(38.2)%
(Gains)/losses on derivative instruments	21		162		(87.2)
Interest income	(87)		(150)		(41.9)
Net (gains)/losses from securities and investment assets (1)	18		(3)		nm
Retirement-related costs/(income)	91		13		nm
Other (2)	(100)		(110)		(9.6)
Total other (income) and expense	$	(109)	$	(173)	(36.9)%
Non-operating adjustments:

Acquisition-related charges	$	0	$	(6)	(100.0)%
Non-operating retirement-related (costs)/income	(91)		(13)		nm
Operating (non-GAAP) other (income) and expense	$	(200)	$	(191)	4.8%


($ in millions)					Yr.-to-Yr. Percent Change
For the nine months ended September 30:	2026		2025
Other (income) and expense:
(Gains)/losses on foreign currency transactions	$	(487)	$	1,131	nm
(Gains)/losses on derivative instruments	560		(881)		nm
Interest income	(325)		(513)		(36.6)%
Net (gains)/losses from securities and investment assets (1)	(97)		8		nm
Retirement-related costs/(income)	283		61		nm
Other (2)	(230)		(181)		26.7
Total other (income) and expense	$	(296)	$	(376)	(21.5)%
Non-operating adjustments:

Acquisition-related charges	$	1	$	(7)	nm
Non-operating retirement-related (costs)/income	(283)		(61)		nm
Operating (non-GAAP) other (income) and expense	$	(578)	$	(444)	30.3%

(1) Includes realized and unrealized net (gains)/losses from equity investments.

(2) Includes net (gains)/losses from divestitures and asset sales.

nm - not meaningful

Total other (income) and expense was income of $109 million in the third quarter of 2026, a decrease of $64 million compared to the prior-year period. The year-to-year change was primarily driven by:

Higher non-operating retirement-related costs of $78 million. Refer to "Retirement-Related Plans" on page 63 for additional information; and
Lower interest income of $63 million primarily driven by a lower average cash balance in the current year, as well as lower average interest rates; partially offset by
Net exchange gains (including derivative instruments) in the current year of $32 million versus net exchange losses in the prior year of $77 million.

Operating (non-GAAP) other (income) and expense was income of $200 million in the third quarter of 2026, an increase of $9 million compared to the prior-year period. The year-to-year change was primarily driven by net exchange gains in the current year, including derivative instruments, versus net exchange losses in the prior year, partially offset by lower interest income.

Management Discussion – (continued)

Total other (income) and expense was income of $296 million in the first nine months of 2026, a decrease of $81 million compared to the prior-year period. The year-to-year change was primarily driven by:

Higher non-operating retirement-related costs of $223 million. Refer to "Retirement-Related Plans" on page 63 for additional information; and
Lower interest income of $188 million primarily driven by lower average cash balances in the current year, as well as lower average interest rates; partially offset by
Lower net exchange losses (including derivative instruments) of $177 million; and
Higher net gains from securities and investment assets of $105 million.

Operating (non-GAAP) other (income) and expense was income of $578 million in the first nine months of 2026, an increase of $134 million compared to the prior-year period. The year-to-year change was primarily driven by lower net exchange losses, including derivative instruments, and higher net gains from securities and investment assets, partially offset by lower interest income.

Interest Expense


($ in millions)					Yr.-to-Yr. Percent Change
For the three months ended September 30:	2026		2025
Interest expense	$	491	$	492	(0.2)	%


($ in millions)					Yr.-to-Yr. Percent Change
For the nine months ended September 30:	2026		2025
Interest expense	$	1,451	$	1,457	(0.4)	%

Interest expense decreased $1 million and $6 million year to year in the third quarter and first nine months of 2026, respectively. In addition, when external borrowings support the Financing business, interest expense is reported in cost of financing on the Consolidated Income Statement. For the third quarter and first nine months of 2026, interest reported in cost of financing was $104 million and $320 million, with year-to-year increases of $9 million and $52 million, respectively.

Management Discussion – (continued)

Retirement-Related Plans

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


($ in millions)					Yr.-to-Yr. Percent Change
For the three months ended September 30:	2026		2025
Retirement-related plans — cost:
Service cost	$	130	$	134	(2.8)	%
Multi-employer plans	3		3		(9.1)
Cost of defined contribution plans	113		116		(2.8)
Total operating costs	$	245	$	253	(2.9)	%
Interest cost	$	503	$	498	0.9	%
Expected return on plan assets	(625)		(645)		(3.1)
Recognized actuarial losses	196		158		23.8
Amortization of prior service costs/(credits)	9		(2)		nm
Curtailments/settlements	2		2		40.4
Other costs	6		0		nm
Total non-operating costs/(income)	$	91	$	13	nm
Total retirement-related plans — cost	$	336	$	265	26.8	%


($ in millions)					Yr.-to-Yr. Percent Change
For the nine months ended September 30:	2026		2025
Retirement-related plans — cost:
Service cost	$	394	$	397	(0.7)	%
Multi-employer plans	10		10		(0.9)
Cost of defined contribution plans	355		345		2.9
Total operating costs	$	758	$	751	0.9	%
Interest cost	$	1,514	$	1,468	3.2	%
Expected return on plan assets	(1,881)		(1,896)		(0.8)
Recognized actuarial losses	591		467		26.4
Amortization of prior service costs/(credits)	26		(5)		nm
Curtailments/settlements	7		8		(17.9)
Other costs	26		18		40.4
Total non-operating costs/(income)	$	283	$	61	nm
Total retirement-related plans — cost	$	1,041	$	812	28.3	%

nm - not meaningful

Total pre-tax retirement-related plan cost in the third quarter of 2026 increased by $71 million compared to the third quarter of 2025, primarily driven by an increase in recognized actuarial losses ($38 million), lower expected return on plan assets ($20 million), and an increase in amortization of prior service costs ($10 million). Total cost for the first nine months of 2026 increased by $230 million compared to the first nine months of 2025, primarily driven by an increase in recognized actuarial losses ($124 million), interest cost ($46 million), and amortization of prior service costs ($31 million).

As described in the “Operating (non-GAAP) Earnings” section on page 45, 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 2026 were $245 million, a decrease of $7 million compared to the third quarter of 2025. For the first nine months of 2026, operating retirement-related costs were $758 million, an increase of $7 million compared

Management Discussion – (continued)

to the prior-year period. Non-operating costs were $91 million in the third quarter of 2026 compared to $13 million in the prior-year period and $283 million for the first nine months of 2026 compared to $61 million in the prior-year period. The year-to-year increases in non-operating costs for the periods presented were driven by the same factors as described in the total pre-tax retirement plan cost above.

Taxes

The continuing operations provision for income taxes was $298 million in the third quarter of 2026, compared to $686 million in the third quarter of 2025. The year-to-year change is primarily driven by the one-time, non-cash income tax charge recorded in the third quarter of 2025 resulting from the enactment of H.R. 1. This charge did not impact our operating (non-GAAP) tax expense. The operating (non-GAAP) provision for income taxes was $483 million in the third quarter of 2026, compared to $516 million in the third quarter of 2025.

The continuing operations provision for income taxes for the first nine months of 2026 was $782 million, compared to $1,193 million for the first nine months of 2025. The year-to-year change is primarily driven by the same factor as described above. The operating (non-GAAP) provision for income taxes in the first nine months of 2026 was $1,290 million, compared to $1,282 million in the first nine months of 2025.

IBM’s tax provision and effective tax rate are impacted by recurring and discrete factors including the geographical mix of income before taxes, changes in business operations, incentives, specific transactions, changes in unrecognized tax benefits, settlement of income tax audits, and changes in tax laws or regulations. 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 changes in law, new regulations and guidance, and audit adjustments, among others.

The U.S. Internal Revenue Service (IRS) has proposed adjustments related to certain cross-border transactions with respect to the company’s 2013-2014 and 2015-2016 U.S. income tax returns. The company strongly disagrees with the IRS’ proposed adjustments, has filed IRS Appeals protests, and will pursue resolution at court, if necessary. In the fourth quarter of 2025, the IRS concluded its audit of the company’s 2017-2018 U.S. income tax returns. The company strongly disagrees with certain adjustments proposed by the IRS and continues to evaluate its options to contest them. 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. Although the outcome of tax audits is always uncertain, the company believes that adequate amounts of tax, interest and penalties have been provided for any adjustments that are expected to result for these years.

Management Discussion – (continued)

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 on page 45 for management’s rationale for presenting operating earnings information.


($ 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, 2026:
Gross profit	$	9,714		$	289		$	—		$	—		$	10,004
Gross profit margin	56.8		%	1.7		pts.	—		pts.	—		pts.	58.5		%
SG&A	$	4,620		$	(428)		$	—		$	—		$	4,193

Other (income) and expense	(109)			0			(91)			—			(200)
Total expense and other (income)	7,217			(418)			(91)			—			6,708
Pre-tax income from continuing operations	2,497			707			91			—			3,295
Pre-tax margin from continuing operations	14.6		%	4.1		pts.	0.5		pts.	—		pts.	19.3		%
Provision for/(benefit from) income taxes (1)	$	298		$	166		$	20		$	—		$	483
Effective tax rate	11.9		%	2.5		pts.	0.3		pts.	—		pts.	14.7		%
Income from continuing operations	$	2,199		$	542		$	71		$	—		$	2,812
Income margin from continuing operations	12.9		%	3.2		pts.	0.4		pts.	—		pts.	16.4		%
Diluted earnings per share from continuing operations	$	2.31		$	0.57		$	0.07		$	—		$	2.95


($ 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, 2025:
Gross profit	$	9,360		$	231		$	—		$	—		$	9,591
Gross profit margin	57.3		%	1.4		pts.	—		pts.	—		pts.	58.7		%
SG&A	$	4,748		$	(354)		$	—		$	—		$	4,394

Other (income) and expense	(173)			(6)			(13)			—			(191)
Total expense and other (income)	6,931			(359)			(13)			—			6,559
Pre-tax income from continuing operations	2,430			590			13			—			3,033
Pre-tax margin from continuing operations	14.9		%	3.6		pts.	0.1		pts.	—		pts.	18.6		%
Provision for/(benefit from) income taxes (1)	$	686		$	136		$	3		$	(309)		$	516
Effective tax rate	28.2		%	(1.0)		pts.	0.0		pts.	(10.2)		pts.	17.0		%
Income from continuing operations	$	1,744		$	454		$	10		$	309		$	2,517
Income margin from continuing operations	10.7		%	2.8		pts.	0.1		pts.	1.9		pts.	15.4		%
Diluted earnings per share from continuing operations	$	1.84		$	0.48		$	0.01		$	0.33		$	2.65

(1)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.

Management Discussion – (continued)


($ 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, 2026:
Gross profit	$	28,571		$	813		$	—		$	—		$	29,384
Gross profit margin	56.9		%	1.6		pts.	—		pts.	—		pts.	58.6		%
SG&A	$	14,691		$	(1,257)		$	—		$	—		$	13,435

Other (income) and expense	(296)			1			(283)			—			(578)
Total expense and other (income)	22,208			(1,256)			(283)			—			20,669
Pre-tax income from continuing operations	6,363			2,069			283			—			8,715
Pre-tax margin from continuing operations	12.7		%	4.1		pts.	0.6		pts.	—		pts.	17.4		%
Provision for/(benefit from) income taxes (1)	$	782		$	470		$	43		$	(6)		$	1,290
Effective tax rate	12.3		%	2.5		pts.	0.1		pts.	(0.1)		pts.	14.8		%
Income from continuing operations	$	5,581		$	1,598		$	240		$	6		$	7,425
Income margin from continuing operations	11.1		%	3.2		pts.	0.5		pts.	0.0		pts.	14.8		%
Diluted earnings per share from continuing operations	$	5.86		$	1.68		$	0.25		$	0.01		$	7.79


($ 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, 2025:
Gross profit	$	27,369		$	657		$	—		$	—		$	28,025
Gross profit margin	57.2		%	1.4		pts.	—		pts.	—		pts.	58.6		%
SG&A	$	14,661		$	(1,055)		$	—		$	—		$	13,606

Other (income) and expense	(376)			(7)			(61)			—			(444)
Total expense and other (income)	21,184			(1,066)			(61)			—			20,058
Pre-tax income from continuing operations	6,185			1,723			61			—			7,968
Pre-tax margin from continuing operations	12.9		%	3.6		pts.	0.1		pts.	—		pts.	16.7		%
Provision for/(benefit from) income taxes (1)	$	1,193		$	396		$	0		$	(307)		$	1,282
Effective tax rate	19.3		%	0.8		pts.	(0.2)		pts.	(3.9)		pts.	16.1		%
Income from continuing operations	$	4,992		$	1,326		$	61		$	307		$	6,686
Income margin from continuing operations	10.4		%	2.8		pts.	0.1		pts.	0.6		pts.	14.0		%
Diluted earnings per share from continuing operations	$	5.27		$	1.40		$	0.06		$	0.32		$	7.06

(1)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.

Management Discussion – (continued)

Financial Position

Dynamics

Our balance sheet at September 30, 2026 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, 2026 were $11,106 million, a decrease of $3,364 million compared to December 31, 2025. Total debt of $63,817 million at September 30, 2026 increased $2,557 million compared to December 31, 2025. We continue to manage our debt levels while being acquisitive and without sacrificing investments in our business.

In the first nine months of 2026, we generated $11,791 million in cash from operating activities, an increase of $2,639 million compared to the first nine months of 2025. Our free cash flow for the nine months ended September 30, 2026 was $7,787 million, an increase of $606 million versus the prior-year period. Refer to pages 71 through 72 for additional information on free cash flow. We returned $4,762 million to shareholders through dividends in the first nine months of 2026 and invested $11,364 million in acquisitions, including Confluent, which completed in the first quarter.

Our pension plans were well funded at the end of 2025, with worldwide qualified plans funded at 116 percent. Overall pension funded status as of the end of September 2026 was fairly consistent with year-end 2025. Refer to “Retirement-Related Plans” on page 30 in our 2025 Annual Report for additional information.

IBM Working Capital


($ in millions)	At September 30, 2026		At December 31, 2025
Current assets	$	31,192	$	36,944
Current liabilities	36,485		38,658
Working capital	$	(5,293)	$	(1,714)
Current ratio	0.85:1		0.96:1

Working capital decreased $3,579 million from the year-end 2025 position. Current assets decreased $5,752 million ($5,285 million adjusted for currency) primarily due to the decline in cash and cash equivalents, restricted cash and marketable securities, which included the reductions for the acquisition of Confluent in the first quarter, along with decreases in receivables related to collections of seasonally higher year-end balances, partially offset by an increase in inventory to support anticipated customer demand. Current liabilities decreased $2,173 million ($1,933 million adjusted for currency) primarily driven by a decrease in deferred income due to seasonality and lower taxes payable.

Receivables and Allowances

Roll Forward of Total IBM Receivables Allowance for Credit Losses


($ in millions)
January 1, 2026	Additions / (Releases) (1)	Write-offs (2)	Foreign currency and other	September 30, 2026
$276	$16	$(36)	$8	$264

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

(2)Refer to note A, “Significant Accounting Policies,” in our 2025 Annual Report for additional information regarding allowance for credit loss write-offs.

Excluding receivables classified as held for sale, the total IBM receivables provision coverage was 1.3 percent at September 30, 2026, an increase of 20 basis points compared to December 31, 2025. The increase in coverage is primarily driven by a decrease in total receivables. The majority of the write-offs during the nine months ended September 30, 2026 were related to receivables which had been previously reserved. Refer to Financing's “Balance Sheet and Return on Equity Highlights” on page 74 for additional details regarding the Financing segment receivables and allowances.

Management Discussion – (continued)

Noncurrent Assets and Liabilities


($ in millions)	At September 30, 2026		At December 31, 2025
Noncurrent assets	$	123,820	$	114,936
Long-term debt	$	56,804	$	54,836
Noncurrent liabilities (excluding debt)	$	25,516	$	25,645

Noncurrent assets increased $8,884 million ($9,594 million adjusted for currency) primarily due to an increase in goodwill and intangible assets from the Confluent acquisition.

Long-term debt increased $1,969 million ($2,546 million adjusted for currency) primarily driven by our 2026 debt issuances, partially offset by reclassifications to short-term debt to reflect upcoming maturities within the next twelve months.

Noncurrent liabilities (excluding debt) decreased $130 million (increased $260 million adjusted for currency).

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.


($ in millions)	At September 30, 2026		At December 31, 2025
Total debt	$	63,817	$	61,260
Financing segment debt (1)	$	12,652	$	15,093
Non-Financing debt	$	51,166	$	46,167

(1)Refer to Financing’s “Balance Sheet and Return on Equity Highlights” on page 74 for additional details.

Total debt of $63,817 million increased $2,557 million ($3,132 million adjusted for currency) from December 31, 2025, primarily driven by proceeds from issuances of $9,415 million, partially offset by maturities of $7,261 million.

Non-Financing debt of $51,166 million increased $4,999 million ($5,504 million adjusted for currency) from December 31, 2025, primarily driven by the same dynamics as described above.

Financing segment debt of $12,652 million decreased $2,442 million ($2,372 million adjusted for currency) from December 31, 2025, 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, 2026.

In the Consolidated Income Statement, when external borrowings support the Financing business, interest expense is presented in cost of financing. Refer to note 12, “Borrowings,” for additional information.

Equity

Total equity increased $3,466 million from December 31, 2025, primarily driven by net income of $5,571 million and an increase in common stock issuances of $1,821 million, partially offset by dividends paid of $4,762 million.

Management Discussion – (continued)

Cash Flow

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


($ in millions)
For the nine months ended September 30:	2026		2025
Net cash provided by/(used in):
Operating activities	$	11,791	$	9,153
Investing activities	(13,539)		(11,719)
Financing activities	(2,402)		(423)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	(209)		429
Net change in cash, cash equivalents and restricted cash	$	(4,359)	$	(2,561)

Net cash provided by operating activities increased $2,639 million as compared to the first nine months of 2025. This was due to an increase in cash provided by total receivables, primarily driven by financing receivables, and an increase in performance-related improvements within net income, partially offset by higher cash taxes and net interest expense.

Net cash used in investing activities increased $1,820 million primarily due to higher cash used for acquisitions, reflecting the impact of the Confluent acquisition compared with the HashiCorp acquisition in the prior‑year period. This increase was partially offset by lower net cash used in purchases of marketable securities and other investments, including proceeds from the sale of marketable securities acquired in the Confluent acquisition.

Net cash used in financing activities increased $1,979 million driven by lower net proceeds from debt in the current-year period, partially offset by cash provided by noncontrolling interest transactions (refer to "Other Transactions" in note 5, "Acquisition, Divestitures and Other Transactions," for additional information).

Looking Forward

Hybrid cloud and Super Intelligence remain the two most consequential technologies for enterprise performance. These technologies are no longer viewed as incremental tools, but as platforms that are fundamentally transforming how businesses scale, compete, and operate.

AI is changing the economics of enterprise operations, and is entering its next phase. To capture this opportunity and build a competitive advantage, businesses must go beyond deploying more models or building more agents, the advantage will belong to companies that can operate AI securely, efficiently and sustainably across the enterprise with infrastructure that secures and optimizes operations, and the hybrid cloud foundation that provides flexibility without lock-in. The portfolio of AI offerings we have built, including cost efficient, fit-for-purpose open-source models deployed in hybrid environments, is focused on helping businesses scale AI and generate return through productivity improvements and automation. In Software, IBM watsonx provides a robust portfolio of AI products for developing AI apps, managing data, and governing the entire lifecycle of AI models and AI agents, with full control over cost, security, sovereignty, and performance. Our watsonx platform and watsonx Orchestrate help enterprises deploy AI by connecting agents, models, and workflows with governance and security. As more agents are deployed, enterprises need to know who each agent is, what authority it has and what it can access. HashiCorp Vault allows clients to register, authorize, audit and revoke agents. We continue to see Infrastructure play a critical role with IBM Z delivering enhanced AI acceleration through multi-model AI capabilities, low unit cost architecture at scale for workloads that require end-to-end encryption, continued availability, and ultra-high throughput. In July, we introduced a smaller LinuxONE system that allows clients to address data center space and costs constraints while offering the security, resiliency and real time inferencing the IBM Z platform can deliver. In Consulting, AI is both a growth driver and a productivity engine. Our experts are helping clients design and execute AI strategies by leveraging the IBM Consulting Advantage platform, an AI delivery platform designed to implement solutions at scale, transforming how our consultants work. As agents take on more work, delivery becomes faster, more software driven, and more scalable.

AI is a powerful productivity driver for our clients and for IBM. We are transforming our enterprise operations, driving efficiency and cost savings with our Client Zero approach, leveraging technology and embedding AI in our own

Management Discussion – (continued)

workflows. Our developer workforce is using IBM Bob, our AI-based software development system that automates the full software lifecycle, driving developer productivity and predictable enterprise costs. IBM Bob, which became generally available in March, is helping clients build enterprise-ready AI applications and agents while creating a natural pathway to adoption of watsonx Orchestrate and IBM's broader AI platform.

We remain focused on accelerating the speed and scale of our innovation. In the second quarter, we launched Lightwell, an investment to establish a trusted enterprise clearinghouse, combined with a global workforce of engineers, to address open-source software vulnerabilities at scale, which became generally available in July. We also continue to invest in emerging technologies, including quantum, which remains an area of strategic differentiation for IBM and a significant long-term opportunity. In the second quarter, we announced our plans to invest more than $10 billion in quantum over the next five years, spanning R&D, capital expenditures, manufacturing scaling, mergers and acquisitions, and ecosystem expansion. This quarter we completed the agreement with the U.S. Department of Commerce (DoC) providing a $1 billion CHIPS award to Anderon, an IBM subsidiary. The award will accelerate Anderon’s R&D efforts to advance the nation’s quantum wafer manufacturing capabilities.

To complement our portfolio, we completed four acquisitions in the first nine months of 2026, including the acquisition of Confluent in the first quarter, which enables enterprises to deploy generative and agentic AI better and faster by providing trusted communication and data flow between environments, applications and APIs.

Our performance over the first nine months of 2026 reflects the strength across our portfolio, disciplined execution against our priorities, and the continued success of our focused strategy around hybrid cloud and AI. Our productivity initiatives generate profit and cash flow growth enabling us to continue to invest in our business while returning value to shareholders. We remain confident in the growth opportunities ahead of us and our ability to capture them.

While the economic and geopolitical environment continues to remain dynamic, we believe our durable, high value portfolio and the resiliency of our business model, underpinned by our software-led hybrid cloud and AI strategy, position us well to navigate the current climate.

Currency Rate Fluctuations

Changes in the relative values of non-U.S. currencies to the U.S. dollar affect our financial results and financial position. 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 2026. 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.

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 2026, revenue from continuing operations increased 4.7 percent as reported and 5.6 percent adjusted for currency compared to the prior year. In the first nine months of 2026, revenue from continuing operations increased 4.9 percent as reported and 4.2 percent at constant currency, compared to the same period in 2025.

At September 30, 2026, currency changes resulted in assets and liabilities denominated in most local currencies being translated into fewer U.S. dollars than at year-end 2025. We use financial hedging instruments to limit specific currency risks related to foreign currency-based transactions.

We translate revenue, cost and expense in our non-U.S. operations at current exchange rates in the reported period. In the third quarter and first nine months of 2026, the impacts from currency translation and hedging to year-to-year pre-tax income, operating (non-GAAP) pre-tax income and segments profit margins were not material. 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 in 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 2025 Annual Report, on pages 31 to 33, there is a discussion of our liquidity including two tables that present three years of data. The table presented on page 31 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, 2026, those amounts are $11.8 billion of net cash from operating activities, $11.1 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, 2026 appear in the following table and remain unchanged from June 30, 2026.


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. Debt levels have increased $2.6 billion ($3.1 billion adjusted for currency) from December 31, 2025. During 2026, we issued $9.4 billion of debt for general corporate purposes. Refer to note 12, “Borrowings,” for additional information.

We do not have “ratings trigger” provisions in our debt covenants or documentation, which would allow the holders to declare an event of default and seek to accelerate payments thereunder in the event of a change in credit rating. Our debt covenants are well within the required levels. Our contractual agreements governing derivative instruments contain standard market clauses which can trigger the termination of the agreement if our credit rating were to fall below investment grade. At September 30, 2026, the fair value of those instruments that were in a liability position was $728 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 69. 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, strategic investments, plan shareholder return levels 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. 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 2026 and 2025 prepared in a manner consistent with the description above.


($ in millions)
For the nine months ended September 30:	2026		2025
Net cash from operating activities per GAAP	$	11,791	$	9,153
Less: change in Financing receivables	2,805		905
Net cash from operating activities, excluding Financing receivables	$	8,986	$	8,248
Capital expenditures, net	(1,200)		(1,067)
Free cash flow	$	7,787	$	7,181
Change in Financing receivables	2,805		905
Acquisitions	(11,364)		(7,903)
Divestitures	30		(1)
Dividends	(4,762)		(4,681)
Change in total debt	2,157		4,683
Other investing and financing activities (1)	193		(531)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	(209)		429
Change in cash, cash equivalents, restricted cash and short-term marketable securities	$	(3,364)	$	81

(1)Includes noncontrolling interest transactions. Refer to "Other Transactions" in note 5, "Acquisition, Divestitures and Other Transactions," for additional information.

In the first nine months of 2026, we generated $7.8 billion in free cash flow, an increase of $0.6 billion versus the prior-year period driven by performance-related improvements within net income partially offset by increased investments in net capital expenditures, higher cash taxes and net interest expense. In addition, we continued to return value to shareholders with $4.8 billion in dividends, and we invested more than $11 billion in acquisitions, including Confluent which completed in the first quarter.

Events that could temporarily change the historical cash flow dynamics discussed previously and in our 2025 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, the timing of tax payments, or the timing of certain working capital activities related to collections and 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, our pension plans remain well funded as of the end of September 2026. Our expected 2026 contributions and pre-tax retirement-related plan costs remain fairly consistent with the expectations disclosed in the 2025 Annual Report. Refer to “Retirement-Related Plans” on page 30 in our 2025 Annual Report 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 2026, we are not legally required to make any contributions to the U.S. defined benefit pension plans and our legally required contributions to certain non-U.S. defined benefit plans are not expected to be material.

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


($ in millions)							Yr.-to-Yr. Percent Change/Margin Change		Yr.-to-Yr. Percent Change Adjusted For Currency
For the three months ended September 30:	2026			2025
Revenue	$	192		$	200		(3.9)	%	(3.3)	%
Segment profit (1)	$	108		$	123		(12.5)	%
Segment profit margin	56.1		%	61.6		%	(5.5)	pts.


($ in millions)							Yr.-to-Yr. Percent Change/Margin Change		Yr.-to-Yr. Percent Change Adjusted For Currency
For the nine months ended September 30:	2026			2025
Revenue	$	598		$	557		7.3	%	5.7	%
Segment profit (1)	$	334		$	371		(9.9)	%
Segment profit margin	55.9		%	66.5		%	(10.7)	pts.

(1)Intercompany financing activities are reflected in segment profit and are eliminated in IBM’s consolidated financial results.

For the three months ended September 30, 2026, Financing revenue decreased 3.9 percent as reported (3.3 percent adjusted for currency) compared to the prior-year period driven by a reduction in used equipment sales. For the nine months ended September 30, 2026, Financing revenue increased 7.3 percent as reported (5.7 percent adjusted for currency) compared to the prior-year period primarily driven by an increase in client financing assets.

Segment profit decreased 12.5 percent to $108 million and segment profit margin decreased 5.5 points to 56.1 percent in the third quarter of 2026 compared to the prior-year period. The decrease in segment profit was driven by lower intercompany financing net other income for sales of returned leased equipment to Infrastructure, which is eliminated in IBM's consolidated financial results and reflects IBM Z product cycle dynamics, and by higher unallocated credit loss reserve requirements in the current period which reflects current economic conditions. For the nine months ended September 30, 2026, segment profit decreased 9.9 percent to $334 million and segment profit margin decreased 10.7 points to 55.9 percent compared to the prior-year period. The decrease in segment profit was driven by the same IBM Z product cycle dynamics above.

Management Discussion – (continued)

Balance Sheet and Return on Equity Highlights


($ in millions)	At September 30, 2026		At December 31, 2025
Client financing receivables (1)	$	11,708	$	13,192
Commercial financing receivables (1) (2)	$	1,548	$	2,992
Financing Segment Debt (3)	$	12,652	$	15,093
Equity	$	1,406	$	1,678

(1)Refer to note 9, “Financing Receivables,” for additional information.

(2)Includes both held for investment and held for sale receivables.

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

Return on equity was 25.0 percent compared to 32.0 percent for the three months ended September 30, 2026 and 2025, respectively. The decrease was primarily driven by a decrease in net income consistent with the decline in segment profit described above. Return on equity was 24.8 percent compared to 32.7 percent for the nine months ended September 30, 2026 and 2025, respectively. The decrease was primarily driven by higher average equity and a decrease in net income consistent with the decline in segment profit as described above. For the three and nine months ended September 30, 2026, return on equity is calculated as annualized after-tax segment profit divided by the average of the ending equity for Financing for the last two quarters and four quarters, respectively. Annualized after-tax segment profit is a function of IBM's provision for income taxes determined on a consolidated basis.

The following table presents Client financing and Commercial financing receivables excluding receivables classified as held for sale.


($ in millions)	At September 30, 2026			At December 31, 2025
Amortized cost	$	12,602		$	15,193
Specific allowance for credit losses	79			88
Unallocated allowance for credit losses	41			53
Total allowance for credit losses	120			141
Net financing receivables	$	12,482		$	15,052
Allowance for credit losses coverage	1.0		%	0.9		%

The percentage of Financing segment receivables reserved increased from 0.9 percent at December 31, 2025 to 1.0 percent at September 30, 2026, primarily driven by the decline in amortized cost resulting from seasonally higher year-end financing receivables balances.

We continue to apply our rigorous credit policies. Approximately 78 percent of the total external portfolio was with investment grade clients, a decrease of 1 point compared to December 31, 2025. This investment grade percentage is based on the credit ratings of the companies in the portfolio and reflects certain mitigating actions taken to reduce the risk to IBM. For additional information relating to the company's credit quality and mitigation actions, including sales of receivables, refer to note 9, “Financing Receivables.”

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 divestitures, including integration challenges, failure to achieve objectives, the assumption or retention 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 and service quality issues; the development and use of AI, including the company's increased AI solutions and use of AI technologies; impacts of business with government clients; reliance on third party distribution channels and ecosystems; cybersecurity and data protection considerations; adverse effects related to climate change and other 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; 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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