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IBM RELEASES THIRD QUARTER RESULTS

Revenue Growth in All Key Segments Led by Global Hybrid Cloud Adoption; Solid Cash Generation
Oct 19, 2022

ARMONK, N.Y., Oct. 19, 2022 /PRNewswire/ -- IBM (NYSE: IBM) today announced third-quarter 2022 earnings results.

"IBM delivered strong revenue growth in the quarter, reflecting our continued focus on the execution of our strategy. Globally, clients view technology as an opportunity to enhance their business, which is evident in the results across our portfolio," said Arvind Krishna, IBM chairman and chief executive officer. "With our year-to-date performance, we now expect full-year revenue growth above our mid-single digit model."

Third-Quarter Highlights

  • Revenue
    - Revenue of $14.1 billion, up 6 percent, up 15 percent at constant currency (about 5 points from sales to Kyndryl)
    - Software revenue up 7 percent, up 14 percent at constant currency (about 8 points from sales to Kyndryl)
    - Consulting revenue up 5 percent, up 16 percent at constant currency
    - Infrastructure revenue up 15 percent, up 23 percent at constant currency (about 9 points from sales to Kyndryl)
    - Hybrid cloud revenue, over the last 12 months, of $22.2 billion, up 15 percent, up 20 percent at constant currency
  • Cash Flow
    - On a consolidated basis, year to date, net cash from operating activities of $6.5 billion; free cash flow of $4.1 billion

THIRD QUARTER 2022 INCOME STATEMENT SUMMARY

   

GAAP results include impact of one-time, non-cash pension settlement charge*

                     

Pre-tax 

         

Diluted 

 
           

Gross

   

Pre-tax 

 

  Income/(Loss) 

   

Net 

   

Earnings/(Loss)

 
     

Revenue

   

Profit

   

Income/(Loss)

 

Margin

   

Income/(Loss)

   

Per Share

 

GAAP from
Continuing
Operations

 

$

14.1B

 

$

7.4B

 

$

(4.5B)

*

(31.9)

%*

$

(3.2B)

*

$

(3.55)

*

    Year/Year

   

6

%**

 

5

%

 

NM

*

(38.0)

Pts*

 

NM

*

 

NM

*

Operating
(Non-GAAP)

       

$

7.6B

 

$

2.0B

 

13.9

%

$

1.7B

 

$

1.81

 

    Year/Year

         

4

%

 

23

%

1.8

Pts

 

(1)

%

 

(2)

%

*  GAAP results include the impact of a one-time, non-cash pension settlement charge of $5.9 billion ($4.4 billion net of tax) related to the transfer of a portion of the company's U.S. defined benefit pension obligations and related plan assets to third party insurers, announced on September 13, 2022.

** 15% at constant currency

"Both our revenue growth and operating profit profile for the first three quarters of the year align to the investment thesis we outlined last fall," said James Kavanaugh, IBM senior vice president and chief financial officer. "Our portfolio mix, business fundamentals, strong recurring revenue stream and solid cash generation allow us to invest for continued growth and return value to shareholders through dividends."

Segment Results for Third Quarter

  • Software (includes Hybrid Platform & Solutions, Transaction Processing)— revenues of $5.8 billion, up 7.5 percent, up 14.2 percent at constant currency (about 8 points from sales to Kyndryl):
    - Hybrid Platform & Solutions up 2 percent, up 8 percent at constant currency (about 1.5 points from sales to Kyndryl):
       -- Red Hat up 12 percent, up 18 percent at constant currency
       -- Automation down 2 percent, up 3 percent at constant currency
       -- Data & AI down 1 percent, up 4 percent at constant currency
       -- Security down 1 percent, up 6 percent at constant currency
    - Transaction Processing up 23 percent, up 33 percent at constant currency (about 26 points from sales to Kyndryl)
  • Consulting (includes Business Transformation, Technology Consulting and Application Operations)— revenues of $4.7 billion, up 5.4 percent, up 15.6 percent at constant currency:
    - Business Transformation up 5 percent, up 14 percent at constant currency
    - Technology Consulting up 6 percent, up 17 percent at constant currency
    - Application Operations up 6 percent, up 17 percent at constant currency
  • Infrastructure (includes Hybrid Infrastructure, Infrastructure Support)— revenues of $3.4 billion, up 14.8 percent, up 23.1 percent at constant currency (about 9 points from sales to Kyndryl):
    - Hybrid Infrastructure up 33 percent, up 41 percent at constant currency (about 11 points from sales to Kyndryl):
       -- IBM z Systems up 88 percent, up 98 percent at constant currency
       -- Distributed Infrastructure up 13 percent, up 21 percent at constant currency
    - Infrastructure Support down 3 percent, up 5 percent at constant currency (about 7 points from sales to Kyndryl)
  • Financing (includes client and commercial financing)— revenues of $0.2 billion, down 5.7 percent, down 0.6 percent at constant currency

Cash Flow and Balance Sheet
On a consolidated basis, in the third quarter, the company generated net cash from operating activities of $1.9 billion or $1.2 billion excluding IBM Financing receivables. IBM's free cash flow was $0.8 billion. The company returned $1.5 billion to shareholders in dividends in the third quarter.

On a consolidated basis, for the first nine months of the year, the company generated net cash from operating activities of $6.5 billion or $5.4 billion excluding IBM Financing receivables. IBM's free cash flow was $4.1 billion, which includes cash impacts from the company's structural actions initiated at the end of 2020.

IBM ended the third quarter with $9.7 billion of cash on hand (which includes marketable securities), up $2.2 billion from year-end 2021. Debt, including IBM Financing debt of $11.2 billion, totaled $50.9 billion, down $0.8 billion since the end of 2021.

Full-Year 2022 Expectations

  • Revenue Growth: The company now expects constant currency revenue growth above its mid-single digit model. The company continues to expect an additional contribution of approximately 3.5 points from sales to Kyndryl, concentrated in the first three quarters. At mid-October 2022 foreign exchange rates, currency is expected to be about a seven-point headwind.
  • Free Cash Flow: The company continues to expect about $10 billion in consolidated free cash flow.

Forward-Looking and Cautionary Statements
Except for the historical information and discussions contained herein, statements contained in this release may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on the company's current assumptions regarding future business and financial performance. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, including, but not limited to, the following: a downturn in economic environment and client spending budgets; a failure of the company's innovation initiatives; damage to the company's reputation; risks from investing in growth opportunities; failure of the company's intellectual property portfolio to prevent competitive offerings and the failure of the company to obtain necessary licenses; the company's ability to successfully manage acquisitions, alliances and dispositions, including integration challenges, failure to achieve objectives, the assumption of liabilities, and higher debt levels; fluctuations in financial results; impact of local legal, economic, political, health and other conditions; the company's failure to meet growth and productivity objectives; ineffective internal controls; the company's use of accounting estimates; impairment of the company's goodwill or amortizable intangible assets; the company's ability to attract and retain key employees and its reliance on critical skills; impacts of relationships with critical suppliers; product quality issues; impacts of business with government clients; reliance on third party distribution channels and ecosystems; cybersecurity and data privacy considerations; adverse effects related to climate change and environmental matters; tax matters; legal proceedings and investigatory risks; the company's pension plans; currency fluctuations and customer financing risks; impact of changes in market liquidity conditions and customer credit risk on receivables; potential failure of the separation of Kyndryl Holdings, Inc. to qualify for tax-free treatment; risk factors related to IBM securities; and other risks, uncertainties and factors discussed in the company's Form 10-Qs, Form 10-K and in the company's other filings with the U.S. Securities and Exchange Commission or in materials incorporated therein by reference. Any forward-looking statement in this release 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.

Presentation of Information in this Press Release
On November 3, 2021, IBM completed the separation of Kyndryl. Unless otherwise specified, results are presented on a continuing operations basis. All references to revenue impacts from sales to Kyndryl are incremental sales post-separation.

In an effort to provide investors with additional information regarding the company's results as determined by generally accepted accounting principles (GAAP), the company has also disclosed in this press release the following non-GAAP information, which management believes provides useful information to investors: 

IBM results —

  • adjusting for currency (i.e., at constant currency);
  • presenting operating (non-GAAP) earnings per share amounts and related income statement items;
  • consolidated free cash flow;
  • consolidated cash from operating activities excluding IBM Financing receivables.

The rationale for management's use of these non-GAAP measures is included in Exhibit 99.2 in the Form 8‑K that includes this press release and is being submitted today to the SEC.

Conference Call and Webcast
IBM's regular quarterly earnings conference call is scheduled to begin at 5:00 p.m. EDT, today. The Webcast may be accessed via a link at https://www.ibm.com/investor/events/earnings-3q22. Presentation charts will be available shortly before the Webcast.

Financial Results Below (certain amounts may not add due to use of rounded numbers; percentages presented are calculated from the underlying whole-dollar amounts).

Contact:       IBM
                    Sarah Meron, 347 891 1770
                    sarah.meron@ibm.com
    
                    Tim Davidson, 914 844 7847
                    tfdavids@us.ibm.com 

 

INTERNATIONAL BUSINESS MACHINES CORPORATION

COMPARATIVE FINANCIAL RESULTS

(Unaudited; Dollars in millions except per share amounts)

 
   

Three Months Ended

     

Nine Months Ended

   
   

September 30, 

     

September 30, 

   
   

2022*

 

2021**

     

2022*

 

2021**

   

REVENUE

                               

Software

 

$

5,811

 

$

5,406

     

$

17,749

 

$

16,339

   

Consulting

   

4,700

   

4,457

       

14,337

   

13,098

   

Infrastructure

   

3,352

   

2,921

       

10,805

   

9,774

   

Financing

   

174

   

184

       

474

   

601

   

Other

   

70

   

282

       

475

   

844

   

TOTAL REVENUE

   

14,107

   

13,251

       

43,840

   

40,656

   
                                 

GROSS PROFIT

   

7,430

   

7,106

       

23,055

   

21,985

   
                                 

GROSS PROFIT MARGIN

                               

Software

   

79.0

%

 

78.6

%

     

79.0

%

 

78.7

%

 

Consulting

   

26.0

%

 

29.5

%

     

24.8

%

 

28.3

%

 

Infrastructure

   

50.8

%

 

52.8

%

     

51.9

%

 

55.6

%

 

Financing

   

32.8

%

 

28.7

%

     

35.1

%

 

31.5

%

 
                                 

TOTAL GROSS PROFIT MARGIN

   

52.7

%

 

53.6

%

     

52.6

%

 

54.1

%

 
                                 

EXPENSE AND OTHER INCOME

                               

S,G&A

   

4,391

   

4,306

       

13,843

   

13,842

   

R,D&E

   

1,611

   

1,606

       

4,963

   

4,863

   

Intellectual property and custom development income

   

(121)

   

(153)

       

(418)

   

(431)

   

Other (income) and expense

   

5,755

   

244

       

5,921

   

891

   

Interest expense

   

295

   

290

       

903

   

852

   

TOTAL EXPENSE AND OTHER INCOME

   

11,931

   

6,293

       

25,212

   

20,017

   
                                 

INCOME/(LOSS) FROM CONTINUING OPERATIONS

                               

BEFORE INCOME TAXES

   

(4,501)

   

813

       

(2,156)

   

1,968

   

Pre-tax margin

   

(31.9)

%

 

6.1

%

     

(4.9)

%

 

4.8

%

 

Provision for/(Benefit from) income taxes

   

(1,287)

   

(224)

       

(1,070)

   

(282)

   

Effective tax rate

   

28.6

%

 

(27.6)

%

     

49.6

%

 

(14.4)

%

 
                                 

INCOME/(LOSS) FROM CONTINUING OPERATIONS

 

$

(3,214)

 

$

1,037

     

$

(1,087)

 

$

2,250

   
                                 

DISCONTINUED OPERATIONS

                               

Income from discontinued operations, net of taxes

   

18

   

93

       

16

   

1,160

   
                                 

NET INCOME/(LOSS)

 

$

(3,196)

 

$

1,130

     

$

(1,071)

 

$

3,410

   
                                 

EARNINGS/(LOSS) PER SHARE OF COMMON STOCK

                               

Assuming Dilution

                               

Continuing Operations

 

$

(3.55)

 

$

1.14

     

$

(1.21)

 

$

2.49

   

Discontinued Operations

 

$

0.02

 

$

0.10

     

$

0.02

 

$

1.28

   

TOTAL

 

$

(3.54)

 

$

1.25

     

$

(1.19)

 

$

3.77

   
                                 

Basic

                               

Continuing Operations

 

$

(3.55)

 

$

1.16

     

$

(1.21)

 

$

2.51

   

Discontinued Operations

 

$

0.02

 

$

0.10

     

$

0.02

 

$

1.30

   

TOTAL

 

$

(3.54)

 

$

1.26

     

$

(1.19)

 

$

3.81

   
                                 

WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (M's)

                               

Assuming Dilution

   

904.1

   

906.0

       

901.6

   

904.0

   

Basic

   

904.1

   

897.1

       

901.6

   

895.3

   

_________________________

*   Includes a one-time, non-cash pension settlement charge of $5.9 billion ($4.4 billion net of tax).

** Recast to conform with 2022 presentation.

 

INTERNATIONAL BUSINESS MACHINES CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEET

(Unaudited)

 
   

At

 

At

   

September 30, 

 

December 31, 

(Dollars in Millions)

 

2022

 

2021

ASSETS:

           

Current Assets:

           

Cash and cash equivalents

 

$

7,816

 

$

6,650

Restricted cash

   

159

   

307

Marketable securities

   

1,753

   

600

Notes and accounts receivable - trade, net

   

5,526

   

6,754

Short-term financing receivables, net

   

6,676

   

8,014

Other accounts receivable, net

   

902

   

1,002

Inventories

   

1,794

   

1,649

Deferred costs

   

921

   

1,097

Prepaid expenses and other current assets

   

3,452

   

3,466

Total Current Assets

   

28,999

   

29,539

             

Property, plant and equipment, net

   

5,150

   

5,694

Operating right-of-use assets, net

   

2,740

   

3,222

Long-term financing receivables, net

   

4,781

   

5,425

Prepaid pension assets

   

9,695

   

9,850

Deferred costs

   

818

   

924

Deferred taxes

   

6,868

   

7,370

Goodwill

   

54,218

   

55,643

Intangibles, net

   

10,967

   

12,511

Investments and sundry assets

   

1,614

   

1,823

Total Assets

 

$

125,850

 

$

132,001

             

LIABILITIES:

           

Current Liabilities:

           

Taxes

 

$

1,667

 

$

2,289

Short-term debt

   

5,937

   

6,787

Accounts payable

   

3,806

   

3,955

Deferred income

   

11,139

   

12,518

Operating lease liabilities

   

844

   

974

Other liabilities

   

7,072

   

7,097

Total Current Liabilities

   

30,466

   

33,619

             

Long-term debt

   

44,942

   

44,917

Retirement related obligations

   

11,760

   

14,435

Deferred income

   

3,018

   

3,577

Operating lease liabilities

   

2,103

   

2,462

Other liabilities

   

13,413

   

13,996

Total Liabilities

   

105,703

   

113,005

             

EQUITY:

           

IBM Stockholders' Equity:

           

Common stock

   

58,117

   

57,319

Retained earnings

   

148,611

   

154,209

Treasury stock — at cost

   

(169,514)

   

(169,392)

Accumulated other comprehensive income/(loss)

   

(17,138)

   

(23,234)

Total IBM Stockholders' Equity

   

20,076

   

18,901

             

Noncontrolling interests

   

71

   

95

Total Equity

   

20,147

   

18,996

             

Total Liabilities and Equity

 

$

125,850

 

$

132,001

 

INTERNATIONAL BUSINESS MACHINES CORPORATION

CASH FLOW ANALYSIS

(Unaudited)

 
           

Trailing Twelve

   

Three Months Ended

 

Nine Months Ended

 

Months Ended

   

September 30, 

 

September 30, 

 

September 30, 

(Dollars in Millions)

 

2022

 

2021

 

2022

 

2021

 

2022

Consolidated Net Cash from Operations per GAAP

 

$

1,901

 

$

2,713

 

$

6,470

 

$

10,252

 

$

9,014

                               

Less: change in IBM Financing receivables

   

704

   

1,472

   

1,071

   

5,235

   

(257)

Capital Expenditures, net

   

(445)

   

(638)

   

(1,317)

   

(1,855)

   

(1,843)

                               

Consolidated Free Cash Flow

   

752

   

603

   

4,082

   

3,162

   

7,428

                               

Acquisitions

   

(62)

   

(152)

   

(1,020)

   

(3,018)

   

(1,295)

Divestitures

   

3

   

51

   

1,271

   

26

   

1,359

Dividends

   

(1,491)

   

(1,471)

   

(4,454)

   

(4,395)

   

(5,927)

Non-Financing Debt

   

2,946

   

1,187

   

4,686

   

(1,143)

   

4,638

Other (includes IBM Financing net receivables and debt)

   

(198)

   

22

   

(2,395)

   

(500)

   

(4,881)

                               

Change in Cash, Cash Equivalents, Restricted Cash and Short-term
Marketable Securities*

 

$

1,950

 

$

241

 

$

2,171

 

$

(5,868)

 

$

1,322

_________________________

* Cash flows are presented on a consolidated basis. 

 

INTERNATIONAL BUSINESS MACHINES CORPORATION

CASH FLOW

(Unaudited)

   
   

Three Months Ended

 

Nine Months Ended

   

September 30, 

 

September 30, 

(Dollars in Millions)

 

2022

 

2021

 

2022

 

2021

Net Income/(Loss) from Operations

 

$

(3,196)

 

$

1,130

 

$

(1,071)

 

$

3,410

Pension Settlement Charge

   

5,894

   

-

   

5,894

   

-

Depreciation/Amortization of Intangibles

   

1,163

   

1,684

   

3,665

   

5,036

Stock-based Compensation

   

251

   

262

   

739

   

719

Working Capital / Other

   

(2,914)

   

(1,834)

   

(3,827)

   

(4,147)

IBM Financing A/R

   

704

   

1,472

   

1,071

   

5,235

Net Cash Provided by Operating Activities

 

$

1,901

 

$

2,713

 

$

6,470

 

$

10,252

                         

Capital Expenditures, net of payments & proceeds

   

(445)

   

(638)

   

(1,317)

   

(1,855)

Divestitures, net of cash transferred

   

3

   

51

   

1,271

   

26

Acquisitions, net of cash acquired

   

(62)

   

(152)

   

(1,020)

   

(3,018)

Marketable Securities / Other Investments, net

   

(1,193)

   

109

   

(1,818)

   

(453)

Net Cash Provided by/(Used in) Investing Activities

 

$

(1,697)

 

$

(629)

 

$

(2,883)

 

$

(5,300)

                         

Debt, net of payments & proceeds

   

2,138

   

(287)

   

2,572

   

(6,086)

Dividends

   

(1,491)

   

(1,471)

   

(4,454)

   

(4,395)

Financing - Other

   

67

   

9

   

(223)

   

(181)

Net Cash Provided by/(Used in) Financing Activities

 

$

714

 

$

(1,748)

 

$

(2,106)

 

$

(10,662)

                         

Effect of Exchange Rate changes on Cash

   

(197)

   

(94)

   

(463)

   

(159)

Net Change in Cash, Cash Equivalents and Restricted Cash*

 

$

721

 

$

241

 

$

1,018

 

$

(5,868)

_________________________

* Cash flows are presented on a consolidated basis. 

 

INTERNATIONAL BUSINESS MACHINES CORPORATION

SEGMENT DATA

(Unaudited)

 
   

Three Months Ended September 30, 2022

 
                     

(Dollars in Millions)

 

Software

 

Consulting

 

Infrastructure

 

Financing

 

Revenue

 

$

5,811

 

$

4,700

 

$

3,352

 

$

174

 

Pre-tax Income/(Loss) from Continuing Operations

 

$

1,306

 

$

462

 

$

280

 

$

79

 

Pre-tax Margin

   

22.5

%

 

9.8

%

 

8.3

%

 

45.4

%

Change YTY Revenue

   

7.5

%

 

5.4

%

 

14.8

%

 

(5.7)

%

Change YTY Revenue - constant currency

   

14.2

%

 

15.6

%

 

23.1

%

 

(0.6)

%

                           
   

Three Months Ended September 30, 2021*

 
                     

(Dollars in Millions)

 

Software

 

Consulting

 

Infrastructure

 

Financing

 

Revenue

 

$

5,406

 

$

4,457

 

$

2,921

 

$

184

 

Pre-tax Income/(Loss) from Continuing Operations

 

$

990

 

$

466

 

$

209

 

$

132

 

Pre-tax Margin

   

18.3

%

 

10.5

%

 

7.1

%

 

71.7

%

_________________________

* Recast to conform with 2022 presentation. 

                           
   

Nine Months Ended September 30, 2022

 
                     

(Dollars in Millions)

 

Software

 

Consulting

 

Infrastructure

 

Financing

 

Revenue

 

$

17,749

 

$

14,337

 

$

10,805

 

$

474

 

Pre-tax Income/(Loss) from Continuing Operations

 

$

3,816

 

$

1,154

 

$

1,236

 

$

265

 

Pre-tax Margin

   

21.5

%

 

8.0

%

 

11.4

%

 

55.9

%

Change YTY Revenue

   

8.6

%

 

9.5

%

 

10.6

%

 

(21.2)

%

Change YTY Revenue - constant currency

   

13.7

%

 

16.9

%

 

16.3

%

 

(17.9)

%

                           
   

Nine Months Ended September 30, 2021*

 
                     

(Dollars in Millions)

 

Software

 

Consulting

 

Infrastructure

 

Financing

 

Revenue

 

$

16,339

 

$

13,098

 

$

9,774

 

$

601

 

Pre-tax Income/(Loss) from Continuing Operations

 

$

2,707

 

$

1,013

 

$

989

 

$

362

 

Pre-tax Margin

   

16.6

%

 

7.7

%

 

10.1

%

 

60.1

%

_________________________

* Recast to conform with 2022 presentation. 

 

INTERNATIONAL BUSINESS MACHINES CORPORATION

U.S. GAAP TO OPERATING (Non-GAAP) RESULTS RECONCILIATION

(Unaudited; Dollars in millions except per share amounts)

 
   

Three Months Ended September 30, 2022

 
   

Continuing Operations

 
         

Acquisition-

 

Retirement-

 

Tax

 

Kyndryl-

       
         

Related

 

Related

 

Reform

 

Related

 

Operating

 
   

GAAP

 

Adjustments (1)

 

Adjustments* (2)

 

Impacts

 

Impacts (3)

 

(Non-GAAP)

 

Gross Profit

 

$

7,430

 

$

165

 

$

 

$

 

$

 

$

7,595

 

Gross Profit Margin

   

52.7

%

 

1.2

 pts.  

 

 pts.  

 

 pts.  

 

 pts.  

 

53.8

%

S,G&A

 

$

4,391

 

$

(253)

 

$

 

$

 

$

(0)

 

$

4,138

 

Other (Income) & Expense

   

5,755

   

(1)

   

(6,062)

   

   

14

   

(293)

 

Total Expense & Other (Income)

   

11,931

   

(253)

   

(6,062)

   

   

14

   

5,630

 

Pre-tax Income/(Loss) from Continuing
Operations

   

(4,501)

   

418

   

6,062

   

   

(14)

   

1,965

 

Pre-tax Income/(Loss) Margin from
Continuing Operations

   

(31.9)

%

 

3.0

 pts.  

 

43.0

 pts.  

 

 pts.  

 

(0.1)

 pts.  

 

13.9

%

Provision for/(Benefit from) Income
Taxes (4)

 

$

(1,287)

 

$

103

 

$

1,495

 

$

 

$

 

$

312

 

Effective Tax Rate

   

28.6

%

 

(0.8)

 pts.  

 

(12.1)

 pts.  

 

 pts.  

 

0.2

 pts.  

 

15.9

%

Income/(Loss) from Continuing
Operations

 

$

(3,214)

 

$

315

 

$

4,566

 

$

 

$

(14)

 

$

1,653

 

Income/(Loss) Margin from Continuing
Operations

   

(22.8)

%

 

2.2

 pts.  

 

32.4

 pts.  

 

 pts.  

 

(0.1)

 pts.  

 

11.7

%

Diluted Earnings/(Loss) Per Share:
Continuing Operations **

 

$

(3.55)

 

$

0.35

 

$

5.05

 

$

 

$

(0.02)

 

$

1.81

 

_________________________

*   Includes a one-time, non-cash, pre-tax pension settlement charge of $5.9 billion ($4.4 billion net of tax).

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

       
   

Three Months Ended September 30, 2021

 
   

Continuing Operations

 
         

Acquisition-

 

Retirement-

 

Tax

 

Kyndryl-

       
         

Related

 

Related

 

Reform

 

Related

 

Operating

 
   

GAAP

 

Adjustments (1)

 

Adjustments (2)

 

Impacts

 

Impacts (3)

 

(Non-GAAP)

 

Gross Profit

 

$

7,106

 

$

183

 

$

 

$

 

$

 

$

7,290

 

Gross Profit Margin

   

53.6

%

 

1.4

 pts.  

 

 pts.  

 

 pts.  

 

 pts.  

 

55.0

%

S,G&A

 

$

4,306

 

$

(288)

 

$

 

$

 

$

 

$

4,018

 

Other (Income) & Expense

   

244

   

(1)

   

(318)

   

   

   

(74)

 

Total Expense & Other (Income)

   

6,293

   

(289)

   

(318)

   

   

   

5,687

 

Pre-tax Income/(Loss) from Continuing
Operations

   

813

   

472

   

318

   

   

   

1,603

 

Pre-tax Income/(Loss) Margin from
Continuing Operations

   

6.1

%

 

3.6

 pts.  

 

2.4

 pts.  

 

 pts.  

 

 pts.  

 

12.1

%

Provision for/(Benefit from) Income
Taxes (4)

 

$

(224)

 

$

102

 

$

55

 

$

 

$

 

$

(67)

 

Effective Tax Rate

   

(27.6)

%

 

14.5

 pts.  

 

8.9

 pts.  

 

 pts.  

 

 pts.  

 

(4.2)

%

Income/(Loss) from Continuing
Operations

 

$

1,037

 

$

370

 

$

262

 

$

 

$

 

$

1,670

 

Income/(Loss) Margin from Continuing
Operations

   

7.8

%

 

2.8

 pts.  

 

2.0

 pts.  

 

 pts.  

 

 pts.  

 

12.6

%

Diluted Earnings/(Loss) Per Share:
Continuing Operations

 

$

1.14

 

$

0.41

 

$

0.29

 

$

 

$

 

$

1.84

 

_________________________

(1)

Includes amortization of purchased intangible assets, in process R&D, transaction costs, applicable restructuring and related expenses, tax charges related to acquisition
integration and pre-closing charges, such as financing costs.

(2)

Includes 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.

(3)

Primarily relates to the realized gain/(loss) and unrealized fair value changes in Kyndryl common stock and the related cash-settled swap.

(4)

Tax impact on operating (non-GAAP) pre-tax income from continuing operations is calculated under the same accounting principles applied to the As Reported pre-tax
income under ASC 740, which employs an annual effective tax rate method to the results.

 

INTERNATIONAL BUSINESS MACHINES CORPORATION

U.S. GAAP TO OPERATING (Non-GAAP) RESULTS RECONCILIATION

(Unaudited; Dollars in millions except per share amounts)

 
   

Nine Months Ended September 30, 2022

 
   

Continuing Operations

 
         

Acquisition-

 

Retirement-

 

Tax

 

Kyndryl-

       
         

Related

 

Related

 

Reform

 

Related

 

Operating

 
   

GAAP

 

Adjustments (1)

 

Adjustments* (2)

 

Impacts

 

Impacts (3)

 

(Non-GAAP)

 

Gross Profit

 

$

23,055

 

$

526

 

$

 

$

 

$

 

$

23,582

 

Gross Profit Margin

   

52.6

%

 

1.2

 pts.  

 

 pts.  

 

 pts.  

 

 pts.  

 

53.8

%

S,G&A

 

$

13,843

 

$

(818)

 

$

 

$

 

$

(0)

 

$

13,025

 

Other (Income) & Expense

   

5,921

   

(2)

   

(6,455)

   

   

(353)

   

(889)

 

Total Expense & Other (Income)

   

25,212

   

(820)

   

(6,455)

   

   

(353)

   

17,584

 

Pre-tax Income/(Loss) from Continuing
Operations

   

(2,156)

   

1,346

   

6,455

   

   

353

   

5,998

 

Pre-tax Income/(Loss) Margin from
Continuing Operations

   

(4.9)

%

 

3.1

 pts.  

 

14.7

 pts.  

 

 pts.  

 

0.8

 pts.  

 

13.7

%

Provision for/(Benefit from) Income
Taxes (4)

 

$

(1,070)

 

$

327

 

$

1,599

 

$

112

 

$

 

$

969

 

Effective Tax Rate

   

49.6

%

 

(5.7)

 pts.  

 

(26.7)

 pts.  

 

1.9

 pts.  

 

(2.9)

 pts.  

 

16.1

%

Income/(Loss) from Continuing
Operations

 

$

(1,087)

 

$

1,019

 

$

4,856

 

$

(112)

 

$

353

 

$

5,029

 

Income/(Loss) Margin from Continuing
Operations

   

(2.5)

%

 

2.3

 pts.  

 

11.1

 pts.  

 

(0.3)

 pts.  

 

0.8

 pts.  

 

11.5

%

Diluted Earnings/(Loss) Per Share:
Continuing Operations **

 

$

(1.21)

 

$

1.13

 

$

5.39

 

$

(0.12)

 

$

0.39

 

$

5.52

 

_________________________

*  Includes a one-time, non-cash, pre-tax pension settlement charge of $5.9 billion ($4.4 billion net of tax).

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

                                       
   

Nine Months Ended September 30, 2021

 
   

Continuing Operations

 
         

Acquisition-

 

Retirement-

 

Tax

 

Kyndryl-

       
         

Related

 

Related

 

Reform

 

Related

 

Operating

 
   

GAAP

 

Adjustments (1)

 

Adjustments (2)

 

Impacts

 

Impacts (3)

 

(Non-GAAP)

 

Gross Profit

 

$

21,985

 

$

537

 

$

 

$

 

$

 

$

22,522

 

Gross Profit Margin

   

54.1

%

 

1.3

 pts.  

 

 pts.  

 

 pts.  

 

 pts.  

 

55.4

%

S,G&A

 

$

13,842

 

$

(870)

 

$

 

$

 

$

 

$

12,972

 

Other (Income) & Expense

   

891

   

(2)

   

(967)

   

   

   

(77)

 

Total Expense & Other (Income)

   

20,017

   

(872)

   

(967)

   

   

   

18,179

 

Pre-tax Income/(Loss) from Continuing
Operations

   

1,968

   

1,409

   

967

   

   

   

4,343

 

Pre-tax Income/(Loss) Margin from
Continuing Operations

   

4.8

%

 

3.5

 pts.  

 

2.4

 pts.  

 

 pts.  

 

 pts.  

 

10.7

%

Provision for/(Benefit from) Income
Taxes (4)

 

$

(282)

 

$

340

 

$

141

 

$

6