# INTERNATIONAL BUSINESS MACHINES CORP (IBM) FY 2024 MD&A Verbatim Item 7 Management's Discussion and Analysis from INTERNATIONAL BUSINESS MACHINES CORP's 10-K for fiscal year 2024. SEC filing source: https://www.sec.gov/Archives/edgar/data/51143/000005114325000015/ibm-20241231.htm Accession: 0000051143-25-000015 Filing date: 2025-02-25 Report date: 2024-12-31 Extracted from a substantive MD&A body after the formal Item 7 span was a TOC or reference stub. Source document followed from filing index: ibm-20241231_d2.htm. Confidence: high Company profile: /company/IBM/ All MD&A years: /company/IBM/mda/ Previous year: /company/IBM/mda/fy2023/ (FY 2023) Next year: /company/IBM/mda/fy2025/ (FY 2025) OVERVIEW The financial section of the International Business Machines Corporation (IBM or “the company”) 2024 Annual Report includes the Management Discussion, the Consolidated Financial Statements and the Notes to Consolidated Financial Statements. This Overview is designed to provide the reader with some perspective regarding the information contained in the financial section. 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. The “Management Discussion Snapshot” presents an overview of the key performance drivers in 2024. •Beginning with the “Year in Review,” the Management Discussion contains the results of operations for each reportable segment of the business, a discussion of our financial position and a discussion of cash flows as reflected in the Consolidated Statement of Cash Flows. “Prior Year in Review,” provides a summary of our reportable segment results and year-to-year comparisons between 2023 and 2022. These segment results have been recast to conform to our organizational structure and management system changes described below. Management Discussion also includes: “Looking Forward” and “Liquidity and Capital Resources,” the latter of which includes a description of management’s definition and use of free cash flow. •The Consolidated Financial Statements provide an overview of income and cash flow performance and financial position. •The Notes follow the Consolidated Financial Statements. Among other items, the Notes contain our accounting policies, revenue information, acquisitions and divestitures, certain commitments and contingencies and retirement-related plans information. •In the first quarter of 2024, we made changes to our organizational structure and management system to better align our portfolio to the market, increase transparency and improve segment comparability to peers. These changes did not impact our Consolidated Financial Statements, but did impact our reportable segments. The segments are reported on a comparable basis for all periods. In addition, due to the removal of certain components of segment profitability we also updated the title of our segment performance metric from pre-tax income from continuing operations to segment profit. Refer to note D, “Segments” for additional information on our reportable segments. •Over the past several years, we have taken actions to reduce the risk profile of our worldwide retirement-related plans, while at the same time increasing the funded status of the plans. In 2022 and 2024, non-participating single group annuity contracts were purchased from insurers which irrevocably transferred to the insurers certain defined benefit (“DB”) pension obligations and related plan assets. There were no changes to the amount of benefits payable to the participants and beneficiaries of the plans transferred. These pension transfers reduced our pension obligations and assets by approximately the same amount and were purchased using assets from their respective retirement plans with no additional funding contributions required from IBM. Each transaction resulted in the recognition of a one-time, non-operating, non-cash, pre-tax pension settlement charge (“pension settlement charge”) in the respective period of the pension transfer. In September 2022, the IBM Personal Pension Plan (“Qualified PPP”) irrevocably transferred to insurers approximately $16 billion of the Qualified PPP’s DB pension obligations and related plan assets, resulting in a pension settlement charge of $5.9 billion ($4.4 billion net of tax) in the third quarter of 2022. In September 2024, the Qualified PPP irrevocably transferred to an insurer approximately $6 billion of the Qualified PPP’s DB pension obligations and related plan assets, resulting in a pension settlement charge of $2.7 billion ($2.0 billion net of tax) in the third quarter of 2024. In October 2024, IBM Canada LTD (“IBMC”) irrevocably transferred to insurers approximately $1.2 billion of the IBMC IBM Retirement Plan DB pension obligations and related plan assets, resulting in a pension settlement charge of $0.4 billion in the fourth quarter of 2024. These pension settlement charges were primarily related to the accelerated recognition of accumulated actuarial losses of the plans and, given they were non-operating and non-cash, they did not impact our operating (non-GAAP) earnings or cash flow results. Refer to note U, “Retirement-Related Benefits,” for additional information. •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” for additional information. •Within the financial statements and tables in this Annual Report, 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 numbers. Certain prior-year amounts have been reclassified to conform to the change in current year presentation. This is annotated where applicable. Table of Contents [[GREPCENT_TABLE]] [["","Management DiscussionInternational Business Machines Corporation and Subsidiary Companies","7"]] [[/GREPCENT_TABLE]] 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, certain impacts from the Kyndryl separation and their related tax impacts. Due to the unique, non-recurring nature of the enactment of the U.S. Tax Cuts and Jobs Act (U.S. tax reform), management characterizes the one-time provisional charge recorded in the fourth quarter of 2017 and adjustments to that charge as non-operating. Adjustments primarily include true-ups, accounting elections and any changes to regulations, laws or audit adjustments that affect the recorded one-time charge. Management characterized direct and incremental charges incurred related to the Kyndryl separation as non-operating given their unique and non-recurring nature. In 2022, these charges primarily related to any net gains or losses on the Kyndryl common stock and the related cash-settled swap with a third-party financial institution, which were recorded in other (income) and expense in the Consolidated Income Statement. As of November 2, 2022, the company no longer held an ownership interest in Kyndryl. For acquisitions, operating (non-GAAP) earnings exclude the amortization of purchased intangible assets and acquisition-related charges such as in-process research and development, transaction costs, applicable retention, restructuring and related expenses, tax charges related to acquisition integration and pre-closing charges, such as financing costs. These charges are excluded as they may be inconsistent in amount and timing from period to period and are significantly impacted by the size, type and frequency of our acquisitions. Management has also characterized as non-operating expense, given its unique and temporary nature, the mark-to-market impact on the foreign exchange derivative contracts entered into prior to the acquisition of StreamSets and webMethods from Software AG, beginning in December 2023, to economically hedge the foreign currency exposure related to the purchase price of this acquisition. These derivative contracts expired by June 28, 2024. This impact was recorded in other (income) and expense in the Consolidated Income Statement and reflects the changes in fair value of these derivative contracts. All other spending for acquired businesses is included in both earnings from continuing operations and in operating (non-GAAP) earnings. For retirement-related costs, management characterizes certain items as operating and others as non-operating, consistent with GAAP. We include defined benefit plan and nonpension postretirement benefit plan service costs, multi-employer plan costs and the cost of defined contribution plans in operating earnings. Non-operating retirement-related costs include defined benefit plan and nonpension postretirement benefit plan amortization of prior service costs, interest cost, expected return on plan assets, amortized actuarial gains/losses, the impacts of any plan curtailments/settlements including the impact of the pension settlement charges of $3.1 billion ($2.4 billion net of tax) and $5.9 billion ($4.4 billion net of tax) in 2024 and 2022, respectively. Refer to note U, “Retirement-Related Benefits,” for additional information. 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. FORWARD-LOOKING AND CAUTIONARY STATEMENTS Certain statements contained in this Annual Report may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any forward-looking statement in this Annual Report speaks only as of the date on which it is made; IBM assumes no obligation to update or revise any such statements except as required by law. Forward-looking statements are based on IBM’s current assumptions regarding future business and financial performance; these statements, by their nature, address matters that are uncertain to different degrees. Forward-looking statements involve a number of risks, uncertainties and other factors that could cause actual results to be materially different, as discussed more fully elsewhere in this Annual Report and in the company’s filings with the Securities and Exchange Commission (SEC), including IBM’s 2024 Form 10-K filed on February 25, 2025. Table of Contents [[GREPCENT_TABLE]] [["8","Management DiscussionInternational Business Machines Corporation and Subsidiary Companies"]] [[/GREPCENT_TABLE]] MANAGEMENT DISCUSSION SNAPSHOT [[GREPCENT_TABLE]] [["($ and shares in millions except per share amounts)"],["For year ended December 31:","","2024 (2)","","2023","","Yr.-to-Yr. Percent/Margin Change"],["Revenue (1)","","$","62,753","","","$","61,860","","","1.4","%"],["Gross profit margin","","56.7","%","","55.4","%","","1.2","pts."],["Total expense and other (income)","","$","29,754","","","$","25,610","","","16.2","%"],["Income from continuing operations before income taxes","","$","5,797","","","$","8,690","","","(33.3)","%"],["Provision for/(benefit from) income taxes from continuing operations","","$","(218)","","","$","1,176","","","NM"],["Income from continuing operations","","$","6,015","","","$","7,514","","","(19.9)","%"],["Income from continuing operations margin","","9.6","%","","12.1","%","","(2.6)","pts."],["Income/(Loss) from discontinued operations, net of tax","","$","8","","","$","(12)","","","NM"],["Net income","","$","6,023","","","$","7,502","","","(19.7)","%"],["Earnings per share from continuing operations\u2013assuming dilution","","$","6.42","","","$","8.15","","","(21.2)","%"],["Consolidated earnings per share\u2013assuming dilution","","$","6.43","","","$","8.14","","","(21.0)","%"],["Weighted-average shares outstanding\u2013assuming dilution","","$","937.2","","","$","922.1","","","1.6","%"],["Assets (3)","","$","137,175","","","$","135,241","","","1.4","%"],["Liabilities (3)","","$","109,783","","","$","112,628","","","(2.5)","%"],["Equity (3)","","$","27,393","","","$","22,613","","","21.1","%"]] [[/GREPCENT_TABLE]] (1)Year-to-year revenue growth of 3 percent adjusted for currency. (2)2024 includes the impact of pension settlement charges of $3.1 billion ($2.4 billion net of tax) resulting in an impact of ($2.57) to diluted earnings per share from continuing operations and an impact of ($2.56) to consolidated diluted earnings per share. Refer to note U, “Retirement-Related Benefits,” for additional information. (3)At December 31. NM–Not meaningful The following table provides the company’s operating (non-GAAP) earnings for 2024 and 2023. Refer to page 28 for additional information. [[GREPCENT_TABLE]] [["($ in millions except per share amounts)"],["For year ended December 31:","2024","","2023","","Yr.-to-Yr. Percent Change"],["Net income as reported (1)","$","6,023","","","$","7,502","","","(19.7)","%"],["Income/(Loss) from discontinued operations, net of tax","8","","","(12)","","","NM"],["Income from continuing operations (1)","$","6,015","","","$","7,514","","","(19.9)","%"],["Non-operating adjustments (net of tax)"],["Acquisition-related charges","1,456","","","1,292","","","12.7 %"],["Non-operating retirement-related costs/(income) (1)","2,668","","","(30)","","","NM"],["U.S. tax reform impacts","(455)","","","95","","","NM"],["Operating (non-GAAP) earnings","$","9,684","","","$","8,870","","","9.2 %"],["Diluted operating (non-GAAP) earnings per share","$","10.33","","","$","9.62","","","7.4 %"]] [[/GREPCENT_TABLE]] (1)2024 includes the impact of pension settlement charges of $2.4 billion net of tax. Refer to note U, “Retirement-Related Benefits,” for additional information. NM–Not meaningful Table of Contents [[GREPCENT_TABLE]] [["","Management DiscussionInternational Business Machines Corporation and Subsidiary Companies","9"]] [[/GREPCENT_TABLE]] Macroeconomic Environment Our business portfolio underpinned by advanced technology and deep consulting expertise positions us uniquely to deliver end-to-end business transformations. Our diversification across geographies, industries, clients and business mix and our recurring revenue base provides some stability in revenue, profit and cash generation. Clients and partners continue to leverage technology to allow businesses to scale, drive efficiencies and fuel sustainable and profitable growth. The economic headwinds driven by factors such as geopolitical tensions, interest rate volatility, supply chain vulnerabilities, demographic shifts and evolving cyber threats are leading clients to manage their discretionary spending, which has impacted certain areas of our Consulting business during 2024. For the year ended December 31, 2024, movements in global currencies continued to impact our reported year-to-year revenue and profit. We execute hedging programs which defer, but do not eliminate, the impact of currency. The (gains)/losses from these hedging programs are reflected primarily in other (income) and expense. Refer to “Currency Rate Fluctuations,” for additional information. Financial Performance Summary In 2024, we reported $62.8 billion in revenue, income from continuing operations of $6.0 billion, which includes the impact of the pension settlement charges of $3.1 billion ($2.4 billion net of tax), and operating (non-GAAP) earnings of $9.7 billion, which excludes the impact of the pension settlement charges. Refer to “Organization of Information,” for additional information. Diluted earnings per share from continuing operations was $6.42 as reported, including an impact of $2.57 from the pension settlement charges, and diluted earnings per share was $10.33 on an operating (non-GAAP) basis. We generated $13.4 billion in cash from operations and $12.7 billion in free cash flow, and returned $6.1 billion to shareholders in dividends. We are pleased with the progress we made in 2024, delivering revenue growth in our re-positioned business and strong cash flow generation. Our 2024 performance demonstrates the success of our focused strategy, enhanced portfolio and sustainable revenue growth. We increased our investment in innovation and talent and completed eleven acquisitions in 2024, strengthening our hybrid cloud and AI capabilities, all while continuing to return value to shareholders through our dividend. Total revenue grew 1.4 percent year to year as reported and 3 percent adjusted for currency compared to the prior year, led by our Software performance. Software revenue increased 8.3 percent as reported and 9.0 percent adjusted for currency, with strength across our portfolio. Hybrid Platform & Solutions increased 8.1 percent as reported and 8.7 percent adjusted for currency, reflecting growth across all lines of business with double-digit revenue growth in Red Hat and Automation. Transaction Processing increased 8.7 percent as reported and 9.6 percent adjusted for currency, with growth in both recurring and transactional revenue. Consulting revenue decreased 0.9 percent as reported but grew 0.6 percent adjusted for currency, and continued to be impacted by a dynamic market environment as clients reprioritized spending. Infrastructure decreased 3.9 percent year to year as reported and 2.7 percent adjusted for currency, reflecting product cycle dynamics. From a geographic perspective, Americas revenue decreased 1.3 percent year to year as reported (0.7 percent adjusted for currency). Europe/Middle East/Africa (EMEA) increased 5.1 percent as reported (4.7 percent adjusted for currency). Asia Pacific grew 3.0 percent as reported (7.9 percent adjusted for currency). Gross margin of 56.7 percent increased 1.2 points year to year, with continued margin expansion driven by portfolio mix and ongoing productivity initiatives. Operating (non-GAAP) gross margin of 57.8 percent increased 1.3 points versus the prior year, due to the same dynamics. Total expense and other (income) increased 16.2 percent in 2024 versus the prior year primarily driven by the pension settlement charges of $3.1 billion in 2024, higher spending reflecting our continued investment in portfolio innovation to drive our strategy and higher workforce rebalancing charges. This was partially offset by a gain from the sale of certain QRadar Software-as-a-Service (SaaS) assets, the gain on the divestiture of The Weather Company assets, the benefits from productivity and the actions taken to transform our operations, and the effects of currency. Total operating (non-GAAP) expense and other (income) increased 1.8 percent year to year, driven primarily by the factors described above, excluding the pension settlement charges. Pre-tax income from continuing operations was $5.8 billion in 2024 compared with $8.7 billion in the prior year and pre-tax margin was 9.2 percent, a decrease of 4.8 points versus 2023. The year-to-year performance was primarily driven by the pension settlement charges in 2024 partially offset by our gross margin expansion and the benefits from productivity and the actions taken to transform our operations which enabled investments to drive innovation. The continuing operations effective tax rate for 2024 was (3.8) percent compared to 13.5 percent in 2023. The current-year effective tax rate was primarily driven by the tax impact of the pension settlement charges and the resolution of certain tax audit matters. Net income from continuing operations was $6.0 billion in 2024 compared with $7.5 billion in the prior year and net income from continuing operations margin was 9.6 percent, a decrease of 2.6 points year to year. Operating (non-GAAP) pre-tax income from continuing operations of $11.2 billion increased 8.7 percent year to year and the operating (non-GAAP) pre-tax margin from continuing operations increased 1.2 points to 17.9 percent. Our revenue growth, portfolio mix and productivity initiatives resulted in strong operating (non-GAAP) pre-tax income growth in 2024 compared to the prior year. The operating (non-GAAP) effective tax rate for 2024 was 13.6 percent compared to 14.0 percent Table of Contents [[GREPCENT_TABLE]] [["10","Management DiscussionInternational Business Machines Corporation and Subsidiary Companies"]] [[/GREPCENT_TABLE]] in 2023. Operating (non-GAAP) income from continuing operations of $9.7 billion increased 9.2 percent and the operating (non-GAAP) income margin from continuing operations of 15.4 percent was up 1.1 points year to year. Diluted earnings per share from continuing operations, which included an impact of $2.57 from the pension settlement charges, was $6.42 in 2024 compared with $8.15 in 2023. Operating (non-GAAP) diluted earnings per share of $10.33 increased 7.4 percent versus 2023. At December 31, 2024, the balance sheet remained strong with financial flexibility to support and invest in the business. Cash and cash equivalents, restricted cash and marketable securities at year end were $14.8 billion, an increase of $1.3 billion from December 31, 2023. During 2024, we invested $3.3 billion in acquisitions and returned $6.1 billion to shareholders through dividends. Total debt of $55.0 billion at December 31, 2024 decreased $1.6 billion driven by maturities partially offset by debt issuances. Total assets increased $1.9 billion ($5.2 billion adjusted for currency) from December 31, 2023 primarily driven by an increase in goodwill mainly related to the StreamSets and webMethods acquisition, and higher cash and cash equivalents. Total liabilities decreased $2.8 billion (increased $0.5 billion adjusted for currency) from December 31, 2023 primarily driven by a decrease in debt and postretirement benefit obligations partially offset by an increase in deferred income. Total equity of $27.4 billion increased $4.8 billion from December 31, 2023, primarily driven by net income, common stock issuances and a decrease in accumulated other comprehensive loss; partially offset by dividends. During 2024, we generated $13.4 billion in cash from operating activities, compared to $13.9 billion in 2023. While cash provided by financing receivables declined year to year from business variability, we had performance-related improvements within net income driving an increase within cash from operating activities. Our free cash flow was $12.7 billion, an increase of $1.5 billion versus the prior year. Refer to page 35 for additional information on free cash flow. Net cash used in investing activities of $4.9 billion decreased $2.1 billion compared to the prior year, mainly driven by a decrease in cash used in acquisitions, higher cash provided by divestitures and the proceeds from the sale of certain QRadar SaaS assets; partially offset by higher net purchases of marketable securities and other investments. Net cash used in financing activities of $7.1 billion increased $5.3 billion compared to 2023, mainly due to a lower level of debt issuances and a higher level of maturities in the current year. Table of Contents [[GREPCENT_TABLE]] [["","Management DiscussionInternational Business Machines Corporation and Subsidiary Companies","11"]] [[/GREPCENT_TABLE]] DESCRIPTION OF BUSINESS Please refer to IBM’s Annual Report on Form 10-K filed with the SEC on February 25, 2025, for Item 1A. entitled “Risk Factors.” IBM is addressing the hybrid cloud and AI opportunity with a platform-centric approach, focused on providing client value through a combination of technology and business expertise. We provide integrated solutions and products that leverage: data, information technology, deep expertise in industries and business processes, with trust and security and a broad ecosystem of partners and alliances. Our hybrid cloud platform and AI technology and services capabilities support clients’ digital transformations and help them engage with their customers and employees in new ways. These solutions draw from an industry-leading portfolio of capabilities in software, consulting services and a deep incumbency in mission-critical systems, all bolstered by one of the world’s leading research organizations. IBM Strategy Over the past 5 years, IBM has shifted to higher growth areas, with approximately 75 percent of our business mix in Software and Consulting. Our strategic focus is hybrid cloud and artificial intelligence (AI), today’s most transformative technologies. As clients drive business growth using their existing technology and investing in new ones, they seek flexibility across distributed technology environments and the need to realize value from AI. We have shaped our business to focus on those client needs. Our strategy aligns with the needs of our clients Companies are increasingly deploying technology workloads across environments where the business runs, with over 90 percent of executives reporting moving to hybrid cloud architectures (IBM IBV). As organizations continue to face innovation challenges, including increased technical complexity, rapidly growing costs, and scarcity of expertise, AI is an opportunity to unlock unrealized value. However, AI brings similar challenges, including costs of AI models, complexity of AI solutions and its governance, and expertise gaps in integrating AI solutions into business workflows. To solve these innovation challenges, leading organizations are embracing a hybrid ‘by design’ platform approach. It allows them to take advantage of hybrid multi-cloud by minimizing cost and complexity which simplifies innovation and operations. IBM Consulting has quantified the value of a hybrid by design approach and shown it delivers over three times higher return on investment. Companies continue to invest in AI and are looking for better approaches to drive enterprise AI adoption. AI is inherently hybrid as it needs to inference, govern, and manage across multiple environments. Conversely, AI simplifies the complexity of hybrid cloud environments through visibility, resource optimization, and automation across platforms and processes. IBM is strategically positioned to help clients unlock their next chapter of technology-led business growth. It will be built across hybrid multi-cloud and leverage AI. With our portfolio of technology and consulting capabilities, we uniquely help deliver that growth. IBM’s differentiated portfolio value IBM Software makes technology that delivers innovation and productivity with capabilities to enable end-to-end enterprise use cases, client usage, consumption, and expansion. We deliver this value in four major areas: Transaction Processing, powering IBM Z to deliver unmatched scalability, security, availability and real-time fraud detection for our client’s mission-critical workloads; Automation, boosting application performance and optimizing costs across clients’ technology operations and reducing overall complexity; Data, accelerating productivity by infusing AI at scale into applications and business processes to drive decisions in real-time; Hybrid cloud platform (Red Hat), unifying on-prem, public and private clouds, and the edge to scale applications and AI models across environments. All capabilities support hybrid cloud deployment and have security and AI embedded throughout. IBM Consulting provides strategy & technology and intelligent operations services to address clients’ most challenging business goals – including how to be more productive, accelerate growth, and drive innovation. We deliver domain expertise to drive client adoption through our offerings, leveraging hybrid cloud and AI technologies from IBM Software and with strategic partners including AWS, Microsoft, Oracle, SAP, and many others across the ecosystem. IBM Consulting brings speed and scale to innovative solutions that combine industry, domain, and hybrid cloud knowledge together with AI-powered assets, such as IBM Consulting Advantage, a first of its kind AI delivery platform designed to deliver solutions at scale and realize faster time to value, transforming how our consultants work. IBM Infrastructure enables hybrid cloud environments for mission-critical transactions and AI workloads, while maintaining the highest security and availability. The business is anchored by IBM Z which excels at delivering transaction processing capability with an industry-first integrated on-chip AI accelerator designed for high-speed, latency-optimized inferencing to deliver unmatched throughput, availability, and security. Our distributed infrastructure offerings, Power, Storage, and Cloud, accelerate client’s digital transformations while our Infrastructure Support delivers lifecycle services enhanced with AI to optimize hybrid cloud environments. Table of Contents [[GREPCENT_TABLE]] [["12","Management DiscussionInternational Business Machines Corporation and Subsidiary Companies"]] [[/GREPCENT_TABLE]] In support for each business segment, our AI strategy focuses on four key differentiators to help address adoption and challenges: Open, Cost Efficient, Hybrid and Domain Expertise, which we deliver across our portfolio. We enable cheaper inferencing built for hybrid cloud architectures with our Red Hat AI portfolio. We provide small, open Granite models that deliver better performance at a fraction of the price. We embed domain expertise in our models, technologies, and consulting offerings to speed client adoption and value. IBM Research continues to demonstrate the ability to transition research to market-ready solutions; reinventing how work gets done and building on its legacy of transforming innovation in computing into client-grade solutions. In 2024, we continued to innovate around hybrid cloud and AI which created new business opportunities for IBM, including Granite 3.0 models and InstructLab. In quantum computing, we continue to progress along our Quantum Development & Innovation Roadmap, including the release of the Heron quantum chip and launch of Qiskit 1.0 software development kit. In addition to organic innovation, we accelerate our strategy and client value with inorganic investments. Areas of focus include hybrid cloud, data, and AI technology along with strategic consulting capabilities. In 2024 IBM closed multiple deals, the most material being the acquisition of assets from Software AG to bolster our automation, data and AI portfolios, and Neural Magic to fuel optimized generative AI innovation across hybrid cloud. Additionally, we announced our intention to acquire HashiCorp, adding advanced capabilities in hybrid multi-cloud infrastructure automation and orchestration. Hybrid cloud and AI together have the power to unleash business productivity. IBM can bring hybrid cloud and AI to life for clients through our portfolio across the various business segments. Each of our business segments contribute to and benefit from the hybrid cloud and AI strategy. Clients realize greater value when complementary parts of the portfolio come together. For example, within Consulting, we have the world’s largest Red Hat practice differentiated with hybrid by design methodologies, with Consulting Advantage used to leverage AI across every stage of the project lifecycle. In IBM Z, watsonx code assistant for Z uses AI to accelerate modernization journeys, delivering more value to clients. Collaborating to create value with clients and ecosystem partners Building our ecosystem is core to our overall strategy, focusing on helping clients transform their core operations and create new sources of competitive advantage through the application of AI and hybrid cloud technologies. Our approach to client engagement allows us to meet clients where they are. We bring our next-generation innovations and core platforms to a wide range of clients and partners through our signature THINK event tour and IBM TechXchange conference. The Partner Plus program makes it easy for partners to deepen technical expertise on IBM products, allowing clients more choice on who to partner with. Additionally, we continue to co-invest with our strategic partners – Adobe, AWS, Microsoft, Oracle, Palo Alto Networks, Salesforce, SAP, ServiceNow – to amplify joint impact for our clients by embedding IBM technology into core platforms that run their businesses. We also bring product innovations to clients through use cases, our internal “client zero” productivity proof points, and technical experiences to demonstrate the value of our technology as a source of competitive advantage. For example, we have resolved 94 percent of low-level HR inquiries with our AskHR assistant, built on watsonx, freeing up HR professionals to focus on more complex issues. We believe that being a client zero exemplar accelerates our product roadmap and commercial success in addition to delivering productivity to the business. Business Segments and Capabilities IBM operates in more than 175 countries around the world. Our platform-centric hybrid cloud and AI strategy is executed through our operations and consists of four business segments: Software, Consulting, Infrastructure and Financing. In the first quarter of 2025, we announced changes to the reported revenue categories within our Software and Consulting reportable segments effective January 1, 2025. These changes will not impact our Consolidated Financial Statements or our reportable segments. Refer to “Looking Forward,” for additional information. Software Software provides software solutions that address client needs for a hybrid cloud platform, data and AI, automation, and security on their journey to hybrid cloud. It includes all software, except operating system software reported in the Infrastructure segment. Table of Contents [[GREPCENT_TABLE]] [["","Management DiscussionInternational Business Machines Corporation and Subsidiary Companies","13"]] [[/GREPCENT_TABLE]] Software comprises two business areas – Hybrid Platform & Solutions and Transaction Processing, which have the following capabilities: Hybrid Platform & Solutions: includes software, infused with AI, to help clients operate, manage and optimize their IT resources and business processes within hybrid, multi-cloud environments. It includes the following: Red Hat: provides enterprise open-source solutions, for hybrid, multi-cloud environments, which includes Red Hat Enterprise Linux (RHEL), OpenShift, our hybrid cloud platform, as well as Ansible. Automation: optimizes processes from business workflows to IT operations with AI-powered automation. Automation includes software for business automation, IT automation, integration and application runtimes. Data & AI: accelerates data-driven agendas by infusing AI throughout the enterprise, empowering intelligent decision making. The portfolio includes capabilities that simplify data consumption through data fabric with data management, optimize lifecycle management, and make better predictions through business analytics. Data & AI capabilities facilitate sustainable, resilient businesses and enable intelligent management of enterprise assets and supply chains with environmental intelligence. Security: creates a risk-aware, secure business by gaining real-time threat insights, orchestrating actions and automating responses across all touchpoints, in line with a zero-trust security strategy. Security includes software for data security, identity and access management, and threat management. Transaction Processing: supports clients’ mission-critical, on-premise workloads in industries such as banking, airlines and retail. This includes transaction processing software such as Customer Information Control System and storage software, as well as the analytics and integration software running on IBM operating systems such as DB2 and WebSphere running on z/OS. Consulting Consulting provides deep domain, technical, and industry expertise and market-leading capabilities in business transformation, technology implementation and managed services, including cloud managed and application services. Consulting designs, builds and operates technology and business processes based on open, hybrid cloud architectures leveraging the power of generative AI, with IBM technology and ecosystem partner technologies. Consulting uses its IBM Garage method and assets deployed through IBM Consulting Advantage to convene experts to co-create solutions with clients to accelerate their digital transformations through AI and automation. Consulting comprises three business areas – Business Transformation, Technology Consulting and Application Operations, which have the following capabilities: Business Transformation: provides strategy, process design, system implementation and operations services to improve and transform key experiences and business processes. These services deploy AI and automation in business processes to exploit the value of data and include an ecosystem of partners alongside IBM technology, including strategic partnerships with Adobe, Oracle, Salesforce and SAP, among others. Technology Consulting: helps clients architect and implement solutions securely across cloud platforms, including Amazon, Microsoft, Palo Alto Networks, and IBM, and deploy strategies to transform the enterprise experience and enable innovation, including data transformation for AI with watsonx and application modernization for hybrid cloud with Red Hat OpenShift. Application Operations: focuses on managing, optimizing, orchestrating, and securing custom application and ISV packages for clients. Services include application management, platform engineering, and security services across hybrid cloud environments. Infrastructure Infrastructure provides trusted and secure solutions for hybrid cloud and is optimized for infusing AI into mission-critical transactions. Infrastructure comprises two business areas – Hybrid Infrastructure and Infrastructure Support, which have the following capabilities: Hybrid Infrastructure: provides clients with innovative infrastructure platforms to help meet the new requirements of hybrid multi-cloud and enterprise AI workloads leveraging flexible and as-a-service consumption models. Hybrid Infrastructure includes IBM Z and Distributed Infrastructure. Table of Contents [[GREPCENT_TABLE]] [["14","Management DiscussionInternational Business Machines Corporation and Subsidiary Companies"]] [[/GREPCENT_TABLE]] IBM Z: the premier transaction processing platform with leading security, resilience and scale, highly optimized for mission-critical, high-volume transaction workloads and enabled for enterprise AI and hybrid cloud. It includes IBM Z and LinuxONE, with a range of high-performance systems designed to address enterprise computing capacity, security and performance needs, z/OS, a security-rich, high-performance enterprise operating system, as well as Linux and other operating systems. Distributed Infrastructure: includes Power, Storage and IBM Cloud Infrastructure-as-a-Service (IaaS). Power consists of high-performance servers, designed and engineered for data intensive and AI-enabled workloads and optimized for hybrid cloud and Linux. The Storage portfolio consists of a broad range of storage hardware and software-defined offerings, including Z-attach and distributed flash, tape solutions, software-defined storage controllers, data protection software and network-attach storage. IBM Cloud IaaS is built on enterprise-grade hardware with leading security and compliance capabilities and offers flexible computing options across architectures to meet client workload needs. Infrastructure Support: delivers comprehensive, proactive and AI-enabled maintenance and support services to maintain and improve the availability and value of clients’ IT infrastructure (hardware and software) both on-premises and in the cloud including maintenance for IBM products and other technology products. Financing Financing facilitates IBM clients’ acquisition of hardware, software and services through its financing solutions. The financing arrangements are predominantly for products or services that are critical to the end users’ business operations and support IBM’s hybrid cloud and AI strategy. Financing conducts a comprehensive credit evaluation of its clients prior to extending financing. As a captive financier, Financing has the benefit of both deep knowledge of its client base and a clear insight into the products and services financed. These factors allow the business to effectively manage two of the primary risks associated with financing, credit and residual value, while generating strong returns on equity. Financing comprises the following two business areas – Client Financing and Commercial Financing: Client Financing: lease, installment payment plan and loan financing to end-user clients for terms generally up to seven years. Assets financed are primarily new and used IBM hardware, software and services. Commercial Financing: short-term working capital financing to business partners and distributors primarily of IBM products and services. The company has an existing agreement with a third-party investor to sell IBM short-term commercial financing receivables on a revolving basis. Refer to note K, “Financing Receivables,” for additional information. Human Capital Employees and Related Workforce [[GREPCENT_TABLE]] [["(In thousands)"],["For the year ended December 31:","2024"],["IBM/wholly owned subsidiaries","270.3"],["Less-than-wholly owned subsidiaries","8.9"],["Complementary (1)","14.2"]] [[/GREPCENT_TABLE]] (1)The complementary workforce is an approximation of equivalent full-time employees hired under temporary, part-time and limited-term employment arrangements to meet specific business needs in a flexible and cost-effective manner. As a globally integrated enterprise, IBM operates in more than 175 countries. Our highly skilled global workforce is reflective of the work we do for clients in support of their digital transformations and mission-critical operations through our focus on hybrid cloud and AI. Our employees are among the world’s leading experts in hybrid cloud, AI, quantum computing, cybersecurity and industry-specific solutions. We believe our success depends on the caliber of our talent and the engagement and inclusion of IBMers in the workplace. Talent, Skills and Culture At IBM, we’re committed to attracting, developing and retaining top talent in a dynamic and competitive environment. Our employee value proposition offers a compelling combination of competitive compensation and exciting career opportunities in the development and delivery of innovative technologies that transform businesses worldwide. Our value proposition and talent strategy are designed to retain our talented professionals. We are continuously transforming and developing our talent through a combination of learning and hiring. In 2024, we focused on adding skills in key areas such as consulting and technical expertise, while also scaling our capacity in strategically important markets. We’re committed to upskilling and reskilling our workforce, and our digital learning and career platforms are designed to provide employees with the resources they need to build strategic skills and advance their careers. We believe that sharing candid Table of Contents [[GREPCENT_TABLE]] [["","Management DiscussionInternational Business Machines Corporation and Subsidiary Companies","15"]] [[/GREPCENT_TABLE]] feedback is essential to helping our employees develop their skills and elevate their performance, which is critical to our ability to transform and evolve. Employee engagement is a key indicator of employee well-being and dedication to our mission, purpose and values. We conduct an annual engagement survey to assess the health of our growth culture and employee sentiment. In 2024, over 200,000 employees globally participated in the survey, providing valuable insights that we are using to enhance the employee experience, transform our culture, and improve our interactions with clients and partners. For the fourth year in a row, more than eight out of ten employees who participated in the survey responded that they felt engaged at work, a testament to our industry-leading talent practices. An inclusive workplace serves as a catalyst for heightened innovation, agility, and overall performance. This environment fuels business growth, sustainable business outcomes and differentiated value to our clients. This is evident in our ability to attract and retain some of the industry's most skilled and talented individuals. Our goal is to ensure individuals from all backgrounds feel a sense of belonging, nurture their talents and advance in their careers. We strive to help all employees build new capabilities, explore various career paths, and engage with mentors to progress in their professional journeys. Once again, our efforts have resulted in nearly nine out of ten of employees who participated in the engagement survey feeling empowered to be their authentic selves at work. We are committed to pay equity and transparency, fostering an environment of equal pay for equal work regardless of gender, race, or other personal characteristics. Statistical pay equity assessments are conducted across all countries with IBM employees, reinforcing our dedication to our longstanding pay equity practice. Health, Safety and Well-Being IBM demonstrates an unwavering commitment to fostering a culture of health, safety, and well-being for its employees. This commitment is reflected in our comprehensive Health & Safety Management System (HSMS), which is externally certified and aims to create a healthy and safe work environment, minimize work-related injuries and illnesses, and empower our workforce to take an active role in managing health and safety risks. Recognizing employees as our most valuable asset, we have seamlessly integrated well-being into every facet of our business operations. We believe that our employees perform best at work, at home and in the communities where they live and work when their well-being is supported. We believe in not taking a one-size-fits-all approach and strive to provide programs that are culturally relevant and inclusive to address the needs of a global employee population. We take a holistic approach to well-being, not only focusing on fundamental safety items but also addressing physical, mental and financial health. Access to well-being services and resources are offered through onsite activities and partnerships with external vendors, among other methods of delivery. IBMers worldwide have confidential, 24/7 access to critical mental health support through employee assistance programs and supplemental resources. Other programs include training for employees on resilience, ergonomics, and financial well-being. In 2024, a resilience-building tool and a digital well-being solution were made available to all IBM employees worldwide. These resources offer a personalized approach to assist IBMers with making small changes – with big results. These resources foster healthier habits focused on physical, mental, and emotional well-being. Table of Contents [[GREPCENT_TABLE]] [["16","Management DiscussionInternational Business Machines Corporation and Subsidiary Companies"]] [[/GREPCENT_TABLE]] YEAR IN REVIEW Results of Continuing Operations Segment Details As discussed in the “Organization of Information” section, we made changes to our organizational structure and management system in the first quarter of 2024. With these changes, we revised our reportable segments and updated the title of our segment performance metric from pre-tax income from continuing operations to segment profit. Prior-year results have been recast to reflect the January 2024 segment changes as described in note D, “Segments.” The table below presents each reportable segment’s revenue and gross margin results, followed by an analysis of the 2024 versus 2023 reportable segment results. The segment details below are presented under our historical reported revenue categories. Refer to “Looking Forward” for changes to the revenue categories reported within our Software and Consulting reportable segments effective in the first quarter of 2025. These changes will not impact our Consolidated Financial Statements or our reportable segments. [[GREPCENT_TABLE]] [["($ in millions)"],["For the year ended December 31:","2024","","2023 (1)","","Yr.-to-Yr. Percent/ Margin Change","","Yr.-to-Yr. Percent Change Adjusted for Currency"],["Revenue"],["Software","$","27,085","","","$","25,011","","","8.3","%","","9.0","%"],["Gross margin","83.7","%","","82.9","%","","0.8","pts."],["Consulting","20,692","","","20,884","","","(0.9)","%","","0.6","%"],["Gross margin","27.0","%","","26.8","%","","0.3","pts."],["Infrastructure","14,020","","","14,593","","","(3.9)","%","","(2.7)","%"],["Gross margin","55.8","%","","56.1","%","","(0.3)","pts."],["Financing","713","","","741","","","(3.7)","%","","(2.5)","%"],["Gross margin","47.9","%","","48.1","%","","(0.3)","pts."],["Other","243","","","632","","","(61.6)","%","","(61.7)","%"],["Gross margin","(352.8)","%","","(87.4)","%","","(265.3)","pts."],["Total revenue","$","62,753","","","$","61,860","","","1.4","%","","2.5","%"],["Total gross profit","$","35,551","","","$","34,300","","","3.6","%"],["Total gross margin","56.7","%","","55.4","%","","1.2","pts."],["Non-operating adjustments"],["Amortization of acquired intangible assets","724","","","631","","","14.6","%"],["Operating (non-GAAP) gross profit","$","36,275","","","$","34,931","","","3.8","%"],["Operating (non-GAAP) gross margin","57.8","%","","56.5","%","","1.3","pts."]] [[/GREPCENT_TABLE]] (1)Recast to reflect January 2024 segment changes. Software [[GREPCENT_TABLE]] [["($ in millions)"],["For the year ended December 31:","2024","","2023 (1)","","Yr.-to-Yr. Percent Change","","Yr.-to-Yr. Percent Change Adjusted for Currency"],["Software revenue","$","27,085","","","$","25,011","","","8.3","%","","9.0","%"],["Hybrid Platform & Solutions","$","18,808","","","$","17,396","","","8.1","%","","8.7","%"],["Red Hat","","","","","11.4","","","12.0"],["Automation","","","","","14.2","","","14.8"],["Data & AI","","","","","1.6","","","2.2"],["Security","","","","","0.8","","","1.5"],["Transaction Processing","8,277","","","7,615","","","8.7","","","9.6"]] [[/GREPCENT_TABLE]] (1)Recast to reflect January 2024 segment changes. Table of Contents [[GREPCENT_TABLE]] [["","Management DiscussionInternational Business Machines Corporation and Subsidiary Companies","17"]] [[/GREPCENT_TABLE]] Software revenue of $27,085 million increased 8.3 percent as reported (9.0 percent adjusted for currency) in 2024 compared to the prior year, reflecting growth across all lines of business with double-digit growth in Red Hat and Automation and high single-digit growth in Transaction Processing. This revenue performance reflects the investments we have been making in Software, both organically and through acquisitions. Our investments in generative AI are contributing to growth, as we had strong demand for our generative AI products such as watsonx, Concert and our AI assistants. We also launched new products in the fourth quarter of 2024 including our next generation of watsonx Code Assistant and Guardium Quantum Safe. In 2024, we also had increased revenue contribution from acquisitions compared to the prior year, including Apptio and StreamSets and webMethods. In addition, we had solid growth in our recurring revenue and double-digit growth in our transactional software revenue in 2024, as we accelerated growth through innovation across our Software portfolio. Hybrid Platform & Solutions revenue of $18,808 million increased 8.1 percent as reported (8.7 percent adjusted for currency) in 2024 compared to the prior year. Within Hybrid Platform & Solutions, Red Hat revenue increased 11.4 percent as reported (12.0 percent adjusted for currency), which reflects the continued demand for our hybrid cloud solutions as clients are prioritizing application modernization on OpenShift containers and Ansible automation to optimize their IT spending and reduce operational complexity. In 2024, we had double-digit revenue growth in OpenShift and Ansible, and high single-digit revenue growth in RHEL. The growth in OpenShift revenue reflects increased volume in OpenShift Virtualization engagements, and we exited 2024 with OpenShift annual recurring revenue of $1.4 billion. Automation revenue increased 14.2 percent as reported (14.8 percent adjusted for currency), driven by our SaaS subscription offerings such as AIOps and Management, which includes the higher revenue contribution from Apptio. Data & AI revenue increased 1.6 percent as reported (2.2 percent adjusted for currency), with strong growth in Data Fabric and our AI assistant for Customer Care, driven by client demand for our watsonx platform offerings, and strength in asset and supply chain management software which helps clients run sustainable operations. Security revenue increased 0.8 percent as reported (1.5 percent adjusted for currency), with revenue growth in data security and identity and access management, partially offset by a revenue decline in security threat management. Across Hybrid Platform & Solutions, our annual recurring revenue (ARR) was $15.3 billion exiting 2024, growing at a double-digit rate compared to the prior year. ARR is a key performance metric management uses to assess the health and growth trajectory of our Hybrid Platform & Solutions business within the Software segment. The metric was updated in the first quarter of 2024 to reflect the organizational changes described in the “Organization of Information” section above, and to simplify the calculation. ARR is calculated by using the current quarter’s recurring revenue and then multiplying that value by four. This value includes the following consumption models: (1) software subscription agreements, including committed term licenses, (2) as-a-service arrangements such as SaaS and PaaS, and (3) maintenance and support contracts. ARR should be viewed independently of revenue as this performance metric and its inputs may not represent revenue that will be recognized in future periods. Transaction Processing revenue of $8,277 million increased 8.7 percent as reported (9.6 percent adjusted for currency) in 2024 compared to the prior year. The performance in 2024 is the result of the combination of clients' growing capacity demands, solid renewal rates, and increased contribution from our generative AI products, including watsonx code assistant for Z. This growth reflects the innovation and value of our transaction processing software, which helps our clients manage their most mission-critical workloads. [[GREPCENT_TABLE]] [["($ in millions)"],["For the year ended December 31:","2024","","2023 (1)","","Yr.-to-Yr. Percent/ Margin Change"],["Software"],["Gross profit","$","22,658","","","$","20,721","","","9.3","%"],["Gross profit margin","83.7","%","","82.9","%","","0.8","pts."],["Segment profit","$","8,684","","","$","7,499","","","15.8","%"],["Segment profit margin","32.1","%","","30.0","%","","2.1","pts."]] [[/GREPCENT_TABLE]] (1)Recast to reflect January 2024 segment changes. Software gross profit margin of 83.7 percent in 2024 increased 0.8 points compared to the prior year. Segment profit of $8,684 million increased 15.8 percent and pre-tax margin of 32.1 percent increased 2.1 points compared to the prior year. The year-to-year increases in segment profit and profit margin reflect our operating leverage driven by our revenue performance and the benefits of the productivity actions taken in 2024; partially offset by key investments across our software portfolio. Table of Contents [[GREPCENT_TABLE]] [["18","Management DiscussionInternational Business Machines Corporation and Subsidiary Companies"]] [[/GREPCENT_TABLE]] Consulting [[GREPCENT_TABLE]] [["($ in millions)"],["For the year ended December 31:","2024","","2023 (1)","","Yr.-to-Yr. Percent Change","","Yr.-to-Yr. Percent Change Adjusted for Currency"],["Consulting revenue","$","20,692","","","$","20,884","","","(0.9)","%","","0.6","%"],["Business Transformation","$","9,347","","","$","9,179","","","1.8","%","","3.2","%"],["Technology Consulting","3,653","","","3,775","","","(3.2)","","","(1.5)"],["Application Operations","7,692","","","7,930","","","(3.0)","","","(1.5)"]] [[/GREPCENT_TABLE]] (1)Recast to reflect January 2024 segment changes. Consulting revenue of $20,692 million decreased 0.9 percent as reported, but increased 0.6 percent adjusted for currency in 2024 compared to the prior year. We had year-to-year revenue growth in Business Transformation, while revenue declined in Technology Consulting and Application Operations in 2024. During 2024, we operated in a dynamic macroeconomic environment following our strong performance in 2023, as clients reprioritized their IT spend toward digital transformation and AI initiatives for cost optimization and operational efficiency. We continued to focus on rapidly evolving our offerings and enhancing investments in skills and capabilities to align with these priorities. Our ability to address client demands contributed to Consulting signings growth in 2024 compared to the prior year. Our generative AI offerings contributed to this signings growth, as clients recognized the value we bring in accelerating their digital transformations through our extensive industry and enterprise AI expertise. Our Red Hat consulting practice grew at a double-digit rate in 2024, with revenue contribution across Consulting and ended the year with total revenue of approximately $3 billion. In addition, Consulting revenue and signings generated through our strategic partnerships continued to grow, contributing double-digit revenue growth year to year. We are actively investing to enhance our skills and capabilities to address our clients’ top priorities, including our fourth-quarter 2024 acquisition of Accelalpha, a global Oracle services provider. Business Transformation revenue of $9,347 million increased 1.8 percent as reported (3.2 percent adjusted for currency) compared to the prior year, driven by revenue growth in transformation projects for finance, supply chain, and data. Technology Consulting revenue of $3,653 million decreased 3.2 percent as reported (1.5 percent adjusted for currency), driven by a decline in client spending on application development; partially offset by revenue growth in cloud-based application modernization projects. Application Operations revenue of $7,692 million decreased 3.0 percent as reported (1.5 percent adjusted for currency), as clients reprioritized spending away from on-premise customized services. [[GREPCENT_TABLE]] [["($ in millions)"],["For the year ended December 31:","2024","","2023 (1)","","Yr.-to-Yr. Percent/ Margin Change"],["Consulting"],["Gross profit","$","5,589","","","$","5,588","","","0.0","%"],["Gross profit margin","27.0","%","","26.8","%","","0.3","pts."],["Segment profit","$","2,054","","","$","2,130","","","(3.6)","%"],["Segment profit margin","9.9","%","","10.2","%","","(0.3)","pts."]] [[/GREPCENT_TABLE]] (1)Recast to reflect January 2024 segment changes. Consulting gross profit margin increased 0.3 points to 27.0 percent compared to the prior year. Segment profit of $2,054 million decreased 3.6 percent and segment profit margin decreased 0.3 points to 9.9 percent compared to the prior year. The segment profit and profit margin performance reflects the investment in skills and capabilities we have made to meet the priorities of our clients, partially offset by the benefits from the productivity actions we took in 2024. Table of Contents [[GREPCENT_TABLE]] [["","Management DiscussionInternational Business Machines Corporation and Subsidiary Companies","19"]] [[/GREPCENT_TABLE]] Consulting Signings and Book-to-Bill [[GREPCENT_TABLE]] [["($ in millions)"],["For the year ended December 31:","2024","","2023 (1)","","Yr.-to-Yr. Percent Change","","Yr.-to-Yr.Percent ChangeAdjusted forCurrency"],["Total Consulting signings","$","25,103","","","$","24,305","","","3.3","%","","4.7","%"]] [[/GREPCENT_TABLE]] (1)Recast to reflect January 2024 segment changes. Consulting signings grew 3.3 percent as reported (4.7 percent adjusted for currency) in 2024, driven by our strong performance in signings in the fourth quarter of 2024. This performance reflects our ability to address client demands and the contribution of our generative AI solutions that help clients accelerate their digital transformations. Our book-to-bill ratio over the trailing twelve months was 1.21. Book-to-bill represents the ratio of IBM Consulting signings to its revenue over the same period and is a useful indicator of the demand for our business over time. Signings are management’s initial estimate of the value of a client’s commitment under a services contract within IBM Consulting. There are no third-party standards or requirements governing the calculation of signings. The calculation used by management involves estimates and judgments to gauge the extent of a client’s commitment, including the type and duration of the agreement and the presence of termination charges or wind-down costs. Contract extensions and increases in scope are treated as signings only to the extent of the incremental new value. Total signings can vary over time due to a variety of factors including, but not limited to, the timing of signing a small number of larger contracts. Signings associated with an acquisition will be recognized on a prospective basis. Management believes the estimated values of signings disclosed provide an indication of our forward-looking revenue. Signings are used to monitor the performance of the business and viewed as useful information for management and shareholders. The conversion of signings into revenue may vary based on the types of services and solutions, contract duration, customer decisions, and other factors, which may include, but are not limited to, the macroeconomic environment. Infrastructure [[GREPCENT_TABLE]] [["($ in millions)"],["For the year ended December 31:","2024","","2023","","Yr.-to-Yr. Percent Change","","Yr.-to-Yr. Percent Change Adjusted for Currency"],["Infrastructure revenue","$","14,020","","","$","14,593","","","(3.9)","%","","(2.7)","%"],["Hybrid Infrastructure","$","8,913","","","$","9,215","","","(3.3)","%","","(2.3)","%"],["IBM Z","","","","","(10.0)","","","(8.9)"],["Distributed Infrastructure","","","","","1.6","","","2.6"],["Infrastructure Support","5,107","","","5,377","","","(5.0)","","","(3.4)"]] [[/GREPCENT_TABLE]] Infrastructure revenue of $14,020 million decreased 3.9 percent as reported (2.7 percent adjusted for currency) as compared to the prior year, reflecting product cycle dynamics within Hybrid Infrastructure and Infrastructure Support. Hybrid Infrastructure revenue of $8,913 million decreased 3.3 percent as reported (2.3 percent adjusted for currency) as compared to the prior year. Within Hybrid Infrastructure, IBM Z revenue decreased 10.0 percent as reported (8.9 percent adjusted for currency) on a year-to-year basis. At the end of 2024, z16 was in its eleventh quarter of availability, and the combination of resiliency, reliability, and security of this platform continues to resonate with clients. The total revenue performance from the z16 program has outpaced prior Z cycles, and program-to-date installed MIPS have increased more than 30 percent as clients’ capacity needs continued to grow. IBM Z remains an enduring platform for mission-critical workloads, driving hardware adoption as well as related software, storage and services. Distributed Infrastructure revenue increased 1.6 percent as reported (2.6 percent adjusted for currency), driven primarily by double-digit growth in Storage systems, partially offset by a decline in cloud platform revenue. Storage revenue performance was driven by growth in high-end storage tied to the z16 platform and solutions tailored to protect, manage and access data for generative AI. In the fourth quarter of 2024, we introduced new innovation within Storage designed to give clients the ability to scale storage capacity to meet the growing data demands to support the next generation of AI workloads and projects. Infrastructure Support revenue of $5,107 million decreased 5.0 percent as reported (3.4 percent adjusted for currency), driven by volume declines in support of non-IBM equipment and IBM product cycle dynamics. Table of Contents [[GREPCENT_TABLE]] [["20","Management DiscussionInternational Business Machines Corporation and Subsidiary Companies"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["($ in millions)"],["For the year ended December 31:","2024","","2023 (1)","","Yr.-to-Yr. Percent/ Margin Change"],["Infrastructure"],["Gross profit","$","7,819","","","$","8,187","","","(4.5)","%"],["Gross profit margin","55.8","%","","56.1","%","","(0.3)","pts."],["Segment profit","$","2,450","","","$","2,828","","","(13.4)","%"],["Segment profit margin","17.5","%","","19.4","%","","(1.9)","pts."]] [[/GREPCENT_TABLE]] (1)Recast to reflect January 2024 segment changes. Infrastructure gross profit margin decreased 0.3 points to 55.8 percent in 2024 compared to the prior year, reflecting product cycle dynamics within both Hybrid Infrastructure and Infrastructure Support. Segment profit of $2,450 million decreased 13.4 percent and segment profit margin decreased 1.9 points to 17.5 percent primarily driven by product cycle dynamics and the investments in innovation we continued to make across IBM Z, Power and Storage systems in support of our clients’ increasing demand for capacity, reliability and security, and the integration of generative AI across their enterprises. The impact to segment profit from these increased investments was partially offset by a year-to-year increase in intellectual property and custom development income in 2024. Financing Refer to pages 41 through 42 for a discussion of Financing’s segment results. Geographic Revenue In addition to the revenue presentation by reportable segment, we also measure revenue performance on a geographic basis. [[GREPCENT_TABLE]] [["($ in millions)"],["For the year ended December 31:","2024","","2023","","Yr.-to-Yr. Percent Change","","Yr.-to-Yr. Percent Change Adjusted for Currency"],["Total revenue","$","62,753","","","$","61,860","","","1.4","%","","2.5","%"],["Americas","$","31,266","","","$","31,666","","","(1.3)","%","","(0.7)","%"],["Europe/Middle East/Africa","19,429","","","18,492","","","5.1","","","4.7"],["Asia Pacific","12,058","","","11,702","","","3.0","","","7.9"]] [[/GREPCENT_TABLE]] Geographic revenue performance for 2024 as compared to 2023: Americas revenue decreased 1.3 percent as reported and 0.7 percent adjusted for currency. The U.S. decreased 0.5 percent. Canada decreased 4.5 percent as reported and 2.9 percent adjusted for currency. Latin America decreased 3.5 percent as reported, but was flat adjusted for currency. Within Latin America, Brazil revenue decreased 9.4 percent as reported and 5.0 percent adjusted for currency. EMEA revenue increased 5.1 percent as reported and 4.7 percent adjusted for currency. Germany increased 14.5 percent as reported and 15.1 percent adjusted for currency. The UK increased 4.3 percent as reported and 1.8 percent adjusted for currency. Italy increased 3.5 percent as reported and 3.9 percent adjusted for currency. France was flat both as reported and adjusted for currency. Asia Pacific revenue increased 3.0 percent as reported and 7.9 percent adjusted for currency. Japan revenue increased 7.6 percent as reported and 16.2 percent adjusted for currency. China decreased 7.2 percent as reported and 6.1 percent adjusted for currency. Australia decreased 3.6 percent as reported and 2.6 percent adjusted for currency. India decreased 1.5 percent as reported, but was flat adjusted for currency. Table of Contents [[GREPCENT_TABLE]] [["","Management DiscussionInternational Business Machines Corporation and Subsidiary Companies","21"]] [[/GREPCENT_TABLE]] Total Expense and Other (Income) [[GREPCENT_TABLE]] [["($ in millions)"],["For the year ended December 31:","2024","","2023","","Yr.-to-Yr. Percent/ Margin Change"],["Total expense and other (income) (1)","$","29,754","","","$","25,610","","","16.2","%"],["Non-operating adjustments"],["Amortization of acquired intangible assets","(1,107)","","","(996)","","","11.1"],["Acquisition-related charges","(122)","","","(33)","","","271.1"],["Non-operating retirement-related (costs)/income (1)","(3,457)","","","39","","","NM"],["Operating (non-GAAP) expense and other (income)","$","25,068","","","$","24,620","","","1.8","%"],["Total expense-to-revenue ratio","47.4","%","","41.4","%","","6.0 pts."],["Operating (non-GAAP) expense-to-revenue ratio","39.9","%","","39.8","%","","0.1 pts."]] [[/GREPCENT_TABLE]] (1)2024 includes the impact of pension settlement charges of $3.1 billion. Refer to note U, “Retirement-Related Benefits,” for additional information. NM–Not meaningful Our expense dynamics in 2024 reflect our continued investment to execute our hybrid cloud and AI strategy. We remain focused on our productivity initiatives as we digitally transform our business processes and scale AI within IBM. This includes simplifying our application and infrastructure environments, aligning our teams by workflow and enabling a higher value-add workforce through automation and AI-driven efficiencies. These productivity initiatives allowed for continued investments to drive innovation in our portfolio. Total expense and other (income) increased 16.2 percent in 2024 versus the prior year primarily driven by the pension settlement charges of $3.1 billion in 2024, higher spending reflecting our continued investment in portfolio innovation to drive our strategy and higher workforce rebalancing charges; partially offset by the benefits from productivity and the actions taken to transform our operations, higher gains from divestitures, and the effects of currency. Total operating (non-GAAP) expense and other (income) increased 1.8 percent year to year, driven primarily by the factors described above, excluding the pension settlement charges. For additional information regarding total expense and other (income) for both expense presentations, refer to the following analyses by category. Selling, General and Administrative Expense [[GREPCENT_TABLE]] [["($ in millions)"],["For the year ended December 31:","2024","","2023","","Yr.-to-Yr. Percent Change"],["Selling, general and administrative expense"],["Selling, general and administrative\u2013other","$","16,047","","","$","15,706","","","2.2","%"],["Advertising and promotional expense","1,173","","","1,237","","","(5.2)"],["Workforce rebalancing charges","696","","","438","","","58.8"],["Amortization of acquired intangible assets","1,105","","","995","","","11.0"],["Stock-based compensation","690","","","616","","","12.0"],["Provision for/(benefit from) expected credit loss expense","(21)","","","10","","","NM"],["Total selling, general and administrative expense","$","19,688","","","$","19,003","","","3.6","%"],["Non-operating adjustments"],["Amortization of acquired intangible assets","(1,105)","","","(995)","","","11.0"],["Acquisition-related charges","(55)","","","(44)","","","23.8"],["Operating (non-GAAP) selling, general and administrative expense","$","18,529","","","$","17,964","","","3.1","%"]] [[/GREPCENT_TABLE]] NM–Not meaningful Table of Contents [[GREPCENT_TABLE]] [["22","Management DiscussionInternational Business Machines Corporation and Subsidiary Companies"]] [[/GREPCENT_TABLE]] Total selling, general and administrative (SG&A) expense increased 3.6 percent in 2024 versus 2023, driven primarily by the following factors: •Higher net spending (3 points), including expenses of acquired businesses (1 point), as a result of our continued investment to drive our hybrid cloud and AI strategy; partially offset by benefits from productivity and the actions taken to transform our operations; and •Higher workforce rebalancing charges (1 point) to address stranded costs and accelerate our productivity initiatives; partially offset by •The effects of currency (1 point). Operating (non-GAAP) SG&A expense increased 3.1 percent year to year primarily driven by the same factors. Expected credit loss was a benefit of $21 million in 2024 as compared to a provision of $10 million in 2023. The year-to-year change was primarily driven by lower specific reserve requirements in the current year. Refer to “Receivables and Allowances” section on page 25 for additional information. Research, Development and Engineering Expense [[GREPCENT_TABLE]] [["($ in millions)"],["For the year ended December 31:","2024","","2023","","Yr.-to-Yr. Percent Change"],["Total research, development and engineering","$","7,479","","","$","6,775","","","10.4","%"]] [[/GREPCENT_TABLE]] Research, development and engineering (RD&E) expense increased 10.4 percent in 2024 versus 2023, primarily driven by investments to drive innovation in AI, hybrid cloud and quantum, as well as in Infrastructure ahead of our next IBM Z cycle in 2025. Intellectual Property and Custom Development Income [[GREPCENT_TABLE]] [["($ in millions)"],["For the year ended December 31:","2024","","2023","","Yr.-to-Yr. Percent Change"],["Intellectual property income (1) (2)","$","329","","","$","374","","","(12.1)","%"],["Custom development income","667","","","485","","","37.5"],["Total","$","996","","","$","860","","","15.9","%"]] [[/GREPCENT_TABLE]] (1)Includes licensing, royalty-based fees and sales. (2)Prior-year amounts have been reclassified to conform to the change in 2024 presentation. Total Intellectual Property and Custom Development Income increased 15.9 percent in 2024 compared to 2023. The increase was primarily driven by joint development and licensing agreements with a Japanese consortium to leverage our intellectual property and expertise on advanced semiconductors. The timing and amount of licensing, sales or other transfers of IP may vary significantly from period to period depending upon the timing of licensing agreements, economic conditions, industry consolidation and the timing of new patents and know-how development. Table of Contents [[GREPCENT_TABLE]] [["","Management DiscussionInternational Business Machines Corporation and Subsidiary Companies","23"]] [[/GREPCENT_TABLE]] Other (Income) and Expense [[GREPCENT_TABLE]] [["($ in millions)"],["For the year ended December 31:","2024","","2023","","Yr.-to-Yr. Percent Change"],["Other (income) and expense"],["(Gains)/losses on foreign currency transactions","$","(458)","","","$","116","","","NM"],["(Gains)/losses on derivative instruments (1)","515","","","(17)","","","NM"],["Interest income","(747)","","","(670)","","","11.4","%"],["Net (gains)/losses from securities and investment assets","(20)","","","(39)","","","(49.4)"],["Retirement-related costs/(income)","3,457","","","(39)","","","NM"],["Other","(877)","","","(266)","","","230.3"],["Total other (income) and expense","$","1,871","","","$","(914)","","","NM"],["Non-operating adjustments"],["Amortization of acquired intangible assets","(2)","","","(1)","","","144.6"],["Acquisition-related charges (1)","(68)","","","11","","","NM"],["Non-operating retirement-related costs/(income)","(3,457)","","","39","","","NM"],["Operating (non-GAAP) other (income) and expense","$","(1,656)","","","$","(866)","","","91.3","%"]] [[/GREPCENT_TABLE]] (1)2024 and 2023 include the impact of a $68 million loss and $12 million gain, respectively, recognized on foreign exchange derivative contracts entered into by the company prior to the acquisition of StreamSets and webMethods from Software AG. Refer to note S, “Derivative Financial Instruments,” for additional information. NM–Not meaningful Total other (income) and expense was $1,871 million of expense in 2024 compared to income of $914 million in 2023. The year-to-year change was primarily driven by: •Non-operating retirement-related cost of $3,457 million in the current-year period versus $39 million of income in the prior-year period primarily driven by the impact of the pension settlement charges of $3,113 million in 2024 and an increase in recognized actuarial losses due to the change in amortization period of the Qualified PPP, effective January 1, 2024. Refer to note U, “Retirement-Related Benefits,” for additional information; and •Lower gains on land/building dispositions ($126 million) included in “Other”; partially offset by •A gain of $349 million from the sale of certain QRadar SaaS assets in 2024, included in “Other”. Refer to note E, “Acquisitions & Divestitures,” for additional information; and •Higher gains on divestitures ($206 million) primarily driven by the divestiture of The Weather Company assets ($243 million), included in “Other”. Refer to note E, “Acquisitions & Divestitures,” for additional information; and •Higher gains on sales of intangibles ($87 million) included in “Other”; and •Higher interest income ($77 million) primarily driven by a higher average cash balance in the current year. Operating (non-GAAP) other (income) and expense was income of $1,656 million in 2024 and increased $790 million compared to the prior year. The year-to-year change was primarily driven by the gain recognized from the sale of certain QRadar SaaS assets in the current year, higher gains on divestitures and sales of intangibles and higher interest income. Interest Expense [[GREPCENT_TABLE]] [["($ in millions)"],["For the year ended December 31:","2024","","2023","","Yr.-to-Yr. Percent Change"],["Total interest expense","$","1,712","","","$","1,607","","","6.5","%"]] [[/GREPCENT_TABLE]] Interest expense of $1,712 million in 2024 increased $105 million compared to 2023. Interest expense is presented in cost of financing in the Consolidated Income Statement only if the related external borrowings are to support the Financing external business. Overall interest expense (excluding capitalized interest) in 2024 was $2,048 million, an increase of $108 million year to year primarily driven by higher average interest rates. Table of Contents [[GREPCENT_TABLE]] [["24","Management DiscussionInternational Business Machines Corporation and Subsidiary Companies"]] [[/GREPCENT_TABLE]] Stock-Based Compensation Pre-tax stock-based compensation cost of $1,311 million increased $178 million compared to 2023. This was primarily due to increases from restricted stock units ($108 million), performance share units ($36 million), stock options ($23 million) and employees stock purchase plan ($11 million). The increases were primarily driven by stock-based compensation awards granted as part of our annual cycles for executives and other employees. The year-to-year change in stock-based compensation cost was reflected in the following categories: Cost: $223 million, up $33 million; SG&A expense: $690 million, up $74 million; and RD&E expense: $398 million, up $70 million. Retirement-Related Plans The following table provides the total pre-tax cost for all retirement-related plans. Total operating costs/(income) are included in the Consolidated Income Statement within the caption (e.g., Cost, SG&A, RD&E) relating to the job function of the plan participants. [[GREPCENT_TABLE]] [["($ in millions)"],["For the year ended December 31:","2024","","2023","","Yr.-to-Yr. Percent Change"],["Retirement-related plans\u2013cost"],["Service cost","$","568","","","$","183","","","209.8","%"],["Multi-employer plans","13","","","13","","","(3.7)"],["Cost of defined contribution plans","440","","","991","","","(55.6)"],["Total operating costs/(income)","$","1,021","","","$","1,188","","","(14.0)","%"],["Interest cost","$","2,135","","","$","2,415","","","(11.6)","%"],["Expected return on plan assets","(2,800)","","","(2,971)","","","(5.7)"],["Recognized actuarial losses","967","","","508","","","90.2"],["Amortization of prior service costs/(credits)","(7)","","","(9)","","","(17.9)"],["Curtailments/settlements (1)","3,159","","","5","","","NM"],["Other costs","3","","","13","","","(74.7)"],["Total non-operating costs/(income) (1)","$","3,457","","","$","(39)","","","NM"],["Total retirement-related plans\u2013cost (1)","$","4,478","","","$","1,149","","","289.7","%"]] [[/GREPCENT_TABLE]] (1)2024 includes pension settlement charges of $3.1 billion. Refer to note U,“Retirement-Related Benefits,” for additional information. NM–Not meaningful Total pre-tax retirement-related plan cost increased by $3,329 million compared to 2023, primarily due to a increase in curtailments/settlements ($3,154 million) primarily driven by the pension settlement charges in 2024, higher recognized actuarial losses ($459 million), higher service cost ($385 million) and lower expected returns on plan assets ($171 million); partially offset by lower cost of defined contribution plans ($551 million) and lower interest costs ($280 million). As discussed in the “Operating (non-GAAP) Earnings” section, we characterize certain retirement-related costs as operating and others as non-operating. Utilizing this characterization, operating retirement-related costs in 2024 were $1,021 million, a decrease of $167 million compared to 2023, primarily driven by lower cost of defined contribution plans ($551 million), partially offset by higher service cost ($385 million) due to U.S. retirement plan changes effective January 1, 2024. Including the related employee salary increase effective January 1, 2024, the net impact to our operating costs from the U.S. retirement plan changes was immaterial for the current year. Refer to note U, “Retirement-Related Benefits,” for additional information. Non-operating cost was $3,457 million in 2024 as compared to income of $39 million in 2023. The year-to-year change in non-operating costs was driven primarily by the pension settlement charges in the current year and higher recognized actuarial losses; partially offset by lower interest costs. Income Taxes The continuing operations effective tax rate for 2024 was (3.8) percent compared to 13.5 percent in 2023. The current-year effective tax rate was primarily driven by the tax impact of the pension settlement charges and the resolution of certain tax audit matters. The operating (non-GAAP) effective tax rate for 2024 was 13.6 percent compared to 14.0 percent in 2023. For additional information, refer to note G, “Taxes.” Table of Contents [[GREPCENT_TABLE]] [["","Management DiscussionInternational Business Machines Corporation and Subsidiary Companies","25"]] [[/GREPCENT_TABLE]] 1 Financial Position Dynamics Our balance sheet at December 31, 2024 continues to provide us with flexibility to support and invest in the business. Cash and cash equivalents, restricted cash and marketable securities at December 31, 2024 were $14,804 million, an increase of $1,342 million compared to prior-year end. Total debt of $54,973 million decreased $1,574 million compared to December 31, 2023. We continue to manage our debt levels while being acquisitive and without sacrificing investments in our business. During 2024, we generated $13,445 million in cash from operating activities, compared to $13,931 million in 2023. While cash provided by financing receivables declined year to year from business variability, we had performance-related improvements within net income driving an increase within cash from operating activities. Our free cash flow for 2024 was $12,749 million, an increase of $1,538 million versus the prior year. Refer to page 35 for additional information on free cash flow. Our cash generation enables us to continue investing in innovation and expertise across the portfolio, while returning value to shareholders through dividends. We invested $3,289 million in acquisitions and returned $6,147 million to shareholders through dividends in 2024. Consistent with accounting standards, the company remeasured the funded status of our retirement and postretirement plans at December 31. The overall net underfunded position at December 31, 2024 was $2,657 million, a decrease of $1,348 million from the prior-year end, primarily due to higher discount rates. At year end, our qualified defined benefit pension plans were well funded and the required contributions related to these plans and multi-employer plans are expected to be $100 million in 2025. In 2024, the return on the U.S. Personal Pension Plan assets was 2.6 percent and the plan was 136 percent funded at December 31, 2024. Overall, global asset returns were 2.0 percent and the qualified defined benefit plans worldwide were 116 percent funded at December 31, 2024. IBM Working Capital [[GREPCENT_TABLE]] [["($ in millions)"],["At December 31:","2024","","2023"],["Current assets","$","34,482","","","$","32,908"],["Current liabilities","$","33,142","","","$","34,122"],["Working capital","$","1,340","","","$","(1,214)"],["Current ratio","1.04:1","","0.96:1"]] [[/GREPCENT_TABLE]] Working capital increased $2,554 million from the year-end 2023 position. Current assets increased $1,574 million ($2,707 million adjusted for currency) primarily in cash and cash equivalents, and short-term financing receivables. Current liabilities decreased $980 million (increased $37 million adjusted for currency) as a result of a decrease in short-term debt mainly due to maturities; partially offset by an increase in deferred income. Receivables and Allowances Roll Forward of Total IBM Receivables Allowance for Credit Losses [[GREPCENT_TABLE]] [["($ in millions)"],["January 1, 2024","","Additions/ (Releases) (1)","","Write-offs (2)","","Foreign currency and other (3)","","December 31, 2024"],["$457","","$(18)","","$(146)","","$(21)","","$273"]] [[/GREPCENT_TABLE]] (1)Additions/(Releases) for allowance for credit losses are recorded in expense. (2)Refer to note A, “Significant Accounting Policies,” for additional information regarding allowance for credit loss write-offs. (3)Other includes additions/(releases) related to discontinued operations. Excluding receivables classified as held for sale, the total IBM receivables provision coverage was 1.4 percent at December 31, 2024, a decrease of 80 basis points compared to December 31, 2023. The decrease in coverage is due to declines in reserves primarily driven by write-offs. The majority of the write-offs during the year were related to receivables which had been previously reserved and were considered uncollectible as the related customer is no longer in operation, or there was no reasonable expectation of repossession or additional collections primarily due to the age of the receivables. Write-offs also includes about $60 million of previously reserved receivables from discontinued operations. Refer to Financing’s “Financial Position” on page 42 for additional details regarding the Financing segment receivables and allowances. Table of Contents [[GREPCENT_TABLE]] [["26","Management DiscussionInternational Business Machines Corporation and Subsidiary Companies"]] [[/GREPCENT_TABLE]] Noncurrent Assets and Liabilities [[GREPCENT_TABLE]] [["($ in millions)"],["At December 31:","","2024","","2023"],["Noncurrent assets","","$","102,693","","","$","102,333"],["Long-term debt","","$","49,884","","","$","50,121"],["Noncurrent liabilities (excluding debt)","","$","26,756","","","$","28,385"]] [[/GREPCENT_TABLE]] The increase in noncurrent assets of $360 million ($2,453 million adjusted for currency) was primarily due to an increase in goodwill primarily from the StreamSets and webMethods acquisition; partially offset by currency impacts. Long-term debt decreased $237 million (increased $761 million adjusted for currency) primarily driven by reclassifications to short-term debt to reflect upcoming maturities and currency impacts; partially offset by our first-quarter 2024 debt issuances. Noncurrent liabilities (excluding debt) decreased $1,629 million ($337 million adjusted for currency) primarily driven by lower retirement and postretirement benefit obligations. Debt Our funding requirements are continually monitored as we execute our strategies to manage the overall asset and liability profile. Additionally, we maintain sufficient flexibility to access global funding sources as needed. [[GREPCENT_TABLE]] [["($ in millions)"],["At December 31:","","2024","","2023"],["Total debt","","$","54,973","","","$","56,547"],["Financing segment debt (1)","","$","12,116","","","$","11,879"],["Non-Financing debt","","$","42,858","","","$","44,668"]] [[/GREPCENT_TABLE]] (1)Refer to Financing’s “Financial Position” on page 41 for additional details. Total debt of $54,973 million decreased $1,574 million ($536 million adjusted for currency) from December 31, 2023, primarily driven by maturities of $6,615 million; partially offset by proceeds from issuances of $5,705 million. Non-Financing debt of $42,858 million decreased $1,810 million ($1,029 million adjusted for currency) from December 31, 2023, primarily driven by maturities; partially offset by proceeds from issuances. Financing segment debt of $12,116 million increased $236 million ($493 million adjusted for currency) from December 31, 2023, primarily due to higher funding requirements associated with financing receivables. Financing provides financing solutions predominantly for IBM’s external client assets, and the debt used to fund Financing assets is primarily composed of intercompany loans. Total debt changes generally correspond with the level of client and commercial financing receivables, the level of cash and cash equivalents, the change in intercompany and external payables and the change in intercompany investment from IBM. The terms of the intercompany loans are set by the company to substantially match the term, currency and interest rate variability underlying the financing receivable. The Financing debt-to-equity ratio remained at 9.0 to 1 at December 31, 2024. Interest expense relating to debt supporting Financing’s external client and internal business is included in the “Financing Results of Operations” and in note D, “Segments.” In the Consolidated Income Statement, the external debt-related interest expense supporting Financing’s internal financing to the company is classified as interest expense. Table of Contents [[GREPCENT_TABLE]] [["","Management DiscussionInternational Business Machines Corporation and Subsidiary Companies","27"]] [[/GREPCENT_TABLE]] Equity Total equity increased $4,780 million from December 31, 2023, primarily driven by an increase from net income of $6,023 million which includes the impact of the pension settlement charges of $2,407 million net of tax, a decrease in accumulated other comprehensive loss of $3,492 million driven by retirement-related benefit plans primarily due to the pension settlement charges and amortization of net losses, and an increase in common stock of $1,737 million; partially offset by dividends paid of $6,147 million. Cash Flow Our cash flows from operating, investing and financing activities, as reflected in the Consolidated Statement of Cash Flows on page 49, are summarized in the table below. These amounts also include the cash flows associated with the Financing business. [[GREPCENT_TABLE]] [["($ in millions)"],["For the year ended December 31:","","2024","","2023"],["Net cash provided by/(used in)"],["Operating activities","","$","13,445","","","$","13,931"],["Investing activities","","(4,937)","","","(7,070)"],["Financing activities","","(7,079)","","","(1,769)"],["Effect of exchange rate changes on cash, cash equivalents and restricted cash","","(359)","","","9"],["Net change in cash, cash equivalents and restricted cash","","$","1,071","","","$","5,101"]] [[/GREPCENT_TABLE]] During 2024, we generated $13,445 million in cash from operating activities, compared to $13,931 million in 2023. While cash provided by financing receivables declined year to year due to variability in volumes, we had performance-related improvements within net income driving an increase within cash from operating activities. Net cash used in investing activities decreased $2,133 million mainly driven by the Apptio acquisition in 2023, an increase in cash provided by divestitures from the sale of The Weather Company assets and an increase in cash from disposition of property, plant and equipment/other mainly driven by proceeds from the sale of certain QRadar SaaS assets; partially offset by the current year acquisition of StreamSets and webMethods and higher net purchases of marketable securities and other investments. Net cash used in financing activities increased $5,309 million mainly due to an decrease in net cash provided by debt of $5,377 million primarily driven by a lower level of debt issuances and a higher level of maturities in the current year compared to 2023. Table of Contents [[GREPCENT_TABLE]] [["28","Management DiscussionInternational Business Machines Corporation and Subsidiary Companies"]] [[/GREPCENT_TABLE]] GAAP Reconciliation The tables below provide a reconciliation of our income statement results as reported under GAAP to our operating earnings presentation which is a non-GAAP measure. Management’s calculation of operating (non-GAAP) earnings, as presented, may differ from similarly titled measures reported by other companies. Please refer to the “Operating (non-GAAP) Earnings” section for management’s rationale for presenting operating earnings information. [[GREPCENT_TABLE]] [["($ in millions except per share amounts)"],["For the year ended December 31, 2024:","","GAAP","","Acquisition- Related Adjustments","","Retirement-Related Adjustments (1)","","U.S. Tax Reform Impacts (2)","","","","Operating (non-GAAP)"],["Gross profit","","$","35,551","","","$","724","","","$","\u2014","","","$","\u2014","","","","","$","36,275"],["Gross profit margin","","56.7","%","","1.2","pts.","","\u2014","pts.","","\u2014","pts.","","","","57.8","%"],["SG&A","","$","19,688","","","$","(1,159)","","","$","\u2014","","","$","\u2014","","","","","$","18,529"],["Other (income) and expense (3)","","1,871","","","(70)","","","(3,457)","","","\u2014","","","","","(1,656)"],["Total expense and other (income)","","29,754","","","(1,229)","","","(3,457)","","","\u2014","","","","","25,068"],["Pre-tax income from continuing operations","","5,797","","","1,953","","","3,457","","","\u2014","","","","","11,207"],["Pre-tax margin from continuing operations","","9.2","%","","3.1","pts.","","5.5","pts.","","\u2014","pts.","","","","17.9","%"],["Provision for/(benefit from) income taxes (4)","","$","(218)","","","$","497","","","$","790","","","$","455","","","","","$","1,523"],["Effective tax rate","","(3.8)","%","","5.1","pts.","","8.2","pts.","","4.1","pts.","","","","13.6","%"],["Income from continuing operations","","$","6,015","","","$","1,456","","","$","2,668","","","$","(455)","","","","","$","9,684"],["Income margin from continuing operations","","9.6","%","","2.3","pts.","","4.3","pts.","","(0.7)","pts.","","","","15.4","%"],["Diluted earnings per share from continuing operations","","$","6.42","","","$","1.55","","","$","2.85","","","$","(0.49)","","","","","$","10.33"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["($ in millions except per share amounts)"],["For the year ended December 31, 2023:","","GAAP","","Acquisition- Related Adjustments","","Retirement- Related Adjustments","","U.S. Tax Reform Impacts","","","","Operating (non-GAAP)"],["Gross profit","","$","34,300","","","$","631","","","$","\u2014","","","$","\u2014","","","","","$","34,931"],["Gross profit margin","","55.4","%","","1.0","pts.","","\u2014","pts.","","\u2014","pts.","","","","56.5","%"],["SG&A","","$","19,003","","","$","(1,039)","","","$","\u2014","","","$","\u2014","","","","","$","17,964"],["Other (income) and expense","","(914)","","","10","","","39","","","\u2014","","","","","(866)"],["Total expense and other (income) (3)","","25,610","","","(1,029)","","","39","","","\u2014","","","","","24,620"],["Pre-tax income from continuing operations","","8,690","","","1,660","","","(39)","","","\u2014","","","","","10,311"],["Pre-tax margin from continuing operations","","14.0","%","","2.7","pts.","","(0.1)","pts.","","\u2014","pts.","","","","16.7","%"],["Provision for income taxes (4)","","$","1,176","","","$","368","","","$","(8)","","","$","(95)","","","","","$","1,441"],["Effective tax rate","","13.5","%","","1.4","pts.","","0.0","pts.","","(0.9)","pts.","","","","14.0","%"],["Income from continuing operations","","$","7,514","","","$","1,292","","","$","(30)","","","$","95","","","","","$","8,870"],["Income margin from continuing operations","","12.1","%","","2.1","pts.","","0.0","pts.","","0.2","pts.","","","","14.3","%"],["Diluted earnings per share from continuing operations","","$","8.15","","","$","1.40","","","$","(0.03)","","","$","0.10","","","","","$","9.62"]] [[/GREPCENT_TABLE]] (1)Retirement-Related Adjustments in 2024 includes the impact of pension settlement charges of $3.1 billion ($2.4 billion net of tax) . Refer to note U, "Retirement-Related Benefits," for additional information. (2)2024 includes a benefit from income taxes due to the resolution of certain tax audit matters. (3)Acquisition-Related Adjustments in 2024 and 2023 include the impact of a $68 million loss and $12 million gain, respectively, recognized on foreign exchange derivative contracts entered into by the company prior to the acquisition of StreamSets and webMethods from Software AG. Refer to note S, “Derivative Financial Instruments,” for additional information. (4)The tax impact on operating (non-GAAP) pre-tax income is calculated under the same accounting principles applied to the GAAP pre-tax income. Table of Contents [[GREPCENT_TABLE]] [["","Management DiscussionInternational Business Machines Corporation and Subsidiary Companies","29"]] [[/GREPCENT_TABLE]] 1 PRIOR YEAR IN REVIEW This section provides a summary of our segment results and year-to-year comparisons between 2023 and 2022. These segment results have been recast to conform to our segment changes effective first-quarter 2024. There was no change to our consolidated results. Refer to “Year in Review” section of our “Management Discussion,” (pages 17 to 28), of our 2023 Annual Report on Form 10-K for a discussion of all other details of our financial condition and results of operations for the year ended December 31, 2023 compared to the year ended December 31, 2022. Segment Details The table below presents each reportable segment’s revenue and gross margin results which are presented on a comparable basis. Refer to “Organization of Information” section of “Management Discussion” and note D, “Segments,” for additional information on the recast of our segment financial results for 2023 and 2022. [[GREPCENT_TABLE]] [["($ in millions)"],["For the year ended December 31:","2023 (1)","","2022 (1)","","Yr.-to-Yr. Percent/ Margin Change","","Yr.-to-Yr. Percent Change Adjusted for Currency"],["Revenue"],["Software","$","25,011","","","$","23,629","","","5.8","%","","5.9","%"],["Gross margin","82.9","%","","82.5","%","","0.4","pts."],["Consulting","20,884","","","20,058","","","4.1","%","","5.6","%"],["Gross margin","26.8","%","","25.8","%","","0.9","pts."],["Infrastructure","14,593","","","15,288","","","(4.5)","%","","(3.9)","%"],["Gross margin","56.1","%","","52.8","%","","3.3","pts."],["Financing","741","","","645","","","14.8","%","","15.0","%"],["Gross margin","48.1","%","","38.3","%","","9.8","pts."],["Other","632","","","909","","","(30.5)","%","","(31.6)","%"],["Gross margin","(87.4)","%","","(32.9)","%","","(54.5)","pts."],["Total revenue","$","61,860","","","$","60,530","","","2.2","%","","2.9","%"],["Total gross profit","$","34,300","","","$","32,687","","","4.9","%"],["Total gross margin","55.4","%","","54.0","%","","1.4","pts."],["Non-operating adjustments"],["Amortization of acquired intangible assets","631","","","682","","","(7.5)","%"],["Operating (non-GAAP) gross profit","$","34,931","","","$","33,370","","","4.7","%"],["Operating (non-GAAP) gross margin","56.5","%","","55.1","%","","1.3","pts."]] [[/GREPCENT_TABLE]] (1)Recast to reflect January 2024 segment changes. Software [[GREPCENT_TABLE]] [["($ in millions)"],["For the year ended December 31:","2023 (1)","","2022 (1)","","Yr.-to-Yr. Percent Change","","Yr.-to-Yr. Percent Change Adjusted for Currency"],["Software revenue","$","25,011","","","$","23,629","","","5.8","%","","5.9","%"],["Hybrid Platform & Solutions","$","17,396","","","$","16,458","","","5.7","%","","5.8","%"],["Red Hat","","","","","9.1","","","9.0"],["Automation","","","","","3.4","","","3.6"],["Data & AI","","","","","6.0","","","6.4"],["Security","","","","","(1.4)","","","(1.4)"],["Transaction Processing","7,615","","","7,171","","","6.2","","","6.3"]] [[/GREPCENT_TABLE]] (1)Recast to reflect January 2024 segment changes. Software revenue of $25,011 increased 5.8 percent as reported (5.9 percent adjusted for currency) in 2023 compared to the prior year, driven by growth in both Hybrid Platform & Solutions and Transaction Processing. The growth in Hybrid Platform & Solutions was led by Red Hat, Automation and Data & AI. In Transaction Processing, our IBM Z platform continued to drive client demand. Our Software revenue performance in 2023 reflected growth in our high-value, recurring revenue base, which was approximately 80 percent of our annual software revenue, as well as transactional revenue. Table of Contents [[GREPCENT_TABLE]] [["30","Management DiscussionInternational Business Machines Corporation and Subsidiary Companies"]] [[/GREPCENT_TABLE]] Hybrid Platform & Solutions revenue of $17,396 increased 5.7 percent as reported (5.8 percent adjusted for currency) in 2023 compared to the prior year. Within Hybrid Platform & Solutions, Red Hat revenue increased 9.1 percent as reported (9.0 percent adjusted for currency) led by double-digit growth in OpenShift and Ansible, and solid growth in RHEL. OpenShift continued its strong performance with annual recurring revenue of $1.2 billion exiting 2023. Automation revenue increased 3.4 percent as reported (3.6 percent adjusted for currency), with strength in AIOps and Management solutions as clients looked to optimize business performance and enhance productivity. Data & AI revenue increased 6.0 percent as reported (6.4 percent adjusted for currency), reflecting demand for data management as clients prepared for generative AI, and strength in asset and supply chain management software which helps clients run sustainable operations. Security revenue decreased 1.4 percent as reported and adjusted for currency. While we had revenue declines in security threat management and identity and access management, we delivered revenue growth in data security. Across Hybrid Platform & Solutions, our annual recurring revenue (ARR) was $13.8 billion exiting 2023. ARR is a key performance metric management uses to assess the health and growth trajectory of our Hybrid Platform & Solutions business within the Software segment. Refer to the “Year in Review” section on page 17 for our definition of ARR. Transaction Processing revenue of $7,615 million increased 6.2 percent as reported (6.3 percent adjusted for currency) in 2023 compared to the prior year. Clients continued to value this portfolio of mission-critical software in support of growing workloads on our hardware platforms, such as IBM Z. This, together with price increases, contributed to growth in both recurring and transactional revenue in Transaction Processing. [[GREPCENT_TABLE]] [["($ in millions)"],["For the year ended December 31:","2023 (1)","","2022 (1)","","Yr.-to-Yr. Percent/ Margin Change"],["Software"],["Gross profit","$","20,721","","","$","19,483","","","6.4","%"],["Gross profit margin","82.9","%","","82.5","%","","0.4","pts."],["Segment profit","$","7,499","","","$","7,012","","","6.9","%"],["Segment profit margin","30.0","%","","29.7","%","","0.3","pts."]] [[/GREPCENT_TABLE]] (1)Recast to reflect January 2024 segment changes. Software gross profit margin of 82.9 percent in 2023 increased 0.4 points compared to the prior year, primarily driven by margin expansion in software services due to portfolio mix. Segment profit of $7,499 million increased 6.9 percent and segment profit margin of 30.0 percent increased 0.3 points compared to 2022. The year-to-year increases in segment profit and segment profit margin were driven by our solid revenue growth, higher gross profit contribution and the productivity actions that were taken; partially offset by key investments in innovation. Segment profit margin in 2023 included approximately 1 point of impact from currency. Consulting [[GREPCENT_TABLE]] [["($ in millions)"],["For the year ended December 31:","2023 (1)","","2022 (1)","","Yr.-to-Yr. Percent Change","","Yr.-to-Yr. Percent Change Adjusted for Currency"],["Consulting revenue","$","20,884","","","$","20,058","","","4.1","%","","5.6","%"],["Business Transformation","$","9,179","","","$","8,834","","","3.9","%","","5.3","%"],["Technology Consulting","3,775","","","3,730","","","1.2","","","2.8"],["Application Operations","7,930","","","7,494","","","5.8","","","7.3"]] [[/GREPCENT_TABLE]] (1)Recast to reflect January 2024 segment changes. Consulting revenue of $20,884 million increased 4.1 percent as reported (5.6 percent adjusted for currency) in 2023 compared to the prior year, with growth across all three business areas. This growth reflected the solid demand for our data and technology transformation projects with a focus on AI and analytics. Clients were also prioritizing cloud modernization and cloud-based application development projects. There was a consistent client focus throughout 2023 on digital transformation and AI initiatives to drive productivity and cost savings for their enterprises. Our integrated value proposition, investments in skills and strategic partnerships and focused execution differentiated us in the marketplace. Our strategic partnerships, which accounted for approximately 40 percent of Consulting revenue, delivered double-digit Consulting revenue growth in 2023 compared to the prior year. Table of Contents [[GREPCENT_TABLE]] [["","Management DiscussionInternational Business Machines Corporation and Subsidiary Companies","31"]] [[/GREPCENT_TABLE]] Business Transformation revenue of $9,179 million increased 3.9 percent as reported (5.3 percent adjusted for currency) year to year, led by data and technology transformations including AI and analytics-focused projects, and finance and supply chain transformations. Technology Consulting revenue of $3,775 million increased 1.2 percent as reported (2.8 percent adjusted for currency), led by cloud-based application development and cloud modernization projects. Application Operations revenue of $7,930 million increased 5.8 percent as reported (7.3 percent adjusted for currency) driven by growth in platform engineering services and cloud application management. [[GREPCENT_TABLE]] [["($ in millions)"],["For the year ended December 31:","2023 (1)","","2022 (1)","","Yr.-to-Yr. Percent/Margin Change"],["Consulting"],["Gross profit","$","5,588","","","$","5,180","","","7.9","%"],["Gross profit margin","26.8","%","","25.8","%","","0.9","pts."],["Segment profit","$","2,130","","","$","1,871","","","13.8","%"],["Segment profit margin","10.2","%","","9.3","%","","0.9","pts."]] [[/GREPCENT_TABLE]] (1)Recast to reflect January 2024 segment changes. Consulting gross profit margin increased 0.9 points to 26.8 percent in 2023 compared to the prior year. Segment profit of $2,130 million increased 13.8 percent and segment profit margin increased 0.9 points to 10.2 percent. The increases in gross profit margin and segment profit margin reflected benefits from pricing and productivity actions, which were partially offset by increased labor costs. Infrastructure [[GREPCENT_TABLE]] [["($ in millions)"],["For the year ended December 31:","2023","","2022","","Yr.-to-Yr. Percent Change","","Yr.-to-Yr. Percent Change Adjusted for Currency"],["Infrastructure revenue","$","14,593","","","$","15,288","","","(4.5)","%","","(3.9)","%"],["Hybrid Infrastructure","$","9,215","","","$","9,451","","","(2.5)","%","","(2.2)","%"],["IBM Z","","","","","(4.5)","","","(4.2)"],["Distributed Infrastructure","","","","","(1.0)","","","(0.7)"],["Infrastructure Support","5,377","","","5,837","","","(7.9)","","","(6.6)"]] [[/GREPCENT_TABLE]] Infrastructure revenue of $14,593 million decreased 4.5 percent as reported (3.9 percent adjusted for currency) in 2023 as compared to the prior year, reflecting product cycle dynamics which impacted both Hybrid Infrastructure and Infrastructure Support. Hybrid Infrastructure revenue of $9,215 million decreased 2.5 percent as reported (2.2 percent adjusted for currency) in 2023 as compared to the prior year. Within Hybrid Infrastructure, IBM Z revenue decreased 4.5 percent as reported (4.2 percent adjusted for currency) on a year-to-year basis, consistent with the z16 cycle, as it was introduced in the second quarter of 2022. Overall, across the program cycle, z16 revenue performance at year-end 2023 had significantly outperformed prior cycles, including the successful z15 program. The z16 program incorporates a number of key innovations for our clients including cloud-native development for hybrid cloud, embedded AI at scale, quantum safe cyber-resilient security, energy efficiency and strong reliability and scalability. Clients increasingly leveraged IBM Z for more workloads which drove demand for more capacity. Installed MIPS have doubled during the last two IBM Z product cycles. IBM Z remains an enduring platform, driving hardware adoption as well as related software, storage and services. Distributed Infrastructure revenue decreased 1.0 percent as reported (0.7 percent adjusted for currency). We had year-to-year declines in high-end Power and cloud platform revenue; partially offset by strong growth in high-end Storage and low- to mid-range Power. Infrastructure Support revenue of $5,377 million decreased 7.9 percent as reported (6.6 percent adjusted for currency), which reflected reduced demand for support services as a result of product cycle dynamics. Table of Contents [[GREPCENT_TABLE]] [["32","Management DiscussionInternational Business Machines Corporation and Subsidiary Companies"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["($ in millions)"],["For the year ended December 31:","2023 (1)","","2022 (1)","","Yr.-to-Yr. Percent/ Margin Change"],["Infrastructure"],["Gross profit","$","8,187","","","$","8,076","","","1.4","%"],["Gross profit margin","56.1","%","","52.8","%","","3.3","pts."],["Segment profit","$","2,828","","","$","2,671","","","5.9","%"],["Segment profit margin","19.4","%","","17.5","%","","1.9","pts."]] [[/GREPCENT_TABLE]] (1)Recast to reflect January 2024 segment changes. Infrastructure gross profit margin increased 3.3 points to 56.1 percent in 2023 compared to the prior year. The increase was driven by margin expansion in Hybrid Infrastructure across both Distributed Infrastructure and IBM Z, reflecting our continued focus on productivity initiatives including streamlining our supply chain; partially offset by margin decline in Infrastructure Support due to product cycle dynamics. Segment profit of $2,828 million increased 5.9 percent and segment profit margin increased 1.9 points to 19.4 percent primarily driven by the increase in gross profit contribution, an increase in IP and custom development income, a benefit from the change in the useful life of servers and network equipment, and productivity actions. Segment profit margin in 2023 included approximately 1 point of impact from currency. Financing [[GREPCENT_TABLE]] [["($ in millions)"],["For the year ended December 31:","","2023","","2022","","Yr.-to-Yr. Percent Change"],["Revenue","","$","741","","","$","645","","","14.8","%"],["Segment profit (1)","","$","373","","","$","340","","","9.8","%"]] [[/GREPCENT_TABLE]] (1)Recast to reflect January 2024 segment changes. Financing revenue increased 14.8 percent (15.0 percent adjusted for currency) to $741 million in 2023 compared to the prior year, primarily driven by client financing up $89 million to $728 million. The increase in client financing revenue was primarily driven by an increase in client financing asset yields. Financing segment profit increased 9.8 percent to $373 million in 2023 compared to the prior year and the segment profit margin of 50.3 percent decreased 2.3 points year to year. The increase in segment profit in 2023 was primarily driven by a decrease in SG&A expenses and settlements on non-accrual assets. Table of Contents [[GREPCENT_TABLE]] [["","Management DiscussionInternational Business Machines Corporation and Subsidiary Companies","33"]] [[/GREPCENT_TABLE]] OTHER INFORMATION Looking Forward Technology has proven to be a fundamental source of competitive advantage and is now the key to sustainable growth and business transformation. Continued demand for technology will serve as a major driving force behind global economic and business growth as businesses look to scale, offer better services, drive efficiencies and seize new market opportunities. AI-driven productivity, in particular, continues to be a top priority for businesses for both cost reductions and new revenue opportunities. Enterprise AI continues to gain momentum. Our clients have moved beyond experimentation and are now looking to scale AI in their businesses and generate return from their investments. The portfolio of AI offerings we have built is focused on generating that return through productivity improvements and automation. We have infused AI across the business, from the tools clients use to manage and optimize their hybrid cloud environments, to the tools to deploy AI within their enterprise, to Infrastructure and Consulting, there is AI innovation within all of our segments. For example, in Software, IBM watsonx provides a robust portfolio of AI products for developing AI apps, managing data, and governing the entire lifecycle of AI models. Red Hat is bringing AI to the platform with innovation such as OpenShift AI and RHEL AI. In Transaction Processing, we are experiencing continued customer interest in our generative AI product, watsonx Code Assistant for Z. In Infrastructure, IBM Z is equipped with real time AI inferencing capabilities. We continue to see Infrastructure play a larger role, enabling hybrid cloud environments for mission-critical transactions and AI workloads, as clients bring AI to their data. In Consulting, 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 and harnessing AI across every stage of the project lifecycle. We are committed to an open innovation ecosystem around AI, to help our clients maximize flexibility and leverage skills, and IBM with Red Hat can be a key driver of open-source AI. In the second quarter of 2024, we open-sourced IBM’s Granite models, which are designed for specific purposes and significantly more cost-efficient than larger alternatives, and we see parallels to how Linux became a leader in the enterprise server space as a result of the speed and innovation offered by open source. Red Hat and IBM also launched InstructLab to evolve and improve AI models. Our partner ecosystem remains essential to both AI and hybrid cloud growth and we continue to progress strategic partnerships with leading technology providers. In August 2024, we completed the sale of certain IBM QRadar SaaS assets to Palo Alto, which is part of a partnership with them to deliver AI-powered security solutions using watsonx to clients. We continue to invest in emerging technologies, bringing new innovations to market. In 2024, we expanded our IBM Quantum Data Center in Poughkeepsie, New York and opened the first IBM Quantum Data Center in Europe. We also announced a partnership with the State of Illinois to build the National Quantum Algorithm Center in Chicago and deploy a next-generation IBM Quantum System Two, supporting the future of quantum-centric supercomputing and greatly advancing our goal of expanding access to the world’s most performant quantum computers. We also remained focused on portfolio optimization. In January 2024, we closed the divestiture of The Weather Company assets. To complement our portfolio, we completed eleven acquisitions in 2024, including the acquisition of the StreamSets and webMethods assets from Software AG. This acquisition brings together leading capabilities in integration, API management, and data ingestion. At the end of 2024, we closed the acquisition of Neural Magic, which strengthens our AI capabilities in performance engineering and model optimization. On April 24, 2024, we announced our intent to acquire all of the outstanding shares of HashiCorp. The combination of IBM’s and HashiCorp’s combined portfolios will help clients manage growing application and infrastructure complexity and create a comprehensive end-to-end hybrid cloud platform designed for the AI era. Under the terms of the definitive agreement, HashiCorp shareholders on record immediately prior to the effective time on the closing date will receive $35 per share in cash, representing a total enterprise value of approximately $6.4 billion. On July 15, 2024, HashiCorp stockholders voted to approve the merger with IBM. The transaction is expected to close in the first quarter of 2025, subject to regulatory approvals and other customary closing conditions. Upon closing, HashiCorp will be integrated into the Software segment. In 2024, we continued to invest organically and inorganically, bring new products and innovation to market, expand our ecosystem and drive productivity across our business. We have made significant progress in becoming a higher growth, more focused business that has delivered sustained revenue growth, strong cash generation and meaningful returns to all our stakeholders – our 2024 performance is a proof point of this progress. Today, IBM is a software-led, fully integrated platform company, a business well positioned for 2025 and the future. In the first quarter of 2025, we announced changes to the reported revenue categories within our Software and Consulting reportable segments to better reflect the market opportunities and how we address them. IBM will report revenue and year-to-year revenue percent change for Hybrid Cloud (Red Hat), Automation, Data, and Transaction Processing within Software, and for Strategy and Technology and Intelligent Operations within Consulting. These changes were effective January 1, 2025 and will not impact our Consolidated Financial Statements or our reportable segments. Since these changes did not occur until first-quarter 2025, the periods presented in this Annual Report reflect the historical reported revenue categories. Table of Contents [[GREPCENT_TABLE]] [["34","Management DiscussionInternational Business Machines Corporation and Subsidiary Companies"]] [[/GREPCENT_TABLE]] Retirement-Related Plans Our retirement-related plans remain in a strong financial position. In aggregate, our worldwide qualified plans are funded 116 percent, with the U.S. at 136 percent. Contributions for all retirement-related plans are expected to be approximately $1.3 billion in 2025, approximately flat compared to 2024, of which $0.1 billion relates to legally required contributions to non-U.S. defined benefits and multi-employer plans. We expect 2025 pre-tax retirement-related plan cost to be approximately $1.1 billion. This estimate reflects current pension plan assumptions at December 31, 2024. Within total retirement-related plan cost, operating retirement-related plan cost is expected to be approximately $1.0 billion in 2025, essentially flat compared to the prior year. Non-operating retirement-related plan cost is expected to be approximately $0.1 billion, a decrease of approximately $3.3 billion compared to 2024, primarily driven by the $3.1 billion pension settlement charges resulting from the U.S. and Canada pension transfers in 2024, and lower recognized actuarial losses. Refer to note U, “Retirement-Related Benefits,” for additional information on the pension transfers. Liquidity and Capital Resources We have generated strong cash flow from operations allowing us to invest and deploy capital to areas with the most attractive long-term opportunities. We provide for additional liquidity through several sources: maintaining an adequate cash balance, access to global funding sources, committed global credit facilities and other committed and uncommitted lines of credit worldwide. The following table provides a summary of the major sources of liquidity for the years ended December 31, 2022 through 2024. Cash Flow and Liquidity Trends [[GREPCENT_TABLE]] [["($ in billions)"],["","","2024","","2023","","2022"],["Net cash from operating activities","","$","13.4","","","$","13.9","","","$","10.4"],["Cash and cash equivalents, restricted cash and short-term marketable securities","","$","14.8","","","$","13.5","","","$","8.8"],["Committed global credit facilities (1)","","$","10.0","","","$","10.0","","","$","10.0"]] [[/GREPCENT_TABLE]] (1)Refer to note O, “Borrowings,” for additional information. The indenture governing our debt securities and our various credit facilities each contain significant covenants which obligate the company to promptly pay principal and interest, limit the aggregate amount of secured indebtedness and sale and leaseback transactions to 10 percent of IBM’s consolidated net tangible assets, and restrict our ability to merge or consolidate unless certain conditions are met. The credit facilities also include a covenant on our consolidated net interest expense ratio, which cannot be less than 2.20 to 1.0, as well as a cross default provision with respect to other defaulted indebtedness of at least $500 million. We are in compliance with all of our significant debt covenants and provide periodic certification to our lenders. The failure to comply with debt covenants could constitute an event of default with respect to our debt to which such provisions apply. If certain events of default were to occur, the principal and interest on the debt to which such event of default applied would become immediately due and payable. 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 IBM’s credit rating were to fall below investment grade. At December 31, 2024, the fair value of those instruments that were in a liability position was $726 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. The following table presents the major ratings agencies’ ratings assigned to our debt securities as of December 31, 2024. The Moody’s, Standard and Poor’s and Fitch’s ratings remain unchanged from December 31, 2023. [[GREPCENT_TABLE]] [["IBM Ratings","","Standard and Poor\u2019s","","Moody\u2019s Investors Service","","Fitch Ratings"],["Senior long-term debt","","A-","","A3","","A-"],["Commercial paper","","A-2","","Prime-2","","F1"]] [[/GREPCENT_TABLE]] We have financial flexibility, supported by our strong liquidity position and cash flows, to operate at a single A credit rating. Debt levels decreased $1.6 billion from December 31, 2023 primarily driven by currency, and maturities of $6.6 billion partially offset by proceeds from issuances of $5.7 billion in the current year. In the first quarter of 2025, we issued $8.4 billion of debt for general Table of Contents [[GREPCENT_TABLE]] [["","Management DiscussionInternational Business Machines Corporation and Subsidiary Companies","35"]] [[/GREPCENT_TABLE]] corporate purposes, including our future debt maturity obligations, as well as capital allocation priorities. Refer to note V, “Subsequent Events,” for additional information. We prepare our Consolidated Statement of Cash Flows in accordance with applicable accounting standards for cash flow presentation on page 49 and highlight causes and events underlying sources and uses of cash in that format on page 27. For the purpose of running its business, IBM manages, monitors and analyzes cash flows in a different manner. Management uses free cash flow as a measure to evaluate its operating results, plan shareholder return levels, strategic investments and assess its ability and need to incur and service debt. The entire free cash flow amount is not necessarily available for discretionary expenditures. We define free cash flow as net cash from operating activities less the change in Financing receivables and net capital expenditures, including the investment in software and other asset sales (e.g., the sale of certain QRadar SaaS assets). A key objective of the Financing business is to generate strong returns on equity, and our Financing receivables are the basis for that growth. Accordingly, management considers Financing receivables as a profit-generating investment, not as working capital that should be minimized for efficiency. Therefore, management includes presentations of both free cash flow and net cash from operating activities that exclude the effect of Financing receivables. The following is management’s view of cash flows for 2024, 2023 and 2022 prepared in a manner consistent with the description above. [[GREPCENT_TABLE]] [["($ in billions)"],["For the year ended December 31:","","2024","","2023","","2022 (1)"],["Net cash from operating activities per GAAP","","$","13.4","","","$","13.9","","","$","10.4"],["Less: change in Financing receivables","","(0.4)","","","1.2","","","(0.7)"],["Net cash from operating activities, excluding Financing receivables","","13.9","","","12.7","","","11.2"],["Capital expenditures, net","","(1.1)","","","(1.5)","","","(1.9)"],["Free cash flow","","12.7","","","11.2","","","9.3"],["Change in Financing receivables (2)","","(0.4)","","","1.2","","","(0.7)"],["Acquisitions","","(3.3)","","","(5.1)","","","(2.3)"],["Divestitures","","0.7","","","0.0","","","1.3"],["Dividends","","(6.1)","","","(6.0)","","","(5.9)"],["Change in total debt (2)","","(0.9)","","","4.5","","","1.2"],["Other (2)","","(1.0)","","","(1.2)","","","(1.2)"],["Effect of exchange rate changes on cash, cash equivalents and restricted cash (2)","","(0.4)","","","0.0","","","(0.2)"],["Change in cash, cash equivalents, restricted cash and short-term marketable securities","","$","1.3","","","$","4.6","","","$","1.3"]] [[/GREPCENT_TABLE]] (1)Includes immaterial cash flows from discontinued operations. (2)Prior-year amounts have been reclassified to conform to the change in 2024 presentation. From the perspective of how management views cash flow, in 2024, after investing $1.1 billion in net capital investments, we generated free cash flow of $12.7 billion, an increase of $1.5 billion versus the prior year. The year-to-year increase in free cash flow primarily reflects current year performance-related improvements within net income and sustainable lower cash requirements through changes in our retirement plans. In 2024, net capital expenditures and net cash from operating activities include $0.4 billion and $0.1 billion, respectively, of cash proceeds from the sale of certain QRadar SaaS assets. This benefit to net capital expenditures, net cash from operating activities and to free cash flow represented only a nominal net benefit to current-year cash flows due to payments for structural actions and foregone profit from the QRadar business. Refer to note E, “Acquisitions & Divestitures,” for additional information. In 2024, we continued to return value to shareholders with $6.1 billion in dividends and invested $3.3 billion in acquisitions. IBM’s Board of Directors considers the dividend payment on a quarterly basis. In the second quarter of 2024, the Board of Directors increased the company’s quarterly common stock dividend from $1.66 to $1.67 per share. Beginning in the first quarter of 2025, we expect to file our quarterly reports on Form 10-Q closer to the timing of our quarterly earnings release, which may not coincide with the timing of our Board of Directors meeting. If the company’s Board of Directors approves a common stock dividend following the filing, the company will disclose this event in a current report on Form 8-K. Events that could temporarily change the historical cash flow dynamics discussed previously include significant changes in operating results, material changes in geographic sources of cash, unexpected adverse impacts from litigation, future pension Table of Contents [[GREPCENT_TABLE]] [["36","Management DiscussionInternational Business Machines Corporation and Subsidiary Companies"]] [[/GREPCENT_TABLE]] funding requirements during periods of severe downturn in the capital markets or the timing of tax payments. Whether any litigation has such an adverse impact will depend on a number of variables, which are more completely described in note Q, “Commitments & Contingencies.” With respect to pension funding, in 2024, we contributed $79 million to our non-U.S. defined benefit plans compared to $70 million in 2023. As highlighted in the Contractual Obligations table, we expect to make legally mandated pension plan contributions to certain non-U.S. plans of approximately $0.7 billion in the next five years. The 2025 contributions are currently expected to be approximately $100 million. Contributions related to all retirement-related plans are expected to be approximately $1.3 billion in 2025, approximately flat compared to 2024. Refer to “Retirement-Related Plans” within the “Looking Forward” section for additional information. Financial market performance could increase the legally mandated minimum contributions in certain non-U.S. countries that require more frequent remeasurement of the funded status. We are not quantifying any further impact from pension funding because it is not possible to predict future movements in the capital markets or pension plan funding regulations. In 2025, we are not legally required to make any contributions to the U.S. defined benefit pension plans. Our cash flows are sufficient to fund our current operations and obligations, including investing and financing activities such as dividends and debt service. When additional requirements arise, we have several liquidity options available. These options may include the ability to borrow additional funds at reasonable interest rates and utilizing our committed global credit facilities. Our overall shareholder payout remains at a comfortable level, and we remain fully committed to our long-standing dividend policy. Contractual Obligations [[GREPCENT_TABLE]] [["($ in millions)"],["","","Total Contractual","","Payments Due In"],["","","Payment Stream","","2025","","2026\u201327","","2028\u201329","","After 2029"],["Long-term debt obligations","","$","55,111","","","$","4,850","","","$","12,326","","","$","8,503","","","$","29,433"],["Interest on long-term debt obligations","","21,441","","","1,901","","","3,132","","","2,467","","","13,942"],["Finance lease obligations (1)","","1,000","","","198","","","334","","","286","","","183"],["Operating lease obligations (1)","","4,026","","","906","","","1,417","","","765","","","938"],["Purchase obligations","","4,892","","","1,657","","","1,880","","","1,065","","","291"],["Other long-term liabilities:"],["Minimum defined benefit pension plan funding (mandated) (2)","","700","","","100","","","300","","","300"],["Excess Savings Plan","","1,674","","","229","","","482","","","513","","","450"],["Long-term termination benefits","","785","","","214","","","113","","","78","","","380"],["Tax reserves (3)","","5,355","","","46"],["Other","","597","","","97","","","118","","","84","","","298"],["Total","","$","95,582","","","$","10,198","","","$","20,100","","","$","14,061","","","$","45,915"]] [[/GREPCENT_TABLE]] (1)Finance lease obligations are presented on a discounted cash flow basis, whereas operating lease obligations are presented on an undiscounted cash flow basis. (2)As funded status on plans will vary, obligations for mandated minimum pension payments after 2028 could not be reasonably estimated. (3)These amounts represent the liability for unrecognized tax benefits. We estimate that approximately $46 million of the liability is expected to be settled within the next 12 months. The settlement period for the noncurrent portion of the income tax liability cannot be reasonably estimated as the timing of the payments will depend on the progress of tax examinations with the various tax authorities; however, it is not expected to be due within the next 12 months. Certain contractual obligations reported in the previous table exclude the effects of time value and therefore, may not equal the amounts reported in the Consolidated Balance Sheet. Certain noncurrent liabilities are excluded from the previous table as their future cash outflows are uncertain. This includes deferred taxes, derivatives, deferred income, disability benefits and other sundry items. Certain obligations related to our divestitures are included. Purchase obligations include all commitments to purchase goods or services of either a fixed or minimum quantity that meet any of the following criteria: (1) they are noncancelable, (2) we would incur a penalty if the agreement was canceled, or (3) we must make specified minimum payments even if we do not take delivery of the contracted products or services (take-or-pay). If the obligation to purchase goods or services is noncancelable, the entire value of the contract is included in the previous table. If the obligation is cancelable, but we would incur a penalty if canceled, the dollar amount of the penalty is included as a purchase obligation. Contracted minimum amounts specified in take-or-pay contracts are also included in the table as they represent the portion of each contract that is a firm commitment. Table of Contents [[GREPCENT_TABLE]] [["","Management DiscussionInternational Business Machines Corporation and Subsidiary Companies","37"]] [[/GREPCENT_TABLE]] In the ordinary course of business, we enter into contracts that specify that we will purchase all or a portion of our requirements of a specific product, commodity or service from a supplier or vendor. These contracts are generally entered into in order to secure pricing or other negotiated terms. They do not specify fixed or minimum quantities to be purchased and, therefore, we do not consider them to be purchase obligations. Interest on floating-rate debt obligations is calculated using the effective interest rate at December 31, 2024, plus the interest rate spread associated with that debt, if any. Off-Balance Sheet Arrangements In the normal course of business, we may enter into off-balance sheet arrangements such as client financing commitments and guarantees. At December 31, 2024, we had no off-balance sheet arrangements that have, or are reasonably likely to have, a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. Refer to the table above for our contractual obligations, and note Q, “Commitments & Contingencies,” for detailed information about our guarantees, financial commitments and indemnification arrangements. We do not have retained interests in assets transferred to unconsolidated entities or other material off-balance sheet interests or instruments. Critical Accounting Estimates The application of GAAP requires IBM to make estimates and assumptions about certain items and future events that directly affect its reported financial condition. The accounting estimates and assumptions discussed in this section are those that we consider to be the most critical to our financial statements. An accounting estimate is considered critical if both (a) the nature of the estimate or assumption is material due to the levels of subjectivity and judgment involved, and (b) the impact within a reasonable range of outcomes of the estimate and assumption is material to IBM’s financial condition. Senior management has discussed the development, selection and disclosure of these estimates with the Audit Committee of IBM’s Board of Directors. Our significant accounting policies are described in note A, “Significant Accounting Policies.” A quantitative sensitivity analysis is provided where that information is reasonably available, can be reliably estimated and provides material information to investors. The amounts used to assess sensitivity (e.g., 1 percent, 10 percent, etc.) are included to allow users of the financial statements to understand a general direction cause and effect of changes in the estimates and do not represent management’s predictions of variability. For all of these estimates, it should be noted that future events rarely develop exactly as forecasted, and estimates require regular review and adjustment. Pension Assumptions For our defined benefit pension plans, the measurement of the benefit obligation to plan participants and net periodic pension (income)/cost requires the use of certain assumptions, including, among others, estimates of discount rates, interest crediting rates and expected return on plan assets. Beginning in 2024, as a result of changes to the Qualified PPP as discussed in note U, “Retirement-Related Benefits,” the interest crediting rate and expected return on plan assets will be based on their relationship to the plan’s discount rate. Changes in the discount rate and the interest crediting rate assumptions would impact the service cost, (gain)/loss amortization and interest cost components of the net periodic pension (income)/cost calculation and the projected benefit obligation (PBO). Changes in the expected long-term return on plan assets assumption impacts the net periodic pension (income)/cost. Expected returns on plan assets are calculated based on the market-related value of plan assets, which recognizes changes in the fair value of plan assets systematically over a five-year period in the expected return on plan assets line in net periodic pension (income)/cost. The differences between the actual return on plan assets and the expected long-term return on plan assets are recognized over five years in the expected return on plan assets line in net periodic pension (income)/cost and also as a component of actuarial (gains)/losses, which are recognized over the service lives or life expectancy of the participants, depending on the plan, provided such amounts exceed thresholds which are based upon the benefit obligation or the value of plan assets, as provided by accounting standards. The discount rate assumption for the Qualified PPP and Excess Personal Pension Plan (U.S. Defined Benefit Pension Plans), increased by 50 basis points to 5.5 percent on December 31, 2024. This change will increase pre-tax income recognized in 2025 by an estimated $104 million. A 25 basis point increase in the discount rate assumption would cause a corresponding increase in the pre-tax income recognized in 2025 by an estimated $75 million. A 25 basis point decrease in the discount rate assumption would cause a corresponding decrease in the pre-tax income recognized in 2025 by an estimated $27 million. The impact on pre-tax income as a result of a change in discount rate includes the impact of a similar change in the interest crediting rate. The increase or decrease in the discount rate would also cause a corresponding increase or decrease, respectively, in the 2025 expected return on plan assets assumption. Further changes in the discount rate assumptions would impact the PBO which, in turn, may impact our funding decisions if the PBO exceeds plan assets. A 25 basis point increase in the discount rate would decrease the PBO by $256 million. A 25 basis point decrease in the discount rate would increase the PBO by $265 million. The impact on the PBO as a result of a change in discount rate includes the impact of a similar change in the interest crediting rate. Each 50 basis point change in the Table of Contents [[GREPCENT_TABLE]] [["38","Management DiscussionInternational Business Machines Corporation and Subsidiary Companies"]] [[/GREPCENT_TABLE]] expected long-term return on these U.S. defined benefit plan assets assumption would have an estimated impact of $98 million on the following year’s pre-tax net periodic pension (income)/cost (based upon the 2025 assumptions). We may voluntarily make contributions or be required, by law, to make contributions to our pension plans. Actual results that differ from the estimates may result in more or less future IBM funding into the pension plans than is planned by management. Impacts of these types of changes on our pension plans in other countries worldwide would vary depending upon the status of each respective plan. In addition to the above, we evaluate other pension assumptions involving demographic factors, such as retirement age and mortality, and update these assumptions to reflect experience and expectations for the future. Actual results in any given year can differ from actuarial assumptions because of economic and other factors. For additional information on our pension plans and the development of these assumptions, refer to note U, “Retirement-Related Benefits.” Revenue Recognition Application of GAAP related to the measurement and recognition of revenue requires us to make judgments and estimates. Specifically, complex arrangements with nonstandard terms and conditions may require significant contract interpretation to determine the appropriate accounting, including whether promised goods and services specified in an arrangement are distinct performance obligations. Other significant judgments include determining the standalone selling price (SSP), determining whether IBM or a reseller is acting as the principal in a transaction and whether separate contracts should be combined and considered part of one arrangement. Revenue recognition is also impacted by our ability to determine when a contract is probable of collection and to estimate variable consideration, including, for example, rebates, volume discounts, service-level penalties and performance bonuses. We consider various factors when making these judgments, including a review of specific transactions, historical experience and market and economic conditions. Evaluations are conducted each quarter to assess the adequacy of the estimates. If the estimates were changed by 10 percent in 2024, the impact on net income would have been $31 million. Costs to Complete Service Contracts We enter into numerous service contracts through our services businesses. During the contractual period, revenue, cost and profits may be impacted by estimates of the ultimate profitability of each contract, especially contracts for which we use cost-to-cost measures of progress. For those contracts, if at any time these estimates indicate the contract will be unprofitable, the entire estimated loss for the remainder of the contract is recorded immediately in cost. We perform ongoing profitability analyses of these services contracts in order to determine whether the latest estimates require updating. Key factors reviewed to estimate the future costs to complete each contract are future labor costs and product costs and expected productivity efficiencies. Contract loss provisions recorded as a component of other accrued expenses and liabilities were immaterial at December 31, 2024 and 2023. Income Taxes We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Significant judgment is required in determining the consolidated provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. As a result, we recognize tax liabilities based on estimates of whether additional taxes and interest will be due. These tax liabilities are recognized when, despite our belief that our tax return positions are supportable, we believe that certain positions may not be fully sustained upon review by tax authorities. We believe that our accruals for tax liabilities are adequate for all open audit years based on our assessment of many factors, including past experience and interpretations of tax law. This assessment relies on estimates and assumptions and may involve a series of complex judgments about future events. To the extent that new information becomes available which causes us to change our judgment regarding the adequacy of existing tax liabilities, such changes to tax liabilities will impact income tax expense in the period in which such determination is made. Significant judgment is also required in determining any valuation allowance recorded against deferred tax assets. In assessing the need for a valuation allowance, management considers all available evidence for each jurisdiction including past operating results, estimates of future taxable income and the feasibility of ongoing tax planning strategies/actions. In the event that we change our determination as to the amount of deferred tax assets that can be realized, we will adjust the valuation allowance with a corresponding impact to income tax expense in the period in which such determination is made. The consolidated provision for income taxes will change period to period based on non-recurring events, such as the settlement of income tax audits and changes in tax laws, as well as recurring factors including the geographic mix of income before taxes, state and local taxes and the effects of various global income tax strategies. Table of Contents [[GREPCENT_TABLE]] [["","Management DiscussionInternational Business Machines Corporation and Subsidiary Companies","39"]] [[/GREPCENT_TABLE]] To the extent that the provision for income taxes increases/decreases by 1 percent of income from continuing operations before income taxes, consolidated net income would have decreased/improved by $58 million in 2024. Valuation of Assets The application of business combination and impairment accounting requires the use of significant estimates and assumptions. The acquisition method of accounting for business combinations requires us to estimate the fair value of assets acquired including separately identifiable intangible assets, liabilities assumed, and any noncontrolling interest in the acquiree to properly allocate purchase price consideration. Impairment testing for assets, other than goodwill, requires the allocation of cash flows to those assets or group of assets and if required, an estimate of fair value for the assets or group of assets. Our estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. These valuations require the use of management’s assumptions, which would not reflect unanticipated events and circumstances that may occur. Valuation of Goodwill We review goodwill for impairment annually and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. In 2024, the company elected to bypass the qualitative assessment and performed a quantitative goodwill impairment test to compare the fair value of each reporting unit to its carrying value. Estimating the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions. We estimate the fair value of our reporting units using the income approach. When circumstances warrant, we may also use a combination of the income approach and certain market approaches. Under the income approach, we estimate the fair value of a reporting unit based on the present value of estimated discounted future cash flows. The discounted cash flow methodology includes the use of projections, which require the use of significant estimates and assumptions specific to the reporting unit as well as those based on general economic conditions. Factors specific to each reporting unit include revenue growth rates, gross margins, discount rates, terminal value growth rates, capital expenditures projections, assumed tax rates and other assumptions deemed reasonable by management. The annual goodwill impairment analysis using the quantitative test performed during the fourth quarter of 2024 did not result in an impairment charge. All of the company’s reporting units had fair values that substantially exceeded their carrying values. Loss Contingencies We are currently involved in various claims and legal proceedings. At least quarterly, we review the status of each significant matter and assess our potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated, we accrue a liability for the estimated loss. Significant judgment is required in both the determination of probability and the determination as to whether an exposure is reasonably estimable. Because of uncertainties related to these matters, accruals are based only on the best information available at the time. As additional information becomes available, we reassess the potential liability related to our pending claims and litigation, and may revise our estimates. These revisions in the estimates of the potential liabilities could have a material impact on our results of operations and financial position. Financing Receivables Allowance for Credit Losses The Financing business reviews its financing receivables portfolio on a regular basis in order to assess collectibility and records adjustments to the allowance for credit losses at least quarterly. A description of the methods used by management to estimate the amount of uncollectible receivables is included in note A, “Significant Accounting Policies.” Factors that could result in actual receivable losses that are materially different from the estimated reserve include significant changes in the economy, or a sudden change in the economic health of a client that represents a significant concentration in Financing’s receivables portfolio. To the extent that actual collectibility differs from management’s estimates currently provided for by 10 percent, Financing’s segment profit and our income from continuing operations before income taxes would be higher or lower by an estimated $13 million depending upon whether the actual collectibility was better or worse, respectively, than the estimates. 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, resulted in a currency impact to our revenues, profit and cash flows throughout 2024. We execute a hedging program which defers, versus eliminates, the volatility of currency impacts on our financial results. During periods of sustained movements in currency, the marketplace and competition adjust to the changing rates over time. 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 2024, revenue from continuing operations increased 1.4 percent as reported and 3 percent at constant currency versus 2023. Table of Contents [[GREPCENT_TABLE]] [["40","Management DiscussionInternational Business Machines Corporation and Subsidiary Companies"]] [[/GREPCENT_TABLE]] At December 31, 2024, currency changes resulted in assets and liabilities denominated in most local currencies being translated into fewer U.S. dollars than at year-end 2023. 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. Currency translation and hedging impacted year-to-year pre-tax income growth and operating (non-GAAP) pre-tax income growth by approximately $100 million in 2024. From a segment perspective, in 2024, the impact from currency translation and hedging to our segments profit margin year-to-year growth was immaterial. We view these amounts as a theoretical maximum impact to our as-reported financial results. Hedging and certain underlying foreign currency transaction gains and losses are allocated to our segment results. Considering the operational responses mentioned above, movements of exchange rates, and the nature and timing of hedging instruments, it is difficult to predict future currency impacts on any particular period. For non-U.S. subsidiaries and branches that operate in U.S. dollars or whose economic environment is highly inflationary, translation adjustments are reflected in results of operations. Generally, we manage currency risk in these entities by linking prices and contracts to U.S. dollars. Market Risk In the normal course of business, our financial position is routinely subject to a variety of risks, including the market risk associated with interest rate and currency movements on outstanding debt and non-U.S. dollar denominated assets and liabilities, and other risks such as collectibility of accounts receivable. We regularly assess these risks and have established policies and business practices to protect against the adverse effects of these and other potential exposures. As a result, we do not anticipate any material losses from these risks. Our debt, in support of the geographic breadth of our operations and our Financing business, contains an element of market risk from changes in interest and currency rates. We manage this risk, in part, through the use of a variety of financial instruments including derivatives, as described in note S, “Derivative Financial Instruments.” To meet disclosure requirements, we perform a sensitivity analysis to determine the effects that market risk exposures may have on the fair values of our debt and other financial instruments. The financial instruments that are included in the sensitivity analysis are comprised of our cash and cash equivalents, marketable securities, short-term and long-term loans, commercial financing and installment payment receivables, investments, long-term and short-term debt and derivative financial instruments. Our derivative financial instruments generally include interest rate swaps, foreign currency swaps, forward contracts, and options. To perform the sensitivity analysis, we assess the risk of loss in fair values from the effect of hypothetical changes in interest rates and foreign currency exchange rates on market-sensitive instruments. The market values for interest and foreign currency exchange risk are computed based on the present value of future cash flows as affected by the changes in rates that are attributable to the market risk being measured. The discount rates used for the present value computations were selected based on market interest and foreign currency exchange rates in effect at December 31, 2024 and 2023. The differences in this comparison are the hypothetical losses associated with each type of risk. Information provided by the sensitivity analysis does not necessarily represent the actual changes in fair value that we would incur under normal market conditions because, due to practical limitations, all variables other than the specific market risk factor are held constant. In addition, the results of the model are constrained by the fact that certain items are specifically excluded from the analysis, while the financial instruments relating to the financing or hedging of those items are included by definition. Excluded items include short-term and long-term receivables from sales-type and direct financing leases, forecasted foreign currency cash flows and the company’s net investment in foreign operations. As a consequence, reported changes in the values of some of the financial instruments impacting the results of the sensitivity analysis are not matched with the offsetting changes in the values of the items that those instruments are designed to finance or hedge. The results of the sensitivity analysis at December 31, 2024 and 2023, are as follows: Interest Rate Risk A hypothetical 10 percent adverse change in the levels of interest rates, with all other variables held constant, would result in a decrease in the fair value of our financial instruments of approximately $0.3 billion at both December 31, 2024 and 2023. Changes in the relative sensitivity of the fair value of our financial instrument portfolio for these theoretical changes in the level of interest rates from the prior year are primarily driven by changes in debt maturities, interest rate profile and amount. Table of Contents [[GREPCENT_TABLE]] [["","Management DiscussionInternational Business Machines Corporation and Subsidiary Companies","41"]] [[/GREPCENT_TABLE]] Foreign Currency Exchange Rate Risk A hypothetical 10 percent adverse change in the levels of foreign currency exchange rates relative to the U.S. dollar, with all other variables held constant, would result in a decrease in the fair value of our financial instruments of approximately $1.3 billion and $1.6 billion at December 31, 2024 and 2023, respectively. The theoretical changes from the prior year are primarily driven by changes in foreign currency activities related to long-term debt and derivatives. Financing Risks Refer to the “Description of Business” on page 14 for a discussion of the financing risks associated with the Financing business and management’s actions to mitigate such risks. FINANCING Financing is a reportable segment that facilitates IBM clients’ acquisition of hardware, software and services by providing financing solutions, while generating solid returns on equity. Results of Operations [[GREPCENT_TABLE]] [["($ in millions)"],["For the year ended December 31:","","2024","","2023","","Yr.-to-Yr. Percent Change"],["Revenue","","$","713","","","$","741","","","(3.7)","%"],["Segment profit (1)","","$","348","","","$","373","","","(6.6)","%"]] [[/GREPCENT_TABLE]] (1)Prior-year amounts recast to reflect January 2024 segment changes. Financing revenue decreased 3.7 percent (2.5 percent adjusted for currency) to $713 million compared to the prior year. Financing segment profit decreased 6.6 percent to $348 million compared to the prior year and the segment profit margin of 48.8 percent decreased 1.5 points. The decreases in revenue and segment profit are primarily driven by a reduction in used equipment sales. Financial Position [[GREPCENT_TABLE]] [["($ in millions)"],["At December 31:","","2024","","2023"],["Cash and cash equivalents","","$","561","","","$","555"],["Client financing receivables"],["Net investment in sales-type and direct financing leases (1)","","3,490","","","4,237"],["Client loans","","6,804","","","6,486"],["Total client financing receivables","","$","10,294","","","$","10,723"],["Commercial financing receivables"],["Held for investment","","1,317","","","1,155"],["Held for sale","","900","","","692"],["Other receivables","","17","","","26"],["Total external receivables (2)","","$","12,528","","","$","12,596"],["Intercompany assets (3)","","800","","","963"],["Other assets","","187","","","294"],["Total assets","","$","14,075","","","$","14,409"],["Debt (4)","","12,116","","","11,879"],["Other liabilities (5)(6)","","613","","","1,205"],["Total liabilities (5)","","$","12,729","","","$","13,085"],["Total equity (5)","","$","1,346","","","$","1,324"],["Total liabilities and equity","","$","14,075","","","$","14,409"]] [[/GREPCENT_TABLE]] (1)Includes deferred initial direct costs which are expensed in IBM’s consolidated financial results. (2)The difference between the change in total external receivables of $(0.1) billion and the $(0.4) billion change in Financing segment’s receivables disclosed in the free cash flow presentation on page 35 is primarily attributable to currency impacts. (3)Total amount is eliminated in IBM’s consolidated financial results and therefore does not appear in the Consolidated Balance Sheet. (4)Financing segment debt is primarily composed of intercompany loans. (5)Prior-year amounts recast to reflect January 2024 segment change. Other liabilities have been reclassified to conform to the change in 2024 presentation. (6)Includes intercompany payables of $0.4 billion at December 31, 2023. There were no intercompany payables outstanding at December 31, 2024. These intercompany payables were eliminated in IBM’s consolidated financial results. Table of Contents [[GREPCENT_TABLE]] [["42","Management DiscussionInternational Business Machines Corporation and Subsidiary Companies"]] [[/GREPCENT_TABLE]] Financing Segment Receivables and Allowances The following table presents external Financing segment receivables excluding receivables classified as held for sale, and immaterial miscellaneous receivables. [[GREPCENT_TABLE]] [["($ in millions)"],["At December 31:","","2024","","2023"],["Amortized cost (1)","","$","11,738","","","$","12,034"],["Specific allowance for credit losses","","99","","","111"],["Unallocated allowance for credit losses","","29","","","45"],["Total allowance for credit losses","","128","","","156"],["Net financing receivables","","$","11,611","","","$","11,878"],["Allowance for credit losses coverage","","1.1","%","","1.3","%"]] [[/GREPCENT_TABLE]] (1)Includes deferred initial direct costs which are expensed in IBM’s consolidated financial results. The percentage of Financing segment receivables reserved decreased from 1.3 percent at December 31, 2023, to 1.1 percent at December 31, 2024 primarily driven by improvements in forward looking economic indicators. We continue to apply our rigorous credit policies. Approximately 74 percent of the total external portfolio was with investment-grade clients, an increase of 2 points compared to December 31, 2023. This investment grade percentage is based on the credit ratings of the companies in the portfolio and reflects certain mitigating actions taken to reduce the risk to IBM. For additional information related to the company’s sales of receivables, refer to “Transfer of Financial Assets” in note K, “Financing Receivables.” Return on Equity Calculation [[GREPCENT_TABLE]] [["($ in millions)"],["At December 31:","","2024","","2023 (1)"],["Numerator"],["Financing after-tax segment profit (A) (2)","","$","287","","","$","311"],["Denominator"],["Average Financing equity (B) (3)","","$","1,231","","","$","1,240"],["Financing return on equity (A)/(B)","","23.3","%","","25.1","%"]] [[/GREPCENT_TABLE]] (1)Recast to reflect January 2024 segment changes. (2)Calculated based upon an estimated tax rate, which is a function of IBM’s provision for income taxes determined on a consolidated basis. (3)Average of the ending equity for Financing for the last five quarters. Return on equity was 23.3 percent compared to 25.1 percent for the years ended December 31, 2024 and 2023, respectively. The decrease was driven by a decrease in net income. Residual Value The following table presents the recorded amount of unguaranteed residual value for sales-type and direct financing leases at December 31, 2024 and 2023. In addition, the table presents the run out of when the unguaranteed residual value assigned to equipment on leases at December 31, 2024, is expected to be returned to the company. The unguaranteed residual value for operating leases at December 31, 2024 and 2023 was not material. For additional information related to the company’s residual value, refer to note A, “Significant Accounting Policies.” Unguaranteed Residual Value [[GREPCENT_TABLE]] [["($ in millions)"],["","","","","","","Estimated Run Out of December 31, 2024 Balance"],["","","At December 31, 2023","","At December 31, 2024","","2025","","2026","","2027","","2028 and Beyond"],["Sales-type and direct financing leases","","$","458","","","$","479","","","$","145","","","$","115","","","$","141","","","$","78"]] [[/GREPCENT_TABLE]] Table of Contents [[GREPCENT_TABLE]] [["","Report of ManagementInternational Business Machines Corporation and Subsidiary Companies","43"]] [[/GREPCENT_TABLE]] Management Responsibility for Financial Information Responsibility for the integrity and objectivity of the financial information presented in this Annual Report rests with IBM management. The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, applying certain estimates and judgments as required. IBM maintains an effective internal control structure. It consists, in part, of organizational arrangements with clearly defined lines of responsibility and delegation of authority, and comprehensive systems and control procedures. An important element of the control environment is an ongoing internal audit program. Our system also contains self-monitoring mechanisms, and actions are taken to correct deficiencies as they are identified. To assure the effective administration of internal controls, we carefully select and train our employees, develop and disseminate written policies and procedures, provide appropriate communication channels and foster an environment conducive to the effective functioning of controls. We believe that it is essential for the company to conduct its business affairs in accordance with the highest ethical standards, as set forth in the IBM Business Conduct Guidelines. These guidelines, translated into numerous languages, are distributed to employees throughout the world, and reemphasized through internal programs to assure that they are understood and followed. The Audit Committee of the Board of Directors is composed solely of independent, non-management directors, and is responsible for recommending to the Board the independent registered public accounting firm to be retained for the coming year, subject to stockholder ratification. The Audit Committee meets regularly and privately with the independent registered public accounting firm, with the company’s internal auditors, as well as with IBM management, to review accounting, auditing, internal control structure and financial reporting matters.