PR Newswire | Jan 24, 2022 04:09PM EST

01/24 15:08 CST

IBM RELEASES FOURTH QUARTER RESULTSSoftware and Consulting Growth Driven by Hybrid Cloud Adoption; Strong Profit Performance ARMONK, N.Y., Jan. 24, 2022

ARMONK, N.Y., Jan. 24, 2022 /PRNewswire/ -- IBM (NYSE: IBM) today announced fourth-quarter 2021 earnings results.

"We increased revenue in the fourth quarter with hybrid cloud adoption driving growth in software and consulting," said Arvind Krishna, IBM chairman and chief executive officer. "Our fourth-quarter results give us confidence in our ability to deliver our objectives of sustained mid-single digit revenue growth and strong free cash flow in 2022."

On November 3, 2021, IBM completed the separation of Kyndryl. Unless otherwise specified, fourth-quarter and full-year results are presented on a continuing operations basis.

Fourth-Quarter Highlights

* Revenue - Revenue of $16.7 billion, up 6.5 percent, up 8.6 percent at constant currency (including about 3.5 points from incremental external sales to Kyndryl) - Software revenue up 8 percent, up 10 percent at constant currency (including about 5 points from incremental external sales to Kyndryl) - Consulting revenue up 13 percent, up 16 percent at constant currency- Infrastructure revenue flat, up 2 percent at constant currency (including about 5 points from incremental external sales to Kyndryl)- Hybrid cloud revenue: -- Fourth Quarter: $6.2 billion, up 16 percent, up 18 percent at constant currency -- Full Year: $20.2 billion, up 20 percent, up 19 percent at constant currency * Pre-tax Income:- GAAP: $2.9 billion, up 183 percent, including 167 points from the impact of fourth-quarter 2020 charge for structural actions- Operating (Non-GAAP): $3.5 billion, up 102 percent, including 92 points from the impact of fourth-quarter 2020 charge for structural actions



FOURTH QUARTER 2021 INCOME STATEMENT SUMMARY

Pre-tax

Gross Pre-tax Income Net Diluted

Revenue Profit Income** Margin** Income** EPS**

GAAP from Continuing $16.7B $9.5B $2.9B 17.2 % $2.5B $2.72 Operations

Year/Year 6.5 %* 2.8 % 183 %10.7 Pts 107 % 106 %

Operating $ $9.7B $3.5B 21.2 % $3.0B $3.35 (Non-GAAP)

Year/Year 2.8 % 102 %10.0 Pts 80 % 78 %

* 8.6% at constant currency

** Year-to-year results include impact of $1.5 billion pre-tax charge for structural actions in fourth quarter of 2020

"In 2021, we continued to invest for the future by increasing R&D spending, expanding our ecosystem and acquiring 15 companies to strengthen our hybrid cloud and AI capabilities," said James Kavanaugh, IBM senior vice president and chief financial officer. "With the separation of Kyndryl we now have taken the next step in the evolution of our strategy, creating value through focus and strengthening our financial profile."

Segment Results for Fourth Quarter

* Software (includes Hybrid Platform & Solutions, Transaction Processing)- revenues of $7.3 billion, up 8.2 percent, up 10.1 percent at constant currency (including about 5 points from incremental external sales to Kyndryl): - Hybrid Platform & Solutions up 7 percent, up 9 percent at constant currency (including about 1 point from incremental external sales to Kyndryl): -- Red Hat up 19 percent, up 21 percent at constant currency -- Automation up 13 percent, up 15 percent at constant currency -- Data & AI up 1 percent, up 3 percent at constant currency -- Security down 2 percent, down 1 percent at constant currency- Transaction Processing up 11 percent, up 14 percent at constant currency (including about 16 points from incremental external sales to Kyndryl)- Software segment hybrid cloud revenue up 22 percent, up 24 percent at constant currency * Consulting (includes Business Transformation, Technology Consulting and Application Operations)- revenues of $4.7 billion, up 13.1 percent, up 15.7 percent at constant currency:- Business Transformation up 18 percent, up 20 percent at constant currency- Technology Consulting up 14 percent, up 19 percent at constant currency- Application Operations up 6 percent, up 8 percent at constant currency- Consulting segment hybrid cloud revenue up 31 percent, up 34 percent at constant currency * Infrastructure (includes Hybrid Infrastructure, Infrastructure Support)- revenues of $4.4 billion, down 0.2 percent, up 1.7 percent at constant currency (including about 5 points from incremental external sales to Kyndryl): - Hybrid Infrastructure flat, up 2 percent at constant currency (including about 4 points from incremental external sales to Kyndryl) -- IBM Z down 6 percent, down 4 percent at constant currency -- Distributed Infrastructure up 5 percent, up 7 percent at constant currency- Infrastructure Support down 1 percent, up 1 percent at constant currency (including about 6 points from incremental external sales to Kyndryl)- Infrastructure segment hybrid cloud revenue down 12 percent, down 11 percent at constant currency * Financing (includes client and commercial financing)- revenues of $0.2 billion, down 29.4 percent, down 28.8 percent at constant currency

Cash Flow and Balance SheetOn a consolidated basis, full-year cash from operating activities was $12.8 billion and free cash flow was $6.5 billion. These consolidated results include ten months of Kyndryl results, and reflect cash paid in 2021 for separation charges and fourth-quarter 2020 structural actions.

IBM's post-separation baseline free cash flow for the year was $7.9 billion excluding Kyndryl charges and pre-separation activity. This view is aligned to the company's go-forward business. Payments for IBM-related structural actions and deferred cash taxes paid in 2021 contributed to the year-to-year decline in the post-separation baseline free cash flow.

IBM ended the year with $7.6 billion of cash on hand (which includes marketable securities), down $6.7 billion from year-end 2020, reflecting acquisitions of $3.3 billion and debt reduction payments consistent with the company's previously-stated intention to deleverage. Debt, including Financing debt of $13.9 billion, totaled $51.7 billion, down $9.6 billion since the end of 2020, and down more than $21 billion since closing the Red Hat acquisition. The company returned $5.9 billion to shareholders in dividends.

Full-Year 2022 ExpectationsThe company will discuss 2022 expectations during today's quarterly earnings conference call.

Continuing OperationsWith the separation completed on November 3, 2021, Kyndryl's operational activity has been reclassified to IBM's discontinued operations results in accordance with U.S. Generally Accepted Accounting Principles (GAAP). As discussed in previous communications, discontinued operations does not include historical intercompany transactions between IBM and Kyndryl (e.g., purchases of IBM hardware and software) which were previously eliminated in consolidation. It also does not include the spending for shared services (e.g., finance, marketing, human resources, global sales coverage) that has already been transferred to Kyndryl. IBM results on a continuing operations basis after separation reflect the new commercial relationship with Kyndryl and do not include shared services costs, which have been transferred to Kyndryl.

Forward-Looking and Cautionary StatementsExcept for the historical information and discussions contained herein, statements contained in this release may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on the company's current assumptions regarding future business and financial performance. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, including, but not limited to, the following: a downturn in economic environment and client spending budgets; a failure of the company's innovation initiatives; damage to the company's reputation; risks from investing in growth opportunities; failure of the company's intellectual property portfolio to prevent competitive offerings and the failure of the company to obtain necessary licenses; the company's ability to successfully manage acquisitions, alliances and dispositions, including integration challenges, failure to achieve objectives, the assumption of liabilities, and higher debt levels; fluctuations in financial results; impact of local legal, economic, political, health and other conditions; the company's failure to meet growth and productivity objectives; ineffective internal controls; the company's use of accounting estimates; impairment of the company's goodwill or amortizable intangible assets; the company's ability to attract and retain key employees and its reliance on critical skills; impacts of relationships with critical suppliers; product quality issues; impacts of business with government clients; reliance on third party distribution channels and ecosystems; cybersecurity and data privacy considerations; adverse effects from environmental matters, tax matters; legal proceedings and investigatory risks; the company's pension plans; currency fluctuations and customer financing risks; impact of changes in market liquidity conditions and customer credit risk on receivables; risk factors related to IBM securities; and other risks, uncertainties and factors discussed in the company's Form 10-Qs, Form 10-K and in the company's other filings with the U.S. Securities and Exchange Commission or in materials incorporated therein by reference. Any forward-looking statement in this release speaks only as of the date on which it is made. Except as required by law, the company assumes no obligation to update or revise any forward-looking statements.

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

IBM results -

* adjusting for currency (i.e., at constant currency); * presenting operating (non-GAAP) earnings per share amounts and related income statement items; * consolidated free cash flow; * post-separation baseline free cash flow.

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

Conference Call and WebcastIBM's regular quarterly earnings conference call is scheduled to begin at 5:00 p.m. EST, today. The Webcast may be accessed via a link at https://www.ibm.com/investor/events/earnings-4q21. Presentation charts will be available shortly before the Webcast.

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

Contact:IBMSarah Meron, 347-891-1770sarah.meron@ibm.com

Tim Davidson, 914-844-7847tfdavids@us.ibm.com

INTERNATIONAL BUSINESS MACHINES CORPORATION COMPARATIVE FINANCIAL RESULTS (Unaudited; Dollars in millions except per share amounts)



Three Months Ended Year Ended

December 31, December 31,

2021 2020 2021 2020

REVENUE

Software $7,273 $6,719 $24,141 $22,927

Consulting 4,746 4,196 17,844 16,257

Infrastructure 4,414 4,425 14,188 14,533

Financing 172 244 774 975

Other 89 98 404 488

TOTAL REVENUE 16,695 15,682 57,350 55,179



GROSS PROFIT 9,500 9,238 31,486 30,865



GROSS PROFIT MARGIN

Software 80.9 % 80.5 % 78.8 % 78.3 %

Consulting 27.0 % 29.7 % 28.0 % 29.3 %

Infrastructure 54.8 % 60.1 % 55.3 % 57.5 %

Financing 32.5 % 36.0 % 31.7 % 41.6 %



TOTAL GROSS PROFIT MARGIN 56.9 % 58.9 % 54.9 % 55.9 %



EXPENSE AND OTHER INCOME

S,G&A 4,903 6,256 18,745 20,561

R,D&E 1,625 1,592 6,488 6,262

Intellectual property and custom development income (181) (171) (612) (620)

Other (income) and expense (18) 230 873 802

Interest expense 303 317 1,155 1,288

TOTAL EXPENSE AND OTHER INCOME 6,632 8,224 26,649 28,293



INCOME/(LOSS) FROM CONTINUING OPERATIONS

BEFORE INCOME TAXES 2,869 1,014 4,837 2,572

Pre-tax margin 17.2 % 6.5 % 8.4 % 4.7 %

Provision for/(Benefit from) income taxes 407 (175) 124 (1,360)

Effective tax rate 14.2 % (17.3)% 2.6 % (52.9) %



INCOME FROM CONTINUING OPERATIONS $2,462 $1,190 $4,712 $3,932



DISCONTINUED OPERATIONS

Income/(Loss) from discontinued operations, net of taxes (129) 166 1,030 1,658



NET INCOME $2,332 $1,356 $5,743 $5,590



EARNINGS/(LOSS) PER SHARE OF COMMON STOCK

Assuming Dilution

Continuing Operations $2.72 $1.32 $5.21 $4.38

Discontinued Operations $(0.14) $0.19 $1.14 $1.85

TOTAL $2.57 $1.51 $6.35 $6.23



Basic

Continuing Operations $2.74 $1.33 $5.26 $4.42

Discontinued Operations $(0.14) $0.19 $1.15 $1.86

TOTAL $2.60 $1.52 $6.41 $6.28



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

Assuming Dilution 906.6 899.0 904.6 896.6

Basic 898.2 892.6 896.0 890.3

INTERNATIONAL BUSINESS MACHINES CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited)



At At

December 31, December 31,

(Dollars in Millions) 2021 2020

ASSETS:

Current Assets:

Cash and cash equivalents $6,650 $13,188

Restricted cash 307 463

Marketable securities 600 600

Notes and accounts receivable - trade, net 6,754 5,790

Short-term financing receivables, net 8,014 10,892

Other accounts receivable, net 1,002 695

Inventories 1,649 1,812

Deferred costs 1,097 1,018

Prepaid expenses and other current assets 3,466 2,089

Current assets of discontinued operations - 2,618

Total Current Assets 29,539 39,165



Property, plant and equipment, net 5,694 6,205

Operating right-of-use assets, net 3,222 3,566

Long-term financing receivables, net 5,425 7,086

Prepaid pension assets 9,850 7,557

Deferred costs 924 1,150

Deferred taxes 7,370 8,404

Goodwill 55,643 53,765

Intangibles, net 12,511 13,739

Investments and sundry assets 1,823 2,187

Non-current assets of discontinued operations - 13,147

Total Assets $132,001 $155,971



LIABILITIES:

Current Liabilities:

Taxes $2,289 $3,198

Short-term debt 6,787 7,116

Accounts payable 3,955 4,033

Deferred income 12,518 11,980

Operating lease liabilities 974 1,035

Other liabilities 7,097 8,688

Current liabilities of discontinued operations - 3,820

Total Current Liabilities 33,619 39,869



Long-term debt 44,917 54,217

Retirement related obligations 14,435 17,184

Deferred income 3,577 3,758

Operating lease liabilities 2,462 2,720

Other liabilities 13,996 14,180

Non-current liabilities of discontinued operations - 3,317

Total Liabilities 113,005 135,244



EQUITY:

IBM Stockholders' Equity:

Common stock 57,319 56,556

Retained earnings 154,209 162,717

Treasury stock - at cost (169,392) (169,339)

Accumulated other comprehensive income/(loss) (23,234) (29,337)

Total IBM Stockholders' Equity 18,901 20,597



Noncontrolling interests 95 129

Total Equity 18,996 20,727



Total Liabilities and Equity $132,001 $155,971

INTERNATIONAL BUSINESS MACHINES CORPORATION CASH FLOW ANALYSIS (Unaudited)



Three Months Ended Year Ended

December 31, December 31,

(Dollars in Millions) 2021 2020 2021 2020

Consolidated Net Cash from Operations per GAAP $2,543 $5,859 $12,796 $18,197



Less: change in IBM Financing receivables (1,328) (974) 3,907 4,349

Capital Expenditures, net (526) (780) (2,381) (3,042)



Consolidated Free Cash Flow 3,345 6,054 6,508 10,805



Acquisitions (275) (299) (3,293) (336)

Divestitures 88 (7) 114 503

Dividends (1,474) (1,455) (5,869) (5,797)

Non-IBM Financing debt (20) (4,814) (1,191) 221

Other (includes IBM Financing net receivables and debt)* (2,514) (958) (2,987) (130)



Change in Cash, Cash Equivalents, Restricted Cash and Short-term$(850) $(1,478)$(6,718)$5,265 Marketable Securities**

____________________

* The three months and year ended December 31, 2021 include distribution from Kyndryl of $0.9 billion.

** Cash flows above are presented on an IBM consolidated basis and therefore include an immaterial amount of cash and cash equivalents presented in current assets of discontinued operations in the IBM Condensed Consolidated Balance Sheet at December 31, 2020.

INTERNATIONAL BUSINESS MACHINES CORPORATION CASH FLOW (Unaudited)



Three Months Ended Year Ended

December 31, December 31,

(Dollars in Millions) 2021 2020 2021 2020

Net Income from Operations $2,332 $1,356 $5,743 $5,590

Depreciation/Amortization of Intangibles 1,380 1,699 6,416 6,695

Stock-based Compensation 264 279 982 937

Working Capital / Other (105) 3,499 (4,253) 625

IBM Financing A/R (1,328) (974) 3,907 4,349

Net Cash Provided by Operating Activities $2,543 $5,859 $12,796 $18,197

Capital Expenditures, net of payments & proceeds (526) (780) (2,381) (3,042)

Divestitures, net of cash transferred 88 (7) 114 503

Acquisitions, net of cash acquired (275) (299) (3,293) (336)

Marketable Securities / Other Investments, net 38 528 (414) (153)

Net Cash Provided by/(Used in) Investing Activities $(675) $(558) $(5,975) $(3,028)

Debt, net of payments & proceeds (2,030) (4,781) (8,116) (3,714)

Dividends (1,474) (1,455) (5,869) (5,797)

Financing - Other* 811 (57) 630 (210)

Net Cash Provided by/(Used in) Financing Activities $(2,692)$(6,293)$(13,354)$(9,721)

Effect of Exchange Rate changes on Cash (26) 113 (185) (87)

Net Change in Cash, Cash Equivalents and Restricted Cash**$(850) $(878) $(6,718) $5,361

____________________

* Represents Common Stock Transactions and other financing activities. The three months and year ended December 31, 2021 include distribution from Kyndryl of $0.9 billion.

** Cash flows above are presented on an IBM consolidated basis and therefore include an immaterial amount of cash and cash equivalents presented in current assets of discontinued operations in the IBM Condensed Consolidated Balance Sheet at December 31, 2020.

INTERNATIONAL BUSINESS MACHINES CORPORATION SEGMENT DATA (Unaudited)



Three Months Ended December 31, 2021



(Dollars in Millions) Software Consulting Infrastructure Financing

Revenue $7,273 $ 4,746 $ 4,414 $ 172

Pre-tax Income/(Loss) from Continuing Operations 2,109 436 1,036 79

Pre-tax Margin 29.0 % 9.2 % 23.5 % 46.0 %

Change YTY Revenue 8.2 % 13.1 % (0.2) % (29.4)%

Change YTY Revenue - constant currency 10.1 % 15.7 % 1.7 % (28.8)%





Three Months Ended December 31, 2020



(Dollars in Millions) Software Consulting Infrastructure Financing

Revenue $6,719 $ 4,196 $ 4,425 $ 244

Pre-tax Income/(Loss) from Continuing Operations 1,151 62 629 110

Pre-tax Margin 17.1 % 1.5 % 14.2 % 45.1 %





Year Ended December 31, 2021



(Dollars in Millions) Software Consulting Infrastructure Financing

Revenue $24,141 $ 17,844 $ 14,188 $ 774

Pre-tax Income/(Loss) from Continuing Operations 4,722 1,449 2,025 441

Pre-tax Margin 19.6 % 8.1 % 14.3 % 57.0 %

Change YTY Revenue 5.3 % 9.8 % (2.4) % (20.6)%

Change YTY Revenue - constant currency 4.1 % 8.3 % (3.4) % (21.9)%





Year Ended December 31, 2020



(Dollars in Millions) Software Consulting Infrastructure Financing

Revenue $22,927 $ 16,257 $ 14,533 $ 975

Pre-tax Income/(Loss) from Continuing Operations 3,341 1,034 1,654 449

Pre-tax Margin 14.6 % 6.4 % 11.4 % 46.1 %

INTERNATIONAL BUSINESS MACHINES CORPORATION U.S. GAAP TO OPERATING (Non-GAAP) RESULTS RECONCILIATION (Unaudited; Dollars in millions except per share amounts)



Three Months Ended December 31, 2021

Continuing Operations

Acquisition- Retirement- Tax Kyndryl-

Related Related Reform Related Operating

GAAP Adjustments ^(1) Adjustments ^(2) Impacts Impacts ^(4) (Non-GAAP)

Gross Profit $9,500 $182 $- $- $ - $ 9,682

Gross Profit Margin 56.9 % 1.1 Pts - Pts - Pts - Pts 58.0 %

S,G&A 4,903 (290) - - (8) 4,605

Other (Income) & Expense (18) (1) (315) - 126 (208)

Total Expense & Other (Income) 6,632 (290) (315) - 118 6,145

Pre-tax Income from Continuing 2,869 472 315 - (118) 3,537 Operations

Pre-tax Income Margin from 17.2 % 2.8 Pts 1.9 Pts - Pts (0.7) Pts 21.2 %Continuing Operations

Provision for/(Benefit from) Income 407 117 109 (94) (37) 502 Taxes ^(3)

Effective Tax Rate 14.2 % 1.4 Pts 1.8 Pts (2.7)Pts (0.6) Pts 14.2 %

Income from Continuing Operations 2,462 355 206 94 (81) 3,035

Income Margin from Continuing 14.7 % 2.1 Pts 1.2 Pts 0.6 Pts (0.5) Pts 18.2 %Operations

Diluted Earnings/(Loss) Per Share: $2.72 $0.39 $0.23 $0.10 $ (0.09) $ 3.35 Continuing Operations





Three Months Ended December 31, 2020

Continuing Operations

Acquisition- Retirement- Tax Kyndryl-

Related Related Reform Related Operating

GAAP Adjustments ^(1) Adjustments ^(2) Impacts Impacts ^(4) (Non-GAAP)

Gross Profit $9,238 $176 $- $- $ - $ 9,414

Gross Profit Margin 58.9 % 1.1 Pts - Pts - Pts - Pts 60.0 %

S,G&A 6,256 (283) - - - 5,973

Other (Income) & Expense 230 (1) (278) - - (49)

Total Expense & Other (Income) 8,224 (283) (278) - - 7,662

Pre-tax Income/(Loss) from Continuing 1,014 459 278 - - 1,752 Operations

Pre-tax Income Margin from 6.5 % 2.9 Pts 1.8 Pts - Pts - Pts 11.2 %Continuing Operations

Provision for/(Benefit from) Income (175) 102 156 (18) - 66 Taxes ^(3)

Effective Tax Rate (17.3)% 10.4 Pts 11.7 Pts (1.0)Pts - Pts 3.7 %

Income from Continuing Operations 1,190 357 122 18 - 1,686

Income Margin from Continuing 7.6 % 2.3 Pts 0.8 Pts 0.1 Pts - Pts 10.8 %Operations

Diluted Earnings/(Loss) Per Share: $1.32 $0.40 $0.14 $0.02 $ - $ 1.88 Continuing Operations

____________________

Includes amortization of purchased intangible assets, in process R&D,(1) transaction costs, applicable restructuring and related expenses, tax charges related to acquisition integration and pre-closing charges, such as financing costs.

Includes amortization of prior service costs, interest cost, expected return on(2) plan assets, amortized actuarial gains/losses, the impacts of any plan curtailments/ settlements and pension insolvency costs and other costs.

Tax impact on operating (non-GAAP) pre-tax income from continuing operations is calculated under the same accounting principles applied to the As Reported(3) pre-tax income under ASC 740, which employs an annual effective tax rate method to the results.

(4) Primarily relates to fair value changes in shares of Kyndryl common stock that were retained by IBM, employee awards, and separation related tax impacts.

INTERNATIONAL BUSINESS MACHINES CORPORATION U.S. GAAP TO OPERATING (Non-GAAP) RESULTS RECONCILIATION (Unaudited; Dollars in millions except per share amounts)



Year Ended December 31, 2021

Continuing Operations

Acquisition- Retirement- Tax Kyndryl-

Related Related Reform Related Operating

GAAP Adjustments ^(1) Adjustments ^(2) Impacts Impacts ^(4) (Non-GAAP)

Gross Profit $31,486 $719 $- $- $ - $ 32,205

Gross Profit Margin 54.9 % 1.3 Pts - Pts - Pts - Pts 56.2 %

S,G&A 18,745 (1,160) - - (8) 17,577

Other (Income) & Expense 873 (2) (1,282) - 126 (285)

Total Expense & Other (Income) 26,649 (1,162) (1,282) - 118 24,324

Pre-tax Income from Continuing 4,837 1,881 1,282 - (118) 7,881 Operations

Pre-tax Income Margin from 8.4 % 3.3 Pts 2.2 Pts - Pts (0.2) Pts 13.7 %Continuing Operations

Provision for/(Benefit from) Income 124 457 251 (89) (37) 706 Taxes ^(3)

Effective Tax Rate 2.6 % 5.2 Pts 2.8 Pts (1.1) Pts (0.4) Pts 9.0 %

Income from Continuing Operations 4,712 1,424 1,031 89 (81) 7,174

Income Margin from Continuing 8.2 % 2.5 Pts 1.8 Pts 0.2 Pts (0.1) Pts 12.5 %Operations

Diluted Earnings/(Loss) Per Share: $5.21 $1.57 $1.14 $0.10 $ (0.09) $ 7.93 Continuing Operations





Year Ended December 31, 2020

Continuing Operations

Acquisition- Retirement- Tax Kyndryl-

Related Related Reform Related Operating

GAAP Adjustments ^(1) Adjustments ^(2) Impacts Impacts ^(4) (Non-GAAP)

Gross Profit $30,865 $726 $- $- $ - $ 31,591

Gross Profit Margin 55.9 % 1.3 Pts - Pts - Pts - Pts 57.3 %

S,G&A 20,561 (1,117) - - - 19,445

Other (Income) & Expense 802 (2) (1,073) - - (273)

Total Expense & Other (Income) 28,293 (1,119) (1,073) - - 26,101

Pre-tax Income from Continuing 2,572 1,845 1,073 - - 5,490 Operations

Pre-tax Income Margin from 4.7 % 3.3 Pts 1.9 Pts - Pts - Pts 9.9 %Continuing Operations

Provision for/(Benefit from) Income (1,360) 411 208 110 - (630) Taxes ^(3)

Effective Tax Rate (52.9) % 25.3 Pts 14.1 Pts 2.0 Pts - Pts (11.5) %

Income from Continuing Operations 3,932 1,434 864 (110) - 6,120

Income Margin from Continuing 7.1 % 2.6 Pts 1.6 Pts (0.2) Pts - Pts 11.1 %Operations

Diluted Earnings/(Loss) Per Share: $4.38 $1.60 $0.96 $(0.12) $ - $ 6.82 Continuing Operations

____________________

Includes amortization of purchased intangible assets, in process R&D,(1) transaction costs, applicable restructuring and related expenses, tax charges related to acquisition integration and pre-closing charges, such as financing costs.

Includes amortization of prior service costs, interest cost, expected return on(2) plan assets, amortized actuarial gains/losses, the impacts of any plan curtailments/ settlements and pension insolvency costs and other costs.

Tax impact on operating (non-GAAP) pre-tax income from continuing operations is calculated under the same accounting principles applied to the As Reported(3) pre-tax income under ASC 740, which employs an annual effective tax rate method to the results.

(4) Primarily relates to fair value changes in shares of Kyndryl common stock that were retained by IBM, employee awards, and separation related tax impacts.

INTERNATIONAL BUSINESS MACHINES CORPORATION U.S. GAAP TO OPERATING (Non-GAAP) RESULTS RECONCILIATION (Unaudited; Dollars in billions)



Year Ended

IBM post-separation baseline Free Cash Flow Reconciliation December 31, 2021



Consolidated Net Cash from Operations per GAAP $12.8

Less: change in Financing receivables 3.9

Capital Expenditures, net (2.4)

Consolidated Free Cash Flow 6.5

Less: Kyndryl charges and pre-separation activity* (1.4) *

IBM post-separation baseline Free Cash Flow 7.9

____________________

* Includes Kyndryl portion of cash impacts incurred in the period related to structural actions initiated in 4Q20 and separation related costs. Kyndryl's estimated free cash flow was deemed immaterial.

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SOURCE IBM