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Exhibit 13

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6Management Discussion

International Business Machines Corporation and Subsidiary Companies

OVERVIEW

The financial section of the International Business Machines Corporation (IBM or the company) 2022 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

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Operating (non-GAAP) Earnings

In an effort to provide better transparency into the operational results of the business, supplementally, management separates business results into operating and non-operating categories. Operating earnings from continuing operations is a non-GAAP measure that excludes the effects of certain acquisition-related charges, intangible asset amortization, expense resulting from basis differences on equity method investments, retirement-related costs, 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, audit adjustments that affect the recorded one-time charge. Management characterizes direct and incremental charges incurred related to the Kyndryl separation as non-operating given their unique and non-recurring nature. These charges primarily relate to any net gains or losses on the Kyndryl common stock and the related cash-settled swap with a third-party financial institution, which are recorded in other (income) and expense in the Consolidated Income Statement. 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. All other spending for acquired companies is included in both earnings from continuing operations and in operating (non-GAAP) earnings. For retirement-related costs, management characterizes certain items as operating and others as non-operating, consistent with GAAP. We include defined benefit plan and nonpension postretirement benefit plan service costs, multi-employer plan costs and the cost of defined contribution plans in operating earnings. Non-operating retirement-related costs include defined benefit plan and nonpension postretirement benefit plan amortization of prior service costs, interest cost, expected return on plan assets, amortized actuarial gains/losses, the impacts of any plan curtailments/settlements including the one-time, non-cash, pre-tax settlement charge of $5.9 billion ($4.4 billion, net of tax) in the third quarter of 2022 and pension insolvency costs and other costs. Non-operating retirement-related costs are primarily related to changes in pension plan assets and liabilities which are tied to financial market performance, and we consider these costs to be outside of the operational performance of the business.

Overall, management believes that supplementally providing investors with a view of operating earnings as described above provides increased transparency and clarity into both the operational results of the business and the performance of our pension plans; improves visibility to management decisions and their impacts on operational performance; enables better comparison to peer companies; and allows us to provide a long-term strategic view of the business going forward. In addition, these non-GAAP measures provide a perspective consistent with areas of interest we routinely receive from investors and analysts. Our reportable segment financial results reflect pre-tax operating earnings from continuing operations, consistent with our management and measurement system.

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 2022 Form 10-K filed on February 28, 2023.

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8Management Discussion

International Business Machines Corporation and Subsidiary Companies

MANAGEMENT DISCUSSION SNAPSHOT

NM–Not meaningful

The following table provides the company’s operating (non-GAAP) earnings for 2022 and 2021. See page 29 for additional information.

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

NM–Not meaningful

Macroeconomic Environment

Our business profile positions us well in challenging times. Our diversification across geographies, industries, clients and business mix provides some stability in revenue, profit and cash generation.

Throughout 2022, we experienced escalating labor and component costs and a strong U.S. dollar. While those dynamics have put pressure on our margin profile, we are seeing progress in the actions we have taken to mitigate the impacts of these higher costs. Consulting, which makes up well over half of IBM’s workforce, is most impacted by the labor cost inflation. We have begun to see improved utilization and priced margin improvements year over year, and our acquisitions have become more accretive, all of which will benefit our margin profile going forward. Our Consulting pre-tax margin of 8.8 percent increased 0.7 points in 2022 versus the prior year and improved 3.2 points in the second half of 2022 compared to the first half reflecting the benefit of these actions. Additionally, across all of our product-based businesses, we have executed price increases above our historical level of increases to be more reflective of the labor and component costs we are incurring due to the inflationary environment. This includes price increases in our maintenance and support agreements for our hardware and software portfolios. Additionally, despite the many global supply chain disruptions throughout 2022, our supply chain has demonstrated resiliency and the ability to proactively respond to potential disruptions in order to meet our clients’ needs. The strengthening of the U.S. dollar impacted our reported revenue and gross profit dollars in 2022. We execute hedging programs which defer but do not eliminate the impact of currency. The gains from these hedging programs are reflected primarily in other income and expense. With the rate and magnitude of

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movements, and because we do not hedge all currencies, this did have a currency impact to our overall profit and cash flows in 2022. See “Currency Rate Fluctuations,” for additional information.

The geopolitical situation in Eastern Europe intensified in February 2022, with Russia’s invasion of Ukraine. The safety and security of our employees and their families in the impacted regions has been our primary focus. The sanctions placed on numerous Russian entities, specific Russian-controlled entities, as well as Belarus and other measures that have been and continue to be imposed as a result of the war have increased the level of economic and political uncertainty. In the second quarter of 2022, we made the decision to carry out an orderly wind-down of our Russian operations. As such, we assessed certain accounting-related matters that generally require consideration of current information reasonably available to us and forecasted financial data in the context of unknown future impacts to IBM that resulted in certain immaterial asset and restructuring charges in 2022. These charges, together with the year-to-year lost business due to the wind-down, impacted our pre-tax income by approximately $230 million for the year ended December 31, 2022. The long-term impacts of the Russian war in Ukraine remain uncertain; however, we do not expect a significant impact on the company’s future results of operations or financial position. Historically, Russia, Ukraine and Belarus made up less than one percent of the company’s full-year revenue. While the revenue impact is not material to total consolidated IBM revenue, the business in Russia has historically been high margin and therefore, is a more significant headwind to our profit and cash flows.

Financial Performance Summary

In 2022, we reported $60.5 billion in revenue, income from continuing operations of $1.8 billion, including a one-time, non-cash, pre-tax pension settlement charge of $5.9 billion ($4.4 billion net of tax), and operating (non-GAAP) earnings of $8.3 billion, which excludes the impact of the settlement charge. The pension settlement charge was the result of the transfer to Insurers of a portion of our U.S. benefit pension obligations, an action we took to further reduce the risk profile of our retirement-related plans. Diluted earnings per share from continuing operations was $1.95 as reported, including an impact of $4.84 from the pension settlement charge, and diluted earnings per share was $9.13 on an operating (non-GAAP) basis. On a consolidated basis, we generated $10.4 billion in cash from operations and $9.3 billion in free cash flow and returned $5.9 billion to shareholders in dividends. We are pleased with the fundamentals of our business and the progress we have made in executing our strategy. Our 2022 performance demonstrates that we are now a higher-growth, higher-value company with the ability to generate strong cash from operations and a growing free cash flow.

Total revenue grew 5.5 percent as reported and 12 percent adjusted for currency compared to the prior year, including approximately 4 points from incremental sales to Kyndryl. Over 70 percent of current-year revenue was in our growth areas of Software and Consulting and approximately half of our revenue is recurring. Software revenue increased 6.9 percent as reported and 12 percent adjusted for currency, including approximately 6 points of growth from incremental sales to Kyndryl. There was continued momentum in our recurring revenue stream in both Hybrid Platform & Solutions and Transaction Processing. Hybrid Platform & Solutions grew 4.9 percent as reported and 9 percent adjusted for currency, led by strong double-digit revenue growth in Red Hat. Transaction Processing increased 12.2 percent as reported and 19 percent adjusted for currency, including approximately 19 points of growth from incremental sales to Kyndryl. Consulting revenue increased 7.1 percent as reported and 15 percent adjusted for currency as we help clients with their digital transformations. Infrastructure revenue increased 7.8 percent year to year as reported and 14 percent adjusted for currency, reflecting strong double-digit growth in Hybrid Infrastructure driven by our z16 program, which launched in the second quarter of 2022. The Infrastructure revenue performance also includes approximately 6 points of growth from incremental sales to Kyndryl. Across the segments, total hybrid cloud revenue of $22.4 billion in 2022 grew 11 percent as reported and 17 percent adjusted for currency, and represents 37 percent of IBM’s revenue.

From a geographic perspective, Americas revenue grew 9.7 percent year to year as reported (10 percent adjusted for currency). Europe/Middle East/Africa (EMEA) increased 2.9 percent (14 percent adjusted for currency). Asia Pacific declined 0.7 percent as reported, but grew 11 percent adjusted for currency.

The gross margin of 54.0 percent decreased 0.9 points year to year, however, gross profit dollars increased 3.8 percent compared to the prior year. Overall, gross margin was impacted by the investments we are making to drive our hybrid cloud and artificial intelligence (AI) strategy, higher labor and component costs and the impacts of currency, while the mitigating hedging benefits and operational productivity and efficiency we have realized are primarily reflected in expense. The operating (non-GAAP) gross margin of 55.1 percent decreased 1.0 points versus the prior year.

Total expense and other (income) increased 18.3 percent in 2022 versus the prior year primarily driven by the pension settlement charge of $5.9 billion, higher spending reflecting continued investment in our offerings, technical talent and ecosystem, and year-to-year impacts related to Kyndryl retained shares, partially offset by the effects of currency and benefits from the actions taken to streamline our operations and go-to-market model. Total operating (non-GAAP) expense and other (income) decreased 3.2 percent year to year, driven primarily by the effects of currency and benefits from the actions taken to streamline our operations and go-to-market model, partially offset by higher spending to drive our hybrid cloud and AI strategy.

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10Management Discussion

International Business Machines Corporation and Subsidiary Companies

Pre-tax income from continuing operations of $1.2 billion decreased 76.1 percent and the pre-tax margin was 1.9 percent, a decrease of 6.5 points versus 2021. These declines were primarily driven by the $5.9 billion pension settlement charge. The continuing operations effective tax rate for 2022 was (54.2) percent compared to 2.6 percent in 2021. The current-year effective tax rate was primarily driven by the pension settlement charge. The prior-year effective tax rate was primarily driven by tax benefits related to audit settlements in multiple jurisdictions. Net income from continuing operations of $1.8 billion decreased 62.2 percent and the net income from continuing operations margin was 2.9 percent, down 5.3 points year to year. Operating (non-GAAP) pre-tax income from continuing operations of $9.8 billion increased 24.6 percent year to year and the operating (non-GAAP) pre-tax margin from continuing operations increased 2.5 points to 16.2 percent. These profit dynamics reflect our portfolio shift toward higher value, driven by Software and Consulting. Our pre-tax profit includes the contribution from incremental sales to Kyndryl and the negative impacts of currency primarily due to the strengthening of the U.S. dollar. The operating (non-GAAP) effective tax rate for 2022 was 15.2 percent compared to 9.0 percent in 2021. The lower prior-year operating (non-GAAP) effective tax rate was primarily driven by tax benefits related to audit settlements in multiple jurisdictions. Operating (non-GAAP) income from continuing operations of $8.3 billion increased 16.0 percent and the operating (non-GAAP) income margin from continuing operations of 13.8 percent was up 1.2 points year to year.  

Diluted earnings per share from continuing operations of $1.95 in 2022 decreased 62.6 percent, which included an impact of $4.84 from the pension settlement charge. Operating (non-GAAP) diluted earnings per share of $9.13 increased 15.1 percent versus 2021.

At December 31, 2022, the balance sheet remained strong with the flexibility to support and invest in the business. Cash and cash equivalents, restricted cash and marketable securities at year end were $8.8 billion, an increase of $1.3 billion from December 31, 2021. During 2022, we continued to invest in acquisitions and provide a solid and modestly growing dividend to shareholders. Total debt of $50.9 billion at December 31, 2022 decreased $0.8 billion driven by currency impacts, partially offset by net debt issuances.  

Total assets decreased $4.8 billion ($1.3 billion adjusted for currency) from December 31, 2021 primarily driven by decreases in prepaid pension assets, intangible assets, deferred taxes, and prepaid expenses and other; partially offset by an increase in cash and restricted cash. Total liabilities decreased $7.8 billion ($4.3 billion adjusted for currency) from December 31, 2021 primarily driven by a decrease in retirement and postretirement benefit obligations. Total equity of $22.0 billion increased $3.0 billion from December 31, 2021 as a result of a decrease in accumulated other comprehensive losses, 2022 net income and common stock issuances, partially offset by dividends paid.

Our cash flows from operating, investing and financing activities, as reflected in the Consolidated Statement of Cash Flows, include the cash flows of discontinued operations. On a consolidated basis, cash provided by operating activities was $10.4 billion in 2022, a decrease of $2.4 billion compared to 2021, driven by financing receivables. Net cash used in investing activities of $4.2 billion decreased $1.8 billion compared to the prior year and net cash used in financing activities of $5.0 billion decreased $8.4 billion compared to 2021.

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DESCRIPTION OF BUSINESS

Please refer to IBM’s Annual Report on Form 10-K filed with the SEC on February 28, 2023, 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

IBM continues to execute its Hybrid Cloud and AI strategy, the two most transformative technologies for business today. Over the last couple of years, we have driven deep change within the company to deliver this platform-centric strategy. We have continually delivered innovation in our software and infrastructure offerings and scaled and enhanced the capabilities of our consulting practices. We have expanded our partner ecosystem, simplified our go-to-market model, and pursued strategic acquisitions and divestitures.

Our strategy aligns with the needs of our clients

Our clients are accelerating their digital transformations as they face economic uncertainties, skill shortages, supply chain instability, security breaches and heightened sustainability goals. These market realities confirm the following convictions that have shaped our strategy:

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IBM’s differentiated value proposition

Our differentiated value proposition encompasses our integrated competencies across software, consulting and infrastructure, leveraging our open hybrid cloud platform. We draw upon five core capabilities to address our clients’ hybrid cloud and AI needs: (1) build and modernize for the hybrid cloud environments that operate with speed, consistency and agility, (2) create AI-infused, data-driven business insights regardless of where data lives, while maintaining enterprise grade data governance, privacy and trust, (3) automate the end-to-end enterprise processes for efficacy with AI-driven decision-making, (4) secure everywhere, with consistent governance and compliance across environments, and (5) bring it together by transforming our clients’ businesses and processes into sustainable best-in-class industry practices.

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12Management Discussion

International Business Machines Corporation and Subsidiary Companies

Our full technology stack helps us meet clients where they are in their digital transformations, and we offer the consulting expertise to help guide and implement the best solutions for that journey. Our rapidly growing ecosystem of cloud, independent software vendors (ISVs), hardware, network and services partners enhance the client experience and drive the value and innovation derived from IBM technologies. Our focus on hybrid cloud accelerates our open and collaborative approach to partnership.

Our hybrid cloud platform strategy drives sustained growth and financial performance: on average, every $1 of platform spend results in $3 to $5 of software revenue, $6 to $8 of services and $1 to $2 of enterprise infrastructure. The hybrid cloud opportunity represents over a $1 trillion market across software, consulting and infrastructure.

IBM’s integrated value is amplified by ensuring our existing businesses all advance the hybrid cloud value proposition to our clients. We strategically embed the Red Hat platform with our offerings: (1) IBM Software’s growing portfolio runs on Red Hat OpenShift Container Platform (OCP), (2) IBM Infrastructure solutions are optimized hybrid cloud deployments for mission-critical workloads, and (3) IBM Consulting is the leading market system integrator with hybrid cloud and Red Hat expertise to help clients transform their business and technology.

IBM Software extends the value of our hybrid cloud platform with four critical capabilities: (1) “Modernize” for agility and speed from legacy to hybrid cloud architecture, (2) “Data-driven”, predicting outcomes from distributed data and applying AI to empower predictive decision-making, real-time digital intelligence and sustainable operations, (3) “Automate” at scale to make experiences and tasks more productive and impactful, and (4) “Secure” all touchpoints, all the time, employing real-time threat insights, automated detection and orchestrated response. Red Hat, reported in our Software segment, delivers the leading open-source hybrid cloud platform and enables clients to build, secure, operate and manage any application, anywhere, from on-premises environments to multiple clouds and the edge. One hundred percent of commercial banks, telecommunication, media and technology companies in the Fortune Global 500 rely on Red Hat. Red Hat collaborates with a broad ecosystem of partners and communities comprised of millions of developers. These capabilities allow our clients to “write once, deploy anywhere” for cloud native application development and modernization. We embed the Red Hat platform with our offerings, to advance the hybrid cloud value proposition to our clients.

IBM Consulting delivers business transformation for our clients through hybrid cloud and AI technologies. Our 160,000+ professionals together with our open ecosystem of partners help clients advance digital transformation, build open hybrid cloud architectures, orchestrate critical applications across environments, and optimize key workflows and business processes. IBM Consulting drives transformative projects across different industries with its IBM Garage method. IBM Consulting has dedicated talent in practices to support IBM technology and continues to invest in the industry’s largest Red Hat practice to make hybrid cloud a foundation for innovation and business growth, enabling clients to get more value from investments. IBM Consulting has deepened its hybrid cloud consulting offerings and scaled cloud capability to 40,000+ cloud platform certifications, while accelerating the transformation journeys for its clients in 2022. IBM Consulting also captures growth by investing in practices with a wide ecosystem of partners, including AWS, Azure and major ISVs.

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IBM Infrastructure solutions provide unmatched performance, security and resiliency for mission-critical, trusted, or regulated applications running in a hybrid environment. We drive customer adoption and leading DevOps experience for IBM hybrid cloud at scale, deeply integrating with Red Hat and IBM Software offerings. We delivered major breakthroughs in 2022, with next generation z16, Power10 servers and new storage offerings. Forty-five of the world’s top 50 banks are running on IBM zSystems, which excel at transaction processing with integrated AI and unmatched throughput, availability and advanced security for the era of quantum computing. Power, Storage, and IBM Cloud help to accelerate enterprise digital transformation with secure, scalable and resilient solutions built for hybrid cloud agility and application modernization. Infrastructure Support provides lifecycle services and support to optimize and maintain hybrid cloud environments, with visibility and automated diagnosis and remediation.

IBM Research continues to help define the evolution of computing. In 2022, our focused research agenda provided a pipeline of innovations, including automated container-driven environments, AI models, security management, sustainability and many others. Our published Technology Atlas illustrates strategic goals and detailed plans for the next three years of research. We continued to develop technology to harness the potential of the paradigm-shifting inflection point in AI represented by foundation models. We outlined a pioneering vision for quantum-centric supercomputing and announced new breakthrough advancements in quantum software and hardware, including the 433 qubit Osprey processor. We continue to monetize our unparalleled IP and to leverage our world-class skills in semiconductors to innovate in hardware and collaborate with industry-leading partners.

In addition to our organic investments in R&D, our inorganic investments foster our strategy by adding critical competencies to our software and consulting businesses. Our acquisitions of Databand.ai, Randori and Envizi expanded our growing portfolio of AI-driven software, bringing capabilities to help our clients gain better observability into their data, protect against cybersecurity breaches across their various exposure points and manage their environmental performance. We expanded our consulting expertise in data, AI, digital, and cloud through the acquisitions of Sentaca, Neudesic, Dialexa and Octo. These investments also facilitate growth by deepening our industry expertise and consulting capabilities with government and telco clients. In 2022, IBM successfully completed eight acquisitions in total.

Expanding client engagements and our ecosystem

During 2022, we helped clients harness the power of hybrid cloud and AI technologies to address current challenges and opportunities. We invested in experiential selling, client engineering, customer success management, expert lab services and deep technical expertise to show clients the value of technology as a fundamental source of competitive advantage. We engaged clients in digital transformations using automation and security and other solutions to increase growth, productivity, resilience and responsiveness. We introduced a product-led growth initiative under our new global “Let’s create” campaign, illustrating how technology can be brought to life to solve the biggest challenges in business.

When IBM and our partners work together to solve clients’ most complex business challenges, everyone wins. We opened access to software technology on the AWS marketplace to provide flexibility through an open ecosystem. IBM customers can purchase 30 IBM products through the Azure Marketplace and deploy these IBM technologies on Azure. We gave partners access to the same training, and deep technical and product expertise as IBMers to foster a consistent client experience. We deepened our partnership with cloud hyperscalers, large independent software vendors and global system integrators, making it easier for partners and clients to embrace hybrid cloud. Our commitment to the IBM ecosystem gives partners and clients the flexibility and market access they need to run workloads seamlessly in any environment.

In 2022, IBM’s execution and innovation of our hybrid cloud and AI strategy improved the trajectory of our business. We see the core convictions that have shaped our strategy continue to resonate in the market. As we enter 2023, we will continue to advance our R&D innovation, inorganic investment and fast-growing ecosystem, positioning IBM as a leader in a world where hybrid cloud and AI are central to enterprise success.

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14Management Discussion

International Business Machines Corporation and Subsidiary Companies

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.

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.

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 and the world’s most accurate weather forecast data.

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 and services for threat management, data security, and identity and access management.

Transaction Processing: the software that 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 industry expertise and market-leading capabilities in business transformation and technology implementation. Consulting designs, builds and operates technology and business processes based on open, hybrid cloud architectures with IBM technology and ecosystem partner technologies. Consulting uses its IBM Garage method 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 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 across cloud platforms, including Amazon, Microsoft and IBM, and strategies to transform the enterprise experience and enable innovation, including application modernization for hybrid cloud with Red Hat OpenShift.

Application Operations: focuses on application and cloud platform services required to operationalize and run cloud platforms. It facilitates clients’ efforts to manage, optimize and orchestrate application and data workloads across platforms and environments through both custom applications and ISV packages.

Infrastructure

Infrastructure provides trusted, agile and secure solutions for hybrid cloud and is the foundation of the hybrid cloud stack. Infrastructure is optimized for infusing AI into mission-critical transactions and tightly integrated with IBM Software including Red Hat for accelerated hybrid cloud benefits.

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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 zSystems and Distributed Infrastructure.

zSystems: the premier transaction processing platform with leading security, resilience and scale, highly optimized for mission-critical, high-volume transaction workloads. It includes zSystems and LinuxONE, with a range of high-performance systems designed to address computing capacity, security and performance needs of businesses. zSystems operating system software environments include z/OS, a security-rich, high-performance enterprise operating system, as well as Linux and other platforms that are enabled with enterprise AI and are hybrid cloud ready.

Distributed Infrastructure: the portfolio is uniquely positioned for hybrid cloud, meeting client demands for scalability, security and capacity. Distributed Infrastructure includes Power, Storage and IBM Cloud Infrastructure-as-a-Service (IaaS). Power consists of high-performance servers, designed and engineered for big data and AI-enabled workloads and are 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 an open architecture and is specifically designed for regulated industries with leading security and compliance capabilities. IBM Cloud IaaS offers flexible computing options across x86, Power, Storage and zSystems as a service to meet client workload needs.

Hybrid Infrastructure also includes remanufacturing and remarketing of used equipment with a focus on sustainable recovery services.

Infrastructure Support: works across hybrid cloud environments providing a uniquely integrated services experience for clients. Infrastructure Support delivers comprehensive, proactive and AI-enabled services to maintain and improve the availability and value of clients’ IT infrastructure (hardware and software) both on-premises and in the cloud. These offerings include maintenance for IBM products and other technology platforms, as well as open-source and cross-vendor software and solution support.

Financing

Financing facilitates IBM clients’ acquisition of information technology systems, 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 up to seven years, and internal loan financing in support of IBM IaaS service arrangements. Assets financed are primarily new and used IT hardware, software and services where we have expertise.

Commercial Financing: short-term working capital financing to distributors and resellers primarily of IBM products. The company has an existing agreement with a third-party investor to sell IBM short-term commercial financing receivables on a revolving basis.

Human Capital

Employees and Related Workforce

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As a globally integrated enterprise, IBM operates in more than 175 countries and is continuing to shift our business to the higher value segments of enterprise IT. 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.

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16Management Discussion

International Business Machines Corporation and Subsidiary Companies

Talent and Culture

We attract, develop, engage and retain talent in a dynamic and competitive environment. IBM provides a compelling employee value proposition, offering professionals competitive compensation and attractive career opportunities in the development and delivery of innovative technologies for clients whose businesses the world relies on. Our value proposition and talent strategy help to retain talent. During 2022, voluntary attrition decreased consistent with the overall labor market.

We are continuously transforming and developing our talent, both through learning and hiring. In 2022, we added skills in consulting and key technical areas and invested in scaling our capacity in strategically important markets. We are expanding our ability to deliver best-in-class customer experiences by investing in talent to facilitate garages, client engineering centers and customer success management. We continue to invest in upskilling and reskilling our workforce. Our digital learning and career platforms are examples of this commitment to provide employees access to the resources needed to build strategic skills and grow their careers. These digital platforms utilize Watson AI to generate personalized recommendations for employees and include peer-to-peer collaboration and internal social sharing functionality. Helping employees learn and apply new skills is important for retention and critical to our ability to transform and evolve.

Employee engagement is an indicator of employee well-being and their dedication to the company’s mission, purpose and values. We conduct an annual engagement survey to assess the health of the company’s culture and employee sentiment. More than 185,000 employees globally participated in the 2022 engagement survey, providing actionable data-driven insights to managers and leaders around factors such as workplace experience, inclusion, pride and propensity to recommend IBM as an employer. More than eight out of ten employees that participated in the survey responded that they felt engaged at work, a testament to our industry-leading talent practices.

Diversity and Inclusion

IBM has a long, proud history as a pioneer in diversity and inclusion. We work to ensure employees from diverse backgrounds are engaged, can be their authentic selves, build skills and grow their careers. Nearly nine out of ten employees feel empowered to be their authentic selves at work. We believe a diverse and inclusive workplace leads to greater innovation, agility, performance and engagement, enabling both business growth and societal impact. Our focus on creating a diverse and inclusive workplace has led to increased levels of inclusion for women, Black and Hispanic employees. Women make up more than one-third of our workforce. In addition, executive representation of women globally, and Hispanic and Black executives in the U.S. improved by 0.3 points, 0.4 points and 0.6 points, respectively, in 2022. Our executive compensation program metrics include a diversity modifier to reinforce our focus and continued accountability for improving the diverse representation of our workforce. Globally, our executives are measured on the improvement of diversity and inclusion for women. In the U.S., executives are also measured on improvement of diversity and inclusion for U.S. underrepresented minorities.

We believe in pay equity whereby employees should be compensated fairly for their work and performance, regardless of their gender, race or other personal characteristics. We have a long-standing practice of maintaining pay equity, which has been part of our global policy since 1935 and we remain firmly committed to equal pay for equal work. To this end, we conduct statistical pay equity assessments across all countries with IBM employees. We also empower employees to understand their pay by providing comprehensive compensation education. Employees can also directly access information about their pay, including a comparison against their market pay range, through the HR system or their direct managers.

Health, Safety and Well-Being

IBM has a long-standing commitment to the health, safety and well-being of our employees. This commitment is embodied in our health and safety policy which is implemented through our externally certified Health and Safety Management System (HSMS). Objectives of our HSMS include providing a safe and healthy workplace, preventing work-related injuries and illnesses, enhancing worker health and productivity and providing resources to fulfill these commitments.

We feel 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 when it comes to health, safety and well-being. We strive to provide programs that are culturally relevant and inclusive to address the needs of a diverse employee population. We have taken our experience from the pandemic and created an environment to support our employees’ needs on flexibility. Access to well-being services and resources are offered through onsite activities, partnerships with external vendors, amongst other methods of delivery.

We offer a wide range of evidence-based health promotion services and programs, covering all aspects of employee well-being: physical, mental and financial health. In 2022, programs were focused on cardiovascular, musculoskeletal and mental health, addressing some of the medical issues that were exacerbated during the COVID-19 pandemic. All IBMers worldwide have confidential, 24/7 access to critical mental health support through employee assistance programs and supplemental resources. Other programs include additional paid time off for working parents and caregivers experiencing life events, training for employees on resilience, as well as financial counseling offerings. Employees are supported with around-the-clock access to IBM’s world-class Health and Safety team, education, timely updates and forums to ask questions and raise concerns.

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YEAR IN REVIEW

Results of Continuing Operations

As discussed in the “Organization of Information” section, with the completion of the separation on November 3, 2021, the results of Kyndryl are reported as discontinued operations and as such, have been excluded from continuing operations and segment results for all periods presented.

Segment Details

In the first quarter of 2022, we realigned our management structure to reflect the planned divestiture of our healthcare software assets which was completed in the second quarter of 2022. This change impacted our Software segment and Other–divested businesses category, but did not impact our Consolidated Financial Statements. Prior-year results have been recast to reflect this change. The table below presents each reportable segment’s revenue and gross margin results, followed by an analysis of the 2022 versus 2021 reportable segment results.

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Software

* Recast to reflect segment change.

Software revenue of $25,037 million increased 6.9 percent as reported (12 percent adjusted for currency) in 2022 compared to the prior year, driven by growth in both Hybrid Platform & Solutions and Transaction Processing. This includes incremental sales to Kyndryl which contributed approximately 6 points to Software revenue growth. Software concluded 2022 with seasonally strong transactional performance in the fourth quarter and a solid and growing recurring revenue base. Within Software, hybrid cloud revenue of $9,321 million grew 11 percent as reported (16 percent adjusted for currency) year to year. Our platform-based approach to hybrid cloud and AI is resonating with clients. We have modernized and optimized our software capabilities to run on this platform across Automation, Data & AI and Security for the platform.

Hybrid Platform & Solutions revenue of $17,866 million increased 4.9 percent as reported (9 percent adjusted for currency) in 2022 compared to the prior year. Incremental sales to Kyndryl contributed approximately 1 point to revenue growth. Within Hybrid Platform & Solutions, we had revenue growth across all of our business areas. Red Hat revenue increased 12.6 percent as reported (17 percent

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adjusted for currency) led by double-digit growth in OpenShift and Ansible, both of which gained market share in 2022. OpenShift had $1.0 billion in annual recurring revenue exiting 2022. Revenue in RHEL also had strong growth and gained share in 2022 compared to the prior year. Red Hat continues to be a leader in open-source technology and its hybrid cloud offerings continue to transform enterprise IT. Automation revenue increased 2.1 percent as reported (7 percent adjusted for currency), led by Integration and AIOps and Management as clients look to automate business workflows and improve applications. Data & AI revenue increased 1.5 percent as reported (6 percent adjusted for currency), reflecting demand in areas such as Data Management, Data Fabric, Information Exchange, and Asset and Supply Chain Management. In addition, our offerings such as Envizi and Environmental Intelligence Suite are resonating with clients as they continue to prioritize sustainability efforts. Security revenue increased 2.2 percent as reported (7 percent adjusted for currency), led by strength across our offerings such as Threat Management, Data Security and Identity. We continue to help clients detect, prevent and respond to security incidents as they adopt zero-trust security strategies.

Across Hybrid Platform & Solutions, our annual recurring revenue (ARR) was $13.3 billion exiting 2022. 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. ARR is calculated by estimating the current quarter’s recurring, committed value for certain types of active contracts as of the period-end date and then multiplying that value by four. This value is based on each arrangement’s contract value and start date, mitigating fluctuations during the contract term, and includes the following consumption models: (1) software subscription agreements, including committed term licenses, (2) as-a-service arrangements such as SaaS and PaaS, (3) maintenance and support contracts, and (4) security managed services contracts. ARR should be viewed independently of revenue as this performance metric and its inputs may not represent the amount of revenue recognized in the period and therefore is not intended to represent current period revenue or revenue that will be recognized in future periods. ARR is calculated at estimated constant currency.

Transaction Processing revenue of $7,171 million increased 12.2 percent as reported (19 percent adjusted for currency) in 2022 compared to the prior year. This includes incremental sales to Kyndryl which contributed approximately 19 points of revenue growth in 2022. Client demand for this mission-critical software has followed increases in zSystems installed capacity over the last two product cycles and consistently strong renewal rates during 2022 are evidence of the importance of this software in a hybrid cloud environment.

* Recast to reflect segment change.

The Software gross profit margin of 79.6 percent in 2022 was flat compared to the prior year. Pre-tax income of $6,162 million increased 27.1 percent compared to the prior year with a pre-tax margin expansion of 3.9 points to 24.6 percent. The improvements year to year in pre-tax income and pre-tax margin were driven primarily by the higher gross profit contribution from our strong revenue growth including the Kyndryl commercial relationship, which reflects the demand for our products, as well as portfolio mix.

Consulting

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Consulting revenue of $19,107 million increased 7.1 percent as reported (15 percent adjusted for currency) in 2022 compared to the prior year, with strong growth across all three business areas. Clients are leveraging IBM’s hybrid cloud leadership and deep industry expertise to navigate the complexity of their digital transformation journeys. Strong demand for our Consulting offerings led to signings growth of 6.9 percent as reported (14 percent adjusted for currency) in 2022. We had our best quarterly book-to-bill for 2022 in the fourth quarter and had a book-to-bill ratio of 1.1 for the year. 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. Clients are partnering with IBM Consulting as they decide which applications to modernize and how to migrate these applications across hybrid, multi-cloud environments. Within Consulting, hybrid cloud revenue of $9,019 million grew 15 percent as reported (23 percent adjusted for currency) year to year with both our Red Hat practice and strategic partnerships contributing to the growth.

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Business Transformation revenue of $8,834 million increased 6.6 percent as reported (14 percent adjusted for currency) compared to the prior year. We had strong demand for our Business Transformation solutions, with growth across our service line offerings such as data and client experience transformations, supply chain and finance optimizations. Our partnerships with key ISVs including SAP, Salesforce and Adobe enabled us to help clients transform their critical workloads at scale and improve the way they engage with their customers.

Technology Consulting revenue of $3,765 million increased 8.6 percent as reported (17 percent adjusted for currency), led by our cloud development and cloud modernization practices which architect and implement clients’ cloud platforms and strategies. Our Red Hat engagements as well as strategic hyperscaler partnerships also contributed to the year-to-year revenue growth.

Application Operations revenue of $6,508 million increased 6.8 percent as reported (15 percent adjusted for currency). We help clients optimize their operations and reduce costs by taking over the management of applications in hybrid and multi-cloud environments. Our incumbency and understanding of clients’ applications are key differentiators which helped to contribute to this growth.

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The Consulting gross profit margin decreased 2.5 points to 25.5 percent compared to the prior year. Pre-tax income of $1,677 million increased 15.7 percent compared to the prior year and the pre-tax margin increased 0.7 points to 8.8 percent. The decline in gross profit margin reflects labor cost inflation which put pressure on the margin profile in 2022, however, the gross profit margin improved 2.4 points in the second half of 2022 compared to the first half reflecting the benefit from pricing actions and productivity. The year-to-year improvement in pre-tax income and pre-tax margin reflects the benefits of productivity within our workforce, a more streamlined operating and go-to-market structure as well as our acquisitions which have become more accretive.

Consulting Signings

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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.

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Infrastructure

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Infrastructure revenue of $15,288 million increased 7.8 percent as reported (14 percent adjusted for currency) year to year driven by strong double-digit growth in Hybrid Infrastructure. Incremental sales to Kyndryl contributed approximately 6 points to the Infrastructure revenue growth. Within Infrastructure, hybrid cloud revenue of $3,895 million increased 7 percent as reported (11 percent adjusted for currency) year to year, driven by the product cycle dynamics of z16 and Storage in the current year.

Hybrid Infrastructure revenue of $9,451 million increased 15.7 percent as reported (21 percent adjusted for currency). Incremental sales to Kyndryl contributed approximately 6 points to the revenue growth. Within Hybrid Infrastructure, zSystems revenue grew 30.6 percent as reported (36 percent adjusted for currency) on a year-to-year basis, reflecting strong execution around our new z16 program. The z16 capabilities include cyber-resilient security, embedded AI at scale and cloud-native development for hybrid cloud. Clients are leveraging cyber-resiliency to comply with business regulations and proactively avoid outages in their operations. The new on-chip AI accelerator has been helping mitigate and detect fraud in credit card application processing. The z16 is also the industry’s first quantum-safe system, delivering 25 billion encrypted transactions per day for clients. In the third quarter of 2022, we also introduced our newest LinuxONE server, a highly scalable Linux and Kubernetes-based platform with capabilities to reduce clients’ energy consumption. IBM zSystems remains an enduring platform, now playing an important role in a hybrid cloud environment. Distributed Infrastructure revenue increased 6.6 percent as reported (12 percent adjusted for currency). This performance was led by strength in Power Systems with the extension of our Power10 innovation throughout the Power Systems product lines. The Power10 server platform is designed to deliver flexible and secure infrastructure for hybrid cloud environments. In addition, recent innovation within our Storage product lines included a refresh to our flash storage solutions which contributed to Storage performance in 2022.

Infrastructure Support revenue of $5,837 million decreased 3.1 percent as reported, but grew 3 percent adjusted for currency year to year. This includes incremental sales to Kyndryl which contributed approximately 6 points of revenue growth in 2022. Infrastructure Support performance in 2022 was impacted by client adoption of new hardware with the launch of the z16 program. In the first year of a new hardware cycle, product is under standard warranty which results in a cyclical decline in maintenance revenue.

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The Infrastructure gross profit margin decreased 2.6 points to 52.8 percent in 2022 compared to the prior year driven by Infrastructure Support. The gross profit margin decline in Infrastructure Support was primarily driven by portfolio mix. Hybrid Infrastructure profit margin reflected declines in zSystems and Distributed Infrastructure profit margins in line with product cycle dynamics, offset by product mix primarily toward zSystems. Pre-tax income of $2,262 million increased 11.7 percent, primarily driven by the revenue growth from the z16 product cycle and an increase in IP income year to year from a joint development and licensing agreement signed in the fourth quarter of 2022. The pre-tax margin increased 0.5 points year to year to 14.8 percent, primarily driven by portfolio mix.

Financing

See pages 40 through 42 for a discussion of Financing’s segment results.

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Geographic Revenue

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

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Total revenue of $60,530 million in 2022 increased 5.5 percent year to year as reported and 12 percent adjusted for currency, which includes approximately 4 points of revenue growth from incremental sales to Kyndryl.

Americas revenue increased 9.7 percent as reported and 10 percent adjusted for currency, which includes approximately 3 points of revenue growth from incremental sales to Kyndryl. Within North America, the U.S. increased 9.2 percent and Canada increased 3.3 percent as reported and 7 percent adjusted for currency. Latin America increased 18.4 percent as reported and 19 percent adjusted for currency. Within Latin America, Brazil revenue increased 17.6 percent as reported and 14 percent adjusted for currency.

EMEA revenue increased 2.9 percent as reported and 14 percent adjusted for currency, which includes approximately 5 points of revenue growth from incremental sales to Kyndryl. France, the UK and Italy increased 9.6 percent, 5.3 percent and 3.2 percent, respectively, as reported, and increased 22 percent, 17 percent and 15 percent, respectively, adjusted for currency. Germany decreased 4.7 percent as reported, but grew 6 percent adjusted for currency. The orderly wind-down of our Russian operations in the second quarter of 2022 negatively impacted the revenue growth rate in EMEA by 1.7 points as reported and 2 points adjusted for currency.

Asia Pacific revenue decreased 0.7 percent as reported, but grew 11 percent adjusted for currency, which includes approximately 5 points of revenue growth from incremental sales to Kyndryl. Japan revenue decreased 3.5 percent as reported, but grew 15 percent adjusted for currency. India increased 20.3 percent as reported and 28 percent adjusted for currency. Australia increased 7.3 percent as reported and 16 percent adjusted for currency. China decreased 22.7 percent as reported and 20 percent adjusted for currency, driven primarily by large transactions in the financial sector in the prior year related to our zSystems products.

Total Expense and Other (Income)

* Includes a one-time, non-cash pension settlement charge of $5.9 billion. See note V, “Retirement-Related Benefits,” for additional information.

NM–Not meaningful

Our expense dynamics in 2022 reflect our continued investment in innovation, skills and our ecosystem, both organically and through acquisitions, as we accelerate and execute our hybrid cloud and AI strategy. Our work to digitally transform our operations provides flexibility to continue to invest in innovation and in talent.

Total expense and other (income) increased 18.3 percent in 2022 versus the prior year primarily driven by the one-time, non-cash pension settlement charge of $5.9 billion, higher spending reflecting our continuing focus on our portfolio and investment in our offerings, technical talent and ecosystem, and year-to-year impacts related to Kyndryl retained shares, partially offset by the effects of currency and benefits from the actions taken to streamline operations and our go-to-market model.

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Total operating (non-GAAP) expense and other (income) decreased 3.2 percent year to year, driven primarily by the effects of currency and benefits from the actions taken to streamline operations and our go-to-market model, partially offset by higher spending reflecting our continuing focus on our portfolio and investment in our offerings, technical talent and ecosystem.

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

Selling, General and Administrative Expense

NM–Not meaningful

Total selling, general and administrative (SG&A) expense decreased 0.7 percent in 2022 versus 2021, driven primarily by the following factors:

Operating (non-GAAP) SG&A expense decreased 0.3 percent year to year primarily driven by the same factors.

Provisions for expected credit loss expense was $64 million in 2022 as compared to a benefit of $71 million in 2021. The year-to-year change was primarily driven by an increase in specific reserves in the current year compared to decreases in both general and specific reserves in the prior year. The prior-year decreases were primarily driven by improvement in customer credit quality and some emergence from bankruptcies as economies began to reopen after the global pandemic shutdowns. The receivables provision coverage was 2.4 percent at December 31, 2022, an increase of 30 basis points from December 31, 2021 driven by an increase in specific reserves and, to a lesser extent, a decrease in receivables.

Research, Development and Engineering Expense

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Research, development and engineering (RD&E) expense increased 1.2 percent in 2022 versus 2021, reflecting our continuing investment to deliver innovation in AI, hybrid cloud and emerging areas such as quantum. The year-to-year increase was primarily driven by higher spending (3 points), partially offset by the effects of currency (2 points).

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Intellectual Property and Custom Development Income