INTERNATIONAL BUSINESS MACHINES CORP (IBM) FY 2025 MD&A

OVERVIEW

The financial section of the International Business Machines Corporation (IBM or “the company”) 2025 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 2025.

•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 year-to-year comparison of the revenue category performance for the Software and Consulting reportable segments between 2024 and 2023, consistent with the 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 2025, we made changes to the reported revenue categories within our Software and Consulting reportable segments. These changes did not impact our Consolidated Financial Statements or our reportable segments. The revenue categories are reported on a comparable basis for all periods presented. Refer to note C, "Revenue Recognition," for additional information.

•We reported a benefit from income taxes for the years ended December 31, 2025 and 2024. The 2025 tax benefit was primarily driven by the resolution of certain tax audit matters. The 2024 tax benefit was driven by the tax impact of the pension settlement charges, as described below, and the resolution of certain tax audit matters. Refer to note G, “Taxes,” for additional information.

•In 2024, as a result of the irrevocable transfer to insurers of a portion of the U.S. and non-U.S. defined benefit pension obligations and related plan assets, we recognized pension settlement charges of $3.1 billion ($2.4 billion net of tax). This reduced 2024 diluted earnings per share from continuing operations and consolidated diluted earnings per share by $2.57 and $2.56, respectively. As the charges 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

Operating (non-GAAP) Earnings

In an effort to provide better transparency into the operational results of the business, supplementally, management separates business results into operating and non-operating categories. Operating earnings from continuing operations is a non-GAAP measure that excludes the effects of certain acquisition-related charges and intangible asset amortization, expense resulting from basis differences on equity method investments, retirement-related costs and their related tax impacts. Due to the unique, non-recurring nature of the enactment of the U.S. Tax Cuts and Jobs Act (TCJA or U.S. tax reform), management characterizes the one-time provisional charge recorded in the fourth quarter of 2017, and adjustments to that charge, as non-operating. Adjustments include the tax effect of true-ups, audit adjustments, accounting elections and new regulations, or laws (e.g., H.R. 1 in July of 2025) that impact the TCJA provisions which resulted in the one-time provisional charge. For acquisitions, operating (non-GAAP) earnings exclude the amortization of acquired intangible assets and acquisition-related charges such as in-process research and development, transaction costs, applicable retention, restructuring and related expenses, tax charges related to acquisition integration and pre-closing charges, such as financing costs. These charges are excluded as they may be inconsistent in amount and timing from period to period and are significantly impacted by the size, type and frequency of our acquisitions. Management also characterized as non-operating expense, given its unique and temporary nature, the 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. 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 impact of the settlement charges of $3.1 billion ($2.4 billion net of tax) resulting from the transfer to insurers of a portion of U.S. and non-U.S. defined benefit pension obligations and related plan assets in 2024 and pension insolvency costs and other costs. 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 2025 Form 10-K filed on February 24, 2026.

Table of Contents

MANAGEMENT DISCUSSION SNAPSHOT

(1)Refer to “Organization of Information” on page 6 for additional information.

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

(3)At December 31.

The following table provides the company’s operating (non-GAAP) earnings for 2025 and 2024. Refer to page 27 for additional information.

(1)Refer to “Organization of Information” on page 6 for additional information.

Table of Contents

Macroeconomic Environment

The strength of our portfolio and the resiliency of our business model underpinned by our software-led hybrid cloud and AI strategy position us well to deliver sustainable and profitable growth. While the current economic and trade environment remains dynamic, we expect technology to continue to drive productivity, resilience, and flexibility - particularly in hybrid cloud, AI, and mission-critical infrastructure. These technologies fundamentally change how businesses scale, compete, and operate and serve as a key source of competitive advantage. This was reflected in our strong performance in 2025. Our disciplined strategy and durable business model enable us to create long-term value for our partners and clients.

For the year ended December 31, 2025, 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 2025, we delivered performance above expectations across all key financial metrics, reporting $67.5 billion in revenue, net income from continuing operations of $10.6 billion, and diluted earnings per share from continuing operations of $11.14. On an operating (non-GAAP) basis, we reported earnings of $11.0 billion and diluted earnings per share of $11.59. We generated $13.2 billion in cash from operations and $14.7 billion in free cash flow, and delivered shareholder returns of $6.3 billion in dividends. Our 2025 performance reflects our deep focus on the business fundamentals with continued revenue growth, gross profit margin expansion and strong cash generation, and a balance sheet with financial flexibility to support our business.

Total revenue grew 7.6 percent as reported and 6.1 percent adjusted for currency compared to the prior year. Software revenue delivered growth of 10.6 percent as reported (9.1 percent adjusted for currency), reflecting the strength of our diversified portfolio and the investments we have made in innovation in our organic software and through acquisitions. Consulting revenue increased 1.8 percent as reported (0.4 percent adjusted for currency). Infrastructure revenue increased 12.1 percent as reported (10.4 percent adjusted for currency), reflecting strength in our new IBM z17.

From a geographic perspective, Americas revenue increased 6.6 percent as reported (6.9 percent adjusted for currency). Europe/Middle East/Africa (EMEA) increased 14.2 percent as reported (9.0 percent adjusted for currency). Asia Pacific decreased 0.4 percent as reported (0.7 percent adjusted for currency).

Gross margin of 58.2 percent increased 1.5 points year to year with gross margin expansion driven by portfolio mix and productivity actions. Operating (non-GAAP) gross margin of 59.5 percent increased 1.7 points compared to the prior year due to the same dynamics.

Total expense and other (income) decreased 2.6 percent in 2025 versus the prior year primarily driven by the prior-year pension settlement charges of $3.1 billion and savings from productivity actions; partially offset by our organic and inorganic investments in portfolio innovation, the effects of currency and prior-year gains from the sale of certain QRadar Software-as-a-Service (SaaS) assets and from the divestiture of The Weather Company assets. Total operating (non-GAAP) expense and other (income) increased 9.6 percent year to year, due to our organic and inorganic investments in portfolio innovation, the effects of currency and prior-year gains from the sale of certain QRadar Software-as-a-Service (SaaS) assets and from the divestiture of The Weather Company assets; partially offset by savings from productivity actions.

Pre-tax income from continuing operations of $10.3 billion increased 78.2 percent and pre-tax margin was 15.3 percent, an increase of 6.1 points as compared to 2024. Performance in 2025 was driven by revenue growth, portfolio mix and increased productivity while providing investment flexibility. In addition, our year-to-year performance reflects lower retirement related costs driven by the pension settlement charges in 2024; partially offset by the prior-year gains from the sale of certain QRadar SaaS assets and from the divestiture of The Weather Company assets. The continuing operations effective tax rate for 2025 was (2.3) percent compared to (3.8) percent in 2024. The current-year effective tax rate was primarily driven by the resolution of certain tax audit matters and the effective tax rate for 2024 was driven by the tax impact of the pension settlement charges and the resolution of certain tax audit matters. Net income from continuing operations was $10.6 billion in 2025 compared with $6.0 billion in the prior year and net income from continuing operations margin was 15.7 percent, an increase of 6.1 points year to year.

Operating (non-GAAP) pre-tax income from continuing operations of $12.7 billion increased 13.4 percent year to year and the operating (non-GAAP) pre-tax margin from continuing operations increased 1.0 point to 18.8 percent primarily driven by the same dynamics as described above, excluding the impact from the prior-year pension settlement charges. The operating (non-GAAP) effective tax rate for 2025 was 13.5 percent compared to 13.6 percent in 2024. Operating (non-GAAP) income from continuing operations of $11.0 billion increased 13.5 percent and the operating (non-GAAP) income margin from continuing operations of 16.3 percent was up 0.8 points year to year.

Table of Contents

Diluted earnings per share from continuing operations was $11.14 in 2025, which included a benefit from income taxes primarily driven by the resolution of certain tax audit matters, compared with $6.42 in 2024, which included an impact from the pension settlement charges. Refer to "Organization of Information" on page 6 for additional information. Operating (non-GAAP) diluted earnings per share of $11.59 increased 12.2 percent versus 2024.

At December 31, 2025, 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 $14.5 billion, a decrease of $0.3 billion from December 31, 2024 and debt of $61.3 billion at December 31, 2025 increased $6.3 billion. The company continues to make investments in innovation both organically and through acquisitions, including the HashiCorp acquisition in first-quarter 2025.

Total assets increased $14.7 billion ($11.2 billion adjusted for currency) from December 31, 2024 primarily driven by an increase in goodwill and intangible assets mainly related to the HashiCorp acquisition. Total liabilities increased $9.4 billion ($4.9 billion adjusted for currency) from December 31, 2024 primarily driven by an increase in debt. Total equity of $32.7 billion increased $5.3 billion from December 31, 2024, primarily driven by net income and an increase in common stock; partially offset by dividends paid.

During 2025, we generated $13.2 billion in cash from operating activities, compared to $13.4 billion in 2024. While cash used in financing receivables increased $2.7 billion year to year reflecting business growth, including strength from the z17 sales cycle, we had performance-related improvements within net income driving an increase in cash from operating activities. Our free cash flow was $14.7 billion, an increase of $2.0 billion versus the prior year. Refer to pages 31 to 32 for additional information on free cash flow. Net cash used in investing activities of $10.3 billion increased $5.4 billion compared to the prior year primarily driven by cash used for the HashiCorp acquisition. Net cash used in financing activities of $3.8 billion decreased $3.2 billion compared to 2024, primarily driven by debt.

Table of Contents

DESCRIPTION OF BUSINESS

Please refer to IBM’s Annual Report on Form 10-K filed with the SEC on February 24, 2026, for Item 1A. entitled “Risk Factors.”

IBM is addressing the hybrid cloud and artificial intelligence (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's strategic focus is hybrid cloud and AI, today’s most transformative technologies. As clients transform their businesses with technology, they seek both technology innovation and domain expertise to translate into real business impact. We have shaped our portfolio to focus on delivering leading technology and business expertise to solve those client needs. As a result, IBM has shifted to higher growth areas as we deliver on that strategy with over 75 percent of our business mix in Software and Consulting.

Our strategy aligns with the needs of our clients

Companies are deploying technology across environments where the business runs, with 86 percent of executives using hybrid cloud architectures to deploy AI (IBM IBV). Leading organizations are embracing a hybrid ‘by design’ approach. This allows them to take advantage of hybrid multi-cloud by minimizing cost and complexity which simplifies innovation and operations. IBM Consulting quantified the value of a hybrid 'by design' approach and showed it delivers over three times higher return on investment.

Companies continue to invest in AI and are demanding results to accelerate achieving their business and operating goals. AI, including AI agents, shows tremendous ability to unlock value by augmenting workflows to improve productivity and accelerating innovation. 80% of executives are increasing investments in agentic AI, with spending expected to nearly triple by 2027 (IBM IBV). AI is inherently hybrid as it needs to inference, govern, and manage multiple models, data flows, and applications that run across the hybrid cloud.

Enterprises that successfully embed hybrid cloud and AI technologies in their businesses are poised to scale for growth. AI simplifies the complexity of hybrid cloud environments through visibility, resource optimization, and automation across platforms and processes. Hybrid 'by design' allows enterprises to leverage common platforms and practices. Hybrid cloud and AI are increasingly fundamental to realizing each other's value.

IBM is uniquely equipped to bring to clients the full value of hybrid cloud and AI. We've worked with enterprises for decades on technology and the business outcomes it powers. IBM leverages this unique combination of technology and expertise to strengthen our leadership in hybrid cloud and AI. We are now extending that approach into quantum computing. Our trusted role in supporting clients' core business transactions gives us unparalleled insight into how their businesses run, exemplified by the mission-criticality of IBM Z. Our clients trust us to deliver innovation and expertise, which we amplify through our extensive partner network.

IBM’s differentiated portfolio value

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. In quantum, we are already seeing early commercial results with clients.

IBM Software develops market-leading technology that delivers innovation and productivity with capabilities that enable end-to-end enterprise use cases, client usage, consumption, and expansion. We deliver this value in four major areas. Hybrid Cloud (Red Hat), built on open-source technologies, unifies on-prem, public clouds, private clouds, and edge computing to scale applications and AI. Data, underpinned by watsonx with built-in governance and compliance, enables clients to use their data in real time and embed enterprise-ready AI into applications and business processes. Automation, including the FinOps portfolio with Apptio, helps clients drive transparency, value, and cost reduction in technology. Capabilities such as HashiCorp Terraform allow clients to operate and automate IT to build, deploy and manage hybrid applications and infrastructure. Transaction Processing powers IBM Z to deliver unmatched resiliency, scalability, security, availability and real-time fraud detection for our clients' mission-critical workloads. Clients can use AI and AI agents directly on IBM Z to simplify operations. All capabilities support hybrid cloud deployment with security and AI embedded throughout. This software portfolio drives demand for consulting and helps clients build hybrid environments on our infrastructure.

IBM Consulting provides Strategy & Technology services and Intelligent Operations services that help clients achieve their most important business goals – including how to be more productive, accelerate growth, strengthen resilience, and drive innovation. We deliver deep domain and industry capabilities to deploy hybrid cloud and AI with platforms from IBM and our strategic partners, including Adobe, AWS, Microsoft, Oracle, Palo Alto Networks, Salesforce, SAP and others. Our clients rely on us to use these

Table of Contents

technologies to modernize their IT, orchestrate their data, and secure their portfolios to realize AI-driven efficiency and growth. We continually advance IBM Consulting Advantage, our AI delivery platform, embedding it into how our consultants work to accelerate speed and value to clients. These capabilities combined with IBM technology uniquely differentiate us in the market.

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 capabilities, with mainframes handling 70% of the world's transactional workflows (IBM IBV). We deliver innovations across IBM Z and our software portfolio that are purpose-built for hybrid architectures, infused with AI for real-time insights and deliver unmatched throughput, availability, and security. Our distributed infrastructure offerings, including Power and Storage, accelerate clients' digital transformations while our Infrastructure Support delivers lifecycle services enhanced with AI to optimize hybrid cloud environments.

IBM invests in research to lead the next era of computing in two transformative paradigms, AI and quantum computing. In 2025, we accelerated enterprise AI leadership by embedding agentic capabilities into IBM products. We also evolved the Granite model family into specialized, open models optimized for performance and cost. We enhanced Red Hat's AI platform with state-of-the-art inference to scale AI deployment across hybrid environments. In quantum computing, we reached pivotal milestones toward delivering quantum advantage in 2026 and fault tolerance by 2029. Together, these advances integrate hardware, architecture, and algorithms into a coherent strategy for building scalable quantum systems. Our semiconductor research with our new Spyre AI accelerator powers the AI capabilities of z17 and Power11 systems. Our Mathematics of Computation initiative advances the math underlying AI, quantum, and their convergence to unlock transformational capabilities in optimization, learning, and modeling.

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 2025, IBM closed multiple deals, including HashiCorp to seamlessly scale hybrid cloud infrastructure automation, and DataStax to enhance our AI capabilities around unstructured data. We announced our intention to acquire Confluent, addressing customer needs to scale real-time, high-volume and distributed event streaming with low latency and reduced cost.

Collaborating to create value with clients and ecosystem partners

IBM has deep relationships and a track record of results with the world’s largest companies. We continue to invest in strengthening these relationships and accelerating their business innovations. In addition, we are extending our reach to bring our latest technology to a broader set of clients where we have proven adoption. We engage clients where they are and invest in our ecosystem so clients can choose how they access and deploy our technology. For example, service partners act as advisors to our clients, helping them select and implement our technology. Independent software vendors embed our leading AI and hybrid‑cloud capabilities into their solutions, enabling them to deliver cutting‑edge technologies that run wherever their customers choose. To ensure our technology is complementary to clients’ existing IT environments, we jointly invest in long-term relationships with strategic partners including Adobe, AWS, Microsoft, Oracle, Palo Alto Networks, Salesforce, SAP, and ServiceNow. Finally, to expand client choice and speed in using AI, we strengthened our AI ecosystem through partnerships with NVIDIA, Anthropic, Groq, and AMD.

The market’s accelerating demand for hybrid cloud and AI technologies underscores that they are fundamental to driving enterprise performance. Our hybrid cloud and AI strategy brings differentiated outcomes for clients and IBM is built to deliver and expand this value.

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 brings together hybrid cloud platform and software solutions to help clients predict, automate, and modernize their environments. It includes all software, except operating system software reported in the Infrastructure segment.

Software comprises four business areas – Hybrid Cloud, Automation, Data, and Transaction Processing, which have the following capabilities:

Hybrid Cloud (Red Hat): provides enterprise open-source solutions, for hybrid, multi-cloud environments, which includes Red Hat Enterprise Linux (RHEL), OpenShift, Ansible, and Red Hat AI.

Automation: optimizes processes from business workflows to IT operations with AI-powered automation. Automation includes application development and integration, infrastructure lifecycle management including HashiCorp, network management, security software for identity access management and threat management, observability, FinOps, IT financial management, and asset lifecycle management.

Table of Contents

Data: unlocks the value of AI with greater speed, reliability and efficiency by leveraging trusted enterprise data. The portfolio includes AI assistants and agents, AI tools and governance, databases, data intelligence, data integration, and data security.

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, analytics and integration software running on IBM operating systems, AI assistants for IBM Z, and security software for IBM Z.

Consulting

Consulting provides deep domain, technical, and industry expertise with market-leading capabilities in business transformation, technology implementation and managed services. Consulting designs, builds and operates technology and business processes based on open, hybrid cloud architectures, leveraging data, generative AI, and automation to drive efficiency and scale. Through IBM technology and ecosystem partnership solutions, we help clients modernize applications and embed and operationalize AI into workflows at scale to achieve measurable return on investment. Our IBM Consulting Advantage platform and Garage method enable co-creation with clients, deploying digital assets and AI-powered solutions that accelerate transformation.

Consulting comprises two business areas – Strategy and Technology and Intelligent Operations, which have the following capabilities:

Strategy and Technology: helps clients accelerate transformation. Provides advice on strategies to drive growth and efficiency, re-design and implement complex end-to-end business processes and applications, and build and modernize applications and data on hybrid cloud. By leveraging IBM technology — including Red Hat — and an ecosystem of partners we enable clients to drive innovation and achieve business outcomes.

Intelligent Operations: helps clients run their operations more efficiently. Operates application workflows and business processes, manages applications, data, AI, and hybrid cloud workloads, and integrates security solutions to reduce risk and prevent threats. By leveraging AI-powered solutions, we deliver faster, more efficient outcomes that help clients scale and innovate securely.

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 designed to meet the evolving demands of hybrid multi-cloud environments and enterprise-scale AI workloads leveraging flexible and as-a-service consumption models. Hybrid Infrastructure includes IBM Z and Distributed Infrastructure.

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. Powered by the IBM Telum processor — which delivers integrated, real-time inferencing and advanced security features — the platform supports emerging generative and multi-model AI workloads. The portfolio includes IBM Z and LinuxONE systems, designed to meet enterprise requirements for capacity, security and performance, across 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. As a captive financier, the financing arrangements are predominantly for IBM products or services that are critical to the end users’ business operations and support IBM’s hybrid cloud and AI strategy.

Financing comprises the following two business areas - Client Financing and Commercial Financing:

Table of Contents

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.

Table of Contents

Human Capital

The table below presents the company's employees and related workforce at December 31, 2025.

(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.

Our highly skilled global workforce leverages expertise in AI and hybrid cloud to drive clients' digital transformations and mission-critical operations. Our employees are among the world’s leading experts in hybrid cloud, AI, quantum computing, cybersecurity, and industry-specific solutions, reflecting our commitment to innovation and talent as key drivers of success.

At IBM, we’re committed to attracting, developing and retaining top talent in a dynamic and competitive environment. We ground this commitment in an inclusive workplace that fuels business growth, sustainable business outcomes and differentiated value to our clients. Our employee value proposition combines competitive compensation and career opportunities to develop and deliver 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 skill-based hiring and advanced learning to build an AI-first enterprise. In 2025, we focused on adding skills in key areas such as consulting and technical expertise, while also scaling our capacity in strategically important markets and workflows. We’re committed to upskilling and reskilling our workforce, with a strong emphasis on AI skilling, 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 feedback is essential to helping our employees develop their skills and elevate their performance, which is critical to our ability to transform and evolve. We strive to help all employees build new capabilities and create career mobility along their professional journeys.

We are committed to pay alignment and transparency that complies fully with all antidiscrimination laws, fostering an environment of fair and competitive pay without regard to gender, race, or other personal characteristics protected by law. Statistical pay alignment assessments are conducted across all countries with IBM employees, reinforcing our dedication to our longstanding fair pay practices.

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 2025, 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. Consistent with prior years, more than eight out of ten employees who participated in the survey responded that they felt engaged at work. In addition, nearly nine out of ten participants reported feeling empowered to be their authentic selves at work.

IBM maintains a comprehensive Health & Safety Management System designed to provide a safe work environment and minimize work-related injuries and illnesses. The company offers global programs supporting physical, mental, and financial well-being, including confidential 24/7 mental health resources through employee assistance programs. These inclusive programs are tailored to meet the needs of a global workforce. Additional initiatives include resilience and ergonomics training and digital tools that promote healthy habits.

Table of Contents

YEAR IN REVIEW

Results of Continuing Operations

Segment Details

As discussed in the “Organization of Information” section, in the first quarter of 2025, we made changes to the reported revenue categories within our Software and Consulting reportable segments. IBM's Software segment reports revenue and year-to-year revenue percent change for Hybrid Cloud (Red Hat), Automation, Data, and Transaction Processing. The Software segment no longer reports Hybrid Platform & Solutions or Security revenue categories. IBM's Consulting segment reports revenue and year-to-year revenue percent change for Strategy and Technology and Intelligent Operations. These changes did not impact our Consolidated Financial Statements or our reportable segments.

The following table presents each reportable segment’s revenue and gross margin results, followed by an analysis of the 2025 versus 2024 reportable segment results. The reported revenue categories within our Software and Consulting reportable segments are reported on a comparable basis for all years.

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

NM–Not meaningful

Software

(1)Recast to reflect January 2025 changes to the reported revenue categories.

Software revenue of $29,962 million increased 10.6 percent as reported (9.1 percent adjusted for currency) in 2025 compared to 2024, with double-digit growth in Hybrid Cloud, Automation and Data. This revenue performance reflects the strength of our diversified portfolio and the investments we have made to drive innovation in our organic software and through acquisitions.

Table of Contents

Revenue performance by line of business in 2025 compared to 2024 was as follows:

Hybrid Cloud (Red Hat) revenue increased 12.9 percent as reported (11.7 percent adjusted for currency) in 2025, as demand for our hybrid cloud solutions remained strong. OpenShift annual recurring revenue at year-end 2025 was $1.9 billion, which increased greater than 30 percent year over year. Automation revenue increased 17.9 percent as reported (16.5 percent adjusted for currency), which includes the contribution from our HashiCorp acquisition. This performance also reflects client demand as they focus on optimizing operations, automating their infrastructure and workflows, building resiliency, and driving cost efficiency across their enterprise. Data revenue increased 11.9 percent as reported (10.6 percent adjusted for currency), reflecting the demand for our portfolio of generative AI products, and strong performance with our established strategic partners, who enable clients to power AI innovation and mission-critical workloads. Transaction Processing revenue increased 2.3 percent as reported (0.4 percent adjusted for currency), reflecting the benefit from our launch of IBM z17 in June 2025 and the strategic importance of this mission-critical software.

Across Software, our annual recurring revenue (ARR) was $23.6 billion at year end 2025, which increased approximately $2 billion compared to year end 2024. ARR is a key performance metric management uses to assess the health and growth trajectory of our Software segment, and is calculated by using the current quarter’s recurring revenue and then multiplying that value by four. In the first quarter of 2025, the ARR calculation was updated to include all recurring revenue within the Software segment, and the comparison to 2024 ARR is on the same basis. This value includes the following consumption models: (1) software subscription agreements, including committed term licenses, (2) as-a-service arrangements such as SaaS and PaaS, and (3) maintenance and support contracts. ARR should be viewed independently of software revenue as this performance metric and its inputs may not represent revenue that will be recognized in future periods.

Software gross profit margin of 83.5 percent in 2025 decreased 0.2 points compared to the prior year. Segment profit of $9,920 million increased 14.2 percent and segment profit margin of 33.1 percent increased 1.0 points compared to the prior year. The year-to-year increases in segment profit and profit margin were driven by revenue growth and reflect the benefits of the productivity actions we have taken, partially offset by our organic and inorganic investments in portfolio innovation.

Consulting

(1)Recast to reflect January 2025 changes to the reported revenue categories.

Consulting revenue of $21,055 million increased 1.8 percent as reported (0.4 percent adjusted for currency) in 2025 compared to 2024. Strategy and Technology revenue increased 0.4 percent as reported, but decreased 1.0 percent adjusted for currency. Intelligent Operations increased 3.4 percent as reported and 2.2 percent adjusted for currency. Consulting inflected back to growth in the second half of 2025 driven by our clients' demand for key offerings, including business application transformation, application migration and modernization, application operations, and cybersecurity, as clients prioritize cost efficiency while continuing to invest in AI-enabled transformation. In addition, we are expanding our impact through Client Zero, applying our own practical experience with generative AI, combined with our domain expertise, to help clients drive productivity and efficiency and operationalize AI at scale.

Table of Contents

Consulting gross profit margin increased 1.1 points to 28.1 percent compared to the prior year. Segment profit of $2,464 million increased 20.0 percent and segment profit margin increased 1.8 points to 11.7 percent compared to the prior year. The gross profit, segment profit and profit margin performance in 2025 reflect the benefits from the productivity actions we have taken, partially offset by our strategic investments in acquisitions and innovation.

Consulting Signings, Book-to-Bill, and Backlog

Consulting signings decreased 13.3 percent as reported and 14.7 percent adjusted for currency in 2025, compared to our strong performance in signings in 2024. The mix of signings continued to improve as we exited 2025, with a greater share of strategic wins from both new clients and expanded engagements with existing clients. Our book-to-bill ratio over the trailing twelve months was 1.03. 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. Backlog at year end 2025 was $31.9 billion, an increase of approximately $0.5 billion compared to year end 2024.

Signings are management’s initial estimate of the value of a client’s commitment under a services contract. 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. Backlog reflects the estimated remaining value of overall work to be recognized as revenue under services contracts, and it is calculated as the total reported signings less already recognized revenue and less any backlog adjustments.

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. Backlog estimates are subject to change and are affected by several factors, including terminations, changes in the scope of contracts, periodic revalidations, adjustments for revenue not materialized and adjustments for currency.

Management believes the estimated values of signings and backlog provide an indication of our forward-looking revenue, which are used by management as tools to monitor the performance of the business and are viewed as useful decision-making information for investors. There are no third-party standards or requirements governing the calculation of these measurements. The conversion of signings and backlog 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 or external events.

Table of Contents

Infrastructure

Infrastructure revenue of $15,718 million increased 12.1 percent as reported (10.4 percent adjusted for currency) as compared to the prior year, driven by Hybrid Infrastructure reflecting the strength of our IBM z17 program which was launched in June 2025.

Hybrid Infrastructure revenue of $10,618 million increased 19.1 percent as reported (16.9 percent adjusted for currency) as compared to the prior year. Within Hybrid Infrastructure, IBM Z revenue increased 51.7 percent as reported (48.4 percent adjusted for currency), reflecting the strong performance of z17. Clients are investing in z17 for its differentiated capabilities, real-time AI inferencing, quantum-safe security, and AI-driven operational efficiency which are critical when modernizing mission-critical workloads and data intensive environments. IBM Z continues to be the backbone of enterprise IT, enabling clients to integrate seamlessly with hybrid cloud while unlocking new levels of resiliency, scalability, and performance. The current performance from the z17 program has outpaced prior product cycles, reflecting how IBM Z remains an enduring platform with its innovative capabilities around AI workloads and hybrid cloud architecture. Revenue performance in both Distributed Infrastructure and Infrastructure Support reflect product cycle dynamics. Within Distributed Infrastructure, Power improved revenue performance in the second half of the year driven by the launch of the next-generation Power11 platform.

Infrastructure gross profit margin increased 2.9 points to 58.6 percent in 2025 compared to the prior year. Segment profit of $3,458 million increased 41.2 percent and segment profit margin increased 4.5 points to 22.0 percent in 2025 compared to 2024. Infrastructure gross profit, segment profit and margin expansion in 2025 were primarily driven by the productivity actions we have taken and the growth and mix of revenue, partially offset by our investments in product innovation.

Financing

Refer to page 38 for a discussion of Financing’s segment results.

Table of Contents

Geographic Revenue

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

Geographic revenue performance for 2025 as compared to 2024:

Americas revenue increased 6.6 percent as reported and 6.9 percent adjusted for currency. The U.S. increased 6.9 percent. Canada increased 6.9 percent as reported and 8.3 percent adjusted for currency. Latin America increased 6.1 percent as reported and 7.6 percent adjusted for currency, with an increase in Brazil of 6.8 percent as reported and 9.2 percent adjusted for currency.

EMEA revenue increased 14.2 percent as reported and 9.0 percent adjusted for currency. France, the UK and Italy increased 25.1 percent, 20.7 percent and 18.5 percent, respectively, as reported, and 19.0 percent, 16.9 percent and 12.5 percent, respectively, adjusted for currency. Germany increased 3.8 percent as reported, but decreased 1.3 percent adjusted for currency.

Asia Pacific revenue decreased 0.4 percent as reported and 0.7 percent adjusted for currency. Japan revenue increased 0.3 percent as reported, but decreased 1.0 percent adjusted for currency. Australia and India increased 4.6 percent and 3.5 percent, respectively, as reported, and 6.4 percent and 7.9 percent, respectively, adjusted for currency.

Total Expense and Other (Income)

(1)2024 includes income from pre-tax gains of $611 million primarily related to the divestiture of The Weather Company assets and the sale of certain QRadar SaaS assets. Refer to note E, “Acquisitions & Divestitures,” for additional information.

(2)Refer to “Organization of Information” on page 6 for additional information.

Our expense dynamics in 2025 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) decreased 2.6 percent in 2025 versus the prior year primarily driven by the prior-year pension settlement charges of $3.1 billion and savings from our productivity actions; partially offset by our organic and inorganic investments in portfolio innovation, the effects of currency and lower gains from divestitures and asset sales.

Total operating (non-GAAP) expense and other (income) increased 9.6 percent year to year, due to higher spending reflecting our organic and inorganic investments in portfolio innovation, the effects of currency and lower gains from divestitures and asset sales; partially offset by savings from our productive actions.

Table of Contents

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

(1) 2025 includes awards in connection with acquisitions of $85 million, which includes a non-operating adjustment in acquisition-related charges of $31 million. Refer to “Stock-Based Compensation” on page 23 for additional information.

NM–Not meaningful

Total selling, general and administrative (SG&A) expense increased 2.2 percent in 2025 versus 2024, driven primarily by the following factors:

•Higher operating expenses from acquired businesses, as a result of our continued investment to drive our hybrid cloud and AI strategy (4 points); and

•Higher amortization of acquired intangible assets and acquisition-related charges (1 point); and

•The effects of currency (1 point); partially offset by

•Benefits from productivity and the actions taken to transform our operations (4 points).

Operating (non-GAAP) SG&A expense increased 1.0 percent year to year primarily driven by the same factors above, excluding the higher amortization of acquired intangible assets and acquisition-related charges.

Expected credit loss expense was a provision of $33 million in 2025 as compared to a benefit of $21 million in 2024. The year-to-year change was primarily driven by higher unallocated reserve requirements in the current year as a result of the current economic conditions. Refer to “Receivables and Allowances” section on page 25 for additional information.

Table of Contents

Research and Development

NM–Not meaningful

Research and development (R&D) expense and operating (non-GAAP) R&D expense increased 11.2 percent and 11.1 percent, respectively, in 2025 compared to 2024, primarily driven by investments to drive innovation in AI, hybrid cloud and quantum and higher operating expenses from acquired businesses.

Intellectual Property and Custom Development Income

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

Total Intellectual Property and Custom Development Income decreased 3.2 percent in 2025 compared to 2024. 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.

Other (Income) and Expense

(1)2024 includes the realized loss 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

Table of Contents

Total other (income) and expense was $442 million of income in 2025 compared to expense of $1,871 million in 2024. The year-to-year change was primarily driven by:

•Lower non-operating retirement-related cost of $3,393 million primarily driven by the impact of the pension settlement charges of $3.1 billion in 2024. Refer to note U, “Retirement-Related Benefits,” for additional information; partially offset by

•Prior-year gains of $611 million primarily related to the divestiture of The Weather Company assets and the sale of certain QRadar SaaS assets (both included in “Other” in the table above). Refer to note E, “Acquisitions & Divestitures,” for additional information; and

•Higher net exchange losses of $295 million.

Operating (non-GAAP) other (income) and expense was income of $518 million in 2025 and decreased $1,138 million compared to the prior year. The year-to-year change was primarily driven by the prior-year gain recognized from the sale of certain QRadar SaaS assets, the prior-year gain on the divestiture of The Weather Company assets and higher net exchange losses.

Interest Expense

Interest expense of $1,935 million in 2025 increased $223 million compared to 2024, driven by higher average interest rates and debt balances. In addition, when external borrowings support the Financing business, interest expense is presented in cost of financing on the Consolidated Income Statement. Interest reported in cost of financing in 2025 was $2,301 million, a year-to-year increase of $253 million.

Stock-Based Compensation

Pre-tax stock-based compensation cost of $1,715 million increased $404 million compared to 2024. This was primarily due to increases from restricted stock units ($289 million) and performance share units ($75 million). The increases were primarily driven by stock-based compensation awards granted as part of our annual cycles for executives and other employees and the issuance and assumption of stock-based compensation awards in connection with the HashiCorp acquisition. The year-to-year change in stock-based compensation cost was reflected in the following categories: Cost: $269 million, up $46 million; SG&A expense: $904 million, up $214 million; and R&D expense: $542 million, up $144 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, R&D) relating to the job function of the plan participants.

(1)2024 includes pension settlement charges of $3.1 billion. Refer to note U, “Retirement-Related Benefits,” for additional information.

NM–Not meaningful

Table of Contents

Total pre-tax retirement-related plan cost decreased by $3,410 million compared to 2024, due to a decrease in curtailments/settlements ($3,151 million) primarily driven by the pension settlement charges in 2024, lower recognized actuarial losses ($342 million), lower interest costs ($161 million) and lower service cost ($38 million); partially offset by lower expected returns on plan assets ($260 million) and higher cost of defined contribution plans ($21 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 2025 were $1,004 million, a decrease of $17 million compared to 2024, primarily driven by lower service cost ($38 million); partially offset by higher cost of defined contribution plans ($21 million). Non-operating costs were $65 million in 2025, a decrease of $3,393 million compared to 2024. The year-to-year change in non-operating costs was driven primarily by the pension settlement charges in the prior year, lower recognized actuarial losses and lower interest cost; partially offset by lower expected return on plan assets. Refer to note U, “Retirement-Related Benefits,” for additional information.

Income Taxes

The continuing operations effective tax rate for 2025 was (2.3) percent compared to (3.8) percent in 2024. The current-year effective tax rate was primarily driven by the resolution of certain tax audit matters and the effective tax rate for 2024 was 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 2025 was 13.5 percent compared to 13.6 percent in 2024. For additional information, refer to note G, “Taxes.”

Financial Position

Dynamics

Our balance sheet at December 31, 2025 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, 2025 were $14,470 million, a decrease of $334 million compared to prior-year end. Total debt of $61,260 million increased $6,287 million compared to December 31, 2024, primarily driven by the first-quarter 2025 debt issuances to increase our financial liquidity and plan for our future debt maturities. We continue to manage our debt levels while being acquisitive and without sacrificing investments in our business.

During 2025, we generated $13,193 million in cash from operating activities, compared to $13,445 million in 2024. While cash used in financing receivables increased $2,728 million year to year reflecting business growth, including strength from the z17 sales cycle, we had performance-related improvements within net income driving an increase in cash from operating activities. Our free cash flow for 2025 was $14,734 million, an increase of $1,986 million versus the prior year. Refer to pages 31 to 32 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 $8,294 million in acquisitions primarily for the acquisition of HashiCorp, which was completed in the first quarter, and we returned $6,255 million to shareholders through dividends in 2025.

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, 2025 was $2,283 million, a decrease of $374 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 2026. In 2025, the return on the U.S. Personal Pension Plan assets was 8.8 percent and the plan was 137 percent funded at December 31, 2025. Overall, global asset returns were 5.4 percent and the qualified defined benefit plans worldwide were 116 percent funded at December 31, 2025.

IBM Working Capital

Working capital decreased $3,054 million from the year-end 2024 position. Current assets increased $2,462 million ($1,329 million adjusted for currency) primarily due to increases in receivables. Current liabilities increased $5,516 million ($4,367 million adjusted for currency) as a result of increases in deferred income, short-term debt driven by reclassifications from long-term debt net of maturities, and accounts payable.

Table of Contents

Receivables and Allowances

Roll Forward of Total IBM Receivables Allowance for Credit Losses

(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.

Excluding receivables classified as held for sale, the total IBM receivables provision coverage was 1.1 percent at December 31, 2025, a decrease of 30 basis points compared to December 31, 2024. The decrease in coverage was primarily driven by the overall increase in total receivables due to revenue growth. The majority of the write-offs during the year were related to receivables which had been previously reserved. Refer to Financing’s “Financing Segment Receivables and Allowances” on page 38 for additional details regarding the Financing segment receivables and allowances.

Noncurrent Assets and Liabilities

The increase in noncurrent assets of $12,243 million ($9,824 million adjusted for currency) was primarily due to an increase in goodwill and intangible assets, primarily from the HashiCorp acquisition, an increase in long term financing receivables and an increase in deferred taxes (refer to note G. "Taxes," for additional information).

Long-term debt increased $4,952 million ($3,063 million adjusted for currency) primarily driven by our first-quarter 2025 debt issuances; partially offset by reclassifications to short-term debt to reflect upcoming maturities and currency impacts.

Noncurrent liabilities (excluding debt) decreased $1,111 million ($2,514 million adjusted for currency) primarily driven by lower income tax reserves (refer to note G. "Taxes," for additional information) and lower retirement and postretirement benefit obligations; partially offset by an increase in deferred income.

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.

(1)Refer to Financing’s “Balance Sheet and Return on Equity Highlights” on page 38 for additional details.

Total debt of $61,260 million increased $6,287 million ($4,375 million adjusted for currency) from December 31, 2024, primarily driven by proceeds from issuances of $8,391 million to increase our financial liquidity and plan for our future debt maturities; partially offset by maturities of $5,489 million.

Non-Financing debt of $46,167 million increased $3,309 million ($1,612 million adjusted for currency) from December 31, 2024, primarily as a result of the issuances and maturities described above.

Financing segment debt of $15,093 million increased $2,977 million ($2,763 million adjusted for currency) from December 31, 2024, primarily due to higher funding requirements associated with higher 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,

Table of Contents

currency and interest rate variability underlying the financing receivable. The Financing debt-to-equity ratio remained at 9.0 to 1 at December 31, 2025.

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.

Equity

Total equity increased 5,348 million from December 31, 2024, primarily driven by an increase from net income of $10,593 million and an increase in common stock of $1,937 million; partially offset by dividends paid of $6,255 million.

Cash Flow

Our cash flows from operating, investing and financing activities, as reflected in the Consolidated Statement of Cash Flows on page 45, are summarized in the table below. These amounts also include the cash flows associated with the Financing business.

During 2025, we generated $13,193 million in cash from operating activities, compared to $13,445 million in 2024. While cash used in financing receivables increased $2,728 million year to year reflecting business growth, including strength from the z17 sales cycle, we had performance-related improvements within net income driving an increase in cash from operating activities. Non-cash adjustments to reconcile net income to net cash provided by operating activities in the Consolidated Statement of Cash Flows include the income tax benefits associated with the resolution of certain tax audit matters in 2025 and 2024, which are primarily reflected in other assets/other liabilities, as well as the tax benefit associated with the pension settlement charges in 2024, which is reflected in deferred taxes.

Net cash used in investing activities increased $5,366 million primarily driven by the HashiCorp acquisition, a decrease in cash provided by divestitures driven by the first-quarter 2024 sale of The Weather Company assets, and higher net capital expenditures as the prior year was reduced by the cash proceeds from the sale of certain QRadar SaaS assets; partially offset by lower cash used in net purchases of marketable securities and other investments.

Net cash used in financing activities decreased $3,250 million mainly due to higher cash proceeds from new debt issuances in 2025 and a decrease in cash used for debt maturities.

Table of Contents

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.

(1)2025 and 2024 include benefits from income taxes primarily driven by the resolution of certain tax audit matters. Refer to note G, "Taxes," for additional information.

(2)The tax impact on operating (non-GAAP) pre-tax income from continuing operations is calculated under the same accounting principles applied to the GAAP pre-tax income.

(3)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.

(4)Acquisition-Related Adjustments in 2024 include a realized loss of $68 million 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.

Table of Contents

1

PRIOR YEAR IN REVIEW

This section provides the year-to-year performance by revenue categories within the Software and Consulting reportable segments between 2024 and 2023, reflecting the changes made in the first quarter of 2025. These changes did not impact our Consolidated Financial Statements or our reportable segments. The revenue categories are reported on a comparable basis for all periods. Refer to note C, "Revenue Recognition," for additional information. In addition, refer to the “Year in Review” section of our “Management Discussion,” (pages 16 to 27), of our 2024 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, 2024 compared to the year ended December 31, 2023.

Software

(1)Recast to reflect January 2025 changes to the reported revenue categories.

Software revenue of $27,085 increased 8.3 percent as reported (9.0 percent adjusted for currency) in 2024 compared to the prior year, driven by growth across the portfolio. Our Software revenue performance in 2024 reflected growth in our high-value, recurring revenue base, as well as our transactional software revenue.

Revenue performance by line of business in 2024 compared to 2023 was as follows:

Hybrid Cloud (Red Hat) revenue of $6,490 million increased 11.4 percent as reported (12.0 percent adjusted for currency) in 2024 compared to the prior year, led by double-digit growth in OpenShift and Ansible, and solid growth in RHEL. OpenShift continued its strong performance with annual recurring revenue of $1.4 billion exiting 2024. Automation revenue of $6,558 million increased 9.1 percent as reported (9.8 percent adjusted for currency), with strength in our SaaS subscription offerings including AIOps and Management. Data revenue of $5,629 million increased 3.1 percent as reported (3.6 percent adjusted for currency), reflecting the strength of our offerings across our AI portfolio. Transaction Processing revenue of $8,408 million increased 9.0 percent as reported (9.9 percent adjusted for currency), with performance in 2024 reflecting the combination of clients' growing capacity demands, solid renewal rates, and increased contribution from our generative AI products, including watsonx code assistant for Z.

Across Software, our annual recurring revenue (ARR) was $21.3 billion at the end of 2024, which increased approximately $1 billion compared to year end 2023. ARR is a key performance metric management uses to assess the health and growth trajectory of our Software segment, and our ARR for 2024 and 2023 were recast to reflect the first-quarter 2025 update to the ARR calculation to include all recurring revenue within the Software segment. Refer to the “Year in Review” section on page 17 for additional information on the definition of ARR.

Table of Contents

Consulting

(1)Recast to reflect January 2025 changes to the reported revenue categories.

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 growth year to year in our Strategy and Technology offerings with declines in Intelligent Operations as reported and adjusted for currency.

Revenue performance by line of business in 2024 compared to 2023 was as follows:

Strategy and Technology revenue of $11,488 million increased 0.5 percent as reported (2.0 percent adjusted for currency) year to year, led by business transformation services and digital transformations including AI and analytics-focused projects, as well as finance and supply chain transformations. Intelligent Operations revenue of $9,204 million decreased 2.7 percent as reported (1.2 percent adjusted for currency) driven by a decline in custom application management services, partially offset by growth in platform engineering services and cloud application management as clients prioritized cloud modernization and cloud-based application development projects.

Table of Contents

OTHER INFORMATION

Looking Forward

Technology remains a key driver of growth and competitive advantage which allows businesses to scale, drive cost efficiencies, productivity and transformation. It is clear that hybrid cloud and AI are the two most consequential technologies for enterprise performance. These technologies are no longer viewed as incremental tools, but as platforms that fundamentally change how businesses scale, compete, and operate. Their value is even more critical in today's environment.

AI is changing the economics of enterprise operations. To capture this opportunity and build competitive advantage, businesses must go beyond just adding AI; they must become AI-first. The portfolio of AI offerings we have built, including cost efficient, fit-for-purpose open-source models deployed in hybrid environments, is focused on helping businesses scale AI and generate return through productivity improvements and automation. In Software, IBM watsonx provides a robust portfolio of AI products for developing AI apps, managing data, and governing the entire lifecycle of AI models and AI agents, allowing clients to move from pilots to production with full control over cost, security, sovereignty, and performance. Our watsonx platform and watsonx Orchestrate help enterprises deploy AI by connecting agents, models, and workflows with governance and security. AI is only as valuable as the data that powers it. In 2025, we introduced watsonx.data integration and watsonx.data intelligence to unlock insights from unstructured data. 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 June 2025, we launched the IBM z17, which delivers enhanced AI acceleration through multi-model AI capabilities. In July, we introduced IBM Power11 which delivers the performance, resiliency, and scalability needed to run mission-critical data-intensive workloads. 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.

AI is also a powerful productivity driver for our clients and for IBM. We are transforming our enterprise operations, driving efficiency and cost savings with our Client Zero approach, leveraging technology and embedding AI in our own workflows, as well as optimizing our supply chain and service delivery. Beginning in the second-quarter 2025, we further optimized our supply chain by shifting our Distributed Infrastructure manufacturing to an industry standard strategic partner. This is the next evolution of our supply transformation as we pivoted to a simpler, more efficient process.

We remain focused on accelerating innovation speed and impact, and we continue to invest in emerging technologies, including Quantum, bringing new innovations to market. To complement our portfolio, we completed ten acquisitions in 2025, including the acquisition of HashiCorp in the first quarter, which brought leading automation and security tools that integrate with our hybrid cloud.

On December 8, 2025, the company announced its intent to acquire all of the outstanding shares of Confluent, Inc. (Confluent). IBM's and Confluent's combined portfolios will enable enterprises to deploy generative and agentic AI better and faster by providing trusted communication and data flow between environments, applications and APIs. Under the terms of the definitive agreement, Confluent shareholders on record immediately prior to the effective time on the closing date will receive $31 per share in cash, representing a total enterprise value of approximately $11 billion. On February 12, 2026, Confluent stockholders voted to approve the merger with IBM. The transaction is expected to close by the middle of 2026, subject to regulatory approvals and other customary closing conditions. Upon closing, Confluent will be integrated into the Software segment.

Our strong performance in 2025, where we exceeded expectations for revenue, profit and cash generation, reflects the continued success of our focused strategy around hybrid cloud and AI and underscores the strength and diversity of our business model and portfolio. We entered 2026 with momentum and in a position of strength, giving us confidence in our ability to continue to deliver long-term growth aligned with our financial model.

While the operating environment continues to remain dynamic, we believe our focused portfolio, disciplined investments in innovation, diverse set of businesses and clients, relentless focus on productivity, and strong liquidity position drive the durability of our performance.

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 137 percent. Contributions for all retirement-related plans are expected to increase $0.1 billion to be approximately $1.4 billion in 2026. Legally required contributions to non-U.S. defined benefits and multi-employer plans are expected to be approximately $0.1 billion. We expect 2026 pre-tax retirement-related plan cost to be approximately $1.5 billion. This estimate reflects current pension plan assumptions at December 31, 2025. Within total retirement-related plan cost, operating retirement-related plan cost is expected to be approximately $1.0 billion in 2026, essentially flat compared to the prior year. Non-operating retirement-related plan cost is expected to be approximately $0.5 billion, an increase of approximately $0.4 billion compared to 2025, primarily driven by higher recognized actuarial losses, interest cost and amortization of prior service costs.

Table of Contents

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, 2023 through 2025.

Cash Flow and Liquidity Trends

(1)Includes impacts from Financing receivables. Refer to pages 31 to 32 for additional information on free cash flow.

(2)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 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, 2025, the fair value of those instruments that were in a liability position was $513 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, 2025. The Moody’s, Standard and Poor’s and Fitch’s ratings remain unchanged from December 31, 2024.

We have financial flexibility, supported by our strong liquidity position and cash flows, to operate at a single A credit rating. Debt levels increased $6.3 billion during 2025, primarily driven by proceeds from issuances of $8.4 billion partially offset by maturities of $5.5 billion in the current year. In the first quarter of 2026, we issued $7.4 billion of debt for general corporate purposes. 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 45 and highlight causes and events underlying sources and uses of cash in that format on page 26. For the purpose of running its business, IBM manages, monitors and analyzes cash flows in a different manner.

Management uses free cash flow as a measure to evaluate its operating results, strategic investments, plan shareholder return levels and assess its ability and need to incur and service debt. The entire free cash flow amount is not necessarily available for discretionary expenditures. We define free cash flow as net cash from operating activities less the change in Financing receivables and net capital expenditures, including the investment in software and other asset sales. A key objective of the Financing business is to generate strong returns on equity, and our Financing receivables are the basis for that growth. Accordingly, management considers Financing receivables as a profit-generating investment, not as working capital that should be minimized for efficiency.

Table of Contents

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 2025, 2024 and 2023 prepared in a manner consistent with the description above.

From the perspective of how management views cash flow, in 2025, after investing $1.6 billion in net capital investments, we generated free cash flow of $14.7 billion, an increase of $2.0 billion versus the prior year. The year-to-year increase in free cash flow primarily reflects current year performance-related improvements within net income; partially offset by higher net capital expenditures including a prior year reduction driven by the cash proceeds from the sale of certain QRadar SaaS assets. In 2025, we invested $8.3 billion in acquisitions, including the acquisition of HashiCorp, and continued to return value to shareholders with $6.3 billion in dividends.

IBM’s Board of Directors considers the dividend payment on a quarterly basis. In the second quarter of 2025, the Board of Directors increased the company’s quarterly common stock dividend from $1.67 to $1.68 per share.

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 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.”

As highlighted in the Contractual Obligations table, we expect to make legally mandated pension plan contributions to certain non-U.S. plans of approximately $0.8 billion in the next five years. The 2026 contributions are currently expected to be approximately $0.1 billion. Contributions related to all retirement-related plans are expected to be approximately $1.4 billion in 2026, an increase of approximately $0.1 billion compared to 2025. 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 2026, 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.

Table of Contents

Contractual Obligations

(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 2030 could not be reasonably estimated.

(3)These amounts represent the liability for unrecognized tax benefits. We estimate that approximately $57 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. Refer to note G, "Taxes," for additional information.

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.

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, 2025, 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, 2025, 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.

Table of Contents

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), decreased by 30 basis points to 5.2 percent on December 31, 2025. This change will decrease pre-tax income recognized in 2026 by an estimated $40 million. A 25 basis point increase in the discount rate assumption would cause a corresponding increase in the pre-tax income recognized in 2026 by an estimated $30 million. A 25 basis point decrease in the discount rate assumption would cause a corresponding decrease in the pre-tax income recognized in 2026 by an estimated $70 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 2026 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 or decrease in the discount rate would decrease or increase the PBO by approximately $300 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 expected long-term return on these U.S. defined benefit plan assets assumption would have an estimated impact of approximately $90 million on the following year’s pre-tax net periodic pension (income)/cost (based upon the 2026 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.”

Table of Contents

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 contract interpretation to determine the appropriate accounting, including whether promised goods and services specified in an arrangement are distinct performance obligations. Other judgments may 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.

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 not material at December 31, 2025 and 2024.

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.

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/increased by approximately $100 million in 2025.

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. We first assess qualitative factors in each of our reporting units that carry goodwill including relevant events and circumstances that affect the fair value of the reporting units to determine if it is more likely than not that the

Table of Contents

fair value of a reporting unit is less than its carrying amount. Judgement in the assessment of qualitative factors of impairment include entity specific factors, industry, market and other macroeconomic conditions, legal and regulatory actions, as well as other individual factors impacting each reporting unit such as loss of key personnel and overall financial performance. If we do not perform a qualitative assessment or if the qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we perform a quantitative test.

In the quantitative test, we compare the fair value of each reporting unit to its carrying amount. 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.

After performing the annual goodwill impairment analysis using the qualitative test during the fourth quarter of 2025, the company determined it was not necessary to perform the quantitative goodwill impairment test.

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.

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 2025. 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 2025, revenue from continuing operations increased 7.6 percent as reported and 6.1 percent at constant currency versus 2024.

At December 31, 2025, currency changes resulted in assets and liabilities denominated in most local currencies being translated into more U.S. dollars than at year-end 2024. 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 contributed approximately $200M in year-to-year pre-tax income growth and contributed approximately $100M in year-to-year operating (non-GAAP) pre-tax income growth in 2025. From a segment perspective, in 2025, the impact from currency translation and hedging to our segments profit margin year-to-year growth was not material. Hedging and certain underlying foreign currency transaction gains and losses are allocated to our segment results. Considering the operational responses mentioned above, movements of exchange rates, and the nature and timing of hedging instruments, it is difficult to predict future currency impacts in any particular period.

Table of Contents

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 as well as 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 risks 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, 2025 and 2024. 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, 2025 and 2024, 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 $1.1 billion and $0.9 billion at December 31, 2025 and 2024, respectively. 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.

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 at both December 31, 2025 and 2024.

Financing Risks

Refer to note K, “Financing Receivables,” for additional information on the financing risks associated with the Financing business and management’s actions to mitigate such risks.

Table of Contents

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

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

Financing revenue increased 3.3 percent (2.5 percent adjusted for currency) to $737 million compared to the prior year. The increase in revenue was primarily driven by an increase in client financing assets. Financing segment profit increased 49.6 percent to $521 million compared to the prior year and segment profit margin increased 21.9 points to 70.7 percent. The increase in segment profit was primarily driven by the revenue growth as described above and higher intercompany financing net other income for sales of returned leased equipment to Infrastructure, which is eliminated in IBM's consolidated financial results and reflects IBM Z product cycle dynamics.

Financing Segment Receivables and Allowances

The following table presents external Financing segment receivables excluding receivables classified as held for sale.

The percentage of Financing segment receivables reserved decreased from 1.1 percent at December 31, 2024, to 0.9 percent at December 31, 2025, driven by the overall increase in financing receivables and write-offs of previously reserved receivables.

We continue to apply our rigorous credit policies. Approximately 78 percent of the total external portfolio was with investment-grade clients, an increase of 4 points compared to December 31, 2024. 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.”

Balance Sheet and Return on Equity Highlights

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

(2)Includes held for investment and held for sale receivables. The 2024 receivables amounts have been combined to conform to the 2025 presentation.

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

Return on equity was 32.3 percent compared to 23.3 percent for the years ended December 31, 2025 and 2024, respectively. The increase was driven by an increase in net income. For the years ended December 31, 2025 and 2024, return on equity is calculated as after-tax segment profit divided by the average of the ending equity for Financing for the last five quarters. Annualized after-tax segment profit is a function of IBM's provision for income taxes determined on a consolidated basis.

Table of Contents

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.