IBM 10-K & 10-Q changes, risk factors and insider trading

Failure of Innovation Initiatives Could Impact the Long-Term Success of the Company: IBM has moved into areas, including those that incorporate or utilize hybrid cloud, AI and generative AI, quantum and other disruptive technologies, in which it can differentiate itself through responsible innovation, by leveraging its investments in R&D and attracting a successful developer ecosystem. If IBM is unable to continue its cutting-edge innovation in a highly competitive and rapidly evolving environment or is unable to commercialize such innovations, expand and scale them with sufficient speed and versatility or is unable to attract a successful developer ecosystem, the company could fail in its ongoing efforts to maintain and increase its market share and its profit margins.

Risks from Investing in Growth Opportunities Could Impact the Company’s Business: The company continues to invest significantly in key strategic areas, including AI and generative AI, to drive revenue growth and market share gains. Client adoption rates and viable economic models are less certain in the high-value, highly competitive, and rapidly-growing segments. Additionally, emerging business and delivery models may unfavorably impact demand and profitability for our other products or services. If the company does not adequately and timely anticipate and respond to changes in customer and market preferences, competitive actions, disruptive technologies, emerging business models and ecosystems, the client demand for our products or services may decline or IBM’s costs may increase.

Due to the Company’s Global Presence, Its Business and Operations Could Be Impacted by Local Legal, Economic, Political, Health and Other Conditions: The company is a globally integrated entity, doing business in over 175 countries worldwide and deriving about sixty percent of its revenues from sales outside the United States. Changes in the laws or policies of the countries in which the company operates, or inadequate development or enforcement of such laws or policies, could affect the company’s business and the company’s overall results of operations. Further, the company may be impacted directly or indirectly by the development and enforcement of laws and regulations in the U.S. and globally that are specifically targeted at the technology industry. The company’s results of operations also could be affected by economic and political changes in those countries and by macroeconomic changes, including recessions, inflation, currency fluctuations between the U.S. dollar and non-U.S. currencies, capital controls, and adverse changes in trade relationships amongst those countries. Further, as the company expands its customer base and the scope of its offerings, both within the U.S. and globally, it may be impacted by additional regulatory or other risks, including, compliance with U.S. and foreign data privacy requirements, outbound investment restrictions, AI and cloud regulations, data localization requirements, labor relations laws, enforcement of IP protection laws, laws relating to anti-corruption, anti-competition regulations, and import, export and trade restrictions. Further, international trade disputes could create uncertainty. Tariffs andTariffs, international trade sanctionssanctions, and export controls on goods, technologies, inputs, and raw materials resulting from these disputes could affect the company’s ability to move goods and services across borders, or could impose added costs to those activities. Measures taken to date by the company to mitigate these impacts could be made less effective should trade sanctionssanctions, export controls, or tariffs change. In addition, any widespread outbreak of an illness, pandemic or other local or global health issue, natural disasters, climate change impacts, or uncertain political climates, international hostilities, or any terrorist activities, could adversely affect customer demand, the company’s operations and supply chain, and its ability to source and deliver products and services to its customers.

The Company Depends on Skilled Employees and Could Be Impacted by a Shortage of Critical Skills: Much of the future success of the company depends on the continued service, availability and integrity of skilled employees, including technical, marketing and staff resources. Skilled and experienced personnel in the areas where the company competes are in high demand, and competition for their talents is intense. Changing demographics and labor work force trends may result in a shortage of or insufficient knowledge and skills. In addition, as global opportunities and industry demand shifts, realignment, training and scaling of skilled resources may not be sufficiently rapid or successful. Further, many of IBM’s key employees receive a total compensation package that includes equity awards. Any new regulations, volatility in the

key employees receive a total compensation package that includes equity awards. Any new regulations, volatility in the stock market and other factors could diminish the company’s use or the value of the company’s equity awards, putting the company at a competitive disadvantage.

The Development and Use of AI and Generative AI, including the Company’s Increased OfferingsAI Solutions and Use of AI-basedAI Technologies, Could Impact the Long-Term Success of the Company and its Reputation or Give Rise to Legal or Regulatory Action: IBM is increasingly applying AI-basedAI technologies, including generative AI,technologies to its services and products, to how it delivers offeringssolutions to IBM clients, and to its own internal operations. Additionally, IBM is investing in and offering new products and services associated with AI development, deploymentdeployment, governance, and management. As stated more comprehensively and in context of several risk factors throughout this Item 1A., this increasing mix and application of AI-based technologies may impact IBM’s ongoing efforts to maintain and increase its market share and its profit margins or harm IBM’s reputation if the company does not continue to be recognized as an AI leader with strong governance processes.processes or if our AI technologies do not work as intended or produce unexpected outcomes, IBM’s ongoing efforts to maintain and increase its market share and its profit margins, its reputation, and its competitiveness could be harmed. Further, IBM’s drive for greater agility, productivity, flexibility and cost savings by continuously transforming with the use of AI may not yield intended gains in speed, quality, productivity and enablement of rapid scaling, which may impact the company’s competitiveness.scaling. The evolving global AI regulatory environment,and includinglegal the enactment of the EU AI Act,environment may affect the company’s business and the company’s overall results of operations. Computer hackers and others routinely attack the security of technology products, services, systems and networks using a wide variety of methods, and the increased use of generativeAI AItechnologies may introduce novel methods of attack. In the event of such actions, the company, its customers and other third parties could be exposed to liability, litigation, and regulatory or other government action, including debarment, as well as the loss of existing or potential customers, damage to brand and reputation, damage to IBM’s competitive position, and other financial loss.

Risks Related to Cybersecurity and Data PrivacyProtection

Cybersecurity, Privacy,Cybersecurity and AIData Protection Considerations Could Impact the Company’s Business: There are numerous and evolving risks to cybersecurity and privacy,data protection, including risks originating from intentional acts of individual and groups of criminal hackers, hacktivists, state-sponsored organizations, nation states and competitors; from intentional and unintentional acts or omissionsomissions, including the practices and investments, of customers, contractors, business partners, vendors, the open source community, the companies we acquire, employees and other third parties; and from errors in processes or technologies, as well as the risks associated with an increase in the number of customers, contractors, business partners, vendors, employees and other third parties working remotely. Computer hackers and others routinely attack the security of technology products, services, systems and networks, like those we offer, using a wide variety of methods, including ransomware or other malicious software and attempts to exploit vulnerabilities in hardware, software, and infrastructure, and the increased use of generativeAI AItechnologies may introduce novel methods of attack. Attacks may also include social engineering and cyber extortion to induce customers, contractors, business partners, vendors, employees and other third parties to disclose information, transfer funds, or unwittinglyprovide provideunauthorized access to systems or data. The company is at risk of security breaches not only of our own products, services, systems and networks, but also those of customers, contractors, business partners, vendors, employees and other third parties, particularly as all parties increasingly digitize their operations. Cyber threats are increasing in number and sophistication, continually evolving, including with the increased use of AI, making it difficult to anticipate and defend against such threats and vulnerabilities that can persist undetected over extended periods of time.

The company’s products, services, systems and networks, including cloud-based systems and systems and technologies that the company maintains on behalf of its customers, are used in critical company, customer or third-party operations, and involve the storage, processing and transmission of sensitive data, including valuable intellectual property, other proprietary or confidential data, and regulated data,data andincluding personal information of employees, customers and others. These products, services, systems and networks are also used by customers in heavily regulated industries, including those in the financial services, healthcare, critical infrastructure and government sectors.

The company regularly addresses cybersecurity attacks and vulnerabilities. Cybersecurity attacks or other security incidents, including industry-wide incidents such as MOVEit,incidents, have or could result in, for example, one or more of the following: unauthorized access to, disclosure, modification, misuse, loss, or destruction of company, customer, or other third-party data or systems; theft or import or export of sensitive, regulated, or confidential data including personal information and intellectual property, including key innovations in AI, quantum, or other disruptive technologies; the loss of access to critical data or systems through ransomware, crypto mining, destructive attacks or other means; and business delays, service or system disruptions or denials of service.

Cybersecurity risk to the company and its customers also depends on factors such as the actions, practices and investments of customers, contractors, business partners, vendors, the open source community and other third parties, including, for example, providing and implementing patches to address vulnerabilities. Cybersecurity attacks or other catastrophic events resulting in disruptions to or failures in power, information technology, communication systems or other critical infrastructure could result in interruptions or delays to company, customer, or other third-party operations or services, financial loss, injury or death to persons or property, potential liability, and damage to brand and reputation. Although the company continuously takes significant steps to mitigate

Although the company continuously takes significant steps to mitigate cybersecurity risk across a range of functions, such measures can never eliminate the risk entirely or provide absolute security.

As a global enterprise, the regulatory environment with regard to cybersecurity, privacy, AIcybersecurity and data protection issues is increasingly complex and will continue to impact the company’s business, including through increased risk, increased costs, and expanded or otherwise altered compliance obligations, including with respect to the increased regulatory activity around the security of critical infrastructure, IoTconnected devices, customer industries (e.g., financial services) and various customer and government supply chain security programs. As the reliance on data grows for the company and our clients, the potential impact of regulations on the company’s business, risks, and reputation will grow accordingly. The enactment and expansion of cybersecurity,cybersecurity AI,and data protection and privacy laws, regulations and standards around the globe will continue to result in increased compliance costs, including due to an increased focus on international data transfer mechanisms and data location; increased cybersecurity requirements and reporting obligations; the lack of harmonization of such laws and regulations; the increase in associated litigation and enforcement activity by governments and private parties; the potential for damages, fines and penalties and debarment; and the potential regulation of new and emerging technologies. Any additional costs and penalties associated with increased compliance, enforcement, and risk reduction could make certain offerings less profitable or increase the difficulty of bringing certain offerings to market or maintaining certain offerings.

The Company Could Incur Substantial Costs Related to Climate Change and Other Environmental Matters: IBM, like other companies, is subject to potential climate-related risks and costs such as those resulting from increased severe weather events, prolonged changes in temperature, new regulations affecting hardware products and data centers, carbon taxes, and increased environmental disclosures requested or required by clients, regulators and others. The company is also subject to various federal, state, local and foreign laws and regulations concerning the discharge of materials into the environment or otherwise related to environmental protection, including the U.S. Superfund law. The company could incur substantial costs, including cleanup costs, fines and civil or criminal sanctions, as well as third-party claims for property damage or personal injury, if it were to violate or become liable under environmental laws and regulations. We do not expect climate change or compliance with environmental laws and regulations focused on climate change or environmental protection to have a disproportionate effect on the company or its financial position, results of operations and competitive position.

FOR THE THREE AND SIX MONTHS ENDED MARCHJUNE 31,30, 2026

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 chargecharge, 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 integrationintegration, and pre-closing charges, such as financing costs. These charges are excluded as they may be inconsistent in amount and timing from period to period and are significantly impacted by the size, type and frequency of our acquisitions. All other spending for acquired companies is included in both earnings from continuing operations and in operating (non-GAAP) earnings. For retirement-related costs, management characterizes certain items as operating and others as non-operating, consistent with GAAP. We include defined benefit plan and nonpension postretirement benefit plan service costs, multi-employer plan costs and the cost of defined contribution plans in operating earnings. Non-operating retirement-related costs include defined benefit plan and nonpension postretirement benefit plan amortization of prior service costs, interest cost, expected return on plan assets, amortized actuarial gains/losses, the impacts of any plan curtailments/settlements and pension insolvency costs and other costs. Non-operating retirement-related costs are primarily related to changes in pension plan assets and liabilities which are tied to financial market performance, and we consider these costs to be outside of the operational performance of the business.

Financial Results Summary — Three Months Ended MarchJune 3130:

The following table provides the company’s operating (non-GAAP) earnings for the firstsecond quarter of 2026 and 2025.

Financial Performance Summary — Three Months Ended MarchJune 3130:

In the firstsecond quarter of 2026, we reported $15.9$17.2 billion in revenue, income from continuing operations of $1.2$2.2 billion, and operating (non-GAAP) earnings of $1.8$2.8 billion. Diluted earnings per share from continuing operations was $1.28$2.27 as reported and $1.91$2.93 on an operating (non-GAAP) basis. We generated $5.2$2.6 billion in cash from operations and $2.2$2.5 billion in free cash flow.flow, Weand returned $1.6 billion to shareholders in dividendsdividends. andWhile investedour second-quarter performance was below our expectations, we have conviction in the acquisitionstrength of Confluent,our Inc.portfolio (Confluent). Our first-quarter performance reinforcesand the strategic choicesdirection weof haveour madebusiness. We believe our strategic investments over the lastpast several years continue to advancestrengthen IBMIBM's position as a software-led Hybrid Cloud and AI platform company.company With our focus on the fundamentals of our business,and we continue to maintainbuild a strong liquidity position and solid investment grade balance sheet which enables us to investleadership in our business and return value to shareholders through dividends.quantum.

Total revenue grew 9.5 percent as reported and 6.1 percent adjusted for currency compared to the prior-year period. Software delivered revenue growth of 11.35.1 percent as reported (7.94.6 percent adjusted for currency). Consulting revenue increasedwas 4.0 percentflat as reported (0.9and increased 1.1 percent adjusted for currency).currency. Infrastructure revenue increaseddecreased 15.37.4 percent both as reported (11.7 percentand adjusted for currency).currency.

From a geographic perspective, Americas revenue increaseddecreased 9.10.5 percent as reported (8.21.0 percent adjusted for currency). Europe/Middle East/Africa (EMEA) increased 15.24.1 percent as reported (5.42.1 percent adjusted for currency). Asia Pacific increased 1.10.3 percent as reported (1.75.2 percent adjusted for currency).

Gross margin of 56.257.7 percent increaseddecreased 1.0 point year to year with margin expansion driven primarilyby our revenue shortfall and mix, partially offset by productivity actions, revenue growth and portfolio mix.actions. Operating (non-GAAP) gross margin of 57.759.4 percent increaseddecreased 1.10.7 points compared to the prior-year period due to the same dynamics.

Total expense and other (income) increased 10.00.7 percent in the firstsecond quarter of 2026 compared to the firstsecond quarter of 2025 driven by our organic and inorganic investments in portfolio innovationinnovation, and thehigher effectsamortization of currency,acquired intangible assets and acquisition-related charges, partially offset by savings from productivity actions.actions and the effects of currency. Total operating (non-GAAP) expense and other (income) increaseddecreased 8.71.5 percent year to year, driven primarilyby savings from productivity actions and the effects of currency, partially offset by theour sameinvestments factors.in portfolio innovations.

Pre-tax income from continuing operations wasof $1.4$2.5 billion indecreased the4.5 first quarter of 2025percent compared to $1.2 billion in the prior-year period and pre-tax margin wasdeclined up 0.80.9 points year to year to 8.714.4 percent. Software and Consulting segment profit margins improved year to year, while Infrastructure profit margin was impacted by the IBM Z shortfall and cycle dynamics. The continuing operations provision for income taxes was $0.2$0.3 billion in the firstsecond quarter of 2026, compared to $0.1$0.4 billion in the firstsecond quarter of 2025. Net income from continuing operations was $1.2essentially billionflat in the current period comparedyear to $1.1year. billion in the prior-year period and the netNet income from continuing operations margin of 7.612.6 percentpercent, was updown 0.40.3 points year to year. The year-to-year performance was primarily driven by revenue growth, portfolio mix and increased productivity, partially offset by our organic and inorganic investments in portfolio innovation.

Operating (non-GAAP) pre-tax income from continuing operations of $2.1$3.3 billion increased 22.52.9 percent compared to the firstsecond quarter of 2025 and the operating (non-GAAP) pre-tax margin from continuing operations increased 1.40.3 points to 13.419.2 percent primarily driven by the factors described above.percent. The operating (non-GAAP) provision for income taxes was $0.3$0.5 billion in both the firstsecond quarter of 2026,2026 compared to $0.2 billion inand the firstsecond quarter of 2025. Operating (non-GAAP) net income from continuing operations of $1.8$2.8 billion increased 20.15.3 percent and the operating (non-GAAP) net income margin from continuing operations of 11.416.3 percent increased 1.00.6 point year to year.

Diluted earnings per share from continuing operations of $1.28$2.27 increaseddecreased 14.31.7 percent and operating (non-GAAP) diluted earnings per share of $1.91$2.93 increased 19.44.6 percent compared to the firstsecond quarter of 2025.

Cash provided by operating activities was $5.2$2.6 billion in the firstsecond three monthsquarter of 2026, an increase of $0.8$0.9 billion compared to the firstsecond three monthsquarter of 2025.2025, which includes a decrease in cash used by financing receivables of $1.2 billion. Free cash flow was $2.2$2.5 billion, ana increasedecrease of $0.3 billion versus the prior-year period. Refer to page 55 for additional information on free cash flow. Net cash used in investing activities ofwas $10.5$0.5 billion, whichcompared includeswith ournet investmentcash provided by investing activities of $1.7 billion in the acquisitionprior-year period. Net cash used in financing activities of Confluent,$5.7 decreasedbillion $2.5increased $2.9 billion compared to the prior-yearsecond period. Financing activities were a net sourcequarter of cash of $2.7 billion, a decrease of $2.7 billion compared to the prior-year period.2025.

FirstSecond Quarter in Review

The following tables present each reportable segment’s revenue and gross margin results, followed by an analysis of the second quarter and the first threesix months of 2026 versus the second quarter and first threesix months of 2025 reportable segments results.

Revenue performance by line of business in the firstsecond quarter compared to the prior-year period was as follows:

Hybrid Cloud (Red Hat) revenue increased 12.911.2 percent as reported (10.010.9 percent adjusted for currency) in the first quarter, reflecting accelerated growth of approximately two points compared to fourth-quarter 2025, primarily, driven by thesubscriptions and stabilization of ourin consumption-based services revenue growth.services. OpenShift had strong year-to-year growth in the first quarter and now represents a $2 billion annual recurring revenue business.is now over $2 billion. Automation revenue grewincreased 9.93.6 percent as reported (6.73.1 percent adjusted for currency). This includes revenue growth contribution from our HashiCorp acquisition which closed in February 2025. Data revenue grewincreased 19.218.9 percent as reported (15.918.4 percent adjusted for currency) reflecting demand for our generative AI products, strength in our strategic partnerships, and inorganicthe contribution from ourrecent acquisitions, includingprimarily DataStax and Confluent which closed in mid-March 2026.Confluent. Transaction Processing revenue increaseddecreased 5.78.1 percent as reported (1.78.6 percent adjusted for currency), reflecting growththe dueshortfall toin our strong IBM z17Z program.performance.

Across Software, our annual recurring revenue (ARR) was solid at $24.6 billion, which increased approximately $3$2 billion as reported year to year. This increase reflects the acquisition of Confluent and growth across other areas of our recurring revenue base. 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. The first-quarter 2026 recurring revenue metric includes annualized Confluent recurring revenue since the acquisition date of March 17, 2026. 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.

SoftwareRevenue gross profit margin decreased 0.8 points to 82.8 percentperformance in the first quartersix months of 2026 compared to the prior-year period,period reflectingwas ouras investments in portfolio innovation.follows:

For the second quarter of 2026, Consulting revenue of $5,272$5,327 million increasedwas 4.0essentially percentflat as reported and(increased 0.91.1 percent adjusted for currency) on a year-to-year basis. We had revenue growth across the portfolio reflecting momentum in the business as client demand continues to shift towards enterprise-wide transformation. Strategy and Technology revenue increased 4.10.5 percent as reported (0.91.3 percent adjusted for currency), and Intelligent Operations revenue increasedwas 4.0 percentflat as reported (increased 0.8 percent adjusted for currency)., compared to the prior-year period. The revenue performance in Consulting reflectswas ourdriven differentiated,by asset-leddemand deliveryfor modelapplication whichmodernization, continuesdata transformation and cybersecurity services as clients balance the need to driveincrease productivity andthrough speedAI with the need to value,strengthen combining our deep domain expertise with software, automation,resiliency and reusablemanage assets to help clients deploy AI securely and at scale.risk.

In the firstsecond quarter of 2026, Consulting gross profit margin of 27.528.9 percent increased 0.21.4 points on a year-to-year basis. Segment profit of $558$647 million decreasedincreased 0.115.1 percent and segment profit margin of 10.612.1 percent decreasedincreased 0.41.6 points yearcompared to year.the prior-year period.

Consulting gross profit, segment profit and profitrespective margin performance in the second quarter and first quartersix months of 2026 comparedprimarily toreflect the prior-yearbenefits periodof declined modestly asthe productivity gainsactions werewe have taken, partially offset by investments in the business and currency headwinds reflecting our geographic mix of the business.innovation.

For the three and six months ended June 30, 2026, Consulting signings increased 8.55.0 percent as reported and 6.0(5.9 percent adjusted for currency) and 6.8 percent as reported (5.9 percent adjusted for thecurrency), three months ended March 31, 2026,respectively, compared to the prior-year period. SigningsThis returnedwas tothe second consecutive quarter of solid signings growth reflecting continued client investment in the first-quarter 2026, with strength across our application and databusiness transformation offerings.initiatives. Our book-to-bill ratio for the trailing twelve-months was 1.04.approximately 1.05. Book-to-bill represents the ratio of IBM Consulting signings to its revenue over the same periodperiod. andThe metric is a useful indicator of the demand forof our business over time. At MarchJune 31,30, 2026, backlog was $31.3$30.8 billion.