IBM REPORTS 2014 FOURTH-QUARTER AND FULL-YEAR RESULTS Fourth-Quarter 2014: o Diluted EPS from continuing operations: - GAAP: $5.54, down 4 percent; - Operating (non-GAAP): $5.81, down 6 percent; o Pre-tax income from continuing operations: - GAAP: $7.1 billion, flat year-to-year; - Operating (non-GAAP): $7.4 billion, down 2 percent; o Net income from continuing operations: - GAAP: $5.5 billion, down 11 percent; - Operating (non-GAAP): $5.8 billion, down 13 percent; o Gross profit margin from continuing operations: - GAAP: 53.3 percent, up 100 basis points; - Operating (non-GAAP): 53.9 percent, up 60 basis points; o Revenue from continuing operations: $24.1 billion: - Down 12 percent; down 2 percent adjusting for divested businesses and currency. Full-Year 2014: o Diluted EPS from continuing operations: - GAAP: $15.59, up 2 percent; - Operating (non-GAAP): $16.53, down 1 percent; o Pre-tax income from continuing operations: - GAAP: $20.0 billion, down 1 percent; - Operating (non-GAAP): $21.1 billion, down 4 percent; o Net income from continuing operations: - GAAP: $15.8 billion, down 7 percent; - Operating (non-GAAP): $16.7 billion, down 9 percent; o Gross profit margin from continuing operations: - GAAP: 50.0 percent, up 50 basis points; - Operating (non-GAAP): 50.6 percent, up 10 basis points; o Revenue from continuing operations: $92.8 billion: - Down 6 percent; down 1 percent adjusting for divested businesses and currency; o Strategic imperatives grew 16 percent to $25 billion, and now represent 27 percent of total IBM revenue: - Total Cloud revenue of $7 billion, up 60 percent; -- Cloud delivered as a service revenues of $3 billion, up approximately 75 percent; -- Year-end annual run rate of $3.5 billion for cloud delivered as a service; - Business analytics revenue up 7 percent to nearly $17 billion; - Mobile revenue more than tripled; - Security revenue up 19 percent. ARMONK, N.Y., January 20, 2015 . . . IBM (NYSE: IBM) today announced fourthquarter 2014 diluted earnings from continuing operations of $5.54 per share, compared with diluted earnings of $5.76 per share in the fourth-quarter of 2013, a decrease of 4 percent. Operating (non-GAAP) diluted earnings from continuing operations were $5.81 per share compared with operating diluted earnings of $6.16 per share in the fourth-quarter of 2013, a decrease of 6 percent. Fourth-quarter net income from continuing operations was $5.5 billion compared with $6.2 billion in the fourth-quarter of 2013, a decrease of 11 percent. Operating (non-GAAP) net income from continuing operations was $5.8 billion, as compared with $6.6 billion in the fourth-quarter of 2013, a decrease of 13 percent. For the fourth-quarter of 2014, IBM reported consolidated net income of $5.5 billion or $5.51 of diluted earnings per share, including operating net losses in discontinued operations related to the microelectronics manufacturing business. Total revenues from continuing operations for the fourth-quarter of 2014 of $24.1 billion were down 12 percent (down 2 percent, adjusting for the impact of the divested customer care outsourcing and System x businesses and for currency) from the fourth-quarter of 2013 and were down 1 percent for the full year 2014, adjusting for the impact of the divested businesses and for currency. “We are making significant progress in our transformation, continuing to shift IBM’s business to higher value, and investing and positioning ourselves for the longer term," said Ginni Rometty, IBM chairman, president and chief executive officer. "In 2014, we repositioned our hardware portfolio for higher value, maintained a services backlog of $128 billion and achieved strong revenue growth across cloud, analytics, mobile, social and security. Together these strategic imperatives grew 16 percent in 2014 and now represent $25 billion and 27 percent of our revenue.” Fourth-Quarter GAAP – Operating (non-GAAP) Reconciliation Fourth-quarter operating (non-GAAP) diluted earnings from continuing operations exclude $0.27 per share of charges; $0.19 per share for the amortization of purchased intangible assets and other acquisition-related charges; and $0.08 per share for retirement-related charges driven by changes to plan assets and liabilities primarily related to market performance. Full-Year 2015 Expectations The company will provide 2015 earnings expectations during today’s quarterly earnings conference call. Geographic Regions The Americas’ fourth-quarter revenues were $11.1 billion, a decrease of 9 percent (down 4 percent, adjusting for divested businesses and currency) from the 2013 period. Revenues from Europe/Middle East/Africa were down 13 percent to $8.0 billion (down 1 percent, adjusting for divested businesses and currency). AsiaPacific revenues decreased 17 percent (down 2 percent, adjusting for divested businesses and currency) to $4.9 billion. Growth Markets and Major Markets Revenues from the company’s growth markets were down 16 percent (down 2 percent, adjusting for divested businesses and currency). Revenues in the BRIC countries — Brazil, Russia, India and China — were down 21 percent (down 8 percent, adjusting for divested businesses and currency). China revenues were down 1 percent, adjusting for divested businesses and currency. Revenues from the company’s major markets were down 11 percent (down 2 percent, adjusting for divested businesses and currency). Services Global Services segment revenues decreased 8 percent (flat adjusting for the impact of the divested customer care outsourcing and System x businesses and for currency) to $13.5 billion. Global Technology Services segment revenues decreased 8 percent (up 2 percent adjusting for the impact of the divested customer care outsourcing and System x businesses and for currency) to $9.2 billion. Global Business Services segment revenues were down 8 percent (down 3 percent, adjusting for currency) to $4.3 billion. Pre-tax income from Global Technology Services decreased 26 percent and pre-tax margin decreased to 15.6 percent. Global Business Services pre-tax income decreased 22 percent and pre-tax margin decreased to 16.4 percent. Pre-tax income and margin include the impact of the fourth-quarter workforce rebalancing charge. The estimated services backlog at December 31, 2014 was $128 billion, flat year to year adjusting for the divested customer care outsourcing and System x businesses and currency. Software Revenues from the Software segment were $7.6 billion, down 7 percent (down 3 percent, adjusting for currency) compared with the fourth-quarter of 2013. Software pre-tax income decreased 11 percent and pre-tax margin decreased to 44.7 percent. Pre-tax income and margin include the impact of the fourth-quarter workforce rebalancing charge. Revenues from IBM’s key middleware products, which include WebSphere, Information Management, Tivoli, Workforce Solutions and Rational products, were $5.4 billion, down 6 percent (down 3 percent, adjusting for currency) versus the fourthquarter of 2013. Operating systems revenues of $557 million were down 19 percent (down 16 percent, adjusting for currency) compared with the prior-year quarter. Financing Global Financing segment revenues were flat (up 5 percent, adjusting for currency) in the fourth-quarter to $532 million. Pre-tax income for the segment decreased 11 percent to $526 million. Hardware Revenues from continuing operations for the Systems and Technology segment totaled $2.4 billion for the quarter, down 39 percent (down 12 percent, adjusting for the impact of the divested System x business and currency) from the fourth-quarter of 2013. Systems and Technology pre-tax income increased 12 percent and pre-tax margin increased to 15.5 percent. Pre-tax income and margin include the impact of the fourth-quarter workforce rebalancing charge. Revenues from Power Systems were down 13 percent (down 11 percent, adjusting for currency) compared with the 2013 period. Revenues from System z mainframe server products decreased 26 percent (down 23 percent, adjusting for currency). Revenues from System Storage decreased 8 percent (down 5 percent, adjusting for currency). Gross Profit The company’s total gross profit margin from continuing operations was 53.3 percent in the 2014 fourth-quarter period compared with 52.4 percent in the 2013 fourth-quarter period. Total operating (non-GAAP) gross profit margin from continuing operations was 53.9 percent in the 2014 fourth-quarter compared with 53.3 percent in the 2013 fourth-quarter period. Expense Total reported expense and other income from continuing operations declined 20 percent to $5.8 billion compared with the prior year period. The reported reduction was driven by the gain of $1.4 billion ($1.1 billion pre-tax income benefit, net of related transaction and performance-based costs) from the divestiture of the System x business and the elimination of the expense for the System x business from the company’s run rate. Without these items, expense and other income would have been up approximately 2 percent. S,G&A expense of $6.0 billion was up 1 percent from the prior-year period and includes the workforce rebalancing charge of approximately $580 million. R,D&E expense of $1.3 billion decreased 9 percent compared with the yearago period, reflecting the divestiture of the System x business and currency impact. Intellectual property and custom development income decreased to $199 million compared with $201 million a year ago. Other (income) and expense was income of $1.5 billion, including the gain from the divested System x business, compared with prioryear income of $116 million. Interest expense increased to $117 million compared with $113 million in the prior-year period. Total operating (non-GAAP) expense and other income from continuing operations decreased 20 percent to $5.6 billion compared with the prior-year period, including the gain from the divestiture of the System x business. Operating (non-GAAP) S,G&A expense increased 1 percent to $5.8 billion compared with the prior-year period and includes the workforce rebalancing charge. Operating (non-GAAP) R,D&E expense of $1.3 billion was down 7 percent compared with the year-ago period, reflecting the divestiture of the System x business and currency impact. Pre-Tax Income Pre-tax income from continuing operations was flat year over year at $7.1 billion; pre-tax margin of 29.4 percent was up 3.5 points compared with the prioryear period. Operating (non-GAAP) pre-tax income from continuing operations decreased 2 percent to $7.4 billion and pre-tax margin was 30.7 percent, up 3.0 points, compared to the year-ago period. *** IBM’s tax rate from continuing operations was 22.3 percent, up 9.8 points year over year; operating (non-GAAP) tax rate was 21.8 percent, up 9.6 points compared to the year-ago period. The change in the fourth-quarter tax rate is driven by prior year discrete tax items, including benefits from tax audit settlements. Net income margin from continuing operations increased 0.2 points to 22.9 percent. Total operating (non-GAAP) net income margin from continuing operations decreased 0.3 points to 24.0 percent. The weighted-average number of diluted common shares outstanding in the fourthquarter 2014 was 995 million, a decrease of 8 percent compared with the same period of 2013. As of December 31, 2014, there were 991 million basic common shares outstanding. Debt, including Global Financing, totaled $40.8 billion, compared with $39.7 billion at year-end 2013, and down $4.9 billion from the third quarter of 2014. From a management segment view, Global Financing debt totaled $29.1 billion versus $27.5 billion at year-end 2013, resulting in a debt-to-equity ratio of 7.2 to 1. Core (non-global financing) debt totaled $11.7 billion, a decrease of $0.5 billion since year-end 2013, resulting in a debt-to-capitalization ratio of 59 percent, which includes impacts from retirement plan remeasurement that take into account changes in discount rates and recently released U.S. mortality tables, the announced Microelectronics business divestiture and foreign exchange translation. IBM ended the fourth-quarter 2014 with $8.5 billion of cash on hand and generated free cash flow of $6.6 billion, excluding Global Financing receivables, down approximately $1.8 billion year over year. In the fourth quarter of 2014, the company returned $1.2 billion to shareholders through $1.1 billion in dividends and $0.1 billion of gross share repurchases. At the end of December 2014, IBM had approximately $6.3 billion remaining from the current share repurchase authorization. Full-Year 2014 Results Net income from continuing operations for the twelve months ended December 31, 2014 was $15.8 billion compared with $16.9 billion in the year-ago period, a decrease of 7 percent. Diluted earnings per share from continuing operations were $15.59, up 2 percent compared to the 2013 period. The consolidated diluted earnings per share were $11.90 as compared to $14.94 per share in 2013, down 20 percent. Revenues from continuing operations for the twelve-month period totaled $92.8 billion, a decrease of 6 percent (down 1 percent, adjusting for divested businesses and currency) compared with $98.4 billion for the twelve months of 2013. Full year results include a non-recurring pre-tax charge of $4.7 billion, or $3.4 billion, net of tax. The charge includes an impairment to reflect fair value less estimated costs to sell the Microelectronics manufacturing business assets, which the company has classified as held for sale at December 31, 2014. The charge also includes other estimated costs related to the transaction, including cash consideration expected to be transferred to GLOBALFOUNDRIES of approximately $1.5 billion. Operating (non-GAAP) net income from continuing operations for the twelve months ended December 31, 2014 was $16.7 billion compared with $18.4 billion in the year-ago period, a decrease of 9 percent. Operating (non-GAAP) diluted earnings per share from continuing operations were $16.53 compared with $16.64 per diluted share for the 2013 period, a decrease of less than 1 percent. Forward-Looking and Cautionary Statements Except for the historical information and discussions contained herein, statements contained in this release may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on the company’s current assumptions regarding future business and financial performance. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, including the following: a downturn in economic environment and client spending budgets; the company’s failure to meet growth and productivity objectives; a failure of the company’s innovation initiatives; risks from investing in growth opportunities; failure of the company’s intellectual property portfolio to prevent competitive offerings and the failure of the company to obtain necessary licenses; cybersecurity and data privacy considerations; fluctuations in financial results, impact of local legal, economic, political and health conditions; adverse effects from environmental matters, tax matters and the company’s pension plans; ineffective internal controls; the company’s use of accounting estimates; the company’s ability to attract and retain key personnel and its reliance on critical skills; impacts of relationships with critical suppliers and business with government clients; currency fluctuations and customer financing risks; impact of changes in market liquidity conditions and customer credit risk on receivables; reliance on third party distribution channels; the company’s ability to successfully manage acquisitions, alliances and dispositions; risks from legal proceedings; risk factors related to IBM securities; and other risks, uncertainties and factors discussed in the company’s Form 10-Qs, Form 10-K and in the company’s other filings with the U.S. Securities and Exchange Commission (SEC) or in materials incorporated therein by reference. Any forward-looking statement in this release speaks only as of the date on which it is made. The company assumes no obligation to update or revise any forward-looking statements. Presentation of Information in this Press Release In an effort to provide investors with additional information regarding the company’s results as determined by generally accepted accounting principles (GAAP), the company has also disclosed in this press release the following non-GAAP information which management believes provides useful information to investors: IBM results and expectations -o presenting operating (non-GAAP) earnings per share from continuing operations amounts and related income statement items; o presenting non-global financing debt-to-capitalization ratio; o adjusting for free cash flow; o adjusting for currency (i.e., at constant currency); o adjusting for the divestiture of the System x and the customer care outsourcing businesses. The rationale for management’s use of non-GAAP measures is included as part of the supplemental materials presented within the fourth-quarter earnings materials. These materials are available on the IBM investor relations Web site at www.ibm.com/investor and are being included in Attachment II (“Non-GAAP Supplemental Materials”) to the Form 8-K that includes this press release and is being submitted today to the SEC. Conference Call and Webcast IBM’s regular quarterly earnings conference call is scheduled to begin at 4:30 p.m. EST, today. The Webcast may be accessed via a link at http://www.ibm.com/investor/events/earnings/4q14.html. Presentation charts will be available shortly before the Webcast. Financial Results Below (certain amounts may not add due to use of rounded numbers; percentages presented are calculated from the underlying whole-dollar amounts.) INTERNATIONAL BUSINESS MACHINES CORPORATION COMPARATIVE FINANCIAL RESULTS (Unaudited; Dollars in millions except per share amounts) Three Months Ended Twelve Months Ended December 31, December 31, Percent Percent 2014 2013* Change 2014 2013* Change ------- ------------- ------- ------- ------REVENUE Global Technology Services Gross profit margin $9,167 38.5% $9,917 38.8% $38,551 38.1% -3.7% Global Business Services Gross profit margin 4,349 32.0% 4,747 30.7% -8.4% 17,825 30.8% 18,396 30.9% -3.1% Software Gross profit margin 7,578 90.0% 8,140 90.5% -6.9% 25,434 88.6% 25,932 88.8% -1.9% Systems and Technology Gross profit margin 2,406 49.6% 3,947 42.2% -39.0% 9,996 39.5% 12,988 40.8% -23.0% Global Financing Gross profit margin 532 48.7% 534 43.3% -0.5% 2,034 49.4% 2,022 45.6% 0.6% 82 -401.7% 100 -234.8% -17.7% 374 -215.0% 478 -195.6% -21.7% TOTAL REVENUE 24,113 27,385 -11.9% 92,793 98,367 -5.7% GROSS PROFIT Gross profit margin 12,862 53.3% 14,337 52.4% -10.3% 46,407 50.0% 48,684 49.5% -4.7% S,G&A Expense to revenue 6,034 25.0% 5,987 21.9% 0.8% 23,180 25.0% 23,451 23.8% -1.2% R,D&E Expense to revenue 1,320 5.5% 1,452 5.3% -9.1% 5,437 5.9% 5,743 5.8% -5.3% Intellectual property and custom development income (199) (201) -1.2% (742) (822) -9.8% (1,506) (116) (1,938) (333) 117 113 3.6% 484 402 20.4% TOTAL EXPENSE AND OTHER INCOME Expense to revenue 5,767 23.9% 7,235 26.4% -20.3% 26,421 28.5% 28,440 28.9% -7.1% INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES Pre-tax margin 7,094 29.4% 7,102 25.9% -0.1% 19,986 21.5% 20,244 20.6% -1.3% Other Gross profit margin -7.6% $37,130 38.3% EXPENSE AND OTHER INCOME Other (income) and expense Interest expense NM NM Provision for income taxes Effective tax rate INCOME FROM CONTINUING OPERATIONS Net margin DISCONTINUED OPERATIONS Loss from discontinued operations, net of taxes NET INCOME EARNINGS PER SHARE OF COMMON STOCK: ASSUMING DILUTION CONTINUING OPERATIONS DISCOUNTINUED OPERATIONS TOTAL BASIC CONTINUING OPERATIONS DISCOUNTINUED OPERATIONS TOTAL WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (M's): ASSUMING DILUTION BASIC 1,580 22.3% 885 12.5% $5,515 22.9% 78.4% 4,234 21.2% 3,363 16.6% 25.9% $6,216 22.7% -11.3% $15,751 17.0% $16,881 17.2% -6.7% (31) (32) (3,729) (398) $5,484 ====== $6,185 ====== -11.3% $12,022 ====== $16,483 ======= -27.1% $5.54 ($0.03) ----$5.51 $5.76 ($0.03) ----$5.73 -3.8% $15.59 ($3.69) -----3.8% $11.90 $15.30 ($0.36) ----$14.94 1.9% $5.57 ($0.03) ----$5.54 $5.80 ($0.03) ----$5.77 -4.0% $15.68 ($3.71) -----4.0% $11.97 $15.42 ($0.36) ----$15.06 995.4 990.4 1,080.0 1,072.5 1,010.0 1,004.3 1,103.0 1,094.5 -20.3% 1.7% -20.5% * Reclassified to reflect discontinued operations presentation. NM = Not Meaningful INTERNATIONAL BUSINESS MACHINES CORPORATION CONSOLIDATED STATEMENT OF FINANCIAL POSITION (Unaudited) (Dollars in Millions) At December 31, 2014 ------------ At December 31, 2013 ------------ ASSETS: Current Assets: Cash and cash equivalents Marketable securities Notes and accounts receivable - trade (net of allowances of $336 in 2014 and $291 in 2013) Short-term financing receivables (net of allowances of $452 in 2014 and $308 in 2013) Other accounts receivable $8,476 0 $10,716 350 9,090 10,465 19,835 19,787 (net of allowances of $40 in 2014 and $36 in 2013) Inventories, at lower of average cost or market: Finished goods Work in process and raw materials Total inventories Deferred taxes Prepaid expenses and other current assets Total Current Assets Property, plant and equipment Less: Accumulated depreciation Property, plant and equipment - net Long-term financing receivables (net of allowances of $126 in 2014 and $80 in 2013) Prepaid pension assets Deferred taxes Goodwill Intangible assets - net Investments and sundry assets Total Assets 2,906 1,584 430 1,674 --------2,103 2,044 4,967 --------49,422 444 1,866 --------2,310 1,651 4,488 --------51,350 39,034 28,263 --------10,771 40,475 26,654 --------13,821 11,109 2,160 4,808 30,556 3,104 5,603 --------$117,532 ========= 12,755 5,551 3,051 31,184 3,871 4,639 --------$126,223 ========= $5,084 5,731 6,864 4,031 11,877 6,013 --------39,600 $4,633 6,862 7,461 3,893 12,557 4,748 --------40,154 35,073 32,856 18,261 3,691 8,892 --------105,518 16,242 4,108 9,934 --------103,294 52,666 137,793 (150,715) (27,875) --------11,868 51,594 130,042 (137,242) (21,602) --------22,792 146 --------12,014 137 --------22,929 LIABILITIES: Current Liabilities: Taxes Short-term debt Accounts payable Compensation and benefits Deferred income Other accrued expenses and liabilities Total Current Liabilities Long-term debt Retirement and nonpension postretirement benefit obligations Deferred income Other liabilities Total Liabilities EQUITY: IBM Stockholders' Equity: Common stock Retained earnings Treasury stock -- at cost Accumulated other comprehensive income/(loss) Total IBM stockholders' equity Noncontrolling interests Total Equity --------$117,532 ========= Total Liabilities and Equity --------$126,223 ========= INTERNATIONAL BUSINESS MACHINES CORPORATION CASH FLOW ANALYSIS (Unaudited) (Dollars in Millions) Net Cash from Operating Activities per GAAP: Less: the change in Global Financing (GF) Receivables Net Cash from Operating Activities (Excluding GF Receivables) Capital Expenditures, Net Free Cash Flow (Excluding GF Receivables) Acquisitions Divestitures Dividends Share Repurchase Non-GF Debt Other (includes GF Receivables, and GF Debt) Change in Cash, Cash Equivalents and Short-term Marketable Securities Three Months Ended December 31, 2014 2013 -----------$6,059 $6,528 Twelve Months Ended December 31, 2014 2013 ------------$16,868 $17,485 (1,505) ------ (2,932) ------ 718 ------ (1,304) ------ 7,564 9,460 16,151 18,789 (976) (1,059) (3,779) (3,768) 6,588 8,401 12,372 15,021 (6) 1,869 (1,089) (132) (5,883) (495) 50 (1,025) (5,797) 1,637 (656) 2,357 (4,265) (13,679) (1,348) (3,056) 297 (4,058) (13,859) 3,193 (2,435) (1,937) 2,629 2,400 ($1,088) ======== $834 ======== ($2,589) ======= ($63) ======= INTERNATIONAL BUSINESS MACHINES CORPORATION SEGMENT DATA (Unaudited) (Dollars in Millions) FOURTH-QUARTER 2014 -------------------------------------------------------Pre-tax Income/ (Loss) --------- Revenue --------Continuing Pre-tax External Internal Total Operations Margin ------------------------------------- SEGMENTS Global Technology Services Y-T-Y change Global Business Services Y-T-Y change $9,167 -7.6% $195 -25.7% $9,362 -8.0% $1,464 -26.4% 15.6% 4,349 -8.4% 127 -24.9% 4,476 -8.9% 733 -22.0% 16.4% Software Y-T-Y change Systems and Technology Y-T-Y change Global Financing Y-T-Y change TOTAL REPORTABLE SEGMENTS Y-T-Y change Eliminations / Other TOTAL IBM CONSOLIDATED Y-T-Y change 7,578 -6.9% 845 -3.8% 8,422 -6.6% 3,765 -11.2% 44.7% 2,406 -39.0% 107 -37.4% 2,512 -39.0% 388 12.2% 15.5% 532 -0.5% 588 -10.1% 1,119 -5.8% 526 -10.8% 47.0% $24,031 -11.9% $1,860 -12.8% $25,891 -12.0% $6,876 -15.2% 26.6% 82 (1,860) (1,778) 219 $24,113 -11.9% $0 $24,113 -11.9% $7,094 -0.1% 29.4% FOURTH-QUARTER 2013* ----------------------------------------------------Pre-tax Income/ (Loss) --------- Revenue --------Continuing Pre-tax External Internal Total Operations Margin ------------------------------------- (Dollars in Millions) SEGMENTS Global Technology Services $9,917 $262 $10,179 $1,989 19.5% Global Business Services 4,747 169 4,915 940 19.1% Software 8,140 878 9,018 4,239 47.0% Systems and Technology* 3,947 170 4,117 346 8.4% 534 654 1,188 589 49.6% $27,285 $2,133 $29,418 $8,104 27.5% 100 (2,133) (2,033) (1,002) $27,385 $0 $27,385 $7,102 Global Financing TOTAL REPORTABLE SEGMENTS Eliminations / Other TOTAL IBM CONSOLIDATED 25.9% * Reclassified to reflect discontinued operations presentation. INTERNATIONAL BUSINESS MACHINES CORPORATION SEGMENT DATA (Unaudited) (Dollars in Millions) TWELVE-MONTHS 2014 --------------------------------------------------Pre-tax Income/ (Loss) --------- Revenue --------Continuing Pre-tax External -------- Internal -------- Total -------- Operations ---------- Margin ------- SEGMENTS Global Technology Services Y-T-Y change $37,130 -3.7% $934 -12.2% $38,063 -3.9% $6,340 -9.2% 16.7% Global Business Services Y-T-Y change 17,825 -3.1% 543 -24.0% 18,367 -3.9% 2,999 -6.7% 16.3% Software Y-T-Y change 25,434 -1.9% 3,496 9.6% 28,931 -0.7% 10,699 -3.7% 37.0% Systems and Technology Y-T-Y change 9,996 -23.0% 647 9.2% 10,643 -21.6% 34 -84.1% 0.3% 2,034 0.6% 2,488 9.0% 4,522 5.1% 2,189 0.8% 48.4% $92,418 -5.6% $8,108 3.4% $100,527 -4.9% $22,262 -6.0% 22.1% 374 (8,108) (7,734) (2,276) $92,793 -5.7% $0 $92,793 -5.7% $19,986 -1.3% Global Financing Y-T-Y change TOTAL REPORTABLE SEGMENTS Y-T-Y change Eliminations / Other TOTAL IBM CONSOLIDATED Y-T-Y change (Dollars in Millions) 21.5% TWELVE-MONTHS 2013* ------------------------------------------------Pre-tax Income (Loss)/ --------- Revenue --------Continuing Pre-tax External Internal Total Operations Margin -------- ----------------------------- SEGMENTS Global Technology Services $38,551 $1,063 $39,615 $6,983 17.6% Global Business Services 18,396 714 19,109 3,214 16.8% Software 25,932 3,191 29,123 11,106 38.1% Systems and Technology* 12,988 593 13,581 213 1.6% 2,022 2,282 4,304 2,171 50.4% $97,889 $7,843 $105,732 $23,687 22.4% 478 (7,843) (7,365) (3,443) $98,367 $0 $98,367 $20,244 Global Financing TOTAL REPORTABLE SEGMENTS Eliminations / Other TOTAL IBM CONSOLIDATED * Reclassified to reflect discontinued operations presentation. 20.6% INTERNATIONAL BUSINESS MACHINES CORPORATION U.S. GAAP TO OPERATING RESULTS RECONCILIATION (Unaudited: Dollars in millions except per share amounts) Gross Profit FOURTH-QUARTER 2014 CONTINUING OPERATIONS -----------------------------------------------Acquisition- RetirementRelated Related Operating GAAP Adjustments* Adjustments** (Non-GAAP) -------- ------------ --------------------$12,862 $101 $33 $12,996 Gross Profit Margin 53.3% 0.4Pts 0.1Pts 53.9% S,G&A 6,034 (94) (95) 5,845 R,D&E 1,320 - 21 1,341 (1,506) (1) - (1,506) Total Expense & Other (Income) 5,767 (95) (74) 5,598 Pre-Tax Income from Continuing Operations 7,094 196 107 7,398 Pre-Tax Income Margin from Continuing Operations 29.4% 0.8Pts 0.4Pts 30.7% Provision for Income Taxes*** 1,580 10 24 1,613 Effective Tax Rate 22.3% -0.5Pts 0.0Pts 21.8% Income from Continuing Operations 5,515 186 84 5,785 Income Margin from Continuing Operations 22.9% 0.8Pts 0.3Pts 24.0% (31) - - (31) 5,484 186 84 5,753 $5.54 ($0.03) $0.19 - $0.08 - $5.81 ($0.03) Other (Income) & Expense Loss from Discontinued Operations Net of Taxes Net Income Diluted Earnings Per Share: Continuing Operations Discontinued Operations FOURTH-QUARTER 2013**** CONTINUING OPERATIONS -----------------------------------------------Acquisition- RetirementRelated Related Operating GAAP Adjustments* Adjustments** (Non-GAAP) -------- ------------ --------------------- Gross Profit $14,337 $105 $154 $14,596 Gross Profit Margin 52.4% 0.4Pts 0.6Pts 53.3% S,G&A 5,987 (101) (90) 5,796 R,D&E 1,452 - (14) 1,438 Other (Income) & Expense (116) (8) - (124) Total Expense & Other (Income) 7,235 (109) (104) 7,023 Pre-Tax Income from Continuing Operations 7,102 213 258 7,574 Pre-Tax Income Margin from Continuing Operations 25.9% 0.8Pts 0.9Pts 27.7% 885 (55) 94 925 Effective Tax Rate 12.5% -1.1Pts 0.8Pts 12.2% Income from Continuing Operations 6,216 268 164 6,649 Income Margin from Continuing Operations 22.7% 1.0Pts 0.6Pts 24.3% (32) - - (32) 6,185 268 164 6,617 $5.76 ($0.03) $0.25 - $0.15 - $6.16 ($0.03) Provision for Income Taxes*** Loss from Discontinued Operations Net of Taxes Net Income Diluted Earnings Per Share: Continuing Operations Discontinued Operations * Includes amortization of acquired intangible assets and other acquisition-related charges. ** Includes retirement-related items driven by changes to plan assets and liabilities primarily related to market performance. *** 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 which employs an annual effective tax rate method to the results. **** Reclassified to reflect discontinued operations presentation. INTERNATIONAL BUSINESS MACHINES CORPORATION U.S. GAAP TO OPERATING RESULTS RECONCILIATION (Unaudited: Dollars in millions except per share amounts) TWELVE-MONTHS 2014 CONTINUING OPERATIONS ------------------------------------------------ Gross Profit Gross Profit Margin Acquisition- RetirementRelated Related Operating GAAP Adjustments* Adjustments** (Non-GAAP) -------- ------------ ------------ ----------$46,407 $416 $173 $46,996 50.0% 0.4Pts 0.2Pts 50.6% S,G&A 23,180 (385) (257) 22,537 R,D&E 5,437 - 77 5,514 (1,938) (1) - (1,939) Total Expense & Other (Income) 26,421 (386) (180) 25,855 Pre-Tax Income from Continuing Operations 19,986 803 353 21,142 Pre-Tax Income Margin from Continuing Operations 21.5% 0.9Pts 0.4Pts 22.8% Provision for Income Taxes*** 4,234 133 73 4,440 Effective Tax Rate 21.2% -0.2Pts 0.0Pts 21.0% Income from Continuing Operations 15,751 670 280 16,702 17.0% 0.7Pts 0.3Pts 18.0% Loss from Discontinued Operations Net of Taxes (3,729) - - (3,729) 12,022 670 280 12,973 $15.59 ($3.69) $0.66 - $0.28 - $16.53 ($3.69) Other (Income) & Expense Income Margin from Continuing Operations Net Income Diluted Earnings Per Share: Continuing Operations Discontinued Operations Gross Profit Gross Profit Margin TWELVE-MONTHS 2013**** CONTINUING OPERATIONS -----------------------------------------------Acquisition- RetirementRelated Related Operating GAAP Adjustments* Adjustments** (Non-GAAP) -------- ------------ ------------ ----------$48,684 $394 $629 $49,706 49.5% 0.4Pts 0.6Pts 50.5% S,G&A 23,451 (394) (376) 22,680 R,D&E 5,743 - (57) 5,686 Other (Income) & Expense (333) (16) - (349) Total Expense & Other (Income) 28,440 (410) (433) 27,597 Pre-Tax Income from Continuing Operations 20,244 804 1,062 22,110 Pre-Tax Income Margin from Continuing Operations 20.6% 0.8Pts 1.1Pts 22.5% Provision for Income Taxes*** 3,363 57 333 3,753 Effective Tax Rate 16.6% -0.4Pts 0.7Pts 17.0% Income from Continuing Operations 16,881 747 729 18,356 Income Margin from Continuing Operations 17.2% 0.8Pts 0.7Pts 18.7% Loss from Discontinued Operations Net of Taxes (398) - - (398) 16,483 747 729 17,959 $15.30 ($0.36) $0.68 - $0.66 - $16.64 ($0.36) Net Income Diluted Earnings Per Share: Continuing Operations Discontinued Operations * Includes amortization of acquired intangible assets and other acquisition-related charges. ** Includes retirement-related items driven by changes to plan assets and liabilities primarily related to market performance. *** 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 which employs an annual effective tax rate method to the results. **** Reclassified to reflect discontinued operations presentation. Contact: IBM Ian Colley, 914-434-3043 [email protected] John Bukovinsky, 732-618-3531 [email protected]